<PAGE> 1
As filed with the Securities and Exchange Commission on December 18, 1998
Registration No. 333-______
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-8
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------------
ABOVENET COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4813 77-0424796
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or organization) Classification Code Number) Identification No.)
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50 W. SAN FERNANDO STREET, SUITE #1010
SAN JOSE, CALIFORNIA 95113
(408) 367-6666
(Address of principal executive offices) (Zip Code)
-------------------
ABOVENET COMMUNICATIONS INC. 1998 STOCK INCENTIVE PLAN
ABOVENET COMMUNICATIONS INC. 1998 EMPLOYEE STOCK PURCHASE PLAN
ABOVENET COMMUNICATIONS INC. 1997 STOCK PLAN
ABOVENET COMMUNICATIONS INC. 1996 STOCK OPTION PLAN
SHARES ACQUIRED UNDER WRITTEN COMPENSATION AGREEMENT WITH SHERMAN TUAN
SHARES AND OPTIONS GRANTED UNDER WRITTEN COMPENSATION AGREEMENT WITH
WARREN J. KAPLAN
(Full title of the Plans)
-------------------
SHERMAN TUAN
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
ABOVENET COMMUNICATIONS INC.
50 W. SAN FERNANDO STREET, SUITE #1010
SAN JOSE, CALIFORNIA 95113
(Name and address of agent for service)
(408) 367-6666
(Telephone number, including area code, of agent for service)
-------------------
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CALCULATION OF REGISTRATION FEE
============================================================================================================
Title of Proposed Maximum Proposed Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered(1) per Share Price(2) Fee
---------- ------------- ---------------- ---------------- ------------
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AboveNet Communications Inc.
1998 Stock Incentive Plan
Options 1,562,500 N/A N/A N/A
Common Stock (par value $.001) 1,562,500 shares $12.9375(2) $20,214,843.75(2) $5,619.73
AboveNet Communications Inc.
1998 Employee Stock Purchase Plan
Common Stock (par value $.001) 156,250 shares $12.9375(2) $2,021,484.38(2) $561.98
</TABLE>
<PAGE> 2
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<S> <C> <C> <C> <C>
AboveNet Communications Inc.
1997 Stock Plan and
AboveNet Communications Inc.
1996 Stock Option Plan
Options 1,433,159 N/A N/A N/A
Common Stock (par value $.001) 1,433,159 shares $4.67(3) $6,692,852.53(3) $1,860.62
Shares Acquired Under Written
Compensation Agreement with
Sherman Tuan
Common Stock (par value $.001) 56,875 shares $12.9375(2) $735,820.32(2) $204.56
Options Granted Under Written
Compensation Agreement with
Warren J. Kaplan
Options 421,923 N/A N/A N/A
Common Stock (par value $.001) 421,923 shares $0.40(3) $168,769.20(3) $46.92
Shares Acquired Under Written
Compensation Agreement with
Warren J. Kaplan
Common Stock (par value $.001) 70,082 shares $12.9375(2) $906,685.88(2) $252.06
</TABLE>
(1) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable under the 1998 Stock Incentive Plan, the
1998 Employee Stock Purchase Plan, the 1997 Stock Plan, the 1996 Stock
Option Plan and the Shares Acquired under the Written Compensation
Agreement with Sherman Tuan and the Shares and Options Granted Under
Written Compensation Agreement with Warren J. Kaplan because of any stock
dividend, stock split, recapitalization or other similar transaction
effected without the receipt of consideration which results in an increase
in the number of the outstanding shares of Common Stock of AboveNet
Communications Inc.
(2) Calculated only for purposes of this offering under Rule 457(h) of the
Securities Act of 1933, as amended, on the basis of the average of the high
and low prices per share of Common Stock of AboveNet Communications Inc. on
the Nasdaq National Market on December 15, 1998.
(3) Calculated only for purposes of this offering under Rule 457(h) of the
Securities Act of 1933, as amended, on the basis of the weighted average
exercise price of the outstanding options.
<PAGE> 3
EXPLANATORY NOTE
Pursuant to General Instruction C of Form S-8, this Registration
Statement contains a prospectus meeting the requirements of Part I of Form S-3
relating to the reoffer by a certain individual of shares of common stock, par
value $0.001 per share, of AboveNet Communications, Inc. acquired pursuant to a
Written Agreement.
<PAGE> 4
ABOVENET COMMUNICATIONS, INC.
FORM S-8 CROSS REFERENCE SHEET SHOWING LOCATION OF INFORMATION
REQUIRED BY PART I OF FORM S-3
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Form S-3 Item Number Location/Heading in Prospectus
- -------------------- ------------------------------
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1. Forepart of Registration Statement and Cover page
Outside Front Cover page of Prospectus
2. Inside Front and Outside Back Cover Available Information; Incorporation of
Page of Prospectus Certain Information by Reference
3. Summary Information, Risk Factors and Risk Factors
Ratio of Earnings to Fixed Charges
4. Use of Proceeds Not applicable
5. Determination of Offering Price Not applicable
6. Dilution Not applicable
7. Selling Security Holder Selling Security Holder
8. Plan of Distribution Plan of Distribution
9. Description of Securities to be Not Applicable
Registered
10. Interests of Named Experts and Counsel Not Applicable
11. Material Changes Not Applicable
12. Incorporation of Certain Information Documents Incorporated by Reference
13. Disclosure of Commission Position on Indemnification
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE> 5
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
Item 3. Incorporation of Documents by Reference
AboveNet Communications Inc. ("AboveNet") hereby incorporates by
reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "SEC"):
(a) AboveNet's prospectus filed with the SEC pursuant to Rule 424(b)
under the Securities Act of 1933, as amended (the "1933 Act"),
in connection with Registration Statement No. 333-63141 on Form
S-1 filed with the SEC on September 10, 1998, the amendment
filed on October 5, 1998 the amendment filed on October 21,
1998, the amendment filed on November 6, 1998, the amendment
filed on November 16, 1998, the amendment filed on December 7,
1998 and the amendment filed on December 8, 1998, in which there
are set forth audited financial statements for AboveNet's fiscal
years ended June 30, 1997 and 1998;
(b) AboveNet's Registration Statement No. 0-25063 on Form 8-A filed
with the SEC on November 16, 1998 under Section 12 of the
Securities Exchange Act of 1934, as amended (the "1934 Act"),
together with amendments thereto, in which there is described
the terms, rights and provisions applicable to AboveNet's
outstanding Common Stock.
All reports and definitive proxy or information statements filed under
Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this
Registration Statement and prior to the filing of a post-effective amendment
which indicates that all securities offered hereby have been sold or which
deregisters all securities then remaining unsold shall also be incorporated by
reference into this Registration Statement and to be a part hereof from the date
of filing of such documents.
Item 4. Description of Securities
Not Applicable.
Item 5. Interests of Named Experts and Counsel
Not Applicable.
Item 6. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court
to award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the 1933 Act. AboveNet's
Bylaws provide for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. AboveNet's Certificate of
Incorporation provides that, under Delaware law, its directors shall not be
liable for monetary damages for breach of their fiduciary duty as directors to
AboveNet and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the fiduciary duty of the directors, and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Delaware law. In addition,
each director will continue to be subject to liability for breach of the
director's duty of loyalty to AboveNet for acts or omissions not in good faith
or involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. AboveNet has entered into Indemnification
Agreements with its officers and directors. The Indemnification Agreements
provide AboveNet's officers and directors with further indemnification to the
maximum extent permitted by the Delaware General Corporation Law.
II-1
<PAGE> 6
Item 7. Exemption from Registration Claimed
Not Applicable.
Item 8. Exhibits
Exhibit Number Exhibit
4 Instrument Defining Rights of Stockholders. Reference is
made to AboveNet's Registration Statement No. 0-25063 on
Form 8-A, which is incorporated herein by reference
under Item 3(d) of this Registration Statement.
5 Opinion and consent of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP.
23.1 Independent Auditors' Consent.
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP is contained in Exhibit 5.
24 Power of Attorney. Reference is made to page II-5 of
this Registration Statement.
99.1 Written Compensation Agreement with Sherman Tuan.
99.2 Written Compensation Agreement with Warren J. Kaplan.
Item 9. Undertakings
A. AboveNet hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement
(i) to include any prospectus required by Section
10(a)(3) of the 1933 Act,
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this
Registration Statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in this Registration Statement and
(iii) to include any material information with respect
to the plan of distribution not previously
disclosed in this Registration Statement or any
material change to such information in this
Registration Statement; provided, however, that
clauses (1)(i) and (1)(ii) shall not apply if
the information required to be included in a
post-effective amendment by those paragraphs is
contained in periodic reports filed with or
furnished to the SEC by AboveNet under Section
13 or Section 15(d) of the 1934 Act that are
incorporated by reference in this Registration
Statement;
(2) that for the purpose of determining any liability under
the 1933 Act each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof and
(3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of AboveNet's 1998 Stock Incentive Plan, the 1998 Employee Stock
Purchase Plan, the 1997 Stock Plan, the 1996 Stock Option Plan, the Shares
Acquired under the Written Compensation Agreement with Sherman Tuan and the
Shares and Options Granted Under the Written Compensation Agreement with Warren
J. Kaplan.
II-2
<PAGE> 7
B. AboveNet undertakes that, for purposes of determining any
liability under the 1933 Act, each filing of AboveNet's annual report under
Section 13(a) or Section 15(d) of the 1934 Act that is incorporated by reference
in this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
C. Insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers or controlling persons of
AboveNet under the indemnification provisions summarized in Item 6 or otherwise,
AboveNet has been advised that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the 1933 Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by AboveNet of expenses incurred or paid by
a director, officer or controlling person of AboveNet in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, AboveNet
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE> 8
REOFFER PROSPECTUS
SIGNATURES
The Securities Act of 1933, as amended, requires that AboveNet certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-8 and has had this Registration Statement signed on its
behalf by the undersigned, who is duly authorized, in the City of San Jose,
State of California on this 18th day of December, 1998.
ABOVENET COMMUNICATIONS INC.
By: /s/ SHERMAN TUAN
-------------------------------------
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of AboveNet Communications
Inc., a Delaware corporation, do hereby constitute and appoint Sherman Tuan and
Stephen P. Belomy, and either of them, the lawful attorneys-in-fact and agents
with full power and authority to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, and either one of them,
determine may be necessary or advisable or required to enable said corporation
to comply with the Securities Act of 1933, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Registration Statement. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or either one of them, shall do or cause to
be done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Under the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
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Signature Title Date
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/s/ SHERMAN TUAN Chairman of the Board,
- ---------------------------------- Chief Executive Officer and December 18, 1998
Sherman Tuan Director
(Principal Executive Officer)
/s/ DAVID F. LARSON Senior Vice President and Chief December 18, 1998
- ---------------------------------- Financial Officer
David F. Larson (Principal Financial Officer)
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<PAGE> 9
REOFFER PROSPECTUS
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/s/ KEVIN HOURIGAN Vice President of Finance and December 18, 1998
- ---------------------------------- Controller (Chief Accounting
Kevin Hourigan Officer)
/s/ PETER C. CHEN, Ph.D. Vice Chairman of the Board December 18, 1998
- ---------------------------------- and Director
Peter C. Chen, Ph.D.
/s/ WARREN J. KAPLAN President, Chief Operating Officer December 18, 1998
- ---------------------------------- and Director
Warren J. Kaplan
/s/ ROBERT A. BURGELMAN Director December 18, 1998
- ----------------------------------
Robert A. Burgelman
/s/ FRANK R. KLINE Director December 18, 1998
- ----------------------------------
Frank R. Kline
/s/ JAMES SHA Director December 18, 1998
- ----------------------------------
James Sha
/s/ TOM SHAO, Ph.D. Director December 18, 1998
- ----------------------------------
Tom Shao, Ph.D.
/s/ KIMBALL W. SMALL Director December 18, 1998
- ----------------------------------
Kimball W. Small
/s/ FRED A. VIERRA Director December 18, 1998
- ----------------------------------
Fred A. Vierra
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<PAGE> 10
REOFFER PROSPECTUS
126,975 Shares
AboveNet Communications Inc.
