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Filed Pursuant to Rule 424(b)(3)
PROSPECTUS Registration No. 333-34408
EXODUS COMMUNICATIONS, INC.
Up to 393,368 Shares of Common Stock
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The 393,368 shares of common stock covered by this prospectus were
previously issued by Exodus in connection with its acquisition of Key Labs,
Inc. These shares may be offered and sold over time by the stockholders named
in this prospectus under the heading "Selling Stockholders," by their pledgees
or donees, or by other transferees that receive the ordinary shares in
transfers other than public sales.
The selling stockholders may sell their Exodus shares in the open market at
prevailing market prices, or in private transactions at negotiated prices. They
may sell the shares directly, or may sell them through underwriters, brokers or
dealers. Underwriters, brokers, or dealers may receive discounts, concessions
or commissions from the selling stockholders or from the purchaser, and this
compensation might be in excess of the compensation customary in the type of
transaction involved. See "Plan of Distribution."
We will not receive any of the proceeds from the sale of these shares.
Our common stock currently trades on the Nasdaq National Market under the
symbol "EXDS." The last reported sale price on April 28, 2000 was $88.4375 per
share.
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Investing in our common stock involves a high degree of risk. Please
carefully consider the "Risk Factors" beginning on page 3 of this prospectus.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities 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 May 2, 2000
In connection with this offering, no person is authorized to give any
information or to make any representations not contained in this prospectus. If
information is given or representations are made, you may not rely on that
information or representations as having been authorized by us. This prospectus
is neither an offer to sell nor a solicitation of an offer to buy any
securities other than those registered by this prospectus, nor is it an offer
to sell or a solicitation of an offer to buy securities where an offer or
solicitation would be unlawful. You may not imply from the delivery of this
prospectus, nor from any sale made under this prospectus, that our affairs are
unchanged since the date of this prospectus or that the information contained
in this prospectus is correct as of any time after the date of this prospectus.
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TABLE OF CONTENTS
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<S> <C> <C> <C>
Summary........................... 1 Plan of Distribution................. 14
Recent Events..................... 2 Legal Matters........................ 15
Risk Factors...................... 3 Experts.............................. 15
Use of Proceeds................... 12 Where You Can Find More Information.. 15
Selling Stockholders.............. 13
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This prospectus includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this prospectus, the words "anticipate,"
"believe," "estimate," "will," "may," "intend" and "expect" and similar
expressions identify certain of such forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in such forward-
looking statements are reasonable, we can give no assurance that such plans,
intentions or expectations will be achieved. Actual results, performance or
achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained in this prospectus.
Important factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this prospectus, including under
the heading "Risk Factors". These factors are not intended to represent a
complete list of the general or specific factors that may affect us. It should
be recognized that other factors, including general economic factors and
business strategies, may be significant, presently or in the future, and the
factors set forth herein may affect us to a greater extent than indicated. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements set
forth herein. Except as required by law, we undertake no obligation to update
any forward-looking statement, whether as a result of new information, future
events or otherwise.
Unless the context otherwise requires, the terms "we," "our," "us," "the
company" and "Exodus" refer to Exodus Communications, Inc., a Delaware
corporation.
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SUMMARY
Exodus Communications is a leading provider of complex Internet hosting for
enterprises with mission-critical Internet operations. We offer sophisticated
system and network management solutions, along with technology professional
services to provide optimal performance for customers' Web sites. Exodus
delivers its services from geographically distributed, state-of-the-art
Internet Data Centers that are connected through a high-performance dedicated
and redundant backbone network. Our tailored solutions are designed to
integrate with existing enterprise systems architectures and to enable
customers to outsource the monitoring, administration and optimization of their
equipment, applications and overall Internet operations. As of December 31,
1999, we had over 2,200 customers under contract and managed over 27,000
customer servers worldwide. Our customers represent a variety of industries,
ranging from Internet leaders, to major enterprise customers. Yahoo!, USA
TODAY.com, weather.com , priceline.com, British Airways and Nordstrom are just
a few of the growing number of companies selecting Exodus as their complex Web
hosting provider.
Internet usage is growing rapidly and businesses are increasing the breadth
and depth of their Internet product and services offerings. These Internet
operations are mission-critical for Internet-centric businesses and are
becoming increasingly mission-critical for many enterprises. In order to ensure
the quality, reliability, availability and redundancy of these mission-critical
Internet operations, corporate IT departments must make substantial investments
in facilities, personnel, equipment and networks which must be continuously
upgraded to reflect changing technologies and must rapidly scale as the
enterprise grows. This recurring and significant investment is an inefficient
use of resources and, as a result, a significant need exists for outsourcing
arrangements that can increase performance, provide continuous operation of
Internet solutions and reduce Internet operating expenses. We believe a
significant opportunity exists for a highly focused company to provide a
combination of server hosting, Internet connectivity and managed and
professional services that will enable reliable, high performance for 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'
mission-critical Internet operations. In addition, we integrate best-of-breed
technologies from leading vendors with our industry expertise and proprietary
technology.
