<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 16, 1998.
REGISTRATION NO. 333-63141
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ABOVENET COMMUNICATIONS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4813 77-0424796
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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50 W. SAN FERNANDO STREET, SUITE #1010
SAN JOSE, CALIFORNIA 95113
(408) 367-6666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SHERMAN TUAN
CHIEF EXECUTIVE OFFICER
50 W. SAN FERNANDO STREET, SUITE #1010
SAN JOSE, CALIFORNIA 95113
(408) 367-6666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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CARLA S. NEWELL, ESQ. JORGE A. DEL CALVO, ESQ.
BENNETT L. YEE, ESQ. BLAIR W. WHITE, ESQ.
ALLISON W. TAKAHASHI, ESQ. GABRIELLA A. LOMBARDI, ESQ.
GUNDERSON DETTMER STOUGH PILLSBURY MADISON & SUTRO LLP
VILLENEUVE FRANKLIN & HACHIGIAN, LLP 2550 HANOVER STREET
155 CONSTITUTION DRIVE PALO ALTO, CA 94035
MENLO PARK, CA 94025 (650) 233-4500
(650) 321-2400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 16, 1998
4,000,000 SHARES
[ABOVENET LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock offered hereby are being sold by AboveNet
Communications Inc. ("AboveNet" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $9.00 and
$11.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied for quotation of the Common Stock on the Nasdaq National Market under
the symbol "ABOV."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
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Per Share.............................. $ $ $
Total(3)............................... $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses payable by the Company, estimated at $1,200,000.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 600,000 additional shares of
Common Stock at the Price to Public per share, less the Underwriting
Discount, for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or in part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
will be made against payment on or about , 1998 at the offices of
CIBC Oppenheimer Corp., CIBC Oppenheimer Tower, World Financial Center, New
York, New York 10281.
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CIBC OPPENHEIMER VOLPE BROWN WHELAN & COMPANY
The date of this Prospectus is , 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated
herein, all information in this Prospectus (i) assumes the Underwriters'
over-allotment option is not exercised, (ii) assumes a 1-for-1.6 reverse stock
split of the Common Stock and Preferred Stock to be effected prior to this
offering, (iii) assumes the exercise prior to the closing of this offering of
warrants to purchase 123,736 shares of Series B Preferred Stock and (iv) assumes
the conversion of all outstanding shares of Preferred Stock into Common Stock
immediately prior to the closing of this offering.
THE COMPANY
AboveNet 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 path to increasing 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.
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(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.
<PAGE> 5
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; (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.
<PAGE> 6
THE OFFERING
Common Stock offered by the Company....... 4,000,000 shares
Common Stock to be outstanding after the
Offering(1)............................... 11,817,680 shares
Use of Proceeds........................... For increased sales and marketing,
capital expenditures, potential
strategic investments and working
capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol.... ABOV
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CUSTOMER DATA)
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PERIOD FROM THREE MONTHS ENDED
MARCH 8, 1996 YEAR ENDED JUNE 30, SEPTEMBER 30,
(INCEPTION) TO -------------------- ------------------
JUNE 30, 1996 1997 1998 1997 1998
---------------- -------- -------- ------- -------
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STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 79 $ 552 $ 3,436 $ 431 $ 1,793
Loss from operations......................... (78) (1,804) (5,327) (605) (3,324)
Net loss..................................... $ (78) $(1,803) $(5,425) $ (662) $(3,351)
====== ======= ======= ======= =======
Basic and diluted loss per share(2).......... $(0.62) $ (9.17) $(20.68) $ (3.14) $ (7.35)
====== ======= ======= ======= =======
Shares used in basic and diluted loss per
share(2)................................... 125 197 262 211 456
OTHER OPERATING DATA:
Capital expenditures(3)...................... $ 101 $ 850 $ 4,145 $ 171 $ 7,339
Number of customers at period end............ 10 110 278 146 316
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SEPTEMBER 30, 1998
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
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BALANCE SHEET DATA:
Cash and equivalents........................................ $10,626 $10,873 $46,873
Working capital............................................. 7,114 7,361 43,361
Total assets................................................ 24,986 25,234 61,234
Long-term obligations, net of current portion............... 6,513 6,513 6,513
Total stockholders' equity.................................. 12,685 12,932 48,932
</TABLE>
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(1) Based on shares outstanding as of September 30, 1998. Excludes, as of
September 30, 1998, (i) 1,555,756 shares of Common Stock issuable upon
exercise of options outstanding under the Company's 1996 and 1997 Stock
Option Plans and non-plan options at a weighted average exercise price of
$3.33 per share and 316,858 shares of Common Stock reserved for issuance
prior to this offering under the 1997 Stock Option Plan, (ii) 57,343 shares
of Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $5.65 per share, (iii) 12,500 shares of Common
Stock issuable upon exercise of outstanding warrants at an exercise price of
80% of the initial public offering price and (iv) an aggregate of 1,718,750
shares of Common Stock reserved for issuance after this offering under the
Company's 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan.
See "Management -- Stock Incentive Plan" and "-- Employee Stock Purchase
Plan" and Note 6 of Notes to Financial Statements.
(2) See Notes 1 and 7 of Notes to Financial Statements for the determination of
shares used in computing basic and diluted loss per share.
(3) Capital expenditures represent purchases of property and equipment,
including non-cash transactions such as the acquisition of equipment under
capital lease.
(4) Pro forma balances reflect (i) the exercise of warrants to acquire 123,736
shares of Series B Preferred Stock and (ii) the conversion of all
outstanding shares of Preferred Stock into Common Stock.
(5) Adjusted to reflect the sale of 4,000,000 shares of Common Stock by the
Company at the assumed initial public offering price of $10.00 per share
(after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company).
<PAGE> 7
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 recently 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, significantly larger ISX facility in San Jose,
California. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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
<PAGE> 8
operations and financial condition. In addition, the Company typically
experiences a lengthy sales cycle for its services, particularly given 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. See "-- Potential Fluctuations in Results of
Operations" and "Business-- Customers."
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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Risks Associated with Recent and Planned Business Expansion. The Company
recently opened its second ISX facility in Vienna, Virginia and is planning to
develop a significantly larger ISX facility in San Jose, California, which is
targeted to open by the fall of 1999. The Company intends to use a significant
portion of the net proceeds of this offering to construct the new San Jose ISX
facility. 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 entering into a real estate lease, obtaining
necessary permits and approvals, passing required inspections, and hiring
necessary contractors, 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,
<PAGE> 9
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 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.
<PAGE> 10
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. See "Business -- Competition."
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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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. In addition, all options to purchase Common Stock held by Mr. Kaplan will
vest on the consummation of this offering. 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. See
"Business -- Employees" and "Management -- Employment Agreements."
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 and similar events. The Company's existing and planned ISX facility in
San Jose, California is in an area that is subject to earthquakes and, as a
result, is 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
<PAGE> 11
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, 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. See "-- Year 2000 Risks" and "Business-- Network
Architecture."
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 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 infrastruc-
<PAGE> 12
ture 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. See "Business --Network Architecture"
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. See "Business --Network
Architecture."
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 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
<PAGE> 13
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 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
<PAGE> 14
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. See "Business --Network Architecture and -- Legal
Proceedings."
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, 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
<PAGE> 15
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. 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<PAGE> 16
Substantial Influence by Principal Stockholders, Executive Officers and
Directors. Upon completion of this offering, the Company's executive officers,
directors and greater than 5% stockholders (and their affiliates) will, in the
aggregate, own approximately 44% of the Company's outstanding Common Stock. As a
result, such persons, acting together, will 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.
The Company may reserve up to 5% of the shares offered hereby under a directed
share program for certain suppliers, customers and business associates pursuant
to which such persons would be able to purchase shares from the Underwriters at
the initial public offering price. See "Principal Stockholders."
No Prior Trading Market for the Common Stock; Potential Volatility of Stock
Price. Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained after this offering. The initial public offering price will be
determined by negotiation among the Company and the representatives of the
Underwriters and may not be indicative of the price that will prevail in the
open market. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price.
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.
Benefits of the Offering to Current Stockholders. This offering is expected
to create a public market for the Company's Common Stock which may result in a
substantial increase in the market value of the initial investments of certain
of the Company's management and existing stockholders. The existing stockholders
of the Company hold 7,817,680 shares of the Company's Common Stock. Based on an
assumed initial public offering price of $10.00 per share, the value of the
shares held by the existing stockholders following this offering will be
approximately $78.2 million, representing an aggregate increase of approximately
$56.7 million over the amount of consideration paid for such shares by the
existing stockholders. The Company's officers, directors and persons or entities
known by the Company to beneficially own 5% or more of the Company's outstanding
Common Stock will collectively beneficially own approximately 5,465,900 shares
of the Company's Common Stock upon consummation of the offering. Based upon an
assumed initial public offering price of $10.00 per share, the value of the
beneficially owned shares held by these stockholders will be approximately $54.7
million. See "-- Immediate and Substantial Dilution" and "Principal
Stockholders."
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
<PAGE> 17
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, upon the closing of the
offering, the Company will institute 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. See "Description of Capital Stock -- Preferred Stock"
and "-- Antitakeover Effects of Provisions of Certain Charter Provisions, Bylaws
and Delaware Law."