Common Stock
This Reoffer Prospectus relates to 126,975 shares of the Common Stock,
par value $.001 (the "Common Stock"), of AboveNet Communications Inc. (the
"Company"), which may be offered from time to time by the Registered
Stockholders named herein (the "Registered Stockholders"). It is anticipated
that the Registered Stockholders will offer shares for sale at prevailing prices
on the Nasdaq National Market System on the date of sale. The Company will
receive no part of the proceeds of sale made hereunder. All expenses of
registration incurred in connection with this offering are being borne by the
Company, but all selling and other expenses incurred by the Registered
Stockholders will be borne by such Registered Stockholders.
The Company's Common Stock is traded on the Nasdaq National Market
System under the symbol ABOV. On December 15, 1998, the average of the high and
low selling prices of the Common Stock was $12.9375 per share.
The Registered Stockholders and any broker executing selling orders on
behalf of the Registered Stockholders may be deemed to be an "underwriter"
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"), in which event commissions received by such broker may be deemed to be
underwriting commissions under the Securities Act.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND SHOULD BE
CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
No person is authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering described herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by the Company
or any Registered Stockholders. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, nor shall there be any sale of these
securities by any person in any jurisdiction in which it is unlawful for such
person to make such offer, solicitation or sale. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create an
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
The date of this Prospectus is December 15, 1998.
<PAGE> 11
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Room of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the Commission's regional offices at 219 South Dearborn Street, Chicago,
IL 60604; 26 Federal Plaza, New York, NY 10007; and 5757 Wilshire Boulevard, Los
Angeles, CA 90036, at prescribed rates. The Common Stock of the Company is
quoted on the Nasdaq National Market System. Reports, proxy statements,
informational statements and other information concerning the Company can be
inspected at the offices of the National Association of Securities Dealers, Inc.
at 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish its stockholders with annual reports
containing additional financial statements and a report thereon by independent
certified public accountants.
A copy of any document incorporated by reference in the Registration
Statement (not including exhibits to the information that is incorporated by
reference unless such exhibits are specifically incorporated by reference into
the information that the Registration Statement incorporates) of which this
Reoffer Prospectus forms a part but which is not delivered with this Reoffer
Prospectus will be provided by the Company without charge to any person
(including any beneficial owner) to whom this Reoffer Prospectus has been
delivered upon the oral or written request of such person. Such requests should
be directed to the Stock Plan Administrator, AboveNet Communications Inc., 50 W.
San Fernando Street, Suite #1010, San Jose, California 95113. The Company's
telephone number is (408) 367-6666.
TABLE OF CONTENTS
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Page
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THE COMPANY..................................................................................3
RISK FACTORS.................................................................................5
REGISTERED STOCKHOLDERS.....................................................................16
PLAN OF DISTRIBUTION........................................................................17
DOCUMENTS INCORPORATED BY REFERENCE.........................................................18
INDEMNIFICATION.............................................................................18
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2
<PAGE> 12
THE COMPANY
AboveNet Communications Inc. ("AboveNet" or the "Company") is a leading
provider of high performance, managed co-location and Internet connectivity
solutions for electronic commerce and other mission-critical Internet
operations. AboveNet has developed a network architecture based upon two
strategically located, fault-tolerant facilities that combine content
co-location services with direct ISP access to create Internet Service Exchanges
("ISXs"). As of September 30, 1998, the Company had 171 public and private data
exchange connections, known as peering arrangements, including relationships
with top-tier network providers. The Company's network architecture and
extensive peering relationships are designed to reduce the number of network
connections or "hops" for data travelling across the Internet. Furthermore, the
convergence of content providers and ISPs at AboveNet's ISXs enables these ISPs
to provide their users with "one hop" connectivity, through AboveNet's local
area network, to the co-located content site. As of September 30, 1998, the
Company had 316 customers including a wide range of Internet content providers,
Web hosting companies and ISPs.
The Internet has experienced tremendous growth and is emerging as a global
medium for communications and commerce. Internet-based businesses and other
enterprises need non-stop, non-congested, fault-tolerant and scalable Internet
operations to allow them to perform mission-critical digital communication and
electronic commerce transactions globally over the Internet. However, many
businesses that are seeking to establish these sophisticated Internet operations
lack the resources and expertise to cost-effectively develop, maintain and
enhance the necessary facilities and network systems. As a result, many
enterprises are seeking outsourcing arrangements to enhance Web site reliability
and performance, provide continuous operation of their Internet solutions and
reduce related operating expenses. Forrester Research, Inc.(1) estimates that by
2002, approximately 40% of complex Web sites will be outsourced and that
Internet hosting revenues for complex sites will increase from approximately
$200 million in 1997 to approximately $8.0 billion by 2002.
AboveNet's solutions are designed to be highly scalable and flexible to
meet the needs of its customers as their Internet operations expand. AboveNet
charges its customers based on space and bandwidth utilization, providing
customers a flexible, cost-effective method to increase their Internet
operations. The Company's services are designed to enhance performance through
redundant and high speed network design and 24x7 monitoring, notification and
diagnosis. AboveNet's proprietary ASAP software monitors all of the Company's
direct and indirect network connections for latency and packet loss, allowing
its network engineers to enhance performance by dynamically rerouting traffic to
avoid congested points. The Company also provides its customers with
sophisticated monitoring, reporting and management tools that can be remotely
accessed by the customer to control its Internet operations. By providing a
means to reduce the number of "hops" in the transmission of data, the Company
believes that its network design can provide significant benefits to ISPs as
they seek to gain fast, reliable access to content.
The Company's objective is to become the leading global Internet Service
Exchange for business enterprises and ISPs that require high-bandwidth,
mission-critical Internet operations. To achieve this objective, the Company
intends to: (i) increase awareness of the AboveNet name on a global basis;
3
<PAGE> 13
- ---------------
(1) Forrester Research, Inc. estimates are based upon interviews with more
than 41,000 households as part of its "Technographics '98" survey. In addition,
the report stated that 81 ISPs were asked to provide detailed unit sales, prices
and projections for 1996 through 1998. The ISP data was extrapolated to provide
a total current market size and direction. Finally, 22 vendors of hosting
services and related organizations were contacted. There can be no assurances
that actual results will not differ materially from those estimated.
(ii) expand its customer base through increased sales and marketing efforts;
(iii) expand its global ISX network by connecting centralized facilities in key
domestic and international locations; (iv) leverage its ISX model to increase
its customer base and generate recurring revenues; and (v) address the emerging
requirements of Internet technologies such as audio and video streaming and
voice over IP.
The Company's customers include CNET Download.com, Dacom America,
Electronic Arts Inc., Got.Net, Imagine Radio, IntelliChoice, Inc., iXL, Inc.,
Netscape Communications Corporation, RealNetworks, Inc. and The Web Zone, Inc.
The Company intends to expand its customer base by substantially expanding its
sales organization, as well as establishing and expanding relationships with
potential channel partners including hardware vendors, value added resellers,
system integrators and Web hosting companies, to leverage their sales
organizations. The Company also plans to invest in building the AboveNet brand
through an integrated marketing plan, including traditional and online
advertising in business and trade publications, trade show participation, direct
mail and public relations campaigns.
The Company was incorporated in California in March 1996 and reincorporated
in Delaware in November 1998. The Company's principal executive offices are
located at 50 W. San Fernando Street, Suite #1010, San Jose, California 95113,
and its telephone number is (408) 367-6666.
EtherValve is a registered trademark of the Company. Cabriolet and MRTG are
trademarks of the Company. The Company has applied for federal trademark
registration for the following names: AboveNet APS, ASAP, As-Ur-Here, Internet
Service Exchange and ISX. All other trademarks, servicemarks or tradenames
referred to in this Prospectus are the property of their respective owners.
AboveNet's executive offices are located at 50 W. San Fernando Street,
Suite #1010, San Jose, California 95113. The Company's telephone number is (408)
367-6666.
4
<PAGE> 14
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
in nature and involves a high degree of risk. In addition to the other
information contained in this Prospectus, the following factors should be
considered carefully in evaluating the Company and its business before
purchasing the shares of Common Stock offered hereby. This Prospectus contains
certain forward-looking statements based on current expectations that involve
risks and uncertainties. Any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. For example,
the words "believes," "anticipates," "plans," "expects," "intends" and similar
expressions are intended to identify forward-looking statements. The Company's
actual results and the timing of certain events may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a discrepancy include, but are not limited to, those discussed below
and elsewhere in this Prospectus.
Limited Operating History; History of Losses; Expected Continued
Losses. The Company was incorporated in March 1996 and has experienced operating
losses in each quarterly and annual period since inception. The Company
experienced net losses of $1.8 million, $5.4 million and $3.4 million in fiscal
years 1997 and 1998, and for the three months ended September 30, 1998,
respectively, and, as of September 30, 1998, had an accumulated deficit of
approximately $10.7 million. The Company began offering its co-location and
Internet connectivity services to content providers in July 1996, and introduced
its co-location and Internet connectivity services to ISPs in August 1997. The
Company began operating its second ISX facility in Vienna, Virginia in July
1998. The revenue and income potential of the Company's business and market is
unproven, and the Company's limited operating history makes an evaluation of the
Company and its prospects difficult. The Company and its prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for co-location and Internet
connectivity services. The Company expects to continue making significant
investments to (i) substantially increase its sales and marketing activities and
(ii) establish a second ISX facility in San Jose, California of approximately
110,000 square feet, including approximately 50,000 square feet of co-location
space. The Company believes that it will continue to experience net losses on a
quarterly and annual basis for the foreseeable future, and such losses are
expected to increase significantly from current levels. To achieve or sustain
profitability, among other things, the Company must substantially grow its
customer base, including maintaining existing customer relationships, expand
domestically and internationally, provide scalable, reliable and cost-effective
services, continue to grow its infrastructure to accommodate expanded and new
facilities, additional customers and increased bandwidth use of its network,
expand its channels of distribution, effectively establish its brand name,
retain and motivate qualified personnel and continue to respond to competitive
developments. Failure of the Company's services to achieve widespread market
acceptance would have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company has
experienced significant growth in revenues in recent periods, the Company does
not believe that this growth rate is necessarily indicative of future operating
results, and there can be no assurance that the Company will ever achieve
profitability on a quarterly or an annual basis or, if achieved, will sustain
profitability.
Need to Grow and Retain Customer Base; Lengthy Sales Cycle. The Company's
success is substantially dependent on the continued growth of its customer base
and the retention of its customers. The Company's ability to attract new
customers will depend on a variety of factors, including the willingness of
businesses to outsource their mission-critical Internet operations, the
reliability and cost-effectiveness of the Company's services and the Company's
ability to effectively market such services. A majority of the Company's
customer contracts are cancelable on 30 days' notice. In the past, the Company
has lost customers to other service providers for various reasons, including as
a result of lower prices and other incentives offered by competitors and not
matched by the Company. Accordingly, there can be no assurance that the
Company's customers will maintain or renew their commitments to use the
Company's services. The Company intends to develop alternative distribution and
lead generation relationships with potential channel partners including hardware
providers, system integrators, value added resellers and Web hosting companies.
Any failure by the Company to develop these relationships could materially and
adversely impact the ability of the Company to generate increased revenues,
which would have a material adverse effect on the Company's business, results of
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operations and financial condition. In addition, the Company typically
experiences a lengthy sales cycle for its services, resulting, in part, from the
importance to customers of securing Internet connectivity for mission-critical
operations and the need to educate certain customers regarding the benefits of
co-location and Internet connectivity services. Changes in the rate of growth in
the Company's customer base, customer renewal rates and the sales cycle for the
Company's services, have caused, and are expected in the future to cause,
significant fluctuations in the Company's results of operations on a quarterly
and an annual basis. In addition, the Company intends to significantly increase
its sales and marketing expenditures. Due to the typically lengthy sales cycle
for the Company's services, such expenses will occur prior to customer
commitments for the Company's services. There can be no assurance that the
increase in the Company's sales and marketing efforts will result in increased
sales of the Company's services.