Our objective is to become the leading provider of Internet system and
network management solutions for enterprises with mission-critical Internet
operations. To achieve this objective, we intend to:
. Position Exodus as the leader in this market
. Focus on enhancing systems and network management, Internet technology
services and professional services
. Accelerate our global expansion
. Leverage our expertise to address new market opportunities
. Continue to establish strategic relationships for distribution and
technology
We began offering server hosting and Internet connectivity services in late
1995, opened our first dedicated Internet Data Center in August 1996, and
introduced Managed Services in 1997 and Professional Services in 1998. We
currently operate Internet Data Centers located in nine metropolitan areas in
the United States: Atlanta, Austin, Boston, Chicago, Los Angeles, New York,
Seattle, Silicon Valley and
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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, and the
second in Tokyo, Japan in December 1999.
We expanded our solutions and services by acquiring providers of Internet
technologies--Arca Systems, American Information Systems, Cohesive Technology
Solutions, Service Metrics, Exodus Communications KK (formerly Global Online
Japan, Inc.) (sinjuku-ku), and KeyLabs, Inc. In October 1998, we purchased Arca
Systems, a provider of advanced network and system security consulting
services. In February 1999, to accelerate our launch into the Chicago
metropolitan area, we acquired American Information Systems, a regional
provider of co-location, Web hosting and professional services. In July 1999,
we acquired Cohesive Technology Solutions, a technology professional services
organization with expertise in networking, Web applications and technology
solutions. In November 1999, we acquired Service Metrics, an Internet
monitoring applications and services company. In December 1999, we acquired
Exodus Communications KK, an Internet solutions provider, through which we
offer complex Web hosting and a range of Managed and Professional Services in
the Japanese market. Finally, in February 2000, we acquired KeyLabs, Inc., a
provider of e-business testing services.
Recent Events
First Quarter Financial Results. On April 20, 2000, we announced our
financial results for the first quarter of 2000. Revenues for the quarter ended
March 31, 2000 were $134.1 million compared to $30.1 million in the same
quarter in 1999. Net loss for the quarter ended March 31, 2000 was $58.4
million, or $0.32 per share, compared to $23.2 million, or $0.14 per share, for
the same quarter in 1999. EBITDA for the quarter ended March 31, 2000 was $1.7
million compared to a loss of $11.8 million for the same quarter in 1999.
Investment in Mirror Image. In March 2000, we entered into a definitive
agreement to make a $637.5 million investment in the common stock of Mirror
Image Internet, Inc. ("Mirror Image"), a provider of content distribution
services. $75.0 million of the investment will be paid in cash, with the
balance of the consideration consisting of 3,758,268 shares of our common
stock. We agreed to register the resale of those shares. This agreement is
expected to close by May 2000. We also entered into a commercial agreement to
offer Mirror Image's content distribution services and to deploy Mirror Image
Content Access Point architecture throughout our Internet Data Center network.
Acquisition of KeyLabs. On February 10, 2000, we acquired KeyLabs, a leading
Internet provider of stress and load testing services, based in Utah. As a
result, we issued approximately 494,785 shares of our common stock and common
stock subject to options, in exchange for all of the outstanding shares of
KeyLabs common stock and common stock subject to outstanding options,
representing an aggregate consideration of approximately $43,108,143 as of the
signing of the definitive agreement in January, 2000. The transaction was
accounted for as a purchase.
Our principal executive offices are located at 2831 Mission College Blvd.,
Santa Clara, California 95054. Our telephone number is (408) 346-2200.
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. You should carefully consider these risk factors, together
with all of the other information contained or incorporated by reference in
this prospectus, before you decide to purchase shares of our common stock.
These factors could cause our future results to differ materially from those
expressed or implied in forward-looking statements made by us. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem
immaterial may also harm our business. The trading price of our common stock
could decline due to any of these risks, and you may lose all or part of your
investment.
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
$228.2 million at December 31, 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.
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;
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. the timing of expansion of existing Internet Data Centers and completion
of new Internet Data Centers, including obtaining necessary permits and
adequate public utility power;
. the introduction by third parties of new Internet and networking
technologies;
. changes in our pricing policies and those of our competitors;
. fluctuations in bandwidth used by customers; and
. licenses and permits required to construct facilities, deploy networking
infrastructure or operate in the United States and foreign countries.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to telecommunications, depreciation,
substantial interest expenses, real estate and personnel. Therefore, our
results of operations are particularly sensitive to fluctuations in revenues.