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 4,000,000
shares of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option), as of the date of this Prospectus, there will be
7,817,680 shares of Common Stock outstanding, all of which 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 will
be eligible for sale in the public market and 9,182 Restricted Shares will be
eligible for sale 90 days after such date. Following the expiration of 180-day
lock-up agreements with the representatives of the Underwriters or the Company,
5,221,845 Restricted Shares will be available for sale in the public market 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. The
Company has agreed with the Underwriters that the Company will not release any
shares subject to lock-up agreements with the Company without the consent of
CIBC Oppenheimer Corp. 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. See "Shares Eligible for Future Sale."
Immediate and Substantial Dilution. The initial public offering price is
substantially higher than the book value per share of the outstanding Common
Stock. As a result, investors purchasing Common Stock in this offering will
incur immediate and substantial dilution of $5.86 per share. In addition, the
Company has issued options and warrants to acquire Common Stock at prices
significantly below the initial public offering price. To the extent such
outstanding options and warrants are exercised, there will be further dilution.
See "Dilution" and "Shares Eligible for Future Sale."
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered hereby will be approximately $36,000,000 (approximately
$41,580,000 if the Underwriter's over-allotment option is exercised in full)
assuming an initial public offering price of $10.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company.
The Company currently expects to use approximately $10 to $15 million of
the net proceeds of this offering for increased sales and marketing activities
and approximately $15 to $20 million of such net proceeds for capital
expenditures associated with the development of the Company's planned second
Northern California ISX facility. The Company may use a portion of the net
proceeds of this offering for acquisitions of, or strategic investments in,
complementary businesses and technologies, including potential strategic
investments in companies developing ISX facilities in Europe and Asia. The
Company currently has no commitments or binding agreements with respect to any
such acquisitions or investments. The balance of the net proceeds of this
offering will be used for working capital and general corporate purposes.
Pending use of the net proceeds for the above purposes, the Company plans to
invest such funds in short-term, investment grade, interest-bearing securities.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. The Company's debt facilities contain
restrictive covenants that limit the Company's ability to pay cash dividends
without the prior written consent of the lender.
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998: (i) on an actual basis; (ii) on a pro forma basis to reflect
(a) the filing of an amendment to the Company's Restated Certificate of
Incorporation to provide for authorized capital stock of 60,000,000 shares of
Common Stock and 5,000,000 shares of undesignated Preferred Stock, (b) the
issuance of 123,736 shares of Series B Preferred Stock upon the exercise of
outstanding warrants, (c) the expensing of approximately $467,000 of deferred
stock compensation upon the closing of this offering, and (d) the conversion of
all outstanding shares of Preferred Stock into shares of Common Stock
immediately prior to the closing of this offering; and (iii) on a pro forma
basis as adjusted to reflect the sale by the Company of 4,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. The capitalization
information set forth in the table below is qualified by and should be read in
conjunction with the more detailed Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long term obligations, less current portion............ $ 6,513 $ 6,513 $ 6,513
-------- -------- -------
Stockholders' equity(1):
Preferred stock, $0.001 par value; 8,750,000 shares
authorized; 7,184,049 shares issued and
outstanding, actual; 5,000,000 shares authorized,
no shares issued and outstanding, pro forma and
pro forma as adjusted............................. 21,224 -- --
Common stock, $0.001 par value; 12,500,000 shares
authorized, 509,895 shares issued and outstanding,
actual; 12,500,000 shares authorized, 7,817,680
shares issued and outstanding, pro forma;
60,000,000 shares authorized, 11,817,680 shares
issued and outstanding, pro forma as adjusted..... 69 21,540 57,540
Common stock options................................. 2,614 2,614 2,614
Deferred stock compensation.......................... (566) (99) (99)
Accumulated deficit.................................. (10,656) (11,123) (11,123)
-------- -------- -------
Total stockholders' equity........................ 12,685 12,932 48,932
-------- -------- -------
Total capitalization................................... $ 19,198 $ 19,445 $55,445
======== ======== =======
</TABLE>
- ---------------
(1) Excludes as of September 30, 1998: (i) 1,555,756 shares of Common Stock
issuable upon exercise of options outstanding under the Company's 1996 and
1997 Stock Option Plans and non-plan options at a weighted average exercise
price of $3.33 per share and 316,858 shares of Common Stock reserved for
future issuance thereunder and (ii) 57,343 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price
of $5.65 per share and (iii) 12,500 shares of Common Stock issuable upon
exercise of outstanding warrants at an exercise price of 80% of the initial
public offering price. Does not include an aggregate of 1,718,750 shares of
Common Stock reserved for future issuance after this offering under the
Company's 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan.
See "Management -- Stock Incentive Plan" and "-- Employee Stock Purchase
Plan" and Note 6 of Notes to Financial Statements.
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
September 30, 1998, giving effect to (i) the issuance of 123,736 shares of
Series B Preferred Stock upon the exercise of outstanding warrants and (ii) the
conversion of all outstanding shares of Preferred Stock into Common Stock
immediately prior to the closing of this offering, was $12,932,200, or
approximately $1.65 per share. "Pro forma net tangible book value" per share
represents the amount of total tangible assets of the Company less total
liabilities, divided by the number of shares of Common Stock outstanding on an
as-converted basis. The pro forma net tangible book value of the Company as of
September 30, 1998 would have been approximately $48,932,200, or $4.14 per share
after giving effect to the sale of 4,000,000 shares of Common Stock offered by
the Company in this offering at an assumed initial public offering price of
$10.00 per share and the application of the estimated net proceeds therefrom.
This represents an immediate increase in pro forma net tangible book value of
$2.49 per share to existing stockholders and an immediate dilution of $5.86 per
share to investors purchasing shares of Common Stock in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
Pro forma net tangible book value per share as of
September 30, 1998..................................... $1.65
Increase per share attributable to new investors.......... 2.49
-----
Adjusted pro forma net tangible book value per share after
offering.................................................. 4.14
------
Net tangible book value dilution per share to new
investors................................................. $ 5.86
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1998, the difference between the number of shares of Common Stock purchased from
the Company, the total consideration paid to the Company and the average price
per share paid by existing stockholders and by new investors purchasing shares
in this offering before deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company at the
assumed initial offering price of $10.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).......... 7,817,680 66% $21,540,600 35% $2.76
New investors..................... 4,000,000 34 40,000,000 65
----------- ----- ----------- -----
Total................... 11,817,680 100.0% $61,540,600 100.0%
=========== ===== =========== =====
</TABLE>
- ---------------
(1) Excludes as of September 30, 1998: (i) 1,555,756 shares of Common Stock
issuable upon exercise of options outstanding under the Company's 1996 and
1997 Stock Option Plans and under non-plan options at a weighted average
exercise price of $3.33 per share and 316,858 shares of Common Stock
reserved for future issuance thereunder and (ii) 57,343 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted average
exercise price of $5.65 per share and (iii) 12,500 shares of Common Stock
issuable upon exercise of outstanding warrants at an exercise price of 80%
of the initial public offering price. Does not include an aggregate of
1,718,750 shares of Common Stock reserved for future issuance after this
offering under the Company's 1998 Stock Incentive Plan and 1998 Employee
Stock Purchase Plan. See "Management -- Stock Incentive Plan" and
"-- Employee Stock Purchase Plan" and Note 6 of Notes to Financial
Statements.
<PAGE> 21
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data as of June 30, 1997 and 1998 and for
the period from March 8, 1996 to June 30, 1996 and for each of the two years in
the period ended June 30, 1998 are derived from the Financial Statements of the
Company which have been audited by Deloitte & Touche LLP, independent auditors,
and are included elsewhere in this Prospectus. The selected balance sheet data
as of June 30, 1996 are derived from the Company's unaudited financial
statements not included herein. The statement of operations data for the three
month periods ended September 30, 1997 and 1998 and the balance sheet at
September 30, 1998 are derived from unaudited interim financial statements
included elsewhere in this prospectus. The unaudited financial statements have
been prepared by the Company on a basis consistent with the Company's audited
financial statements and include, in the opinion of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the Company's results of operations for those periods and
financial position as of those dates. The financial data are qualified by
reference to and should be read in conjunction with the Company's Financial
Statements, related Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM ENDED
MARCH 8, 1996 YEAR ENDED JUNE 30, SEPTEMBER 30,
(INCEPTION) TO -------------------- -----------------
JUNE 30, 1996 1997 1998 1997 1998
-------------- -------- -------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE AND CUSTOMER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 79 $ 552 $ 3,436 $ 431 $ 1,793
------ ------- ------- ------ -------
Costs and expenses:
Data communications and telecommunications.... -- 559 2,200 256 1,080
Network operations............................ 20 417 1,572 222 773
Sales and marketing........................... 19 382 1,618 259 1,356
General and administrative.................... 66 434 1,621 199 812
Depreciation and amortization................. 52 133 476 86 660
Stock-based compensation expense.............. -- -- 1,276 14 436
Joint venture termination fee................. -- 431 -- -- --
------ ------- ------- ------ -------
Total costs and expenses............... 157 2,356 8,763 1,036 5,117
------ ------- ------- ------ -------
Loss from operations............................ (78) (1,804) (5,327) (605) (3,324)
Interest expense................................ -- (7) (161) (59) (148)
Interest income................................. -- 8 63 2 121
------ ------- ------- ------ -------
Net loss........................................ $ (78) $(1,803) $(5,425) $ (662) $(3,351)
====== ======= ======= ====== =======
Basic and diluted loss per share(1)............. $(0.62) $ (9.17) $(20.68) $(3.14) $ (7.35)
====== ======= ======= ====== =======
Shares used in basic and diluted loss per
share(1)...................................... 125 197 262 211 456
OTHER OPERATING DATA:
Capital expenditures(2)......................... $ 101 $ 850 $ 4,145 $ 171 $ 7,339
Number of customers at period end............... 10 110 278 146 316
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------ SEPTEMBER 30,
1996 1997 1998 1998
----- ------ ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.................................... $ 89 $ 331 $ 8,141 $10,626
Working capital (deficit)............................... 88 (946) 5,061 7,114
Total assets............................................ 151 1,171 13,693 24,986
Long-term obligations, net of current portion........... 210 116 9,325 6,513
Total stockholders' equity (deficiency)................. (73) (262) 661 12,685
</TABLE>
- ---------------
(1) See Notes 1 and 7 of Notes to Financial Statements for the determination of
shares used in computing basic and diluted loss per share.