Potential Fluctuations in Results of Operations. The Company has
experienced significant fluctuations in its results of operations on a quarterly
and annual basis. The Company expects to continue to experience significant
fluctuations in its future quarterly and annual results of operations due to a
variety of factors, many of which are outside the Company's control, including:
demand for and market acceptance of the Company's services; capacity utilization
of its ISX facilities; fluctuations in data communications and
telecommunications costs; reliable continuity of service and network
availability; customer retention; the timing and success of marketing efforts by
the Company; the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations; the timely expansion of existing
facilities and completion of new facilities; the ability to increase bandwidth
as necessary; fluctuations in bandwidth used by customers; the timing and
magnitude of expenditures for sales and marketing; introductions of new services
or enhancements by the Company and its competitors; the timing of customer
installations and related payments; the ability to maintain or increase peering
relationships; provisions for customer discounts and credits; the introduction
by third parties of new Internet services; increased competition in the
Company's markets; growth of Internet use and establishment of Internet
operations by mainstream enterprises; changes in the pricing policies of the
Company and its competitors; changes in regulatory laws and policies; economic
conditions specific to the Internet industry; and general economic factors. In
addition, a relatively large portion of the Company's expenses are fixed in the
short-term, particularly with respect to data communications and
telecommunications costs, depreciation, real estate, interest and personnel, and
therefore the Company's future results of operations will be particularly
sensitive to fluctuations in revenues. In addition, the Company expects to incur
compensation costs related to certain option grants and warrants, including a
significant charge in the quarter that this offering is consummated.
Furthermore, although the Company has not encountered significant difficulties
in collecting its accounts receivable in the past, many of the Company's
customers are in an emerging stage, and there can be no assurance that the
Company will be able to collect receivables on a timely basis. The Company also
expects that its sales may be affected by seasonality trends with decreased
revenues during the summer months. Due to all of the foregoing factors, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Furthermore, as a result of the foregoing and other factors,
the Company's results of operations in future periods may fall below the
expectations of securities analysts and investors. In such event, the trading
price of the Company's Common Stock will likely be materially and adversely
affected.
Risks Associated with Recent and Planned Business Expansion. The Company
recently opened its second ISX facility in Vienna, Virginia. The Company is also
planning to develop a second ISX facility in San Jose, California of
approximately 110,000 square feet, including approximately 50,000 square feet of
co-location space. The new facility is targeted to open by the fall of 1999. The
Company intends to initially complete the build-out of approximately 13,000
square feet of co-location space and to complete the build-out of additional
co-location space incrementally over time based on customer demand. The Company
intends to use a significant portion of the net proceeds of this offering to
construct the new San Jose ISX facility. In addition, any build-out of
incremental co-location space at the new facility may require the Company to
obtain additional debt or equity financing. The Company will need to accomplish
a number of objectives in order to successfully complete the development of the
planned ISX facility, on a timely basis or at all, including obtaining necessary
permits and approvals, passing required inspections, and hiring necessary
contractors,
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builders, electricians, architects and designers. In addition, the development
of this new facility could place a significant strain on the Company's
management resources and could result in the diversion of management attention
from the day-to-day operation of the Company's business. The successful
development of the facility will require careful management of various risks
associated with significant construction projects, including construction delay,
cost estimation errors or overruns, equipment and material delays or shortages,
inability to obtain necessary permits on a timely basis and other factors, many
of which are beyond the Company's control. There can be no assurance with
respect to the cost, timing or extent of any expansion or that the Company will
be successful in expanding its operations, or developing the ISX facility
planned for San Jose, California, as well as any new ISX facilities that the
Company may want to establish in the future, on a timely basis, or at all. The
Company's inability to establish its planned facility or to effectively manage
its expansion would have a material adverse effect upon the Company's business,
results of operations and financial condition. Furthermore, the Vienna, Virginia
ISX facility and, if completed, the new San Jose ISX facility, will result in
substantial new fixed and operating expenses, including expenses associated with
hiring, training and managing new employees, purchasing new equipment,
implementing power and redundancy systems, implementing multiple data
communication and telecommunication connections, leasing additional real estate
and depreciation. In addition, the Company will need to continue to implement
and improve its operational and financial systems. If revenue levels do not
increase sufficiently to offset these new expenses, the Company's operating
results will be materially adversely impacted in future periods. There can be no
assurance that the Company will accurately anticipate the customer demand for
new facilities or that the Company will attract a sufficient number of
customers.
The Company also intends to make strategic minority investments in joint
ventures and foreign companies that develop ISX facilities in Europe and Asia
and to license its trademarks and technology to such entities. If the Company
makes such investments, the Company will be dependent on these joint ventures
and foreign companies to establish and operate ISX facilities. The ability of
these joint ventures and foreign companies to successfully establish and operate
ISX facilities is subject to a number of risks over which the Company will have
little or no control, as a result of its anticipated minority ownership in such
entities. There can be no assurance that these entities will be able to obtain
the necessary data communications and telecommunications infrastructure in a
cost-effective manner or compete effectively in international markets. In
addition, there can be no assurance that any of these investments, if made, will
result in the establishment of ISX facilities, or that such investment
relationships will not be disrupted. Furthermore, to the extent that such
entities use the AboveNet brand name and do not provide the same level of
performance and service as the Company, their operations could have a material
adverse effect on the Company's reputation and brand equity. Furthermore,
certain foreign governments have enforced laws and regulations related to
content distributed over the Internet that are more restrictive than those
currently in place in the United States. There can be no assurance that one or
more of these factors will not have a material adverse effect on the Company's
global ISX strategy, business, results of operations and financial condition.
Intense Competition. The market served by the Company is intensely
competitive. There are few substantial barriers to entering the co-location
service business, and the Company expects that it will face additional
competition from existing competitors and new market entrants in the future. The
Company believes that participants in this market must grow rapidly and achieve
a significant presence in the market in order to compete effectively. There can
be no assurance that the Company will have the resources or expertise to compete
successfully in the future. In addition, many of the Company's current and
potential competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than the
Company. As a result, certain of these competitors may be able to develop and
expand their network infrastructures and service offerings more quickly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
devote greater resources to the marketing and sale of their services and adopt
more aggressive pricing and incentive policies than can the Company. In an
effort to gain market share, certain of the Company's competitors have offered
co-location services similar to those of the Company at lower prices than those
of the Company or with incentives not
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<PAGE> 17
matched by the Company, including free start-up and domain name registration,
periods of free service and low-priced Internet access. As a result of these
policies, the Company may encounter increasing pricing pressure which could
result in loss of customers and have a material adverse effect on its business,
results of operations and financial condition.
In addition, certain of the Company's competitors have entered and will
likely continue to enter into joint ventures, consortiums or consolidations to
provide additional services competitive with those provided by the Company. As a
result, such competitors may be able to provide customers with additional
benefits in connection with their co-location and network management solutions,
including reduced communications costs, which could reduce the overall costs of
their services relative to the Company's services. There can be no assurance
that the Company will be able to offset the effects of any such price
reductions. The Company believes that companies seeking co-location and Internet
connectivity providers for their mission-critical Internet operations may use
more than one company to provide this service. As a result, these customers
would be able to more easily shift the amount of service and bandwidth usage
from one provider to another. The Company may also face competition from its
suppliers.
Management of Growth; Dependence on Key Personnel. The Company has recently
experienced a period of rapid growth with respect to the expansion of its ISX
facilities and its customer base. The Company's ability to manage effectively
its recent growth and any future growth will require it to continue to expand
its operating and financial procedures and controls, to replace or upgrade its
operational, financial and management information systems and to attract, train,
motivate, manage and retain key employees. The Company is currently upgrading
its financial and management information systems. There can be no assurance that
the Company will be able to implement such new systems successfully or on a
timely basis. The Company also is dependent upon its ability to increase
substantially the size of its sales and marketing organization. The market for
highly qualified sales and marketing personnel is very competitive. There can be
no assurance that the Company will be successful in meeting its hiring goals or
that any new employees will be successful in expanding the Company's customer
base. The Company's growth has placed, and if it continues, will place, a
significant strain on the Company's financial, management, operational and other
resources. If the Company's management is unable to effectively manage any
further growth that may occur, the Company's business, results of operations and
financial condition would be materially adversely affected.
The Company has recently hired many key employees and officers, including
its President and Chief Operating Officer, its Senior Vice President of Sales
and Marketing, its Vice President of International-Europe, its Vice President of
Sales, its Vice President of Construction and Real Estate and most recently, its
Chief Financial Officer. As a result, the Company's management team has worked
together for only a brief time. The Company's ability to effectively execute its
strategies will depend in part upon its ability to integrate these and future
managers into its operations. The Company also has plans to hire additional
executive management personnel, including a Vice President of Marketing. If the
Company's executives are unable to manage growth effectively, the Company's
business, results of operations and financial condition could be materially
adversely affected. The Company's success also depends in significant part upon
the continued services of its senior management and key technical and sales
personnel, including the Company's Chief Executive Officer, Sherman Tuan,
President and Chief Operating Officer, Warren J. Kaplan, Chief Technical
Officer, David Rand, and Senior Vice President of Sales and Marketing, David
Dembitz. The Company maintains a key man insurance policy in the amount of
approximately $1.1 million on the life of Mr. Tuan, but does not maintain such
insurance with respect to any other executive officers. Any officer or employee
of the Company can terminate his or her relationship with the Company at any
time. The loss of the services of one or more of the Company's key employees or
the Company's failure to attract additional qualified personnel could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Risk of System Failure. The Company's operations are dependent upon its
ability to prevent system interruption and protect its network infrastructure
and customers' equipment against damage from human error, fire, earthquakes,
floods, power loss, telecommunications failures, sabotage, intentional acts of
vandalism
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and similar events. The Company's existing and planned ISX facilities in San
Jose, California are in an area that is subject to earthquakes and, as a result,
are subject to greater risk of system interruption. Despite precautions taken,
and planned to be taken, by the Company the occurrence of a natural disaster or
other unanticipated problems such as human interference or mistake, unannounced
or unexpected changes in transmission protocols or other technology, could
result in interruptions in the services provided by the Company or significant
damage to customer equipment. In addition, failure of any of the Company's data
communication and telecommunication providers, such as MCI WorldCom, Sprint,
Pacific Bell, Teleport Communications Group, a subsidiary of AT&T, and WinStar
Communications, Inc., to provide the data communication and/or telecommunication
capacity required by the Company, whether as a result of human error, a natural
disaster or other operational disruption, could result in interruptions in the
Company's services. Any damage to or failure of the systems of the Company or
its service providers could result in reductions in, or terminations of,
services supplied to the Company's customers, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company's reputation could be materially adversely
affected. The Company may be subject to legal claims by its customers for
disruption of service or damage to customer equipment. While the Company's
customer contracts generally purport to eliminate the Company's liability for
consequential or punitive damages or for damage to customer equipment not caused
by the Company's gross negligence or willful acts, there can be no assurance
that the Company would not be held liable for such damages.
Risks Associated with Emerging Market for Network Management Services;
Uncertainty of Acceptance of Services. The market for co-location and Internet
connectivity services has only recently begun to develop, is evolving rapidly
and likely will be characterized by an increasing number of market entrants.
There is significant uncertainty regarding whether this market ultimately will
prove to be viable or, if it becomes viable, that it will grow. The Company's
future growth, if any, will be dependent on the growth of the Internet as a
global communication and commerce medium, the growth of mission-critical
Internet operations, the willingness of enterprises to co-locate and outsource
Internet connectivity for their mission-critical Internet operations and the
Company's ability to successfully and cost-effectively market its services to a
sufficiently large number of customers. There can be no assurance that the
market for the Company's services will develop, that the Company's services will
be adopted or that businesses, organizations or consumers will significantly
increase use of the Internet for commerce and communication. If this market
fails to develop, or develops more slowly than expected, or if the Company's
services do not achieve widespread market acceptance, the Company's business,
results of operations and financial condition would be materially and adversely
affected. In addition, in order to be successful in this emerging market, the
Company must be able to differentiate itself from its competition through its
service offerings and brand name recognition. There can be no assurance that the
Company will be successful in differentiating itself or achieving widespread
market acceptance of its services, or that it will not experience difficulties
that could delay or prevent the successful development, introduction or
marketing of these services. In addition, there can be no assurance that the
Company's business model of establishing centralized ISX facilities will be
widely adopted over the model established by other outsource providers who have
developed and are continuing to develop numerous geographically disbursed
facilities. In addition, if the Company incurs increased costs or is unable, for
technical or other reasons, to develop and introduce new services or
enhancements of existing services in a timely manner, or if these or other new
services do not achieve widespread market acceptance, the Company's business,
results of operations and financial condition would be materially adversely
affected.
