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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-95937
PROSPECTUS
Exodus Communications, Inc.
Exchange Offer For $375,000,000 and (Euro)125,000,000 10 3/4% Senior Notes Due
2009
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 December 8, 1999.
All outstanding notes that are validly tendered and not validly withdrawn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
March 20, 2000 at 5:00 p.m., New York City time (10:00 p.m., London Time).
Old Notes
On December 8, 1999, we issued and sold $375.0 million and (Euro)125.0
million of 10 3/4% Senior Notes due 2009.
If you tender your old notes in the exchange offer, interest will cease to
accrue before your new notes are issued. If you do not tender in the exchange
offer, your old notes will continue to be subject to the same terms and
restrictions except that we will not be required to register your old notes
under the Securities Act.
Exodus Communications, Inc.
2831 Mission College Boulevard, Santa Clara, California 95054, (408) 346-
2200.
New Notes
Identical to the old notes except that the new notes will be registered
under the Securities Act.
. Maturity: December 15, 2009.
. Change of Control: You can require us to purchase your notes at 101% of
the principal amount.
. Interest: Paid every six months on June 15 and December 15, starting
June 15, 2000.
. Redemption by Exodus: Anytime on or after December 15, 2004, except that
redemptions for a portion of the notes may be made at any time prior to
December 15, 2002 with the cash proceeds of specified capital stock
sales.
. Ranking: The new notes will be general unsecured obligations, ranking:
. equally with all our senior unsecured indebtedness;
. senior to all our subordinated indebtedness; and
. junior to all our secured indebtedness and liabilities of our
subsidiaries.
Investment in the notes to be issued in the exchange offer involves risks.
See the risk factors section beginning on page 10.
This prospectus and the accompanying letter of transmittal are first being
mailed to holders of outstanding notes on or about February 17, 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 February 11, 2000.
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TABLE OF CONTENTS
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Documents Incorporated by Reference...................................... ii
Prospectus Summary....................................................... 1
Risk Factors............................................................. 10
Disclosure Regarding Forward-Looking Statements.......................... 22
Use of Proceeds.......................................................... 23
Capitalization........................................................... 24
Selected Summary Supplemental Consolidated Financial Data................ 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 35
Management............................................................... 46
Other Indebtedness....................................................... 49
The Exchange Offer....................................................... 51
Description of Notes..................................................... 61
Material United States Federal Income Tax Considerations................. 92
Plan of Distribution..................................................... 96
Legal Matters............................................................ 97
Experts.................................................................. 97
Available Information.................................................... 98
Index to Consolidated Financial Statements and Schedule.................. F-1
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DOCUMENTS INCORPORATED BY REFERENCE
This prospectus incorporates business and financial information about Exodus
that is not included in or delivered with this prospectus. We are incorporating
by reference in this prospectus the following documents which we filed with the
Commission:
. Our annual report on Form 10-K for the year ended December 31, 1998.
. Our quarterly reports on Form 10-Q for the quarters ended (1) March 31,
1999, as amended June 25, 1999, (2) June 30, 1999 and (3) September 30,
1999, as amended January 18, 2000.
. Our current reports on Form 8-K filed January 29, 1999, February 22,
1999, March 2, 1999, June 18, 1999, August 11, 1999, as amended October
12, 1999 and November 29, 1999, November 29, 1999 and December 3, 1999.
We are also incorporating by reference in this prospectus all reports and
other documents that we file after the date of this prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934,
prior to the termination of the offering of securities under this prospectus.
These reports and documents will be incorporated by reference in and considered
to be part of this prospectus as of the date of filing of the reports and
documents.
Any statement contained in this prospectus or in a document which is
incorporated by reference in this prospectus will be modified or superseded for
purposes of this prospectus to the extent that a statement in any document that
we file after the date of this prospectus that also is incorporated by
reference in this prospectus modifies or supersedes the prior statement. Any
statement so modified or superseded will not, except as so modified or
superseded, constitute a part of this prospectus.
This prospectus incorporates by reference documents which are not presented
in this prospectus or delivered to you with it. You may request, and we will
send to you, without charge, copies of these documents, other than exhibits to
these documents, which we will send to you for a reasonable fee. Requests
should be directed to:
Exodus Communications, Inc.
2831 Mission College Boulevard
Santa Clara, California 95054
Attn: Secretary
Telephone: (408) 346-2200
In order to assure timely delivery of the requested materials before the
expiration of the exchange offer, any request should be made prior to March 13,
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 Internet system and network
management solutions for enterprises with mission-critical Internet operations.
Our solutions include Internet Data Centers, network services, managed services
and professional services, which together provide the high performance,
scalability and expertise that enterprises need to optimize their complex
Internet operations. Exodus delivers its services from geographically
distributed, state-of-the-art Internet Data Centers that are connected through
a high performance dedicated and redundant backbone network. Our tailored
solutions are designed to integrate with existing enterprise systems
architectures and to enable customers to outsource the monitoring,
administration and optimization of their equipment, applications and overall
Internet operations. As of September 30, 1999, we had more than 1,700
customers, including installed and uninstalled customers under contract, and
managed over 16,000 customer servers worldwide. Our customers represent a
variety of industries, ranging from Internet companies such as Lycos, Inc.,
eBay Inc., MSN Hotmail (a subsidiary of Microsoft Corporation), Yahoo!GeoCities
and Inktomi Corporation, to media companies such as MSNBC, USA Today
Information Network, SportsLine USA, Inc. and E-Online!, to major enterprise
companies such as Applied Materials and Storage Networks.
Because Internet usage is growing rapidly, businesses are increasing the
breadth and depth of their Internet product and services offerings. These
Internet operations are mission-critical for Internet-centric businesses and
are becoming increasingly mission-critical for many enterprises. In order to
ensure the quality, reliability, availability and redundancy of these mission-
critical Internet operations, corporate IT departments must make substantial
investments in facilities, personnel, equipment and networks which must be
continuously upgraded to reflect changing technologies and must rapidly scale
as the enterprise grows. This recurring and significant investment is an
inefficient use of resources and, as a result, a significant need exists for
outsourcing arrangements that can increase performance, provide continuous
operation of Internet solutions and reduce Internet operating expenses. We
believe a significant opportunity exists for a highly focused company to
provide a combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance of mission-
critical Internet operations.
Exodus offers an integrated portfolio of solutions that provides customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers' redundant backbone network of multiple high speed OC-3
and OC-12 lines, along with our public and private network interconnections. We
continue to upgrade our network in order to accommodate expected traffic
growth. Our managed services include performance monitoring, site management
reports, data backup and content delivery and management services, security
services and professional services. These services provide the foundation for
high performance, availability, scalability and reliability of customers'
Internet operations. In addition, we integrate best-of-breed technologies from
leading vendors with our industry expertise and proprietary technology.
Our objective is to become the leading provider of Internet system and
network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, we intend to:
. Position Exodus as the leader in this market;
. Focus on enhancing systems and network management, Internet technology
services and professional services;
. Accelerate our global expansion;
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. Leverage our expertise to address new market opportunities; and
. Continue to establish strategic relationships for distribution and
technology.
We began offering server hosting and Internet connectivity services in late
1995, opened our first dedicated Internet Data Center in August 1996, and
introduced managed services in 1997 and professional services in 1998. We
currently operate 17 domestic Internet Data Centers located in nine
metropolitan areas: Atlanta, Austin, Boston, Chicago, Los Angeles, New York,
Seattle, Silicon Valley and Washington, D.C. In June 1999, we opened our first
Internet Data Center outside of the United States in the London metropolitan
area. In December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo,
Japan, which has an Internet Data Center located in Tokyo. Our Internet Data
Centers consist of approximately 1,600,000 gross square feet.
Our principal executive offices are located at 2831 Mission College Blvd.,
Santa Clara, California 95054. Our telephone number is (408) 346-2200.
Recent Events
Acquisition of Service Metrics, Inc. In November 1999, we acquired Service
Metrics, Inc. Service Metrics is a leading provider of Internet monitoring
applications and services that measure the consistency, availability and
performance of Web sites. As a result, we issued approximately 7.0 million
shares of our Common Stock and Common Stock subject to options in exchange for
all of the outstanding shares of common stock of Service Metrics and shares of
Service Metrics common stock subject to outstanding options, representing an
aggregate consideration of approximately $280.0 million as of the signing of
the definitive agreement in October 1999. The transaction was accounted for as
a pooling of interests.
Acquisition of Global OnLine Japan Co., Ltd. In December 1999, we acquired
Global OnLine Japan Co., Ltd., an Internet solutions provider based in Tokyo.
As a result, we issued approximately 415,000 shares of our common stock in
exchange for 85% of the outstanding shares of Global OnLine Japan. The
transaction will be accounted for as a purchase.
Stock Split. On November 19, 1999, we announced a two-for-one stock split in
the form of a stock dividend, payable December 14, 1999 to holders of our
Common Stock of record as of November 30, 1999. Share and per share information
in this prospectus reflects this stock split.
Issuance of Debt. In December 1999, we issued $375.0 million aggregate
principal amount of 10 3/4% Senior Notes due 2009 and (Euro)125.0 million
aggregate principal amount of 10 3/4% Senior Notes due 2009 concurrently with
our issuance of $500.0 million aggregate principal amount of 4 3/4% Convertible
Subordinated Notes due July 15, 2008.
Acquisition of KeyLabs, Inc. In January 2000, we agreed to acquire KeyLabs,
Inc., a provider of e-business testing services based in Utah. The transaction
is expected to close by the end of February 2000 and will be accounted for as a
purchase.
Hiring of New Chief Financial Officer. Effective January 31, 2000, R.
Marshall Case was appointed Executive Vice President, Finance and Chief
Financial Officer of Exodus. Mr. Case's predecessor, Richard S. Stoltz, will
continue with Exodus as its Senior Adviser, Strategy and Finance.
Summary of 1999 Fourth Quarter and Annual Results. For the three months
ended December 31, 1999, our revenues were $101.4 million compared to revenues
of $21.1 million for the same period of the prior year. Our net loss for the
three months ended December 31, 1999 was $52.9 million, or $0.30 per share,
compared to a net loss of $21.9 million, or $0.14 per share, for the same
period of the prior year. EBITDA loss (loss before net interest expense, income
taxes, depreciation, amortization and other non-cash charges) for the three
months ended December 31, 1999 was $16.7 million compared to $12.1 million for
the same period of the prior year.
Revenues for the twelve months ended December 31, 1999 were $242.1 million
compared to $52.7 million for the same period of the prior year. Our net loss
attributable to common stockholders for the twelve months ended December 31,
1999 was $130.3 million, or $0.78 per share, compared to a net loss
attributable to common stockholders of $69.3 million, or $0.55 per share, for
the same period of the prior year. EBITDA loss for the twelve months ended
December 31, 1999 was $44.7 million compared to $41.9 million for the same
period of the prior year.
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The Exchange Offer
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Securities Offered............... $375.0 million aggregate principal amount
of 10 3/4% Senior Notes due 2009 and
(Euro)125.0 million aggregate principal
amount of 10 3/4% Senior Notes due 2009.
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............ $375.0 million aggregate principal amount
of 10 3/4% Senior Notes due 2009 and
(Euro)125.0 million aggregate principal
amount of 10 3/4% Senior Notes due 2009
were issued on December 8, 1999 to Goldman,
Sachs & Co., Donaldson, Lufkin & Jenrette
Securities Corporation, BancBoston
Robertson Stephens Inc., PaineWebber
Incorporated and Morgan Stanley & Co.
Incorporated, 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 $375.0 million
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)125.0
million aggregate principal amount of old
euro notes outstanding.
Conditions to the Exchange The exchange offer is not conditioned upon
Offer........................... 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 timely delivery.
Some brokers, dealers, commercial banks,
trust companies and other nominees may also
effect tenders by book-
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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 OfferProcedures for Tendering
Old Notes."
Expiration Date; Withdrawal...... The exchange offer will expire on the
earlier of 5:00 p.m., New York City time
(10:00 p.m., London time) on March 20, 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 March 20, 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 Procedures... If you wish to tender your old notes and
(1) your old notes are not immediately
available or (2) you cannot deliver your
old notes together with the 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.
Appraisal Rights................. Holders of old notes will not have
dissenters' rights or appraisal rights in
connection with the exchange offer.
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Exchange Agent................... Chase Manhattan Bank & Trust Company,
National Association is serving as exchange
agent in connection with the exchange offer
for the dollar notes, and Chase Manhattan
Bank London is serving as exchange agent in
connection with the exchange offer for the
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 If you do not tender your old notes or your
the Old Notes................... 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.
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Notes Offered.................... $375.0 million aggregate principal amount
of 10 3/4% Senior Notes due 2009.
(Euro)125.0 million aggregate principal
amount of 10 3/4% Senior Notes due 2009.
The euro notes and the dollar notes will
generally be treated for purposes of the
indenture governing the notes as a single
series of securities ranking equally with
each other.
Maturity Date.................... December 15, 2009
Interest Payment Dates........... June 15 and December 15 of each year,
commencing June 15, 2000.
Optional Redemption.............. Except as described in this prospectus, the
notes will not be redeemable at our option
prior to December 15, 2004. The notes will
be subject to redemption, at our option, in
whole or in part, at any time on or after
December 15, 2004 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 December
15, 2002, we may redeem up to 35% of the
aggregate outstanding principal amount of
the dollar notes and up to 35% of the
aggregate outstanding principal amount of
the euro 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
110.75% 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 each of
the dollar notes and the euro notes remains
outstanding immediately following the
redemption. In order to effect the
redemption, we must mail a notice of
redemption no later than 45 days after the
related sale of capital stock and must
consummate the redemption within 60 days
after the closing of the sale of capital
stock.
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Change of Control................ In the event of a change of control (as
described below), each holder shall have
the right to require that we purchase the
notes at a price equal to 101% of the
principal amount, plus accrued and unpaid
interest, and liquidated damages, if any,
to the date of purchase. See "Risk
Factors--We may not be able to effect
repurchase of the notes upon a Change of
Control in accordance with the terms of the
indenture."
Ranking.......................... The notes will be senior unsecured
indebtedness ranking equally with our
existing and future senior unsecured
obligations and senior in right of payment
to all of our subordinated indebtedness.
The notes will be effectively subordinated
to all secured indebtedness and to any
liabilities of any of our subsidiaries,
including trade payables. As of September
30, 1999, we had approximately
$79.1 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 are senior in
right of payment to our $250.0 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 indenture governing the notes contains
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."
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Summary Supplemental Consolidated Financial Information
The following summary supplemental consolidated financial information should
be read in conjunction with our supplemental 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
supplemental consolidated financial statements have been prepared to give
retroactive effect to the merger with Service Metrics, Inc. ("SMI") on November
23, 1999. The summary supplemental consolidated financial information for each
of the years in the three-year period ended December 31, 1998 is derived from
our supplemental consolidated financial statements that have been audited by
KPMG LLP, independent auditors. The summary supplemental consolidated financial
information as of September 30, 1999 and for the nine months ended September
30, 1998 and September 30, 1999 is derived from our unaudited supplemental
condensed consolidated financial statements for these periods. Historical
results are not necessarily indicative of the results to be expected in the
future.
"EBITDA" represents earnings (loss) before net interest expense, income
taxes, depreciation, amortization, including amortization of deferred stock
compensation, and other noncash charges. EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for) operating
activities, investing activities or financing activities, each as measured
under generally accepted accounting principles. In addition, EBITDA may not be
comparable to other similarly titled information from other companies. However,
our management believes that EBITDA is an additional meaningful measure of
performance and liquidity. With respect to the captions entitled "Deficiency of
earnings available to cover fixed charges", earnings consist of income (loss)
before provision for income taxes plus fixed charges. Fixed charges consist of
interest charges and amortization of debt expense and discount or premium
related to indebtedness, whether expensed or capitalized and the portion of
rental expense that we believe to be representative of interest.
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Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(in thousands, except per share data)
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Supplemental Consolidated
Statement of Operations Data:
Total revenues................ $ 3,130 $ 12,408 $ 52,745 $ 31,638 $140,754
Operating loss................ (4,094) (24,792) (57,573) (40,282) (57,332)
Net loss...................... (4,133) (25,298) (67,316) (45,392) (77,376)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.. -- (1,413) (2,014) (2,014) --
Net loss attributable to
common stockholders.......... (4,133) (26,711) (69,330) (47,406) (77,376)
Basic and diluted net loss per
share........................ $ (0.27) $ (1.73) $ (0.55) $ (0.42) $ (0.47)
Shares used in computing basic
and diluted net loss per
share........................ 15,312 15,428 125,808 114,088 165,974
Supplemental Consolidated
Statement of Cash Flows Data:
Net cash used for operating
activities................... $(3,116) $(15,518) $(47,312) $(31,568) $(68,542)
Net cash used for investing
activities................... (3,877) (23,864) (92,757) (70,323) (235,134)
Net cash provided by financing
activities................... 10,545 45,937 285,814 283,254 319,632
Other Data:
EBITDA........................ $(3,633) $(20,274) $(41,945) $(29,592) $(27,994)
Depreciation and
amortization................. 461 3,429 13,024 8,575 28,383
Capital expenditures.......... 3,499 22,489 44,564 26,680 160,624
Deficiency of earnings
available to cover fixed
charges...................... (4,133) (25,298) (67,316) (45,392) (77,376)
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The following table provides a summary of our balance sheet.
The as adjusted column reflects the sale of $375.0 million principal amount
of our 10 3/4% Senior Notes due 2009 and (Euro)125.0 million principal amount
of our 10 3/4% Senior Notes due 2009 issued December 8, 1999 after deducting
the underwriting discount and estimated offering expenses payable by us. For
purposes of this table, the translation of euros into dollars has been made at
$1.0023 per euro, which represents the Noon Buying Rate on December 2, 1999.
The as further adjusted column reflects the sale of $500.0 million principal
amount of our 4 3/4% Convertible Subordinated Notes due July 15, 2008 issued
December 8, 1999 after deducting the underwriting discount and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
At September 30, 1999
-----------------------------
As As Further
Actual Adjusted Adjusted
-------- --------- ----------
(in thousands)
<S> <C> <C> <C>
Supplemental Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $171,971 $ 657,501 $1,142,751
Restricted cash and cash equivalents............ 35,444 35,444 35,444
Working capital................................. 153,753 639,283 1,124,533
Total assets.................................... 684,825 1,185,113 1,685,113
Current portion of equipment loans, line of
credit facilities and capital lease
obligations.................................... 22,539 22,539 22,539
Equipment loans, line of credit facilities and
capital lease obligations, less current
portion........................................ 41,801 41,801 41,801
Convertible subordinated notes.................. 250,000 250,000 750,000
Senior notes.................................... 275,375 775,663 775,663
Total stockholders' equity...................... 32,601 32,601 32,601
</TABLE>
9
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RISK FACTORS
Holders of old notes should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
prospectus before tendering their old notes in the exchange offer. The risk
factors set forth in this prospectus, other than "Risk Factors--There could be
negative consequences to you if you do not exchange your old notes for new
notes," are generally applicable to the old notes as well as the new notes.
There could be negative consequences to you if you do not exchange your old
notes for new notes
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Because we anticipate that
most holders will elect to exchange their old notes for new notes due to the
absence of most restrictions on the resale of new notes, we anticipate that the
liquidity of the market for any old notes remaining outstanding after the
exchange offer may be substantially limited. Following the consummation of the
exchange offer, holders who did not tender their old notes generally will not
have any further registration rights under the registration rights agreement,
and these old notes will continue to be subject to restrictions on transfer.
The old 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 Exodus or one of its subsidiaries;
. to a qualified institutional buyer;
. to an institutional accredited investor;
. to a party outside the United States under Regulation S under the
Securities Act;
. under an exemption from registration provided by Rule 144 under the
Securities Act; or
. under an effective registration statement.
Our short operating history and heavy losses make our business difficult to
evaluate
Our limited operating history makes evaluating our business operations and
our prospects difficult. We began offering server hosting and Internet
connectivity services in 1995, opened our first dedicated Internet Data Center
in August 1996 and introduced managed services in 1997 and professional
services in 1998. Due to our short operating history, our business model is
still evolving. We have incurred operating losses and negative cash flows each
fiscal quarter and year since 1995. Our accumulated deficit was approximately
$175.3 million at September 30, 1999. We anticipate continuing to make
significant investments in new Internet Data Centers and network
infrastructure, product development, sales and marketing programs and
personnel. We believe that we will continue to experience net losses on a
quarterly and annual basis for the foreseeable future. We may also use
significant amounts of cash and/or equity to acquire complementary businesses,
products, services or technologies. Although we have experienced significant
growth in revenues in recent periods, this growth rate is not necessarily
indicative of future operating results. It is possible that we may never
achieve profitability on a quarterly or an annual basis.
10
<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;
. reliable continuity of service and network availability;
. the ability to increase bandwidth as necessary, both on our network and
at our interconnection points with other networks;
. costs related to the acquisition of network capacity and arrangements
for interconnections with third-party networks;
. customer retention and satisfaction;
. capacity utilization of our Internet Data Centers;
. the timing, magnitude and integration of acquisitions of complementary
businesses and assets;
. the timing of customer installations;
. the provision of customer discounts and credits;
. the mix of services sold by us;
. the timing and success of marketing efforts and service introductions by
us and our competitors;
. the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
. the timing of expansion of existing Internet Data Centers and completion
of new Internet Data Centers;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and those of our competitors; and
. fluctuations in bandwidth used by customers.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our
results of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third-party
products in our services offerings, our product development costs could
increase significantly. Finally, many of our customers are emerging growth
companies which may have negative cash flows, and there is the possibility that
we will not be able to collect receivables on a timely basis.
Our rapid expansion produces a significant strain on our business and requires
us to expend substantial resources
The expansion of our network through the opening of additional Internet Data
Centers in geographically diverse locations is one of our key strategies. We
currently have 17 Internet Data Centers located in nine metropolitan areas of
the United States: Atlanta, Austin, Boston, Chicago, Los Angeles, New York,
Seattle, Silicon Valley and Washington, D.C. In June, we opened our first
Internet Data Center outside of the United States in the London metropolitan
area. In December 1999, we acquired Global OnLine Japan Co., Ltd. of Tokyo,
Japan, which has an Internet Data Center located in Tokyo. To expand
successfully, we must be able to assess markets, locate and secure new Internet
Data Center sites, install telecommunications and Internet Data Center
facilities and establish additional peering interconnections with Internet
service providers. To manage this expansion effectively, we must continue to
improve our operational and financial systems and expand, train
11
<PAGE>
and manage our employee base. Our inability to establish additional Internet
Data Centers or effectively manage our expansion would have a material adverse
effect upon our business.
We expect to expend substantial resources for leases and/or the purchase of
real estate, significant improvements of facilities, purchase of complementary
businesses, assets and equipment, implementation of multiple telecommunications
connections and hiring of network, administrative, customer support and sales
and marketing personnel with the establishment of each new Internet Data
Center. Moreover, we expect to make significant investments in sales and
marketing and the development of new services as part of our expansion
strategy. The failure to generate sufficient cash flows or to raise sufficient
funds may require us to delay or abandon some or all of our development and
expansion plans or otherwise forego market opportunities, making it difficult
for us to generate additional revenue and to respond to competitive pressures.
In general, it takes us at least six months to select the appropriate
location for a new Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure and hire operations and
sales personnel. Expenditures commence well before the Internet Data Center
opens, and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are opened. We
incur further expenses from sales personnel hired to test market our services
in markets where there is no Internet Data Center. Growth in the number of our
Internet Data Centers is likely to increase the amount and duration of losses.
In addition, if we do not attract customers to new Internet Data Centers in a
timely manner, or at all, our business would be materially adversely affected.
We compete with much larger companies and there are few barriers to entry, and
if we cannot compete effectively, we will lose business
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have announced recently
that they intend to begin providing and/or greatly expand their service
offerings that are competitive with our services. The principal competitive
factors in this market include:
. Internet system engineering and other expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits, equipment and
interconnection capacity to other networks;
. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:
. providers of server hosting services;
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<PAGE>
. national, foreign and regional ISPs;
. global, regional and local telecommunications companies and Regional
Bell Operating Companies;
. IT outsourcing firms; and
. other technology services and products companies.
Many of our competitors have substantially greater resources, more
customers, longer operating histories, greater name recognition and more
established relationships in the industry. As a result, these competitors may
be able to develop and expand their network infrastructures and service
offerings more quickly, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies. In addition, these
competitors have entered and will likely continue to enter into business
relationships to provide additional services competitive with those we provide.
Some of our competitors may be able to provide customers with additional
benefits in connection with their Internet system and network management
solutions, including reduced communications costs, which could reduce the
overall costs of their services relative to ours. We may not be able to offset
the effects of any price reductions. In addition, we believe our market is
likely to encounter consolidation in the near future, which could result in
increased prices and other competition.
Our market is new and our services may not be generally accepted by enterprises
looking to outsource their mission-critical Internet operations, which could
harm our operating results
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable
or, if it becomes viable, may not continue to grow. Our future growth depends
on the willingness of enterprises to outsource the system and network
management of their mission-critical Internet operations and our ability to
market our services in a cost-effective manner to a sufficiently large number
of customers. If this market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, our business
would be adversely affected. In addition, in order to be successful we must be
able to differentiate ourselves from our competition through our service
offerings.
Our substantial leverage and debt service obligations adversely affect our cash
flow
We have substantial amounts of outstanding indebtedness, primarily from our
11 1/4% senior notes, 10 3/4% senior notes, 4 3/4% convertible subordinated
notes and 5% convertible subordinated notes. There is the possibility that we
may be unable to generate cash sufficient to pay the principal of, interest on
and other amounts due in respect of, our debt when due. As of September 30,
1999, we had debt of approximately $589.7 million and available borrowings of
up to an additional $1.2 million. In addition, in December 1999, we incurred
additional debt of $375.0 million aggregate principal amount of our 10 3/4%
senior notes and (Euro)125.0 million aggregate principal amount of the 10 3/4%
senior notes as well as $500.0 million aggregate principal amount of our 4 3/4%
convertible subordinated notes. We will also have the right to issue additional
10 3/4% senior notes on or prior to December 8, 2000 in an aggregate principal
amount not to exceed $100.0 million. In addition, we expect to add additional
equipment loans and lease lines to finance capital expenditures for our
Internet Data Centers and to obtain additional long term debt, working capital
lines of credit and lease lines. We cannot be certain that any financing
arrangements will be available.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
13
<PAGE>
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
We are subject to restrictive covenants in our note indentures that limit our
flexibility in managing our business
Our senior notes and convertible subordinated notes contain various
restrictions on our ability to incur debt, pay dividends or make other
restricted payments, sell assets, enter into affiliate transactions and take
other actions. Furthermore, our existing financing arrangements are, and future
financing arrangements are likely to be, secured by substantially all of our
assets. The existing financing arrangements require, and future financing
arrangements are likely to require, that we maintain specific financial ratios
and comply with covenants restricting our ability to incur debt, pay dividends
or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions.
In addition, a number of instruments evidencing our debt restrict the manner
in which this debt and debt incurred in the future may be used.
We must manage growth effectively by expanding operating and financial
procedures, controls and systems or our business will be harmed
We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network
infrastructure, expansion of our service offerings, geographic expansion,
expansion of our customer base and increases in the number of employees. This
growth has placed, and we expect it to continue to place, a significant strain
on our financial, management, operational and other resources, including our
ability to ensure customer satisfaction. This expansion also requires
significant time commitment from our senior management and places a significant
strain on their ability to manage the existing business. In addition, we are
required to manage multiple relationships with a growing number of third
parties as we seek to complement our service offerings. Our ability to manage
our growth effectively will require us to continue to expand operating and
financial procedures and controls, to replace or upgrade our operational,
financial and management information systems and to attract, train, motivate
and retain key employees. We have recently hired many key employees and
officers, and as a result, our entire management team has worked together for
only a brief time. In addition, we intend to hire additional senior management
personnel to support our growth and expansion of our business. If our
executives are unable to manage growth effectively, our business could be
materially adversely affected.
We may experience difficulty in integrating our recent acquisitions which could
harm our operating results
In October 1998 we acquired the assets of Arca Systems, Inc., in February
1999 we acquired American Information Systems, Inc., in July 1999 we acquired
Cohesive Technology Solutions, Inc, in November 1999 we acquired Service
Metrics, Inc. and in December 1999 we acquired Global OnLine Japan Co., Ltd.
Furthermore, in January 2000, we agreed to acquire KeyLabs, Inc. We continue to
expend resources integrating Cohesive and Service Metrics and the personnel
hired in connection with acquisitions. As we acquire additional companies, we
may incur expenses to, among other things, remediate Year 2000 problems
relating to these acquired companies.
We believe that our future growth depends, in part, upon the acquisition of
complementary businesses, products, services or technologies. After purchasing
a company, we could have difficulty in assimilating that company's technology,
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and
14
<PAGE>
employees and increase our expenses. In addition, future acquisitions by us may
require us to incur additional debt, result in large one-time write-offs or
create goodwill or other intangible assets that could result in amortization
expenses.
System failures could lead to significant costs
We must protect our network infrastructure and customers' equipment against
damage from human error, physical or electronic security breaches, power loss
and other facility failures, fire, earthquake, flood, telecommunications
failure, sabotage, vandalism and similar events. Despite precautions we have
taken, a natural disaster or other unanticipated problems at one or more of our
Internet Data Centers could result in interruptions in our services or
significant damage to customer equipment. In addition, failure of any of our
telecommunications providers, such as MCI WorldCom, Qwest Communications
Corporation and Global Crossing, to provide consistent data communications
capacity, and local exchange carriers to provide interconnection agreements,
could result in interruptions in our services. Any damage to or failure of our
systems or service providers could result in reductions in, or terminations of,
services supplied to our customers, which could have a material adverse effect
on our business. In the past, we have experienced interruptions in specific
circuits within our network resulting from events outside our control, which
led to short-term degradation in the level of performance of our network.
Customer satisfaction with our services is critical to our success
Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level commitment related to the continuous
availability of service on a 24 hours per day, seven days per week basis. This
commitment is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. To
date, only a limited number of customers have been entitled to this credit. If
we incur significant service level commitment obligations in connection with
system downtime, our liability insurance may not be adequate to cover these
expenses. As customers outsource more mission-critical operations to us, we are
subject to increased liability claims and customer dissatisfaction if our
systems fail or our customers otherwise become unsatisfied.
Our ability to expand our network is unproven and will require substantial
financial, operational and 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,
including our dedicated clear channel network. The expansion and adaptation of
our telecommunications infrastructure will require substantial financial,
operational and management resources as we negotiate telecommunications
capacity with network infrastructure suppliers. Due to the limited deployment
of our services to date, our ability to connect and manage a substantially
larger number of customers at high transmission speeds is unknown. We have yet
to prove our network's ability to be scaled up to higher customer levels while
maintaining superior performance. Furthermore, it may be difficult for us to
increase quickly our network capacity in light of current necessary lead times
within the industry to purchase circuits and other critical items. If we fail
to achieve or maintain high capacity data transmission circuits, customer
demand could diminish because of possible degradation of service. In addition,
as we upgrade our telecommunications infrastructure to increase bandwidth
available to our customers, we expect to encounter equipment or software
incompatibility which may cause delays in implementation.
We depend on network interconnections provided by third parties 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
15
<PAGE>
networks do not add more bandwidth to accommodate increased traffic. Many of
the companies with which we maintain interconnections are our competitors.
There is nothing to prevent any networks, many of which are significantly
larger than we are, from charging high usage fees or denying access. In the
future, networks could refuse to continue to interconnect directly with us,
might impose significant costs on us or limit our customers' access to their
networks. In this event, we may not be able on a cost-effective basis to access
alternative networks to exchange our customers' traffic. In addition, we may
not be able to pass through to our customers any additional costs of utilizing
these networks. In these cases, our business could be harmed.
Difficulties presented by international economic, political, legal, accounting
and business factors could harm our business in international markets
A component of our strategy is to expand into international markets. We
opened our first Internet Data Center outside of the United States in the
London metropolitan area in June 1999 and acquired an Internet Data Center in
Tokyo through our acquisition of Global OnLine Japan Co., Ltd. in December
1999. 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 current or future
customers to rely on in-house personnel and equipment to furnish the services
we currently provide. In addition, keeping pace with technological advances may
require substantial expenditures and lead time.
We believe that our ability to compete successfully is also dependent upon
the continued compatibility and interoperability of our services with products,
services and architectures offered by various vendors. Although we work with
various vendors in testing newly developed products, these products may not be
compatible with our infrastructure or adequate to address changing customer
needs. For instance, existing networking hardware may not be immediately
compatible with leading edge telecommunications infrastructure services. This
16
<PAGE>
incompatibility would require us to make significant investments to achieve
compatibility. Although we intend to support emerging standards, industry
standards may not be established or we may not be able to timely conform to new
standards. Our failure to conform to a prevailing standard, or the failure of a
common standard to emerge, could have a material adverse effect on our
business.
System security risks could disrupt our services
The ability to provide secure transmissions of confidential information over
networks accessible to the public is a significant barrier to electronic
commerce and communications. A portion of our services rely on encryption and
authentication technology licensed from third parties. Despite a variety of
network security measures taken by us, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Our Internet Data Centers have experienced and may
in the future experience delays or interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees of Exodus or others. Furthermore, inappropriate use of the network by
third parties could also jeopardize the security of confidential information,
such as customer and Exodus passwords as well as credit card and bank account
numbers, stored in our computer systems or those of our customers. As a result,
we could become liable to others and lose existing or potential customers. The
costs required to eliminate computer viruses and alleviate other security
problems could be prohibitively expensive. In addition, the efforts to address
these problems could result in interruptions, delays or cessation of service to
our customers.
We depend on third-party equipment and software suppliers
We depend on vendors to supply key components of our telecommunications
infrastructure and system and network management solutions. Some of the
telecommunications services and networking equipment is available only from
sole or limited sources. For instance, the routers, switches and modems we use
are currently supplied primarily by Cisco Systems, Inc. We typically purchase
or lease all of our components under purchase orders placed from time to time.
We do not carry significant inventories of components and have no guaranteed
supply arrangements with vendors. If we are unable to obtain required products
or services on a timely basis and at an acceptable cost, our business would be
harmed. In addition, if our sole or limited source suppliers do not provide
products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components we use, our business would be harmed. For example, we have
experienced performance problems, including previously unknown software and
firmware bugs, with routers and switches that have caused temporary disruptions
in and impairment of network performance. In addition, we expect to depend for
a time on third parties to deliver and manage our services from certain
international operations.
Government regulation and legal uncertainties may harm our business
Laws and regulations directly applicable to communications and commerce over
the Internet are becoming more prevalent. The United States Congress has
recently considered enacting Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union also recently enacted its own privacy regulations. The law of
the Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. In addition, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business. We provide services over the Internet in all states in the
United States and in many foreign countries, and we facilitate the activities
of our customers in these jurisdictions. As a result we may be required to
qualify to do business, or be subject to taxation, or be subject to other laws
and regulations, in these jurisdictions even if we do not have a physical
presence or employees or property in these jurisdictions. The application of
these multiple sets of laws and regulations is uncertain, but we could find
that Exodus is subject to regulation, taxation, enforcement or other liability
in unexpected ways, which could materially adversely affect our business.
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<PAGE>
We could be held liable for the information disseminated through our network
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. The Child Online Protection Act of 1998
imposes criminal penalties and civil liability on anyone engaged in the
business of selling or transferring material that is harmful to minors, by
means of the World Wide Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon us and other
Internet network providers of potential liability for information carried on or
disseminated through systems could require us to implement measures to reduce
exposure to liability, which may require the expenditure of substantial
resources, or to discontinue various service or product offerings. Further, the
costs of defending against any claims and potential adverse outcomes of these
claims could have a material adverse effect on our business. While we carry
professional liability insurance, it may not be adequate to compensate or may
not cover us in the event we become liable for information carried on or
disseminated through our networks.
Some businesses, organizations and individuals have in the past sent
unsolicited commercial e-mail messages advertising sites hosted at our
facilities to a massive number of people. This practice, known as "spamming,"
has led to some complaints against us. In addition, some ISPs and other online
services companies could deny network access to us if we allow undesired
content or spamming to be transmitted through our networks. Although we
prohibit customers by contract from spamming, we cannot be sure that customers
will not engage in this practice, which could have a material adverse effect on
our business.
Our future success depends on our key personnel
Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Any officer or employee
can terminate his or her relationship at any time. If we lose the services of
one or more of our key employees or are unable to attract additional qualified
personnel, our business would be adversely affected. We do not carry key-person
life insurance for any of our employees.
If 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 as a whole could undermine the benefits of our
services. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.
We face risks associated with protection and enforcement of intellectual
property rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights in our products and services. We have no patented technology that would
preclude or inhibit competitors from entering our market. Although we have
entered into confidentiality agreements with our employees, contractors,
suppliers, distributors and appropriate customers to limit access to and
disclosure of our proprietary information, these may prove insufficient to
prevent misappropriation of our technology or to deter independent third-party
development of similar technologies. In addition, the laws of various foreign
countries may not protect our products, services or intellectual property
rights to the same extent as do the laws of the United States.
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In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual
property. We expect that participants in our markets will be increasingly
subject to infringement claims. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product installation delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
Potential risks related to the Year 2000 problem might harm our business
The Year 2000 problem stems from the use of a two digit date to represent
the year (for example, 85 = 1985) in computer software and firmware. As a
result, many currently installed computer systems are not capable of
distinguishing dates beginning with the Year 2000 from dates prior to the Year
2000. As a result, computer systems or applications used by many companies in a
wide variety of industries may experience operating difficulties unless the
systems or applications are modified to process adequately information related
to the date change. Significant uncertainty exists in the software and other
industries concerning the scope and magnitude of problems associated with the
century change. To the extent Year 2000 issues cause significant delay in, or
cancellation of decisions to purchase products or product support, due to the
reallocation of resources to address Year 2000 issues or otherwise, our
business could be materially adversely affected.
We recognize the need to ensure our operations will not be adversely
impacted by Year 2000 issues. We have put into place a comprehensive Year 2000
Risk Management initiative that is adequately funded, staffed and managed. This
initiative's scope covers both our IT systems and non-IT systems and addresses
all areas of the Year 2000 issues as defined by the Information Technology
Association of America (ITAA). Our internal inventory audit was completed
January 1999. Due to our acquisition of Cohesive, we expanded the independent
review of our Year 2000 assessment. The review was completed in the third
quarter of 1999. Due to our recent acquisition of Service Metrics, Inc., we
performed an independent review of their Year 2000 program. The review was
completed in December 1999. We believe that their internal management
information systems and other systems are Year 2000 compliant. In December
1999, we acquired Global OnLine Japan. We believe that their internal
management information systems and other systems are Year 2000 compliant. We
continue to monitor their program.
We have determined that our Internet Data Center equipment is currently Year
2000 compliant. We will continue to monitor vendors and suppliers for any
potential Year 2000 issues. Likewise, based on the on-going assessment relative
to our current software service offerings, we believe that the current versions
of these products are Year 2000 compliant. We have reviewed, and continue to
review, internal management information and other systems in order to identify
and modify those products, services or systems to ensure that they remain Year
2000 compliant. We have completed the assessment of the Year 2000 compliance of
Cohesive's internal management information and other systems. Based on our
assessment to date, we believe that our internal management information and
other systems and Cohesive's internal management information and other systems
are Year 2000 compliant. We do not foresee any significant issues with internal
IT and internal non-IT systems remaining Year 2000 compliant.
Our Year 2000 initiative also addresses vendor relationships (both IT and
non-IT) and their readiness/preparedness relating to Year 2000 issues. IT
vendors include software providers, hardware providers, service providers, off
the shelf software publishers and IT consultants. Non-IT providers include
electric power suppliers, vendors of uninterruptable power supplies and
generators, telecommunications service providers, business partners, facilities
maintainers and other non-IT service contractors. In the event that third
parties cannot provide us with products, services or systems that are Year 2000
compliant on a timely basis, our business could be materially adversely
affected. To date, we have not discovered nor do we anticipate any material
issues with vendors and service providers. Evaluation of vendor Year 2000
preparedness is an on-going process. As our Year 2000 evaluation does not
evaluate our vendors' vendors nor our vendors' customer base viability issues,
we have put in place contingency plans. To minimize our risk, effective
November 15, 1999 through January 4, 2000, we instituted a freeze on the
introduction of new technology, new software versions and new configurations.
During that period, we utilized only hardware approved for production.
19
<PAGE>
Many of our customers maintain their Internet operations on servers which
may be impacted by Year 2000 complications. The failure of our customers to
ensure that their servers are Year 2000 compliant could have a material adverse
effect on our customers, which in turn could have a material adverse effect on
our business, if our customers are forced to cease or interrupt Internet
operations or experience malfunctions related to their equipment.
We have established procedures for evaluating and managing the risks and
costs associated with the Year 2000 problem. Funding and execution for this
initiative is within our existing business units and operating budgets and is
not viewed as material. Based on our current assessment, we believe the costs,
excluding employee personnel time and effort and unanticipated liabilities, to
resolve Year 2000 issues should not exceed $900,000, of which we have incurred
approximately $800,000 as of December 31, 1999. We further estimate that the
time and effort required of our personnel to resolve Year 2000 issues will not
be material.
While we believe our Year 2000 initiative to be prudent, properly funded and
staffed and well-managed, there can be no assurance that we will identify and
remedy all Year 2000 problems in a timely fashion, that any remedial efforts in
this regard will not involve significant time and expense, or that these
problems will not have a material adverse effect on our business.
The notes are effectively subordinated to our secured indebtedness and the
liabilities of our subsidiaries
The notes are effectively subordinated to our secured debt to the extent of
the value of the assets securing the debt. The notes are effectively
subordinated to all liabilities, including trade payables and lease
obligations, of our subsidiaries. Any right we may have to receive assets of
any of our subsidiaries upon liquidation or reorganization will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. As of September 30, 1999, we had approximately $64.3 million of
outstanding secured debt and our subsidiaries had approximately $17.4 million
of liabilities. The indenture governing the Notes contains limitations on our
ability and the ability of our subsidiaries to incur additional debt. However,
these limitations are subject to a number of exceptions, and there can be no
assurances that we will not incur significant additional debt in the future,
including debt to which the holders of the Notes would be effectively
subordinated. See "Description of Notes--Covenants--Limitation on Debt".