Furthermore, if we were to become unable to continue leveraging third-party
products in our services offerings, our product development costs could
increase significantly. Finally, many of our customers are emerging growth
companies which may have negative cash flows, and there is the possibility that
we will not be able to collect receivables on a timely basis.
Our rapid expansion produces a significant strain on our business and requires
us to expend substantial resources
The expansion of our network through the opening of additional Internet Data
Centers in geographically diverse locations is one of our key strategies. We
currently have 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 1999, we opened our first
Internet Data Center outside of the United States in the London metropolitan
area. In December 1999, we acquired GOL, 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
circuits and equipment and Internet Data Center facilities, and establish
additional interconnections with Internet service providers. To manage this
expansion effectively, we must continue to improve our operational and
financial systems and expand, train and manage our employee base. Our inability
to establish additional Internet Data Centers or effectively manage our
expansion would have a material adverse effect upon our business.
We expect to expend substantial resources for leases and/or the purchase of
real estate, significant improvements of facilities, purchase of complementary
businesses, assets and equipment, implementation of multiple telecommunications
connections and hiring of network, administrative, customer support and sales
and marketing personnel with the establishment of each new Internet Data
Center. Moreover, we expect to make additional significant investments in sales
and marketing and the development of new services as part of our expansion
strategy. The failure to generate sufficient cash flows or to raise sufficient
funds may require us to delay or abandon some or all of our development and
expansion plans or otherwise forego market opportunities, making it difficult
for us to generate additional revenue and to respond to competitive pressures.
In general, it takes us at least six months to select the appropriate
location for a new Internet Data Center, construct the necessary facilities,
install equipment and telecommunications infrastructure and hire operations and
sales personnel. Expenditures commence well before the Internet Data Center
opens, and it takes an extended period for us to approach break-even capacity
utilization. As a result, we expect that individual Internet Data Centers will
experience losses for in excess of one year from the time they are 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.
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We compete with much larger companies and there are few barriers to entry, and
if we cannot compete effectively, we will lose business
Our market is intensely competitive. There are few substantial barriers to
entry, and we expect to face additional competition from existing competitors
and new market entrants in the future. Many companies have announced that they
intend to begin providing and/or greatly expand their service offerings that
are competitive with our services. The principal competitive factors in this
market include:
. the ability to deliver services when requested by the customer;
. Internet system engineering and other expertise;
. customer service;
. network capability, reliability, quality of service and scalability;
. the variety of services offered;
. access to network resources, including circuits, equipment and
interconnection capacity to other networks;
. broad geographic presence;
. price;
. the ability to maintain and expand distribution channels;
. brand name;
. the timing of introductions of new services;
. network security; and
. financial resources.
There can be no assurance that we will have the resources or expertise to
compete successfully in the future. Our current and potential competitors in
the market include:
. providers of server hosting services;
. national, foreign and regional ISPs;
. global, regional and local telecommunications companies and Regional Bell
Operating Companies;
. IT outsourcing firms; and
. other technology services and products companies.
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.
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Our market is new and our services may not be generally accepted by enterprises
looking to outsource their mission-critical Internet operations, which could
harm our operating results
The market for Internet system and network management solutions has only
recently begun to develop, is evolving rapidly and is characterized by an
increasing number of market entrants. This market may not prove to be viable
or, if it becomes viable, may not continue to grow. We currently incur costs
greater than our revenues. If we cannot retain or grow our customer base, we
will not be able to increase our sales and revenues or create economics of
scale to offset our fixed and operating costs. Our future growth depends on the
willingness of enterprises to outsource the system and network management of
their mission-critical Internet operations and our ability to market our
services in a cost-effective manner to a sufficiently large number of
customers. If this market fails to develop, or develops more slowly than
expected, or if our services do not achieve market acceptance, our business
would be adversely affected. In addition, in order to be successful we must be
able to differentiate ourselves from our competition through our service
offerings and delivery.
Our substantial leverage and debt service obligations adversely affect our cash
flow
We have substantial amounts of outstanding indebtedness, primarily from our
10 % senior notes, 4 % convertible subordinated notes, 11 % senior notes, and
our 5% convertible subordinated notes. There is the possibility that we may be
unable to generate cash sufficient to pay the principal of, interest on and
other amounts due in respect of, our debt when due. As of December 31, 1999, we
had debt of approximately $1.6 billion. We also have the right to issue
additional 10 % senior notes on or prior to December 15, 2000 in an aggregate
principal amount not to exceed $100.0 million. In addition, we expect to add
additional equipment loans and lease lines to finance capital expenditures for
our Internet Data Centers and to obtain additional long term debt, working
capital lines of credit and lease lines. We cannot be certain that any
financing arrangements will be available.