(2) Capital expenditures represent purchases of property and equipment,
including non-cash transactions such as the acquisition of equipment under
capital lease.
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following description of the Company's financial condition and results
of operations should be read in conjunction with the Financial Statements and
the Notes thereto included elsewhere in this Prospectus. This discussion
contains forward-looking statements based upon 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 in
"Risk Factors," "Business" and elsewhere in this Prospectus. The Company's
fiscal year ends on June 30. The fiscal year ended June 30, 1997 is referred to
as fiscal 1997 and the fiscal year ended June 30, 1998 is referred to as fiscal
1998.
OVERVIEW
AboveNet is a leading provider of high performance, managed co-location and
Internet connectivity solutions for electronic commerce and other
mission-critical Internet operations. The Company was founded in March 1996 and,
in July 1996, it began providing co-location and Internet connectivity services
to content providers at its San Jose, California facility. In August 1997, the
Company expanded its service offerings to provide co-location and Internet
connectivity services to ISPs, enabling the development of the Company's ISX
model. In July 1998, the Company opened its second ISX facility in Vienna,
Virginia and completed the expansion of its San Jose ISX facility with the
addition of approximately 7,000 square feet.
The Company derives most of its revenues from bandwidth charges, with
additional revenues generated from charges related to space requirements and
one-time installation fees. Bandwidth and space requirement charges are billed
on a monthly basis. Space requirement charges include access to the Company's
network, proprietary tools and management services. The Company charges its
customers for a set amount of bandwidth availability and charges incremental
fees if the customer uses additional bandwidth. The Company's contracts range
from month to month to multiple year commitments, a majority of which are
cancelable on 30 days' notice. Revenues relating to bandwidth usage and space
requirement charges are generally recognized in the period in which the services
are performed. Installation fees are recognized in the period of installation.
See "Risk Factors -- Need to Grow and Retain Customer Base; Lengthy Sales
Cycle."
A significant component of the Company's expenses relates to data
communications and telecommunications. Data communications costs consist
primarily of payments to network providers, such as MCI WorldCom and Sprint.
Telecommunications charges consist of one time fees for circuit installation and
variable recurring circuit charges. Monthly circuit charges vary based upon
circuit type, the distance the circuit spans and/or the circuit usage, as well
as the term of the contract.
The Company intends to develop a second, significantly larger ISX facility
in San Jose, California by the fall of 1999. The development and equipping of
this facility will significantly increase the Company's 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. The Company's ability to
complete this expansion, on a timely basis and within the cost anticipated, is
dependent on a number of factors. In addition there can be no assurance that the
Company has accurately anticipated the customer demand for such new facilities
or that the Company will be able to attract a sufficient number of customers to
offset the additional expenses. See "Risk Factors -- Risks Associated with
Recent and Planned Business Expansion."
A key aspect of the Company's strategy is to significantly increase its
sales and marketing activities through the expansion of its sales force,
increased focus on developing reseller channels and increased marketing efforts
to build the AboveNet brand. In April 1998, the Company hired its Senior Vice
President of Sales and Marketing and engaged an outside public relations firm.
Prior to that time, the Company had undertaken no significant
<PAGE> 23
marketing activities. As a result, the Company expects sales and marketing
expenses to increase substantially in future periods. See "Risk Factors -- Need
to Grow and Retain Customer Base; Lengthy Sales Cycle."
The Company has recently hired many of its key employees and officers. The
Company's President and Chief Operating Officer joined the Company in November
1997. The Company's Senior Vice President of Sales and Marketing joined the
Company in April 1998. The Company's Vice President of Sales, Vice President of
Construction and Real Estate and Vice President of International -- Europe all
joined the Company in August 1998. Most recently, the Company hired a Chief
Financial Officer in November 1998. See "Risk Factors -- Management of Growth;
Dependence on Key Personnel."
During late fiscal 1997 and 1998, the Company granted stock options and
warrants to strategic business partners and non-employees. Additionally, during
fiscal 1998 and the first quarter of fiscal 1999, the Company granted a key
executive stock options at an exercise price below market. As a result, the
Company recognized stock-based compensation expense of approximately $1.3
million and $436,000 in fiscal 1998 and the first quarter of fiscal 1999,
respectively. In addition, as a result of the acceleration of the vesting of
certain options upon the closing of the offering, the Company expects to
recognize additional stock-based compensation expense (approximately $467,000 as
of September 30, 1998) in the quarter in which the offering closes.
Since its inception in March 1996, the Company has experienced operating
losses and negative cash flows from operations in each quarterly and annual
period. As of September 30, 1998, the Company had an accumulated deficit of
approximately $10.7 million. 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. In addition,
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. 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. See "Risk Factors -- Limited Operating
History; History of Losses; Expected Continued Losses."
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as a
percentage of revenues for the period from March 8, 1996 (Inception) to June 30,
1996, for the years ended June 30, 1997 and 1998 and for the three months ended
September 30, 1997 and 1998. This information should be read in conjunction with
the Financial Statements and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
MARCH 8, 1996 JUNE 30, SEPTEMBER 30,
(INCEPTION) ---------------- ------------------
TO JUNE 30, 1996 1997 1998 1997 1998
---------------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- ------ ------ ------ ------
Costs and expenses:
Data communications and
telecommunications......... -- 101.3 64.0 59.4 60.2
Network operations............ 24.7 75.5 45.7 51.5 43.1
Sales and marketing........... 24.3 69.4 47.1 60.0 75.6
General and administrative.... 84.1 78.6 47.2 46.2 45.3
Depreciation and
amortization............... 65.6 24.1 13.8 20.0 36.8
Stock-based compensation
expense.................... -- -- 37.2 3.3 24.4
Joint venture termination
fee........................ -- 78.1 -- -- --
----- ------ ------ ------ ------
Total costs and
expenses............ 198.7 427.0 255.0 240.4 285.4
----- ------ ------ ------ ------
Loss from operations............ (98.7) (327.0) (155.0) (140.4) (185.4)
Interest income (expense),
net........................... -- 0.2 (2.9) (13.2) (1.5)
----- ------ ------ ------ ------
Net loss........................ (98.7)% (326.8)% (157.9)% (153.6)% (186.9)%
===== ====== ====== ====== ======
</TABLE>
<PAGE> 24
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1998
Revenues. The Company derives most of its revenues from monthly bandwidth
charges, with additional revenues from space requirement charges and one-time
installation fees. The Company's revenues increased 316% from $431,000 in the
quarter ended September 30, 1997, to $1.8 million in the quarter ended September
30, 1998. This growth in revenues resulted primarily from an increase in the
number of customers, from 146 customers at September 30, 1997 to 316 customers
at September 30, 1998. One customer, Supernews, Inc., accounted for 10% of
revenues in the quarter ended September 30, 1997 and 11% of revenues in the
quarter ended September 30, 1998. The Company's agreement with SuperNews has a
term of one year which expires July 1999 and does not contain any minimum
bandwidth usage requirements.
Data Communications and Telecommunications. Data communications costs
consist primarily of payments to network providers, such as WinStar
Communications, Inc., MCI WorldCom and Sprint. Telecommunications charges
consist of one-time fees for circuit installation and variable recurring circuit
charges. The Company's data communications and telecommunications expenses
increased 322% from $256,000 in the quarter ended September 30, 1997, to $1.1
million in the quarter ended September 30, 1998. The increase is due to the
growth in the Company's customer base and usage of additional bandwidth. The
Company expects that data communications and telecommunications costs will
continue to increase in absolute dollars as the Company continues to expand its
network infrastructure.
Network Operations. Network operations expenses are comprised primarily of
salaries, benefits and related expenses for the Company's operations and
engineering personnel, as well as facility rent and expenses associated with
maintaining the Company's co-location facilities. The Company's network
operations expenses increased 248% from $222,000 in the quarter ended September
30, 1997, to $773,000 in the quarter ended September 30, 1998. The increase is
primarily due to the hiring of additional operations and engineering personnel
and the costs associated therewith. The Company expects that network operations
expenses will continue to increase in absolute dollars as the Company hires
additional personnel to expand its operations.
Sales and Marketing. The Company's sales and marketing expenses are
primarily comprised of salaries, commissions and benefits related to the
Company's sales and marketing personnel, the cost of the Company's marketing and
promotional efforts, including advertising, printing and trade show costs, as
well as related consultants' fees and travel and entertainment expenses. Sales
and marketing expenses increased 424% from $259,000 in the quarter ended
September 30, 1997, to $1.4 million in the quarter ended September 30, 1998. Of
this increase, approximately $0.4 million was due to increased compensation and
related expenses resulting from the hiring of additional sales and marketing
personnel. The increase was also attributable to increases in trade show,
advertising and marketing program expenses. The Company expects that sales and
marketing expenses will increase substantially in future periods as the Company
continues to expand its sales force and its brand-building activities. The
Company expects to use approximately $10 to $15 million of the net proceeds of
the offering for sales and marketing expenses.