Our management has broad discretion in the allocation of the proceeds of the
sale of the notes
We expect to use the net proceeds from the sale of the notes in December
1999 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 indenture 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 indenture
Upon the occurrence of a Change of Control (as defined elsewhere in this
prospectus), we may be required to purchase all or a portion of the notes at a
purchase price equal to 101% of the principal amount, plus accrued and unpaid
interest, if any, to the date of purchase. Prior to commencing such an offer to
purchase, we may be required to (1) repay in full all of our indebtedness that
would prohibit the repurchase of the notes or (2) obtain any consent required
to make the repurchases. If we are unable to repay all of this indebtedness or
are unable to obtain the necessary consents, we will be unable to offer to
purchase the notes. That failure would constitute an event of default under the
indenture. We may not have sufficient funds available at the time of any Change
of Control to repurchase the notes. The events that require a repurchase upon a
Change of Control under the indenture may also constitute events of default
under any of our indebtedness. See "Description of the Notes--Repurchase at the
Option of Holders."
20
<PAGE>
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.
21
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act. When used in this prospectus, the words "anticipate," "believe,"
"estimate," "will," "may," "intend" and "expect" and similar expressions
generally identify forward-looking statements. Although we believe that our
plans, intentions and expectations reflected in the forward-looking statements
are reasonable, we cannot be sure that they will be achieved. Forward-looking
statements in this prospectus include those relating to the expansion of our
network through the opening of additional Internet Data Centers and the timing
of openings, the upgrading of our telecommunications infrastructure, our
planned introduction of various new products and services, the possibility of
acquiring complementary businesses, products, services and technologies and our
ability to make required payments on our current and future debt instruments.
Actual results, performance or achievements could differ materially from those
contemplated by the forward-looking statements contained in this prospectus.
Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this prospectus, including under
the heading "Risk Factors." These factors are not intended to represent a
complete list of the general or specific factors that may affect us. It should
be recognized that other factors, including general economic factors and
business strategies, may be significant, presently or in the future, and the
factors set forth in this prospectus may affect us to a greater extent than
indicated. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements set forth in this prospectus. Except as required by law, we
undertake no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
22
<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 $485.5 million.
The net proceeds will be used in the System and Network Management Business (as
defined in the indenture governing the notes), such as Internet Data Centers.
In the ordinary course of business, we evaluate potential acquisitions of
businesses, products, services and technologies. However, 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."
23
<PAGE>
CAPITALIZATION
The following table sets forth our unaudited capitalization as of September
30, 1999 on a supplemental actual basis, on an as adjusted basis to reflect the
receipt of the net proceeds from the sale of the notes, and as further adjusted
to reflect the receipt of the net proceeds from the sale of $500.0 million
principal amount of our 4 3/4% Convertible Subordinated Notes due July 15, 2008
issued December 8, 1999.
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------
As As Further
Actual Adjusted Adjusted
--------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Cash and cash equivalents................... $ 171,971 $ 657,501 $1,142,751
--------- ---------- ----------
Restricted cash and cash equivalents........ $ 35,444 $ 35,444 $ 35,444
--------- ---------- ----------
Current portion of equipment loans, line of
credit facilities and capital lease
obligations(1)............................. $ 22,539 $ 22,539 $ 22,539
--------- ---------- ----------
Long-term debt (excluding current
maturities)(1):
Bank borrowings(2)........................ -- -- --
Equipment loans and line of credit
facility................................. 9,600 9,600 9,600
Capital lease obligations................. 32,201 32,201 32,201
Convertible Subordinated Notes(3)......... 250,000 250,000 750,000
Senior Notes(4)(5)........................ 275,375 775,663 775,663
--------- ---------- ----------
Total long-term debt.................... 567,176 1,067,464 1,567,464
Stockholders' equity(6):
Preferred stock, $0.001 par value:
5,000,000 shares authorized, no shares
issued or outstanding.................... -- -- --
Convertible preferred stock of an acquired
company, 20,554,832 shares issued and
outstanding(7)........................... 15,437 15,437 15,437
Common stock, $0.001 par value:
300,000,000 shares authorized,
170,087,594 shares issued and
outstanding.............................. 170 170 170
Additional paid-in capital................ 195,166 195,166 195,166
Deferred stock compensation............... (2,903) (2,903) (2,903)
Accumulated deficit....................... (175,269) (175,269) (175,269)
--------- ---------- ----------
Total stockholders' equity.............. 32,601 32,601 32,601
--------- ---------- ----------
Total capitalization.................. $ 599,777 $1,100,065 $1,600,065
========= ========== ==========
</TABLE>
- --------
(1) See Notes 4 and 6 of Notes to Supplemental Consolidated Financial
Statements.
(2) See Note 4 of Notes to Supplemental Consolidated Financial Statements.
(3) Includes $250.0 million aggregate principal amount of our 5% Convertible
Subordinated Notes due March 15, 2006.
(4) Includes $275.0 million aggregate face amount of our 11 1/4% Senior Notes
due 2008 and a related $375,000 premium.
(5) For purposes of this table, the translation of euros into dollars has been
made at $1.0023 per euro, which represents the Noon Buying Rate on December
2, 1999.
(6) Does not include (i) 51,939,748 shares of common stock issuable upon the
exercise of stock options outstanding under our stock option plans as of
September 30, 1999 with a weighted average per share exercise price of
$10.18, (ii) 8,461,612 shares of Common Stock available for future grant as
of September 30, 1999 under our stock and option plans or (iii) 506,664
shares of Common Stock issuable upon the exercise of warrants outstanding
as of September 30, 1999 with a weighted average per share exercise price
of $1.83. See Note 1 of Notes to Supplemental Consolidated Financial
Statements.
(7) These shares are convertible into 5,171,554 shares of Exodus Common Stock
upon the closing of our acquisition of Service Metrics in November 1999.
24
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data should be
read in conjunction with our supplemental consolidated financial statements and
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The supplemental
consolidated financial statements have been prepared to give retroactive effect
to the merger with Service Metrics, Inc. on November 23, 1999. The supplemental
consolidated statement of operations data for each of the years in the three-
year period ended December 31, 1998, and the supplemental consolidated balance
sheet data as of December 31, 1997 and 1998, are derived from supplemental
consolidated financial statements that have been audited by KPMG LLP,
independent auditors, and are included elsewhere in this prospectus. The
supplemental consolidated statement of operations data for the nine-month
periods ended September 30, 1998 and September 30, 1999 and the supplemental
consolidated balance sheet data as of September 30, 1999 are derived from
supplemental unaudited condensed consolidated financial statements included
elsewhere in this prospectus. The supplemental consolidated statement of
operations data for the year ended December 31, 1995 and the supplemental
consolidated balance sheet data as of December 31, 1994, 1995 and 1996 are
derived from consolidated financial statements that have been audited by KPMG
LLP that are not included in this prospectus. The supplemental consolidated
statement of operations data for the year ended December 31, 1994 are derived
from unaudited consolidated financial statements that are not included in this
prospectus. The unaudited consolidated financial statements have been prepared
on substantially the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of operations for these periods. Historical results
are not necessarily indicative of the results to be expected in the future, and
results of interim periods are not necessarily indicative of results for the
entire year.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer consulting services. We began to offer Internet
connectivity services to enterprises in October 1994 and server hosting
services in late 1995. In August 1996, we opened our first dedicated Internet
Data Center and refocused our business strategy on providing Internet system
and network management solutions for enterprises with mission-critical Internet
operations.
In the following tables and in this document, "EBITDA" represents earnings
(loss) before net interest expense, income taxes, depreciation, amortization
(including amortization of deferred stock compensation) and other noncash
charges. EBITDA should not be used as an alternative to operating loss or net
cash provided by (used for) operating activities, investing activities or
financing activities, each as measured under generally accepted accounting
principles. In addition, EBITDA may not be comparable to other similarly titled
information from other companies. However, our management believes that EBITDA
is an additional meaningful measure of performance and liquidity. With respect
to the captions entitled "Deficiency of earnings available to cover fixed
charges" and "Ratio of earnings to fixed charges," earnings consist of income
(loss) before provision for income taxes plus fixed charges. Fixed charges
consist of interest charges and amortization of debt expense and discount or
premium related to indebtedness, whether expensed or capitalized, and that
portion of rental expense we believe to be representative of interest.
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended
------------------------------------ --------------------
Sept. 30, Sept. 30,
1995 1996 1997 1998 1998 1999
------- ------- -------- -------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
Consolidated Statement
of Operations Data:
Total revenues.......... $ 1,408 $ 3,130 $ 12,408 $ 52,745 $ 31,638 $ 140,754
------- ------- -------- -------- -------- ---------
Costs and expenses:
Total cost of
revenues.............. 1,128 2,990 16,868 61,578 39,291 118,827
Marketing and sales.... 1,056 2,734 12,702 29,034 20,576 42,473
General and
administrative........ 427 1,056 5,983 16,058 9,664 25,548
Product development.... 70 444 1,647 3,507 2,389 5,641
Amortization of
intangibles........... -- -- -- 141 -- 4,674
Restructuring costs.... -- -- -- -- -- 923
------- ------- -------- -------- -------- ---------
Total costs and
expenses.............. 2,681 7,224 37,200 110,318 71,920 198,086
------- ------- -------- -------- -------- ---------
Operating loss......... (1,273) (4,094) (24,792) (57,573) (40,282) (57,332)
Net interest expense... 38 39 506 9,743 5,110 20,044
------- ------- -------- -------- -------- ---------
Net loss............... (1,311) (4,133) (25,298) (67,316) (45,392) (77,376)
Cumulative dividends
and accretion on
redeemable convertible
preferred stock....... -- -- (1,413) (2,014) (2,014) --
------- ------- -------- -------- -------- ---------
Net loss attributable to
common stockholders.... $(1,311) $(4,133) $(26,711) $(69,330) $(47,406) $ (77,376)
======= ======= ======== ======== ======== =========
Basic and diluted net
loss per share(1)...... $ (0.12) $ (0.27) $ (1.73) $ (0.55) $ (0.42) $ (0.47)
======= ======= ======== ======== ======== =========
Shares used in computing
basic and diluted net
loss per share(1)...... 10,524 15,312 15,428 125,810 114,088 165,974
======= ======= ======== ======== ======== =========
Supplemental
Consolidated Statement
of Cash Flows Data:
Net cash used for
operating activities... $ (461) $(3,116) $(15,518) $(47,312) $(31,568) $ (68,542)
Net cash used for
investing activities... (69) (3,877) (23,864) (92,757) (70,323) (235,134)
Net cash provided by
financing activities... 692 10,545 45,937 285,814 283,254 319,632
Other Data:
EBITDA.................. (1,208) (3,633) (20,274) (41,945) (29,592) (27,994)
Depreciation and
amortization........... 65 461 3,429 13,024 8,575 28,383
Capital expenditures.... 69 3,499 22,489 44,564 26,680 160,624
Deficiency of earnings
available to cover
fixed charges.......... (1,311) (4,133) (25,298) (67,316) (45,392) (77,376)
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1994
-----------------
(in thousands,
except ratio and
per share data)
<S> <C>
Supplemental Consolidated Statement of Operations Data:
Total revenues.............................................. $ 977
Operating income............................................ 143
Net income.................................................. 144
Basic and diluted net income per share...................... $0.02
Shares used in computing basic and diluted net income per
share...................................................... 8,000
Ratio of earnings to fixed charges.......................... 26x
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
---- ------- ------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Supplemental
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 1 $ 163 $ 3,715 $ 10,270 $156,015 $171,971
Restricted cash
equivalents and
investments............ -- -- 378 1,753 45,614 35,444
Working capital
(deficiency)........... 93 (1,170) 1,892 (3,707) 124,636 153,753
Total assets............ 320 840 8,289 40,973 298,798 684,825
Equipment loans, line of
credit facility,
capital lease
obligations,
convertible
subordinated notes and
senior notes, less
current portion........ -- 141 1,449 15,135 227,284 567,176
Total stockholders'
equity (deficit)....... 169 (1,140) (5,234) (30,600) 24,277 32,601
</TABLE>
- --------
(1) See Note 1 of Notes to supplemental consolidated financial statements for
our explanation of the determination of the number of shares used in
computing per share data.
26
<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 supplemental 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
We are a leading provider of Internet system and network management
solutions and technology professional services for enterprises with mission-
critical Internet operations. Our solutions include Internet Data Centers,
network services, managed services and professional services that together
provide the high performance, scalability and expertise that enterprises need
to optimize Internet operations. We deliver our services from our
geographically distributed, state-of-the-art Internet Data Centers that are
connected through a high-performance Internet backbone network.
We are the successor to a Maryland corporation that was formed in August
1992 to provide computer-consulting services. We began offering server hosting
and Internet connectivity services in late 1995, opened our first dedicated
Internet Data Center in August 1996 and introduced managed services in 1997 and
professional services in 1998. We have derived most of our revenues from
customers for whom we provide these services. Most 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 16 additional domestic
Internet Data Centers in the metropolitan areas of New York (March 1997 and
September 1999), Silicon Valley (second site--August 1997; third site--June
1998; and fourth site June 1999), Seattle (September 1997 and June 1999), Los
Angeles (October 1997 and September 1999), Washington, D.C. (December 1997 and
May 1999), Boston (July 1998 and December 1999), Chicago (April 1999), Atlanta
(December 1999) and Austin, Texas (November 1999). 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. 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.
In October 1998, we purchased the assets of Arca Systems, Inc. ("Arca"), a
provider of advanced network and system security consulting services. In
February 1999, we acquired American Information Systems, Inc. ("AIS"), a
regional provider of co-location, web hosting and professional services. In
July 1999, we acquired Cohesive Technology Solutions, Inc. ("Cohesive"), a
technology professional services organization with expertise in networking,
Internet-based applications and technology solutions. In November 1999, we
acquired Service Metrics, Inc., a provider of Internet monitoring applications
and services. In connection with the merger, we issued a total of approximately
7.0 million shares of our common stock and options for Exodus Common Stock in
exchange for all outstanding shares of Service Metrics common stock and
outstanding options we assumed. We will account for the Service Metrics merger
as a pooling of interests. In December 1999, we acquired Global OnLine Japan
Co., Ltd., an Internet solutions provider based in Tokyo. As a result, we
issued 415,000 shares of our common stock in exchange for 85% of the
outstanding shares of Global OnLine Japan. The transaction will be accounted
for as a purchase. In January 2000, we agreed to
27
<PAGE>
acquire KeyLabs, Inc., a provider of e-business testing services based in Utah.
We expect the transaction, which will be accounted for as a purchase, to close
by the end of February 2000.
We intend to expand domestically and internationally. Prior to building an
Internet Data Center in a new geographic region, we employ various means to
evaluate the market opportunity in a given location, including market research
on Internet usage statistics, the pre-selling of services into the proposed
market and analysis of specific financial criteria. We typically require at
least six months to select the appropriate location for an Internet Data
Center, construct the necessary facilities, install equipment and
telecommunications infrastructure, and hire the operations and sales personnel
needed to conduct business at that site. Expenditures related to an Internet
Data Center commence well before the Internet Data Center opens, and it takes
an extended period to approach break-even capacity utilization at each site. As
a result, we expect that individual Internet Data Centers will experience
losses for in excess of one year from the time they are opened. We experience
further losses from sales personnel hired to test market our services in
markets where there is no, and may never be an, Internet Data Center. As a
result, we expect to make investments in expanding our business rapidly into
new geographic regions which, while potentially 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".
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 September 30, 1999, we had an
accumulated deficit of approximately $175.3 million. The revenue and income
potential of our business and market is unproven, and our limited operating
history makes an evaluation of our prospects and us difficult. We intend to
invest in new Internet Data Centers and other sites, product development, and
sales and marketing programs. We therefore believe that we will continue to
experience net losses on a quarterly and annual basis for the foreseeable
future. As a company in the new and rapidly evolving market for Internet system
and network management solutions, we encounter risks, expenses and difficulties
that affect our business and prospects. There can be no assurance that we will
achieve profitability on a quarterly or an annual basis or that we will sustain
profitability. See "Risk Factors--Our short operating history and heavy losses
make our business difficult to evaluate".
28
<PAGE>
Results of Operations for the Years Ended December 31, 1996, 1997 and 1998 and
the Nine Months Ended September 30, 1998 and 1999
The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31, 1996, 1997 and
1998 and the nine-month periods ended September 30, 1998 and 1999. The
information for the years ended December 31, 1996, 1997 and 1998 has been
derived from our supplemental audited consolidated financial statements
included in this prospectus. The information for the nine-month periods ended
September 30, 1998 and 1999 has been derived from our supplemental unaudited
condensed consolidated financial statements included in this prospectus which,
in management's opinion, have been prepared on substantially the same basis as
the supplemental 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. This
information should be read in conjunction with the supplemental consolidated
financial statements and related notes included in this prospectus. The
operating results in any periods are not necessarily indicative of the results
to be expected for any future period.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
--------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues........ 78.4 % 93.4 % 94.4 %
Equipment revenues...... 21.6 6.6 5.6
------- ------- ------- ------- ------
Total revenues........ 100.0 100.0 100.0 100.0 % 100.0 %
------- ------- ------- ------- ------
Costs and expenses:
Cost of service
revenues............... 81.1 130.8 112.4
Cost of equipment
revenues............... 14.4 5.2 4.4
------- ------- ------- ------- ------
Total cost of
revenues............. 95.5 135.9 116.7 124.2 84.4
Marketing and sales..... 87.3 102.4 55.0 65.0 30.2
General and
administrative......... 33.7 48.2 30.4 30.5 18.2
Product development..... 14.2 13.3 6.6 7.6 4.0
Amortization of
intangibles............ -- -- 0.3 -- 3.3
Restructuring costs..... -- -- -- -- 0.7
------- ------- ------- ------- ------
Total cost and
expenses............. 230.8 299.8 209.2 227.3 140.7
------- ------- ------- ------- ------
Operating loss........ (130.8) (199.8) (109.2) (127.3) (40.7)
Net interest expense...... 1.2 4.1 18.5 16.2 14.2
------- ------- ------- ------- ------
Net loss.............. (132.0)% (203.9)% (127.6)% (143.5)% (55.0)%
======= ======= ======= ======= ======
</TABLE>
Revenues
Our revenues consist of (1) monthly fees from customer use of Internet Data
Center sites, network services and managed services, including professional
services and use of equipment and software provided by us, (2) revenues from
sales of third-party equipment to customers and (3) fees for installation and
certain professional services. Currently, substantially all of our revenue is
derived from services. Revenues, other than installation fees, equipment sales
to customers and certain professional services, are generally billed and
recognized ratably over the term of the contract, which is generally one year.
Installation fees are typically recognized at the time the installation occurs,
and equipment revenues are typically recognized when the equipment is delivered
to the customer or placed into service at an Internet Data Center. We sell
third-party equipment to our customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when the services are rendered.
29
<PAGE>
Our service revenues increased 372% from $2.5 million in 1996 to $11.6
million in 1997 and increased an additional 330% to $49.8 million in 1998. This
growth in service revenues was primarily the result of opening our Internet
Data Centers, increases in the number of new customers, substantially all of
which were Internet Data Center customers, and increases in revenues from
existing customers. Equipment revenues increased 21% from $676,000 in 1996 to
$820,000 in 1997 and 257% to $2.9 million in 1998.
Our revenues increased 345% to $140.8 million for the nine month period
ended September 30, 1999 from $31.6 million in the same period of the prior
year. This growth in revenues was the result of increases in the number of new
customers, substantially all of which were Internet Data Center customers,
increases in revenues from existing customers and revenue contributions from
Cohesive.
Cost of Revenues
Our cost of revenues is comprised of the costs for our backbone network and
local telecommunications loops, interconnections to other networks,
depreciation and amortization, salaries and benefits for our customer service
and operations personnel (customer service personnel, network engineers and
professional services personnel), rent, repairs and utilities related to our
Internet Data Centers and other sites and costs of third-party equipment sold
to customers.
Cost of service revenues increased from $2.5 million in 1996 to $16.2
million in 1997 and to $59.3 million in 1998. Our cost of service revenues as a
percentage of revenues increased from 81% in 1996 to 131% in 1997 and declined
to 112% in 1998. The increases in cost of service revenues in absolute dollars
were due to increased costs associated with the build-out and operation of our
increasing number of Internet Data Centers, including increased costs for our
redundant backbone network and local telecommunications loops, depreciation,
salaries and benefits for our customer service and operations personnel, and
rent. The increase in cost of service revenues as a percentage of revenues from
1996 to 1997 reflects the timing of investments in Internet Data Centers and
network infrastructure relative to the growth in associated revenue. The
decrease in cost of service revenues as a percentage of revenues from 1997 to
1998 resulted from revenues from new and existing Internet Data Centers
increasing faster than related costs of revenues. Costs for our redundant
backbone network and local telecommunications loops increased by approximately
$3.8 million from 1996 to 1997 and by approximately $15.2 million from 1997 to
1998. Depreciation increased by approximately $3.0 million from 1996 to 1997
and by approximately $8.4 million from 1997 to 1998. Salaries and benefits for
our customer service and operations personnel increased by approximately $3.5
million from 1996 to 1997 and by approximately $6.7 million from 1997 to 1998.
Rent expense increased by approximately $945,000 from 1996 to 1997 and by
approximately $3.1 million from 1997 to 1998. Cost of equipment revenues
increased from $452,000 in 1996 to $640,000 in 1997 and to $2.3 million in
1998. Cost of equipment revenue in absolute dollars varies primarily as a
result of equipment revenues and cost of equipment revenues as a percentage of
revenues varies due to the mix of equipment purchased by customers.
Cost of revenues increased 202% to $118.8 million for the nine month period
ended September 30, 1999 from $39.3 million in the same period of the prior
year. This increase in cost of revenues in absolute dollars was primarily the
result of costs associated with hiring additional employees, including
professional services employees hired in connection with our acquisition of
Cohesive, and consultants, 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. Our cost of revenues as a percentage of revenues decreased to 84% for
the nine months ended September 30, 1999 from 124% for the same period of the
prior year. This decline was due primarily to an increase in revenue between
comparison periods. We expect that cost of revenues will continue to increase
in absolute dollars.
30
<PAGE>
Marketing and Sales
Our marketing and sales expenses are comprised of salaries, commissions and
benefits for our marketing and sales personnel, printing and advertising costs,
public relations costs, consultants' fees and travel and entertainment
expenses.
Our marketing and sales expenses increased from $2.7 million in 1996 to
$12.7 million in 1997 and to $29.0 million in 1998. These increases were
primarily the result of hiring additional marketing and sales personnel,
expanding marketing programs in connection with our expansion of our
operations, including the number and scope of our Internet system and network
management solutions, and in 1998, the charge of $525,000 associated with the
warrant for common stock issued to At Home Corporation. Salaries and benefits
for our sales and marketing personnel increased by approximately $6.1 million
from 1996 to 1997 and by approximately $10.5 million from 1997 to 1998, and
costs associated with tradeshows and advertising increased by approximately
$977,000 from 1996 to 1997 and approximately $114,000 from 1997 to 1998. The
increase in marketing and sales expenses as a percentage of revenues from 1996
to 1997 reflects the continued expansion of marketing and sales efforts prior
to the receipt of associated revenues. The decrease in marketing and sales as a
percentage of revenues from 1997 to 1998 was due to revenues growing faster
than marketing and sales expenses.
Our marketing and sales expenses increased 106% to $42.5 million for the
nine month period ended September 30, 1999 from $20.6 million in the same
period of the prior year. The increase in absolute dollars was primarily the
result of increased compensation and related expenses associated with hiring
additional marketing and sales personnel, including employees hired in
connection with our acquisition of Cohesive, and increased advertising
expenses. Our marketing and sales expense as a percentage of revenues decreased
to 30% for the nine months ended September 30, 1999 from 65% for the same
period of the prior year. This decline was primarily due to our significant
increase in revenue between comparison periods. We expect that marketing and
sales expense will continue to 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
personnel, consulting fees and recruiting fees.
Our general and administrative expenses increased from $1.1 million in 1996
to $6.0 million in 1997 and to $16.1 million in 1998. These increases were
primarily the result of increased compensation expenses associated with
additional hiring of general and administrative personnel, costs for
consultants and professional services providers, fees paid for recruiting and
amortization of deferred compensation. Salaries and benefits for general and
administrative personnel increased by approximately $2.0 million from 1996 to
1997 and by approximately $2.8 million from 1997 to 1998. Costs for consultants
and professional services providers increased by approximately $1.1 million
from 1996 to 1997 and by approximately $900,000 from 1997 to 1998. Recruiting
fees increased by approximately $968,000 from 1996 to 1997 and by approximately
$440,000 from 1997 to 1998. These increased expenses reflected our need for
additional general and administrative personnel to handle the expansion of our
operations. The amortization of deferred compensation included in general and
administrative expenses was $741,000 in 1997 and $597,000 in 1998, and there
was no such expense recorded in 1996. The increase in general and
administrative expenses as a percentage of revenues from 1996 to 1997 resulted
primarily from deferred compensation expenses in 1997. The decrease in general
and administrative expenses as a percentage of revenues from 1997 to 1998 was
due to revenues growing faster than general and administrative expenses.
Our general and administrative expenses increased 164% to $25.5 million for
the nine month period ended September 30, 1999 from $9.7 million in the same
period of the prior year. The increase in absolute dollars was primarily the
result of increased compensation expenses associated with additional hiring of
general and administrative personnel, including employees hired in connection
with our acquisition of Cohesive, increased
31
<PAGE>
rent and related expenses due to entering into additional operating leases
during the period, higher depreciation and increased recruiting expenses. Our
general and administrative expense as a percentage of revenues decreased to 18%
for the nine month period ended September 30, 1999 from 31% for the same period
of the prior year. This decline was primarily due to our significant increase
in revenue between comparison periods. We expect that general and
administrative expense will continue to 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 from $444,000 in 1996 to $1.6
million in 1997 and to $3.5 million in 1998. Our product development expenses
grew between the comparison periods primarily because of the addition of
product development personnel to support our expanded service offerings. The
decrease in product development expenses as a percentage of revenues from 1996
to 1998 resulted from revenues growing faster than product development
expenses.
Our product development expenses increased 136% to $5.6 million for the nine
month period ended September 30, 1999 from $2.4 million in the same period of
the prior year. Our product development expenses grew primarily due to the
addition of product development personnel to support our expanded service
offerings. Our product development expense as a percentage of revenues
decreased to 4% for the nine months ended September 30, 1999 from 8% for the
same period of the prior year. This decline was due to our significant increase
in revenue between comparison periods. We expect that product development
expenses will continue to increase in absolute dollars.
Amortization of Intangibles
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 and Cohesive in July 1999. 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 $4.7 million for the nine
month period ended September 30, 1999. These intangibles are being amortized on
a straight-line basis generally over 5 to 10 years.
Restructuring Costs
In August 1999, we announced plans to consolidate seven professional
services practice offices of Cohesive, which we acquired on July 27, 1999. We
determined that consolidation of these offices would maximize efficiencies of
the combined companies. This action is expected to be completed by December 31,
1999. In connection with the consolidation of these facilities, we recorded a
restructuring charge of $923,000 for the nine month period ended September 30,
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.
Net Interest Expense
Our net interest expense increased from $39,000 in 1996 to $506,000 in 1997
and to $9.7 million in 1998. The increase in net interest expense from 1996 to
1997 was primarily the result of substantially increased borrowings as we
entered into equipment loans and lease agreements to finance the construction
of our Internet Data Centers. The increase in net interest expense from 1997 to
1998 was primarily the result of interest expenses associated with our $200.0
million of senior notes which were issued July 1, 1998, substantially increased
borrowings as we entered into equipment loans and lease agreements to finance
the construction of our Internet Data Centers, and working capital lines of
credit to finance working capital for our operations.
Our net interest expense increased to $20.0 million for the nine month
period ended September 30, 1999 from $5.1 million for the same period of the
prior year. The increase in net interest expense was primarily the result of
interest expense associated with our senior notes issued July 1, 1998 and June
22, 1999, and our convertible subordinated notes issued March 3, 1999.
32
<PAGE>
We expect that net interest expense will continue to increase as we enter
into additional equipment leases and loans, obtain additional borrowings and
long term debt and experience reduced interest income as a result of the
decline in our cash reserves to fund working capital and other uses.
EBITDA
Our loss before net interest expense, income taxes, depreciation,
amortization, including amortization of deferred stock compensation, and other
non-cash charges ("EBITDA") was $3.6 million in 1996, $20.3 million in 1997 and
$41.9 million in 1998. The increases in the level of EBITDA losses between the
comparison periods were primarily due to increased expenditures needed to
support our growth in operations, including salaries and benefits for
additional employees, network costs, rent, utilities and other costs related to
the increase in the number of our Internet Data Centers as well as increased
marketing and sales expenses, consulting fees and professional services.
EBITDA loss was $28.0 million for the nine month period ended September 30,
1999 compared to $29.6 million for the same period of the prior year. The
decrease in the magnitude of EBITDA losses between the comparison periods was
primarily due to the significant increases in revenue over these periods offset
in part by increased compensation costs associated with the hiring of
additional employees during those time periods.
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 and liquidity.
Liquidity and Capital Resources
From inception through September 30, 1999, 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 and June
1999, our convertible subordinated notes offering in March 1999 and through
various types of equipment loans and lease lines and working capital lines of
credit. At September 30, 1999, our principal source of liquidity was
approximately $172.0 million in cash and cash equivalents. As of that date, we
also had equipment loans and lease lines of credit under which we could borrow
up to an additional aggregate of $1.2 million for purchases of equipment. As of
September 30, 1999, our total bank borrowings, equipment loans and lines of
credit facilities, capital lease obligations and senior and convertible notes
were $589.7 million. See Notes 4 and 6 of Notes to Supplemental Consolidated
Financial Statements.
Since we began to offer server-hosting services in 1995, we have had
significant negative cash flows from operating activities. Net cash used for
operating activities for the nine months ended September 30, 1999 was $68.5
million, primarily due to net losses and increases in accounts receivable and
prepaid expenses and other assets, offset in part by increases in accounts
payable and depreciation and amortization. This compares to net cash used for
operating activities for the nine months ended September 30, 1998 of $31.6
million which was primarily due to net losses and an increase in accounts
receivable, offset in part by increases in accounts payable and accrued
interest payable and depreciation and amortization.
Net cash used for investing activities for the nine months ended September
30, 1999 was $235.1 million primarily due to capital expenditures for the
continued construction of Internet Data Centers and the acquisitions of AIS and
Cohesive. This compares to net cash used for investing activities for the nine
months ended September 30, 1998 of $70.3 million which was due to capital
expenditures for the construction of Internet Data Centers and an increase in
restricted cash equivalents and investments.
Net cash provided by financing activities for the nine month period ended
September 30, 1999 was $319.6 million, primarily due to the proceeds from our
issuance of $250.0 million of 5% Convertible Subordinated Notes and our
additional $75.0 million offering of 11 1/4% Senior Notes in June 1999. This
33
<PAGE>
compares to net cash provided by financing activities for the nine months ended
September 30, 1998 of $283.3 million which was primarily due to our initial
public offering of common stock in March 1998 and our original $200.0 million
11 1/4% Senior Notes offering in July 1998.
As of September 30, 1999, we had commitments under capital leases and under
noncancellable operating leases of $47.0 million and $260.3 million,
respectively, through 2012. In addition, in August 1999 we entered into
capacity purchase agreements with Global Crossing. 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 September 30, 1999
we had expended $7.0 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 expect to finance such capital
expenditures primarily through the remaining net proceeds from the 11 1/4%
Senior Notes and 5% Convertible Subordinated Notes and our 10 3/4% Senior Notes
and 4 3/4% Convertible Subordinated Notes issued in December 1999, existing and
future equipment loans and lease lines of credit, and issuances of additional
debt and other financing activities. We believe our working capital and capital
expenditure requirements over the next 12 months can be met with existing cash
and cash equivalents and short-term investments, cash from sales of services
and proceeds from 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".
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes methods for 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 implement SFAS No. 133 for the
year ending December 31, 2001.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. 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, United States Treasury Notes and certificates of
deposit. An increase or decrease in interest rates would not significantly
increase or decrease interest expense on debt obligations due to the fixed
nature of our debt obligations. We do not currently have any significant
foreign operations and thus are not currently materially exposed to foreign
currency fluctuations.
34
<PAGE>
BUSINESS
The Company
Exodus Communications is a leading provider of Internet system and network
management solutions for enterprises with mission-critical Internet operations.
Our solutions include Internet Data Centers, network services, managed services
and professional services, which together provide the high performance,
scalability and expertise that enterprises need to optimize their complex
Internet operations. Exodus delivers its services from geographically
distributed, state-of-the-art Internet Data Centers that are connected through
a high-performance dedicated and redundant backbone network. Our tailored
solutions are designed to integrate with existing enterprise systems
architectures and to enable customers to outsource the monitoring,
administration and optimization of their equipment, applications and overall
Internet operations. As of September 30, 1999, we had more than 1,700
customers, including installed and uninstalled customers under contract, and
managed over 16,000 customer servers worldwide. Our customers represent a
variety of industries, ranging from Internet companies such as Lycos, Inc.,
eBay Inc., MSN Hotmail (a subsidiary of Microsoft Corporation), Yahoo!GeoCities
and Inktomi Corporation, to media companies such as MSNBC, USA Today
Information Network, SportsLine USA, Inc. and E-Online!, to major enterprise
companies such as Applied Materials and Storage Networks.
Because Internet usage is growing rapidly, businesses are increasing the
breadth and depth of their Internet product and services offerings. These
Internet operations are mission-critical for Internet-centric businesses and
are becoming increasingly mission-critical for many enterprises. In order to
ensure the quality, reliability, availability and redundancy of these mission-
critical Internet operations, corporate IT departments must make substantial
investments in facilities, personnel, equipment and networks which must be
continuously upgraded to reflect changing technologies and must rapidly scale
as the enterprise grows. This recurring and significant investment is an
inefficient use of resources and, as a result, a significant need exists for
outsourcing arrangements that can increase performance, provide continuous
operation of Internet solutions and reduce Internet operating expenses. We
believe a significant opportunity exists for a highly focused company to
provide a combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance of mission-
critical Internet operations.
Exodus offers an integrated portfolio of solutions that provide customers
with a scalable, secure and high performance platform for the development,
deployment and proactive management of mission-critical Internet operations.
Our server hosting and Internet connectivity services are offered through our
Internet Data Centers' redundant backbone network of multiple high speed 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'
Internet operations. In addition, we integrate best-of-breed technologies from
leading vendors with our industry expertise and proprietary technology.
Our objective is to become the leading provider of Internet system and
network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, we intend to:
. Position Exodus as the leader in this market;
. Focus on enhancing systems and network management, Internet technology
services and professional services;
. Accelerate our global expansion;
. Leverage our expertise to address new market opportunities; and
. Continue to establish strategic relationships for distribution and
technology.
35
<PAGE>
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 17 domestic Internet Data Centers located in nine
metropolitan areas: Atlanta, Austin, Boston, Chicago, Los Angeles, New York,
Seattle, Silicon Valley and Washington, D.C. In addition, we opened our first
Internet Data Center outside of the United States in the London metropolitan
area in June 1999. In December 1999, we acquired Global OnLine Japan which has
an Internet Data Center in Tokyo, Japan. Our Internet Data Centers consist of
approximately 1,600,000 gross square feet.
We recently expanded our solutions and services by acquiring providers of
Internet technologies--Arca, AIS, Cohesive Service Metrics and Global OnLine
Japan. In October 1998, we purchased Arca, a provider of advanced network and
system security consulting services. In February 1999, to accelerate our launch
into the Chicago metropolitan area, we acquired AIS, a regional provider of co-
location, Web hosting and professional services. In July 1999, we acquired
Cohesive for approximately $112.0 million in cash, Exodus common stock and the
assumption of Cohesive options. Cohesive is a technology professional services
organization with expertise in networking, Web applications and technology
solutions. 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. In addition, in January
2000, we agreed to acquire KeyLabs, Inc., a provider of e-business testing
services. See "Prospectus Summary--Recent Events".
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.
Internet Data Centers--Server Hosting Facilities
We deliver our services from geographically distributed, state-of-the-art
Internet Data Centers with uninterruptible power supply and back-up generators,
fire suppression, raised floors, HVAC, separate cooling zones, seismically
braced racks, 24x7 operations and high levels of physical security. In these
facilities, we support leading Internet hardware and software systems vendor
platforms, including those from Compaq Computer Corporation, Dell Computer
Corporation, Hewlett-Packard Company, IBM, Microsoft Corporation, Silicon
Graphics, Inc., Sun Microsystems, Inc. and The Santa Cruz Operation, Inc. This
multi-vendor flexibility enables the customer to retain complete control over
the technical solution and to integrate its Internet operations with its
existing IT technical architecture. Because mission-critical Internet
operations are typically very dynamic and often require immediate hardware and
software upgrades to maintain targeted service levels, customers have unlimited
24x7 access to the Internet Data Centers. Additional space and electrical power
can be added as needed, ensuring that the customer has access to additional
server hosting services.
Based upon their 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.
36
<PAGE>
The following chart summarizes the key features of our current server
hosting services:
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
CyberRack . 199 or 239 quarter, half or full rack . Entry-level service, providing
economical solution for
customers that do not need
dedicated environments
. Secured environment that is
shared by multiple customers
CyberCabinet . 199 or 239 full cabinet . Dedicated, locked cabinet
. A single rack with the
security of a dedicated
environment
. Dedicated power circuits
Virtual Data . 78 x 88 cage or customized to order . Dedicated, locked cage
Center
. Flexibility in designing and
configuring Internet servers,
including space for multiple
racks and other customer
computing products
. Dedicated power circuits
ExodusVault . 88 x 88 or 88 x 128 vault or . Dedicated, enclosed security
area
customized to order . Additional security for
sensitive Internet
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.
Our network services are also designed to consistently deliver low-latency
and peak network performance. During the third quarter of 1999, our network
exchanged a sustained peak 5.6 gigabits per second volume of
37
<PAGE>
traffic with the Internet. Our backbone engineering personnel continuously
monitor traffic patterns and congestion points throughout our network and at
our interconnection points, and dynamically reroute traffic flows to optimize
end-user response times. We also provide peak network performance by
maintaining a large number of direct public and private network peering
interconnections. Our network includes private peering interconnections with
approximately 200 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 the customer's site. We believe this
framework provides an important advantage to enterprises seeking to outsource a
portion of their Internet operations and to link the management of the
outsourced operations with in-house operations. Our proactive service
methodology focuses on identifying and resolving potential problems before they
affect an Internet site's availability or performance. Our sophisticated
Internet system and network management solutions enable us to identify and to
begin to resolve hardware, software, network and application problems,
frequently before the customer is even aware that a problem exists. We offer
the services summarized in the following chart:
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
Managed . A package of 24x7 monitoring . Real time monitoring,
Monitoring and management solutions for notification and reporting for
Services system and database server and database alarms and
(MMS) applications problems
. 24x7 proactive monitoring of . Maximizes availability of
Internet server process customers' mission-critical
Internet operations by
identifying potential problems
proactively
. 24x7 rebooting of servers . Allows customers to leverage
Exodus' systems expertise
. Monthly and daily reports . Offload problem resolution to
available via the Web Exodus (optional)
. An Exodus system
administrator that performs
problem resolution and
automated process restarts
(optional)
Site . Bandwidth usage reports, . Assists in capacity planning
Management graphic and tabular and management of network
Reports statistics delivered to resources
customers via the Internet on
an hourly, daily and semi-
monthly basis
Internet . Tape management services to . Maximizes the availability of
Disaster restore sites after a system customers' applications;
Recovery failure provides additional redundancy
in the event of Internet site
failure
. Distributed load balancing
services to seamlessly re-
route user traffic to an
alternate site in the event
of a failure
Internet . Assigned project manager . Assures a smooth transition to
Systems accountable for developing a an Exodus Internet Data Center
Integration migration plan, managing the along with ongoing support
site's installation and
providing ongoing account
support
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Service Description Benefits
- ------- ----------- --------
<S> <C> <C>
. 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 . Fully-managed on site back-up . Maintains regular data back-up
Vault 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 . Intelligent routing services . Maximizes availability and
MultiPath that geographically performance for Internet sites
Net distribute end-user requests located across multiple
Internet Data Centers
. Traffic routed based upon . Optimizes end-user response
server performance and time
availability, Internet
traffic patterns and the . Provides sophisticated
geographic locations of the Internet site redundancy
requesters Exodus MultiPath Site
Exodus . Site requests intelligently . Increases availability and
MultiPath balanced across multiple performance for multi-server,
Site servers located within a mission-critical Internet
single Internet Data Center sites
Managed . Fully managed firewall . Enhances site security
Firewall perimeter security solution
Service
. 24x7 proactive monitoring
Vulnerability . Automated testing for web . Provides notification of
Scanning site weaknesses potential security
vulnerabilities
Intrusion . Detection and notification of . Allows customers to react
Detection hacker attacks quickly when their site is
being attacked
Exodus . Deployment of Inktomi's . Provides customers with the
ReadyCache network caching technology cost-effective option to
Content through our network of geographically distribute
Distribution Internet Data Centers that their content, thereby
Service will facilitate the enabling them to reach a wider
distribution of customer range of their Internet end-
content worldwide users
</TABLE>
We also offer professional services and, through the acquisition of Cohesive
Technology Solutions, Inc., have expanded these services to assist our
customers in planning their strategies for managing mission-critical Internet
operations, transitioning operations to our Internet Data Centers and managing
various aspects of their Internet operations. These services can be layered to
allow customers to outsource an increasing portion of the management of their
Internet operations.
39
<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 September 30, 1999, we had over 1,700
customers (including installed and uninstalled customers under contract). The
following is a representative list of our Internet Data Center customers. None
of these customers individually represented in excess of 10% of 1998 revenues
or revenues for the first nine months of 1999.
<TABLE>
<S> <C> <C>
Applied Materials Kelley Blue Book Quote.com
DoubleClick Lycos Reebok
eBay Macromedia Sony Online Ventures
Egghead.com (formerly
Onsale) MSNBC Interactive News SportsLine USA
E-Loan MSN Hotmail Storage Networks
eShare Technologies National Semiconductor United Media
France Telecom North USA Today Information
America NextCard Network
FreeRealTime.com Nordstrom Yahoo!GeoCities
Inktomi priceline.com
</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 September 30, 1999, we had 316 employees
engaged in sales and marketing.