Our substantial leverage could have significant negative consequences,
including:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing;
. requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
. limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
. placing us at a possible competitive disadvantage compared to less
leveraged competitors and competitors that have better access to capital
resources.
We are subject to restrictive covenants in our note indentures that limit our
flexibility in managing our business
Our senior notes and convertible subordinated notes contain various
restrictions on our ability to incur debt, pay dividends or make other
restricted payments, sell assets, enter into affiliate transactions and take
other actions. Furthermore, our existing financing arrangements are, and future
financing arrangements are likely to be, secured by substantially all of our
assets. The existing financing arrangements require, and future financing
arrangements are likely to require, that we maintain specific financial ratios
and comply with covenants restricting our ability to incur debt, pay dividends
or make other restricted payments, sell assets, enter into affiliate
transactions or take other actions.
In addition, a number of instruments evidencing our debt restrict the manner
in which the funds raised in our debt financings and debt incurred in the
future may be used.
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We must manage growth effectively by expanding operating and financial
procedures, controls and systems or our business will be harmed
We are experiencing, and expect to continue experiencing, rapid growth with
respect to the building of our Internet Data Centers and network
infrastructure, acquisitions of assets and companies, expansion of our service
offerings, geographic expansion, expansion of our customer base and increases
in the number of employees. This growth has placed, and we expect it to
continue to place, a significant strain on our financial, management,
operational and other resources, including our ability to ensure customer
satisfaction. This expansion also requires significant time commitment from our
senior management and places a significant strain on their ability to manage
the existing business. In addition, we are required to manage multiple
relationships with a growing number of third parties as we seek to complement
our service offerings. Our ability to manage our growth effectively will
require us to continue to expand operating and financial procedures and
controls, to replace or upgrade our operational, financial and management
information systems and to attract, train, motivate and retain key employees.
We have recently hired many key employees and officers, and as a result, our
entire management team has worked together for only a brief time. In addition,
we intend to hire additional senior management personnel to support our growth
and expansion of our business. If our executives are unable to manage growth
effectively, our business could be materially adversely affected.
We may experience difficulty in integrating our recent acquisitions which could
harm our operating results
In October 1998 we acquired the assets of Arca, in February 1999 we acquired
AIS, in July 1999 we acquired Cohesive, in November 1999 we merged with SMI,
and in December 1999 we acquired GOL. Furthermore, in February 2000, we
completed our acquisition of KeyLabs. We continue to expend resources
integrating Cohesive, SMI, and KeyLabs and the personnel hired in connection
with acquisitions. As we acquire additional companies, we will incur additional
expenses.
We believe that our future growth depends, in part, upon the acquisition of
complementary businesses, products, services or technologies. After purchasing
a company, we could have difficulty in assimilating that company's technology,
personnel and operations. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. In addition, future acquisitions by us may require us to issue stock
that could dilute the ownership of our then existing stockholders, incur
additional debt or assume liabilities, result in large one-time write-offs or
create goodwill or other intangible assets that could result in amortization
expenses.
System failures could lead to significant costs
We must protect our network infrastructure, our equipment, and customers'
equipment against damage from human error, physical or electronic security
breaches, power loss and other facility failures, fire, earthquake, flood,
telecommunications failure, sabotage, vandalism and similar events. Despite
precautions we have taken, a natural disaster or other unanticipated problems
at one or more of our Internet Data Centers could result in interruptions in
our services or significant damage to customer equipment. In addition, failure
of any of our telecommunications providers, such as MCI WorldCom, Qwest
Communications Corporation and Global Crossing, to provide consistent data
communications capacity, and local exchange carriers to provide interconnection
agreements, could result in interruptions in our services. Any damage to or
failure of our systems or service providers could result in reductions in, or
terminations of, services supplied to our customers, which could have a
material adverse effect on our business. In the past, we have experienced
interruptions in specific circuits within our network resulting from events
outside our control, temporary loss of power, and failure of networking
equipment, all of which led to short-term degradation in the level of
performance of our network or temporary unavailability of our services. We
attempt to limit exposure to system downtime by contract by giving customers a
credit of free service for a short period of time for disruptions.
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However, customers may demand additional remedies. If we incur significant
service level commitment obligations in connection with system downtime, our
liability insurance may not be adequate to cover those expenses.
Customer satisfaction with our services is critical to our success
Our customers demand a very high level of service. Our customer contracts
generally provide a limited service level commitment related to the continuous
availability of service on a 24 hours per day, seven days per week basis. This
commitment is generally limited to a credit consisting of free service for a
short period of time for disruptions in Internet transmission services. If we
incur significant service level commitment obligations in connection with
system downtime, our liability insurance may not be adequate to cover these
expenses. As customers outsource more mission-critical operations to us, we are
subject to increased liability claims and customer dissatisfaction if our
systems fail or our customers otherwise become unsatisfied.