Risks Associated with Network Scalability. The Company must continue to
expand and adapt its network infrastructure as the number of users and the
amount of information they wish to transport increase and to meet changing
customer requirements. Due to the limited deployment of the Company's services
to date, the ability of the Company's network to connect and manage a
substantially larger number of customers at high transmission speeds is as yet
unknown, and the Company faces risks related to the network's ability to be
scaled up to significantly greater customer levels while maintaining a high
level of performance. To the extent customers' usage of bandwidth increases, the
Company will need to make additional investments in its infrastructure to
maintain adequate downstream data transmission speeds, the availability of which
may be limited or the cost of which may be significant. There can be no
assurance that additional network capacity
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will be available from third-party suppliers when it is needed by the Company.
As a result, there can be no assurance that the Company's network will be able
to achieve or maintain a sufficiently high data transmission capacity. The
Company's failure to achieve or maintain high data transmission capacity could
significantly reduce consumer demand for its services and have a material
adverse effect on its business, results of operations and financial condition.
In addition, as the Company upgrades its telecommunications infrastructure to
increase bandwidth available to its customers, it may encounter equipment or
software incompatibility which may cause delays in implementation. There can be
no assurance that the Company will be able to expand or adapt its
telecommunications infrastructure to meet additional demand or its customers'
changing requirements, on a timely basis and at a commercially reasonable cost,
or at all.
Need to Maintain and Increase Peering Relationships. The Internet is
comprised of several network providers who operate their own networks and
interconnect their networks at various public and private peering points,
through "peering arrangements" with one another. The Company's establishment and
maintenance of peering relationships is necessary in order to effectively
exchange traffic with ISPs without having to pay the higher costs of transit
services and in order to maintain high network performance levels. These
arrangements are not subject to regulation and are subject to revision in terms,
conditions or costs over time. There is no assurance that ISPs will maintain
peering relationships with the Company. In addition, increasing requirements or
costs may be imposed on the Company in order to maintain peering relationships
with ISPs, particularly national ISPs. Failure to maintain peering relationships
would adversely affect the level of connectivity available to the Company's
customers or cause the Company to incur additional operating expenditures by
paying for transit, either of which could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
if these network providers were to increase the pricing associated with
utilizing their networks, the Company may be required to identify alternative
methods through which it can distribute its customers' content. If the Company
were unable to access on a cost-effective basis alternative networks to
distribute its customers' content or pass through any additional costs of
utilizing these networks to its customers, the Company's business, results of
operations and financial condition would be materially adversely affected.
Dependence upon Third Party Suppliers. The Company's success will depend
upon third party network infrastructure providers, including the capacity leased
from its telecommunications network suppliers. In particular, the Company is
dependent on Sprint, MCI WorldCom and certain other data communication and
telecommunication providers for its backbone capacity and is therefore dependent
on such companies to maintain the operational integrity of its backbone. In
addition, any significant increase in data communication or telecommunication
costs could have a material adverse effect on the Company's business, results of
operations and financial condition. MCI WorldCom is a current competitor and the
Company's other data communications providers are potential competitors of the
Company. Furthermore, the Company relies on a number of public and private
peering interconnections to deliver its services. If the carriers that operate
the Internet exchange points were to discontinue their support of the peering
points and no alternative providers emerged, or such alternative providers
increased the cost of utilizing the Internet exchange points, the distribution
of content through the Internet exchange points, including content distributed
by the Company, would be significantly constrained. Furthermore, as traffic
through the Internet exchange points increases, if commensurate increases in
bandwidth are not added, the Company's ability to distribute content rapidly and
reliably through these networks will be materially adversely affected.
The Company relies on other companies to supply certain key components of
its network infrastructure, including networking equipment which, in the
quantities and quality demanded by the Company, are available only from limited
sources. Currently, the Company orders all of its routers from Cisco Systems,
Inc. Although the Company believes that it could procure alternative sources to
supply routers in the event routers from Cisco Systems, Inc. were unavailable,
the Company would need to train its personnel in the use of alternative routers,
which could cause delay or interruption in its services.
Risks Associated with Potential Future Acquisitions. The Company may in the
future pursue acquisitions of technologies or businesses. Future acquisitions by
the Company may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt, or amortization
expenses related to goodwill and other intangible assets, any of which could
materially adversely affect the
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Company's business, results of operations or financial condition. In addition,
acquisitions involve numerous risks, including difficulties in the assimilation
of the operations, technologies, products and personnel of the acquired company,
the diversion of management's attention from other business concerns, risks of
entering markets in which the Company has no or limited direct prior experience,
and the potential loss of key employees of the acquired company. In the event
that any such acquisitions occur, there can be no assurance that the Company's
business, results of operations and financial condition would not be materially
adversely affected.
Dependence on Growth of Internet Use and Internet Infrastructure
Development. The increased use of the Internet for retrieving, sharing and
transferring information among businesses, consumers, suppliers and partners has
only recently begun to develop, and the Company's success will depend in large
part on continued growth in the use of the Internet, which in turn will depend
on a variety of factors including security, reliability, cost, ease of access,
quality of service and necessary increases in bandwidth availability. The
adoption of the Internet for information retrieval and exchange, commerce and
communications, particularly by those enterprises that have historically relied
upon alternative means of commerce and communications, generally will require
the acceptance of a new medium of conducting business and exchanging
information. Demand for and market acceptance of the Internet are subject to a
high level of uncertainty and are dependent on a number of factors, including
growth in consumer access to and acceptance of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences and increases in user bandwidth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, the Company's business, results of operations and
financial condition could be materially adversely affected. 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 the
Company's services. Potentially increased performance provided by the services
of the Company and others is ultimately limited by and reliant upon the speed
and reliability of the networks operated by third parties. Consequently, the
emergence and growth of the market for the Company's services is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
Rapid Technological Change; Evolving Industry Standards. The Company's
future success will depend, in part, on its ability to offer services that
address the increasingly sophisticated and varied needs of its current and
prospective customers and to respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis.
Mission-critical Internet operations are complex and are characterized by
rapidly changing and unproven technology, evolving industry standards, changes
in customer needs, emerging competition and frequent new service introductions.
There can be no assurance that future advances in technology will be beneficial
to, or compatible with, the Company's business, that the Company will be able to
incorporate such advances on a cost-effective or timely basis into its business
or that such advances will not make the Company's services unnecessary or less
cost-effective than using the new technology. Moreover, technological advances
may have the effect of encouraging certain of the Company's current or future
customers to rely on in-house personnel and equipment to furnish the services
currently provided by the Company. In addition, keeping pace with technological
advances in the Company's industry may require substantial expenditures and lead
time. Although the Company currently intends to support emerging standards,
there can be no assurance that industry standards will be established or, that
if they become established, the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
The failure of the Company to conform to prevailing standards, or the failure of
a common standard to emerge, could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
there can be no assurance that products, services or technologies developed by
others will not render the Company's services uncompetitive, unnecessary or
obsolete.
Security Risks. Customer operations at the Company's facilities have in the
past experienced, and may in the future experience, delays or interruptions in
service as a result of the accidental or intentional actions of
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Internet users, current and former employees or others. Furthermore, such
inappropriate access to the network by third parties could also potentially
jeopardize the security of confidential information, such as credit card and
bank account numbers, stored in the computer systems of the Company and its
customers, which could result in liability to the Company and the loss of
existing customers or the deterrence of potential customers. Although the
Company implements security procedures and systems, such procedures and systems
have been circumvented in the past, and there can be no assurance that
unauthorized access, accidental or intentional actions and other disruptions
will not occur in the future. The Company was recently sued by a customer
alleging that the Company negligently allowed the customer's consultant access
to the customer's servers located at the Company's San Jose facility. The costs
required to minimize security problems could be prohibitively expensive and the
efforts to address such problems could result in interruptions, delays or
cessation of service to the Company's customers, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet, especially as a means of
conducting commercial transactions.
Government Regulations and Legal Uncertainties. There is currently only a
small body of laws and regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted at
the international, federal, state and local levels with respect to the Internet.
A number of laws and regulations have already been proposed or are currently
being considered by federal, state and foreign legislatures. The nature of any
new laws and regulations and the manner in which existing and new laws and
regulations may be interpreted and enforced cannot be fully determined. The
adoption of any future laws or regulations might decrease the growth of the
Internet, decrease demand for the services of the Company, impose taxes or other
costly technical requirements or otherwise increase the cost of doing business
or in some other manner have a material adverse effect on the Company or its
customers, each of which could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition,
applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. In addition, as the Company's
services are available over the Internet in multiple states and foreign
countries, and as the Company facilitates sales by its customers to end users
located in such states and foreign countries, such jurisdictions may claim that
the Company is required to qualify to do business as a foreign corporation in
each such state or foreign country. Any such new legislation or regulation, or
the application of laws or regulations from jurisdictions whose laws may not
currently apply to the Company's business, could have a material adverse effect
on the Company's business, results of operations and financial condition.
Risks Associated with Information Disseminated through the Company's
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. It is possible that claims could be made
against online services companies, co-location companies and Internet access
providers under both United States and foreign law for defamation, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of the materials disseminated through their networks. The Company has in
the past received, and may in the future receive, letters from recipients of
information transmitted by the Company's customers objecting to the nature and
content of the materials disseminated through the Company's networks. Several
private lawsuits seeking to impose such liability upon online services companies
and Internet access providers are currently pending. In addition, legislation
has been proposed that imposes liability for or prohibits the transmission over
the Internet of certain types of information. The imposition upon the Company
and other Internet network providers of potential liability for information
carried on or disseminated through their systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain service
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could impact the growth of Internet
use. While the Company carries general liability insurance, it may not be
adequate to compensate or may not cover the Company in the event the Company
becomes liable for information carried on or disseminated through its networks.
Any costs not covered by insurance incurred as a result of such liability or
asserted liability could have a material adverse effect on the Company's
business,
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results of operations and financial condition. In addition, there can be no
assurance that content distributed by certain of the Company's current or future
customers will not be regulated or banned, which could reduce the Company's
customer base. Certain businesses, organizations and individuals have in the
past sent unsolicited commercial e-mails from servers hosted at the Company's
facilities to massive numbers of people, typically to advertise products or
services. This practice, known as "spamming," can lead to complaints against
service providers that enable such activities, particularly where recipients
view the materials received as offensive. There can be no assurance certain ISPs
and other online services companies would not deny network access to the Company
if undesired content or spamming were to be transmitted from servers hosted by
the Company, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
Limited Protection of Proprietary Technology; Risk of Infringement. The
Company relies on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in its services. The Company has no patented technology that
would preclude or inhibit competitors from entering the Company's market. There
can be no assurance that the steps taken by the Company to protect its
intellectual property will prove sufficient to prevent misappropriation of the
Company's technology or to deter independent third-party development of similar
technologies. The laws of certain foreign countries may not protect the
Company's services or intellectual property rights to the same extent as do the
laws of the U.S. To date, the Company has not been notified that the Company
infringes the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at all.
As a result, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition.