General and Administrative. The Company's general and administrative
expenses are comprised primarily of salaries and benefits for the Company's
management and administrative personnel, as well as fees paid for professional
services and corporate overhead. General and administrative expenses increased
309% from $199,000 in the quarter ended September 30, 1997, to $813,000 in the
quarter ended September 30, 1998. Of this increase, approximately $0.2 million
was due to increased compensation and related benefits associated with
additional personnel in management, finance and administration. In addition,
general and administrative expenses increased as a result of increases in
professional services fees, an increase in the Company's accounts receivable
reserve and the costs associated with supporting the Company's expansion. The
Company expects that general and administrative expenses will continue to
increase in absolute dollars as the Company expands its operations and incurs
the higher costs associated with being a publicly-traded company.
Depreciation and Amortization. Depreciation and amortization expenses
relate primarily to the Company's facility improvement and construction efforts
as well as telecommunications equipment. The Company's depreciation and
amortization expenses increased 664% from $86,000 in the quarter ended September
30, 1997 to $660,000 in the quarter ended September 30, 1998. The increase is
due to additional
<PAGE> 25
capital expenditures incurred during fiscal 1998 and 1999, primarily for
facility improvement and construction costs and telecommunications equipment.
The Company expects to incur increased depreciation and amortization expenses
related to its planned new ISX facility in San Jose, California. Furthermore,
the Company recognized a loss on disposal of assets of $186,000 in the quarter
ended September 30, 1998. The loss is attributed to the retirement of certain
assets and the demolition of previously capitalized facility improvement costs
in connection with the Company's recent expansion.
Stock-based Compensation. During fiscal 1998 and 1999, the Company granted
to a key executive stock options at an exercise price below market.
Additionally, during late fiscal 1997 and fiscal 1998 and 1999, the Company
granted stock options and warrants to strategic business partners and
non-employees. Stock-based compensation expense related to these issuances was
$14,000 and $436,000 for the quarters ended September 30, 1997 and 1998,
respectively. As of September 30, 1998, the Company had $566,000 in deferred
stock compensation, which will continue to be amortized through fiscal 2000;
however, as the vesting of certain of these options accelerates upon the closing
of this offering, any unamortized deferred compensation relating to these
options (approximately $467,000 at September 30, 1998) will be recognized in the
quarter this offering closes.
Interest Income (Expense), Net. Interest income (expense), net was
$(57,000) in the quarter ended September 30, 1997 compared to $(27,000) in the
quarter ended September 30, 1998. During the first quarter of fiscal 1998, the
Company recognized interest expense of $56,000 relating to the issuance of
warrants associated with the Company's Series B Preferred Stock offering.
Interest expense for the quarter ended September 30, 1998 primarily relates to
increased borrowings to finance equipment purchases and improvements to the
Company's San Jose, California ISX facility and construction of its Vienna,
Virginia ISX facility. The Company expects that interest expense will continue
to increase in absolute dollars as the Company enters into additional equipment
leases and borrowing facilities to finance expansion, including the development
of its planned second ISX facility in San Jose, California.
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1998
Revenues. The Company's revenues increased 523% from $552,000 in fiscal
1997 to $3.4 million in fiscal 1998. This growth in revenues resulted primarily
from an increase in the number of customers, from 110 customers at June 30, 1997
to 278 customers at June 30, 1998. One customer, Supernews, Inc., accounted for
12% of revenues in fiscal 1997 and 14% of revenues in fiscal 1998.
Data Communications and Telecommunications. The Company's data
communications and telecommunications expenses increased 294% from $559,000 in
fiscal 1997 to $2.2 million in fiscal 1998. This increase is primarily due to
the growth in the Company's customer base and usage of additional bandwidth.
Network Operations. The Company's network operations expenses increased
277% from $417,000 in fiscal 1997 to $1.6 million in fiscal 1998. The increase
is primarily due to the hiring of additional operations and engineering
personnel and the costs associated therewith.
Sales and Marketing. Sales and marketing expenses increased 323% from
$383,000 in fiscal 1997 to $1.6 million in fiscal 1998. Sales and marketing
expenses as a percentage of total revenues decreased from 69% in fiscal 1997 to
47% in fiscal 1998. Of this increase, approximately $0.7 million was due to
increased compensation and related expenses as the result of the hiring of
additional sales and marketing personnel. The increase was also attributable to
increased marketing program, trade show and advertising expenses. The decrease
as a percentage of revenue in fiscal 1998 was primarily due to increased
revenues associated with higher bandwidth utilization among the existing
customer base, which had lower associated sales and marketing expenses.
General and Administrative. General and administrative expenses increased
274% from $434,000 in fiscal 1997 to $1.6 million in fiscal 1998. General and
administrative expenses as a percentage of revenues decreased from 79% in fiscal
1997 to 47% in fiscal 1998 due to the increase in revenues. Of this increase,
approximately $0.5 million was due to increased compensation and related
benefits associated with additional personnel in management, finance and
administration, while the remaining increase was primarily attributable to the
costs associated with supporting the Company's expansion.
<PAGE> 26
Depreciation and Amortization. The Company's depreciation and amortization
expenses increased 258% from $133,000 in fiscal 1997 to $476,000 in fiscal 1998.
The increase is due to additional capital expenditures incurred during fiscal
1998, primarily for telecommunications equipment.
Stock-Based Compensation. Stock-based compensation expense during fiscal
1997 and fiscal 1998 was zero and $1.3 million, respectively. Stock-based
compensation in fiscal 1998 related to services rendered during fiscal 1998 and
the acceleration of the vesting during the fourth quarter of 1998 of certain
non-employee stock option and warrant grants.
Joint Venture Termination Fee. In fiscal 1996, the Company entered into a
joint venture agreement (the "DSK Agreement") with DSK, Inc. ("DSK") to
cooperatively market and develop the Company's services. The Company paid
$33,700 to DSK during the year ended June 30, 1997 related to the DSK Agreement.
In the fourth quarter of fiscal 1997, the Company terminated the DSK Agreement
and hired the majority shareholders of DSK as employees or consultants by
issuing 500,000 fully vested shares of Series B Preferred Stock with a fair
value of $1.20 per share, or $600,000, for the outstanding shares of common
stock of DSK. The Company recorded the transaction by allocating the value of
the shares issued to property and equipment (at DSK's net book value of
$169,000, which approximated fair market value), with the balance of $431,000
reflected as a joint venture termination fee.
Interest Income (Expense), Net. Interest income (expense), net decreased
from $1,000 in fiscal 1997 to $(98,000) in fiscal 1998. The decrease was
primarily the result of higher interest expense related to the issuance of stock
purchase warrants in conjunction with the issuance of the Company's convertible
debt during the first half of fiscal 1998 as well as increased borrowings to
finance equipment purchases and improvements to its San Jose, California ISX
facility and construction of its Vienna, Virginia ISX facility. The Company
expects that interest expense will continue to increase in absolute dollars as
the Company enters into additional equipment leases and borrowing facilities to
finance expansion, including the development of its planned second ISX facility
in San Jose, California.
INCEPTION THROUGH JUNE 30, 1996
The Company generated $79,000 in revenues in the period from inception to
June 30, 1996, primarily as a result of consulting services provided as the
Company was developing its tools and preparing to commence its current
co-location and Internet connectivity operations. The Company's costs and
expenses during this period consisted primarily of salaries, depreciation and
amortization expenses and consulting services. Given the stage of the Company's
business and the shortness of the period, the Company does not believe that the
results of operations for this period are comparable to fiscal 1997.