We sell our services to enterprises directly through our sales force and
indirectly through our channel partners. We are actively seeking to increase
our sales and distribution capabilities and coverage in the United States and
to expand internationally as new Internet Data Centers are installed outside of
the United States, commencing with our Internet Data Center in London, England.
Currently, most of our sales are derived through the efforts of our direct
sales force.
Sales Force
Our sales force is organized into four distinct groups, consisting of field
sales, strategic accounts, channel sales and telesales, each of which is
further divided into geographical regions within the United States. There is
also a new sales organization in London that we began to staff in October 1998.
Systems engineers and project managers support our sales force, providing pre-
and post-sales support to ensure that customers' services are implemented
properly and efficiently.
Channel Program
Our channel program includes relationships with At Home Corporation, Compaq
Computer Corporation, Hewlett-Packard Company, Microsoft Corporation, Silicon
Graphics, Inc. and Sun Microsystems, Inc. The various levels of channel program
partner participation are summarized below:
. Solutions Integrators play a sales representative role for us, and
receive a one-time payment, based on the monthly recurring charges from
opportunities brought into us. They are typically consultants,
independent Web developers, content developers, developers of small-to
medium-sized applications and regional VARs.
. Alliance Partners market our services, and receive a monthly residual
income for opportunities introduced to us. Alliance Partners are
typically larger regional or national systems integrators, Web
developers, hardware and software resellers, consulting organizations
and ISPs.
40
<PAGE>
. Technology Partners market software or hardware solutions, working
together with us to offer superior services and innovative products.
Through product promotions and bundled solutions, technology partners
can offer their customers new value-added services and greater pricing
incentives.
. Resellers market co-branded Exodus services. They commit to a certain
volume level to resell as part of their application or niche-focused
service offering to their customer base.
Marketing
Our marketing organization is responsible for product marketing management,
public relations and marketing communications. Product marketing management
includes defining the product roadmap and bringing to market the portfolio of
services and programs that will address customer needs. These activities
include product strategy and definition, pricing, competitive analysis, product
launches, channel program management and product lifecycle management. We
stimulate service demand and brand awareness for Exodus through a broad range
of marketing communications, public relations, advertising, as well as through
our Web site. Public relations focuses on cultivating industry analyst and
media relationships with the goal of securing broad media coverage and public
recognition of our leadership position in the market for Internet system and
network management solutions.
Customer Service
We offer superior customer service by understanding the technical
requirements and business objectives of our customers and by fulfilling their
needs proactively on an individual basis. Working closely with our customers,
we optimize the performance of our customers' Internet operations, avoid
downtime, resolve problems that may arise, and make appropriate adjustments in
services as customer needs change over time. In December 1998, in order to
enhance our customer service delivery and increase operating efficiencies 24x7,
we launched a centralized response center which handles inbound calls,
monitoring, and problem resolution for our Internet Data Centers in the Silicon
Valley metropolitan area. Given the success of this program, in May 1999, we
centralized all response handling support for our domestic Internet Data
Centers in this Response Center. Partnering with our customers, we also solicit
feedback to ensure that we continue to offer the highest quality of service. We
use advanced software tools to aid in customer monitoring and service efforts.
Many of our customer service personnel have been specifically trained and
certified by the vendors of our software tools, including Sun Microsystems,
Inc., Microsoft Corporation, Oracle Corporation and Computer Associates.
We also provide customer service and technical support during the
installation phase, including a transition team and project management support.
Our customer service continues after installation, through customer advocacy
representatives who are responsible for resolving customer problems.
In addition, we provide system integration services between the customer's
Internet site and legacy systems. After installation, primary customer support
is coordinated through each Internet Data Center's Network Control Center.
These centers are operated 24x7 by engineers who monitor site and network
operations, and activate teams to solve problems that arise. To solve complex
problems, we draw on the collective expertise at all of our Internet Data
Centers, creating a nationwide engineering pool. Our customer service personnel
are also available to assist customers whose operations require specialized
procedures.
We employ network engineers and systems administrators who work with
customers to design and maintain their Internet operations. Our network
engineers and system administrators are trained specialists who support Windows
NT, Solaris, Linux and other UNIX platforms. They are also trained to support
Cisco routers and switches. They also serve as the second level of support for
customer issues that cannot be resolved by the Network Control Center. We also
employ a group of backbone engineers who are accountable for designing and
operating the dynamic network that connects our Internet Data Centers. This
group constantly monitors the network design and effectiveness to optimize
performance for customers, rerouting and redesigning traffic as conditions
require.
41
<PAGE>
Our contracts with customers generally cover the provision of services by us
for a one-year period and may contain, among other things, various service
level warranties. These service agreements entered into prior to August 1997
typically included service level warranties which provided that, if we failed
to provide Internet Data Center services to a customer for more than 24
consecutive hours, a customer's account would be credited for the charges the
customer paid for services it did not receive during period affected. Between
August 1997 and July 1998, our service agreements typically included service
level warranties which provided that, if we fail to provide Internet Data
Center services to a customer for more than two consecutive hours, the
customer's account would be credited for one day of service and, if for more
than eight consecutive hours, one week of service, with each customer limited
to one credit per month. Since July 1998, our service agreements have typically
included service level warranties which provide that, if we fail to provide
Internet Data Center services to a customer for more than 15 minutes, the
customer's account would be credited for one day of service, up to a maximum of
seven days in any month. In addition, we provide additional credits for packet
loss and transmission latency. Certain customers have received more favorable
terms than those described above. To date, only a limited number of customers
have been entitled to these warranties to receive a credit for a period of free
service. As we did not open our first dedicated Internet Data Center until
August 1996, we have had Internet Data Center customers for only a short period
of time. Accordingly, we have had limited experience with customers continuing
to receive services after the initial term of their contract.
As of September 30, 1999, we had 766 employees dedicated to customer
service, professional services and network engineering.
Network Design
Our high performance server network is designed to provide the highest
possible availability and reliability for our customers' Internet operations.
The network comprises our Internet Data Centers that are interconnected by a
high-performance backbone network that is connected to the Internet through
public and private peering interconnections. Within each Internet Data Center,
a virtual LAN environment provides redundant, high-speed internal connectivity.
Our Internet Data Centers are located near most of the major Internet
exchange points ("IXPs") and are connected to their local IXPs by multiple 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, OC-3 and OC-12 lines are
strategically placed on different routers to avoid any single points of
failure. We also use a combination of public and private peering
interconnections to achieve fast and reliable delivery of content. We have
private and public interconnections with approximately 200 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 private and public interconnections provides
customers with the reliability and redundancy that they need to ensure their
content reaches its intended destination. We seek to provide significant
unutilized network capacity for our LAN, WAN and public and private peering
links to allow for spikes in demand or line outages.
42
<PAGE>
Product Development
Our product development group is accountable for evaluating and integrating
best-of-breed technologies to enhance our service offerings that support the
customers' mission-critical Internet operations. We are also developing
proprietary technologies that will be integrated with these best-of-breed
technologies. We believe that establishing relationships with technology
leaders enables us to leverage these enterprises' research and development
expertise. These relationships enable us to gain quicker access to innovative
technologies and thus provide more creative value-added solutions for our
customers. For example, we have worked very closely with Computer Associates to
develop certain of our management services using Computer Associates' Unicenter
TNG technology. See "Risk Factors--We depend on third-party equipment and
software suppliers".
Our product development personnel have continued to develop strategic vendor
and technology relationships, such as the one with Computer Associates. Other
key partners include Checkpoint Software Technologies Limited, Cisco Systems,
Inc., Inktomi Corporation, Raptor Systems, Inc. and Sun Microsystems, Inc. To
the extent that we are unable to obtain the technology necessary to meet
customers' needs from a third party, we may develop the technology ourselves.
As of September 30, 1999, we employed 45 persons in product development.
We incurred product development expenses of $444,000 in 1996, $1.6 million
in 1997, $3.5 million in 1998 and $5.6 million in the first nine months of
1999.
Competition
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have announced recently
that they intend to begin providing and/or greatly expanding their service
offerings to be competitive with our services. The principal competitive
factors in this market include:
. Internet system engineering and other technical expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits, equipment and
interconnection capacity to other networks;
. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:
. providers of server hosting services;
. national, foreign and regional ISPs;
. global, regional and local telecommunications companies and Regional
Bell Operating Companies;
43
<PAGE>
. IT outsourcing firms; and
. other technology services and products companies.
Many of our competitors have substantially greater resources, more
customers, longer operating histories, greater name recognition and more
established relationships in the industry. As a result, these competitors may
be able to develop and expand their network infrastructures and service
offerings more quickly, devote greater resources to the marketing and sale of
their products and adopt more aggressive pricing policies. In addition, these
competitors have entered and will likely continue to enter into business
relationships to provide additional services competitive with those we provide.
Some of our competitors may be able to provide customers with additional
benefits in connection with 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 September 30, 1999, Exodus had 1,315 employees, including 316
employees in sales and marketing, 45 employees in product development, 766
employees in customer service, professional services and network engineering
and 188 employees in finance and administration. We believe that our future
success will depend in part on our continued ability to attract, hire and
retain qualified personnel. The competition for personnel is intense, and there
can be no assurance that we will be able to identify, attract and retain
personnel in the future. None of our employees is represented by a labor union,
and management believes that our employee relations are good. See "Risk
Factors--We must manage growth effectively" and "Risk Factors--We depend on our
key personnel".
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 1,600,000 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 2002
Santa Clara, CA 2008
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 2009
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 2000
</TABLE>
44
<PAGE>
Most of our leases provide for a renewal option upon the expiration of the
initial term. We currently maintain sales offices in unutilized space in our
Internet Data Centers. We intend to expand domestically and internationally.
Legal Proceedings
We are not a party to any material legal proceedings.
45
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Chief Executive Officer, President and
Ellen M. Hancock............... 56 Director
Executive Vice President, Chief Marketing
Beverly Brown.................. 55 Officer
Executive Vice President, Finance and
R. Marshall Case............... 41 Chief Financial Officer
Herbert Dollahite.............. 48 Executive Vice President, Customer
Services and Support and Quality
James J. McInerney............. 47 Executive Vice President, Engineering
Sam S. Mohamad................. 40 Executive Vice President, Worldwide Sales
Executive Vice President, Professional
William R. Yeack............... 41 Services
Adam W. Wegner................. 34 Senior Vice President, Legal and Corporate
Affairs, General Counsel and Secretary
K.B. Chandrasekhar............. 39 Chairman of the Board of Directors
Frederick W.W. Bolander(1)(2).. 38 Director
John R. Dougery(2)............. 59 Director
Mark Dubovoy(3)(4)............. 53 Director
Max D. Hopper(1)(4)............ 65 Director
Peter A. Howley(1)............. 59 Director
Daniel C. Lynch(3)............. 58 Director
Thadeus J. Mocarski(3)(4)...... 38 Director
Naomi O. Seligman(2)........... 66 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Finance Committee
(4) Member of the Corporate Governance Committee
Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors.
Ellen M. Hancock has served as our President since March 1998 and our Chief
Executive Officer since September 1998 and has been a director since April
1998. She also served as the acting Vice President, Marketing 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. Mrs.
Hancock is also a director of Colgate-Palmolive Company and Aetna Inc. She
holds a B.A. degree in mathematics from The College of New Rochelle and an M.A.
degree in mathematics from Fordham University.
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.
46
<PAGE>
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.
James J. McInerney has served as our Executive Vice President, Engineering
since February 1999 and served as our Vice President, Engineering from October
1998 to February 1999. From November 1995 to October 1998, he served as Vice
President of Software Engineering at Synopsys, Inc., a provider of software
tools for electronic design automation. From 1974 to October 1995, Mr.
McInerney served in various research, managerial and executive positions at
International Business Machines Corporation, most recently as Director,
Intelligent Communication Services. He holds B.S. and M.S. degrees in
mathematics from Polytechnic University in New York.
Sam S. Mohamad has served as our Executive Vice President, Worldwide Sales
since December 1998 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.
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.
K.B. Chandrasekhar, a co-founder of Exodus, has served as our Chairman of
the Board of Directors since Exodus' incorporation in California in February
1995, as President from the incorporation until March 1998 and as Chief
Executive Officer from the incorporation until September 1998. He has been
Chief Executive Officer of VitalTone, Inc. since 1999. From 1992 to May 1995,
he served as President and a director of Fouress, Inc., a network software
design and development firm and Exodus' predecessor, which he co-founded. Mr.
Chandrasekhar holds a B.S. degree in physics from Madras University and a
B.Tech. degree in electronics and communications from the Madras Institute of
Technology.
Frederick W. W. Bolander has served as a director of Exodus since October
1996. He has been a Managing Director of Gabriel Venture Partners, a venture
capital firm he co-founded in April 1999. From October 1994 to December 1998 he
was associated with Apex Investment Partners, a venture capital firm,
47
<PAGE>
where he held various capacities and retired as a general partner. From May
1993 to September 1993, he was a consultant to the African Communications
Group, a venture capital and project management firm, and from September 1985
to September 1992, Mr. Bolander held the position of Manager for AT&T
Corporation. Mr. Bolander is also a director of Concord Communications, Inc.
Mr. Bolander holds B.S. and M.S. degrees in electrical engineering from the
University of Michigan and an M.B.A. degree from Harvard University.
John R. Dougery has served as a director of Exodus since February 1996. He
has been President of Dougery Ventures, a venture capital firm, since January
1998. Prior to that time, he was a general partner of Dougery & Wilder, a
venture capital firm, from 1981 to December 1997. Mr. Dougery is also a
director of Printronix, Inc. Mr. Dougery holds 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 since November
1999. He also has served as a general partner of Information Technology
Ventures since September 1994. Prior to that time, he was a general partner of
Grace/Horn Ventures from 1991 to August 1994. Mr. Dubovoy holds a B.S. degree
in physics from the National University of Mexico and M.A. and Ph.D. degrees in
physics from the University of California, Berkeley.
Max D. Hopper has served as a director of Exodus since January 1998. Mr.
Hopper has been the Chief Executive Officer of Max D. Hopper Associates, Inc.,
an IS management consulting firm, since January 1995. From 1985 to January
1995, he served in various positions at American Airlines, a subsidiary of AMR
Corporation, most recently as Senior Vice President, Information Systems and
Chairman of the SABRE Group. Mr. Hopper is also a director of Gartner Group,
Inc., USData Corporation, Accrue Software, Inc., Metrocall, Inc., Payless
Cashways, Inc. and United Stationers, Inc. From April 1995 to January 2000, he
served as a director of VTEL Corporation. From October 1995 to January 2000, he
served as a director of Worldtalk Corporation. He holds a B.S. degree in
mathematics from the University of Houston.
Peter A. Howley has served as a director of Exodus since September 1996.
Since April 1999, Mr. Howley has served as the Chief Executive Officer of
IPWireless, Inc. From May 1994 to April 1999, Mr. Howley was a private
consultant. From 1985 until April 1994, he served as Chairman of the Board,
Chief Executive Officer and President of Centex Telemanagement, Inc., a
telecommunications management company, which was acquired. Mr. Howley is also a
director of FaxSAV, Inc. and WorldPort Communications, Inc. Mr. Howley holds a
B.I.E. degree and an M.B.A. degree from New York University.
Daniel C. Lynch has served as director of Exodus since January 1998. Mr.
Lynch has been the owner of Lynch Enterprises, a venture capital firm, since
August 1993. From April 1994 to August 1996, he was a director of UUNet
Technologies, Inc., an Internet service provider. From 1991 to August 1993, he
was the Chairman of the Board of Interop, a conference and trade show company,
which he founded and which is now a division of ZD Comdex Forums. Mr. Lynch is
a director of Cybercash, Inc., which he founded, 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. Mr.
Mocarski has been an officer of various entities affiliated with Fleet Equity
Partners since January 1994. Prior to joining Fleet Equity Partners, Mr.
Mocarski was an attorney with the law firm of Edwards & Angell from 1989 to
January 1994. Mr. Mocarski holds a B.A. degree in economics and government from
Colby College and a J.D. degree from the Washington College of Law.
Naomi O. Seligman has served as a director of Exodus since July 1999. Ms.
Seligman has been a senior partner of the Research Board since 1971. Ms.
Seligman holds a B.A. degree in economics from Vassar College and an M.B.A.
degree from the London School of Economics. Ms. Seligman is also a director of
the Dun & Bradstreet Corporation, Chemdex Corporation, Martha Stewart Living
Omnimedia, Inc., and Sun Microsystems, Inc.
48
<PAGE>
OTHER INDEBTEDNESS
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
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 indenture governing our 10 3/4%
Senior Notes.
The debt evidenced by the 11 1/4% Senior Notes ranks equally in right of
payment with all or our existing and future unsubordinated unsecured debt,
including the 10 3/4% Senior Notes, and senior in right of payment to all of
our existing and future subordinated debt, including the 4 3/4% Convertible
Subordinated Notes and the 5% Convertible Subordinated Notes.
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 are convertible into our common stock at a conversion rate of
87.5704 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.
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 the 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 indenture
governing our 10 3/4% Senior Notes.
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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 the 11 1/4% Senior Notes and the 10 3/4% Notes and ranks equally in
right of payment to all of our existing and future subordinated debt. The
indenture governing the 10 3/4% senior notes will provide that the 10 3/4%
senior notes are "Designated Senior Indebtedness" as defined in the 5%
Convertible Subordinated Notes Indenture. This designation provides certain
additional rights to the holders of the 10 3/4% Senior 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 are convertible into our common stock at a conversion rate
of 14.2034 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.
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 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 indenture governing the 10 3/4% Senior 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 the 11 1/4% Senior Notes and the 10 3/4% Senior Notes
and ranks equally in right of payment to all of our existing and future
subordinated indebtedness, including the 5% Convertible Subordinated Notes. The
indenture governing the 4 3/4% Convertible Subordinated Notes provides that the
10% Senior 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 10 3/4% Senior Notes.
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THE EXCHANGE OFFER
Terms of the Exchange Offer; Period for Tendering Old Notes
The old notes were sold by us on December 8, 1999 to Goldman, Sachs & Co.,
Donaldson Lufkin & Jenrette Securities Corporation, BancBoston Robertson
Stephens, Inc., PaineWebber Incorporated and Morgan Stanley & Co., Incorporated
(the "Purchasers") pursuant to a purchase agreement dated December 2, 1999
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 March 20, 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, $375.0 million aggregate principal amount
of the old dollar notes and (Euro)125.0 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 agreement with the Purchasers, we have agreed
to file with the Commission the exchange offer registration statement on the
appropriate form under the securities Act with respect to the new notes. Upon
the effectiveness of the exchange offer registration statement, we will offer
to the holders of the old notes who are able to make required representations
the opportunity to exchange their old notes for new notes. Alternatively, we
will file with the Commission a shelf registration statement to cover resales
of transfer restricted securities (as defined below) by the holders of old
notes who satisfy specific conditions relating to the provision of information
in connection with the shelf registration statement if:
. we are not permitted to consummate the exchange offer because it is not
permitted by applicable law or Commission policy; or
. any holder of old notes notifies us prior to the 20th day following
consummation of the exchange offer that:
. it is prohibited by law or Commission policy from participating in
the exchange offer;
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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 agreement provides that:
. we will file and exchange offer registration statement with the
Commission on or prior to 60 days after December 8, 1999, 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 December 8, 1999;
. unless the exchange offer would not be permitted by applicable law or
Commission policy , we will commence the exchange offer and use our best
efforts to issue, on or prior to 30 business days after the date on
which the exchange offer registration statement was declared effective
by the Commission, new notes in exchange for all old notes tendered in
the exchange offer; and
. if obligated to file the shelf registration statement, we will use our
best efforts to file the shelf registration statement with the
Commission on or prior to 45 days after the filing obligations arises,
but in no event less than 60 days after December 8, 1999, and to cause
the shelf registration to be declared effective by the Commission on or
prior to 90 days after this obligation arises, but in no event less than
150 days after December 8, 1999.
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 per week the registration
default continues per $1,000 principal amount of transfer restricted securities
held by the holder. The amount of the liquidated damages will increase by an
additional $0.05 per week that the registration default continues per
$1,000 principal amount of transfer restricted securities with respect to each
subsequent 90-day period until all registration defaults have been cured, up to
a maximum amount of liquidated damages for all registration defaults of $0.25
per week per $1,000 principal amount of transfer restricted securities. 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 agreement on or before the date specified for the
filing;
. any of the registration statements is not declared effective by the
Commission on or prior to the date specified for the effectiveness;
. we fail to completed the exchange offer within 30 business days of the
date of effectiveness of the exchange offer registration statement; or
. the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales (except in specified circumstances) of
transfer restricted securities during the period specified in the
registration rights agreement.
This summary of the provisions of the registration rights agreement is not
complete and is subject to, and is qualified by reference to, all provisions of
the registration rights agreement. A copy of this agreement is filed as an
exhibit to the registration statement of which this prospectus is a part.
Interest on Exchange Notes
Each new note will bear interest from the most recent date to which interest
has been paid or duly provided for on the old note surrendered in exchange for
a new note, or, if no interest has been paid or duly provided for on the old
note, from December 8, 1999, the date of issuance of the old note. Holders of
the old notes whose old notes are accepted for exchange will not receive
accrued interest on the old notes for any period from and after the last
interest payment date to which interest has been paid or duly provided for on
the old notes prior to the original issue date of the new notes, 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 December 8, 1999. Interest on the notes is payable semi-annually
in arrears on each June 15 and December 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 to use 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 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.
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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, non 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 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
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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 exchange
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offer, we will promptly disclose the waiver by means of a prospectus
supplement that will be distributed to the registered holders, and we
will extend the exchange offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the exchange offer would
otherwise expire during that five to ten business-day period.
Exchange Agent
Chase Manhattan Bank & Trust Company, National Association has been
appointed as the exchange agent for the exchange offer 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.
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.
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Accounting Treatment
The new notes will be recorded at the same carrying value as the old notes.
This is the aggregate principal amount of the old notes, as reflected in our
accounting records on the date of exchange. Accordingly, no gain or loss for
accounting purposes will be recognized in connection with the exchange offer.
The expenses of the exchange offer will be amortized over the term of the new
notes.
Appraisal Rights
Holders of old notes will not have dissenters' rights or appraisal rights in
connection with the exchange offer.
Resale of New Notes
The new notes are being offered to satisfy our obligations contained in the
registration rights agreement. We are making the exchange offer in reliance on
the position of the Staff of the Commission as set forth in the Exxon Capital
No-Action Letter, the Morgan Stanley No-Action Letter, the Shearman & Sterling
No-Action Letter, and other interpretive letters addressed to third parties in
other transactions. However, we have not sought our own interpretive letter
addressing these matters and there can be no assurance that the Staff would
make a similar determination with respect to the exchange offer as it has in
those interpretive letters to third parties. Based on these interpretations by
the Staff, and subject to the two immediately following sentences, we believe
that new notes issued pursuant to this exchange offer in exchange for old notes
may be offered for resale, resold and otherwise transferred by holders, other
than a holder who is a broker-dealer, without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that:
. the new notes are acquired in the ordinary course of the holder's
business; and
. the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution within the meaning of
the Securities Act of the new notes.
However, any holder who:
. is an "affiliate" of us, within the meaning of Rule 405 under the
Securities Act;
. does not acquire new notes in the ordinary course of its business;
. intends to participate in the exchange offer for the purpose of
distributing new notes; or
. is a broker-dealer who purchased old notes directly from us,
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."
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
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. 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 agreement, we
shall use our best efforts to:
. keep the exchange offer registration statement continuously effective,
supplemented and amended to the extent necessary to ensure that it is
available for sales of new notes by participating broker-dealers; and
. ensure that the exchange offer registration statement conforms with the
requirements of the Securities Act and the policies, rules and
regulations of the Commission as announced from time to time, for a
period ending upon the earlier of 180 days after the exchange offer has
been completed or at the time the participating broker-dealers no longer
own any transfer restricted securities. See "Plan of Distribution."
Any participating broker-dealer who is an affiliate of us may not rely on
the interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
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 agreement, the
participating broker-dealer will suspend the sale of new notes pursuant to this
prospectus until we have amended or supplemented this prospectus to correct the
misstatement or omission and have furnished copies of the amended or
supplemented prospectus to the participating broker-dealer or we have given
notice that the sale of the new notes may be resumed, as the case may be.
Consequences of Failure to Exchange Old Notes
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Following the consummation
of the exchange offer, holders who did not tender their old notes generally
will not have any further registration rights under the registration rights
agreement, and these old notes will continue to be subject to restrictions on
transfer. Accordingly, the liquidity of the market for the old notes could be
adversely affected. The old 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.
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As a result of the making of the exchange offer, we will have fulfilled our
obligations under the registration rights agreement, and holders who do not
tender their old notes generally will not have any further registration rights
or rights to receive liquidated damages specified in the registration rights
agreement for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
. to Exodus or one of its subsidiaries;
. to a qualified institutional buyer;
. to an institutional accredited investor;
. to a party outside the United States under Regulation S under the
Securities Act;
. under an exemption from registration provided by Rule 144 under the
Securities Act; or
. under an effective registration statement.
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DESCRIPTION OF NOTES
General
The old notes were and the new notes will be issued under an indenture dated
December 1, 1999 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
indenture are summaries and are not intended to be complete. In addition, they
are subject to, and are qualified by the actual provisions of the indenture.
The indenture is by its terms subject to and governed by the Trust Indenture
Act of 1939. If we make reference to particular provisions of the indenture or
to defined terms not defined in this prospectus, the provisions or defined
terms are incorporated by reference to this prospectus. You may obtain copies
of the indenture and the registration rights agreement 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 due 2008;
. are senior in right of payment to our existing and future subordinated
debt, including $250.0 million principal amount of our 5% Convertible
Subordinated Notes due March 15, 2006 and $500.0 million principal
amount of our 4 3/4% Convertible Subordinated Notes due July 15, 2008;
and
. are effectively subordinated to our secured indebtedness to the extent
of the value of the assets securing the indebtedness; and to any
liabilities of our subsidiaries.
Any right we have to receive assets of our subsidiaries upon their
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 the subsidiary, in which case our
claims would still be subordinate to any security in the assets of the
subsidiary and any debt of the subsidiary senior to that held by us. See "Risk
Factors--The notes are effectively subordinated to our secured indebtedness and
the liabilities of our subsidiaries."
Assuming that we had completed the offering of the old notes and $500.0
million principal amount of our 4 3/4% Convertible Subordinated Notes due July
15, 2008 as of September 30, 1999, we would have
. approximately $275.0 million of debt outstanding which ranks equally in
right of payment with the notes;
. approximately $750.0 million of debt outstanding which is subordinate in
right of payment to the notes; and
. approximately $79.1 million of outstanding secured debt and liabilities
of our subsidiaries, including trade payables, which effectively rank
senior to the notes.
The indenture limits our ability and the ability of our subsidiaries to
incur additional indebtedness. However, these limitations are subject to a
number of exceptions, and we and our subsidiaries may incur significant
additional indebtedness in the future, including indebtedness to which the
holders of the notes would be effectively subordinated.
Under various circumstances, we will be able to designate current or future
subsidiaries as Unrestricted Subsidiaries, which will not be subject to many of
the restrictive covenants discussed in the indenture.
The notes are not entitled to any security and are not entitled to the
benefit of any guarantees except under the circumstances described under "--
Covenants--Limitation on Guarantees of Issuer Debt by Restricted Subsidiaries."
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The euro notes and the dollar notes will generally be treated for purposes
of the indenture as a single series of securities ranking equally with each
other. Various actions taken on a "pro rata" basis under the indenture will be
taken in the manner described below.
The aggregate principal amount, or any portion thereof, of the notes, at any
date of determination, shall be the sum of (1) the U.S. Dollar Equivalent at
such date of determination, of the principal amount, or portion thereof, as the
case may be, of the euro notes and (2) the principal amount, or portion
thereof, as the case may be, of the dollar notes at such date of determination.
With respect to any matter requiring consent, waiver, approval or other action
of the holders of a specified percentage of the principal amount of the notes,
such percentage shall be calculated, on the relevant date of determination, by
dividing (a) the principal amount, as of such date, of notes the holders of
which have so consented by (b) the aggregate principal amount, as of such date,
of the notes then outstanding, in each case, as determined in accordance with
the preceding sentence.
Principal, Interest and Maturity
The notes will mature on December 15, 2009. The dollar notes will be limited
to $375.0 million (together with $100.0 million of Additional Notes) and the
euro notes will be limited to (Euro)125.0 million. However, we may issue an
additional $100.0 million of dollar notes and (Euro)100.0 million of euro notes
(above and beyond the $100.0 million of Additional Notes) under the indenture
under specific circumstances. Each note bears interest at 10 3/4% per annum
from December 8, 1999 or from the most recent interest payment date to which
interest has been paid, payable semiannually on June 15 and December 15 of each
year, commencing June 15, 2000. 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 June 1 and December 1 immediately preceding the
interest payment date. Interest is computed on the basis of a 360-day year of
12 30-day months.
We have agreed to file and cause to become effective a registration
statement relating to an exchange offer for the old notes, or, in lieu thereof,
to file and cause to become effective a resale shelf registration for the old
notes. If the exchange offer or shelf registration statement is not filed or is
not declared effective, or if the exchange offer is not consummated, within the
time periods set forth in the registration rights agreement, special interest
will accrue and be payable on the old notes. See "Registration Covenant;
Exchange Offer" above.
Principal, premium, if any, interest and liquidated damages, if any, on the
dollar notes will be payable in U.S. dollars, and the dollar notes may be
presented for registration of transfer and exchange, at the office or agency of
the exchange agent maintained for that purpose in the Borough of Manhattan, The
City of New York. Principal, premium, if any, interest and liquidated damages,
if any, on the euro notes will be payable in euros, and the euro notes may be
presented for registration of transfer and exchange, at the office or agency of
the registrar or exchange agent maintained for that purpose in Luxembourg or
London, as the case may be. However, at our option, payment of interest on the
notes may be made by check mailed to the address of the person entitled thereto
as it appears in the Note Register.
You will not pay a service charge for any registration of transfer or
exchange of notes, but we may require payment of a sum sufficient to cover any
related tax or other governmental charge.
Issuance of Additional Notes
We will have the right to issue dollar denominated Additional Notes on or
prior to December 8, 2000, in an aggregate principal amount not to exceed
$100.0 million, upon written notice to the trustee.
Form, Denomination, Book-Entry Procedures and Transfer
The old notes were initially 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, are subject to certain restrictions
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on transfer set forth therein and in the indenture. Euro notes sold to
qualified institutional buyers pursuant to Rule 144A of the Securities Act were
initially 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 were initially represented by one global note (the "Euro
International Global Note" and, together with the Euro U.S. Global Note, the
"Euro Global Notes"). We deposited Euro International Global Notes with a
common depositary for Euroclear and Cedelbank, or its nominee and the Euro U.S.
Global Note with a depositary for Euroclear. Investors may hold their interests
in the Euro International Global Notes directly through Euroclear or Cedelbank
or indirectly through organizations which are participants in Euroclear or
Cedelbank 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 were initially 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 were initially 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 were deposited with the trustee as custodian for DTC (together with
Euroclear and Cedelbank, the "Depositaries") and registered in the name of Cede
& Co., as nominee of DTC. Prior to January 17, 2000, interests in the Dollar
International Global Notes could be held only through Euroclear and Cedelbank.
Investor may hold their interests in the Dollar International Global Notes
directly through Euroclear or Cedelbank, or indirectly through organizations
which are participants in such systems. Euroclear and Cedelbank hold interests
in the Dollar International Global Note in their respective names on the books
of DTC on behalf of their participants. Beginning January 17, 2000, ownership
interests in the Dollar International Global Notes could also be held through
organizations other than Cedelbank 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 Cedelbank 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 are not held in definitive from. Instead,
DTC, Euroclear and/or Cedelbank 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 purchasers of
securities take physical delivery of 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 indenture.
Owners of Book-Entry Interests may receive notes in definitive registered
form ("Definitive Registered Notes") in specified circumstances described in
the indenture.
In such an event, the registrars for the notes will issue notes in
definitive registered form ("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 Cedelbank, 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 indenture
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, London or
Luxembourg for such purpose.
If Definitive Registered Notes are issued and these euro notes are listed on
the Luxembourg Stock Exchange, transfers of 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.
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To the extent permitted by law, we, the trustee and the registrars 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
Cedelbank.
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 Cedelbank 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 transfer of Book-Entry Interests between participants in DTC,
participants in Euroclear or participants in Cedelbank will be effected by DTC,
Euroclear or Cedelbank pursuant to customary procedures and subject to the
applicable rules and procedures established by DTC, Euroclear or Cedelbank 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 Cedelbank, 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 the 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 indenture
contains 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 such 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 of (Euro)1,000 and dollar notes issued as Definitive Registered Notes
may be transferred, upon surrender for registration of transfer of such 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
of $1,000.
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Optional Redemption
Except as described below, the notes will not be redeemable at our option
prior to December 15, 2004.
The notes are subject to redemption, at our option, in whole or in part, at
any time on or after December 15, 2004 and prior to maturity, upon not less
than 30 nor more than 60 days' notice. The notice must be mailed to each
holder of notes to be redeemed at each holder's address appearing in the Note
Register. The dollar notes are redeemable in amounts of $1,000 or an integral
multiple of $1,000 and the euro notes are redeemable in amounts of (Euro)1,000
or an integral multiple of (Euro)1,000, as the case may be. Redemption would
be made at the following prices, expressed as percentages of the principal
amount if redeemed during the 12-month period beginning December 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>
2004.............................................................. 105.375%
2005.............................................................. 103.583%
2006.............................................................. 101.792%
2007 and thereafter............................................... 100.000%
</TABLE>
In addition, at any time prior to December 15, 2002, we may redeem up to
35% of the aggregate outstanding principal amount of the dollar notes and up
to 35% of the aggregate outstanding principal amount of the euro notes with
the Net Cash Proceeds of one or more sales of Capital Stock, other than
Disqualified Stock, at a redemption price equal to 110.75% of the aggregate
principal amount of the notes, plus accrued and unpaid interest and liquidated
damages, if any, to the date of redemption. However, at least 65% of the
original principal amount of the dollar notes and 65% of the original
principal amount of the euro notes must remain outstanding immediately
following the redemption. In order to effect the redemption, we must mail a
notice of redemption no later than 45 days after the related sale of Capital
Stock and must consummate the redemption within 60 days of the closing of the
sale of Capital Stock.
If less than all the notes are to be redeemed, selection of notes for
redemption will be made by the trustee, in compliance with the requirements of
the principal national securities exchange, if any, on which the notes are
listed, or, if the notes are not so listed, on a pro rata basis, by lot or in
a manner as it shall deem fair and appropriate. However, after the redemption
in part, all notes must be in amounts of $1,000 or integral multiples of
$1,000 or amounts of (Euro)1,000 or integral multiples of (Euro)1,000, as
applicable. Notices of redemption may not be conditional. If any note is to be
redeemed in part only, the notice of redemption that relates to the note must
state the portion of the principal amount of the note to be redeemed. A note
in principal amount equal to the unredeemed portion will be issued in the name
of the holder upon cancellation of the original note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption and, unless we default in the payment of the redemption price,
notes or portions of them called for redemption will no longer be deemed
outstanding.
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 Luxembourger 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 are not 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 occurs at any time, then each holder of notes has the
right to require that we purchase the holder's notes at a purchase price in
cash, in an amount equal to 101% of the principal amount of the notes or
portion of the notes, plus accrued and unpaid interest and liquidated damages,
if any, to the date of purchase. The holders may require that we purchase their
notes in whole or in part in integral multiples of $1,000 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 indenture. 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. We will
comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations to the extent these laws and regulations are
applicable in connection with the purchase of the notes under the Offer to
Purchase.
In the event a Change of Control occurs at a time when we are prohibited
from purchasing the notes, due to provisions of other debt agreements or
otherwise, we could seek the consent of our lenders to the purchase of notes or
could attempt to refinance the borrowings that contain this prohibition. If we
do not obtain a consent or repay borrowings, we will remain prohibited from
purchasing notes. In this case, our failure to purchase tendered notes would
constitute an Event of Default under the indenture, which could, in turn,
constitute a default under the terms of other debt agreements. See "Risk
Factors--We may not be able to effect repurchase of the notes upon a Change of
Control in accordance with the terms of the indenture."
The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that we
repurchase or redeem the notes in the event of a takeover, recapitalization or
similar transaction.
We will not be required to make an Offer to Purchase upon a Change of
Control if a third party:
. makes the Offer to Purchase in the manner, at the times and otherwise in
compliance with the requirements set forth in the indenture applicable
to the Offer to Purchase; and
. purchases all notes validly tendered and not withdrawn under the Offer
to Purchase.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of our assets and the assets of our subsidiaries taken as a whole. There is no
precise established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a holder of notes to require us to
repurchase the notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of our assets and the assets of our
subsidiaries taken as a whole to another person or group may be uncertain.
Covenants
The indenture contains the following covenants:
Limitation on Debt
We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Debt, other than the notes and Debt existing on the original issuance
date of the notes; provided that we may Incur Debt if, after giving effect to
the Incurrence of Debt and the receipt and application of the proceeds, the
Consolidated Debt to EBITDA Ratio would be greater than zero and less than 6:1.
However, the following Debt may be Incurred, each item to be given
independent effect:
(1) Permitted Senior Bank Debt;
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(2) Debt owed:
. to us evidenced by a promissory note; or
. to any Restricted Subsidiary; provided that any event which results
in any Restricted Subsidiary ceasing to be a Restricted Subsidiary
or any subsequent transfer of Debt, other than to us or another
Restricted Subsidiary, is deemed, in each case, to constitute the
Incurrence of Debt not permitted by this clause (2);
(3) Debt or the Debt of any Restricted Subsidiary:
. in respect of performance, surety or appeal bonds or letters of
credit in the ordinary course of business;
. under Permitted Interest Rate or Currency Protection Agreements; or
. arising under, or arising from, agreements providing for
indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any of our obligations Incurred in
connection with the disposition of any business, assets or
Restricted Subsidiary other than Guarantees of Debt Incurred by any
person acquiring all or any portion of the business, assets or
Restricted Subsidiary for the purpose of financing an acquisition,
in a principal amount not to exceed the gross proceeds actually
received by us or any Restricted Subsidiary in connection with the
disposition;
(4) Debt which is exchanged for or the proceeds of which are used to
refinance or refund, or any extension or renewal of (each a
"refinancing"):
. the notes;
. Debt incurred pursuant to clauses (3), (5), (6), (7) and (9) of this
paragraph and this clause (4), in each case in an aggregate
principal amount not to exceed the principal amount of the Debt so
refinanced, together with any accrued interest and any premium and
other payment required to be made with respect to the Debt being
refinanced or refunded, and any fees, costs, expenses, underwriting
discounts or commissions and other payments paid or payable with
respect to the Debt incurred pursuant to this clause (4); provided,
however, that:
. Debt, the proceeds of which are used to refinance the notes, or
Debt which is equal with or subordinate in right of payment to
the notes, shall only be permitted if (x) in the case of any
refinancing of the notes or Debt which is equal to the notes, the
refinancing Debt is Incurred by us and made equal to the notes or
subordinated to the notes, and (y) in the case of any refinancing
of Debt which is subordinated to the notes, the refinancing Debt
is Incurred by us and is subordinated to the notes in a manner
that is at least as favorable to the holders as that of the Debt
refinanced;
. the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which Debt is issued, does
not have a final maturity prior to the final maturity of the Debt
being refinanced and has an Average Life longer than the Average
Life of the Debt being refinanced; and
. in the case of any refinancing of Debt Incurred by us, the
refinancing of Debt may be Incurred only by us, and in the case
of any refinancing of Debt Incurred by a Restricted Subsidiary,
the refinancing of Debt may be Incurred only by the Restricted
Subsidiary or by us;
(5) Acquisition Debt or Acquisition Debt of any Restricted Subsidiary;
(6) the new notes issued in the exchange offer and Additional Notes issued
under the indenture;
(7) Debt not to exceed, at any time outstanding, two times the Net Cash
Proceeds received by us after the original issue date of the notes from
the issuance and sale of our Capital Stock, other than
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Disqualified Stock, to a person that is not our Subsidiary, to the
extent that Net Cash Proceeds have not been used pursuant to the third
clause of clause (4) of the first paragraph or clauses (3), (4) or (6)
of the second paragraph of the "Limitation on Restricted Payments"
covenant described below to make a Restricted Payment; provided that the
Debt does not have a final maturity prior to the final maturity of the
notes and has an Average Life longer than the Average Life of the notes;
(8) Existing Debt;
(9) Debt or the Debt of any Restricted Subsidiary Incurred to finance the
purchase or other acquisition of any property, inventory, asset or
business directly or indirectly, by us or any Restricted Subsidiary
used in, or to be used in, the System and Network Management Business;
(10) Subordinated Debt not to exceed $300.0 million in principal
outstanding at any time; provided that the calculation of the
principal amount of Subordinated Debt excludes the principal amount of
our 4 3/4% Convertible Subordinated Notes; and
(11) our other Debt or other Debt of any Restricted Subsidiary not to
exceed $50.0 million at any one time outstanding.
For purposes of determining compliance with this covenant, in the event
that an item of Debt meets the criteria of more than one of the types of Debt
described in the above clauses, or is permitted in part under the first
paragraph of this covenant and in part under one or more of the above clauses,
we, in our sole discretion, shall classify, and from time to time may
reclassify, the item of Debt.
For purposes of determining any particular amount of Debt under this
covenant, Guarantees, Liens or obligations with respect to letters of credit
supporting Debt otherwise included in the determination of the particular
amount will not be included.
Limitation on Our Guarantees of Our Debt by Restricted Subsidiaries
We may not permit any Restricted Subsidiary, directly or indirectly, to
Guarantee, assume or in any other manner become liable for the payment of any
of our Debt, other than our Debt:
. Incurred pursuant to clauses (1), (3), (5), (9) or (11) of the second
paragraph of "Limitation on Debt;" or
. refinanced pursuant to clause (4) of the second paragraph of "Limitation
on Debt" of Debt originally incurred under clause (3), (5) or (9) of the
second paragraph of "Limitation on Debt," that is equal with or
subordinate in right of payment to the notes unless:
. the Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Guarantee of payment of the
notes by the Restricted Subsidiary and, with respect to any Guarantee
of our Debt that is subordinate in right of payment to the notes, the
Guarantee shall be subordinated to the Restricted Subsidiary's
Guarantee with respect to the notes at least to the same extent as
the Debt is subordinated to the notes; and
. the Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
us or any other Restricted Subsidiary as a result of any payment by a
Restricted Subsidiary under its Guarantee until the notes have been
paid in full.