Our ability to expand our network is unproven and will require substantial
financial, operational and management resources
To satisfy customer requirements, we must continue to expand and adapt our
network infrastructure. We are dependent on MCI WorldCom, Qwest, Global
Crossing and other telecommunications providers for our network capacity. The
expansion and adaptation of our telecommunications infrastructure will require
substantial financial, operational and management resources as we negotiate
telecommunications capacity with network infrastructure suppliers. Due to the
limited deployment of our services to date, our ability to connect and manage a
substantially larger number of customers at high transmission speeds is
unknown. We have yet to prove our network's ability to be scaled up to higher
customer levels while maintaining superior performance. Furthermore, it may be
difficult for us to increase quickly our network capacity in light of current
necessary lead times within the industry to purchase circuits and other
critical items. If we fail to achieve or maintain high capacity data
transmission circuits, customer demand could diminish because of possible
degradation of service. In addition, as we upgrade our telecommunications
infrastructure to increase bandwidth available to our customers, we expect to
encounter equipment or software incompatibility which may cause delays in
implementation.
We depend on network interconnections provided by third parties who may raise
their fees or deny access
We rely on a number of public and private network interconnections to allow
our customers to connect to other networks. If the networks with which we
interconnect were to discontinue their interconnections, our ability to
exchange traffic would be significantly constrained. Furthermore, our business
will be harmed if these networks do not add more bandwidth to accommodate
increased traffic. Many of the companies with which we maintain
interconnections are our competitors. Some of these networks require that we
pay them fees for the right to maintain interconnections. There is nothing to
prevent any networks, many of which are significantly larger than we are, from
increasing fees or denying access. In 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 GOL 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
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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. Any incompatibility would require us to make significant investments to
achieve compatibility. Although we intend to support emerging standards,
industry standards may not be established or we may not be able to conform
timely to new standards. Our failure to conform to a prevailing standard, or
the failure of a common standard to emerge, could have a material adverse
effect on our business.
System security risks could disrupt our services
The ability to provide secure transmissions of confidential information over
networks accessible to the public is a significant barrier to electronic
commerce and communications. A portion of our services rely on encryption and
authentication technology licensed from third parties. Despite a variety of
network security measures taken by us, we cannot assure that unauthorized
access, computer viruses, accidental or intentional actions and other
disruptions will not occur. Our Internet Data Centers have experienced and may
in the future experience delays or interruptions in service as a result of the
accidental or intentional actions of Internet users, current and former
employees of Exodus or others. Furthermore, inappropriate use of the network by
third parties could also jeopardize the security of confidential information,
such as customer and Exodus passwords
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as well as credit card and bank account numbers, stored in our computer systems
or those of our customers. As a result, we could become liable to others and
lose existing or potential customers. The costs required to eliminate computer
viruses and alleviate other security problems could be prohibitively expensive.
In addition, the efforts to address these problems could result in
interruptions, delays or cessation of service to our customers.
We depend on third-party equipment and software suppliers
We depend on vendors to supply key components of our telecommunications
infrastructure and system and network management solutions. Some of the
telecommunications services and networking equipment is available only from
sole or limited sources. For instance, the routers, switches and modems we use
are currently supplied primarily by Cisco Systems, Inc. We typically purchase
or lease all of our components under purchase orders placed from time to time.
We do not carry significant inventories of components and have no guaranteed
supply arrangements with vendors. If we are unable to obtain required products
or services on a timely basis and at an acceptable cost, our business would be
harmed. In addition, if our sole or limited source suppliers do not provide
products or components that comply with evolving Internet and
telecommunications standards or that interoperate with other products or
components we use, our business would be harmed. For example, we have
experienced performance problems, including previously unknown software and
firmware bugs, with routers and switches that have caused temporary disruptions
in and impairment of network performance.
Government regulation and legal uncertainties may harm our business
Laws and regulations directly applicable to communications and commerce over
the Internet are becoming more prevalent. The United States Congress has
recently considered enacting Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The
European Union also recently enacted its own privacy regulations. The law of
the Internet, however, remains largely unsettled, even in areas where there has
been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. In addition, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business. We provide services over the Internet in many states in
the United States and in many foreign countries, and we facilitate the
activities of our customers in these jurisdictions. As a result we may be
required to qualify to do business, or be subject to taxation, or be subject to
other laws and regulations, in these jurisdictions even if we do not have a
physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain, but we
could find that Exodus is subject to regulation, taxation, enforcement or other
liability in unexpected ways, which could materially adversely affect our
business.