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations
data for the nine quarters ended September 30, 1998, as well as the percentage
of the Company's revenues represented by each item. This data has been derived
from unaudited interim financial statements prepared on the same basis as the
audited Financial Statements contained herein and, in the opinion of management,
include all adjustments consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of such information when
read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus. The operating results for any quarter should not
be considered indicative of results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1996 1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 22.4 $ 100.2 $ 183.7 $ 245.3 $ 430.9 $ 674.6 $ 963.3 $ 1,367.6 $ 1,793.1
------- ------- ------- --------- -------- -------- --------- --------- ---------
Costs and expenses:
Data communications and
telecommunications..... 20.7 93.9 170.1 273.9 256.0 372.8 639.1 931.9 1,079.9
Network operations....... 5.6 32.8 185.4 192.9 221.8 222.8 411.8 715.4 772.8
Sales and marketing...... 41.3 78.5 103.9 158.9 258.6 216.4 433.4 710.3 1,355.8
General and
administrative......... 51.4 54.9 132.5 194.9 198.9 276.9 483.8 661.9 812.7
Depreciation and
amortization........... 15.7 22.7 44.9 49.4 86.4 95.4 117.6 176.1 659.8
Stock-based compensation
expense................ -- -- -- -- 14.3 35.1 459.6 767.4 436.2
Joint venture termination
fee.................... -- -- -- 431.1 -- -- -- -- --
------- ------- ------- --------- -------- -------- --------- --------- ---------
Total costs and
expenses......... 134.7 282.8 636.8 1,301.1 1,036.0 1,219.4 2,545.3 3,963.0 5,117.2
------- ------- ------- --------- -------- -------- --------- --------- ---------
Loss from operations....... (112.3) (182.6) (453.1) (1,055.8) (605.1) (544.8) (1,582.0) (2,595.4) (3,324.1)
Interest expense........... -- -- -- (7.4) (58.8) (67.0) (2.6) (32.4) (147.6)
Interest income............ 4.2 0.8 1.7 1.7 1.9 7.4 22.0 31.8 120.8
------- ------- ------- --------- -------- -------- --------- --------- ---------
Net loss................... $(108.1) $(181.8) $(451.4) $(1,061.5) $ (662.0) $ (604.4) $(1,562.6) $(2,596.0) $(3,350.9)
======= ======= ======= ========= ======== ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1996 1996 1997 1997 1997 1997 1998 1998 1998
-------- -------- -------- --------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
------- ------- ------- --------- -------- -------- --------- --------- ---------
Costs and expenses:
Data communications and
telecommunications..... 92.4 93.7 92.6 111.7 59.4 55.3 66.3 68.2 60.2
Network operations....... 25.0 32.7 100.9 78.6 51.5 33.0 42.8 52.3 43.1
Sales and marketing...... 184.4 78.3 56.6 64.8 60.0 32.1 45.0 51.9 75.6
General and
administrative......... 229.5 54.8 72.1 79.5 46.2 41.1 50.2 48.4 45.3
Depreciation and
amortization........... 70.0 22.7 24.4 20.1 20.0 14.1 12.2 12.9 36.8
Stock-based compensation
expense................ -- -- -- -- 3.3 5.2 47.7 56.1 24.4
Joint venture termination
fee.................... -- -- -- 175.7 -- -- -- -- --
------- ------- ------- --------- -------- -------- --------- --------- ---------
Total costs and
expenses......... 601.3 282.2 346.6 530.4 240.4 180.8 264.2 289.8 285.4
------- ------- ------- --------- -------- -------- --------- --------- ---------
Loss from operations....... (501.3) (182.2) (246.6) (430.4) (140.4) (80.8) (164.2) (189.8) (185.4)
Interest expense........... -- -- -- (3.0) (13.6) (9.9) (0.3) (2.3) (8.2)
Interest income............ 18.7 0.8 0.9 0.7 0.4 1.1 2.3 2.3 6.7
------- ------- ------- --------- -------- -------- --------- --------- ---------
Net loss................... (482.6)% (181.4)% (245.7)% (432.7)% (153.6)% (89.6)% (162.2)% (189.8)% (186.9)%
======= ======= ======= ========= ======== ======== ========= ========= =========
</TABLE>
<PAGE> 28
FACTORS AFFECTING OPERATING RESULTS
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 expenses 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. 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. See "Risk Factors -- Need to Grow and Retain Customer Base;
Lengthy Sales Cycle," "-- Potential Fluctuations in Results of Operations,"
"-- Risks Associated with Recent and Planned Business Expansion," "-- Intense
Competition," and "-- Management of Growth; Dependence on Key Personnel."
YEAR 2000 COMPLIANCE
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 has begun the first phase of its Year 2000 readiness review.
The review will include assessment, implementation, testing and contingency
planning. To date, the Company has evaluated its internally developed software
and believes that such software is Year 2000 compliant. However, the Company
utilizes software and hardware developed by third parties both for its network
and internal information systems. The Company has not done any testing of such
third party software to determine if such software is Year 2000 compliant. The
Company has sought assurances from certain of its vendors, and intends to
continue to seek assurances from others, that such vendors products are or will
be Year 2000 compliant.
The Company expects to continue assessing and testing its internal
information technology ("IT") and non-IT systems into 1999. The Company is not
currently aware of any material operations issues or costs associated with
preparing its internal IT and non-IT systems for the Year 2000. However, the
Company may experience material unanticipated problems and costs caused by
undetected errors or defects in the technology used in its internal IT and
non-IT systems.
<PAGE> 29
Based upon the public filings and press releases of the Company's primary
equipment, telecommunications and data communications providers, the Company is
aware that all such providers are in the process of reviewing and implementing
their own Year 2000 compliance programs. Since the Company does not believe that
it will be afforded the opportunity to test the systems of these providers, it
will seek assurances from them that they are Year 2000 compliant. If the
Company's primary vendors experience business interruptions as a result of the
failure to achieve Year 2000 compliance, the Company's ability to provide
Internet connectivity could be impaired, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company does not currently have any information regarding the Year 2000
status of its customers, most of whom are private companies. However, the
Company is in the process of developing a plan to survey all of its customers
regarding their Year 2000 compliance. As is the case with similarly situated
companies, if the Company's customers experience Year 2000 problems, which
result in business interruptions or otherwise impact their operations, the
Company could experience a decrease in the demand for its services, which could
have a material adverse impact on its business, results of operations and
financial condition.
The Company has not incurred any significant expenses to date associated
with its Year 2000 plan and is not aware of any material costs associated with
its anticipated Year 2000 efforts. The Company believes that a material loss of
revenues that could materially adversely affect the Company's business, results
of operations and financial condition would arise only if the Company's major
customers or providers fail to achieve Year 2000 readiness. The Company has not
yet developed a comprehensive contingency plan to address the issues which could
result from such failure.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally from the private sale
of equity securities and, to a lesser extent, lease financing. The Company had
cash and cash equivalents of approximately $10.6 million as of September 30,
1998.
Net cash used in operating activities was $331,000 and $2.3 million for the
quarters ended September 30, 1997 and 1998, respectively, and $777,000 and $1.8
million for fiscal years 1997 and 1998, respectively. Net cash used in operating
activities is primarily attributable to the Company's net losses, partially
offset by depreciation and amortization, stock-based compensation expense and
increases in accounts payable and accrued liabilities.
Net cash used by investing activities was $171,000 and $8.3 million for the
quarters ended September 30, 1997 and 1998, respectively, and $475,000 and $3.7
million in fiscal years 1997 and 1998, respectively. Net cash used by investing
activities consists primarily of purchases of property and equipment, including
costs associated with the establishment of the Company's ISX facility in Vienna,
Virginia and the expansion of the Company's ISX facility in San Jose,
California. In addition, for the quarter ended September 30, 1998, the Company
purchased $1.0 million of short term investments.
Net cash provided by financing activities was $242,000 and $13.1 million
for the quarters ended September 30, 1997 and 1998, respectively, and $1.5
million and $13.3 million in fiscal years 1997 and 1998, respectively. Net cash
provided by financing activities for the quarter ended September 30, 1997 and in
fiscal 1998 resulted primarily from the sale of notes and advances, partially
offset by debt and capital lease repayments. Net cash provided by financing
activities for the quarter ended September 30, 1998 resulted primarily from the
issuance of convertible preferred stock and utilization of the Company's
equipment financing facility, partially offset by debt and capital lease
repayments.
The Company had working capital of $7.1 million as of September 30, 1998.
In addition, the Company has a $15.0 million equipment financing facility, $6.0
of which is not available until the completion of this offering. As of September
30, 1998, there was $8.4 million of borrowings under this facility. Borrowings
outstanding under these facilities are payable in 42 monthly installments and
bear interest at 14.7%. The Company also has a $2.5 million equipment lease
facility, $550,000 of which was used at September 30, 1998. Finally, the Company
has a $750,000 line of credit facility with a bank, none of which was
outstanding at
<PAGE> 30
September 30, 1998. Borrowings under the line of credit facility bear interest
at the bank's prime rate plus 1% (9.5% at September 30, 1998) and the line of
credit facility expires in May 1999. The line of credit agreement requires,
among other things, that the Company satisfy certain financial covenants. As of
June 30, 1998 and September 30, 1998, the Company was not in compliance with the
profitability covenant of its revolving line of credit agreement. The Company
obtained waivers with respect to its covenant from the bank as of June 30, 1998
and September 30, 1998, and, on October 26, 1998, entered into an agreement with
the bank modifying the covenant terms to increase the permissible quarterly
loss. Any failure to satisfy the terms of the agreement could prevent the
Company from being able to draw down amounts under the revolving line of credit
agreement or cause the bank to accelerate the Company's repayment with respect
to any outstanding amounts under the revolving line of credit. As of September
30, 1998, the Company had not drawn down any amounts under the revolving line of
credit.
The Company currently expects to utilize approximately $15 to $20 million
of the net proceeds of this offering for capital expenditures in connection with
the development of the Company's planned second ISX facility in San Jose,
California, although as of September 30, 1998 the Company did not have any
material capital commitments with respect to such planned facility.
The Company believes that the net proceeds from this offering, together
with existing cash balances and financing arrangements, will provide the Company
with sufficient funds to finance its operations through at least the next twelve
months. Thereafter, the Company may require additional funds to support its
working capital requirements or for other uses and may seek to raise additional
funds through public or private equity or debt financings or other sources. No
assurance can be given that additional financing will be available or that, if
available, such financing will be obtainable on terms favorable to the Company
and its stockholders. See "Risk Factors -- Uncertain Need and Availability of
Additional Funding" and "Use of Proceeds."
<PAGE> 31
BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements based upon 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 limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
GENERAL
AboveNet 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 direct public and private data exchange connections, known as peering
arrangements, including relationships with all 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 AboveNet's ISP customers to provide their users with
"one hop" connectivity, through AboveNet's local area network, to the co-located
content provider's site. As of September 30, 1998, the Company had 316
customers, including a wide range of Internet content providers, Web hosting
companies and ISPs.