However, any Guarantee by a Restricted Subsidiary may provide by its terms
that it shall be automatically and unconditionally released and discharged
upon:
. any sale, exchange or transfer, to any person who is not one of our
Affiliates, of all of our Capital Stock and the Capital Stock of each
Restricted Subsidiary in, or all or substantially all of the assets of,
the Restricted Subsidiary, which sale, exchange or transfer is not
prohibited by the indenture; or
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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 a
Guarantee.
Limitation on Restricted Payments
We will not, and will not permit any Restricted Subsidiary directly or
indirectly to:
(1) declare or pay any dividend or make any distribution on or with respect
to its Capital Stock to persons other than us or any of our Restricted
Subsidiaries, other than:
. dividends or distributions payable solely in shares of its Capital
Stock, other than Disqualified Stock, or in options, warrants or
other rights to acquire shares of Capital Stock;
. pro rata dividends or distributions on common stock of Restricted
Subsidiaries held by minority stockholders; or
. dividends in respect of Disqualified Stock;
(2) purchase, redeem, retire or otherwise acquire for value any shares of
our Capital Stock or the Capital Stock of an Unrestricted Subsidiary
including options, warrants or other rights to acquire shares of
Capital Stock, held by any person, or any shares of Capital Stock of a
Restricted Subsidiary, including options, warrants or other rights to
acquire shares of Capital Stock, held by any person other than us or
one of our Wholly Owned Restricted Subsidiaries;
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of our Debt that is subordinated in right of
payment to the notes; or
(4) make any Investment, other than a Permitted Investment, in any person
(the payments or any other actions described in clauses (1) through (4)
above being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment:
. a Default or Event of Default shall have occurred and be continuing;
. we could not Incur at least $1.00 of Debt under the first paragraph
of the "Limitation on Debt" covenant; or
. the aggregate amount of all Restricted Payments, the amount, if
other than in cash, to be determined in good faith by the board of
directors, whose determination shall be conclusive and evidenced by
a board resolution, made after the date of original issuance of the
notes shall exceed the sum of:
. cumulative Consolidated EBITDA 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; 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 original
issuance date of the notes from the issuance and sale permitted
by the indenture of our Capital Stock, other than Disqualified
Stock, to a person who is not one of our Subsidiaries, including
an issuance or sale permitted by the indenture of our Debt for
cash subsequent to the original issuance date of the notes upon
the conversion of Debt into our Capital Stock, other than
Disqualified Stock, or from the issuance to a person who is not
one of our Subsidiaries of any options,
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warrants or other rights to acquire our Capital Stock, in each
case, exclusive of any Disqualified Stock or any options,
warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the stated final
maturity date of the notes, in each case except to the extent Net
Cash Proceeds are used to Incur Debt pursuant to clause (7) of
the second paragraph under the "Limitation on Debt" covenant,
plus
. amount equal to the net reduction in Investments, other than
reductions in Permitted Investments, in any person resulting from
payments of interest on Debt, dividends, repayments of loans or
advances, or other transfers of assets, in each case to us or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale
of any Investment except, in each case, to the extent any payment
or proceeds are included in the calculation of Consolidated
EBITDA, or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries, not to exceed, in each case, the amount
of Investments previously made by us or any Restricted Subsidiary
in a person or Unrestricted Subsidiary.
The provision above shall not be violated by reason of:
(1) the payment of any dividend within 60 days after the date of
declaration thereof if, at the date of declaration, the payment would
comply with the paragraph above;
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Debt that is subordinated in right of payment
to the notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, Debt Incurred under clause (4) of the
second paragraph of the "Limitation on Debt" covenant;
(3) the repurchase, redemption or other acquisition of our Capital Stock or
the Capital Stock of one of our Subsidiaries, or options, warrants or
other rights to acquire the Capital Stock, in exchange for, including
upon exercise of a conversion right, or out of the proceeds of a
capital contribution or a substantially concurrent offering of, shares
of our Capital Stock, other than Disqualified Stock, or options,
warrants or other rights to acquire the Capital Stock;
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of our Debt which
is subordinated in right of payment to the notes in exchange for, or
out of the proceeds of, a capital contribution or a substantially
concurrent offering of, shares of the our Capital Stock, other than
Disqualified Stock, or options, warrants or other rights to acquire
Capital Stock;
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation,
merger or transfer of assets that complies with the provisions of the
indenture applicable to mergers, consolidations and transfers of all or
substantially all of our property and assets, and payments of cash
instead of fractional shares;
(6) Investments in any person; provided that the aggregate amount of
Investments made pursuant to this clause (6) does not exceed the sum
of:
. $50.0 million, plus
. the amount of Net Cash Proceeds received by us after the original
issuance date of the notes from the sale of our Capital Stock, other
than Disqualified Stock, to a person who is not our Subsidiary,
except to the extent the Net Cash Proceeds are used to Incur Debt
pursuant to clause (7) of the second paragraph of the "Limitation on
Debt" covenant or to make Restricted Payments pursuant to the third
clause of clause (4) of the first paragraph, or clauses (3) or (4)
of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus
. the net reduction in Investments made pursuant to this clause (6)
resulting from distributions on or repayments of the Investments or
from the Net Cash Proceeds from the sale of any the Investment,
except in each case to the extent any payment or proceeds is
included in the
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calculation of Consolidated EBITDA, or from a person becoming a
Restricted Subsidiary; provided that the net reduction in any
Investment shall not exceed the amount of the Investment;
(7) Investments acquired in exchange for our Capital Stock, other than
Disqualified Stock;
(8) the purchase, redemption or other acquisition or retirement of our
common stock or any option or other right to acquire shares of our
common stock:
. if the common stock, option or other right was issued pursuant to a
plan or arrangement approved by our board of directors, and the
purchase, redemption or other acquisition or retirement occurs in
accordance with the terms of a plan or arrangement, from our former
employees and the former employees of our Subsidiaries or their
estates or is from our employee and the price paid by us to the
employee is equal to the exercise or purchase price paid by the
employee; and
. from our employees or the employees of our Subsidiaries in an amount
not to exceed $5.0 million in any fiscal year; provided that amounts
not paid for any purchase, redemption or other acquisition or
retirement in any fiscal year may be accumulated and paid in any
subsequent fiscal year;
(9) additional Restricted Payments not to exceed $50.0 million in the
aggregate; or
(10) the acquisition of our Capital Stock by us in connection with the
cashless exercise of any options, warrants or similar rights issued by
us.
Each Restricted Payment permitted pursuant to the preceding paragraph,
other than the Restricted Payment referred to in clause (2) thereof and an
exchange of Capital Stock for Capital Stock or Debt referred to in clause (3)
or (4) thereof, and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (3), (4) and (6), shall be included in calculating
whether the conditions of the third clause of clause (4) of the first
paragraph of this "Limitation on Restricted Payments" covenant have been met
with respect to any subsequent Restricted Payments. In the event the proceeds
of an issuance of our Capital Stock are used for the redemption, repurchase or
other acquisition of the notes, or Debt that is equal with the notes, then the
Net Cash Proceeds of the issuance shall be included in the third clause of
clause (4) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent the proceeds are not used for redemption,
repurchase or other acquisition of Debt.
Limitation on Asset Sales
We will not, and will not permit any Restricted Subsidiary to, consummate
an Asset Sale unless:
. we or the Restricted Subsidiary, as the case may be, receive
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of, as evidenced
by a resolution of the board of directors; and
. at least 75% of the consideration received by us or the Restricted
Subsidiary, as the case may be, from the Asset Sale shall be cash or
other Qualified Consideration.
We or any Restricted Subsidiary may, within 365 days of the Asset Sale,
invest the Net Cash Proceeds:
. in property or assets used, or to be used, in the System and Network
Management Business, or in a company engaged primarily in the System and
Network Management Business, if and to the extent otherwise permitted
under the indenture; or
. to repay our Secured Debt or the Secured Debt of any Restricted
Subsidiary.
The amount of the Net Cash Proceeds not used or invested within 365 days of
the Asset Sale in the manner described in the foregoing clauses shall
constitute "Excess Proceeds."
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In the event that Excess Proceeds exceed $10.0 million, we shall make an
Offer to Purchase that amount of notes equal to the amount of Excess Proceeds
at a price equal to 100% of the principal amount of the notes to be purchased,
plus accrued and unpaid interest and liquidated damages, if any, to the date of
purchase and, to the extent required by the terms of the notes, our other Debt
that is equal with the notes or Debt of a Restricted Subsidiary. Each Offer to
Purchase shall be mailed within 30 days following the date that we shall become
obligated to purchase notes with any Excess Proceeds. Following the completion
of an Offer to Purchase, the amount of Excess Proceeds shall be deemed to be
reset at zero and, to the extent there are any remaining Excess Proceeds we may
use Excess Proceeds for any use which is not otherwise prohibited by the
indenture.
We will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations to the extent the laws and
regulations are applicable in connection with the purchase of notes pursuant to
the Offer to Purchase.
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 any
agreement related to an encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement the subject of the refinancing clause (4) of the second
paragraph of the "Limitation on Debt" covenant;
. restrictions contained in any agreement relating to a Lien of a
Restricted Subsidiary or us otherwise permitted under the indenture, but
only to the extent the restrictions restrict the transfer of the
property subject to the Lien;
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. customary nonassignment provisions entered into in the ordinary course
of business in leases, licenses and other contracts to the extent the
provisions restrict the transfer, sublicensing or any license or
subletting of any lease or the assignment of rights under any such
contract;
. any restriction with respect to a Restricted Subsidiary imposed pursuant
to an agreement which has been entered into for the sale or disposition
of all or substantially all of the Capital Stock or assets of the
Restricted Subsidiary; provided that consummation of the transaction
would not result in an Event of Default or an event that, with the
passing of time or the giving of notice or both, would constitute an
Event of Default, that the restriction terminates if the transaction is
closed or abandoned and that the closing or abandonment of the
transaction occurs within one year of the date the agreement was entered
into;
. any restriction imposed pursuant to contracts for the sale of assets
with respect to the transfer of the assets to be sold pursuant to the
contract;
. arising or agreed to in the ordinary course of business, not relating to
any Debt, and that do not, individually, or in the aggregate, detract
from the value of our property or assets or the property or assets of
any Restricted Subsidiary in any manner material to us or any Restricted
Subsidiary; or
. the encumbrance or restriction is contained in the terms of any
agreement pursuant to which the Debt was issued if:
. the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in the Debt or agreement,
. the encumbrance or restriction is not materially more
disadvantageous to the holders of the notes than is customary in
comparable financings, and
. we determine that any encumbrance or restriction will not materially
affect our ability to make principal or interest payments on the
notes.
Limitation on Liens
We may not, and may not permit any Restricted Subsidiary to, Incur or suffer
to exist any Lien, on or with respect to any property or assets now owned or
hereafter acquired to secure any Debt without making, or causing the Restricted
Subsidiary to make, effective provision for securing the notes:
. equally and ratably with Debt as to such property or assets for so long
as the Debt will be so secured or;
. in the event the Debt is our Debt which is subordinate in right of
payment to the notes, prior to this Debt as to such property or assets
for so long as this Debt will be so secured.
The foregoing restrictions shall not apply to:
. Liens in existence on the date of original issuance of the notes;
. Liens securing only the notes and any Lien in favor of the trustee for
the benefit of the holders arising under the provisions in the
indenture;
. Liens granted by a Restricted Subsidiary in favor of us or any
Restricted Subsidiary;
. Liens to secure Permitted Senior Bank Debt;
. Liens securing Purchase Money Secured Debt;
. Liens on property existing immediately prior to the time of its
acquisition, and not Incurred in anticipation of the financing of the
acquisition;
. Liens on property of a person existing at the time the person becomes a
Restricted Subsidiary and not incurred in anticipation of becoming a
Restricted Subsidiary;
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. any interest in or title of a lessor to any property subject to a
Capital Lease Obligation which is permitted under the indenture; or
. Liens to secure Debt Incurred pursuant to clause (4) of the second
paragraph of the "Limitation on Debt" covenant; provided that the Lien
does not extend to any property other than the property securing the
Debt being refinanced pursuant to clause (4) of the second paragraph of
the "Limitation on Debt" covenant.
Limitation on Issuance or Sale of Capital Stock of Restricted Subsidiaries
We will not sell, and will not permit any Restricted Subsidiary, directly or
indirectly, to issue or sell, any shares of Capital Stock of a Restricted
Subsidiary, including options, warrants or other rights to purchase shares of
Capital Stock, except:
. to us or a Wholly Owned Restricted Subsidiary;
. issuances of director's qualifying shares or sales to foreign nationals
of shares of Capital Stock of foreign Restricted Subsidiaries, to the
extent required by applicable law;
. if, immediately after giving effect to an issuance or sale, the
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in any person remaining after giving effect to the
issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of the
issuance or sale; or
. issuances or sales of common stock of a Restricted Subsidiary.
Transactions with Affiliates and Related Persons
We may not, and may not permit any Restricted Subsidiary to, enter into any
transaction, or series of related transactions, not in the ordinary course of
business with our Affiliates or Related Persons, other than us or a Wholly
Owned Restricted Subsidiary, involving aggregate consideration in excess of
$5.0 million, including any Investment, either directly or indirectly, unless
the transaction is on terms no less favorable to us or the Restricted
Subsidiary than those that could be obtained in a comparable arm's-length
transaction with an entity that is not an Affiliate or Related Person and is in
our best interests or the best interests of the Restricted Subsidiary. For any
transaction, or series of related transactions, that involves less than or
equal to $10.0 million, our Chief Executive Officer, President or Chief
Operating Officer shall determine that the transaction satisfies the above
criteria and shall evidence a determination by an Officer's Certificate filed
with the trustee. For any transaction that involves in excess of $10.0 million:
. a majority of the disinterested members of the board of directors shall
determine that the transaction satisfies the above criteria; or
. we shall obtain a written opinion of a nationally recognized investment
banking or appraisal firm stating that the transaction is fair to us or
the Restricted Subsidiary.
The limitation above does not apply, and shall not apply, to:
. any transaction solely between us and any Restricted Subsidiary or
solely between any Restricted Subsidiaries;
. the payment of reasonable and customary regular fees to our directors
who are not our employees;
. any payments or other transactions pursuant to any tax-sharing agreement
between us and any other person with which we file a consolidated tax
return or with which we are part of a consolidated group for tax
purposes;
. licensing or sublicensing or the use of any intellectual property by us
or any Restricted Subsidiary to us or any Restricted Subsidiary;
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. any transaction entered into for the purpose of granting or altering
registration rights with respect to any of our Capital Stock;
. any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant; or
. compensation, severance and employee benefit arrangements with our or
any Restricted Subsidiary's officers, directors or employees, including
under any stock option or stock incentive plans, in the ordinary course
of business.
Limitation on Sale-Leaseback Transactions
We will not, and will not permit any Restricted Subsidiary to, enter into
any sale-leaseback transaction involving any of our assets or properties,
whether now owned or hereafter acquired, whereby we or a Restricted Subsidiary
sell or transfer the assets or properties and then or thereafter lease the
assets or properties or any part thereof or any other assets or properties that
we or the Restricted Subsidiary, as the case may be, intend to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
The above restriction does not apply to any sale-leaseback transaction if:
. the lease is for a period, including renewal rights, of not in excess of
three years;
. the sale-leaseback transaction is consummated within 180 days after the
purchase of the assets subject to the transaction;
. the transaction is solely between us and any Wholly Owned Restricted
Subsidiary or solely between Wholly Owned Restricted Subsidiaries; or
. we or the Restricted Subsidiary, within 12 months after the sale or
transfer of any assets or properties is completed, apply an amount no
less than the Net Cash Proceeds received from the sale in accordance
with second paragraph of "--Limitation on Asset Sales."
Provision of Financial Information
Whether or not we are required to be subject to Section 13(a) or 15(d) of
the Exchange Act, we shall file with the Commission the annual reports,
quarterly reports and other documents which we would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) or any successor
provision if we were so required. These documents must be filed with the
Commission on or prior to the respective dates (each a "Required Filing Date,"
collectively, the "Required Filing Dates") by which we would have been required
so to file the documents if we were so required. We shall also in any event:
. within 15 days of each Required Filing Date (1) transmit by mail to all
holders, as their names and addresses appear in the Note Register,
without cost to the holders, and (2) file with the trustee, copies of
the annual reports, quarterly reports and other documents which we file
with the Commission pursuant to Section 13(a) or 15(d) or any successor
provision or would have been required to file with the Commission
pursuant to Section 13(a) or 15(d) or any successor provisions if we
were required to be subject to these Sections; and
. if filing these documents by us with the Commission is not permitted
under the Exchange Act, promptly upon written request supply copies of
these documents to any prospective holder.
Unrestricted Subsidiaries
We may designate any of our Subsidiaries to be an "Unrestricted Subsidiary"
as provided below in which event the Subsidiary and each other person that is
then, or thereafter becomes, a Subsidiary of the Subsidiary will be deemed to
be an Unrestricted Subsidiary. "Unrestricted Subsidiary" means:
. any Subsidiary designated as such by the Board of Directors as set forth
below where (1) no default with respect to any Debt of the Subsidiary or
any Subsidiary of the Subsidiary, including any right
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which the holders thereof may have to take enforcement action against
the Subsidiary, would permit, upon notice, lapse of time or both, any
holder of any other Debt in a principal amount in excess of $10.0
million of us and our Subsidiaries, other than another Unrestricted
Subsidiary, to declare a default on the other Debt or cause the payment
thereof to be accelerated or payable prior to its final scheduled
maturity and (2) we could make a Restricted Payment in an amount equal
to the greater of the fair market value and book value of the Subsidiary
pursuant to "Limitation on Restricted Payments" and the amount is
thereafter treated as a Restricted Payment for the purpose of
calculating the aggregate amount available for Restricted Payments
thereunder; and
. any Subsidiary of an Unrestricted Subsidiary.
The board of directors may not designate a Subsidiary to be an Unrestricted
Subsidiary if the Subsidiary owns any Capital Stock of, or owns or holds any
Lien on any property of, any of our other Subsidiaries which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary. The board of directors may designate any Unrestricted Subsidiary a
Restricted Subsidiary and shall be deemed to have made this designation if at
that time the condition set forth in the item listed under in the definition
of "Unrestricted Subsidiary" shall cease to be true.
Mergers, Consolidations and Certain Sales of Assets
We may not, in a single transaction or a series of related transactions,
(1) consolidate or merge with or into any other person or permit any other
person to consolidate or merge with or into us or (2) directly or indirectly
transfer, sell, lease or otherwise dispose of all or substantially all of its
assets, unless:
. in a transaction in which we do not survive or in which we sell, lease
or otherwise dispose of all or substantially all of our assets, the
successor entity to us shall be organized and validly existing under the
laws of the United States of America, any State thereof or the District
of Columbia, and shall expressly assume, by a supplemental indenture
executed and delivered to the trustee in form satisfactory to the
trustee, all of our obligations under the indenture;
. immediately before and after giving effect to the transaction and
treating any Debt which becomes our obligation or an obligation of a
Restricted Subsidiary as a result of the transaction as having been
Incurred by us or the Restricted Subsidiary at the time of the
transaction, no Event of Default or event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default
shall have occurred and be continuing;
. except in the case of any such consolidation or merger of us with or
into, or any such transfer, sale, lease or other disposition of assets
to, a Wholly Owned Restricted Subsidiary, immediately after giving
effect to the transaction, our Consolidated Net Worth, or the
Consolidated Net Worth of any other successor entity to us, is equal to
or greater than our immediately prior to the transaction; and
. except in the case of any consolidation or merger of us with or into, or
any such transfer, sale, lease or other disposition of assets to, a
Wholly Owned Restricted Subsidiary, immediately after giving effect to
the transaction and treating any Debt which becomes our obligation or
the obligation of a Restricted Subsidiary as a result of the transaction
as having been Incurred 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 indenture described in the first paragraph under "Limitation on
Debt" above.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any other terms used in this prospectus for which no
definition is provided.
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"Acquisition Debt" means Debt of a person existing at the time the person
becomes a Restricted Subsidiary or assumed in connection with an Asset
Acquisition, and not Incurred in connection with, or in anticipation of, the
person becoming a Restricted Subsidiary or an Asset Acquisition.
"Affiliate" of any person means any other person directly or indirectly
controlling or controlled by or under direct or indirect common control with
the person. For the purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies of
the person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means an acquisition by us or any of our Restricted
Subsidiaries of the property and assets of any person other than us or any of
our Restricted Subsidiaries that constitute substantially all of a division or
line of business of the person; provided that the property and assets acquired
are to be used in the System and Network Management Business.
"Asset Sale" by any person means any transfer, conveyance, sale, lease,
license or other disposition by such person or any of its Restricted
Subsidiaries, including a consolidation or merger or other sale of the
Restricted Subsidiary with, into or to another person in a transaction in which
the Restricted Subsidiary ceases to be a Restricted Subsidiary, (collectively,
a "transfer") of:
. shares of Capital Stock, other than directors' qualifying shares, or
other ownership interests of a Restricted Subsidiary of a person;
. all or substantially all of the assets of a person or any of its
Restricted Subsidiaries; or
. any other property, assets or rights, including intellectual property
rights, of a person or any of its Restricted Subsidiaries outside of the
ordinary course of business; provided that "Asset Sale" shall not
include:
. any transfer of all or substantially all of our assets in a
transaction that is made in compliance with the requirements of
provisions of the indenture described under "--Mergers,
Consolidations and Certain Sales of Assets,"
. any transfer by us to any Wholly Owned Restricted Subsidiary or by
any Wholly Owned Restricted Subsidiary to any other Wholly Owned
Subsidiary or to us in a manner that does not otherwise violate the
terms of the indenture,
. transfers made in compliance with the requirements of provisions of
the indenture described under "Limitation on Restricted Payments,"
. transfers constituting the granting of a Permitted Lien,
. exchanges of equipment used in the System and Network Management
Business for other equipment to be used in the System and Network
Management Business; provided any exchange for equipment with a fair
market value in excess of $2.0 million must be approved by our board
of directors, and
. transfers of assets, property or other rights, including
intellectual property rights, with a fair market value of less than
$2.0 million.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from the date of determination to the dates of each
successive scheduled principal payment of the debt security and (b) the amount
of the principal payment, by (2) the sum of all of the principal payments.
"Capital Lease Obligation" of any person means the obligation to pay rent or
other payment amounts under a lease of, or other Debt arrangements conveying
the right to use, real or personal property of a person
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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 a person in accordance with GAAP.
The principal amount of the obligation shall be the capitalized amount thereof
that would appear on the face of a balance sheet of a person in accordance with
GAAP.
"Capital Stock" of any person means any and all shares, interests,
participations or other equivalents, however designated, of corporate stock or
other equity participations, including partnership interests, whether general
or limited, of such person.
"Cash Equivalents" means:
. securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof,
provided that the full faith and credit of the United States is pledged
in support thereof, having maturities of six months from the date of
acquisition;
. certificates of deposit with maturities of not more than six months or
less from the date of acquisition, bankers' acceptances with maturities
not exceeding six months and overnight bank deposits, in each case with
any domestic commercial bank having capital and surplus in excess of
$500.0 million and a Thompson Bank Watch Rating of "B" or better;
. repurchase obligations with a term of not more than seven days for
underlying securities of the types described in the first two clauses
above entered into with any financial institution meeting the
qualifications specified in the second clause above;
. commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group and in each
case maturing within six months after the date of acquisition; and
. money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in the foregoing clauses of this
definition.
"Change of Control" means the occurrence of one or more of the following
events:
. any sale, lease, exchange or other transfer, in one transaction or a
series of related transactions, of all or substantially all of the
assets of ours and our Subsidiaries, taken as a whole, to any person or
group of related persons, as defined in Section 13(d) of the Exchange
Act (a "Group");
. the approval by the holders of our Capital Stock of any plan or proposal
for our liquidation or dissolution, whether or not otherwise in
compliance with the provisions of the applicable indenture;
. any person or Group shall become the owner, directly or indirectly,
beneficially or of record, of shares representing more than 50% of the
aggregate ordinary voting power represented by our issued and
outstanding Voting Stock or any successor to all or substantially all of
its assets; or
. during any period of two consecutive years, individuals who at the
beginning of the period constituted our board of directors, together
with any new directors whose election to the board of directors or whose
nomination for election by our stockholders was approved by a vote of a
majority of the directors then still in office who were either directors
at the beginning of this period or whose election or nomination for
election was previously so approved, cease for any reason to constitute
a majority of the board of directors then in office.
"Common stock" of any person means Capital Stock of a person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such person, to shares of Capital Stock of any other class of the person.
"Consolidated Debt to EBITDA Ratio" means the ratio of:
. the total consolidated Debt as of the date of calculation (the
"Determination Date") to
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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 such operating
business any operating business during the Measurement Period or after
the end of the period and on or prior to the Determination Date, the
calculation will be made on a pro forma basis in accordance with GAAP as
if, in the case of an acquisition or the commencement of activities
constituting such operating business, all transactions had been
consummated prior to the first day of the Measurement Period, it being
understood that in calculating Consolidated EBITDA the exclusions set
forth in the definition of Consolidated Net Income shall apply to any
person acquired as if it were a Restricted Subsidiary.
"Consolidated EBITDA" means, with respect to any period, Consolidated Net
Income for the period increased, without duplication, to the extent deducted in
calculating the Consolidated Net Income, by:
. Consolidated Income Tax Expense for the period;
. Consolidated Interest Expense for the period without regard to the
proviso therein; and
. depreciation, amortization and any other non-cash items for the period,
less any non-cash items to the extent they increase Consolidated Net
Income, including the partial or entire reversal of reserves taken in
prior periods, for the period, for us and any Restricted Subsidiary,
including, without limitation, amortization of capitalized debt issuance
costs for the period,
all of the foregoing determined on a consolidated basis for us and our
Restricted Subsidiaries in accordance with GAAP; provided that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced, to the extent not otherwise reduced in accordance with
GAAP, by an amount equal to:
. the amount of Consolidated EBITDA attributable to such Restricted
Subsidiary, multiplied by
. the percentage ownership interest in a Restricted Subsidiary not owned
on the last day of a period by us or any of our Restricted Subsidiaries.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for our income taxes and the income taxes of our Restricted
Subsidiaries for the period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in our consolidated income statement and the
consolidated income statement of our Restricted Subsidiaries, without deduction
of interest income, for a period calculated on a consolidated basis in
accordance with GAAP, including without limitation or duplication, or, to the
extent not so included, with the addition of:
. the amortization of Debt discounts;
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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 of and the consolidated net income of our Restricted Subsidiaries for a
period determined on a consolidated basis in accordance with GAAP; provided
that there shall be excluded therefrom:
. the net income or loss of any person acquired by us or any of our
Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of the transaction;
. the net income or loss of any person that is not our Restricted
Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to us or our Restricted Subsidiary by the
person during the period;
. gains or losses on Asset Sales by us or our Restricted Subsidiaries;
. all extraordinary gains and extraordinary losses;
. the cumulative effect of changes in accounting principles; and
. the tax effect of any of the items described in the foregoing clauses.
"Consolidated Net Worth" of any person means the consolidated stockholders'
equity of such person, determined on a consolidated basis in accordance with
GAAP, less amounts attributable to Disqualified Stock of such person; provided
that, with respect to us, adjustments following the date of the indenture to
our accounting books and records in accordance with Accounting Principles Board
Opinions Nos. 16 and 17, or successor opinions thereto, or otherwise resulting
from the acquisition of control of us by another person shall not be given
effect.
"Debt" means, without duplication, with respect to any person, whether
recourse is to all or a portion of the assets of the person and whether or not
contingent:
. every obligation of the person for money borrowed;
. every obligation of the person evidenced by bonds, debentures, notes or
other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses;
. every reimbursement obligation of the person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of the person, including reimbursement obligations with respect
thereto, but excluding obligations with respect to trade letters of
credit securing obligations entered into in the ordinary course of
business to the extent the letters of credit are not drawn upon or, if
drawn upon, to the extent the drawing is reimbursed no later than the
third business day following receipt by the person of a demand for
reimbursement;
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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 such time of determination.
In no event shall "Debt" include any trade payable or accrued expenses
arising in the ordinary course of business.
"Disqualified Stock" of any person means any Capital Stock of the person
that by its terms, or by the terms of any security into which it is
convertible or for which it is exchangeable, at the option of the holder
thereof, or otherwise matures or is required to be redeemed, pursuant to any
sinking fund obligation or otherwise, but other than as a result of the death
or disability of the holder thereof or the termination of the employment with
us of the holder thereof, or is convertible into or exchangeable for Debt or
is redeemable at the option of the holder thereof, in whole or in part, at any
time prior to the final maturity of the notes; provided, however, that any
Capital Stock which would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require us or a Restricted
Subsidiary to repurchase or redeem the Capital Stock upon the occurrence of an
"Asset Sale" or a "Change of Control" occurring prior to the final maturity
date of the notes shall not constitute Disqualified Stock if the provisions
applicable to the Capital Stock are no more favorable to the holders of the
stock than the corresponding provisions applicable to the notes contained in
the indenture and the provisions applicable to the Capital Stock specifically
provide that we and our Restricted Subsidiaries will not repurchase or redeem
any of the stock pursuant to the provisions prior to the repurchase of such
notes as are required to be repurchased pursuant to the indenture upon an
Asset Sale or a Change of Control.
"Existing Debt" shall mean our Debt and the Debt of our Restricted
Subsidiaries in existence on the original issue date of the notes and our 4
3/4% Convertible Subordinated Notes.
"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:
. 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;
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. purchase property, securities or services for the purpose of assuring
the holder of the Debt of the payment of the Debt; or
. maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the
primary obligor to pay the Debt, and "Guaranteed," "Guaranteeing" and
"Guarantor" shall have meanings correlative to the foregoing; provided,
however, that the Guaranty by any person shall not include endorsements
by the person for collection or deposit, in either case, in the ordinary
course of business.
"Incur" means, with respect to any Debt or other obligation of any person,
to create, issue, incur, by conversion, exchange or otherwise, assume,
Guarantee or otherwise become liable in respect of the Debt or other obligation
including by acquisition of Restricted Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any of the Debt or other obligation
on the balance sheet of the person, and "Incurrence," "Incurred," "Incurrable"
and "Incurring" shall have meanings correlative to the foregoing; provided,
however, that a change in GAAP that results in an obligation of the person that
exists at such time becoming Debt shall not be deemed an Incurrence of the
Debt.
"Interest Rate or Currency Protection Agreement" of any person means any
forward contract, futures contract, swap, option or other financial agreement
or arrangement, including, without limitation, caps, floors, collars and
similar agreements, relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"Internal Revenue Code" means the Internal Revenue Code of 1986 and any
successor thereto.
"Investment" by any person means any direct or indirect loan, advance or
other extension of credit or capital contribution, by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise, to, or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of Debt
issued by, any other person, including any payment on a Guarantee of any
obligation of such other person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement, other than any easement not materially
impairing usefulness or marketability, encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets, including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing.
"Material Restricted Subsidiary" means, at any date of determination, any
Restricted Subsidiary that represents more than 10% of our total consolidated
assets at the end of the most recent fiscal quarter for which financial
information is available, or more than 10% of our consolidated net sales or
consolidated operating income for the most recent four quarters for which
financial information is available.
"Net Cash Proceeds" means:
. with respect to any Asset Sale by any person, cash or Cash Equivalents
received, including by way of sale or discounting of a note, installment
receivable or other receivable, but excluding any other consideration
received in the form of assumption of Debt or other obligations relating
to the properties or assets, therefrom by the person, net of:
. all legal, title and recording tax expenses, commissions and other
fees and expenses Incurred and all federal, state, foreign and local
taxes required to be accrued as a liability as a consequence of the
Asset Sale;
. all payments made by the person or its Restricted Subsidiaries on
any Debt which is secured by the assets in accordance with the terms
of any Lien upon or with respect to the assets or which
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must by the terms of such Lien, or in order to obtain a necessary
consent to the Asset Sale or by applicable law, be repaid out of the
proceeds from the Asset Sale;
. all distributions and other payments made to minority interest
holders in Restricted Subsidiaries of the person or joint ventures as
a result of the Asset Sale; and
. appropriate amounts to be provided by the person or any Restricted
Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with such assets and
retained by the person or any Restricted Subsidiary thereof, as the
case may be, after the Asset Sale, including, without limitation,
liabilities under any indemnification obligations and severance and
other employee termination costs associated with the Asset Sale, in
each case as determined by the board of directors, in its reasonable
good faith judgment evidenced by a resolution of the board of
directors filed with the trustee; provided, however, that any
reduction in the reserve within 12 months following the consummation
of the Asset Sale will be treated for all purposes of the indenture
and the notes 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.
"Note Register" shall mean the note registry maintained by the registrar.
"Offer to Purchase" means a written offer (the "offer") sent by us by first
class mail, postage prepaid, to each holder at his address appearing in the
Note Register on the date of the offer offering to purchase up to the principal
amount of notes specified in such offer at the purchase price specified in such
offer, as determined pursuant to the indenture. Unless otherwise required by
applicable law, the offer shall specify an expiration date (the "offer
expiration date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such offer and a settlement date (the "purchase date")
for purchase of notes within five business days after the offer expiration
date. We shall notify the trustee at least 15 business days, or such shorter
period as is acceptable to the trustee, prior to the mailing of the offer of
our obligation to make an offer to purchase, and the offer shall be mailed by
us or, at our request, by the trustee in the name and at our expense. The offer
shall contain information concerning our business and the business of our
Restricted Subsidiaries which we in good faith believe will enable such holders
to make an informed decision with respect to the Offer to Purchase, which at a
minimum will include:
. the most recent annual and quarterly financial statements and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained in the documents required to be filed with the
trustee pursuant to the indenture, which requirements may be satisfied
by delivery of the documents together with the offer;
. a description of material developments in our business subsequent to the
date of the latest of such financial statements referred to in the
foregoing clause, including a description of the events requiring us to
make the Offer to Purchase;
. if applicable, appropriate pro forma financial information concerning
the Offer to Purchase and the events requiring us to make the Offer to
Purchase; and
. any other information required by applicable law to be included therein.
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The offer shall contain all instructions and materials necessary to enable
such holders to tender notes pursuant to the Offer to Purchase. The offer shall
also state:
. the section of the indenture pursuant to which the Offer to Purchase is
being made;
. the offer expiration date and the purchase date;
. the aggregate principal amount of the outstanding notes offered to be
purchased by us pursuant to the Offer to Purchase, including, if less
than 100%, the manner by which such has been determined pursuant to the
Section of the indenture requiring the Offer to Purchase (the "purchase
amount");
. the purchase price to be paid by us for each $1,000 aggregate principal
amount of notes accepted for payment, as specified pursuant to the
indenture (the "purchase price");
. that the holder may tender all or any portion of the notes registered in
the name of the holder and that any portion of a note tendered must be
tendered in an integral of $1,000 principal amount;
. the place or places where notes are to be surrendered for tender
pursuant to the Offer to Purchase;
. that interest on any notes not tendered or tendered but not purchased by
us pursuant to the Offer to Purchase will continue to accrue;
. that on the purchase date the purchase price will become due and payable
upon each note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after
the purchase date;
. that each holder electing to tender a note pursuant to the Offer to
Purchase will be required to surrender the note at the place or places
specified in the Offer prior to the close of business on the offer
expiration date, the note being, if we or the trustee so require, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to us and the trustee duly executed by, the holder thereof
or his attorney duly authorized in writing;
. that holders will be entitled to withdraw all or any portion of notes
tendered if we or their paying agent receive, not later than the close
of business on the offer expiration date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the
principal amount of the note the holder tendered, the certificate number
of the note the holder tendered and a statement that such holder is
withdrawing all or a portion of his tender;
. that (1) if notes in an aggregate principal amount less than or equal to
the purchase amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, we shall purchase all the notes and (2) if notes in
an aggregate principal amount in excess of the purchase amount are
tendered and not withdrawn pursuant to the Offer to Purchase, we shall
purchase notes having an aggregate principal amount equal to the
purchase amount on a pro rata basis, with adjustments as may be deemed
appropriate so that only notes in denominations of $1,000 or integral
multiples thereof shall be purchased; and
. that in the case of any holder whose note is purchased only in part, we
shall execute, and the trustee shall authenticate and deliver to the
holder of the note without service charge, a new note or notes of any
authorized denomination as requested by, the holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the offer for such Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions that is designed to protect the person against
fluctuations in interest rates or currency exchange rates with respect to Debt
Incurred and which shall have a notional amount no greater than the payments
due with respect to the Debt being hedged thereby and not for purposes of
speculation.
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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 ours officer or employees or officers or employees
of any Restricted Subsidiary, other than loans or advances made pursuant
to the next clause below, that do not in the aggregate exceed $10.0
million at any time outstanding;
. accounts receivable in the ordinary course of business and Investments
obtained in exchange or settlement of accounts receivable for which we
have determined that collection is not likely; and
. loans or advances to persons who own Debt or Capital Stock, other than
any of our Affiliates or any Restricted Subsidiary, of any person if the
loans or advances are made as part of, or in connection with, a
transaction pursuant to which the person becomes our Restricted
Subsidiary or the Restricted Subsidiary of our Restricted Subsidiary or
substantially all of the assets of the person are acquired by us or any
Restricted Subsidiary, in an aggregate amount not to exceed 20% of the
total consideration paid in connection with such acquisition.
"Permitted Lien" means any Lien on ours assets or the assets of any
Restricted Subsidiary permitted under the "Limitation on Liens" covenant.
"Permitted Senior Bank Debt" means Debt Incurred by us or any Restricted
Subsidiary pursuant to one or more senior commercial term loan and/or revolving
credit facilities, including any letter of credit subfacility, entered into
principally with commercial banks and/or other financial institutions typically
party to commercial loan agreements, and any replacement, extension, renewal,
refinancing or refunding thereof; provided that the aggregate principal amount
of all Permitted Senior Bank Debt, at any one time outstanding, shall not
exceed $150.0 million plus 85% of our consolidated net accounts receivable.
"Preferred stock" of any person means Capital Stock of such person of any
class or classes, however designated, that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such person, to shares of Capital
Stock of any other class of such person.
"Purchase Money Secured Debt" of any person means Debt of the person secured
by a Lien on real or personal property of the person which Debt:
. constitutes all or a part of the purchase price or construction cost of
the property; or
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. is Incurred prior to, at the time of or within 180 days after the
acquisition or substantial completion of the property for the purpose of
financing all or any part of the purchase price or construction cost
thereof; provided, however, that:
. the Debt so incurred does not exceed 100% of the purchase price or
construction cost of the property and related expenses,
. the Lien does not extend to or cover any property other than the
item of property and any improvements on the item and proceeds
thereof,
. the purchase price or construction cost for the property is or
should be included in "addition to property, plant and equipment" in
accordance with GAAP, and
. the purchase or construction of the property is not part of any
acquisition of a person or business unit or line of business.
"Qualified Consideration" shall mean:
. cash;
. Cash Equivalents;
. assets that are used or useful in the System and Network Management
Business;
. any securities or other obligations that are converted into or exchanged
for cash or Cash Equivalents within six months after an Asset Sale; or
. our liabilities or the liabilities of a Restricted Subsidiary assumed by
the transferee, or its designee, such that we or the Restricted
Subsidiary have no further liability therefor, the amount of the
liability to be determined in accordance with GAAP.
"Related person" of any person means any other person directly or indirectly
owning:
. 5% or more of the outstanding common stock of the person or, in the case
of a person that is not a corporation, 5% or more of the equity interest
in the person; or
. 5% or more of the combined voting power of the Voting Stock of the
person.
"Restricted Subsidiary" means any of our Subsidiaries, whether existing on
or after the date of the indenture, unless the Subsidiary is an Unrestricted
Subsidiary.
"Secured Debt" means Permitted Senior Bank Debt, Purchase Money Secured Debt
and other Debt secured by a Permitted Lien.
"Strategic Investment" means an Investment in any person, other than our
Unrestricted Subsidiary, whose primary business is related, ancillary or
complementary to the System and Network Management Business, and the Investment
is determined by our board of directors to promote or significantly benefit our
businesses and the businesses of our Restricted Subsidiaries on the date of the
Investment.
"Subordinated Debt" means our Debt as to which the payment of principal of,
and premium, if any, and interest and other payment obligations in respect of
the Debt shall be subordinate to the prior payment in full of the notes to at
least the following extent:
. no payments of principal of or premium, if any, or interest on, or
otherwise due in respect of the Debt, may be permitted for so long as
any default in the payment of principal or premium, if any, or interest
on the notes exists;
. in the event that any other default that with the passing of time or the
giving of notice, or both, would constitute an Event of Default with
respect to the notes, upon notice by 25% or more in principal
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amount of the notes to the trustee, the trustee shall have the right to
give notice to us and the holders of the Debt, or trustees or agents
therefor, of a payment blockage, and thereafter no payments of principal
of or premium, if any, or interest on or otherwise due in respect of the
Debt may be made for a period of 179 days from the date of the notice;
and
. the Debt may not:
. provide for payments of principal of the Debt at its maturity or by
way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by us,
including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of acceleration of the Debt upon an event of
default thereunder, in each case prior to the final maturity date of
the notes; or
. permit redemption or other retirement, including pursuant to an Offer
to Purchase made by us, of the other Debt at the option of the holder
thereof prior to the final maturity date of the notes, other than a
redemption or other retirement at the option of the holder of the
Debt, including pursuant to an Offer to Purchase made by us, which is
conditioned upon a change of control of us pursuant to provisions
substantially similar to those described under "Change of Control,"
and which shall provide that the Debt will not be repurchased
pursuant to these provisions prior to our repurchase of the notes
required to be repurchased by us pursuant to the provisions described
under "Change of Control;" provided, however, that any Debt which
would constitute Subordinated Debt but for provisions thereof giving
holders thereof the right to require us or a Restricted Subsidiary to
repurchase or redeem the Subordinated Debt upon the occurrence of an
Asset Sale occurring prior to the final maturity of the notes shall
constitute Subordinated Debt if the provisions applicable to the
Subordinated Debt are no more favorable to the holders of the Debt
than the provisions applicable to the notes contained in the covenant
described under "Limitation on Asset Sales" and the provisions
applicable to the Debt specifically provide that we and our
Restricted Subsidiaries will not repurchase or redeem any of the Debt
pursuant to these provisions prior to the repurchase of the notes as
are required to be repurchased pursuant to the covenant described
under "Limitation on Asset Sales."