We could be held liable for the information disseminated through our network
The law relating to the liability of online services companies and Internet
access providers for information and commerce carried on or disseminated
through their networks is currently unsettled. The Child Online Protection Act
of 1998 imposes criminal penalties and civil liability on anyone engaged in the
business of selling or transferring material that is harmful to minors, by
means of the World Wide Web, without restricting access to this type of
material by underage persons. Numerous states have adopted or are currently
considering similar types of legislation. The imposition upon us and other
Internet network providers of potential liability for information carried on or
disseminated through systems could require us to implement measures to reduce
exposure to liability, which may require the expenditure of substantial
resources, or to discontinue various service or product offerings. Further, the
costs of defending against any claims and potential adverse outcomes of these
claims could have a material adverse effect on our business. While we carry
professional liability
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insurance, it may not be adequate to compensate or may not cover us in the
event we become liable for information carried on or disseminated through our
networks.
Some businesses, organizations and individuals have in the past sent
unsolicited commercial e-mail messages through our network or advertising sites
hosted at our facilities to a massive number of people. This practice, known as
"spamming," has led to some complaints against us. In addition, some ISPs and
other online services companies could deny network access to us if we allow
undesired content or spamming to be transmitted through our networks. Although
we prohibit customers by contract from spamming, we cannot be sure that
customers will not engage in this practice, which could have a material adverse
effect on our business.
Our future success depends on our key personnel
Our success depends in significant part upon the continued services of our
key technical, sales and senior management personnel. Any officer or employee
can terminate his or her relationship at any time. If we lose the services of
one or more of our key employees or are unable to attract additional qualified
personnel, our business would be adversely affected. We do not carry key-person
life insurance for any of our employees.
If the Internet and Internet infrastructure development do not continue to
grow, our business will be harmed
Our success depends in large part on continued growth in the use of the
Internet. Critical issues concerning the commercial use of the Internet,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability, remain unresolved and are likely
to affect the development of the market for our services. In addition, the rate
of development and adoption of the Internet has been slower outside of the
United States and the cost of bandwidth has been higher. The recent growth in
the use of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers and switches, telecommunications links and
other components forming the infrastructure of the Internet by ISPs and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of our
services. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet infrastructure
to alleviate overloading and congestion.
We face risks associated with protection and enforcement of intellectual
property rights
We rely on a combination of copyright, patent trademark, service mark and
trade secret laws and contractual restrictions to establish and protect
proprietary rights in our products and services. We have very little patented
technology that would preclude or inhibit competitors from entering our market.
Although we have entered into confidentiality agreements with our employees,
contractors, suppliers, distributors and appropriate customers to limit access
to and disclosure of our proprietary information, these may prove insufficient
to prevent misappropriation of our technology or to deter independent third-
party development of similar technologies. In addition, the laws of various
foreign countries may not protect our products, services or intellectual
property rights to the same extent as do the laws of the United States.
In addition to licensing technologies from third parties, we are developing
and acquiring additional proprietary intellectual property. Third parties may
try to claim that our products or services infringe their intellectual
property. We expect that participants in our markets will be increasingly
subject to infringement claims. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation, cause product installation delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on terms acceptable to us or at
all.
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Potential risks related to the Year 2000 problem might harm our business
In many of our recent filings with the Commission, we discussed the nature
and progress of our plans to become year 2000 compliant. In late 1999, we
completed our remediation and testing of systems. As a result of those planning
and implementation efforts, we experienced no significant disruptions in
mission critical information technology systems and other internal operating
systems. Costs directly associated with our year 2000 compliance efforts were
not material, amounting to less than $1.0 million. We are not aware of any
material problems with our products or services or internal operating systems
resulting from year 2000 issues, and we have not received notice of any
material year 2000 compliance issues from our external vendors. However, it
remains possible that year 2000 problems associated with our systems or our
vendors' products may still arise or that we could receive notice of year 2000
problems that have arisen with our vendors' products.
Our stock price has been volatile in the past and is likely to continue to be
volatile
The market price of our common stock has been volatile in the past and is
likely to continue to be volatile. In addition, the securities markets in
general, and Internet stocks in particular, have experienced significant price
volatility and accordingly the trading price of our common stock is likely to
be affected by this activity.
USE OF PROCEEDS
We will not receive any proceeds from the sales of our common stock by the
selling stockholders under this prospectus.
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SELLING STOCKHOLDERS
The following table sets forth certain information regarding the shares
beneficially owned by the selling stockholders named below as of March 15,
2000, the shares that may be offered and sold from time to time by the selling
stockholders pursuant to this prospectus, assuming each selling stockholder
sells all of the shares offered in this prospectus, and the nature of any
position, office or other material relationship which each selling stockholder
has had with Exodus or any of its predecessors or affiliates within the past
three years. The selling stockholders named below, together with any pledgee or
donee of any named stockholders, and any person who may purchase shares offered
hereby from any named stockholders in a private transaction in which they are
assigned the stockholders' rights to registration of their shares, are referred
to in this prospectus as the "selling stockholders."