INDUSTRY BACKGROUND
The Growth of the Internet
The Internet has experienced tremendous growth and is emerging as a global
medium for communications and commerce. According to International Data
Corporation ("IDC")(1), the number of Internet users worldwide will grow from 69
million at the end of 1997 to 320 million by 2002 and, according to Forrester
Research, Inc. ("Forrester")(2), the number of Internet sites worldwide is
expected to grow from less than 500,000 in 1997 to approximately 4 million in
2002. The growth of the Internet is being driven by a number of factors,
including the large and growing installed base of personal computers,
improvements in network architectures, increasing numbers of network-enabled
applications, the emergence of compelling content and commerce-enabling
technologies, and easier, faster and cheaper Internet access. The future growth
in Internet usage is also projected to be fueled by increased use of high speed
access devices such as cable modems and ADSL lines and satellite Internet
connectivity as such devices become more widely available and affordable.
Forrester projects that the penetration of broadband Internet access through
cable, ADSL and other high-speed access devices will grow from approximately
200,000 households in 1997 to approximately 5.5 million households in 2000 and
approximately 17.6 million households in 2002. The increase in the availability
of
- ---------------
(1) International Data Corporation estimates are based upon its Internet
Commerce Market Model. This model utilizes both supply- and demand-side research
involving input from 40,000 interviews per year. Other data components include
web usage figures, penetration rates, quarterly trend research, lead user
research and device base information. The estimates are qualified by the
following assumptions: no catastrophic failure of the Internet will occur;
regional economies will continue their current expansion without untoward
upheaval; and security on the Internet, as well as consumer confidence, will
continue to improve slowly. There can be no assurances that any of the projected
amounts in the report will be achieved.
(2) Forrester estimates are based upon interviews with more than 41,000
households as part of Forrester's "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.
<PAGE> 32
high-speed access devices is also expected to increase the demand for emerging
high bandwidth technologies such as audio and video streaming and voice over IP
applications.
The Expansion of Electronic Commerce
The functionality and accessibility of the Internet and commercial online
services have created an increasingly attractive commercial medium by providing
features that historically have been unavailable through traditional channels.
In the last several years, many enterprises that focus solely on delivering
services over the Internet have emerged and many businesses have implemented Web
sites and electronic commerce applications. Internet-based businesses have
developed Internet products and services in areas such as finance, banking,
entertainment, education and advertising, while other businesses are using the
Internet for an expanding variety of applications, ranging from corporate
publicity and advertising to sales, customer service, employee training and
communication with business partners. The ability to offer these kinds of
products and services requires high bandwidth Internet sites and operations. In
addition, due to advances in on-line security and payment mechanisms, the number
of businesses establishing commerce-enabled Web sites is expected to increase
dramatically. IDC estimates that the number of consumers buying goods and
services on the Internet will grow from 17.6 million in 1997 to 128.4 million in
2002, and that the total value of goods and services purchased over the Internet
will increase from approximately $12 billion in 1997 to approximately $425
billion by 2002.
The Internet Infrastructure
The Internet is a worldwide network of private and public computer networks
that link businesses, individuals, government agencies, universities and other
users having disparate computer systems and networks. A multi-tiered system of
local, regional and national ISPs has evolved to provide connectivity among
Internet users. Data travelling across the Internet is broken down into multiple
packets. ISPs exchange these packets of IP data generated by their users through
either direct or indirect connections with other ISPs. Large ISPs often have
multiple direct data exchange connections with other ISPs, known as peering
relationships, either through private line connections between their routers or
through a public peering arrangement where multiple ISPs can be connected
through a single interface. However, significant peering relationships are
generally unavailable to many small and mid-sized ISPs and, even if available,
the associated telecommunication costs could be prohibitive. As a result, these
ISPs typically need to purchase indirect connection services, known as
"transit," from a third party ISP.
To address the needs of ISPs to exchange data at centralized points, a
series of Internet exchanges were established by Internet backbone providers.
Although there are numerous exchanges, the Company believes the two principal
exchanges in the United States, based upon traffic volume, are MAE West in San
Jose, California and MAE East in Vienna, Virginia. Despite the relatively
centralized nature of these exchange points, data travelling across the
dispersed Internet architecture often must make multiple connections or "hops"
through a variety of local, regional and national ISPs as it moves from the
originating site to the Internet backbone and back to its destination site.
The Trend Toward Outsourcing of Internet Operations
Internet operations are increasingly becoming mission-critical to an
enterprise's commercial and communication operations. Internet-based businesses
and other enterprises need non-stop, non-congested, fault-tolerant and scalable
Internet operations to allow them to perform sophisticated digital
communications and 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 continually enhance the necessary facilities and network systems.
In addition, individuals with the expertise to establish and maintain a
sophisticated Internet service are scarce and their services are costly.
Furthermore, businesses often find it difficult to keep up with new technology
introductions and to integrate new technologies into their own IT
infrastructure. Finally, many businesses are currently being forced to deploy
their limited IT resources to address the impending Year 2000 issues. As a
result of these and other factors, many enterprises are seeking outsourcing
arrangements to enhance Web site reliability and perform-
<PAGE> 33
ance, provide continuous operation of their Internet solutions and reduce
related operating expenses. By outsourcing these services, businesses,
particularly non Internet-centric enterprises, can focus on their core
competencies rather than utilizing their resources to support their Internet
operations. Forrester estimates that by 2002, approximately 40% of Internet Web
sites will be outsourced and that Internet hosting revenues for complex sites
will increase from approximately $200 million in 1997 to almost $8 billion by
2002.
The Emergence of Co-Location Services
A variety of companies including Web hosting companies and ISPs have begun
to focus on providing Internet co-location services. These co-location companies
typically build networks of numerous geographically dispersed data centers in
order to be physically close to their customers. As a result of this dispersed
geographic network, data moving from one customer to another is subject to
increased risks of latency and data loss, as data travels across multiple
network connections or "hops." These problems are compounded by the lack of
available tools to monitor all of the various connection points on the Internet
in order to identify and avoid the congested links which can cause latency and
data loss. While these problems existed to some extent with early, less data
intensive applications, such as e-mail, they are becoming increasingly acute
with the growth of bandwidth intensive applications such as audio and video
streaming. In addition, many co-location providers do not have the flexibility
or capacity to quickly scale their services to meet the sharp growth and high
bandwidth requirements of mission-critical Internet operations.
Internet co-location companies also typically fail to address the
increasing need of local and regional ISPs to provide enhanced connectivity to
compelling content for their customers. Without the ability to maintain
extensive peering relationships with large ISPs, the cost of providing
redundant, reliable and scalable connectivity is often prohibitive for these
local and regional ISPs. As a result, they face increasing congestion as
emerging applications consume more bandwidth. International ISPs are also
seeking a means to obtain fast, reliable access to the large concentration of
U.S.-based content. While many of these problems could be addressed if these
ISPs co-located their facilities with content providers, many of the Web hosting
and co-location companies also compete with ISPs for sales of Internet access
and, therefore, ISPs are often reluctant to co-locate in their facilities.
THE ABOVENET SOLUTION
AboveNet provides high performance, managed co-location and Internet
connectivity services to a wide range of Internet content providers, Web hosting
companies and ISPs. The Company's Internet Service Exchange facilities ("ISXs")
provide high performance, reliable and scalable solutions for electronic
commerce and other mission-critical applications. AboveNet operates two ISXs,
located near MAE West and MAE East, utilizing the Company's suite of
sophisticated network management and remote monitoring tools. The Company
believes that its centralized network architecture provides enhanced
connectivity while eliminating the need to build numerous geographically
dispersed data centers. The Company's ISX model offers customers the benefits of
combining content co-location services with direct ISP access. 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. This direct connectivity minimizes the risk of
delays and data loss often encountered in the transmission of data over the
disperse Internet infrastructure.
The AboveNet solution provides the following key advantages to its
customers:
Scalability and Flexibility. The Company's services are designed to be
highly scalable and flexible in order to meet the needs of its customers as
their Internet operations expand. The Company's network is designed to enable it
to quickly scale bandwidth to meet its customer's needs. In addition, since the
Company charges its customers based on the amount of space and bandwidth it
provides, customers are afforded a flexible, cost-effective path to increasing
their Internet operations. The Company also provides flexibility for its
customers by supporting most leading Internet hardware and software systems
vendor platforms.
High Performance and Enhanced Connectivity. The Company's services are
designed to enhance Internet performance through redundant and high speed
network design and 24x7 monitoring, notification and diagnosis. The Company is
able to address the high bandwidth needs and rapid growth of its customers'
<PAGE> 34
mission-critical operations by maintaining an extensive number of direct public
and private network peering interconnections, including peering relationships
with top-tier network providers. In order to provide its customers with
available and uncongested bandwidth during network traffic spikes, the Company
is committed to maintaining excess network capacity. The amount of excess
bandwidth at any given time depends upon many factors including the timing of
the addition of new circuits, the timing of customer additions and increases in
usage by existing customers.
Enhanced Access for ISPs. By connecting within the Company's ISX, ISPs have
"one hop" connectivity to content providers co-located in the same facility. The
Company believes that by providing a means to reduce the number of "hops" in the
transmission of data, its network design offers significant benefits to
international ISPs as they seek to gain fast, reliable access to U.S.-based
content. In addition, ISPs that participate in the ISX are able to take
advantage of peering relationships generally available only to top-tier network
providers.