"Subsidiary" of any person means:
. a corporation more than 50% of the combined voting power of the
outstanding Voting Stock of which is owned, directly or indirectly, by
the person or by one or more other Subsidiaries of the person or by the
person and one or more Restricted Subsidiaries thereof; or
. any other person, other than a corporation, in which the person, or one
or more other Subsidiaries of the person or the person and one or more
other Subsidiaries thereof, directly or indirectly, has the power to
direct the policies, management and affairs thereof.
"System and Network Management Business" means:
. server and other hardware hosting;
. connectivity, data networking, telecommunications or content for
computer or data networks or systems;
. management of computer or data networks or systems;
. technology services, equipment sales or leasing or software licensing
for computer or data networks or systems, including Internet Protocol
and any successor protocol(s) based networks; and
. businesses reasonably related, complementary or incidental thereto.
"U.S. Dollar Equivalent" means, as of the date of determination, the dollar
value at the noon buying rate in the City of New York for cable transfers in
euros as certified for customs purposes by the Federal Reserve Bank of New
York for the Business Day prior to such date of determination.
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"U.S. government securities" means securities that are direct obligations of
the United States of America, direct obligations of the Federal Home Loan
Mortgage Corporation, direct obligations of the Federal National Mortgage
Association, securities which the timely payment of whose principal and
interest is unconditionally guaranteed by the full faith and credit of the
United States of America, trust receipts or other evidence of a direct claim
upon the instruments described above and money market mutual funds that invest
solely in these securities.
"Voting Stock" of any person means Capital Stock of a person which
ordinarily has voting power for the election of directors, or persons
performing similar functions, at a person, whether at all times or only so long
as no senior class of securities has voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any person means a Restricted
Subsidiary of a person all of the outstanding Capital Stock or other ownership
interests of which, other than directors' qualifying shares, shall at the time
be owned by the person or by one or more Wholly Owned Restricted Subsidiaries
of the person or by the person and one or more Wholly Owned Restricted
Subsidiaries of such person.
Events of Default
The following will be "Events of Default" under the indenture:
. failure to pay principal of or premium, if any, on any note when due
upon acceleration, optional or mandatory redemption, required repurchase
or otherwise;
. failure to pay interest on any note when due, and such default continues
for a period of 30 days;
. default in the payment of principal and interest on notes required to be
purchased pursuant to an Offer to Purchase as described under "Change of
Control" and "Asset Sales" when due and payable;
. failure to perform or comply with the provisions described under
"Merger, Consolidation and Certain Sales of Assets;"
. failure to perform any other of our covenants or agreements under the
indenture or the notes and such failure continues for 60 days after
written notice to us by the trustee or holders of at least 25% in
aggregate principal amount of outstanding notes;
. (1) any default by us or any Material Restricted Subsidiary in the
payment of the principal, premium, if any, or interest has occurred with
respect to amounts in excess of $10.0 million under any agreement,
indenture or instrument evidencing Debt when the same shall become due
and payable in full and the default shall have continued after any
applicable grace period and shall not have been cured or waived and, if
not already matured at its final maturity in accordance with its terms,
the holders of the Debt shall have the right to accelerate the Debt, or
(2) any event of default as defined in any of our agreements, indentures
or instruments or any agreements, indentures or instruments of any
Restricted Subsidiary evidencing Debt in excess of $10.0 million shall
have occurred and the Debt thereunder, if not already matured at its
final maturity in accordance with its terms, shall have been
accelerated;
. the rendering of a final judgment or judgments against us or any
Material Restricted Subsidiary in an amount in excess of $10.0 million
which remains undischarged or unstayed for a period of 60 days after the
date on which the right to appeal has expired; and
. events of bankruptcy, insolvency or reorganization affecting us or any
Material Restricted Subsidiary.
Subject to the provisions of the indenture relating to the duties of the
trustee in case an Event of Default shall occur and be continuing, the trustee
will be under no obligation to exercise any of its rights or powers under the
indenture at the request or direction of any of the holders, unless the holders
shall have offered to the
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trustee reasonable indemnity. Subject to provisions for the indemnification of
the trustee, the holders of a majority in aggregate principal amount of the
outstanding notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee.
If an Event of Default, other than events of bankruptcy, insolvency or
reorganization affecting us or any Material Restricted Subsidiary, shall occur
and be continuing, either the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding notes may accelerate the maturity
of all notes; provided, however, that after the acceleration, but before a
judgment or decree based on acceleration, the holders of a majority in
aggregate principal amount of outstanding notes may, under various
circumstances, rescind and annul the acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived
as provided in the indenture. If an event of bankruptcy, insolvency or
reorganization affecting us or any Material Restricted Subsidiary occurs, the
principal of and any accrued interest on the notes then outstanding will ipso
facto become immediately due and payable without any declaration or other act
on the part of the trustee or any holder. For information as to waiver of
defaults, see "Modification and Waiver."
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless the holder shall
have previously given to the trustee written notice of a continuing Event of
Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding notes shall have made written request, and offered
reasonable indemnity, to the trustee to institute such proceeding as trustee,
and the trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding notes a direction inconsistent
with the request and shall have failed to institute a proceeding within 60
days. However, these limitations do not apply to a suit instituted by a holder
of a note for enforcement of payment of the principal of and premium, if any,
or interest on such note on or after the respective due dates expressed in the
note.
We are required to furnish to the trustee annually a statement as to the
performance by us of our obligations under the indenture and as to any default
in such performance.
Satisfaction and Discharge of the Indenture
The indenture will cease to be of further effect as to all outstanding
notes, except as to:
. rights of registration of transfer and exchange and our right of
optional redemption;
. substitution of apparently mutilated, defaced, destroyed, lost or stolen
notes;
. rights of holders to receive payment of principal and interest on the
notes;
. rights, obligations and immunities of the trustee under the indenture;
and
. rights of the holders of the notes as beneficiaries of the indenture
with respect to any property deposited with the trustee payable to all
or any of them if:
. we will have paid or caused to be paid the principal of and interest
on the notes as and when they will have become due and payable; or
. all outstanding notes, except lost, stolen or destroyed notes which
have been replaced or paid, have been delivered to the trustee for
cancellation.
Defeasance
At our option, if applicable:
(1) we will be discharged from any and all obligations in respect of the
outstanding notes; or
(2) we may omit to comply with various restrictive covenants, and this
omission shall not be deemed to be an Event of Default under the
indenture and the notes,
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in either case (1) or (2) upon irrevocable deposit with the trustee, in trust,
of money and/or U.S. government obligations which will provide money in an
amount sufficient, in the opinion of a nationally recognized firm of
independent certified public accountants, to pay the principal of and premium,
if any, and each installment of interest if any, on the outstanding notes.
With respect to clause (2), the obligations under the indenture other than
with respect to these covenants and the Events of Default other than the Events
of Default relating to these covenants above shall remain in full force and
effect. A trust may only be established if, among other things:
. with respect to clause (1), we have received from, or there has been
published by, the Internal Revenue Service a ruling or there has been a
change in law, which in the opinion of counsel provides that holders of
the notes will not recognize gain or loss for U.S. federal income tax
purposes as a result of the deposit, defeasance and discharge and will
be subject to U.S. federal income tax on the same amount, in the same
manner and at the same times as would have been the case if the deposit,
defeasance and discharge had not occurred; or, with respect to clause
(2), we have delivered to the trustee an opinion of counsel to the
effect that the holders of the notes will not recognize gain or loss for
U.S. federal income tax purposes as a result of the deposit and
defeasance and will be subject to U.S. federal income tax on the same
amount, in the same manner and at the same times as would have been the
case if the deposit and defeasance had not occurred;
. the deposit, defeasance and discharge will not result in a breach or
violation of, or constitute a default under, any agreement or instrument
to which we or any Restricted Subsidiary are a party or by which we and
any Restricted Subsidiary are bound;
. no Event of Default or event that with the passing of time or the giving
of notice, or both, shall constitute an Event of Default, shall have
occurred and be continuing;
. we have delivered to the trustee an opinion of counsel to the effect
that the deposit shall not cause the trustee or the trust so created to
be subject to the Investment Company Act of 1940; and
. other customary conditions precedent are satisfied.
Modification and Waiver
Modifications and amendments of the indenture may be made by us and the
trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding notes; provided, however, that no modification or
amendment may, without the consent of the holder of each outstanding note
affected thereby:
. change the stated maturity of the principal of, or any installment of
interest on, any note;
. reduce the principal amount of, or premium or interest on, any note;
. change the place or currency of payment of principal of, or premium or
interest on, any note;
. impair the right to institute suit for the enforcement of any payment on
or with respect to any note;
. reduce the above-stated percentage of outstanding notes necessary to
modify or amend the indenture;
. reduce the percentage of aggregate principal amount of outstanding notes
necessary for waiver of compliance with provisions of the indenture or
for waiver of defaults;
. modify any provisions of the indenture relating to the modification and
amendment of the indenture or the waiver of past defaults or covenants,
except as otherwise specified; or
. following the mailing of any Offer to Purchase, modify any Offer to
Purchase for the notes required under the "Limitation on Asset Sales"
and the "Change of Control" covenants contained in the indenture in a
manner materially adverse to the holders thereof.
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However, without the consent of any holder, we and the trustee may amend or
supplement the indenture or the notes to cure any ambiguity, defect or
inconsistency; provided that this action does not adversely affect the
interests of the holders of the notes in any material respect, to provide for
the assumption of our obligations to holders of notes in the case of a merger
or consolidation, to secure the notes, to add to our covenants for the benefits
of the holders or to comply with requirements of the Commission in order to
effect or maintain the qualification of the indenture under the Trust Indenture
Act.
The holders of a majority in aggregate principal amount of the outstanding
notes, on behalf of all holders of notes, may waive compliance by us with
restrictive provisions of the indenture. Subject to rights of the trustee, as
provided in the indenture, the holders of a majority in aggregate principal
amount of the outstanding notes, on behalf of all holders of notes, may waive
any past default under the indenture, except a default in the payment of
principal, premium or interest or a default arising from failure to purchase
any note tendered pursuant to an Offer to Purchase.
Governing Law
The indenture and the old notes are, and the new notes will be, governed by
the laws of the State of New York.
The Trustee
The indenture provides that, except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set
forth in the indenture. During the existence of an Event of Default, the
trustee will exercise such rights and powers vested in it under the indenture
and use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such persons own
affairs.
The indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the trustee, should it
become our creditor, to obtain payment of claims in certain cases or to realize
on certain property received by it in respect of any such claim as security or
otherwise. The trustee is permitted to engage in other transactions with us or
any Affiliate; provided, however, that if it acquires any conflicting interest,
as defined in the indenture or in the Trust Indenture Act, it must eliminate
the conflict or resign.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material U.S. federal income
considerations relevant to holders of the notes including material U.S. federal
income tax consequences of the exchange of old notes for new notes pursuant to
the exchange offer. This discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change, possibly with retroactive effect, or different interpretations.
There can be no assurance that the IRS will not challenge one or more of the
tax consequences described herein, and we have not obtained, nor does it intend
to obtain, a ruling from the IRS with respect to the U.S. federal income tax,
state tax, local tax, foreign tax or other tax consequences of acquiring or
holding notes. This discussion does not purport to deal with all aspects of
U.S. federal income taxation that may be relevant to a particular holder in
light of the holder's circumstances (for example, persons subject to the
alternative minimum tax provisions of the Code). Also, it is not intended to be
wholly applicable to all categories of investors, some of which, such as
dealers in securities, banks, insurance companies, tax-exempt (employment,
charitable or other) organizations, and persons holding notes as part of a
hedging or conversion transaction or straddle or persons deemed to sell notes
under the constructive sale provisions of the Code, may be subject to special
rules. The discussion also does not discuss any aspect of state, local or
foreign law, or U.S. federal estate and gift tax law. This discussion is
limited to purchasers of notes who hold the notes as "capital assets" within
the meaning of Section 1221 of the Code.
All purchasers of the notes are advised to consult their own tax advisors
regarding the federal, state, local and foreign tax consequences of the
purchase, ownership and disposition of the notes.
U.S. Holders
As used herein, the term "U.S. Holder" means the beneficial owner of a note
that for United States federal income tax purposes is:
. a citizen or resident (as defined in Section 7701 (b) of the Code) of
the United States;
. a corporation, partnership or other entity formed under the laws of the
United States or any political subdivision thereof;
. an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
. a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in Section
7701(a)(30) of the Code.
. A "Non-U.S. Holder" is any holder other than a U.S. Holder.
Interest
Stated interest on the notes will generally be includable in a U.S. Holder's
gross income and taxable as ordinary income for U.S. federal income tax
purposes at the time it is paid or accrued in accordance with the U.S. Holder's
regular method of accounting.
Sale, Exchange or Redemption
Each U.S. Holder generally will recognize capital gain or loss upon the
sale, exchange, redemption or other disposition of the notes measured by the
difference, if any, between:
. the amount of cash and the fair market value of any property received,
except to the extent that such cash or other property is attributable to
the payment of accrued interest not previously included in income, which
amount will be taxable as ordinary income; and
. such holder's adjusted tax basis in the notes;
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Capital gain recognized by an individual U.S. Holder generally will be subject
to a maximum United States Federal income tax rate of:
. 39.6% if the U.S. Holder held the asset for not more than 12 months
before the disposition; or
. 20% if the U.S. Holder held the asset for more than 12 months before the
disposition.
A holder's initial tax basis in a note will be the amount paid therefor.
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind or extent
from the old notes and because the exchange will occur by operation of the
terms of the old notes. A U.S. Holder's adjusted tax basis in the new notes
should be the same as such Holder's adjusted tax basis in the old notes. A U.S.
Holder's holding period for the new notes received pursuant to the exchange
offer should include its holding period for the old notes surrendered therefor.
Information Reporting and Backup Withholding
A U.S. Holder of notes may be subject to "backup withholding" at a rate of
31% with respect to "reportable payments," including interest payments, and,
under various circumstances, principal payments on the notes and proceeds from
the sale, exchange or redemption of the notes. These backup withholding rules
apply if the U.S. Holder, among other things:
. fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury
within a reasonable time after the request therefor;
. furnishes a TIN as to which the IRS provides notification that it is an
incorrect TIN;
. fails to report properly interest; or
. under various circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is correct and
that such U.S. Holder is not subject to backup withholding.
A U.S. Holder who does not provide us with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to
a U.S. Holder under the backup withholding rules is creditable against the U.S.
Holder's federal income tax liability, provided that the required information
is furnished to the IRS. Backup withholding will not apply, however, with
respect to payments made to certain holders, including corporations and tax-
exempt organizations, provided their exemptions from backup withholding are
properly established.
We will report to the U.S. Holders of notes and to the IRS the amount of any
"reportable payments" for each calendar year and the amount of tax withheld, if
any, with respect to such payments.
US Holder of Euro Denominated Notes
In addition to the information described above regarding U.S. Holders, the
following applies to U.S. Holders of a Euro denominated note ("Euro Note").
Interest
The stated interest on the 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 includible 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.
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If such U.S. Holder uses the cash method of accounting for tax purposes, the
U.S. Dollar value of such payment is determined using the spot rate at the time
such payment is received. If a U.S. Holder uses the accrual method of
accounting for tax purposes, the U.S. Dollar value of such 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 such
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 a Euro Note
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
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 recognized 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 recognized upon such 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 the U.S. federal income tax
consequences relevant to a Non-U.S. Holder. Non-U.S. Holders should consult
their own tax advisors concerning the state, local, foreign and other tax
consequences of the purchase, ownership and disposition of the notes.
For purposes of U.S. federal income tax on interest discussed below, a Non-
U.S. Holder (as defined above) includes a non-resident fiduciary of an estate
or trust. For purposes of the following discussion, interest and gain on the
sale, exchange or other disposition of a note will be considered to be "U.S.
trade or business income" if such income or gain is:
. effectively connected with the conduct of a trade or business within the
U.S. of such Non-U.S. Holder; or
. in the case of certain residents of certain countries which have an
income tax treaty in force with the U.S., attributable to a permanent
establishment or, in the case of an individual, a fixed base, in the
United States as such terms are defined in the applicable treaty.
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Stated Interest
Generally any interest paid to a Non-U.S. Holder of a note that is not U.S.
trade or business income will not be subject to U.S. federal income tax if the
interest qualifies as "portfolio interest." Generally interest on the notes
will qualify as portfolio interest if:
. the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock entitled
to vote and is not a "controlled foreign corporation" with respect to
which we are a "related person" within the meaning of the appropriate
provisions of the Code;
. the Non-U.S. Holder, under penalty of perjury, certifies in general that
the Non-U.S. Holder is not a U.S. person and such certificate provides
the Non-U.S. Holder's name and address;
. the Non-U.S. Holder is not a bank receiving interest on an extension of
credit made pursuant to a loan agreement made in the ordinary course of
its trade or business; and
. the notes are in registered form.
The gross amount of payments of interest to a Non-U.S. Holder that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate such tax.
Interest payments that are considered as U.S. trade or business income will be
taxed at regular U.S. income tax rates rather than the 30% gross rate. In the
case of a Non-U.S. Holder that is a corporation, such U.S. trade or business
income may also be subject to the branch profits tax (which is generally
imposed on a foreign corporation on the actual or deemed repatriation from the
United States of earnings and profits attributable to U.S. trade or business
income) at a 30% rate unless a U.S. income tax treaty applies to reduce or
eliminate such tax. To claim the benefit of a tax treaty or to claim exemption
from withholding because the income is U.S. trade or business income, the Non-
U.S. Holder must provide a properly executed IRS Form 1001 or IRS Form 4224 (or
such successor forms as the IRS designates), as applicable, prior to the
payment of interest. Under recently issued U.S. Treasury Regulations that will
generally be effective on and after January 1, 2001 (the "Withholding
Regulations"), the required Forms 1001 and 4224 will be replaced by a new Form
W-8. Under the Withholding Regulations, a Non-U.S. Holder may under certain
circumstances be required to obtain a U.S. taxpayer identification number and
make certain certifications to us. Special procedures are provided in the
Withholding Regulations for payments through qualified intermediaries.
Investors should consult their tax advisors regarding the effect, if any, of
the Withholding Regulations.
Sale, Exchange or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a note generally will not be subject to U.S. federal income tax,
unless:
. such gain is U.S. trade or business income; 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 such Holder's adjusted tax basis in the old notes. A U.S.
Holder's holding period for the new notes received pursuant to the exchange
offer should include its holding period for the old notes surrendered therefor.
95
<PAGE>
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. We may have to report to the IRS
payments of principal.
Generally, information reporting and backup withholding of United States
federal income tax at a rate of 31% may apply to payments made by us or our
agents to Non-U.S. Holders if the payee fails to make the appropriate
certification that the holder is a non-U.S. person or if we or our paying agent
have actual knowledge that the payee is a United States person.
The payment of the proceeds from the disposition of notes to or through a
United States office of a United States or foreign broker will be subject to
information reporting and backup withholding unless the owner provides
certification as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The proceeds of the disposition by
a Non-U.S. Holder of the notes to or through a foreign office of a broker will
generally not be subject to backup withholding. However, if such broker is a
U.S. person, a controlled foreign corporation for United States tax purposes,
or a foreign person 50% or more of whose gross income from all sources for
certain periods is effectively connected with a United States trade or
business, or, in addition, for periods after December 31, 2000, a foreign
partnership that at any time during its tax year either is engaged in the
conduct of a trade or business in the United States or has as partners one or
more United States persons that, in the aggregate hold more than 50% of the
income or capital interest in the partnership, such payments will be subject to
information reporting, but not backup withholding, unless such broker has
documentary evidence in its records that the holder is a Non-U.S. holder and
certain other conditions are met or the holder otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures for claiming such refund or credit are followed.
The preceding discussion of material United States federal income tax
consequences is for general information only and is not tax advice.
Accordingly, each investor should consult its own tax advisers as to particular
U.S. federal, state, local, foreign and other tax consequences to it of
purchasing, holding and disposing of our notes, including the applicability and
effect of any state, local or foreign tax laws, and of any proposed changes in
applicable laws.
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
96
<PAGE>
writing of options on the new notes or a combination of these methods of
resale, at market prices prevailing at the time of resale, at prices related to
prevailing market prices or negotiated prices. Any resale may be made directly
to purchasers or through brokers or dealers who may receive compensation in the
form of commissions or concessions from any broker-dealer and/or the purchasers
of any new notes. Any broker-dealer that resells new notes that were received
by it for its own account in the exchange offer and any broker or dealer that
participates in a distribution of new notes may be deemed to be an
"underwriter" within the meaning of the Securities Act, and any profit on any
such resale of new notes and any commissions or concessions received by these
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver,
and by delivering, a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. We have
agreed to indemnify broker-dealers against various liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the notes offered by this prospectus will be passed upon on
behalf of Exodus by Fenwick & West LLP, Palo Alto, California, and Winthrop,
Stimson, Putnam & Roberts, New York City, New York.
EXPERTS
Our consolidated financial statements and related schedule as of December
31, 1997 and 1998, and for each of the years in the three-year period ended
December 31, 1998 have been included in the registration statement in reliance
upon the report of KPMG LLP, independent auditors, appearing elsewhere in the
registration statement, and upon the authority of said firm as experts in
auditing and accounting.
Our supplemental consolidated financial statements and related schedule as
of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, have been included in the registration
statement in reliance upon the report of KPMG LLP, independent auditors,
appearing elsewhere in the registration statement, and upon the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Cohesive Technology Solutions, Inc.
as of December 31, 1997 and 1998, and for each of the years in the three-year
period ended December 31, 1998, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
as experts in auditing and accounting.
97
<PAGE>
AVAILABLE INFORMATION
We are currently subject to the informational requirements of the Exchange
Act, and file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at:
Room 1024 Suite 1400 13th Floor
450 Fifth Street, N.W. Northwest Atrium Center Seven World Trade Center
Judiciary Plaza 500 West Madison Street New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
Copies of material can be obtained at prescribed rates from the Public
Reference Section of the Commission at:
450 Fifth Street, N.W.
Judiciary Plaza
Washington, D.C. 20549
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov. Our common stock is quoted for trading on the Nasdaq
National Market and reports, proxy statements and other information concerning
us also may be inspected at the offices of the National Association of
Securities Dealers at:
9513 Key West Avenue
Rockville, Maryland 20850
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
EXODUS COMMUNICATIONS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
Supplemental Consolidated Financial Statements: ----
<S> <C>
Independent Auditors' Report.............................................. F-2
Supplemental Consolidated Balance Sheets.................................. F-3
Supplemental Consolidated Statements of Operations........................ F-4
Supplemental Consolidated Statements of Stockholders' (Deficit) Equity.... F-5
Supplemental Consolidated Statements of Cash Flows........................ F-7
Notes to Supplemental Consolidated Financial Statements................... F-8
<CAPTION>
Historical Consolidated Financial Statements:
<S> <C>
Independent Auditors' Report.............................................. F-28
Consolidated Balance Sheets............................................... F-29
Consolidated Statements of Operations..................................... F-30
Consolidated Statements of Stockholders' (Deficit) Equity................. F-31
Consolidated Statements of Cash Flows..................................... F-32
Notes to Consolidated Financial Statements................................ F-33
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
Independent Auditors' Report.............................................. F-52
Consolidated Balance Sheets............................................... F-53
Consolidated Statements of Operations..................................... F-54
Consolidated Statements of Stockholders' Equity........................... F-55
Consolidated Statements of Cash Flows..................................... F-56
Notes to Consolidated Financial Statements................................ F-57
Condensed Consolidated Balance Sheets..................................... F-67
Condensed Consolidated Statements of Operations........................... F-68
Condensed Consolidated Statements of Cash Flows........................... F-69
Notes to Unaudited Condensed Consolidated Financial Statements............ F-70
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Financial Statements............... F-71
Unaudited Pro Forma Combined Condensed Statement of Operations............ F-72
Notes to Unaudited Pro Forma Combined Condensed Financial Statements...... F-74
FINANCIAL STATEMENT SCHEDULES
Supplemental Schedule II--Valuation and Qualifying Accounts............... S-1
Schedule II--Valuation and Qualifying Accounts............................ S-2
</TABLE>
F-1
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Exodus Communications, Inc. and subsidiaries (the Company) as of December 31,
1997 and 1998, and the related supplemental consolidated statements of
operations, stockholders' (deficit) equity and cash flows for each of the years
in the three-year period ended December 31, 1998. In connection with our audits
of the supplemental consolidated financial statements, we have also audited the
supplemental financial statement schedule as listed in the index on page F-1.
These supplemental consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these supplemental consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements and related supplemental
financial statement schedule give retroactive effect to the merger of the
Company and Service Metrics, Inc. on November 23, 1999, which has been
accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These supplemental consolidated
financial statements do not extend through the date of consummation. However,
they will become the historical consolidated financial statements of the
Company after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Exodus Communications, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination. Also, in our opinion, the related supplemental financial statement
schedule, when considered in relation to the supplemental consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG LLP
Mountain View, California
November 23, 1999, except as to Note 9,
which is as of December 14, 1999
F-2
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 10,270 $156,015 $ 171,971
Accounts receivable, net of allowance for
doubtful accounts of $691, $1,821, and
$5,251 as of December 31, 1997 and 1998, and
September 30, 1999, respectively............. 1,837 9,653 47,858
Prepaid expenses and other current assets..... 1,377 6,205 18,972
-------- -------- ---------
Total current assets........................ 13,484 171,873 238,801
Property and equipment, net.................... 25,170 68,572 245,392
Restricted cash equivalents and investments.... 1,753 45,614 35,444
Intangibles and other assets................... 566 12,739 165,188
-------- -------- ---------
$ 40,973 $298,798 $ 684,825
======== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank borrowings............................... $ 3,000 $ -- $ --
Current portion of equipment loans and line
of credit facilities......................... 3,777 14,367 7,722
Current portion of capital lease
obligations.................................. 1,143 5,223 14,817
Accounts payable.............................. 6,252 9,208 34,141
Accrued expenses.............................. 3,019 6,876 20,294
Accrued interest payable...................... -- 11,563 8,074
-------- -------- ---------
Total current liabilities................... 17,191 47,237 85,048
Equipment loans and line of credit facilities,
less current portion.......................... 12,693 15,695 9,600
Capital lease obligations, less current
portion....................................... 2,442 11,589 32,201
Convertible subordinated notes................. -- -- 250,000
Senior notes................................... -- 200,000 275,375
-------- -------- ---------
Total liabilities........................... 32,326 274,521 652,224
======== ======== =========
Redeemable convertible preferred stock and
warrants, $0.001 par value: 74,960,124, no
shares, and no shares authorized as of
December 31, 1997 and 1998, and September 30,
1999 respectively; 34,117,371, no shares, and
no shares issued and outstanding as of
December 31, 1997 and 1998, and September 30,
1999, respectively; aggregate liquidation
preference of $39,640 as of
December 31, 1997............................. 39,247 -- --
-------- -------- ---------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: no shares,
5,000,000 shares and 5,000,000 shares
authorized as of December 31, 1997 and 1998,
and September 30, 1999 and no shares issued
or outstanding as of December 31, 1997 and
1998, and September 30, 1999................. -- -- --
Convertible preferred stock of Service
Metrics, Inc.; no shares, 1,553,158, and
2,585,777 shares issued and outstanding as
of December 31, 1997 and 1998, and September
30, 1999, respectively; aggregate
liquidation preference of $0, $6,000, and
$15,500 as of December 31, 1997 and 1998,
and September 30, 1999, respectively......... -- 5,961 15,437
Common stock, $0.001 par value: 53,281,579,
50,000,000, and 300,000,000 shares
authorized as of December 31, 1997 and 1998,
and September 30 1999, respectively;
16,538,024, 161,670,932, and
170,084,342 shares issued and outstanding as
of December 31, 1997 and 1998, and September
30, 1999, respectively....................... 17 162 170
Additional paid-in capital.................... 2,493 117,127 195,166
Notes receivable from stockholders............ (140) -- --
Deferred stock compensation................... (2,393) (1,080) (2,903)
Accumulated deficit........................... (30,577) (97,893) (175,269)
-------- -------- ---------
Total stockholders' (deficit) equity........ (30,600) 24,277 32,601
======== ======== =========
$ 40,973 $298,798 $ 684,825
======== ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-3
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues............ $ 2,454 $ 11,588 $ 49,815
Equipment revenues.......... 676 820 2,930
------- -------- --------
Total revenues............ 3,130 12,408 52,745 $ 31,638 $140,754
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,280
Cost of equipment revenues.. 452 640 2,298
------- -------- --------
Total cost of revenue..... 2,990 16,868 61,578 39,291 118,827
Marketing and sales......... 2,734 12,702 29,034 20,576 42,473
General and administrative.. 1,056 5,983 16,058 9,664 25,548
Product development......... 444 1,647 3,507 2,389 5,641
Amortization of
intangibles................ -- -- 141 -- 4,674
Restructuring costs......... -- -- -- -- 923
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 48,740 32,629 79,259
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 110,318 71,920 198,086
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (57,573) (40,282) (57,332)
Interest income............... 68 193 7,157 4,028 10,561
Interest expense.............. (107) (699) (16,900) (9,138) (30,605)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (67,316) (45,392) (77,376)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.. -- (1,413) (2,014) (2,014) --
------- -------- -------- -------- --------
Net loss attributable to
common stockholders.......... $(4,133) $(26,711) $(69,330) $(47,406) $(77,376)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.27) $ (1.73) $ (0.55) $ (0.42) $ (0.47)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share........................ 15,312 15,428 125,808 114,088 165,974
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-4
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock of
Services Notes Total
Metrics, Inc. Common Stock Additional Receivable Deferred Stockholders'
------------- -------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
------ ------ ------ ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1995............... -- $ -- 14,568 $15 $ 186 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock.................. -- -- 1,072 1 31 -- -- -- 32
Issuance of common stock
in connection with
stock purchase plan and
exercise of stock
options................ -- -- 128 -- 4 (3) -- -- 1
Repurchase of common
stock.................. -- -- (200) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- -- -- (4,133) (4,133)
----- ------ ------ --- ------ ----- ------- -------- --------
Balances as of December
31, 1996............... -- -- 15,568 16 215 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants... -- -- 1,378 1 221 -- -- -- 222
Repurchase of common
stock.................. -- -- (408) -- (12) 12 -- -- --
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 34 -- -- 34
Deferred stock
compensation related to
stock option grants.... -- -- -- -- 3,482 -- (3,482) -- --
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 1,089 -- 1,089
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (750) -- -- -- (750)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (663) -- -- -- (663)
Net loss................ -- -- -- -- -- -- -- (25,298) (25,298)
----- ------ ------ --- ------ ----- ------- -------- --------
Balances as of December
31, 1997............... -- -- 16,538 17 2,493 (140) (2,393) (30,577) (30,600)
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants............... -- -- 6,703 7 2,286 -- -- -- 2,293
Issuance of common stock
in conjunction with
initial public
offering, net of
offering costs of
$7,062................. -- -- 41,000 41 69,777 -- -- -- 69,818
Issuance of common stock
to an officer for
cash................... -- -- 400 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants............... -- -- -- -- 786 -- -- -- 786
Issuance of Service
Metrics, Inc.
convertible preferred
stock.................. 1,553 5,961 -- -- -- -- -- -- 5,961
Issuance of Service
Metrics, Inc. common
stock to founders...... -- -- 1,132 1 8 -- -- -- 9
Repayment of notes
receivable from
stockholders........... -- -- -- -- -- 140 -- -- 140
</TABLE>
(continued)
F-5
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY--
(Continued)
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred
Stock of
Services Notes Total
Metrics, Inc. Common Stock Additional Receivable Deferred Stockholders'
-------------- -------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Shares Amount Capital Stockholders Compensation Deficit Equity
------ ------- ------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Conversion of redeemable
convertible preferred
stock into common
stock.................. -- $ -- 95,898 $ 96 $ 43,341 $ -- $ -- $ -- $ 43,437
Amortization of deferred
stock compensation..... -- -- -- -- -- -- 1,313 -- 1,313
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible preferred
stock.................. -- -- -- -- (1,552) -- -- -- (1,552)
Net loss................ -- -- -- -- -- -- -- (67,316) (67,316)
----- ------- ------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1998............... 1,553 5,961 161,671 162 117,127 -- (1,080) (97,893) 24,277
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants (unaudited)... -- -- 6,813 7 14,000 -- -- -- 14,007
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.
(unaudited)............ -- -- 1,600 1 61,261 -- -- -- 61,262
Issuance of Service
Metrics, Inc.
convertible preferred
stock (unaudited)...... 1,033 9,476 -- -- -- -- -- -- 9,476
Deferred stock
compensation related to
Service Metrics, Inc.
stock option grants
(unaudited)............ -- -- -- -- 2,778 -- (2,778) -- --
Amortization of deferred
stock compensation
(unaudited)............ -- -- -- -- -- -- 955 -- 955
Net loss (unaudited).... -- -- -- -- -- -- -- (77,376) (77,376)
----- ------- ------- ---- -------- ----- ------- --------- --------
Balances as of September
30, 1999 (unaudited)... 2,586 $15,437 170,084 $170 $195,166 $ -- $(2,903) $(175,269) $ 32,601
===== ======= ======= ==== ======== ===== ======= ========= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-6
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(4,133) $(25,298) $(67,316) $(45,392) $ (77,376)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............. 461 3,429 13,024 8,575 28,383
Loss on disposal of
property and equipment... -- -- 464 248 --
Noncash common stock and
warrant expense.......... -- -- 786 786 --
Amortization of deferred
stock compensation....... -- 1,089 1,354 1,081 955
Amortization of debt
issuance costs........... -- -- 846 274 1,063
Interest accretion on
restricted cash
equivalents and
investments.............. -- -- (1,088) (580) (1,068)
Changes in operating
assets and liabilities:
Accounts receivable..... (265) (1,316) (8,306) (7,127) (28,272)
Prepaid expenses and
other assets........... (189) (748) (4,193) (3,970) (17,516)
Accounts payable........ 671 5,089 2,791 4,981 22,980
Accrued expenses........ 339 2,237 2,763 3,806 5,798
Accrued interest
payable................ -- -- 11,563 5,750 (3,489)
------- -------- -------- -------- ---------
Net cash used for
operating activities.. (3,116) (15,518) (47,312) (31,568) (68,542)
------- -------- -------- -------- ---------
Cash flows from investing
activities:
Capital expenditures........ (3,499) (22,489) (44,564) (26,680) (160,624)
Proceeds from sale of
property and equipment..... -- -- 245 -- --
Businesses acquired, net of
cash received.............. -- -- (5,654) -- (70,398)
Release of restricted cash
and investments............ -- -- -- -- 24,938
Increase in restricted cash
equivalents and
investments................ (378) (1,375) (42,773) (43,562) (13,413)
Other assets................ -- -- (11) (81) (15,637)
------- -------- -------- -------- ---------
Net cash used for
investing activities.. (3,877) (23,864) (92,757) (70,323) (235,134)
------- -------- -------- -------- ---------
Cash flows from financing
activities:
Proceeds from issuance of
redeemable convertible
preferred stock and
warrants................... 9,409 23,320 2,176 2,176 --
Proceeds from issuance of
Service Metrics, Inc.
convertible preferred
stock...................... -- -- 5,961 982 9,477
Proceeds from issuance of
common stock, net.......... 32 222 72,530 71,362 14,006
Proceeds from issuance of
bridge financing
convertible notes.......... -- 3,975 -- -- --
Repayment of notes
receivable from
stockholders............... 7 34 140 90 --
Bank borrowings, net........ (100) 3,000 (3,000) (3,000) --
Proceeds from sale-leaseback
transactions............... 552 932 4,035 4,190 776
Payments on capital leases
obligations................ (154) (720) (3,020) (1,689) (6,468)
Proceeds from equipment
loans and line of credit
facilities................. 1,296 16,480 18,611 18,611 --
Repayment of equipment loans
and line of credit
facilities................. (497) (1,306) (5,019) (3,468) (13,529)
Proceeds from convertible
subordinated notes, net.... -- -- -- -- 242,124
Proceeds from senior notes,
net of discounts and
offering costs............. -- -- 193,400 194,000 73,246
------- -------- -------- -------- ---------
Net cash provided by
financing activities.. 10,545 45,937 285,814 283,254 319,632
------- -------- -------- -------- ---------
Net increase in cash and cash
equivalents................. 3,552 6,555 145,745 181,363 15,956
Cash and cash equivalents at
beginning of period......... 163 3,715 10,270 10,270 156,015
------- -------- -------- -------- ---------
Cash and cash equivalents at
end of period............... $ 3,715 $ 10,270 $156,015 $191,633 $ 171,971
======= ======== ======== ======== =========
Supplemental disclosures of
cash flow information:
Cash paid--interest......... $ -- $ 699 $ 4,923 $ 2,923 $ 34,010
======= ======== ======== ======== =========
Noncash investing and
financing activities:
Assets recorded under
capital leases........... $ 27 $ 2,700 $ 12,001 $ 6,848 $ 35,897
======= ======== ======== ======== =========
Conversion of note payable
to stockholder to
preferred stock.......... $ 200 $ -- $ -- $ -- $ --
======= ======== ======== ======== =========
Cumulative dividends and
accretion on Series C and
D redeemable convertible
preferred stock.......... $ -- $ 1,413 $ 2,014 $ 2,014 $ --
======= ======== ======== ======== =========
Deferred compensation on
grants of stock options.. $ -- $ 3,482 $ -- $ -- $ 2,778
======= ======== ======== ======== =========
Warrants issued for
financing commitments.... $ -- $ 730 $ -- $ -- $ --
======= ======== ======== ======== =========
Conversion of bridge
financing convertible
notes to redeemable
convertible preferred
stock.................... $ -- $ 3,975 $ -- $ -- $ --
======= ======== ======== ======== =========
Conversion of redeemable
convertible preferred
stock to common stock.... $ -- $ -- $ 43,437 $ 43,437 $ --
======= ======== ======== ======== =========
Issuance of common stock
and assumption of options
in connection with the
acquisition of Cohesive
Technology Solutions,
Inc. .................... $ -- $ -- $ -- $ -- $ 61,262
======= ======== ======== ======== =========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-7
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(1) Summary of the Company and Significant Accounting Policies
The Company
Exodus Communications, Inc. ("Exodus" or "the Company") is a leading
provider of Internet system and network management solutions and technology
professional services for enterprises with mission-critical Internet
operations.
The accompanying supplemental consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the merger with Service Metrics, Inc. ("SMI" or
"Service Metrics") on November 23, 1999. The consolidated financial statements
have been restated for all periods presented as if SMI and the Company had
always been combined. Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling-of-
interests method in financial statements that do not include the date of
consummation. These supplemental financial statements do not extend through the
date of consummation; however, they will become the historical consolidated
financial statements of the Company after financial statements covering the
date of consummation of the business combination are issued.
In recording the pooling-of-interests combination, the Company's
consolidated statement of operations for the year ended December 31, 1998 has
been combined with SMI's statement of operations for the period from May 19,
1998 ("inception") through December 31, 1998. The Company's consolidated
statements of operations for the nine-month periods ended September 30, 1998
and 1999 have been combined with SMI's statements of operations for the period
from inception through September 30, 1998, and the nine-month period ended
September 30, 1999, respectively. The consolidated balance sheets of the
Company as of December 31, 1998 and September 30, 1999, have been combined with
the balance sheets of Service Metrics as of the same dates.
Service Metrics, which was incorporated in May 1998, is a leading provider
of Internet monitoring applications and services that measure the consistency,
availability and performance of Web sites. SMI is based in Boulder, Colorado,
and had 79 employees as of November 1999.
In connection with the merger, the former shareholders and option holders of
SMI common stock received shares and options of Exodus common stock at the rate
of approximately 0.252 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 6,200,000 shares of
Exodus common stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 760,000 shares of common stock for issuance upon the
exercise of SMI options the Company assumed pursuant to the merger agreement.
F-8
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
As SMI was incorporated in May 1998, supplemental results of operations for
the periods ended December 31, 1996 and 1997 are the same as Exodus' results of
operations. The results of operations previously reported by the separate
companies and the combined amounts presented in the supplemental consolidated
financial statements are summarized below.
<TABLE>
<CAPTION>
Nine Months Ended
Year September 30,
Ended ------------------
1998 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Exodus....................................... $ 52,738 $ 31,638 $140,186
Service Metrics.............................. 7 -- 568
-------- -------- --------
Combined..................................... $ 52,745 $ 31,638 $140,754
======== ======== ========
Net loss:
Exodus....................................... $(66,442) $(45,057) $(71,880)
Service Metrics.............................. (874) (335) (5,496)
-------- -------- --------
Combined..................................... $(67,316) $(45,392) $(77,376)
======== ======== ========
</TABLE>
Use of Estimates
The preparation of supplemental consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the supplemental consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
The Company's revenues consist of (i) monthly fees from customer use of
Internet Data Center sites, network services, managed services, and
professional services and use of equipment and software provided by the
Company, (ii) revenues from sales of third-party equipment to customers and
(iii) fees for installation and certain professional services. Currently,
substantially all of the Company's revenue is derived from services. Revenues
(other than installation fees, equipment sales to customers and certain
professional services) are generally billed and recognized ratably over the
term of the contract, which is generally one year. Installation fees are
typically recognized at the time the installation occurs, and equipment
revenues are typically recognized when the equipment is delivered to the
customer or placed into service at an Internet Data Center. The Company sells
third-party equipment to its customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when services are rendered.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. As of September 30, 1999, cash equivalents
consisted principally of money market funds at four financial institutions.
The Company classifies its investments as "held-to-maturity." As of
September 30, 1999, such investments consisted of U.S. Treasury Notes and are
recorded at amortized cost.