Uncertain Need and Availability of Additional Funding. The Company expects
to incur significant expenditures as part of its planned expansion, including
increases in sales and marketing expenses and expenditures for new and expanded
co-location facilities. Although the Company believes that, following this
offering, its cash reserves and available borrowings will be adequate to fund
the Company's operations for at least the next 12 months, there can be no
assurance that such sources will be adequate or that additional funds will not
be required either during or after such 12 month period. In addition, any
incremental development of additional co-location space at the planned ISX
facility in San Jose, California will require additional debt or equity
financing. No assurance can be given that additional financing will be available
or that, if available, it will be available on terms favorable to the Company or
its stockholders. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the then current stockholders of the
Company could be significantly diluted and such equity securities may have
rights, preferences or privileges senior to those of the holders of the
Company's Common Stock. If adequate funds are not available to satisfy either
short or long-term capital requirements, the Company may be required to limit
its operations and expansion plans significantly, sell assets, or seek to
refinance outstanding obligations, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
Year 2000 Risks. Many currently installed computer systems and software
products are coded to accept only two digit entries in the date code field.
These date code fields will need to distinguish 21st century dates from 20th
century dates. This could result in system failures or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. As a result, many companies' software and computer systems may need
to be upgraded or replaced in order to comply with such "Year 2000"
requirements. The Company is in the process of establishing procedures for
evaluating and managing the risks and costs associated with this problem and
believes that its computer systems on a stand-alone basis are currently Year
2000 compliant. There can be no assurance, however, that the Company's computer
systems are Year 2000 compliant. In addition, many of the Company's customers'
and suppliers' Internet operations may be impacted by Year 2000
13
<PAGE> 23
complications. The failure of the Company's customers or suppliers to ensure
that their systems are Year 2000 compliant could have a material adverse effect
on the Company's customers and suppliers resulting in decreased Internet usage
or the delay or inability to obtain necessary data communication and
telecommunication capacity, which in turn could have a material adverse effect
on the Company's business, results of operations and financial condition.
Substantial Influence by Principal Stockholders, Executive Officers and
Directors. The Company's executive officers, directors and greater than 5%
stockholders (and their affiliates), in the aggregate, own approximately 30% of
the Company's outstanding Common Stock. As a result, such persons, acting
together, have the ability to substantially influence all matters submitted to
stockholders of the Company for approval (including the election and removal of
directors and any merger, consolidation or sale of all or substantially all of
the Company's assets) and to control the management and affairs of the Company.
Accordingly, such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of the Company, impeding a merger,
consolidation, takeover or other business combination involving the Company or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company, which in turn could have an adverse
effect on the value of the Company.
Recently Established Trading Market for the Common Stock; Potential
Volatility of Stock Price. The public market for the Common Stock was only
established on December 10, 1998 and there can be no assurance that an active
trading market will develop or be sustained.
The market price of the shares of Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations, new services introduced by the
Company or its competitors, changes in financial estimates by security analysts,
conditions and trends in the Internet, general market conditions and other
factors. Furthermore, the stock markets, and in particular the Nasdaq National
Market, have experienced extreme price and volume fluctuations that have
particularly affected the market prices of equity securities of many technology
companies and that often have been unrelated or disproportionate to the
operating performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and reflect price to earnings
ratios substantially above historical levels. There can be no assurance that
these trading prices and price to earnings ratios will be sustained. These broad
market factors may adversely affect the market price of the Company's Common
Stock. These market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international
currency fluctuations, may adversely affect the market price of the Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, class action litigation has often been instituted against
such companies. Such litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, results of operations and
financial condition.
14
<PAGE> 24
Antitakeover Effects of Certain Charter Provisions, Bylaws and Delaware
Law. Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of the
Company. Pursuant to the terms of the Company's Certificate of Incorporation
which will be effective upon the consummation of this offering, the Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future (including, but not limited to,
preferences of the Preferred Stock with respect to the payment of dividends and
upon liquidation, dissolution or winding up). The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock. In
addition, certain provisions of the Company's Certificate of Incorporation
eliminate the right of stockholders to act by written consent without a meeting.
Furthermore the Company's Certificate of Incorporation provides for a classified
Board of Directors such that approximately only one-third of the members of the
Board of Directors are elected at each annual meeting of stockholders.
Classified Boards may have the effect of delaying, deferring or discouraging
changes in control of the Company. Further, certain provisions of Delaware law
could delay or make difficult a merger, tender offer or proxy contest involving
the Company. Section 203 of the General Corporation Law of the State of
Delaware, which is applicable to the Company, prohibits certain business
combinations with certain stockholders for a period of three years after they
acquire 15% or more of the outstanding voting stock of a corporation.
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock (including shares issued upon the exercise of outstanding
options and warrants) in the public market after this offering could adversely
affect the market price of the Common Stock. Such sales also might make it more
difficult for the Company to sell equity-related securities in the future at a
time and price that the Company deems appropriate. In addition to the 126,975
shares of Common Stock offered hereby as of the date of this Prospectus, there
are 12,817,680 shares of Common Stock outstanding, of which 7,817,680 are
restricted shares ("Restricted Shares") under the Securities Act of 1933, as
amended (the "Securities Act"). As of such date, approximately 62,500 Restricted
Shares are eligible for sale in the public market and 43,682 Restricted Shares
will be eligible for sale 84 days after such date. 5,187,345 Restricted Shares,
which are subject to lock-up agreements with either the Company or CIBC
Oppenheimer Corp., will be available for sale in the public market 174 days
after such date, and the remaining Restricted Shares will be eligible for sale
from time to time thereafter upon expiration of applicable holding periods under
Rule 144 under the Securities Act. In addition, as of September 30, 1998, there
were outstanding 1,555,756 options and 69,843 warrants to purchase Common Stock.
CIBC Oppenheimer Corp. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements. In addition, the holders of approximately 7,359,131 Restricted
Shares are entitled to certain rights with respect to registration of such
shares for sale in the public market. If such holders sell in the public market,
such sales could have a material adverse effect on the market price of the
Company's Common Stock.
Dilution. The Company has issued options and warrants to acquire Common
Stock at prices significantly below the price per share of $12.9375 as reported
on the Nasdaq National Market on December 15, 1998. To the extent such
outstanding options and warrants are exercised, there will be dilution.
15
<PAGE> 25
REGISTERED STOCKHOLDERS
The Reoffer Prospectus relates to shares of Common Stock which have been
acquired by certain key employees of the Company, Sherman Tuan and Warren J.
Kaplan, (the "Registered Stockholders"). Mr. Tuan acquired his shares of Common
Stock pursuant to the exercise of options granted under the 1996 Stock Option
Plan. The address of Mr. Tuan is 1927 Wellington Drive, Milpitas, California
95035. Mr. Kaplan acquired his shares of Common Stock pursuant to the Employment
Agreement between the Company and such person dated as of November 10, 1997. The
address of Mr. Kaplan is 14690 Stoneridge Drive, Saratoga, California 95070.
The following table sets forth certain information with respect to the
Registered Stockholders as of December 15, 1998:
<TABLE>
<CAPTION>
Number of Number of Number of Percentage of
Position Shares Owned as Shares to Shares Shares Owned
Registered with of be Owned After After
Stockholder the Company December 9, 1998 Offered Hereby Offering Offering (1)
<S> <C> <C> <C> <C> <C>
Sherman Tuan Chief 181,875 56,875 125,000 *
Executive
Officer
Warren J. Kaplan President 72,082 70,082 2,000 *
and Chief
Operating
Officer
</TABLE>
* less than 1%.
(1) Percentage of ownership is calculated assuming 12,833,305 shares of Common
Stock were outstanding on December 15, 1998.
Shares of Common Stock covered by this Reoffer Prospectus may be offered
and sold from time to time by the Registered Stockholders through brokers
through the Nasdaq National Market System or otherwise, at the prices prevailing
at the time of such sales. To the Company's knowledge, no specific brokers or
dealers have been designated by the Registered Stockholders nor has any
agreement been entered into in respect of brokerage commissions or for the
exclusive or coordinated sale of any securities which may be offered pursuant to
this Reoffer Prospectus. The Company will pay all expenses of preparing and
reproducing this Reoffer Prospectus, but will not
16
<PAGE> 26
receive the proceeds from sales by the Registered Stockholders. On December 15,
1998, the average of the high and low selling prices per share of the Common
Stock as reported on the NASDAQ National Market System was $12.9375.
PLAN OF DISTRIBUTION
The shares of Common Stock covered by this Reoffer Prospectus are being
registered by the Company for the account of the Registered Stockholders. The
Company understands that none of such shares will be offered through
underwriters.
Shares of Common Stock covered by this Reoffer Prospectus may be offered
and sold from time to time by the Registered Stockholders through the NASDAQ
National Market System, the over-the-counter market, negotiated transactions or
otherwise, at the prices prevailing at the time of such sales, at prices
relating to such prevailing market prices or at prices otherwise negotiated. To
the Company's knowledge, no specific brokers or dealers have been designated by
the Registered Stockholders nor has any agreement been entered into in respect
of brokerage commissions or for the exclusive or coordinated sale of any
securities which may be offered pursuant to this Reoffer Prospectus. The
Registered Stockholders and any broker dealer through whom sales are made by the
Registered Stockholders may be regarded as "underwriters" within the meaning of
the Securities Act although the Registered Stockholders disclaims such status,
and his compensation may be regarded as underwriter's compensation.
The Company will not receive any of the proceeds from the offering
hereunder. All expenses of registration incurred in connection with this
offering are being borne by the Company, but all selling and other expenses
incurred by the individual Registered Stockholders will be borne by such
Registered Stockholders.
On December 15, 1998, the average of the high and low selling prices of
the Common Stock, as reported on the NASDAQ National Market System, was $12.9375
per share.
17
<PAGE> 27
DOCUMENTS INCORPORATED BY REFERENCE
AboveNet Communications Inc. ("AboveNet") hereby incorporates by
reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "SEC"):
(b) AboveNet's prospectus filed with the SEC pursuant to Rule 424(b)
under the Securities Act of 1933, as amended (the "1933 Act"),
in connection with Registration Statement No. 333-63141 on Form
S-1 filed with the SEC on September 10, 1998, the amendment
filed on October 5, 1998 the amendment filed on October 21,
1998, the amendment filed on November 6, 1998, the amendment
filed on November 16, 1998, the amendment filed on December 7,
1998 and the amendment filed on December 8, 1998, in which there
are set forth audited financial statements for AboveNet's fiscal
years ended June 30, 1997 and 1998;
(c) AboveNet's Registration Statement No. 0-25063 on Form 8-A filed
with the SEC on November 16, 1998 under Section 12 of the
Securities Exchange Act of 1934, as amended (the "1934 Act"),
together with amendments thereto, in which there is described
the terms, rights and provisions applicable to AboveNet's
outstanding Common Stock.
All reports and definitive proxy or information statements filed under
Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this
Registration Statement and prior to the filing of a post-effective amendment
which indicates that all securities offered hereby have been sold or which
deregisters all securities then remaining unsold shall also be incorporated by
reference into this Registration Statement and to be a part hereof from the date
of filing of such documents.
INDEMNIFICATION
Section 145 of the Delaware General Corporation Law authorizes a court
to award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the 1933 Act. The
Registrant's Bylaws provide for mandatory indemnification of its directors and
officers and permissible indemnification of employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. The
Registrant's Certificate of Incorporation provides that, pursuant to Delaware
law, its directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Registrant and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies,
such as injunctive or other forms of non-monetary relief, will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Registrant for
acts or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit of
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law.
18
<PAGE> 28
EXHIBIT INDEX
Exhibit Number Exhibit
4 Instrument Defining Rights of Stockholders. Reference is
made to AboveNet's Registration Statement No. 0-25063 on
Form 8-A, which is incorporated herein by reference
under Item 3(d) of this Registration Statement.
5 Opinion and consent of Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP.
23.1 Independent Auditors' Consent.
23.2 Consent of Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP is contained in Exhibit 5.
24 Power of Attorney. Reference is made to page II-5 of
this Registration Statement.
99.1 Written Compensation Agreement with Sherman Tuan.
99.2 Written Compensation Agreement with Warren J. Kaplan.
<PAGE> 1
EXHIBIT 5
December 18, 1998
AboveNet Communications Inc.