Sophisticated Network Management Services and Tools. By leveraging the
knowledge gained from supporting many leading-edge Internet operations, the
Company provides sophisticated network management and monitoring services on a
24x7 basis. The Company's proprietary ASAP software monitors all of the
Company's direct and indirect network connections for latency and packet loss,
allowing the Company's network engineers to dynamically reroute traffic to avoid
congested points. By utilizing ASAP, the Company is able to identify and resolve
many potential problems before they impact an Internet site's availability or
performance.
Remote Management Capabilities. The Company provides its customers with
sophisticated monitoring, reporting and management tools that can be accessed by
the customer to control its Internet hardware, software and application
environments. The Company's monitoring system probes each customer's equipment
every five minutes and provides the customer with notice of potential problems.
The Company believes that these tools, combined with its trained 24x7 support
staff, provide customers with a highly effective means of monitoring, responding
to and resolving problems, significantly reducing customers' needs for on-site
access to their equipment.
Fault Tolerant Facilities. The Company has built fault tolerant facilities
designed to enable the uninterrupted operations necessary for mission-critical
Internet operations. Each of the Company's facilities is equipped with an
uninterruptible DC or AC power supply and back-up generators for power
redundancy, multi-tiered fire suppression systems, seismically braced racks,
separate and redundant cooling zones and security systems.
STRATEGY
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's
strategy includes the following key elements:
Build Brand Name. The Company intends to increase awareness of the AboveNet
brand name among Internet content providers, Web hosting companies and ISPs on a
global basis. The Company believes that associating the AboveNet brand with the
highest quality and most technologically advanced network and services for
outsourcing mission-critical Internet operations is key to the expansion of its
customer base. Through June 1998, the Company focused on building its
infrastructure and developing its tools and, as a result, has engaged in minimal
marketing efforts. Going forward, the Company plans to aggressively 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 also
intends to conduct a series of seminar programs to increase awareness of the
Company's services among potential customers.
Expand Customer Base. The Company intends to expand its base of
approximately 300 customers by significantly increasing its sales and marketing
efforts. The Company's direct sales force consisted of 24 persons as of
September 30, 1998 who are organized into groups to target leading Internet
content
<PAGE> 35
providers, Web hosting companies and ISPs. In addition, the Company has
personnel responsible for addressing the development of customers in the Asian
and European markets. The Company's sales force is supported in their sales
efforts by a sales engineer and, in many instances, by the Company's senior
management. The Company intends to significantly expand its direct sales force
and sales engineers, as well as hire experienced channel managers. The Company
seeks to establish and expand relationships with potential channel partners
including hardware vendors, value added resellers, system integrators and Web
hosting companies in order to leverage their sales organizations. The Company
also plans to develop seminar programs and other cooperative sales programs to
further develop these relationships.
Extend ISX Network. AboveNet seeks to create a global ISX network by
connecting centralized facilities in key domestic and international locations.
The Company currently has ISXs in San Jose, California (near MAE West) and
Vienna, Virginia (near MAE East) and plans to develop a second, significantly
larger ISX facility in San Jose by the fall of 1999. The Company also intends to
expand its network internationally, primarily through strategic investments in
joint ventures and foreign companies that can develop ISX facilities in Europe
and Asia.
Leverage ISX Model. The Company intends to leverage its ISX model to
increase its customer base and generate recurring revenue. The Company believes
that as its customer base expands the benefits to both content providers and
ISPs of its "one hop" solution will increase, creating greater incentives for
new customers to use the Company's services. Since the Company charges these
customers monthly based upon space and bandwidth usage, the Company is generally
able to increase revenue as its customers' Internet usage grows. In addition,
since the Company's service fees are based upon bandwidth usage, the Company
believes that it is well positioned to capitalize on the requirements of high
bandwidth applications.
Address Emerging Internet Technology Markets. The Company believes that its
centralized ISX network will enable it to address the needs of emerging Internet
technologies such as audio and video streaming and voice over IP. Since these
applications require a solution that provides low latency and packet loss, the
Company believes that its high bandwidth, centralized network and enhanced
connectivity capabilities will enable it to offer significant advantages to
customers utilizing these emerging technologies.
THE ABOVENET INTERNET SERVICE EXCHANGE
The Company's ISX provides co-location services, Internet connectivity
services and network management services and tools. The Company's co-location
services are designed to provide enterprises with the high performance,
scalability, connectivity, security, reliability and expertise they need to
enhance their mission-critical Internet applications. The Company creates
solutions for its customers based on their specific business and technical
requirements, modifying the services as customers' needs evolve. The services
are delivered from centralized, state-of-the-art facilities located near MAE
West and MAE East. The Company's management services and tools enable the
Company and its customers to continuously manage customers' Internet operations
jointly, proactively and remotely.
Co-Location Services
The Company provides co-location services designed to meet the demands of
sophisticated, multi-vendor mission-critical Internet operations. The Company
supports most leading Internet hardware and software system vendor platforms,
including those from Ascend Communications, Inc., Bay Networks, Cisco Systems,
Inc., Compaq Computer Corporation, Dell Computer Corporation, EMC Corporation,
Hewlett-Packard Company, International Business Machines Corporation, Lucent
Technologies Inc., Microsoft Corporation, Apple Computer, Inc., Network
Appliance, Inc., Silicon Graphics Inc., Sun Microsystems Inc. and 3COM. This
multi-vendor capability enables the customer to retain control over its choice
of technical solution and enables the customer to integrate its Internet
operations into its existing IT architecture. Because mission-critical Internet
operations are dynamic and often require timely hardware and software upgrades
to maintain targeted service levels, customers have 24x7 physical and remote
access to the ISX facilities. Additional space and electrical power can be added
as needed in order to provide the customer access to additional server
<PAGE> 36
co-location services. Customers install and manage their own hardware and
software at the Company's facilities and the Company does not provide any Web
hosting services.
The Company's co-location facilities include dedicated electrical power
circuits to ensure that each customer's electrical power requirements are met.
Each ISX facility is constructed to address the requirements of mission-critical
network operations with an uninterruptible DC or AC power supply and back-up
generators, FM-200 Fire Suppression with pre-action backup, HVAC, separate
cooling zones, seismically braced racks, 24x7 operations, and high levels of
physical security. 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. See
"Risk Factors -- Risk of System Failure."
Customers can select from shared rack facilities, secure cabinets, or
enclosed cage facilities, based upon their business and technical requirements.
These facilities have the following features:
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
TYPE OF SPACE SIZE FEATURES
- ---------------------------------------------------------------------------------------------------
Open Rack Single shelf, 1/4, 1/2, or Entry-level service providing a
full 9' or 6' racks cost-effective solution for customers that
do not need dedicated environments. Secured
environment that is shared by multiple
customers.
- ---------------------------------------------------------------------------------------------------
Cabriolet 9' or 6' stainless steel Dedicated, locked cabinet. Provides a single
enclosed, secure cabinet, rack with the security of a dedicated
1/4, 1/2, or full rack environment.
- ---------------------------------------------------------------------------------------------------
Cage 8' x 6', 8' x 8' or customized Dedicated, locked cage. Provides flexibility
to order in designing and configuring Internet
servers, including space for multiple racks
and other equipment.
- ---------------------------------------------------------------------------------------------------
</TABLE>
Internet Connectivity
The Company's Internet connectivity services are designed to meet the
requirements of high bandwidth, mission-critical Internet operations by
providing highly reliable, scaleable, non-stop and uncongested operations. On
September 30, 1998, the Company had public and private peering relationships
with 129 and 42 network providers, respectively. Any failure by the Company to
maintain and increase peering relationships would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Risk Factors -- Need to Maintain and Increase Peering Relationships."
The Company's network is designed to minimize the likelihood of failure.
Each ISX has multiple physical fiber paths into the facility. The Company
maintains multiple network links from multiple vendors and regularly checks that
its fiber backbone traverses physically separated paths. This network
architecture enhances the availability of a customer's site, even in the event
of a link failure. In addition, since enterprises' Internet operations often
experience network traffic spikes due to promotions or events, the Company has a
policy of maintaining significant excess capacity. 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. See "Risk Factors -- Risks Associated with Network Scalability."
The Company's Internet connectivity services are also designed to reduce
latency and to enhance network performance. The Company's engineering personnel
continuously monitor traffic patterns and congestion points throughout the
Internet and dynamically reroute traffic flows to improve end-user response
times. The Company also enhances network performance by maintaining what it
believes is among the largest number of direct public and private network
peering interconnections in the industry. For customers seeking a direct
communications link to the site of another customer that is located at the same
ISX, the Company offers highly secure, fast, and efficient cross-connections.
<PAGE> 37
The Company's connectivity services utilize its proprietary ASAP technology
to enhance Internet connectivity by monitoring all of the Company's direct and
indirect network connections for congestion.
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------
TOOL DESCRIPTION BENEFITS
- ---------------------------------------------------------------------------------------------------
ASAP -- Asymmetric ASAP automatically monitors If packet loss and congestion is detected on
Allocation of all of the Company's major any of the links that directly affect
Packets providers' and peers' direct customers' performance, the Company's
and indirect connections on a network engineers are able to dynamically
real-time 24-hour basis to reroute traffic temporarily away from the
identify congestion. problem link. The functionality is
particularly important for emerging
applications such as audio and video
streaming and voice over IP.
- ---------------------------------------------------------------------------------------------------
</TABLE>
Management Services and Tools
The Company's management services and tools support mission-critical
Internet operations by providing the customer with detailed monitoring,
reporting, and management tools to control their hardware, network, software and
application environments. Through the Company's network management services and
tools, customers are able to remotely manage their mission-critical Internet
operations housed at the Company's ISX facilities. The Company believes that
this provides an important advantage to enterprises that seek to outsource a
portion of their Internet operations and to link the management of the
outsourced operations with in-house operations. The Company's proactive
management services and tools enable the Company to identify and resolve
hardware, software, network, and application problems, often before the customer
is aware that a problem exists.