F-9
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The components of restricted cash equivalents and investments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
U.S. treasury notes:
Due within one year........................... $10,733 $29,528
Due after one year through two years.......... 20,594 --
Money market funds.............................. 11,049 --
Cash collateral related to leases............... 3,238 5,916
------- -------
Total restricted cash equivalents and
investments.................................... $45,614 $35,444
======= =======
</TABLE>
See Notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, investments, accounts receivable, bank borrowings and
debt approximates fair market value. Financial instruments that potentially
expose the Company to a concentration of credit risk principally consist of
cash and cash equivalents, investments and accounts receivable.
The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential losses.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives, which are generally three
to five years. Equipment recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the respective lease term or estimated useful life of the asset.
Software Development Costs
The Company capitalizes software development costs incurred to develop
certain of the Company's collaborative system management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the
F-10
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be recovered.
Stock-Based Compensation
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets or intangibles
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Unaudited Interim Financial Statements
The accompanying unaudited supplemental consolidated interim financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. In the opinion of management, the
accompanying unaudited supplemental consolidated financial statements have been
prepared on the same basis as the audited supplemental consolidated financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the Company's financial
position as of September 30, 1999, and the results of its operations and its
cash flows for the nine-month periods ended September 30, 1998 and 1999.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are comprised primarily of amounts
recorded in business acquisitions and are included in intangibles and other
assets on the accompanying supplemental consolidated balance sheets. The
goodwill and other intangible amounts related to the acquisitions are being
amortized on a straight-line basis over periods generally ranging from 5 to 10
years (see Note 2).
F-11
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing the net
loss attributable to holders of common stock by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per
share does not include the effect of the following common equivalent shares as
the effect of their inclusion is antidilutive during each period (in
thousands):
<TABLE>
<CAPTION>
Years Ended December Nine Months Ended
31, September 30,
---------------------- -----------------
1996 1997 1998 1998 1999
------- ------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options... 2,336 13,672 38,594 26,810 51,940
Shares issuable pursuant to warrants
to purchase common stock and
redeemable convertible preferred
stock................................ 5,096 22,504 1,448 2,136 506
Shares of redeemable convertible
preferred stock and convertible
preferred stock of SMI on an "as if
converted" basis..................... 124,296 272,936 3,106 1,086 5,172
Shares of convertible subordinated
notes on an "as if converted" basis.. -- -- -- -- 21,892
</TABLE>
Comprehensive Loss
There are no differences between consolidated net loss and comprehensive
loss for any period presented.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(2) Business Combinations
On October 2, 1998, the Company purchased substantially all of the assets,
including customer agreements, and assumed certain liabilities of Arca
Systems, Inc. ("Arca"), a wholly owned subsidiary of Cyberguard Corporation.
Arca, which has been in business for more than 10 years, is a provider of
advanced network and system security consulting services and designs and
develops security technology solutions for complex and sensitive information
systems. Arca operates as a wholly owned subsidiary of the Company. Total
consideration paid, including direct acquisition costs, aggregated
approximately $5,800,000. The acquisition was accounted for as a purchase and
the results of Arca have been included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $5,000,000 and was attributed primarily to workforce
in place ($2,500,000) and goodwill ($2,400,000). These amounts are generally
being amortized on a straight-line basis over 10 years.
On February 1, 1999, the Company purchased all of the capital stock of
American Information Systems, Inc ("AIS"). AIS provides co-location services
as well as professional services. Total
F-12
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
consideration paid, including direct acquisition costs, aggregated
approximately $20,500,000. The acquisition was accounted for as a purchase with
the results of AIS included from the acquisition date. The excess of the
purchase price over the fair value of tangible net assets acquired amounted to
approximately $18,700,000 and was attributed primarily to goodwill
($15,000,000), customer lists ($3,200,000) and assembled workforce ($500,000).
These amounts are being amortized on a straight-line basis over periods ranging
from 5 to 7 years.
On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Cohesive offers a variety of services
including network design and development, Internet-based and application
development and information technology strategy and project management.
Pursuant to the terms of the Agreement and Plan of Reorganization, each share
of Cohesive common stock was converted into the right to receive 0.10488 shares
of Exodus common stock and $1.338 in cash; each share of Cohesive Series A
preferred stock was converted into the right to receive $122.337 in cash; each
share of Cohesive Series B preferred stock was converted into the right to
receive $115.965 in cash; each share of Cohesive Series C preferred stock was
converted into the right to receive $5.00 in cash; and each share of Cohesive
Series D preferred stock, which automatically converted into Cohesive common
stock immediately prior to the merger, was converted into the right to receive
0.10488 shares of Exodus common stock and approximately $6.655 in cash. In
addition, the Company assumed each issued and outstanding option to purchase
shares of Cohesive common stock which was converted into an option to purchase
Exodus common stock using an exchange ratio of 0.14604.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 1,600,796 shares of Exodus common stock and paid approximately
$50,000,000 in cash and assumed options to purchase a total of 408,712 shares
of Exodus common stock for a total purchase price of approximately
$112,000,000. Of the cash consideration, $10,000,000 was deposited in an escrow
account to secure and collateralize the indemnification obligations of Cohesive
stockholders to Exodus and certain affiliates of Exodus. The acquisition was
accounted for as a purchase with the results of Cohesive included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $107,900,000 and was
attributed primarily to goodwill ($69,300,000), customer lists ($32,300,000)
and workforce in place ($6,300,000). These amounts are being amortized on a
straight-line basis over periods ranging from 5 to 8 years.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's supplemental consolidated results of operations with Arca's,
AIS', and Cohesive's results of operations, as if Arca, AIS, and Cohesive had
been acquired as of January 1, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Nine Months Nine Months
December 31, Ended Ended
------------------ September 30, September 30,
1997 1998 1998 1999
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 41,004 $103,774 $ 69,208 $169,945
Net loss attributable to
holders of common stock... $(24,009) $(87,022) $(62,892) $(87,215)
Basic and diluted net loss
per share................. $ (1.41) $ (0.68) $ (0.54) $ (0.52)
Shares used in pro forma
per share calculation .... 17,028 127,408 115,688 167,188
</TABLE>
F-13
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The pro forma results are not necessarily indicative of what would have
occurred if the acquisitions had been in effect for the periods presented. In
addition, they are not intended to be a projection of future results and do not
reflect any synergies that might be achieved from combined operations.
In November 1999, the Company agreed to acquire Global OnLine Japan Co.,
Ltd., an Internet solutions provider based in Tokyo. The transaction is
expected to close by the end of December 1999 and will be accounted for as a
purchase.
(3) Financial Statement Components
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Data centers and related equipment........... $16,316 $43,959 $150,239
Furniture, fixtures, computer equipment and
other....................................... 12,815 33,179 94,892
Construction in progress..................... -- 8,497 40,576
------- ------- --------
29,131 85,635 285,707
Less accumulated depreciation and
amortization................................ 3,961 17,063 40,315
------- ------- --------
$25,170 $68,572 $245,392
======= ======= ========
</TABLE>
Computer and other equipment and certain data center infrastructure are
recorded under capital leases that aggregated $4,492,000, $20,528,000, and
$56,425,000 as of December 31, 1997 and 1998, and September 30, 1999,
respectively. Accumulated amortization on the assets recorded under capital
leases aggregated $722,000, $4,452,000, and $12,621,000 as of December 31, 1997
and 1998, and September 30, 1999, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Accrued payroll and related expenses............. $1,183 $2,956 $ 9,074
Other............................................ 1,836 3,920 11,220
------ ------ -------
$3,019 $6,876 $20,294
====== ====== =======
</TABLE>
F-14
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(4) Bank Borrowings and Debt
A summary of equipment loans and line of credit facilities follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------- September 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
$1,800,000 equipment line of credit facility;
effective interest rate of 16.4%; principal
and interest due April 2000 through September
2000; collateralized by equipment............ $ 1,393 $ 981 $ 583
$3,000,000 equipment line of credit facility--
April 1997; effective interest rate of 12.9%;
principal and interest due monthly through
July 2001; collateralized by equipment....... 2,756 2,080 1,448
$6,500,000 equipment line of credit facility;
effective interest rate of 15.9%; principal
and interest due monthly through July 2001;
collateralized by equipment.................. 6,312 4,842 3,523
$3,000,000 equipment line of credit facility--
August 1997; effective interest rate of
16.2%; principal and interest due monthly
through May 2001; collateralized by
equipment.................................... 2,787 2,192 1,617
$5,000,000 equipment line of credit facility;
effective interest rate of 16.2%; principal
and interest due monthly through September
2001; collateralized by equipment............ 3,044 3,084 2,322
$10,000,000 equipment line of credit facility;
effective interest rate of 13.8%; principal
and interest due monthly through August 2002;
collateralized by equipment.................. -- 8,883 7,329
$8,000,000 line of credit facility; interest
rate of 12.8%; principal and interest due
March 1999; collateralized by all of the
Company's assets............................. -- 8,000 --
Other......................................... 178 -- 500
-------- -------- -------
16,470 30,062 17,322
Less current portion.......................... 3,777 14,367 7,722
-------- -------- -------
Equipment loans and line of credit facilities,
less current portion......................... $ 12,693 $ 15,695 $ 9,600
======== ======== =======
</TABLE>
As of December 31, 1998, aggregate maturities for outstanding equipment
loans and line of credit facilities, for fiscal 1999, 2000, 2001 and 2002 were
$14,367,000, $7,342,000, $5,943,000 and $2,410,000, respectively.
On July 1, 1998, the Company issued $200,000,000 of 11% Senior Notes
("Original Senior Notes") due 2008 for aggregate net proceeds of approximately
$193,400,000 (net of discounts to the initial purchasers and offering
expenses). Interest is payable semiannually on January 1 and July 1 of each
year commencing January 1, 1999. As of December 31, 1998, restricted cash
equivalents and investments include approximately $42,400,000 deposited with an
escrow agent that will be used to pay the first four semiannual interest
payments when due. Interest payments of $11,250,000 were made in January and
July 1999. Subject to significant exceptions, the Original Senior Notes
indenture restricts, among other things, the Company's ability to incur
additional indebtedness and the use of proceeds therefrom, pay dividends, make
certain other restricted payments, incur certain liens to secure indebtedness
or engage in merger transactions.
F-15
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
On March 3, 1999, the Company issued $250,000,000 of 5% Convertible
Subordinated Notes due March 15, 2006 (the "Convertible Notes") for aggregate
net proceeds of approximately $242,100,000 (net of offering expenses). Proceeds
from the sale of the Convertible Notes may be used only for limited purposes.
Proceeds in the amount of $48,500,000 may be used for general corporate
purposes. The remaining $193,600,000 may be used only to finance the purchase
of assets or other businesses to be used in the Company's business.
The Convertible Notes are convertible into the Company's common stock at a
conversion rate of 87.5704 shares per $1,000 principal amount of Convertible
Notes, subject to adjustment in certain events and at each holder's option. The
Convertible Notes will not be subject to redemption prior to March 20, 2001,
and generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the Convertible
Notes ("Convertible Notes Indenture"), subject to certain provisions. In the
event of a Change in Control (as defined in the Convertible Notes Indenture),
each holder of the Convertible Notes has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of the holder's Convertible Notes at a repurchase price of 100% of the
principal amount, plus accrued interest of the Convertible Notes being
repurchased. Interest on the Convertible Notes is payable on March 15 and
September 15 of each year, commencing on September 15, 1999. Accordingly, the
Company made its first interest payment in the amount of approximately
$6,700,000 on September 15, 1999. The Convertible Notes are unsecured
obligations of the Company and are subordinated to all existing and future
Senior Indebtedness (as defined in the Convertible Notes Indenture) and
effectively subordinated to all indebtedness and other liabilities of the
Company's subsidiaries.
On June 22, 1999, the Company issued an additional $75,000,000 of Senior
Notes due 2008 ("Additional Senior Notes") at 100.50% plus accrued interest, if
any, from June 22, 1999, for aggregate net proceeds of approximately
$73,200,000 (net of offering expenses). The Company issued the Additional
Senior Notes under the indenture dated July 1, 1998 under which it previously
issued the Original Senior Notes discussed above. The Additional Senior Notes
will be subject to substantially the same terms and conditions as the Original
Senior Notes. Interest is payable semi-annually on January 1 and July 1 of each
year commencing July 1, 1999. Concurrent with the closing of the offering, the
Company deposited approximately $8,400,000 with an escrow agent that would be
sufficient to pay when due the first three interest payments. An interest
payment of approximately $211,000 was made on July 1, 1999 representing
interest from June 22, 1999 to July 1, 1999.
On July 22, 1999, the Company amended its revolving line of credit agreement
with a financial institution, increasing the total commitment amount from
$7,000,000 to $10,000,000. Pursuant to the terms of the new amendment, the line
of credit can be used for working capital requirements, foreign exchange
forward contracts, and letters of credit. The amount available for working
capital borrowings is limited to $4,000,000. In addition, total foreign
exchange contracts at any one time cannot exceed 10 times the amount of the
foreign exchange sublimit, which is a maximum of $1,000,000. The line of credit
will expire in July 2000 and is subject to certain covenants.
(5) Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity
Redeemable Convertible Preferred Stock and Warrants
In February and March 1996, the Company issued 7,798,483 shares of Series A
redeemable convertible preferred stock at $0.413 per share. In October 1996,
the Company issued
F-16
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
7,738.095 shares of Series B redeemable convertible preferred stock at $0.84
per share. In March and June 1997, the Company received a total of
approximately $3,975,000 in cash in exchange for bridge financing convertible
promissory notes. In June 1997, the Company issued 15,789,868 shares of Series
C redeemable convertible preferred stock for $1.362 per share in exchange for
approximately $17,500,000 in cash and the conversion of the bridge financing
notes. In December 1997, the Company issued 2,631,579 shares of Series D
redeemable convertible preferred stock at $2.85 per share for aggregate cash
proceeds of $7,500,000.
In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 137,256 shares of the Company's
common stock at prices ranging from $0.30 to $0.34 per share. Also in 1996, in
connection with various lease agreements and other matters, the Company issued
warrants to purchase 329,167 shares of the Company's Series B1 redeemable
convertible preferred stock at $0.84 per share.
In March and June 1997, in connection with the bridge financing convertible
promissory notes discussed above, the Company issued warrants to purchase
198,697 shares of the Company's Series B redeemable convertible preferred stock
at $0.84 per share. In April 1997, in connection with the $3,000,000 equipment
line of credit, the Company issued warrants to purchase 196,429 shares of the
Company's Series B1 redeemable convertible preferred stock at $0.84 per share.
In June 1997, in connection with the issuance of the Company's Series C
redeemable convertible preferred stock, the Company issued warrants to purchase
1,579,011 shares of the Company's Series C redeemable convertible preferred
stock at $1.362 per share. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit, the Company issued
warrants to purchase a total of 271,598 shares of the Company's Series C1
redeemable convertible preferred stock at $1.362 per share. In December 1997,
in connection with the $8,000,000 line of credit facility and the $5,000,000
equipment line of credit, the Company issued warrants to purchase 247,826 and
125,000 shares, respectively, of the Company's Series D1 redeemable convertible
preferred stock at $2.85 per share.
In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 480,000 shares of the Company's common
stock at a price of $1.88 per share.
The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing model, with the following assumptions: dividends--none; expected
life--contractual term; risk-free interest rate of 5.7% to 6.7%; volatility of
60%, was not material except as follows:
. The 1,579,011 warrants issued in connection with the sale of the Series C
redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred stock
and recorded as the carrying value of the Series C warrants.
. The 247,826 and 125,000 warrants issued in connection with the $8,000,000
line of credit facility and $5,000,000 equipment line of credit,
respectively, for which the values were determined to be $530,000 and
$200,000, respectively. These amounts are being amortized on a straight-
line basis through the commitment periods of the credit facilities.
. The 480,000 warrants issued in connection with the strategic alliance for
which the value was determined to be $525,000. This amount was recorded
as marketing and sales expense in the accompanying supplemental
consolidated statement of operations for the year ended December 31,
1998.
F-17
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Redeemable convertible preferred stock and related warrants issued and
outstanding as of December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Warrants
----------------------- ----------------------
Shares Issued and Carrying Issued and Carrying
Series Designated Outstanding Value Outstanding Value
------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A................. 7,798,483 7,798,483 $ 3,168,000 -- $ --
A1................ 7,798,483 -- -- -- --
B................. 8,600,000 7,775,930 6,473,000 160,862 --
B1................ 8,600,000 65,524 55,000 466,072 --
C................. 17,850,000 15,845,855 20,333,000 1,523,024 1,242,000
C1................ 17,850,000 -- -- 271,598 --
D................. 3,231,579 2,631,579 7,246,000 -- --
D1................ 3,231,579 -- -- 372,826 730,000
---------- ---------- ----------- --------- ----------
74,960,124 34,117,371 $37,275,000 2,794,382 $1,972,000
========== ========== =========== ========= ==========
</TABLE>
As of December 31, 1997 and 1998, the Company has 149,304 and 1,448,680
warrants to purchase common stock outstanding, respectively.
Convertible Preferred Stock of Service Metrics, Inc.
In May 1998, SMI issued 540,936 shares of Series A convertible preferred
stock for approximately $1,000,000 in cash. In December 1998, SMI issued
1,012,222 shares of Series B convertible preferred stock for approximately
$5,000,000 in cash. In January 1999, SMI issued an additional 303,667 shares of
Series B convertible preferred stock for approximately $1,500,000 in cash. In
July 1999, SMI issued 728,953 shares of Series C convertible preferred stock
for approximately $8,000,000 in cash.
The Series A, B, and C convertible preferred stock ("SMI Preferred Stock")
was convertible, at the option of the holder, into common stock of SMI based on
formulas specified in the preferred stock agreements. The SMI Preferred Stock
would automatically convert into common stock upon the closing of an initial
public offering of SMI, where the net cash proceeds were at least $15,000,000
and the public offering price would be at least $2.50 per share. The holders of
the SMI Preferred Stock were entitled to receive dividends at the rate of $0.16
for Series A, $0.48 for Series B, and $1.10 for Series C, when and if declared
by the Board of Directors. These dividends were noncumulative. Holders of the
SMI preferred stock were entitled to vote upon any matter submitted to the
stockholders for a vote and have one vote for each full share of common stock
into which their SMI Preferred Stock would be converted at the date of the
vote. The SMI Preferred Stock had liquidation privileges generally equal to the
SMI Preferred Stock purchase price per share plus any declared but unpaid
dividends and was in preference to shares of common stock.
In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI preferred shareholders converted their SMI Preferred Stock into
SMI common stock which was converted into Exodus Common Stock based on a
specified exchange ratio.
F-18
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 41,000,000 shares of its common stock. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $69,800,000. At the closing of the IPO, all redeemable
convertible preferred stock was converted to common stock and all warrants to
purchase redeemable convertible preferred stock were converted to warrants to
purchase common stock on a one-for-three basis. In connection with the IPO,
certain warrant holders exercised their warrants to purchase redeemable
convertible preferred stock (which converted into common stock), which resulted
in additional proceeds of $1,842,000.
Stock Purchase and Stock Option Plans
During 1995, the Company adopted a Stock Purchase Plan under which 2,933,336
shares of common stock were authorized. Awards totaling 858,944 shares of
common stock were granted to individuals through 1996, at a price of $0.03 per
share, the estimated fair market value of the shares on the date of the award.
No awards were granted during the years ended December 31, 1997 and 1998.
Generally, the shares are subject to a 50-month vesting period. As of December
31, 1998, 34,408 shares remained unvested. Unvested shares are subject to
repurchase, at the Company's option, at the original purchase price upon a
participant's termination. Of the shares granted, 370,408 had been repurchased
by the Company as of December 31, 1998.
In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 4,800,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
During 1998, 436,528 shares were issued under the Purchase Plan at a weighted-
average purchase price of $1.67 per share.
In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which served as the successor to the Company's 1995 Stock Option
Plan (the "1995 Plan"). Options granted under the 1995 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan. Options granted under
the 1995 Plan were granted with exercise prices not less than fair market value
at the date of grant as determined by the Board of Directors, generally vested
12% after 6 months from the date of grant and 2% per month thereafter, and
generally are exercisable for a term of 10 years after the date of grant. Under
the 1997 Plan, the Company reserved 17,600,000 shares of its common stock for
issuance to employees and consultants to be granted as either incentive or
nonqualified stock options. Options granted under the 1997 Plan generally vest
12% after 6 months from the date of grant and 2% per month thereafter and are
generally exercisable for a term of 10 years after the date of grant.
In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's IPO, the 1998 Plan became
effective as the successor to the 1997 Plan. The Company has reserved
12,000,000 shares of common stock for issuance under the 1998 Plan in addition
to the shares that remain from the 1997 Plan. The 1998 Plan permits the grant
of either incentive or nonqualified stock options. Options granted under the
1998 Plan will have a maximum term of 10 years and generally will vest over 50
months. The 1998 Plan will terminate in January 2008.
On June 2, 1999, the Company's stockholders approved an amendment to the
Company's 1998 Equity Incentive Plan to increase the number of shares of common
stock reserved for issuance thereunder by 8,000,000 shares, from 12,000,000
shares to 20,000,000 shares.
F-19
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 1,600,000 shares of the
Company's common stock for issuance thereunder. Each nonemployee director who
is or becomes a member of the Board of Directors on or after the effective date
of the Company's IPO, with certain limited exceptions, will initially be
granted an option for 40,000 shares of the Company's common stock and,
thereafter, an option to purchase an additional 10,000 shares of the Company's
common stock annually. Initial options granted under the Directors Plan will
vest as to 33 1/3% of the shares on each annual anniversary of the date of
grant. Annual grants will vest 25% on each annual anniversary of the date of
grant. The exercise price of the options granted under the Directors Plan will
be at the fair market value of the Company's common stock on the date of grant.
In January 1998, the Company granted stock options to purchase 2,666,672
shares of common stock to an officer of the Company, of which half have an
exercise price of $1.13 per share and vest 100% after 3 years and half have an
exercise price of $2.25 per share and vest 100% after 5 years. The stock
options accelerate and become fully vested if the Company is acquired or sells
all or substantially all of its assets.
In March 1998, the Company granted a stock option to an officer of the
Company to purchase 5,775,848 shares of common stock with an exercise price of
$1.13 per share (fair market value on the date of grant) that vests as to 12%
of such shares in September 1998 and vests as to an additional 2% per month
thereafter.
In January 1999, the Company adopted the 1999 Stock Option Plan (the "1999
Plan"). Under the 1999 Plan, the Company has reserved 16,000,000 shares of
common stock for issuance to employees, consultants, and to be used for
acquisitions, to be granted as nonqualified stock options. Options granted
under the 1999 Plan generally will vest over 50 months and are generally
exercisable for a term of 10 years from the date of grant.
Service Metrics, Inc. Stock Option Plan
In July 1998, the SMI Board of Directors adopted the 1998 Stock Option Plan.
Under the Plan, officers, employees and certain other individuals could be
granted options and rights to purchase shares of common stock. Options granted
could be either incentive stock options or non-statutory stock options. SMI had
reserved 512,624 shares of common stock for issuance of stock options. As of
December 31, 1998, 359,841 shares were available for future grant. Depending on
the type of option, the exercise price could not be less than the fair market
value per common share on the date of grant or as determined by the Board of
Directors. Options were exercisable over periods determined by the Board of
Directors, not to exceed 10 years, and generally were to vest ratably over 4
years. In the event of the termination of the optionee's relationship with SMI,
vested options yet to be exercised would remain exercisable for such period of
time ending on the earlier of 3 months after termination or the expiration of
the term of the option, or as determined by the Board of Directors.
In connection with the merger between Exodus and SMI on November 23, 1999,
all of the SMI stock options were assumed by Exodus and converted into Exodus
stock options based on a specified exchange ratio.
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date for
F-20
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
each stock option, except for stock options granted by the Company from March
1997 through December 1997 and stock options granted by SMI from January 1999
to September 1999. With respect to the stock options granted by the Company
from March to December 1997, the Company recorded deferred stock compensation
of $3,482,000 for the difference at the grant date between the exercise price
and the fair value of the common stock underlying the options. With respect to
the stock options granted by SMI from January 1999 to September 1999, SMI
recorded deferred stock compensation of $2,778,000. These amounts are being
amortized consistent with the method described in FASB Interpretation No. 28
over the vesting period of the individual options, generally 48 to 50 months.
Had compensation cost been determined in accordance with SFAS No. 123 for all
of the Company's and SMI's stock-based compensation plans, net loss
attributable to holders of common stock and net loss per share would have been
changed to the amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss applicable to holders of common
stock:
As reported ............................... $(4,133) $(26,711) $(69,330)
Pro forma.................................. $(4,133) $(26,711) $(77,009)
Basic and diluted net loss per share:
As reported ............................... $ (0.27) $ (1.73) $ (0.55)
Pro forma ................................. $ (0.27) $ (1.73) $ (0.61)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Expected life............................... 2.55 years 2.59 years 3.09 years
Risk-free interest rate..................... 6.28% 5.81% 4.98%
Volatility ................................. -- -- 80.00%
</TABLE>
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in 1998: no expected
dividends, expected volatility of 80%, risk-free interest rate of 5.26%, and
expected life of 1.33 years. The weighted-average fair value of purchase rights
granted under the Purchase Plan during 1998 was $1.25 per share.
F-21
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
A summary of the Company's stock option plans including SMI is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1996 1997 1998
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,000,664 $0.03 2,336,264 $0.03 13,674,288 $0.10
Granted................. 1,797,872 0.04 12,894,400 0.11 31,594,374 2.84
Forfeited............... (422,800) 0.03 (846,880) 0.08 (2,311,752) 1.03
Exercised............... (39,472) 0.03 (709,496) 0.04 (4,367,032) 0.33
--------- ---------- ----------
Outstanding at end of
year .................. 2,336,264 0.03 13,674,288 0.10 38,589,878 2.26
--------- ---------- ----------
Exercisable at end of
year................... 645,336 0.03 1,791,600 0.06 3,076,720 0.61
========= ========== ==========
Weighted-average fair
value of options
granted during the year
at market.............. 1,797,872 0.01 2,666,136 0.01 28,560,800 1.57
Weighted-average fair
value of options
granted during the year
at less than market.... -- -- 10,228,264 0.29 366,914 0.78
Weighted-average fair
value of options
granted during the year
at greater than
market ................ -- -- -- -- 2,666,672 0.53
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Shares Life Price Shares Price
- --------------- ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.03 to 0.10.............. 8,789,854 8.51 years $0.07 1,992,688 $0.06
$0.47 to 1.13.............. 9,360,616 9.13 1.04 826,136 0.91
$1.88 to 3.03.............. 9,929,680 9.64 2.67 82,544 2.48
$3.84 to 5.00.............. 10,509,728 9.84 4.75 175,352 4.50
---------- ---------
38,589,878 9.31 2.26 3,076,720 0.61
========== =========
</TABLE>
Stockholder Rights Plan
In January 1999, the Company adopted a Stockholder Rights Plan ("the Rights
Plan"). The Rights Plan is designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition
attempt. In connection with the Rights Plan, the Company declared a dividend
of one preferred share purchase right for each share of the Company's common
stock outstanding on February 11, 1999 ("Record Date") and further directed
the issuance of one such right with respect to each share of the Company's
common stock that is issued after the Record Date, except in certain
circumstances.
F-22
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of common stock issuable by the Company from 100,000,000 to 300,000,000.
Stock Splits
On April 12, 1999 and August 12, 1999, the Company completed two-for-one
stock splits accomplished in the form of stock dividends. Share and per share
amounts in the accompanying supplemental consolidated financial statements
reflect both two-for-one stock splits retroactively.
(6)Commitments and Contingencies
Leases
The Company has entered into a number of operating leases for its
facilities. The leases expire from 1999 through 2010. As of December 31, 1998,
the Company had collateralized letters of credit aggregating $3,238,000 for
these leases. The related funds are included in restricted cash equivalents and
investments on the accompanying supplemental consolidated balance sheet. The
Company also leases certain data center infrastructure and equipment under
capital leases. Certain of these capital leases were entered into as sales-
leaseback transactions. No gain or loss was recorded in any such transaction
due to the short holding period from the time the assets were purchased until
the time of the sale-leaseback. Future minimum lease payments as of December
31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999....................................................... $ 6,470 $ 9,206
2000....................................................... 6,720 9,892
2001....................................................... 6,009 9,964
2002....................................................... 676 9,508
2003....................................................... -- 9,271
Thereafter................................................. -- 43,994
------- -------
Total minimum lease payments............................... 19,875 $91,835
=======
Less amount representing imputed interest.................. 3,063
-------
Present value of minimum lease payments.................... 16,812
Less current portion....................................... 5,223
-------
Capital lease obligations, less current portion............ $11,589
=======
</TABLE>
The Company's rent expense was $248,000, $1,764,000, $5,583,000, $3,389,000
and $11,143,000 for the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, respectively.
Telecommunications Agreements
In September 1997, the Company entered into an agreement to obtain
telecommunications services for a period of 60 months with a minimum commitment
of $230,000 per month. In January 1999, this original agreement was replaced
with a new agreement for a period of 60 months with a minimum commitment of
$1,000,000 per month.
F-23
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
In July 1998, the Company entered into an agreement to obtain
telecommunications services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.
In August 1999 the Company entered into capacity purchase agreements. The
agreements provide for a total potential outlay of approximately $105,000,000
for fiber capacity and related maintenance covering approximately 25 years.
Royalty Agreement
In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement have
not been significant to date.
In March 1999, this agreement was replaced with a new agreement that
obligates the Company to make certain future payments for the use of the
software license. These payments are not expected to have a material effect on
the consolidated financial statements.
Contingencies
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's consolidated financial position and results of operations.
(7) Income Taxes
The following table reconciles the expected corporate federal income tax
expense (benefit) (computed by multiplying the Company's loss before taxes by
34%) to the Company's actual income tax expense (benefit) (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(1,405) $(8,602) $(22,895)
Permanent differences........................... 2 15 81
Net operating loss not benefited................ 1,403 8,587 22,814
------- ------- --------
Actual income tax expense (benefit)........... $ -- $ -- $ --
======= ======= ========
</TABLE>
F-24
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $10,941 $35,137
Difference between book and tax depreciation............. -- 2,284
Reserves and accruals.................................... 195 1,234
Research and experimentation credit carryforwards........ 113 548
Deferred compensation.................................... 437 957
Other.................................................... 41 6
------- -------
Total gross deferred tax assets........................ 11,727 40,166
Less valuation allowance................................... 11,708 40,166
------- -------
19 --
Deferred tax liabilities:
Difference between book and tax depreciation............. (19) --
------- -------
Net deferred tax assets................................ $ -- $ --
======= =======
</TABLE>
As of December 31, 1998, the Company has a net operating loss carryforward
for federal and state purposes of $94,961,000 and $48,753,000, respectively.
The difference between the federal and state net operating loss carryforward is
due to the 50% limitation of net operating loss carryforwards for state
purposes. The federal net operating loss carryforward will expire from 2011
through 2018. The state net operating loss carryforward will expire from 2001
through 2003.
Gross deferred tax assets as of December 31, 1998 include approximately
$3,430,000 relating to the exercise of stock options, which will be credited to
equity when realized.
The net change in the valuation allowance was an increase of $9,654,000 and
$28,458,000 for the years ended December 31, 1997 and 1998, respectively.
Federal and state tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
Internal Revenue Code, Section 382. The Company has not determined if an
ownership change, as defined, has occurred. The Company plans to compute exact
limitations upon realization of taxable earnings and associated utilization of
the net operating loss carryforwards.
(8) Segment Information
The Company operates a number of Internet Data Centers throughout the United
States and one in Europe. The Company establishes these Internet Data Centers
using a consistent investment and operating model. As a result, the expected
long-term economic characteristics and financial performance are similar. In
particular, each data center provides the same Internet related services to a
similar type of customer who may locate its servers in multiple Internet Data
Centers. As a result, the Company believes these Internet Data Centers
represent one reportable segment under the aggregation criteria of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information.
Internet Data Center operations primarily include services such as server
infrastructure support, Internet connectivity, and managed services.
F-25
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
With the acquisition of Cohesive on July 27, 1999, management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and by professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy.
Financial information for the Company's reportable segments is presented
below:
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers........ $ 3,130 $ 12,408 $ 52,263 $ 31,423 $119,650
Professional services........ -- -- 482 215 21,104
------- -------- -------- -------- --------
Total revenues............. $ 3,130 $ 12,408 $ 52,745 $ 31,638 $140,754
======= ======== ======== ======== ========
Operating profit (loss):
Internet Data Centers........ $ * $ (1,243) $ (1,492) $ (3,204) $ 23,166
Professional services........ * -- (351) 17 1,880
Corporate areas.............. * (23,549) (55,730) (37,095) (82,378)
------- -------- -------- -------- --------
Total operating loss....... $(4,094) $(24,792) $(57,573) $(40,282) $(57,332)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Total assets:
Internet Data Centers.......................... $ * $ 52,725 $200,616
Professional services.......................... * 212 3,011
Corporate assets............................... * 245,861 481,198
------- -------- --------
Total assets................................. $40,973 $298,798 $684,825
======= ======== ========
</TABLE>
- --------
*Information is not available.
(9) Stock Split
On December 14, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts in
the accompanying supplemental consolidated financial statements reflect this
two-for-one stock split retroactively.
F-26
<PAGE>
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Exodus Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Exodus
Communications, Inc. and subsidiaries (the Company) as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for each of the years in the three-year period
ended December 31, 1998. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule as
listed in the index on page F-1. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Exodus
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Mountain View, California
January 26, 1999, except as to Note 9,
which is as of November 23, 1999, and
except as to Note 10, which is as of
December 14, 1999
F-27
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 10,270 $150,891 $ 164,215
Accounts receivable, net of allowance for
doubtful accounts of $691, $1,821, and
$5,240 as of December 31, 1997 and 1998,
and September 30, 1999, respectively....... 1,837 9,648 47,449
Prepaid expenses and other current assets... 1,377 6,203 18,235
-------- -------- ---------
Total current assets...................... 13,484 166,742 229,899
Property and equipment, net.................. 25,170 68,306 241,180
Restricted cash equivalents and investments.. 1,753 45,614 35,444
Intangibles and other assets................. 566 12,624 164,873
-------- -------- ---------
$ 40,973 $293,286 $ 671,396
======== ======== =========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Bank borrowings............................. $ 3,000 $ -- $ --
Current portion of equipment loans and line
of credit facilities....................... 3,777 14,367 7,722
Current portion of capital lease
obligations................................ 1,143 5,140 14,131
Accounts payable............................ 6,252 9,208 32,897
Accrued expenses............................ 3,019 6,771 19,757
Accrued interest payable.................... -- 11,563 8,074
-------- -------- ---------
Total current liabilities................. 17,191 47,049 82,581
Equipment loans and line of credit
facilities, less current portion............ 12,693 15,695 9,600
Capital lease obligations, less current
portion..................................... 2,442 11,401 30,772
Convertible subordinated notes............... -- -- 250,000
Senior notes................................. -- 200,000 275,375
-------- -------- ---------
Total liabilities......................... 32,326 274,145 648,328
Redeemable convertible preferred stock and
warrants, $0.001 par value: 74,960,124, no
shares, and no shares authorized as of
December 31, 1997 and 1998, and September
30, 1999 respectively; 34,117,371, no
shares, and no shares issued and outstanding
as of December 31, 1997 and 1998, and
September 30, 1999, respectively; aggregate
liquidation preference of $39,640 as of
December 31, 1997 .......................... 39,247 -- --
-------- -------- ---------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, $0.001 par value: no
shares, 5,000,000 shares and 5,000,000
shares authorized as of December 31, 1997
and 1998, and September 30, 1999,
respectively; and no shares issued or
outstanding as of December 31, 1997 and
1998, and September 30, 1999 .............. -- -- --
Common stock, $0.001 par value: 53,281,579,
50,000,000, and 300,000,000 shares
authorized as of December 31, 1997 and
1998, and September 30, 1999,
respectively; 16,538,024, 160,538,816, and
168,981,250 shares issued and outstanding
as of December 31, 1997 and 1998, and
September 30, 1999, respectively .......... 17 161 169
Additional paid-in capital................... 2,493 117,079 192,339
Notes receivable from stockholders........... (140) -- --
Deferred stock compensation.................. (2,393) (1,080) (541)
Accumulated deficit.......................... (30,577) (97,019) (168,899)
-------- -------- ---------
Total stockholders' (deficit) equity...... (30,600) 19,141 23,068
-------- -------- ---------
$ 40,973 $293,286 $ 671,396
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Service revenues............ $ 2,454 $ 11,588 $ 49,808
Equipment revenues.......... 676 820 2,930
------- -------- -------- -------- --------
Total revenues............ 3,130 12,408 52,738 $ 31,638 $140,186
------- -------- -------- -------- --------
Costs and expenses:
Cost of service revenues.... 2,538 16,228 59,261
Cost of equipment revenues.. 452 640 2,298
------- -------- -------- -------- --------
Total cost of revenue..... 2,990 16,868 61,559 39,291 117,775
Marketing and sales......... 2,734 12,702 28,778 20,467 39,523
General and administrative.. 1,056 5,983 15,724 9,518 24,396
Product development......... 444 1,647 3,221 2,299 4,610
Amortization of
intangibles................ -- -- 141 -- 4,674
Restructuring costs......... -- -- -- -- 923
------- -------- -------- -------- --------
Total expenses............ 4,234 20,332 47,864 32,284 74,126
------- -------- -------- -------- --------
Total costs and expenses.. 7,224 37,200 109,423 71,575 191,901
------- -------- -------- -------- --------
Operating loss............ (4,094) (24,792) (56,685) (39,937) (51,715)
Interest income............... 68 193 7,137 4,016 10,353
Interest expense.............. (107) (699) (16,894) (9,136) (30,518)
------- -------- -------- -------- --------
Net loss.................. (4,133) (25,298) (66,442) (45,057) (71,880)
Cumulative dividends and
accretion on redeemable
convertible preferred stock.. -- (1,413) (2,014) (2,014) --
------- -------- -------- -------- --------
Net loss attributable to
common stockholders...... $(4,133) $(26,711) $(68,456) $(47,071) $(71,880)
======= ======== ======== ======== ========
Basic and diluted net loss per
share........................ $ (0.27) $ (1.73) $ (0.55) $ (0.41) $ (0.44)
======= ======== ======== ======== ========
Shares used in computing basic
and diluted net loss per
share ....................... 15,312 15,428 125,148 113,584 164,854
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands)
<TABLE>
<CAPTION>
Notes Total
Common Stock Additional Receivable Deferred Stockholders'
--------------- Paid-In from Stock Accumulated (Deficit)
Shares Amount Capital Stockholders Compensation Deficit Equity
------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1995................ 14,568 $ 15 $ 186 $(195) $ -- $ (1,146) $ (1,140)
Issuance of common
stock................... 1,072 1 31 -- -- -- 32
Issuance of common stock
in connection with stock
purchase plan and
exercise of stock
options................. 128 -- 4 (3) -- -- 1
Repurchase of common
stock................... (200) -- (6) 6 -- -- --
Repayment of notes
receivable from
stockholders............ -- -- -- 6 -- -- 6
Net loss................ -- -- -- -- -- (4,133) (4,133)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1996................ 15,568 16 215 (186) -- (5,279) (5,234)
Issuance of common stock
in connection with
exercise of stock
options and warrants.... 1,378 1 221 -- -- -- 222
Repurchase of common
stock................... (408) -- (12) 12 -- -- --
Repayment of notes
receivable from
stockholders............ -- -- -- 34 -- -- 34
Deferred stock
compensation related to
stock option grants..... -- -- 3,482 -- (3,482) -- --
Amortization of deferred
stock compensation...... -- -- -- -- 1,089 -- 1,089
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock................... -- -- (750) -- -- -- (750)
Accretion on Series C
and D redeemable
convertible
preferred stock......... -- -- (663) -- -- -- (663)
Net loss................ -- -- -- -- -- (25,298) (25,298)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1997................ 16,538 17 2,493 (140) (2,393) (30,577) (30,600)
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants................ 6,703 7 2,246 -- -- -- 2,253
Issuance of common stock
in conjunction with
initial public offering,
net of offering costs of
$7,062.................. 41,000 41 69,777 -- -- -- 69,818
Issuance of common stock
to an officer for cash.. 400 -- 450 -- -- -- 450
Issuance of common stock
and common stock
warrants................ -- -- 786 -- -- -- 786
Repayment of notes
receivable from
stockholders............ -- -- -- 140 -- -- 140
Conversion of redeemable
convertible preferred
stock into common
stock................... 95,898 96 43,341 -- -- -- 43,437
Amortization of deferred
stock compensation...... -- -- -- -- 1,313 -- 1,313
Accrual of cumulative
dividends on Series C
and D redeemable
convertible preferred
stock................... -- -- (462) -- -- -- (462)
Accretion on Series C
and D redeemable
convertible
preferred stock......... -- -- (1,552) -- -- -- (1,552)
Net loss................ -- -- -- -- -- (66,442) (66,442)
------- ---- -------- ----- ------- --------- --------
Balances as of December
31, 1998................ 160,539 161 117,079 -- (1,080) (97,019) 19,141
Issuance of common stock
in connection with
employee stock purchase
plan and exercise of
stock options and
warrants (unaudited).... 6,842 7 13,999 -- -- -- 14,006
Issuance of common stock
and assumption of
options in connection
with the acquisition of
Cohesive Technology
Solutions, Inc.......... 1,600 1 61,261 -- -- -- 61,262
Amortization of deferred
stock compensation
(unaudited)............. -- -- -- -- 539 -- 539
Net loss (unaudited).... -- -- -- -- -- (71,880) (71,880)
------- ---- -------- ----- ------- --------- --------
Balances as of September
30, 1999 (unaudited).... 168,981 $169 $192,339 $ -- $ (541) $(168,899) $ 23,068
======= ==== ======== ===== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
EXODUS COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(4,133) $(25,298) $(66,442) $(45,057) $(71,880)
Adjustments to reconcile net
loss to net cash used for
operating activities:
Depreciation and
amortization............. 461 3,429 12,997 8,568 28,045
Loss on disposal of
property and equipment... -- -- 464 248 --
Noncash common stock and
warrant expense.......... -- -- 786 786 --
Amortization of deferred
stock compensation....... -- 1,089 1,313 1,081 539
Amortization of debt
issuance costs........... -- -- 846 274 1,063
Interest accretion on
restricted cash
equivalents and
investments.............. -- -- (1,088) (580) (1,068)
Changes in operating
assets and liabilities:
Accounts receivable..... (265) (1,316) (8,301) (7,117) (27,865)
Prepaid expenses and
other assets........... (189) (748) (4,086) (3,970) (16,812)
Accounts payable........ 671 5,089 2,791 4,981 21,735
Accrued expenses........ 339 2,237 2,659 3,790 5,366
Accrued interest
payable................ -- -- 11,563 5,750 (3,489)
------- -------- -------- -------- --------
Net cash used for
operating activities.. (3,116) (15,518) (46,498) (31,246) (64,366)
------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures........ (3,499) (22,489) (44,564) (26,523) (157,703)
Proceeds from sale of
property and equipment..... -- -- 245 -- --
Businesses acquired, net of
cash received.............. -- -- (5,654) -- (70,398)
Release of restricted cash
and investments............ -- -- -- -- 24,938
Increase in restricted cash
equivalents and
investments................ (378) (1,375) (42,773) (43,562) (13,413)
Other assets................ -- -- -- -- (15,405)
------- -------- -------- -------- --------
Net cash used for
investing activities.. (3,877) (23,864) (92,746) (70,085) (231,981)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Proceeds from issuance of
redeemable convertible
preferred stock and
warrants................... 9,409 23,320 2,176 2,176 --
Proceeds from issuance of
common stock, net.......... 32 222 72,521 71,353 14,006
Proceeds from issuance of
bridge financing
convertible notes.......... -- 3,975 -- -- --
Repayment of notes
receivable from
stockholders............... 7 34 140 90 --
Bank borrowings, net........ (100) 3,000 (3,000) (3,000) --
Proceeds from sale-leaseback
transactions............... 552 932 4,035 4,035 --
Payments on capital leases
obligations................ (154) (720) (2,999) (1,689) (6,176)
Proceeds from equipment
loans and line of credit
facilities................. 1,296 16,480 18,611 18,611 --
Repayment of equipment loans
and line of credit
facilities................. (497) (1,306) (5,019) (3,468) (13,529)
Proceeds from convertible
subordinated notes, net.... -- -- -- -- 242,124
Proceeds from senior notes,
net of discounts and
offering costs............. -- -- 193,400 194,000 73,246
------- -------- -------- -------- --------
Net cash provided by
financing activities.. 10,545 45,937 279,865 282,108 309,671
------- -------- -------- -------- --------
Net increase in cash and cash
equivalents................. 3,552 6,555 140,621 180,777 13,324
Cash and cash equivalents at
beginning of period......... 163 3,715 10,270 10,270 150,891
------- -------- -------- -------- --------
Cash and cash equivalents at
end of period............... $ 3,715 $ 10,270 $150,891 $191,047 $164,215
======= ======== ======== ======== ========
Supplemental disclosures of
cash flow information:
Cash paid--interest......... $ -- $ 699 $ 4,917 $ 2,921 $ 33,910
======= ======== ======== ======== ========
Non cash investing and
financing activities:
Assets recorded under
capital leases............. $ 27 $ 2,700 $ 11,709 $ 6,691 $ 34,538
======= ======== ======== ======== ========
Conversion of note payable
to stockholder to preferred
stock...................... $ 200 $ -- $ -- $ -- $ --
======= ======== ======== ======== ========
Cumulative dividends and
accretion on Series C and D
redeemable convertible
preferred stock............ $ -- $ 1,413 $ 2,014 $ 2,014 $ --
======= ======== ======== ======== ========
Deferred compensation on
grants of stock options.... $ -- $ 3,482 $ -- $ -- $ --
======= ======== ======== ======== ========
Warrants issued for
financing commitments...... $ -- $ 730 $ -- $ -- $ --
======= ======== ======== ======== ========
Conversion of bridge
financing convertible notes
to redeemable convertible
preferred stock............ $ -- $ 3,975 $ -- $ -- $ --
======= ======== ======== ======== ========
Conversion of redeemable
convertible preferred stock
to common stock............ $ -- $ -- $ 43,437 $ 43,437 $ --
======= ======== ======== ======== ========
Issuance of common stock and
assumption of options in
connection with the
acquisition of Cohesive
Technology Solutions,
Inc. ...................... $ -- $ -- $ -- $ -- $ 61,262
======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(1) Summary of the Company and Significant Accounting Policies
The Company
Exodus Communications, Inc. ("Exodus" or "the Company") is a leading
provider of Internet system and network management solutions and technology
professional services for enterprises with mission-critical Internet
operations.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company's revenues consist of (i) monthly fees from customer use of
Internet Data Center sites, network services, managed services, and
professional services and use of equipment and software provided by the
Company, (ii) revenues from sales of third-party equipment to customers and
(iii) fees for installation and certain professional services. Currently,
substantially all of the Company's revenue is derived from services. Revenues
(other than installation fees, equipment sales to customers and certain
professional services) are generally billed and recognized ratably over the
term of the contract, which is generally one year. Installation fees are
typically recognized at the time the installation occurs, and equipment
revenues are typically recognized when the equipment is delivered to the
customer or placed into service at an Internet Data Center. The Company sells
third-party equipment to its customers as an accommodation to facilitate their
purchase of services. One-time professional service fees are typically
recognized when services are rendered.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original
maturities of 90 days or less. As of September 30, 1999 cash equivalents
consisted principally of money market funds at three financial institutions.