50 W. San Fernando Street
Suite #1010
San Jose, CA 95113
Re: AboveNet Communications Inc. (the "Company")
Registration Statement for
an aggregate of 3,700,789 Shares of Common Stock
Ladies and Gentlemen:
We refer to your registration on Form S-8 (the "Registration Statement")
under the Securities Act of 1933, as amended, of (i) 1,562,500 shares of Common
Stock available for issuance under the Company's 1998 Stock Incentive Plan, (ii)
156,250 shares of Common Stock available for issuance under the Company's 1998
Employee Stock Purchase Plan, (iii) 1,433,159 shares of Common Stock available
for issuance under the Company's 1997 Stock Plan and the Company's 1996 Stock
Option Plan, (iv) 56,875 shares of Common Stock available for issuance under the
Shares Acquired Under the Written Compensation Agreement with Sherman Tuan and
(v) 492,005 shares of Common Stock available for issuance under the Shares and
Options Granted Under the Written Compensation Agreement with Warren J. Kaplan.
We advise you that, in our opinion, when such shares have been issued and sold
under the applicable provisions of the 1998 Stock Incentive Plan, the Company's
1998 Employee Stock Purchase Plan, the Company's 1997 Stock Plan, the Company's
1996 Stock Option Plan, the Written Compensation Agreement with Sherman Tuan,
the Written Compensation Agreement with Warren J. Kaplan and in accordance with
the Registration Statement, such shares will be validly issued, fully paid and
nonassessable shares of AboveNet Communications Inc.'s Common Stock.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ GUNDERSON DETTMER STOUGH VILLENEUVE
FRANKLIN & HACHIGIAN, LLP
--------------------------------------------
Gunderson Dettmer Stough Villeneuve Franklin
& Hachigian, LLP
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
of AboveNet Communications Inc.:
We consent to the incorporation by reference in this Registration Statement
of AboveNet Communications Inc. on Form S-8 of our reports dated August 7, 1998
(December 4, 1998 as to Note 12), appearing in Registration Statement No.
333-63141 on Form S-1 of AboveNet Communications Inc.
DELOITTE & TOUCHE LLP
San Jose, California
December 17, 1998
<PAGE> 1
Exhibit 99.1
WRITTEN COMPENSATION AGREEMENT WITH SHERMAN TUAN
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION AND ITS COUNSEL, THAT
SUCH REGISTRATION IS NOT REQUIRED.
INCENTIVE STOCK OPTION AGREEMENT
This Stock Option Agreement is made and entered into this 12th day of
June, 1998, in full replacement of the Stock Option Agreement dated March 8,
1996 pursuant to the AboveNet Communications, Inc. 1996 Stock Option Plan (the
"Plan"). The Committee administering the Plan has selected Sherman Tuan ("the
Optionee") to receive the following grant of an incentive stock option ("Stock
Option") to purchase shares of the common stock of AboveNet Communications, Inc.
(the "Corporation"), on the terms and conditions set forth below to which
Optionee accepts and agrees:
1. Stock Options Granted
No. of Shares Subject to Option 700,000
-----------------------------------------
Date of Grant March 8, 1996
-----------------------------------------------------------
Vesting Commencement Date February 1, 1996
-----------------------------------------------
Exercise Price Per Share $0.01
------------------------------------------------
Expiration Date March 7, 2006
---------------------------------------------------------
2. The Stock Option is granted pursuant to the Plan to purchase the number
of shares of authorized but unissued common stock of the Corporation specified
in Section 1 hereof (the "Shares"). The Stock Option shall expire, and all
rights to exercise it shall terminate on the Expiration Date, except that the
Stock Option may expire earlier as provided in the Plan. The number of shares,
subject to the Stock Option granted hereunder shall be adjusted as provided in
the Plan.
3. The Stock Option shall be exercisable in all respects in accordance with
the terms of the Plan which are incorporated herein by this reference. Optionee
acknowledges having received and read a copy of the Plan. All shares of the
Corporations's common stock issued pursuant to the exercise of this Stock
Option shall be subject to the Corporation's Right of First Refusal as set
forth in Sections 11 of the Plan.
4. Optionee shall have the right to exercise the Stock Option in accordance
with the following schedule:
4.1 The Stock Option may not be exercised in whole or in part at any
time prior to the end of the first semiannual calendar period (semiannual
calendar period" shall mean six (6) continuous calendar months) following the
Vesting Commencement Date.
4.2 Optionee may exercise the Stock Option as to one eighth (1/8th)
of the Shares at the end of 1st full semiannual calendar period following the
Vesting Commencement Date.
4.3 Optionee may exercise the Stock Option as to an additional one
eighth (1/8th) of the Shares at the end of each of the full semiannual calendar
period of employment which Optionee completes with the Company commencing with
the 2nd full semiannual calendar period following the Vesting Commencement Date.
4.4 The right to exercise the Stock Option shall be cumulative.
Optionee may buy all, or from time to time any part, of the maximum number of
shares which are exercisable under the Stock Option, but in no case may Optionee
exercise the Stock Option with regard to a fraction of a share, or for any share
for which the Stock Option is not exercisable.
5. The Optionee agrees to comply with all laws, rules, and regulations
applicable to the grant and exercise of the Stock Option and the sale or other
disposition of the common stock of the Corporation received pursuant to the
exercise of such Stock Option. The Stock Option shall not become exercisable
unless and until the shares exercisable under the Stock Option have been
qualified under the California Corporate Securities Law of 1968 pursuant to a
permit application filed with the California Department of Corporations or
unless the exercise is otherwise exempt from the qualification requirements of
such law. The Stock Option is conditioned upon the Optionee's representation,
which Optionee hereby confirms as of the date hereof and which Optionee must
confirm as of the date of any exercise of all or part of the Stock Option, that:
6.1 Optionee understands that both this Stock Option and any shares
purchased upon its exercise are securities, the issuance of which require
compliance with state and federal securities laws;
6.2 Optionee understands that the securities have not been
registered under the Securities Act of 1933 (the "Act") in reliance upon a
specific exemption contained in the Act which depends upon Optionee's bona fide
investment intention in acquiring these securities; that Optionee's intention is
to hold these securities for Optionee's own benefit for an indefinite period;
that Optionee has no present intention of selling or transferring any part
thereof
<PAGE> 2
(recognizing that the Stock Option is not transferable) and that certain
restrictions may exist on transfer of the shares issued upon exercise of the
Stock Option;
6.3 Optionee understands that the shares issued upon exercise of
this Stock Option, in addition to other restrictions on transfer, must be held
indefinitely unless subsequently registered under the Act, or unless an
exemption from registration is available; that Rule 701 and Rule 144, two
exemptions from registration which may be available, are only available after
the satisfaction of certain conditions and require the presence of a U.S. public
market for such shares; that no certainty exists that a U.S. public market for
the shares will exist, and that otherwise Optionee may have to sell the shares
pursuant to another exemption from registration which exemption may be difficult
to satisfy; and
6.4 The Corporation shall not be under any obligation to issue
any shares upon the exercise of this Stock Option unless and until the
Corporation has determined that:
(a) it and Optionee have taken all actions required to register
such shares under the Securities Act, or to perfect an exemption from the
registration requirements thereof;
(b) any applicable listing requirement of any F stock exchange
on which such shares are listed has been satisfied; and
(c) all other applicable provisions of state and federal law
have been satisfied.
7. By signing this agreement, Optionee hereby declares under
penalties of perjury that to the best of his/her knowledge and belief, the
following is correct and complete:
7.1 Optionee is the holder of a stock option (the "Option")
granted to Optionee described above in this agreement.
7.2 Optionee hereby certifies that the Stock Option Agreement
evidencing the Option (the "Agreement") was issued but contained an error in the
vesting schedule. Optionee hereby agrees to immediately deliver the Agreement to
the Company.
7.3 Optionee agrees that the Agreement will be deemed to have
been surrendered for cancellation on the date hereof and releases the Company
from any and all liability under the Agreement.
7.4 Optionee further agrees to defend and indemnify the Company
and hold the Company harmless from any damage or loss caused by or in any way
relating to the loss of the Agreement or the issuance of a new agreement
replacing the Agreement.
7.5 Optionee further certifies that Optionee has not assigned or
transferred the Option or any rights thereunder to any other person.
7.6 Optionee hereby authorizes any officer of the Company to
issue this new agreement evidencing the Option to Optionee in order to replace
the inaccurate Agreement.
IN WITNESS WHEREOF, each of the parties hereto has executed this
Stock Option Agreement, in the case of the Corporation by its duly authorized
officer, as of the date and year written above.
OPTIONEE AboveNet Communications, Inc.
/s/ SHERMAN TUAN By: /s/ WARREN J. KAPLAN
- --------------------- -------------------------
(signature) (signature)
Address: Its: President & COO
-------------------------
1927 Wellington Dr.
Milpitas, CA 95035
<PAGE> 3
NOTICE OF EXERCISE
AboveNet Communications Inc.
Corporate Secretary
Date of Exercise: 6/30/98
Dear Corporate Secretary:
This constitutes notice under my stock option that I elect to
purchase the number of shares for the price set forth below.
<TABLE>
<S> <C>
Type of option: Nonstatutory Stock Option
---
Incentive Stock Option X
---
(Please check your option type)
Stock option granted: March 8, 1996
(See your stock option agreement)
Number of shares as to which option
is exercised: 350,000
Certificates to be issued in name of: Sherman Tuan
Total exercise price: $0.01/share
Cash payment delivered herewith: $3,500
</TABLE>
By this exercise, I agree (i) to sign the Common Stock Purchase
Agreement with the Company (ii) to provide such additional documents as you may
require pursuant to the terms of the 1996 Stock Option Plan, and (iii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this Option.
I hereby make the following certifications and representations
with respect to the number of shares of Common Stock of the Company listed above
(the "Shares"), which are being acquired by me for my own account upon exercise
of the Option as set forth above:
I acknowledge that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), and are deemed to constitute
"restricted securities" under Rule 701 and "control securities" under Rule 144
promulgated under the Act. I warrant and represent to the Company that I have no
present intention of distributing or selling said Shares, except as permitted
under the Act and any applicable state securities laws.
I further acknowledge that the Shares I receive through the
exercise of my stock option is subject to the restriction of First Right of
Refusal as provided in the Common Stock Purchase Agreement between myself and
the Company.
I further acknowledge that I will not be able to resell the
Shares for at least ninety days after the stock of the Company becomes publicly
traded (i.e., subject to the reporting requirements of Section 13 or l5(d) of
the Securities Exchange Act of 1934) under Rule 701 and that more restrictive
conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of
the Shares subject to the provisions of the Option shall have endorsed thereon
appropriate legends reflecting the foregoing limitations, as well as any
<PAGE> 4
legends reflecting restrictions pursuant to the Company's Articles of
Incorporation, Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a
representative of the underwriters) in connection with the first underwritten
registration of the offering of any securities of the Company under the Act, I
will not sell or otherwise transfer or dispose of any shares of Common Stock or
other securities of the Company during such period (not to exceed one hundred
eighty (180) days) following the effective date of the registration statement of
the Company filed under the Act (the "Effective Date") as may be requested by
the Company or the representative of the underwriters. For purposes of this
restriction I will be deemed to own securities that (i) are owned directly or
indirectly by me, including securities held for my benefit by nominees,
custodians, brokers or pledgees; (ii) may be acquired by me within sixty (60)
days of the Effective Date; (iii) are owned directly or indirectly, by or for my
brothers or sisters (whether by whole or half blood), spouse, ancestors and
lineal descendants; or (iv) are owned, directly or indirectly, by or for a
corporation, partnership, estate or trust of which I am a shareholder, partner
or beneficiary, but only to the extent of my proportionate interest therein as a
shareholder, partner or beneficiary thereof I further agree that the Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such period.
Very truly yours,
OPTIONEE
/s/ Sherman Tuan
---------------------------------------------
Name: Sherman Tuan
---------------------------------------
(Type or Print Name)
<PAGE> 1
Exhibit 99.2
WRITTEN COMPENSATION AGREEMENT WITH WARREN J. KAPLAN
Employment Agreement
EMPLOYMENT AGREEMENT, dated as of November 10, 1997, between AboveNet
Communications, Inc., a corporation organized under the laws of the State of
California ("Employer"), and Warren Kaplan ("Executive").