Except as indicated below, the shares that may be offered and sold pursuant
to this prospectus represent all of the shares beneficially owned by each named
selling stockholder as of March 15, 2000. All of these shares were acquired by
the selling stockholders in connection with our acquisitions of Key Labs, Inc.
Because the selling stockholders may offer from time to time all or some of
their shares under this prospectus, no assurances can be given as to the actual
number of shares that will be sold by any selling stockholder or that will be
held by the selling stockholder after completion of the sales. Information
concerning the selling stockholders may change from time to time and any
changed information will be set forth in supplements to this prospectus if and
when necessary.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission that consider shares to be beneficially
owned by any person who has voting or investment power with respect to the
shares. Common stock subject to options that are currently exercisable or
exercisable within 60 days after April 26, 2000 are considered to be
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of a person but are not
treated as outstanding for the purpose of computing the percentage ownership of
any other person. Based upon the 201,119,346 outstanding shares of common stock
as of April 7, 2000 and assuming each selling stockholder sells all of the
shares offered in this prospectus, no selling stockholder will own one percent
or more of our outstanding shares of common stock after the completion of this
offering.
<TABLE>
<CAPTION>
Shares Shares
owned owned
before Shares after
Name offering Offered offering
- ---- -------- ------- --------
<S> <C> <C> <C>
The Canopy Group, Inc................................. 315,580 315,580 --
Newman Family Trust................................... 32,355 32,355 --
Moon Shadow FLP....................................... 25,543 25,543 --
Island Park LP........................................ 13,623 13,623 --
Karan Bawandi......................................... 3,263 3,263 --
Francois Dodu......................................... 1,490 1,490 --
Christopher P. Clark.................................. 1,277 1,277 --
James Brown........................................... 187 187 --
Ruth Cuell............................................ 32 32 --
Tara Settle........................................... 18 18 --
------- ------- ---
Totals.............................................. 393,368 393,368 --
</TABLE>
- --------
(1) Of the shares beneficially owned by The Canopy Group, Inc., the name of the
registered owner of 298,299 of those shares is NFT Ventures, Inc., the
former name of The Canopy Group, Inc.
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PLAN OF DISTRIBUTION
The selling stockholders and their successors, including their transferees,
pledgees or donees or their successors, may sell the common stock offered under
this prospectus directly to purchasers or through underwriters, broker-dealers
or agents, who may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or the purchasers. These
discounts, concessions or commissions as to any particular underwriter, broker-
dealer or agent may be in excess of those customary in the types of
transactions involved. Neither Exodus nor the selling stockholders can
presently estimate the amount of this compensation.
The common stock offered under this prospectus may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at prices related to the prevailing market prices, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions:
. on any national securities exchange or U.S. inter-dealer system of a
registered national securities association on which the common stock may
be listed or quoted at the time of sale;
. in the over-the-counter market;
. in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
. through the writing of options, whether the options are listed on an
options exchange or otherwise; or
. through the settlement of short sales.
In connection with the sale of the common stock, the selling stockholders
may enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the common stock in
the course of hedging the positions they assume. The selling stockholders may
also sell the common stock short and deliver these securities to close out
their short positions, or loan or pledge the common stock to broker-dealers
that in turn may sell these securities.
The aggregate proceeds to the selling stockholders from the sale of the
common stock offered by them will be the purchase price of the common stock
less discounts and commissions, if any. Each of the selling stockholders
reserves the right to accept and, together with their agents from time to time,
to reject, in whole or in part, any proposed purchase of common stock to be
made directly or through agents. Exodus will not receive any of the proceeds
from this offering.
Exodus' outstanding common stock is listed for trading on the Nasdaq
National Market.
The selling stockholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock may be "underwriters" within the
meaning of Section 2(11) of the Securities Act. Any discounts, commissions,
concessions or profit they earn on any resale of the shares may be underwriting
discounts and commissions under the Securities Act. Selling stockholders who
are "underwriters" within the meaning of Section 2(11) of the Securities Act
will be subject to the prospectus delivery requirements of the Securities Act.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 of the Securities Act may be sold under Rule 144
rather than pursuant to this prospectus. A selling stockholder may not sell any
common stock described in this prospectus and may not transfer, devise or gift
these securities by other means not described in this prospectus.