The Company classifies its investments as "held-to-maturity." As of
September 30, 1999 such investments consisted of United States Treasury Notes
and are recorded at amortized cost.
F-32
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The components of restricted cash equivalents and investments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
United States treasury notes:
Due within one year............................ $10,733 $29,528
Due after one year through two years........... 20,594 --
Money market funds............................... 11,049 --
Cash collateral related to leases................ 3,238 5,916
------- -------
Total restricted cash equivalents and
investments................................. $45,614 $35,444
======= =======
</TABLE>
See Notes 4 and 6 for additional information regarding restricted cash
equivalents and investments.
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, investments, accounts receivable, bank borrowings and
debt approximates fair market value. Financial instruments that potentially
expose the Company to a concentration of credit risk principally consist of
cash and cash equivalents, investments and accounts receivable.
The Company's customer base is primarily composed of businesses throughout
the United States. The Company performs ongoing credit evaluations of its
customers and maintains reserves for potential losses.
Property and Equipment
Property and equipment are stated at cost and depreciated on a straight-line
basis over their respective estimated useful lives, which are generally three
to five years. Equipment recorded under capital leases and leasehold
improvements are amortized using the straight-line method over the shorter of
the respective lease term or estimated useful life of the asset.
Software Development Costs
The Company capitalizes software development costs incurred to develop
certain of the Company's collaborative systems management services that are
included in the Company's co-location services in accordance with Statement of
Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed. Costs are
capitalized after technological feasibility is achieved; generally upon the
development of a working model. To date, software development costs
capitalizable under SFAS No. 86 have not been material.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the
F-33
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be recovered.
Stock-Based Compensation
The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans. Expense associated with stock-based
compensation is being amortized consistent with the method described in
Financial Accounting Standards Board (FASB) Interpretation No. 28 over the
vesting period of the individual options.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates its long-lived assets, including goodwill and certain
identifiable intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets or intangibles
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Unaudited Interim Financial Statements
The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, the accompanying
unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's financial position as of September 30, 1999,
and the results of its operations and its cash flows for the nine-month periods
ended September 30, 1998 and 1999.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are comprised primarily of amounts
recorded in business acquisitions and are included in intangibles and other
assets on the accompanying consolidated balance sheets. The goodwill and other
intangible amounts related to the acquisitions are being amortized on a
straight-line basis over periods generally ranging from 5 to 10 years (see Note
2).
F-34
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing the net
loss attributable to common stockholders by the weighted-average number of
shares of common stock outstanding during the period. Diluted net loss per
share does not include the effect of the following common equivalent shares as
the effect of their inclusion is antidilutive during each period (in
thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended December Ended
31, September 30,
---------------------- -------------
1996 1997 1998 1998 1999
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Shares issuable under stock options... 2,336 13,672 38,288 26,760 51,282
Shares issuable pursuant to warrants
to purchase common and redeemable
convertible preferred stock.......... 5,096 22,504 1,448 2,136 506
Shares of redeemable convertible
preferred stock on an "as if
converted" basis..................... 124,296 272,936 -- -- --
Shares of convertible subordinated
notes on an "as if converted" basis.. -- -- -- -- 21,892
</TABLE>
Comprehensive Loss
There are no differences between consolidated net loss and comprehensive
loss for any period presented.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(2) Business Combinations
On October 2, 1998, the Company purchased substantially all of the assets,
including customer agreements, and assumed certain liabilities of Arca
Systems, Inc. ("Arca"), a wholly owned subsidiary of Cyberguard Corporation.
Arca, which has been in business for more than ten years, is a provider of
advanced network and system security consulting services and designs and
develops security technology solutions for complex and sensitive information
systems. Arca operates as a wholly owned subsidiary of the Company. Total
consideration paid, including direct acquisition costs, aggregated
approximately $5,800,000. The acquisition was accounted for as a purchase and
the results of Arca have been included from the acquisition date. The excess
of the purchase price over the fair value of tangible net assets acquired
amounted to approximately $5,000,000 and was attributed primarily to workforce
in place ($2,500,000) and goodwill ($2,400,000). These amounts are generally
being amortized on a straight-line basis over 10 years.
On February 1, 1999, the Company purchased all of the capital stock of
American Information Systems, Inc ("AIS"). AIS provides co-location services
as well as professional services. Total consideration paid, including direct
acquisition costs, aggregated approximately $20,500,000. The acquisition was
accounted for as a purchase with the results of AIS included from the
acquisition
F-35
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
date. The excess of the purchase price over the fair value of tangible net
assets acquired amounted to approximately $18,700,000 and was attributed
primarily to goodwill ($15,000,000), customer lists ($3,200,000) and assembled
workforce ($500,000). These amounts are being amortized on a straight-line
basis over periods ranging from 5 to 7 years.
On July 27, 1999, the Company completed its acquisition of Cohesive
Technology Solutions, Inc. ("Cohesive"). Cohesive offers a variety of services
including network design and development, Internet-based and application
development and information technology strategy and project management.
Pursuant to the terms of the Agreement and Plan of Reorganization, each share
of Cohesive common stock was converted into the right to receive 0.10488 shares
of Exodus common stock and $1.338 in cash; each share of Cohesive Series A
Preferred Stock was converted into the right to receive $122.337 in cash; each
share of Cohesive Series B Preferred Stock was converted into the right to
receive $115.965 in cash; each share of Cohesive Series C Preferred Stock was
converted into the right to receive $5.00 in cash; and each share of Cohesive
Series D Preferred stock, which automatically converted into Cohesive common
stock immediately prior to the merger, was converted into the right to receive
0.10488 shares of Exodus common stock and approximately $6.655 in cash. In
addition, the Company assumed each issued and outstanding option to purchase
shares of Cohesive common stock which was converted into an option to purchase
Exodus common stock using an exchange ratio of 0.14604.
Pursuant to the exchange ratios applied in the acquisition, the Company
issued 1,600,796 shares of Exodus common stock and paid approximately
$50,000,000 in cash and assumed options to purchase a total of 408,712 shares
of Exodus common stock for a total purchase price of approximately
$112,000,000. Of the cash consideration, $10,000,000 was deposited in an escrow
account to secure and collateralize the indemnification obligations of Cohesive
stockholders to Exodus and certain affiliates of Exodus. The acquisition was
accounted for as a purchase with the results of Cohesive included from the
acquisition date. The excess of the purchase price over the fair value of
tangible net assets acquired amounted to approximately $107,900,000 and was
attributed primarily to goodwill ($69,300,000), customer lists ($32,300,000)
and workforce in place ($6,300,000). These amounts are being amortized on a
straight-line basis over periods ranging from 5 to 8 years.
The following summary, prepared on an unaudited pro forma basis, combines
the Company's consolidated results of operations with Arca's, AIS', and
Cohesive's results of operations, as if Arca, AIS, and Cohesive had been
consummated as of January 1, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended Nine Months Nine Months
December 31, Ended Ended
------------------ September 30, September 30,
1997 1998 1998 1999
-------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................... $ 41,004 $103,767 $ 69,208 $169,377
Net loss attributable to
common stockholders....... $(24,009) $(86,148) $(62,557) $(81,719)
Basic and diluted net loss
per share................. $ (1.41) $ (0.68) $ (0.54) $ (0.49)
Shares used in pro forma
per share calculation..... 17,028 126,748 115,184 166,068
</TABLE>
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.
F-36
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(3) Financial Statement Components
Property and Equipment
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Data centers and related equipment........... $16,316 $43,959 $150,239
Furniture, fixtures, computer equipment and
other....................................... 12,815 32,887 90,319
Construction in progress..................... -- 8,497 40,576
------- ------- --------
29,131 85,343 281,134
Less accumulated depreciation and
amortization................................ 3,961 17,037 39,954
------- ------- --------
$25,170 $68,306 $241,180
======= ======= ========
</TABLE>
Computer equipment and certain data center infrastructure are recorded under
capital leases that aggregated $4,492,000, $20,236,000, and $54,774,000 as of
December 31, 1997 and 1998, and September 30, 1999, respectively. Accumulated
amortization on the assets recorded under capital leases aggregated $722,000,
$4,426,000, and $12,260,000 as of December 31, 1997 and 1998, and September 30,
1999, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------- September 30,
1997 1998 1999
------ ------ -------------
<S> <C> <C> <C>
Accrued payroll and related expenses............. $1,183 $2,956 $ 8,940
Other............................................ 1,836 3,815 10,817
------ ------ -------
$3,019 $6,771 $19,757
====== ====== =======
</TABLE>
F-37
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
(4) Bank Borrowings and Debt
A summary of equipment loans and line of credit facilities follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
$1,800,000 equipment line of credit facility;
effective interest rate of 16.4%; principal
and interest due April 2000 through
September 2000; collateralized by
equipment................................... $ 1,393 $ 981 $ 583
$3,000,000 equipment line of credit
facility--April 1997; effective interest
rate of 12.9%; principal and interest due
monthly through July 2001; collateralized by
equipment................................... 2,756 2,080 1,448
$6,500,000 equipment line of credit facility;
effective interest rate of 15.9%; principal
and interest due monthly through July 2001;
collateralized by equipment................. 6,312 4,842 3,523
$3,000,000 equipment line of credit
facility--August 1997; effective interest
rate of 16.2%; principal and interest due
monthly through May 2001; collateralized by
equipment................................... 2,787 2,192 1,617
$5,000,000 equipment line of credit facility;
effective interest rate of 16.2%; principal
and interest due monthly through September
2001; collateralized by equipment........... 3,044 3,084 2,322
$10,000,000 equipment line of credit
facility; effective interest rate of 13.8%;
principal and interest due monthly through
August 2002; collateralized by equipment.... -- 8,883 7,329
$8,000,000 line of credit facility; interest
rate of 12.8%; principal and interest due
March 1999; collateralized by all of the
Company's assets............................ -- 8,000 --
Other........................................ 178 -- 500
------- ------- ------
16,470 30,062 17,322
Less current portion......................... 3,777 14,367 7,722
------- ------- ------
Equipment loans and line of credit
facilities, less current portion............ $12,693 $15,695 $9,600
======= ======= ======
</TABLE>
As of December 31, 1998, aggregate maturities for outstanding equipment
loans and line of credit facilities, for fiscal 1999, 2000, 2001 and 2002 were
$14,367,000, $7,342,000, $5,943,000 and $2,410,000, respectively.
On July 1, 1998, the Company issued $200,000,000 of 11 1/4% Senior Notes
("Original Senior Notes") due 2008 for aggregate net proceeds of approximately
$193,400,000 (net of discounts to the initial purchasers and offering
expenses). Interest is payable semi annually on January 1 and July 1 of each
year commencing January 1, 1999. As of December 31, 1998 restricted cash
equivalents and investments include approximately $42,400,000 deposited with an
escrow agent that will be used to pay the first four semiannual interest
payments when due. Interest payments of $11,250,000 were made in January and
July 1999. Subject to significant exceptions, the Original Senior Notes
Indenture restricts, among other things, the Company's ability to incur
additional indebtedness and the use of proceeds therefrom, pay dividends, make
certain other restricted payments, incur certain liens to secure indebtedness
or engage in merger transactions.
F-38
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
On March 3, 1999, the Company issued $250,000,000 of 5% Convertible
Subordinated Notes due March 15, 2006 (the "Convertible Notes") for aggregate
net proceeds of approximately $242,100,000 (net of offering expenses). Proceeds
from the sale of the Convertible Notes may be used only for limited purposes.
Proceeds in the amount of $48,500,000 may be used for general corporate
purposes. The remaining $193,600,000 may be used only to finance the purchase
of assets or other businesses to be used in the Company's business.
The Convertible Notes are convertible into the Company's common stock at a
conversion rate of 87.5704 shares per $1,000 principal amount of Convertible
Notes, subject to adjustment in certain events and at each holder's option. The
Convertible Notes will not be subject to redemption prior to March 20, 2001,
and generally will be redeemable on or after that date at the option of the
Company, at the redemption prices set forth in the indenture to the Convertible
Notes ("Convertible Notes Indenture"), subject to certain provisions. In the
event of a Change in Control (as defined in the Convertible Notes Indenture),
each holder of the Convertible Notes has the right, subject to certain
conditions and restrictions, to require the Company to repurchase all or any
part of the holder's Convertible Notes at a repurchase price of 100% of the
principal amount, plus accrued interest of the Convertible Notes being
repurchased. Interest on the Convertible Notes is payable on March 15 and
September 15 of each year, commencing on September 15, 1999. Accordingly, the
Company made its first interest payment in the amount of approximately
$6,700,000 on September 15, 1999. The Convertible Notes are unsecured
obligations of the Company and are subordinated to all existing and future
Senior Indebtedness (as defined in the Convertible Notes Indenture) and
effectively subordinated to all indebtedness and other liabilities of the
Company's subsidiaries.
On June 22, 1999, the Company issued an additional $75,000,000 of Senior
Notes due 2008 ("Additional Senior Notes") at 100.50% plus accrued interest, if
any, from June 22, 1999, for aggregate net proceeds of approximately
$73,200,000 (net of offering expenses). The Company issued the Additional
Senior Notes under the Indenture dated July 1, 1998 under which it previously
issued the Original Senior Notes discussed above. The Additional Senior Notes
will be subject to substantially the same terms and conditions as the Original
Senior Notes. Interest is payable semi-annually on January 1 and July 1 of each
year commencing July 1, 1999. Concurrent with the closing of the offering, the
Company deposited approximately $8,400,000 with an escrow agent that would be
sufficient to pay when due the first three interest payments. An interest
payment of approximately $211,000 was made on July 1, 1999 representing
interest from June 22, 1999 to July 1, 1999.
On July 22, 1999, the Company amended its revolving line of credit agreement
with a financial institution, increasing the total commitment amount from
$7,000,000 to $10,000,000. Pursuant to the terms of the new amendment, the line
of credit can be used for working capital requirements, foreign exchange
forward contracts, and letters of credit. The amount available for working
capital borrowings is limited to $4,000,000. In addition, total foreign
exchange contracts at any one time cannot exceed ten times the amount of the
foreign exchange sublimit, which is a maximum of $1,000,000. The line of credit
will expire in July 2000 and is subject to certain covenants.
(5) Redeemable Convertible Preferred Stock and Stockholders' (Deficit) Equity
Redeemable Convertible Preferred Stock and Warrants
In February and March 1996, the Company issued 7,798,483 shares of Series A
redeemable convertible preferred stock at $0.413 per share. In October 1996,
the Company issued 7,738,095 shares of Series B
F-39
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
redeemable convertible preferred stock at $0.84 per share. In March and June
1997, the Company received a total of approximately $3,975,000 in cash in
exchange for bridge financing convertible promissory notes. In June 1997, the
Company issued 15,789,868 shares of Series C redeemable convertible preferred
stock for $1.362 per share in exchange for approximately $17,500,000 in cash
and the conversion of the bridge financing notes. In December 1997, the Company
issued 2,631,579 shares of Series D redeemable convertible preferred stock at
$2.85 per share for aggregate cash proceeds of $7,500,000.
In 1996, in connection with various financing arrangements, the Company
issued warrants to purchase an aggregate of 137,256 shares of the Company's
common stock at prices ranging from $0.30 to $0.34 per share. Also in 1996, in
connection with various lease agreements and other matters, the Company issued
warrants to purchase 329,167 shares of the Company's Series B1 redeemable
convertible preferred stock at $0.84 per share.
In March and June 1997, in connection with the bridge financing convertible
promissory notes discussed above, the Company issued warrants to purchase
198,697 shares of the Company's Series B redeemable convertible preferred stock
at $0.84 per share. In April 1997, in connection with the $3,000,000 equipment
line of credit, the Company issued warrants to purchase 196,429 shares of the
Company's Series B1 redeemable convertible preferred stock at $0.84 per share.
In June 1997, in connection with the issuance of the Company's Series C
redeemable convertible preferred stock, the Company issued warrants to purchase
1,579,011 shares of the Company's Series C redeemable convertible preferred
stock at $1.362 per share. In August and September 1997, in connection with the
$3,000,000 and the $6,500,000 equipment lines of credit, the Company issued
warrants to purchase a total of 271,598 shares of the Company's Series C1
redeemable convertible preferred stock at $1.362 per share. In December 1997,
in connection with the $8,000,000 line of credit facility and the $5,000,000
equipment line of credit, the Company issued warrants to purchase 247,826 and
125,000 shares, respectively, of the Company's Series D1 redeemable convertible
preferred stock at $2.85 per share.
In March 1998, in connection with a strategic alliance, the Company issued
warrants to purchase an aggregate of 480,000 shares of the Company's common
stock at a price of $1.88 per share.
The fair value of all warrant issuances, calculated using the Black-Scholes
option pricing model, with the following assumptions: dividends--none; expected
life--contractual term; risk-free interest rates of 5.7% to 6.7%; volatility--
60%, was not material except as follows:
. The 1,579,011 warrants issued in connection with the sale of the Series C
redeemable convertible preferred stock for which the fair value was
determined to be $1,200,000. This amount was recorded as a reduction in
the carrying value of the Series C redeemable convertible preferred stock
and recorded as the carrying value of the Series C warrants.
. The 247,826 and 125,000 warrants issued in connection with the $8,000,000
line of credit facility and $5,000,000 equipment line of credit,
respectively, for which the values were determined to be $530,000 and
$200,000, respectively. These amounts are being amortized on a straight-
line basis through the commitment periods of the credit facilities.
. The 480,000 warrants issued in connection with the strategic alliance for
which the value was determined to be $525,000. This amount was recorded
as marketing and sales expense in the accompanying consolidated statement
of operations for the year ended December 31, 1998.
F-40
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Redeemable convertible preferred stock and related warrants issued and
outstanding as of December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Redeemable convertible
preferred stock Warrants
----------------------- ----------------------
Shares Issued and Carrying Issued and Carrying
Series Designated Outstanding Value Outstanding Value
------ ---------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
A................. 7,798,483 7,798,483 $ 3,168,000 -- $ --
A1................ 7,798,483 -- -- -- --
B................. 8,600,000 7,775,930 6,473,000 160,862 --
B1................ 8,600,000 65,524 55,000 466,072 --
C................. 17,850,000 15,845,855 20,333,000 1,523,024 1,242,000
C1................ 17,850,000 -- -- 271,598 --
D................. 3,231,579 2,631,579 7,246,000 -- --
D1................ 3,231,579 -- -- 372,826 730,000
---------- ---------- ----------- --------- ----------
74,960,124 34,117,371 $37,275,000 2,794,382 $1,972,000
========== ========== =========== ========= ==========
</TABLE>
As of December 31, 1997 and 1998, the Company has 149,304 and 1,448,680
warrants to purchase common stock outstanding, respectively.
Initial Public Offering
On March 24, 1998, the Company completed its initial public offering ("IPO")
of 41,000,000 shares of its common stock. Net proceeds to the Company, after
deducting underwriting discounts and commissions and offering expenses,
aggregated approximately $69,800,000. At the closing of the IPO, all redeemable
convertible preferred stock was converted to common stock and all warrants to
purchase redeemable convertible preferred stock were converted to warrants to
purchase common stock on a one-for-three basis. In connection with the IPO,
certain warrant holders exercised their warrants to purchase redeemable
convertible preferred stock (which converted into common stock), which resulted
in additional proceeds of $1,842,000.
Stock Purchase and Stock Option Plans
During 1995, the Company adopted a Stock Purchase Plan under which 2,933,336
shares of common stock were authorized. Awards totaling 858,944 shares of
common stock were granted to individuals through 1996, at a price of $0.03 per
share, the estimated fair market value of the shares on the date of the award.
No awards were granted during the years ended December 31, 1997 and 1998.
Generally, the shares are subject to a 50-month vesting period. As of December
31, 1998, 34,408 shares remained unvested. Unvested shares are subject to
repurchase, at the Company's option, at the original purchase price upon a
participant's termination. Of the shares granted, 370,408 had been repurchased
by the Company as of December 31, 1998.
In January 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Purchase Plan") and reserved a total of 4,800,000 shares of the Company's
common stock for issuance thereunder. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions at a purchase
price of 85% of the lower of the fair market value of the common stock on the
first day of the offering period or on the last day of the purchase period.
During 1998, 436,528 shares were issued under the Purchase Plan at a weighted-
average purchase price of $1.67 per share.
F-41
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
In January 1997, the Company adopted the 1997 Equity Incentive Plan (the
"1997 Plan"), which served as the successor to the Company's 1995 Stock Option
Plan (the "1995 Plan"). Options granted under the 1995 Plan before its
termination continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan. Options granted under
the 1995 Plan were granted with exercise prices not less than fair market value
at the date of grant as determined by the Board of Directors, generally vested
12% after 6 months from the date of grant and 2% per month thereafter, and
generally are exercisable for a term of 10 years after the date of grant. Under
the 1997 Plan, the Company reserved 17,600,000 shares of its common stock for
issuance to employees and consultants to be granted as either incentive or
nonqualified stock options. Options granted under the 1997 Plan generally vest
12% after 6 months from the date of grant and 2% per month thereafter and are
generally exercisable for a term of 10 years after the date of grant.
In January 1998, the Company adopted the 1998 Equity Incentive Plan (the
"1998 Plan"). On the effective date of the Company's IPO, the 1998 Plan became
effective as the successor to the 1997 Plan. The Company has reserved
12,000,000 shares of common stock for issuance under the 1998 Plan in addition
to the shares that remain from the 1997 Plan. The 1998 Plan permits the grant
of either incentive or nonqualified stock options. Options granted under the
1998 Plan will have a maximum term of 10 years and generally will vest over 50
months. The 1998 Plan will terminate in January 2008.
On June 2, 1999, the Company's stockholders approved an amendment to the
Company's 1998 Equity Incentive Plan to increase the number of shares of common
stock reserved for issuance thereunder by 8,000,000 shares, from 12,000,000
shares to 20,000,000 shares.
In January 1998, the Company adopted the 1998 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 1,600,000 shares of the
Company's common stock for issuance thereunder. Each nonemployee director who
is or becomes a member of the Board of Directors on or after the effective date
of the Company's IPO, with certain limited exceptions, will initially be
granted an option for 40,000 shares of the Company's common stock and,
thereafter, an option to purchase an additional 10,000 shares of the Company's
common stock annually. Initial options granted under the Directors Plan will
vest as to 33 1/3% of the shares on each annual anniversary of the date of
grant. Annual grants will vest 25% on each annual anniversary of the date of
grant. The exercise price of the options granted under the Directors Plan will
be at the fair market value of the Company's common stock on the date of grant.
In January 1998, the Company granted stock options to purchase 2,666,672
shares of common stock to an officer of the Company, of which half have an
exercise price of $1.13 per share and vest 100% after 3 years and half have an
exercise price of $2.25 per share and vest 100% after 5 years. The stock
options accelerate and become fully vested if the Company is acquired or sells
all or substantially all of its assets.
In March 1998, the Company granted a stock option to an officer of the
Company to purchase 5,775,848 shares of common stock with an exercise price of
$1.13 per share (fair market value on the date of grant) that vests as to 12%
of such shares in September 1998 and vests as to an additional 2% per month
thereafter.
In January 1999, the Company adopted the 1999 Stock Option Plan ("the 1999
Plan"). Under the 1999 Plan, the Company has reserved 16,000,000 shares of
common stock for issuance to employees, and consultants, and to be used for
acquisitions, to be granted as nonqualified stock options. Options granted
under the 1999 Plan generally will vest over 50 months and are generally
exercisable for a term of 10 years from the date of grant.
F-42
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Fair Value Disclosures
The Company uses the intrinsic value method in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for any of its stock options because the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date for each stock option, except for stock options granted by the
Company from March 1997 through December 1997. With respect to the stock
options granted by the Company from March to December 1997, the Company
recorded deferred stock compensation of $3,482,000 for the difference at the
grant date between the exercise price and the fair value of the common stock
underlying the options. This amount is being amortized consistent with the
method described in FASB Interpretation No. 28 over the vesting period of the
individual options, generally 50 months. Had compensation cost been determined
in accordance with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss attributable to common stockholders and net loss
per share would have been changed to the amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported.................................. $(4,133) $(26,711) $(68,456)
Pro forma.................................... $(4,133) $(26,711) $(76,134)
Basic and diluted net loss per share:
As reported.................................. $ (0.27) $ (1.73) $ (0.55)
Pro forma.................................... $ (0.27) $ (1.73) $ (0.61)
</TABLE>
The fair value of each stock option is estimated on the date of grant using
the minimum value method prior to the IPO and the Black-Scholes option pricing
model after the IPO, with no expected dividends and the following weighted-
average assumptions:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Expected life............................... 2.55 years 2.59 years 3.09 years
Risk-free interest rate..................... 6.28% 5.81% 4.98%
Volatility.................................. -- -- 80.00%
</TABLE>
The fair value of purchase rights granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for grants in 1998: no expected
dividends, expected volatility of 80%, risk-free interest rate of 5.26%, and
expected life of 1.33 years. The weighted-average fair value of purchase rights
granted under the Purchase Plan during 1998 was $1.25 per share.
F-43
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
A summary of the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1996 1997 1998
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,000,664 $0.03 2,336,264 $0.03 13,674,288 $0.10
Granted................. 1,797,872 0.04 12,894,400 0.11 31,288,808 2.86
Forfeited............... (422,800) 0.03 (846,880) 0.08 (2,311,752) 1.03
Exercised............... (39,472) 0.03 (709,496) 0.04 (4,367,032) 0.33
--------- ---------- ----------
Outstanding at end of
year................... 2,336,264 0.03 13,674,288 0.10 38,284,312 2.27
--------- ---------- ----------
Exercisable at end of
year................... 645,336 0.03 1,791,600 0.06 3,076,720 0.61
========= ========== ==========
Weighted average fair
value of options
granted during the year
at market.............. 1,797,872 0.01 2,666,136 0.01 28,560,800 1.57
Weighted average fair
value of options
granted during the year
at less than market.... -- -- 10,228,264 0.29 61,336 4.24
Weighted average fair
value of options
granted during the year
at greater than
market................. -- -- -- -- 2,666,672 0.53
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Shares Life Price Shares Price
------------------------ ---------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$0.03 to 0.10 8,484,288 8.47 years $0.07 1,992,688 $0.06
$0.47 to 1.13........... 9,360,616 9.13 1.04 826,136 0.91
$1.88 to 3.03........... 9,929,680 9.64 2.67 82,544 2.48
$3.84 to 5.00........... 10,509,728 9.84 4.75 175,352 4.50
---------- ---------
38,284,312 9.31 2.27 3,076,720 0.61
========== =========
</TABLE>
Stockholder Rights Plan
In January 1999, the Company adopted a Stockholder Rights Plan ("the Rights
Plan"). The Rights Plan is designed to protect the long-term value of the
Company for its stockholders during any future unsolicited acquisition
attempt. In connection with the Rights Plan, the Company declared a 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.
F-44
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
On June 2, 1999, stockholders approved an amendment to the Company's
Restated Certificate of Incorporation to increase the authorized number of
shares of Common Stock issuable by the Company from 100,000,000 to 300,000,000.
Stock Splits
On April 12, 1999 and August 12, 1999, the Company completed two-for-one
stock splits accomplished in the form of stock dividends. Share and per share
amounts in the accompanying consolidated financial statements reflect both two-
for-one stock splits retroactively.
(6)Commitments and Contingencies
Leases
The Company has entered into a number of operating leases for its
facilities. The leases expire from 1999 through 2010. As of December 31, 1998,
the Company had collateralized letters of credit aggregating $3,238,000 for
these leases. The related funds are included in restricted cash equivalents and
investments on the accompanying consolidated balance sheet. The Company also
leases certain data center infrastructure and equipment under capital leases.
Certain of these capital leases were entered into as sales-leaseback
transactions. No gain or loss was recorded in any such transaction due to the
short holding period from the time the assets were purchased until the time of
the sale-leaseback. Future minimum lease payments as of December 31, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999.................................................... $ 6,354 $ 9,065
2000.................................................... 6,604 9,726
2001.................................................... 5,920 9,803
2002.................................................... 676 9,325
2003.................................................... -- 9,176
Thereafter.............................................. -- 43,994
------- -------
Total minimum lease payments............................ 19,554 $91,089
=======
Less amount representing imputed interest............... 3,013
-------
Present value of minimum lease payments................. 16,541
Less current portion.................................... 5,140
-------
Capital lease obligations, less current portion......... $11,401
=======
</TABLE>
The Company's rent expense was $248,000, $1,764,000, $5,554,000, $3,376,000
and $11,007,000 for the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, respectively.
F-45
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
Telecommunications Agreements
In September 1997, the Company entered into an agreement to obtain
telecommunications services for a period of 60 months with a minimum commitment
of $230,000 per month. In January 1999, this original agreement was replaced
with a new agreement for a period of 60 months with a minimum commitment of
$1,000,000 per month.
In July 1998, the Company entered into an agreement to obtain
telecommunications services for a period of 36 months with a minimum commitment
of approximately $500,000 per month.
In August 1999 the Company entered into capacity purchase agreements. The
agreements provide for a total potential outlay of approximately $105,000,000
for fiber capacity and related maintenance covering approximately 25 years.
Royalty Agreement
In April 1997, the Company entered into an agreement with a software company
under which the Company licensed certain software for a royalty based on 1% of
the Company's gross revenues. Royalty expenses related to this agreement have
not been significant to date.
In March 1999, this agreement was replaced with a new agreement that
obligates the Company to make certain future payments for the use of the
software license. These payments are not expected to have a material effect on
the consolidated financial statements.
Contingencies
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses
and that the ultimate outcome of these actions will not have a material effect
on the Company's financial position and results of operations.
(7) Income Taxes
The following table reconciles the expected corporate federal income tax
expense (benefit) (computed by multiplying the Company's loss before taxes by
34%) to the Company's actual income tax expense (benefit) (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Expected income tax benefit..................... $(1,405) $(8,602) $(22,591)
Permanent differences........................... 2 15 81
Net operating loss not benefited................ 1,403 8,587 22,510
------- ------- --------
Actual income tax expense (benefit)............. $ -- $ -- $ --
======= ======= ========
</TABLE>
F-46
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 10,941 $ 34,807
Difference between book and tax depreciation........... -- 2,284
Reserves and accruals.................................. 195 1,234
Research and experimentation credit carryforwards...... 113 548
Deferred compensation.................................. 437 957
Other.................................................. 41 6
-------- --------
Total gross deferred tax assets...................... 11,727 39,836
Less valuation allowance............................... (11,708) (39,836)
-------- --------
19 --
Deferred tax liabilities:
Difference between book and tax depreciation........... (19) --
-------- --------
Net deferred tax assets.............................. $ -- $ --
======== ========
</TABLE>
As of December 31, 1998, the Company has a net operating loss carryforward
for federal and California purposes of $94,087,000 and $48,316,000,
respectively. The difference between the federal and California net operating
loss carryforward is due to the 50% limitation of net operating loss
carryforwards for California purposes. The federal net operating loss
carryforward will expire from 2011 through 2018. The California net operating
loss carryforward will expire from 2001 through 2003.
Gross deferred tax assets as of December 31, 1998 include approximately
$3,430,000 relating to the exercise of stock options, which will be credited to
equity when realized.
The net change in the valuation allowance was an increase of $9,654,000 and
$28,128,000 for the years ended December 31, 1997 and 1998, respectively.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
Internal Revenue Code, Section 382. The Company has not determined if an
ownership change, as defined, has occurred. The Company plans to compute exact
limitations upon realization of taxable earnings and associated utilization of
the net operating loss carryforwards.
(8) Segment Information
The Company operates a number of Internet Data Centers throughout the United
States and one in Europe. The Company establishes these Internet Data Centers
using a consistent investment and operating model. As a result, the expected
long term economic characteristics and financial performance are similar. In
particular, each data center provides the same Internet related services to a
similar type of customer who may locate its servers in multiple Internet Data
Centers. As a result, the Company believes these Internet Data Centers
represent one reportable segment under the aggregation criteria of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of
an Enterprise and Related Information." Internet Data Center operations
primarily include services such as server infrastructure support, Internet
connectivity, and managed services.
F-47
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
With the acquisition of Cohesive on July 27, 1999, Management began
reviewing financial information and business performance and allocating
resources based on both Internet Data Center operations and by professional
services, given Cohesive's expertise in networking, Internet-based applications
and technology solutions. As a result, the Company identified professional
services as an additional reportable segment. Professional services primarily
include services such as network design and development, Internet-based and
application development, and information technology strategy.
Financial information for the Company's reportable segments is presented
below:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Internet Data Centers.... $ 3,130 $ 12,408 $ 52,256 $ 31,423 $119,082
------- -------- -------- -------- --------
Professional services.... -- -- 482 215 21,104
------- -------- -------- -------- --------
Total revenues......... $ 3,130 $ 12,408 $ 52,738 $ 31,638 $140,186
======= ======== ======== ======== ========
Operating profit (loss):
Internet Data Centers.... * $ (1,243) $ (604) $ (2,859) $ 28,783
Professional services.... * -- (351) 17 1,880
Corporate areas.......... * (23,549) (55,730) (37,095) (82,378)
------- -------- -------- -------- --------
Total operating loss... $(4,094) $(24,792) $(56,685) $(39,937) $(51,715)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Total assets:
Internet Data Centers....................... * $ 52,459 $196,404
Professional services....................... * 212 3,011
Corporate assets............................ * 240,615 471,981
------- -------- --------
Total assets.............................. $40,973 $293,286 $671,396
======= ======== ========
</TABLE>
- --------
* Information is not available.
(9) Subsequent Events
On November 23, 1999, the Company closed a merger with Service Metrics, Inc.
("SMI") pursuant to which Service Metrics became its wholly owned subsidiary.
SMI, which was incorporated in May 1998, is a leading provider of Internet
monitoring applications and services that measure the consistency, availability
and performance of web sites. SMI is based in Boulder, Colorado and has
79 employees as of November 1999.
In connection with the merger, the former shareholders and option holders of
SMI common stock received shares and options of Exodus Common Stock at the rate
of approximately 0.252 shares of Exodus common stock for each share of SMI
common stock. The Company issued a total of approximately 6,200,000 shares of
Exodus Common Stock in exchange for all outstanding shares of SMI common stock
and reserved approximately 760,000 shares of Exodus Common Stock for issuance
upon the exercise of SMI options the Company assumed pursuant to the merger
agreement.
F-48
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998 and September 30, 1998 and 1999
(Information as of September 30, 1999 and for the nine months ended
September 30, 1998 and 1999 is unaudited)
SMI's revenues for the period ended December 31, 1998 and the nine months
ended 1998 are not considered material. SMI's revenues for the nine months
ended 1999 were approximately $568,000. SMI's net losses for the period ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999 were
approximately $874,000, $335,000, and $5,496,000, respectively.
In November 1999, the Company agreed to acquire Global Online Japan Co.,
Ltd., an Internet solutions provider based in Tokyo. The transaction is
expected to close by the end of December 1999 and will be accounted for as a
purchase.