WHEREAS, Executive desires to provide services to Employer and Employer
desires to retain the services of Executive;
WHEREAS, Employer and Executive desire to formalize the terms and
conditions of Executive's employment with Employer.
NOW, THEREFORE, Employer and Executive hereby agree as follows:
1. Employment.
(a) General. Employer hereby employs Executive in the capacity of
President and Chief Operating Officer, commencing with the Employment Term (as
defined in Section 2.5). Effective as of the Hire Date (as defined in Section
2.5), Employer has elected Executive as a member of the Board of Directors of
Employer (the "Board"). Executive hereby accepts such employment, upon the terms
and subject to the conditions herein contained.
(b) Duties. During Executive's employment with Employer, Executive
shall report directly to Employer's Chief Executive Officer and shall be
responsible for performing those duties consistent with the position of
President and Chief Operating Officer as may from time to time be reasonably
assigned to or requested of Executive by Employer's Chief Executive Officer.
Executive shall use his reasonable efforts to perform faithfully and effectively
such responsibilities. Executive shall conduct all of his activities in a manner
so as to maintain and promote the business and reputation of Employer.
(c) Full-Time Position. Executive, during his employment with
Employer, shall devote all of his business time, attention and skills to the
business and affairs of Employer. Notwithstanding the foregoing, it shall not be
a violation of this Agreement if Executive performs consulting services for
NETCOM On-Line Communications Services, Inc. ("NETCOM") prior to September 30,
1998, not to exceed 10 hours per month. Executive may also serve as a director
(but not as an officer, employee, finder or consultant) to other companies that
are not directly competitive with Employer; provided that Executive shall advise
the Board in writing of all compensation of any nature that Executive shall be
entitled to in connection with such other directorships.
(d) Location of Employment. Executive's principal place of
employment during his employment with Employer shall be in Silicon Valley,
California. In the event that Employer shall change the location of its
principal office from Silicon Valley, California, and Executive does not
terminate his employment pursuant to Section 3.1.5 hereof, Executive shall be
entitled to be reimbursed for reasonable documented relocation expenses,
including moving costs, temporary housing, commuting expenses and other
relocation costs not to exceed $100,000.
2. Compensation and Benefits.
(a) Salary. Employer shall pay to Executive, and Executive shall
accept, as full compensation for any and all services rendered and to be
rendered by him to Employer in all capacities during the term of his employment
under this Agreement, (a) a base salary at the annual rate of $150,000 for the
first year of employment hereunder and $175,000 for the second through fourth
years of employment hereunder, or at such higher rate as the Board shall
determine in its sole discretion ("Base Salary"), payable in accordance with the
regular payroll practices of Employer, and (b) the additional benefits
hereinafter set forth in this Section 2. Notwithstanding the foregoing, in the
event that a Corporate Transaction (as hereinafter defined) occurs on or before
December 31, 1999, Executive's Base Salary for the balance of the employment
year in which the Corporate Transaction occurs shall be increased to an annual
rate of $225,000 and Executive's Base Salary for each year of employment
following the year of the Corporate Transaction shall be increased by an amount
equal to not less than 10% of the Base Salary for the preceding year of
employment hereunder. The preceding sentence shall not apply if no Corporate
Transaction occurs on or before December 31, 1999.
For all purposes under this Agreement, "Corporate Transaction"
means one of the following events:
(1) Sherman Tuan ceases to be Employer's Chief Executive
Officer and is succeeded in such position by any person other than Executive;
(2) An underwritten initial public offering of Employer's
securities;
(3) The consummation of a merger or consolidation of
Employer with or into another entity or any other corporate reorganization, if
more than 50% of the combined voting power of the continuing or surviving
entity's securities outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not shareholders of Employer
immediately prior to such merger, consolidation or other reorganization;
<PAGE> 2
(4) The sale, transfer or other disposition of all or
substantially all of Employer's assets;
(5) The liquidation or dissolution of Employer; or
(6) Any transaction as a result of which any person becomes
the beneficial owner of securities of Employer representing at least 50% of the
total voting power represented by Employer's then outstanding voting securities.
For purposes of this Subsection (e), the term "person" shall exclude (i) any
person who is a shareholder of Employer on the date of this Agreement or (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
Employer or of a parent or subsidiary of Employer.
A transaction shall not constitute a "Corporate Transaction" if
its sole purpose is to change the state of Employer's incorporation or to create
a holding company that will be owned in substantially the same proportions by
the persons who held Employer's securities immediately before such transaction.
(b) Additional Compensation. Executive shall be entitled to an
annual bonus of up to the amount of his Base Salary, as determined by the Board
in its sole discretion based upon performance targets established by the Board
at the beginning of each year of employment hereunder. Notwithstanding the
foregoing, in the event that during a fiscal year ending on or before December
31, 1999, a Corporate Transaction occurs or Employer reports earnings before
depreciation and amortization for a fiscal year ending on or before December 31,
1999, the minimum annual bonus hereunder shall be $50,000 for such fiscal year,
and the minimum bonus for each subsequent fiscal year shall be the minimum bonus
for the preceding fiscal year plus an additional 10%. The preceding sentence
shall not apply if no Corporate Transaction occurs in a fiscal year ending on or
before December 31, 1999, and Employer does not report earnings before
depreciation and amortization for a fiscal year ending on or before December 31,
1999.
(c) Stock Options. As of his first day of employment hereunder,
Executive shall be granted a stock option to purchase 700,000 shares of
Employer's Common Stock. The exercise price per share shall be equal to $0.10.
The option shall be subject to the terms and conditions described in the Stock
Option Agreement attached hereto as Exhibit A. The option shall be exercisable
immediately with respect to 20% of the option shares, and the balance shall
become exercisable in equal monthly installments over the next 36 months of
service (as described in such Stock Option Agreement), except as otherwise
provided in Section 3.2.2. For purposes of determining the number of shares with
respect to which the option is exercisable, Executive's service shall be deemed
to commence on November 10, 1997.
(d) Executive Benefits.
A. Expenses. Employer shall reimburse Executive for expenses he
reasonably incurs in connection with the performance of his duties (including
business travel and entertainment expenses), all in accordance with Employer's
policies with respect thereto.
B. Employer Plans. Executive shall be entitled to participate in
such executive benefit plans and programs as Employer may from time to time
offer or provide to executives of Employer, including, but not limited to,
participation in life insurance, health and accident, medical and dental,
disability and retirement plans and programs.
C. Vacation. Executive shall be eligible for three weeks' paid
vacation leave.
D. Car Allowance. Employer shall pay to Executive a car allowance
of $600 per month.
E. Cellular Telephone. Employer shall purchase a cellular telephone
for Executive's use and shall reimburse Executive for business telephone calls
related to Executive's employment made to or from such telephone within 30 days
after receipt of telephone bills for such telephone calls.
(e) Employment Term. Executive's employment by Employer pursuant to
this Agreement shall commence on the closing date of an equity, convertible debt
or bridge loan investment in the Company by one or more venture capital funds,
financial institutions or individuals in the aggregate amount of $1 million or
more (the
<PAGE> 3
"Hire Date"). Except as provided in Section 3.1 hereof, Executive's employment
by Employer pursuant to this Agreement shall continue until the fourth
anniversary of the Hire Date (the "Initial Term"). Thereafter, this Agreement
shall automatically be renewed for successive one-year periods (the Initial
Term, together with any subsequent employment period or periods, being referred
to herein as the "Employment Term"); provided, however, that either party may
elect to terminate this Agreement as of the anniversary of the Hire Date in 2002
or as of any subsequent anniversary of the Hire Date by written notice to such
effect delivered to the other party at least 120 days prior to such termination
date.
3. Termination of Employment.
(a) Events of Termination. Executive's employment with Employer
shall terminate upon the occurrence of any one or more of the following events:
A. Death. In the event of Executive's death, Executive's employment
shall terminate on the date of death.
B. Disability. In the event of Executive's Disability (as
hereinafter defined), Employer shall have the option to terminate Executive's
employment by giving a notice of termination to Executive. The notice of
termination shall specify the date of termination, which date shall not be
earlier than 30 days after the notice of termination is given. For purposes of
this Agreement, "Disability" means the inability of Executive to substantially
perform his duties hereunder for 180 days out of 365 consecutive days as a
result of a physical or mental illness, all as determined in good faith by the
Board.
C. Termination by Employer for Cause. Employer may, at its option,
terminate Executive's employment for "Cause," based on objective factors
determined in good faith by a majority of the Board, by giving a notice of
termination to Executive specifying the reasons for termination and, if
Executive shall fail to cure same within 10 days of his receiving the notice of
termination, his Employment shall terminate at the end of such 10-day period;
provided that in the event the Board in good faith determines that the
underlying reasons giving rise to such determination cannot be cured, then said
cure period shall not apply and Executive's employment shall terminate on the
date of Executive's receipt of the notice of termination. "Cause" shall mean (a)
Executive's conviction of, guilty or "no contest" plea to or confession of guilt
of a felony, (b) a willful act by Executive which constitutes gross misconduct
and which is materially injurious to Employer or (c) violation by Executive of
the Inventions Agreement (as defined in Section 4.1 hereof) without the prior
written consent of Employer.
D. Without Cause by Employer. Employer may, at its option,
terminate Executive's employment for any reason whatsoever (other than for the
reasons set forth above in this Section 3.1) by giving written notice of
termination to Executive, and Executive's employment shall terminate on the
later of (a) the date the notice of termination is given or (b) the date set
forth in such notice of termination.
E. Employer's Material Breach. Executive may, at his option,
terminate Executive's employment upon Employer's Material Breach of this
Agreement by giving Employer written notice of such breach (which notice shall
identify the manner in which Employer has materially breached this Agreement)
and, if such breach is not cured within 30 days of Employer's receiving such
written notice, Executive's employment shall terminate at the end of such 30-day
period. Employer's "Material Breach" of this Agreement shall mean (a) the
failure of Employer to pay Base Salary or additional compensation hereunder in
accordance with this Agreement, including a failure of Employer to commence this
Agreement pursuant to Section 2.5 hereof, (b) the assignment to Executive
without Executive's consent of duties substantially inconsistent with his
duties, as set forth in Section 1.2 hereof, (c) the relocation of Employer's
principal offices to a geographic location other than Northern California, the
New York City metropolitan area or the Boston metropolitan area or (d) a failure
to reelect Executive as a member of the Board.
F. Without Material Breach by Executive. Executive may terminate
Executive's employment for any reason whatsoever by giving written notice of
termination to Employer. Executive's employment shall terminate on the earlier
of (a) the date, following the date of the notice of termination, upon which a
suitable replacement for Executive is found by the Employer or (b) 10 days after
the date of receipt by Employer of the notice of termination.
<PAGE> 4
(b) Certain Obligations of Employer Following Termination of
Executive's Employment. Following the termination of Executive's employment
under the circumstances described below, Employer shall pay to Executive in
accordance with its regular payroll practices the following compensation and
provide the following benefits in full satisfaction and final settlement of any
and all claims and demands that Executive now has or hereafter may have against
Employer under this Agreement:
A. Death; Disability. In the event that Executive's employment is
terminated by reason of Executive's death or Disability, Executive or his
estate, as the case may be, shall be entitled to the following payments:
(1) Base Salary through the date Executive's employment is
terminated;
(2) Any additional compensation (including compensation
pursuant to Section 2.2 and reimbursement pursuant to Section 2.4.1 hereof),
prorated to the date of death of Executive or the date of termination due to
Executive's Disability; and
(3) Employer shall pay to Executive or his estate, as the
case may be, the amounts and shall provide all benefits generally available
under the employee benefit plans, policies and practices of Employer, determined
in accordance with the applicable terms and provisions of such plans, policies
and practices in each case, as accrued to the date of termination or otherwise
payable as a consequence of Executive's death or Disability.