To the extent required, the specific common stock to be sold, the names of
the selling stockholders, the respective purchase prices and public offering
prices, the names of any agent, dealer or underwriter, and any applicable
commissions or discounts with respect to a particular offer will be set forth
in an accompanying
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<PAGE>
prospectus supplement or, if appropriate, a post-effective amendment to the
registration statement of which this prospectus is a part. This prospectus also
may be used, with Exodus' consent, by donees or pledgees of the selling
stockholders, or by other persons acquiring shares and who wish to offer and
sell shares under circumstances requiring or making desirable its use.
In order to comply with the securities laws of some states, if applicable,
the common stock may be sold in these jurisdictions only through registered or
licensed brokers or dealers. In addition, in some states the common stock may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
The common stock offered under this prospectus was originally issued to
former stockholders of Key Labs, Inc. in connection with its acquisition
pursuant to exemptions from the registration requirements of the Securities Act
provided by Section 4(2) thereof and/or Regulation D promulgated thereunder. In
connection with the acquisition of Key Labs, Inc., Exodus agreed to register
the shares of common stock offered under this prospectus under the Securities
Act. Exodus and the selling stockholders have agreed to indemnify each other,
and their respective controlling persons, against specific liabilities,
including liabilities arising under the Securities Act and Exchange Act, in
connection with the offer and sale of the shares. In addition, the selling
stockholders may indemnify brokers, dealers, agents or underwriters that
participate in transactions involving sales of the shares against specific
liabilities, including liabilities arising under the Securities Act and/or
Exchange Act. Exodus will pay substantially all of the expenses incident to
this offering of the shares by the selling stockholders to the public other
than commissions and discounts of underwriters, brokers, dealers or agents.
LEGAL MATTERS
Fenwick & West LLP, Palo Alto, California, will provide Exodus with an
opinion as to legal matters in connection with the common stock.
EXPERTS
Our consolidated financial statements and related schedule as of December
31, 1998 and 1999, and for each of the years in the three-year period ended
December 31,1999, have been incorporated by reference in this registration
statement in reliance on the report of KPMG LLP, independent auditors,
incorporated by reference in this registration statement, and upon the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
The following documents we have filed with the Commission are incorporated
into this prospectus by reference:
. our annual report on Form 10-K for the fiscal year ended December 31,
1999 filed with the Commission on March 30, 2000;
. our current report on Form 8-K filed with the Commission on April 7,
2000.
. the description of our common stock contained in our registration
statement on Form 8-A filed with the Commission on February 13, 1998
under Section 12(g) of the Exchange Act, including any amendment or
report filed for the purpose of updating such description;
. the description of our preferred stock purchase rights contained in our
registration statement on Form 8-A filed with the Commission on January
29, 1999 under Section 12(g) of the Exchange Act, as amended
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by a Form 8- A/A filed with the Commission on November 29, 1999, including
any amendment or report filed for the purpose of updating such
description; and
. all documents subsequently filed by us pursuant to Sections 13(a), 13(c),
14 and 15(d) of the Exchange Act after the date of this prospectus and
before the termination of this offering.
To the extent that any statement in this prospectus is inconsistent with any
statement that is incorporated by reference, the statement in this prospectus
shall control. The incorporated statement shall not be deemed, except as
modified or superseded, to constitute a part of this prospectus or the
registration statement.
Because we are subject to the informational requirements of the Exchange
Act, we file reports and other information with the Commission. Reports,
registration statements, proxy and information statements and other information
that we have filed can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain copies of this material from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at rates prescribed by the Commission. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at 1-
800-SEC-0330. The Commission also maintains a World Wide Web site that contains
reports, proxy and information statements and other information that is filed
electronically with the Commission. This web site can be accessed at
http://www.sec.gov.
We have filed with the Commission a registration statement on Form S-3 under
the Securities Act with respect to the common stock offered under this
prospectus. This prospectus does not contain all of the information in the
registration statement, parts of which we have omitted, as allowed under the
rules and regulations of the Commission. You should refer to the registration
statement for further information with respect to us and our common stock.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, we refer you
to the copy of each contract or document filed as an exhibit to the
registration statement. Copies of the registration statement, including
exhibits, may be inspected without charge at the Commission's principal office
in Washington, D.C., and you may obtain copies from this office upon payment of
the fees prescribed by the Commission.
We will furnish without charge to each person to whom a copy of this
prospectus is delivered, upon written or oral request, a copy of the
information that has been incorporated by reference into this prospectus
(except exhibits, unless they are specifically incorporated by reference into
this prospectus). You should direct any requests for copies to Exodus
Communications, Inc., 2831 Mission College Boulevard, Santa Clara, California
95054, Attention: Adam W. Wegner, General Counsel, telephone: (408) 346-2200.
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EXODUS COMMUNICATIONS, INC.
PROSPECTUS
May 2, 2000