(10) Stock Split
On December 14, 1999, the Company completed a two-for-one stock split
accomplished in the form of a stock dividend. Share and per share amounts in
the accompanying consolidated financial statements reflect this two-for-one
stock split retroactively.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of
Cohesive Technology Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Cohesive
Technology Solutions, Inc. (formerly Cohesive Network Systems, Inc.) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Cohesive Technology Solutions,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
April 8, 1999
(April 21, 1999 as to Note 10)
F-50
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 3,217,000 $ 3,580,000
Restricted cash..................................... 5,130,000 --
Short-term investments.............................. 15,784,000 --
Accounts receivable, net of allowance for doubtful
accounts of $250,000 and $962,000 in 1997 and 1998,
respectively....................................... 4,038,000 7,561,000
Income tax receivable............................... -- 1,984,000
Other receivables................................... 109,000 --
Inventory........................................... 393,000 422,000
Prepaid expenses.................................... 294,000 758,000
----------- -----------
Total current assets............................... 28,965,000 14,305,000
Property and equipment, net........................... 1,241,000 2,748,000
Other assets.......................................... 108,000 60,000
Intangibles, net...................................... 5,816,000 26,454,000
----------- -----------
Total.............................................. $36,130,000 $43,567,000
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit........................... $ 515,000 $ 6,997,000
Accounts payable.................................... 1,058,000 2,316,000
Amounts due under acquisition agreements............ 3,815,000 6,896,000
Accrued payroll and related expenses................ 1,026,000 2,224,000
Other accrued liabilities........................... 495,000 1,047,000
Income taxes payable................................ 2,125,000 --
Deferred revenue.................................... 719,000 276,000
Deferred gain....................................... 1,050,000 --
Current portion of long-term obligations (Note 2)... -- 440,000
----------- -----------
Total current liabilities.......................... 10,803,000 20,196,000
Long-term obligations (Note 2)........................ -- 349,000
----------- -----------
Total liabilities.................................. 10,803,000 20,545,000
----------- -----------
Commitments and contingencies (Notes 3 and 9)......... -- --
Redeemable preferred stock:
Preferred stock, $1.00 par value; 196,800 shares
authorized: Series A, 120,000 shares designated;
shares outstanding: 60,570 in 1997 and 1998........ 6,743,000 7,166,000
Series B, 76,800 shares designated; shares
outstanding: 28,800 in 1997 and 1998............... 3,000,000 3,202,000
Convertible Series D preferred stock, $1.00 par
value, none in 1997, 900,000 shares authorized,
designated and outstanding in 1998................. -- 7,906,000
Total redeemable preferred stock................... 9,743,000 18,274,000
Stockholders' equity:
Convertible Series C preferred stock, $1.00 par
value, 800,000 shares authorized, designated and
outstanding in 1997 and 1998....................... 4,000,000 4,000,000
Common stock $0.01 par value per share; 21,000,000
shares authorized; shares outstanding: 13,519,919
in 1997 and 13,902,769 in 1998..................... 135,000 139,000
Additional paid-in capital.......................... 3,169,000 3,364,000
Retained earnings (accumulated deficit)............. 8,280,000 (2,755,000)
----------- -----------
Total stockholders' equity......................... 15,584,000 4,748,000
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity.............................. $36,130,000 $43,567,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Service revenues.................... $ 3,494,000 $ 8,463,000 $ 26,328,000
Product revenues.................... 9,298,000 11,957,000 15,380,000
----------- ------------ ------------
Total revenues.................... 12,792,000 20,420,000 41,708,000
Costs of revenues:
Costs of service revenues........... 2,292,000 5,489,000 15,291,000
Costs of product revenues........... 6,693,000 9,577,000 13,033,000
----------- ------------ ------------
Total cost of revenues............ 8,985,000 15,066,000 28,324,000
----------- ------------ ------------
Gross profit...................... 3,807,000 5,354,000 13,384,000
----------- ------------ ------------
Operating expenses:
Sales and marketing................. 2,285,000 5,100,000 5,672,000
General and administrative.......... 4,229,000 6,528,000 10,219,000
Research and development............ 566,000 1,308,000 --
Amortization of intangibles......... 869,000 1,583,000 6,734,000
Acquisition related charges......... 964,000 1,917,000 4,463,000
----------- ------------ ------------
Total operating expenses............ 8,913,000 16,436,000 27,088,000
----------- ------------ ------------
Operating loss.................... (5,106,000) (11,082,000) (13,704,000)
----------- ------------ ------------
Other income (expense):
Gain on divestiture................. -- 37,966,000 --
Interest income, net................ 71,000 579,000 354,000
Other expense, net.................. -- -- (2,000)
----------- ------------ ------------
Total other income................ 71,000 38,545,000 352,000
----------- ------------ ------------
Income (loss) from continuing
operations before income taxes....... (5,035,000) 27,463,000 (13,352,000)
Provision for (benefit from) income
taxes................................ -- 11,450,000 (2,555,000)
----------- ------------ ------------
Income (loss) from continuing
operations........................... (5,035,000) 16,013,000 (10,797,000)
Loss from discontinued operations..... (135,000) (136,000) --
Gain on divestiture of discontinued
operations (Less income taxes of
$1,412,000 in 1997 and $380,000
in 1998)............................. -- 2,523,000 562,000
----------- ------------ ------------
Net income (loss)..................... (5,170,000) 18,400,000 (10,235,000)
Preferred dividends................... (639,000) (827,000) (625,000)
Accretion on preferred stock.......... -- -- (175,000)
----------- ------------ ------------
Net income (loss) applicable to common
stockholders......................... $(5,809,000) $ 17,573,000 $(11,035,000)
=========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Series C Convertible
Preferred Stock Common Stock Additional Retained
-------------------- -------------------- Paid In Earnings
Shares Amount Shares Amount Capital (Deficit) Total
-------------------- ---------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1,
1996................... -- $ -- 10,700,031 $107,000 $ 805,000 $ (3,484,000) $ (2,572,000)
Exercise of options..... 129,850 1,000 12,000 13,000
Preferred dividends..... (639,000) (639,000)
Net loss................ (5,170,000) (5,170,000)
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1996................... -- -- 10,829,881 108,000 817,000 (9,293,000) (8,368,000)
Exercise of options..... 770,038 8,000 135,000 143,000
Sale of common stock.... 1,920,000 19,000 1,901,000 1,920,000
Issuance of preferred
stock.................. 800,000 4,000,000 4,000,000
Compensatory stock
arrangements (Note 3).. 316,000 316,000
Preferred dividends..... (827,000) (827,000)
Net income.............. 18,400,000 18,400,000
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1997................... 800,000 4,000,000 13,519,919 135,000 3,169,000 8,280,000 15,584,000
Repurchase of common
stock.................. (250,000) (3,000) (747,000) (750,000)
Exercise of options..... 632,850 7,000 352,000 359,000
Compensatory stock
arrangements (Note 6).. 590,000 590,000
Accretion on preferred
stock.................. (175,000) (175,000)
Preferred dividends..... (625,000) (625,000)
Net loss................ (10,235,000) (10,235,000)
-------- ----------- ---------- -------- ---------- ------------ ------------
Balances, December 31,
1998................... 800,000 $ 4,000,000 13,902,769 $139,000 $3,364,000 $ (2,755,000) $ 4,748,000
======== =========== ========== ======== ========== ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-53
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $(5,170,000) $ 18,400,000 $(10,235,000)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization....... 1,033,000 1,893,000 7,034,000
Stock compensation expense.......... -- 281,000 590,000
Loss on disposal of property and
equipment.......................... -- 25,000 598,000
Interest income on restricted cash.. -- (80,000) (44,000)
Gain on divestiture................. -- (37,966,000) --
Results of discontinued operations
and gain on disposal............... 135,000 (2,387,000) (562,000)
Change in assets and liabilities, net
of effect of acquisitions and
divestitures:
Accounts receivable................. (692,000) (190,000) (1,317,000)
Other receivables................... (72,000) (64,000) 125,000
Inventory........................... (267,000) 311,000 (29,000)
Prepaid expenses.................... (166,000) (70,000) (449,000)
Other assets........................ (37,000) 17,000 105,000
Accounts payable.................... (43,000) (334,000) 942,000
Income taxes........................ 100,000 492,000 (4,341,000)
Amounts due under acquisition
agreements......................... 964,000 -- --
Accrued payroll and related
expenses........................... 467,000 424,000 586,000
Accrued liabilities................. 337,000 239,000 (2,159,000)
Other current liabilities........... 177,000 328,000 (452,000)
----------- ------------ ------------
Net cash used by continuing
operating activities............. (3,234,000) (18,681,000) (9,608,000)
Net cash used by discontinued
operations....................... (168,000) (72,000) --
----------- ------------ ------------
Net cash used by operating
activities....................... (3,402,000) (18,753,000) (9,608,000)
----------- ------------ ------------
Cash flows from investing activities:
Sale (purchase) of short-term
investments........................ -- (15,784,000) 15,784,000
Acquisitions, net of cash acquired.. (1,312,000) (4,507,000) (11,928,000)
Repayment of acquisition
obligations, net................... -- -- (3,556,000)
Purchases of property and
equipment.......................... (860,000) (745,000) (1,338,000)
Proceeds from divestitures.......... -- 34,210,000 4,124,000
Proceeds from sale of discontinued
operations......................... -- 4,830,000 942,000
Investing activities of discontinued
operations......................... (344,000) (260,000) --
----------- ------------ ------------
Net cash provided by (used by)
investing activities............. (2,516,000) 17,744,000 4,028,000
----------- ------------ ------------
Cash flows from financing activities:
Proceeds (repayments) on line of
credit, net........................ 110,000 (193,000) 6,482,000
Proceeds from issuance of common
stock.............................. 13,000 2,063,000 211,000
Proceeds from issuance of preferred
stock.............................. 4,420,000 6,880,000 --
Repurchase of common stock.......... -- -- (750,000)
Redemption of preferred stock....... -- (7,003,000) --
Financing activities of discontinued
operations......................... 512,000 226,000 --
----------- ------------ ------------
Net cash provided by financing
activities....................... 5,055,000 1,973,000 5,943,000
----------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... (863,000) 964,000 363,000
Cash and cash equivalents, beginning
of year............................. 3,116,000 2,253,000 3,217,000
----------- ------------ ------------
Cash and cash equivalents, end of
year................................ $ 2,253,000 $ 3,217,000 $ 3,580,000
=========== ============ ============
Non-cash investing and financing
activities:
Purchase of software under deferred
payment arrangement (Note 2)....... $ -- $ -- $ 769,000
Preferred stock issued in
acquisition (Note 3)............... -- -- 7,731,000
Tax benefit on stock option
exercises.......................... -- -- 148,000
Supplemental cash flow information:
Interest paid....................... $ -- $ 107,000 $ 96,000
Income taxes paid................... -- 10,862,000 1,787,000
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1997 and 1998
1. Business and Significant Accounting Policies
Business--The Company was incorporated in California in 1993 under the name
Global Internet Access Services, Inc. and reincorporated in Delaware in 1994,
subsequently changing its name to Cohesive Network Systems, Inc. During
September 1998, the Company merged with Business Technologies, Inc. and changed
its name to Cohesive Technology Solutions, Inc. Cohesive Technology Solutions,
Inc. and its wholly-owned subsidiaries (collectively, the "Company") are
primarily in the business of providing information technology related
consulting services to mid-tier customers and divisions of large corporations.
The Company has core competencies in the areas of business consulting,
application development and network integration.
The Company has incurred a net loss of $10,235,000 for the year ended
December 31, 1998. In addition, the Company has a negative working capital of
$5,891,000 and an accumulated deficit of $2,755,000 as of December 31, 1998.
Approximately $3 million of the Company's preferred stock is redeemable in
September 1999 while another $10.4 million is redeemable in January 2000. The
Company believes, to the extent existing resources and anticipated revenues are
insufficient to fund the Company's planned activities, that additional debt or
equity financing will be available from its majority stockholder. This
stockholder has indicated that to the extent that the Company is otherwise
unable to meets it obligation to repay its existing credit line at maturity in
December 1999, it will make an investment in debt or equity securities of the
Company in an amount sufficient to permit the Company to meet such obligation
up to a maximum of $15 million. In addition, the stockholder has agreed, to the
extent that the Company may not have capital legally available for the payment
of redemption amounts otherwise due in January 2000 in respect to preferred
stock held by the stockholder, to extend the redemption date of such preferred
stock until at least May 2000.
Consolidation--The consolidated financial statements include the accounts of
Cohesive Technology Solutions, Inc. and its wholly-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk consist of cash
equivalents and accounts receivable. The Company invests its excess cash in
money market accounts and highly liquid government securities. The Company's
accounts receivable are generally derived from sales to customers in the United
States which require information technology and networking services. The
Company maintains reserves for potential credit losses.
Fair Value of Financial Instruments--As of December 31, 1997 and 1998, the
carrying amounts of cash and cash equivalents, accounts receivable and
borrowings under the Company's credit agreements approximate their respective
fair values.
Cash and Cash Equivalents--Cash equivalents are short-term, highly liquid
cash investments with an original maturity of less than 90 days.
F-55
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Restricted Cash--Restricted cash represents cash in escrow related to the
divestiture of the Company's software development group and Internet services
division.
Short-Term Investments--While the Company's practice is to hold securities
to maturity, the Company has classified all securities as available-for-sale
securities, as the sale of such securities may be required prior to maturity to
implement management strategies. The carrying value of securities is adjusted
to fair market value, with unrealized gains and losses, net of deferred taxes,
being excluded from earnings and reported as a separate component of
stockholders' equity. Cost is based on the specific identification method for
purposes of computing realized gains or losses. At December 31, 1997, the
difference between fair value and amortized cost was not significant.
Inventory--Inventory consists primarily of computer hardware held for resale
and spare parts, and is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
Property and Equipment--Property and equipment are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets, which are generally two to five
years.
Intangibles--Intangibles resulting from the acquisition of technology
service businesses are estimated by management to be primarily associated with
the acquired workforce and technological know-how. As a result of the limited
operating history of the entities acquired, the rapid technological changes
occurring in the industry and the intense competition for qualified engineering
professionals, recorded intangibles are amortized on the straight-line basis
over the estimated periods of benefit, generally two to seven years. At
December 31, 1997 and 1998, accumulated amortization was $2,493,000 and
$9,227,000, respectively.
At each balance sheet date, the Company assesses the value of recorded
intangibles for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
Revenue Recognition--Revenue from services is recognized upon performance.
Revenue from hardware and software sales is recognized upon shipment.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Income Taxes--Deferred tax liabilities are recognized for future taxable
amounts and deferred tax assets are recognized for future deductions net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year presentation. Other than the reclassification of
redeemable preferred stock, these reclassifications had no effect on total
stockholders' equity or net income (loss). Redeemable preferred stock has been
reclassified from stockholders' equity to mezzanine equity to comply with SEC
reporting requirements.
F-56
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Recently Issued Accounting Standards--In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which requires an enterprise to report,
by major components and as a single total, the change in its net assets during
the period from nonowner sources. The Company adopted SFAS No. 130 in 1998. The
Company's comprehensive income is the same as its net income (loss).
In 1998, the AICPA issued a Statement of Position (SOP 98-1), which requires
companies to capitalize the costs incurred to develop and install software for
internal use. The Company adopted SOP 98-1 in 1998. Adoption of this statement
did not impact the Company's financial position, results of operations or cash
flows.
2. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Computer and office equipment........................ $1,595,000 $2,877,000
Software............................................. 135,000 968,000
Furniture and fixtures............................... 223,000 389,000
Vehicles............................................. 73,000 91,000
Leasehold improvements............................... 52,000 86,000
---------- ----------
2,078,000 4,411,000
Accumulated depreciation and amortization............ (837,000) (1,663,000)
---------- ----------
Property and equipment, net.......................... $1,241,000 $2,748,000
========== ==========
</TABLE>
During 1998, the Company spent approximately $789,000 to purchase, install
and implement new back office systems software. Of this amount, approximately
$440,000 and $349,000 is payable in 1999 and 2000, respectively.
3. Acquisitions and Divestitures
During the years ended December 31, 1996, 1997 and 1998, the Company made
the following acquisitions:
<TABLE>
<CAPTION>
Total
Acquisition Purchase
Company Date Price
------- ----------- -----------
<S> <C> <C>
Forte Computer Services, Inc........................ 4/2/96 $ 2,020,000
The Leftbank Operations, Inc........................ 4/10/97 1,300,000
R&D Networking, Inc................................. 8/28/97 3,600,000
Computer Lanscapes, Inc............................. 12/19/97 4,770,000
Napier Corporation.................................. 1/28/98 3,500,000
I. Consulting Corporation........................... 3/19/98 717,000
Integrated Office Solutions, Inc.................... 7/1/98 6,000,000
Business Technologies, Inc.......................... 9/18/98 16,731,000
-----------
Total............................................. $38,638,000
===========
</TABLE>
F-57
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
The total purchase prices above consist of (i) nonrefundable cash payments
due on closing of the acquisition (approximately $18.1 million), (ii) 900,000
shares of Convertible Redeemable Series D preferred stock issued to the former
shareholders of Business Technologies, Inc. (valued at $7.7 million) and
(iii) probable amounts to be paid in cash to the former owners of the acquired
companies upon the attainment of certain performance criteria (the "Cash
Earnouts") (approximately $12.8 million). Of the Cash Earnouts, $9.3 million
were allocated to original purchase price as the performance criteria were
considered probable of occurring as of the acquisition date. The remaining of
Cash Earnouts were contingent upon continued employment and were recorded as
Acquisition Related Charges during the employment periods. As of December 31,
1998, no additional amounts are contingent upon continued employment.
During 1996, 1997 and 1998, the Company recognized Acquisition Related
Charges comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Signing and retention bonuses............... $ -- $ 500,000 $1,818,000
Cash earnouts contingent upon continued
employment................................. 964,000 1,417,000 1,696,000
Reorganization expenses (primarily severance
and relocation costs)...................... -- -- 949,000
-------- ---------- ----------
$964,000 $1,917,000 $4,463,000
======== ========== ==========
</TABLE>
As of December 31, 1998, accrued liabilities included $283,000 of unpaid
Acquisition Related Charges that will be paid in 1999.
The acquisitions have been accounted for in accordance with the purchase
method of accounting and the accompanying consolidated financial statements
reflect the purchase price allocated to assets acquired and liabilities assumed
based upon their fair values as of the acquisition date. The $34.5 million
excess of the cash purchase price over the fair value of the net identifiable
assets has been allocated to intangibles. The Company's results of operations
include those of the acquired companies from their respective dates of
acquisition.
On July 25, 1997, the Company sold a portion of its software development
group to an unrelated third party for $40 million. As of December 31, 1997, all
of the proceeds except $4 million were available for operations. The remaining
amount was placed in escrow. During 1998, this entire amount and the related
accrued interest of $124,000 were released from escrow. In connection with this
sale, the vesting of options held by employees of the software development
division were accelerated by one year. This resulted in the Company recognizing
$281,000 in stock compensation expense during fiscal 1997. The Company recorded
a gain of $38 million during 1997 related to this sale.
On November 26, 1997, the Company sold its Internet services division to an
unrelated third party for $6 million. As of December 31, 1997, all of the
proceeds except $1,050,000 were available for operations. The $1,050,000 amount
was placed in escrow at the time of the sale and was recorded as a deferred
gain at December 31, 1997. Of this amount, $942,000 was released to the Company
and recognized as a gain on divestiture during 1998. The remaining $108,000 was
released to the third party purchaser. In connection with
F-58
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
this sale, the vesting of options held by employees of the Internet services
division were accelerated by one year. This resulted in the Company recognizing
$35,000 in stock compensation expense during fiscal 1997. The Company recorded
gains of $3.9 million and $0.9 million during 1997 and 1998, respectively,
related to this sale.
The operating results of the Internet services division have been segregated
from continuing operations and reported as discontinued operations in the
accompanying statement of operations. Revenues for the discontinued operations
were $3,721,000 and $3,805,000 for 1996 and 1997, respectively.
4. Lines of Credit
The Company has a revolving line of credit from a bank that provides for
borrowings up to $15 million through December 31, 1999. Borrowings under the
line are secured by substantially all of the Company's assets and bear interest
at varying rates based upon the bank's prime or LIBOR rate on the date of
borrowing. In addition, the line of credit restricts the payment by the Company
of cash dividends or distributions on its common stock. The agreements require,
among other things, that the Company satisfy certain financial covenants. As of
December 31, 1998, the Company was in compliance with such covenants.
As of December 31, 1997, the Company had two revolving lines of credit from
banks, which provided for borrowings up to $1,000,000 each through June 2,
1998, and July 1, 1998. All outstanding amounts were fully paid during 1998 and
the lines of credit were not renewed.
5. Redeemable Preferred Stock
Preferred Stock
Holders of Series A and B preferred stock are entitled to annual dividends
at the rate of $7 per share when and if declared by the Board of Directors.
Such dividends for Series A and B preferred stock shall be cumulative and shall
accrue on each share of preferred stock from the date of original issuance of
such share. Dividends for Series A and B are payable in preference and priority
to convertible Series C and D preferred stock.
In the event of a liquidation, dissolution or winding up of the Company, the
Series A and B preferred stockholders are entitled to a liquidation preference
of $100 per share plus all accrued but unpaid dividends. Upon payment of the
liquidation preference (aggregating $10,368,000 at December 31, 1998), the
remaining proceeds will be allocated to the convertible Series C and Series D
preferred stockholders.
The Company may redeem Series A and B preferred stock at any time.
Redemption is mandatory (1) on January 31, 2000 or (2) in the event of the
closing of a firm underwritten offering meeting certain criteria, if earlier.
The redemption price shall be equal to $100 per share plus all accrued but
unpaid dividends.
The holders of Series A and B preferred stock are not entitled to vote on
any matter to be voted on by the stockholders of the Company, except
liquidation, dissolution, winding up, consolidation or merger of the Company,
or sale of all or substantially all of the Company's assets, requires approval
of two-thirds of the Series A and B preferred stock voting as a single class.
Series A and B preferred stock is not convertible into common stock.
F-59
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Convertible Series D Preferred Stock
Holders of redeemable convertible Series D preferred stock have the right to
require redemption of the Series D shares at a price of $10 per share plus all
declared but unpaid dividends. As of September 18, 1999, 2000 and 2001, the
redemption rights will apply to 300,000, 600,000 and 900,000 Series D shares,
respectively. The redemption rights expire as to all shares that have not been
redeemed as of September 19, 2002. The carrying value of the Series D preferred
stock is being accreted to its redemption price over the redemption period.
In the event of a liquidation, dissolution or winding up of the Company,
Series D preferred stockholders are entitled to a liquidation preference of $10
per share plus any declared and unpaid dividends. Upon payment of the Series D
liquidation preference (aggregating $9 million at December 31, 1998), the
remaining proceeds will be allocated to the preferred Series C, preferred
Series D and common stockholders on an as converted basis.
Each share of Series D preferred stock is convertible into one share of
common stock at the option of the holder, subject to adjustment for certain
dilutive issuances. Conversion of the Series D preferred stock is mandatory in
the event of the closing of a firm underwritten public offering under the
Securities Act of 1993.
The holders of Series D preferred stock are entitled to one vote for each
share of common stock into which the preferred stock is convertible.
6. Stockholders' Equity
Convertible Series C Preferred Stock
Holders of convertible Series C preferred stock are entitled to
noncumulative annual dividends of $0.50 per share, when and if declared, and
are payable in preference to any dividends on Series D preferred stock or
common stock.
In the event of a liquidation, dissolution or winding up of the Company,
Series C preferred stockholders are entitled to a liquidation preference of $5
per share plus any declared and unpaid dividends. Upon payment of the
liquidation preference (aggregating $4,000,000 at December 31, 1998), the
remaining proceeds will be allocated to the Series D preferred stockholders.
Each share of Series C preferred stock is convertible into one share of
common stock at the option of the holder, subject to adjustment for certain
dilutive issuances. Conversion of the Series C preferred stock is mandatory in
the event of the closing of a firm underwritten public offering under the
Securities Act of 1933, at a price of at least $5 per share and at an aggregate
gross offering price of not less than $10,000,000, or upon the consent of the
stockholders holding a majority of the outstanding Series C preferred stock.
The holders of Series C preferred stock are entitled to one vote for each
share of common stock into which the preferred stock is convertible.
Stock Option Plans
The Company has stock option plans (the "Plans") under which officers,
employees, directors and consultants may be granted options to purchase shares
of the Company's common stock. At
F-60
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
December 31, 1998, 5,560,000 shares of the Company's common stock have been
reserved for issuance under the Plans. The Plans permit incentive and
nonqualified stock options to be granted at an exercise price not less than the
fair market value on the date of grant with terms of up to ten years. Options
generally vest over a four-year period.
A summary of option activity under the Plans is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balances, January 1, 1996 (192,675 shares
exercisable at a weighted average price of $0.10).. 1,523,100 $0.12
Granted........................................... 933,500 0.32
Exercised......................................... (129,850) 0.13
Canceled.......................................... (328,925) 0.17
---------
Outstanding, December 31, 1996 (405,750 shares
exercisable at a weighted average price of $0.10) 1,997,825 0.21
Granted........................................... 1,409,850 1.14
Exercised......................................... (770,038) 0.18
Canceled.......................................... (567,637) 0.49
---------
Outstanding, December 31, 1997 (294,625 shares
exercisable at a weighted average price of $0.20).. 2,070,000 0.77
Granted........................................... 2,769,333 2.58
Exercised......................................... (632,850) 0.34
Canceled.......................................... (668,595) 1.82
---------
Outstanding, December 31, 1998...................... 3,537,888 $2.07
=========
</TABLE>
Additional information regarding options outstanding as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Prices
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.11............ 237,500 6.6 $0.10 181,250 $0.10
0.35 - 1.00............ 502,950 7.8 0.55 205,550 0.48
1.75 - 2.00............ 1,242,923 9.0 1.90 136,125 1.77
3.00.................... 1,554,515 9.6 3.00 -- --
--------- -------
$0.10 - $3.00............ 3,537,888 8.9 $2.07 522,925 $0.69
========= =======
</TABLE>
At December 31, 1998, 714,443 shares were available for future grants under
the Plans.
During 1998, in connection with the resignation of certain officers and
employees, the Company accelerated the vesting of options to purchase 244,000
shares of the Company's common stock. The Company recorded an associated
$590,000 charge to compensation expense.
F-61
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) had the Company adopted the fair
value method since the Company's inception. Under SFAS No. 123, the fair value
of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly affect the
calculated values.
The Company's calculations were made using the minimum value method with the
following weighted average assumptions: expected life, one year following
vesting; risk free interest rate of 6%; and no dividends during the expected
term. The Company's calculations are based on a multiple award valuation
approach, and forfeitures are recognized as they occur. If the computed minimum
values of the Company's stock-based awards to employees had been amortized to
expense over the vesting period of the awards as specified under SFAS No. 123,
net income (loss) available to common stockholders would have been
$(5,226,000), $18,065,000 and $(10,562,000) in 1996, 1997 and 1998,
respectively. The estimated weighted-average minimum value per option as of the
grant date for the awards granted for the years ended December 31, 1996, 1997
and 1998 were $0.06, $0.24 and $0.47, respectively.
7. Income Taxes
The provision for (benefit from) income taxes on continuing operations
consists of:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal.............................. $ -- $ 9,124,000 $(2,513,000)
State................................ -- 2,326,000 (42,000)
----------- ----------- -----------
Total current income taxes............. -- 11,450,000 (2,555,000)
Deferred:
Federal.............................. 1,322,000 746,000 786,000
State................................ 125,000 48,000 291,000
----------- ----------- -----------
Total deferred income taxes............ 1,447,000 794,000 1,077,000
Valuation allowance.................... (1,447,000) (794,000) (1,077,000)
----------- ----------- -----------
Provision for (benefit from) income
taxes................................. $ -- $11,450,000 $(2,555,000)
=========== =========== ===========
</TABLE>
F-62
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
Deferred income tax assets are comprised of:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deductible intangibles................................ $ 833,000 $ 1,968,000
Net operating losses.................................. -- 139,000
Deferred gain......................................... 461,000 113,000
Other................................................. 150,000 301,000
----------- -----------
Total................................................. 1,444,000 2,521,000
Valuation allowance................................... (1,444,000) (2,521,000)
----------- -----------
Total net deferred income tax assets.................. $ -- $ --
=========== ===========
</TABLE>
The Company has net operating loss carryforwards of approximately $2.3
million for state income tax purposes, which will expire in 2003. The Company
has deferred tax assets of approximately $1,444,000 and $2,521,000 as of
December 31, 1997 and 1998, respectively, resulting primarily from basis
differences in intangibles and other items. However, because realization of
these benefits depends on the generation of future taxable income, which is
subject to uncertainty, the Company has placed a full valuation allowance
against the deferred tax assets.
The Tax Reform Act of 1986 and California Conformity Act of 1987 impose
substantial restrictions on the utilization of net operating losses in the
event of an "ownership change" as defined in the Internal Revenue Code. Any
such ownership change could significantly limit the Company's ability to
utilize its tax carryforwards.
8. Employee Benefit Plan
The Company has a qualified employee salary savings plan (401(k) plan). The
401(k) plan allows the Company to make discretionary contributions of a certain
percentage of employees' contributions to the 401(k) plan. The Company made no
contributions during 1996 and 1997 and the Company made a $12,000 contribution
during 1998.
9. Commitments and Contingencies
The Company leases its facilities under various operating leases that extend
through February 2003. Rental expense for the Company's facilities was
$356,000, $530,000 and $987,000, for 1996, 1997 and 1998, respectively.
Future minimum operating lease payments at December 31, 1998 are
approximately as follows:
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999........................................................... $ 802,000
2000........................................................... 595,000
2001........................................................... 428,000
2002........................................................... 67,000
2003........................................................... 10,000
----------
Total minimum lease payments................................... $1,902,000
==========
</TABLE>
F-63
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1996, 1997 and 1998
The Company is party to various litigation arising in the normal course of
its operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on the Company's
financial position or results of operations.
10. Subsequent Events
On April 21, 1999, the Company entered into a definitive agreement to be
acquired by Exodus Communications, Inc. (Exodus) for cash and common stock
valued at approximately $100 million. The acquisition is expected to close in
mid-1999, subject to regulatory review and approval. Upon closing of the
acquisition, the Company will exchange all outstanding preferred and common
stock for cash and shares of Exodus common stock at that date.
F-64
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998* 1999
------------ -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,580,000 $ 1,558,000
Accounts receivable, net of allowance for doubtful
accounts of $962,000 and $1,098,000, respectively.... 7,561,000 10,300,000
Income tax receivable................................. 1,984,000 1,953,000
Inventory............................................. 422,000 129,000
Prepaid expenses...................................... 758,000 568,000
----------- -----------
Total current assets................................ 14,305,000 14,508,000
Property and equipment, net............................. 2,748,000 2,790,000
Other assets............................................ 60,000 147,000
Intangibles, net........................................ 26,454,000 22,179,000
----------- -----------
Total assets........................................ $43,567,000 $39,624,000
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Revolving line of credit and current portion of long-
term obligations..................................... $ 7,437,000 $ 9,680,000
Accounts payable...................................... 2,316,000 3,006,000
Amounts due under acquisition agreements.............. 6,896,000 4,371,000
Accruals and other current liabilities................ 3,547,000 4,057,000
----------- -----------
Total current liabilities........................... 20,196,000 21,114,000
Long-term obligations................................... 349,000 141,000
----------- -----------
Total liabilities................................... 20,545,000 21,255,000
----------- -----------
Commitments and contingencies........................... -- --
Redeemable preferred stock.............................. 18,274,000 18,919,000
----------- -----------
Stockholders' equity:
Convertible preferred stock........................... 4,000,000 4,000,000
Common stock.......................................... 139,000 140,000
Additional paid-in capital............................ 3,364,000 3,448,000
Accumulated deficit................................... (2,755,000) (8,138,000)
----------- -----------
Total stockholders' equity (deficit)................ 4,748,000 (550,000)
----------- -----------
Total liabilities, redeemable preferred stock and
stockholders' equity (deficit)..................... $43,567,000 $39,624,000
=========== ===========
</TABLE>
- --------
* Derived from audited consolidated financial statements included elsewhere in
this registration statement.
See notes to consolidated condensed financial statements.
F-65
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Revenues:
Service revenues.................................. $10,762,000 $19,124,000
Product revenues.................................. 10,470,000 6,965,000
----------- -----------
Total revenues.................................. 21,232,000 26,089,000
Cost of revenues:
Costs of service revenues......................... 5,879,000 12,583,000
Costs of product revenues......................... 8,927,000 6,031,000
----------- -----------
Total cost of revenues.......................... 14,806,000 18,614,000
----------- -----------
Gross profit........................................ 6,426,000 7,475,000
----------- -----------
Operating expenses:
Sales and marketing............................... 2,712,000 3,064,000
General and administrative........................ 4,307,000 4,349,000
Amortization of intangibles....................... 2,710,000 4,300,000
Acquisition related charges....................... 2,425,000 --
----------- -----------
Total operating expenses........................ 12,154,000 11,713,000
----------- -----------
Operating loss...................................... (5,728,000) (4,238,000)
----------- -----------
Interest income (expense), net...................... 418,000 (495,000)
----------- -----------
Loss before income taxes............................ (5,310,000) (4,733,000)
Benefit from income taxes........................... 413,000 --
----------- -----------
Net loss............................................ (4,897,000) (4,733,000)
Dividends and accretion on redeemable preferred
stock.............................................. (311,000) (645,000)
----------- -----------
Net loss applicable to common stockholders.......... $(5,208,000) $(5,378,000)
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-66
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June
30,
------------------------
1998 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(4,897,000) $(4,733,000)
Adjustments to reconcile net income to net cash used
by operating activities:
Loss on disposal of properties and equipment....... -- 52,000
Depreciation and amortization...................... 3,026,000 4,715,000
Stock compensation expense......................... -- 13,000
Interest income on restricted cash................. (40,000) --
Changes in assets and liabilities, net of effect of
acquisitions:
Accounts receivable............................... (1,992,000) (2,739,000)
Income taxes payable, net......................... (1,857,000) 31,000
Inventory......................................... 116,000 293,000
Prepaid expenses.................................. 7,000 190,000
Other assets...................................... 223,000 (87,000)
Accounts payables................................. 1,734,000 685,000
Amounts due under acquisition agreements.......... 2,138,000 (1,080,000)
Accruals and other current liabilities............ (2,522,000) 510,00
----------- -----------
Net cash used by operating activities............ (4,064,000) (2,150,000)
----------- -----------
Cash flows from investing activities:
Sales of short-term investments.................... 5,346,000 --
Acquisitions, net of cash received................. (1,538,000) --
Repayment of acquisition obligations............... (900,000) (1,470,000)
Purchase of property and equipment................. (975,000) (509,000)
Proceeds from divestitures......................... 2,000,000 --
----------- -----------
Net cash provided by (used for) investing
activities...................................... 3,933,000 (1,979,000)
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit........................ -- 2,900,000
Repayment on line of credit......................... (503,000) (597,000)
Repayments of long-term obligations................. -- (268,000)
Issuance of common stock............................ 132,000 72,000
----------- -----------
Net cash (used for) provided by financing
activities...................................... (371,000) 2,107,000
----------- -----------
Net decrease in cash................................. (502,000) (2,022,000)
Cash and cash equivalents--beginning of period....... 3,217,000 3,580,000
----------- -----------
Cash and cash equivalents--end of period............. $ 2,715,000 $ 1,558,000
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-67
<PAGE>
COHESIVE TECHNOLOGY SOLUTIONS, INC. AND SUBSIDIARIES
(Formerly Cohesive Network Systems, Inc.)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Cohesive Technology Solutions, Inc. (the "Company") and do not
include all of the disclosures normally required by generally accepted
accounting principles. The unaudited financial information has been prepared in
accordance with the Company's customary accounting policies and practices. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments considered necessary for a fair presentation of results of
operations for the periods, have been included. Results of operations for the
interim periods are not necessarily indicative of results for the full year.
(2) Inventory
Inventory consists primarily of computer hardware held for sale and spare
parts, and is stated at the lower of cost or market. Cost is determined using
the first-in, first-out method.
(3) Litigation
The Company is party to various litigation arising in the normal course of
its operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on the Company's
financial position or results of operations.
(4) Subsequent Events
On July 27, 1999, the Company was acquired by Exodus Communications, Inc.
("Exodus") for a total purchase price valued at approximately $112,000,000. The
Company's shareholders received 1,600,796 shares of Exodus Common Stock and
approximately $50,000,000 in cash. In addition, option holders of Cohesive
common stock received a total of 408,712 shares of Exodus Common Stock in the
form of Exodus stock options.
F-68
<PAGE>
EXODUS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the combined results of operations for future periods or the results of
operations that actually would have been realized had Exodus and Cohesive been
a combined company during the specified periods. The unaudited pro forma
combined condensed financial statements, including the related notes, are
qualified in their entirety by reference to, and should be read in conjunction
with, the supplemental consolidated financial statements and related notes
thereto of Exodus and the historical consolidated financial statements and
related notes thereto of Cohesive, included elsewhere in this registration
statement.
The following unaudited pro forma combined condensed financial statements
give effect to the merger between Exodus and Cohesive using the purchase method
of accounting. The pro forma combined condensed financial statements are based
on the audited and unaudited supplemental consolidated financial statements and
related notes of Exodus and the audited and unaudited historical consolidated
financial statements and related notes of Cohesive. The pro forma adjustments
are based on management's estimates of the value of the tangible and intangible
assets acquired. In addition, management is continuing to assess its
integration plans, which may result in further costs.
The pro forma combined condensed statements of operations assume the merger
took place as of January 1, 1998 and combine Exodus' audited supplemental
consolidated statement of operations for the year ended December 31, 1998 and
unaudited supplemental consolidated statement of operations for the nine months
ended September 30, 1999, with Cohesive's audited historical statement of
operations for the year ended December 31, 1998 and unaudited historical
statement of operations for the seven-month period ended July 27, 1999,
respectively.
A pro forma condensed balance sheet as of September 30, 1999 has not been
presented since the merger has already been reflected in such balance sheet.
F-69
<PAGE>
EXODUS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------
Supplemental Historical Pro forma
------------ ---------- -----------------------
Exodus Cohesive Adjustments Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $ 52,745 $ 41,708 $ $ 94,453
Costs and expenses:
Cost of revenues............. 61,578 28,324 89,902
Marketing and sales.......... 29,034 5,672 34,706
General and administrative... 16,058 10,219 26,277
Product development.......... 3,507 -- 3,507
Amortization of goodwill and
other intangible assets..... 141 6,734 (6,734)(a)
14,549 (a) 14,690
Acquisition related charges.. -- 4,463 4,463
-------- -------- -------- --------
Total costs and expenses... 110,318 55,412 7,815 173,545
-------- -------- -------- --------
Operating loss............. (57,573) (13,704) (7,815) (79,092)
Interest (expense) income ,
net........................... (9,743) 352 (2,510)(b) (11,901)
-------- -------- -------- --------
Loss from continuing
operations before taxes... (67,316) (13,352) (10,325) (90,993)
Income tax benefit............. -- 2,555 2,555
-------- -------- -------- --------
Loss from continuing
operations................ (67,316) (10,797) (10,325) (88,438)
Cumulative dividends and
accretion on redeemable
preferred stock............... (2,014) (800) 800 (c) (2,014)
-------- -------- -------- --------
Loss from continuing
operations attributable to
common stockholders....... $(69,330) $(11,597) $ (9,525) $(90,452)
======== ======== ======== ========
Basic and diluted loss per
share from continuing
operations.................... $ (0.55) $ (0.71)
======== ========
Shares used to compute basic
and diluted loss per share
from continuing operations.... 125,808 1,600 (d) 127,408
======== ======== ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-70
<PAGE>
EXODUS COMMUNICATIONS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
----------------------------------------------
Supplemental Historical Pro forma
------------ ---------- ----------------------
Exodus Cohesive Adjustments Combined
------------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues....................... $140,754 $29,191 $ $169,945
Costs and expenses:
Cost of revenues............. 118,827 20,896 139,723
Marketing and sales.......... 42,473 3,594 46,067
General and administrative... 25,548 5,223 30,771
Product development.......... 5,641 -- 5,641
Amortization of goodwill and
other intangible assets..... 4,674 4,994 (4,994)(a)
8,486 (a) 13,160
Restructuring costs.......... 923 -- 923
-------- ------- ------- --------
Total costs and expenses... 198,086 34,707 3,492 236,285
-------- ------- ------- --------
Operating loss............. (57,332) (5,516) (3,492) (66,340)
Interest expense, net........ (20,044) (565) (1,464)(b) (22,073)
-------- ------- ------- --------
Loss from continuing
operations before taxes... (77,376) (6,081) (4,956) (88,413)
Income tax benefit........... -- 450 450
-------- ------- ------- --------
Loss from continuing
operations................ (77,376) (5,631) (4,956) (87,963)
Cumulative dividends and
accretion on redeemable
preferred stock............... -- (738) 738 (c) --
-------- ------- ------- --------
Loss from continuing
operations attributable to
common stockholders....... $(77,376) $(6,369) $(4,218) $(87,963)
======== ======= ======= ========
Basic and diluted loss per
share from continuing
operations.................... $ (0.47) $ (0.52)
======== ========
Shares used to compute basic
and diluted loss per share
from continuing operations.... 165,974 1,600 (d) 167,574
======== ======= ========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
F-71
<PAGE>
EXODUS COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
On July 27, 1999, Exodus acquired all of the outstanding capital stock of
Cohesive in exchange for approximately $50 million in cash and 1,600,796 shares
of Exodus common stock. In addition, Exodus issued options to purchase a total
of 408,712 shares of Exodus common stock in exchange for all issued and
outstanding Cohesive options.
Under purchase accounting, the total purchase price was allocated to
Cohesive's assets and liabilities based on their relative fair values. The
amounts and components of the purchase price along with the allocation of the
purchase price to assets acquired were as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................... $ 46,500
Common stock....................................................... 52,000
Fair value of Cohesive stock options assumed....................... 9,300
Transaction costs.................................................. 3,700
--------
Total purchase price............................................. $111,500
========
Book value of net tangible assets of Cohesive...................... $ 3,500
Workforce in place................................................. 6,300
Customer lists..................................................... 32,300
Goodwill........................................................... 69,400
--------
Net assets acquired.............................................. $111,500
========
</TABLE>
The pro forma combined condensed statements of operations give effect to the
merger as if it had occurred at January 1, 1998. Cohesive's historical
statement of operations data for the nine months ended September 30, 1999
reflects its operating activity for the period January 1, 1999 through July 27,
1999, as Exodus acquired Cohesive on July 27, 1999.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statements of operations:
(a) Adjustment to remove the amortization of historical goodwill and
other intangible assets previously recorded by Cohesive and to record the
amortization of goodwill and intangible assets resulting from the
allocation of the Cohesive purchase price. The pro forma adjustment assumes
goodwill and other intangible assets will be amortized on a straight-line
basis over the following estimated lives:
<TABLE>
<S> <C>
Workforce in place................................................. 5 years
Customer lists..................................................... 7 years
Goodwill........................................................... 8 years
</TABLE>
(b) To eliminate interest income earned by Exodus on cash paid at the
date of the merger assuming a 5% interest rate which approximates the
Company's actual rate of return during the periods presented.
(c) To remove Cohesive's historical cumulative dividends and accretion
on redeemable preferred stock which are settled in cash at the date of the
merger.
(d) To reflect the shares issued as consideration for the merger.
F-72
<PAGE>
EXODUS COMMUNICATIONS, INC.
SUPPLEMENTAL SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End of
Classification of Year Additions Deductions Year
- -------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996....... $-- $ 15 $ -- $ 15
Year ended December 31, 1997....... 15 742 (66) 691
Year ended December 31, 1998....... 691 1,410 (280) 1,821
</TABLE>
S-1
<PAGE>
EXODUS COMMUNICATIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning at End of
Classification of Year Additions Deductions Year
- -------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1996....... $-- $ 15 $ -- $ 15
Year ended December 31, 1997....... 15 742 (66) 691
Year ended December 31, 1998....... 691 1,410 (280) 1,821
</TABLE>
S-2
<PAGE>
$375,000,000
and
(Euro)125,000,000
EXODUS COMMUNICATIONS, INC.
Exchange Offer For All Outstanding
10 3/4% Senior Notes Due 2009