B. Without Cause by Employer; Material Breach by Employer. In the
event that Executive's employment is terminated by Employer pursuant to Section
3.1.4 hereof or by Executive pursuant to Section 3.1.5 hereof, Executive shall
be entitled to the following payments and benefits:
(1) Base Salary through the date Executive's employment is
terminated;
(2) Any additional compensation (including compensation
pursuant to Section 2.2 hereof, reimbursements pursuant to Section 2.4.1 hereof
and benefits pursuant to Section 2.4.2 hereof), prorated to the date Executive's
employment is terminated hereunder;
(3) Continuing payments of Base Salary, payable in
accordance with the regular payroll practices of Employer, for 12 months
following the date of termination of Executive's employment: and
(4) Immediate full vesting of the option shares described in
Section 2.3. This Subsection (d) shall apply only if either (i) Executive's
employment is terminated on or before December 31, 1999, or (ii) a Corporate
Transaction occurs on or before December 31, 1999. This Subsection (d) shall be
inoperative if no Corporate Transaction occurs on or before December 31, 1999,
and Executive's employment is terminated after December 31, 1999.
C. Termination by Executive Without Material Breach or by Employer
for Cause. In the event Executive's employment is terminated by Executive
pursuant to Section 3.1.6 hereof or by Employer pursuant to Section 3.1.3
hereof, Executive shall be entitled to no further compensation or other benefits
under this Agreement except as to that portion of any unpaid Base Salary and
other benefits accrued and earned by him hereunder, including compensation
pursuant to Section 2.2 hereof, reimbursements pursuant to Section 2.4.1 hereof
and benefits pursuant to Section 2.4.2 hereof, up to and including the effective
date of such termination. In addition, Executive shall be entitled to receive
any additional compensation earned but not yet paid with respect only to any
fiscal year prior to the fiscal year of termination.
(c) Nature of Payments. All amounts to be paid by Employer to
Executive pursuant to this Section 3 are considered by the parties to be
severance payments. In the event such payments are treated as damages, it is
expressly acknowledged by the parties that damages to Executive for termination
of employment would be difficult to ascertain and the above amounts are
reasonable estimates thereof.
<PAGE> 5
(d) Duties Upon Termination. Upon termination of Executive's
employment with Employer pursuant to Sections 3.1.1 through 3.1.6 hereof or upon
expiration of the Employment Term, Executive shall be released from any duties
and obligations hereunder (except those duties and obligations set forth in
Sections 4, 5.11 and 5.12 hereof). Upon termination of Executive's employment
with Employer pursuant to Sections 3.1.1 through 3.1.6 hereof, the obligations
of Employer to Executive shall be as set forth in Section 3.2 hereof.
Item 20. Confidentiality; Non-Solicitation; Non-Compete.
(a) Nondisclosure of Confidential Information. As a condition of his
employment hereunder, Executive shall execute Employer's standard form of
Proprietary Information and Inventions Agreement (the "Inventions Agreement").
(b) Certain Activities. Executive shall not, while employed by
Employer and for a period of two years thereafter, directly or indirectly hire,
offer to hire, entice away or in any other manner persuade or attempt to
persuade any officer, employee, agent, lessor, lessee, licensor, licensee,
customer, prospective customer, supplier or shareholder or prospective
shareholder of Employer to discontinue or alter his, her or its relationship
with Employer.
(c) Covenant Not to Compete. During the Executive's employment and
for a period of one year after the termination of Executive's employment, but
only as long as Executive is receiving severance payments pursuant to Section
3.2 hereof, Executive shall not directly or indirectly engage in competition
with Employer by being associated with any competitor of Employer that sells or
offers to sell any products or services which compete with the products or
services offered or sold by Employer or being developed by Employer for sale at
the time of termination of Executive, or induce or attempt to induce, directly
or indirectly, any then potential customer contemplating doing business with
Employer to not commence doing business, or any current customer of Employer to
cease doing business, in whole or in part, with Employer or solicit business of
any such customer for any products or services of any competitor of Employer
which compete with the products or services offered or sold by Employer or being
developed by Employer for sale at the time of termination of Executive.
(d) Injunctive Relief. Executive acknowledges and agrees that (a)
Employer will be irreparably injured in the event of a breach by Executive of
any of his obligations under this Section 4, (b) monetary damages will not be an
adequate remedy for any such breach, (c) Employer shall be entitled to
injunctive relief, in addition to any other remedy which it may have, in the
event of any such breach, including, but not limited to, termination of
Executive's employment for Cause and (d) the existence of any claims which
Executive may have against Employer, whether under this Agreement or otherwise,
shall not be a defense to the enforcement by Employer of any of its rights under
this Section 4.
(e) Non-Exclusivity and Survival. The covenants and obligations of
Executive contained in this Section 4 are in addition to, and not in lieu of,
any covenants and obligations which Executive may have with respect to the
subject matter hereof, whether by contract, as a matter of law or otherwise, and
such covenants and obligations, and their enforceability, shall survive any
termination of Executive's employment by either party and any investigation made
with respect to the breach thereof by Employer at any time.
4. Miscellaneous Provisions.
(a) Severability. If in any jurisdiction any term or provision
hereof is determined to be invalid or unenforceable, (a) the remaining terms and
provisions hereof shall be unimpaired, (b) any such invalidity or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction and (c) the invalid or
unenforceable term or provision shall, for purposes of such jurisdiction, be
deemed replaced by a term or provision that is valid and enforceable and that
comes closest to expressing the intention of the invalid or unenforceable term
or provision.
(b) Execution in Counterparts. This Agreement may be executed in one
or more counterparts, and by the different parties hereto in separate
counterparts, each of which shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement (and all signatures
need not appear on any one counterpart), and this Agreement shall become
effective when one or more counterparts has been signed by each of the parties
hereto and delivered to each of the other parties hereto.
<PAGE> 6
(c) Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed duly given when delivered by
hand, or when delivered if mailed by registered or certified mail or private
courier service, postage prepaid, return receipt requested or via facsimile
(with written confirmation of receipt) as follows:
If to Employer, to:
AboveNet Communications, Inc.
50 West San Fernando Street
Suite 1010
San Jose, CA 95113
Telefax No.: (408) 367-6666
Copy to:
Carla Newell, Esq.
Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP
155 Constitution Drive
Menlo Park, CA 94025
Telefax No.: (650) 321-2800
If to Executive, to:
Warren Kaplan
14690 Stoneridge Drive
Saratoga, CA 95070
and
68 Yarmouth Road
Wellesley, MA 02181
Copy to:
Irwin M. Heller, Esq.
Managing Partner
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Telefax No.: (617) 542-2241
or to such other address(es) as a party hereto shall have designated by like
notice to the other parties hereto.
(d) Amendment. No provision of this Agreement may be modified,
amended, waived or discharged in any manner except by a written instrument
executed by Employer and Executive.
(e) Entire Agreement. This Agreement, the Stock Option Agreement,
the Inventions Agreement and the Consulting Agreement between the parties of
even date herewith constitute the entire agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior agreements and
understandings of the parties hereto, oral or written, with respect to the
subject matter hereof.
<PAGE> 7
(f) Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be wholly performed therein without regard to its
conflicts or choice-of-law provisions.
(g) Headings. The headings contained herein are for the sole purpose
of convenience of reference and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
(h) Binding Effect; Successors and Assigns. Executive may not
delegate his duties or assign his rights hereunder. This Agreement shall inure
to the benefit of, and be binding upon, the parties hereto and their respective
heirs, legal representatives, successors and permitted assigns.
(i) Waiver, etc. The failure of either of the parties hereto to at
any time enforce any of the provisions of this Agreement shall not be deemed or
construed to be a waiver of any such provision, nor to in any way affect the
validity of this Agreement or any provision hereof or the right of either of the
parties hereto to thereafter enforce each and every provision of this Agreement.
No waiver of any breach of any of the provisions of this Agreement shall be
effective unless set forth in a written instrument executed by the party against
whom or which enforcement of such waiver is sought, and no waiver of any such
breach shall be construed or deemed to be a waiver of any other or subsequent
breach.
(j) Representations and Warranties. Executive and Employer hereby
represent and warrant to the other that: (a) he or it has full power, authority
and capacity to execute and deliver this Agreement and to perform his or its
obligations hereunder, (b) such execution, delivery and performance will not
(and with the giving of notice or lapse of time or both would not) result in the
breach of any agreements or other obligations to which he or it is a party or he
or it is otherwise bound and (c) this Agreement is his or its valid and binding
obligation in accordance with its terms. Executive represents that the
Transition Agreement and Release, dated as of September 1, 1995, is the only
binding agreement between Executive and NETCOM regarding his prior employment by
NETCOM. Employer represents that it will purchase directors' and officers'
liability insurance covering Executive in such amounts as reasonably determined
by the Board and consistent with the amounts purchased for other executive
officers of the Company.
(k) Enforcement. If any party institutes legal action to enforce or
interpret the terms and conditions of this Agreement, the prevailing party shall
be awarded reasonable attorneys' fees at all trial and appellate levels, and the
expenses and costs incurred by such prevailing party in connection therewith.
(l) Arbitration. Except as provided in Section 4 hereof, any dispute
arising out of this Agreement, including but not limited to the determination by
the Board of a termination for Cause pursuant to Section 3.1.3 hereof, or in
respect of the breach hereof shall be resolved under the following procedures.
The burden of proof for demonstrating Cause shall be on Employer. The party
claiming to be aggrieved shall furnish to the other party a written statement of
the grievance and the relief requested and proposed. If the other party does not
agree to furnish the relief requested or proposed, or otherwise does not satisfy
the demand of the party claiming to be aggrieved, the parties shall submit the
dispute to non-binding mediation before a mediator to be jointly selected by the
parties. Employer shall pay the cost of the mediation, including the reasonable
attorneys' fees of Executive. If the mediation does not produce a resolution of
the dispute, the parties agree that the dispute shall be resolved by final and
binding arbitration before an arbitrator mutually selected by the parties or, if
no agreement is reached, then under the Expedited Labor Arbitration Rules of the
American Arbitration Association, except that the arbitrator shall be selected
by alternately striking names from a panel of five neutral labor or employment
arbitrators designated by the American Arbitration Association. The arbitrator
shall have the authority to grant any relief authorized by law. The arbitrator
shall not have the authority to modify, change or refuse to enforce the terms of
this Agreement. In addition, the arbitrator shall not have the authority to
require Employer to change any lawful policy or benefit plan. The hearing shall
be transcribed. Employer shall bear the costs of arbitration if Executive
prevails. If Employer prevails, Executive shall pay half the cost of arbitration
or $500, whichever is less. Executive shall pay the first $10,000 of his
attorneys' fees related to the arbitration, and Employer shall reimburse
Executive for his reasonable attorneys' fees related to the arbitration in
excess of $10,000. Employer shall pay all of its attorneys' fees related to the
arbitration. Arbitration shall be the exclusive final remedy for any dispute
between the parties; provided, however, that nothing in this Section 5.12 shall
limit the right of Employer to go to court to obtain injunctive relief for
violation of Section 4 hereof. The parties further agree that no dispute shall
be submitted to arbitration where the
<PAGE> 8
party claiming to be aggrieved has not provided the other party with a written
statement of the grievance and first sought mediation. All mediation and
arbitration shall be conducted in California.
(m) Continuing Effect. Where the context of this Agreement requires,
the respective rights and obligations of the parties shall survive any
termination or expiration of the term of this Agreement.
(n) Expenses. Each party to this Agreement agrees to bear his or its
own expenses in connection with the negotiation and execution of this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto as of the date first above written.
ABOVENET COMMUNICATIONS, INC.
By: /s/ Sherman Tuan
--------------------------------------
Name: Sherman Tuan
Title: Chief Executive Officer and
Member of the Board of Directors
ABOVENET COMMUNICATIONS, INC.
By:
--------------------------------------
Name:
------------------------------------
Title: Chairman of the Board
/s/ Warren Kaplan
-----------------------------------------
WARREN KAPLAN
President and Chief Operating Officer