Customers may access their co-located equipment by visiting the ISX
facility or by using the Company's software tools and services for remote
access. Using the Company's remote access tools, customers can perform emergency
tasks, control power functions and monitor their own system usage. These remote
access tools alleviate the need for the Company to build numerous geographically
dispersed ISX facilities. In the event of a system problem, the Company notifies
the customer who can then attempt to resolve the issue remotely. The Company
intends to continue to enhance its software tools in order to meet the needs of
mission-critical Internet operations. The Company's space requirement charges
include access to all of the Company's management services and tools. See "Risk
Factors -- Rapid Technological Change; Evolving Industry Standards."
<PAGE> 38
The Company offers the tools/services summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
TOOLS/SERVICES DESCRIPTION BENEFITS
<S> <C> <C>
- ----------------------------------------------------------------------------------------------
MRTG MRTG is a widely used tool MRTG shows customers the amount of
licensed by the Company that bandwidth being used and,
provides real-time monitoring and therefore, the actual cost of that
management of bandwidth. Currently business expense. Through a
used by most major backbone graphical interface, users can
providers, MRTG generates HTML view, in real-time, the actual
pages containing GIF images which amount of bandwidth flowing
provide a real-time visual through their servers and/or
representation of this traffic. networking equipment. MRTG also
MRTG can also be used to display allows the Company and its
historical statistical data in customers to view the Company's
graphic form. connections and bandwidth usage
with each of its backbone
providers.
- ----------------------------------------------------------------------------------------------
EtherValve EtherValve is a tool licensed by EtherValve allows AboveNet to
the Company that regulates the provide each customer a clear
actual flow of bandwidth from a channel of the bandwidth
customer's server through a 10 purchased. This assures customers
Mbps or 100 Mbps Ethernet segment. that they will have the bandwidth
they have purchased available to
them at any given time. EtherValve
also allows the customer's
bandwidth to be scaled up
immediately, in increments as
small as 8 bps (0.008 Kbps).
- ----------------------------------------------------------------------------------------------
APS -- Automatic APS is a suite of proprietary APS provides real-time information
Pro-Active tools developed to continually about a customer's remote
Services monitor the performance of equipment. APS automatically
customer equipment. Three levels notifies the customer and the
of predetermined escalation Company's technical personnel of
procedures include automatic system malfunctions. Predetermined
notification by e-mail, escalation procedures customized
notification by pager and for each AboveNet customer are
automatic power cycle. then carried out by the Company's
personnel. Automatic rebooting and
other predetermined procedures
often serve to correct problems
before the customer is aware of
the problem.
- ----------------------------------------------------------------------------------------------
As-Ur-Here Service As-Ur-Here provides various As-Ur-Here allows customers to
service aspects including maintain access and control over
automatic remote power cycle and their equipment and perform
remote services terminal server effective equipment maintenance
access. and problem solving while they
outsource their servers and/or
networking equipment.
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 39
CUSTOMERS
The Company has established a diversified base of customers including
Internet content providers, Web hosting companies and ISPs. As of September 30,
1998, the Company had approximately 316 customers. One customer, Supernews,
Inc., accounted for 12% and 14% of the Company's revenues in fiscal 1997 and
1998, respectively. No other customer accounted for more than 10% of revenues in
either fiscal 1997 or 1998. The Company's success is substantially dependent on
the continued growth of its customer base and the retention of its customers.
The Company's customer base increased from 221 at March 31, 1998 to 278 at June
30, 1998 and 316 at September 30, 1998. The Company had a monthly customer
retention rate of 97% or greater in each of the six months ended September 30,
1998. See "Risk Factors -- Need to Grow and Retain Customer Base; Lengthy Sales
Cycle."
The following is a representative list of customers as of October 31, 1998:
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
INTERNET CONTENT PROVIDERS WEB HOSTING COMPANIES ISPS
- -------------------------------------------------------------------------------------------------------
Electronic Arts Inc. CNET Download.com Action Systems, Inc.
e-Media, LLC Galaxy-NET Telecom BigBiz Internet Services
Imagine Radio, Inc. iXL, Inc. Dacom America
IntelliChoice, Inc. ProHosting Direct Network Access, Ltd.
Netscape Communications Corporation PulseWeb Ventures Got.Net Corporation
RealNetworks, Inc. The Web Zone, Inc. Hurricane Electric
Supernews, Inc. Trakprops, Inc. Innetix
Visual Dynamics LLC VirtuaLynx Internet, LLC Internet Gateway Corp.
Web MD, Inc. WebPresence, Inc. LinkAGE Online Limited
Westech ExpoCorp. WebAsyst Corporation PH Communications
- -------------------------------------------------------------------------------------------------------
</TABLE>
The following examples illustrate how the Company's customers use its
services:
INTERNET CONTENT PROVIDERS
RealNetworks, Inc.
RealNetworks is a leading developer of software products and services
designed to enable users of personal computers and other consumer electronic
devices to send and receive audio, video and other multimedia services using the
World Wide Web. RealNetworks uses the Company's facilities to host its Web site
for users to download its client and server software. RealNetworks selected
AboveNet because of the speed and high performance of the Company's network
(enabling fast, reliable downloading of its products), the Company's ability to
rapidly scale the amount of bandwidth and the Company's extensive peering
relationships. Since becoming a customer in February 1998, RealNetworks has
co-located an increasing portion of its downloading operations with the Company.
Electronic Arts Inc.
Electronic Arts is an interactive entertainment software company that
develops, publishes and distributes products for personal computers and other
entertainment systems. Electronic Arts' IT department decided to outsource its
Web site because of the network congestion it encountered with its internal
solution and chose AboveNet because of its reliability, redundancy and
connectivity. Electronic Arts' usage has expanded significantly since 1996 and
it currently uses AboveNet to host the Web sites of multiple divisions.
Electronic Arts, one of the Company's first customers, has expanded its
co-location space over time from a 1/4 rack to a full cage.
<PAGE> 40
WEB HOSTING COMPANIES
iXL, Inc.
iXL is an interactive media company that provides complete Web design and
hosting solutions. iXL offers the Company's co-location and connectivity
services to its customers as part of its bundled solution. iXL has relied upon
the scalability of AboveNet's solution as it has grown through a series of
acquisitions. iXL currently occupies two cages in the Company's San Jose
facility and a rack in its Vienna, Virginia facility. iXL uses AboveNet to
provide its customers with high performance and highly reliable Internet
connectivity.
CNET Download.com
CNET is an Internet media company that operates a network of sites on the
Web. Download.com, a division of CNET, is a leading site for downloading
software titles. CNET Download.com recently selected AboveNet to provide
co-location and connectivity services for its ftp servers due to the high
performance of AboveNet's network and peering relationships with major ISPs and
other large companies, including America Online, Inc. AboveNet's scalable
bandwidth also allows CNET Download.com the flexibility necessary to accommodate
traffic surges accompanying new software releases.
ISPS
Internet Gateway Corp.
Internet Gateway is a Canadian ISP that provides its customers access,
hosting, e-mail, and support services. Internet Gateway recently chose AboveNet
to provide co-location and Internet connectivity services. Internet Gateway uses
AboveNet's management tools, including APS and MRTG, to enable it to remotely
manage the status of its equipment and bandwidth utilization on a 24x7 basis.
Dacom America
Dacom America is a subsidiary of Dacom Corporation, a large Korean ISP.
Dacom America recently chose AboveNet to be one of its primary providers of
Internet connectivity in the United States. Dacom America purchases transit
services from AboveNet, which provides Dacom America with high performance
connectivity to U.S.-based content sites. Through this connection, Dacom America
is able to use AboveNet as its U.S. gateway, providing Dacom America with high
performance Internet connectivity. Dacom also benefits from access to AboveNet's
extensive peering relationships, reducing the need to negotiate separate peering
arrangements with other ISPs.
SALES AND MARKETING
The Company's sales and marketing objective is to achieve broad market
penetration and increase brand name recognition among Internet content
providers, Web hosting companies and ISPs on a global basis through investments
in the expansion of its sales organization and extensive marketing activities.
As of September 30, 1998, the Company employed 29 persons in sales and
marketing. The Company has developed a two-tiered sales strategy to target
leading Internet content providers, Web hosting companies and ISPs through
direct sales and channel relationships. See "Risk Factors -- Management of
Growth; Dependence on Key Personnel."
Direct Sales Force
The Company maintains a direct sales force of highly trained individuals in
San Jose, California and Vienna, Virginia. As of September 30, 1998, the Company
had 24 persons in direct sales targeting Internet content providers, Web hosting
companies and ISPs. The Company also has personnel responsible for addressing
the development of customers in Asia and Europe. The Company is actively seeking
to expand its direct sales force and sales engineers. Substantially all of the
Company's sales are currently generated by the Company's direct sales force. The
Company's sales force is supported in their sales efforts by its sales engineer
and, in many instances, by the Company's senior management. The Company believes
that the integration of
<PAGE> 41
its sales engineer with its sales account managers assists in both the
establishment of customer relationships as well as the migration of customers to
increased use of the Company's services. The Company has developed programs to
attract and retain high quality, motivated sales representatives that have the
necessary technical skills, consultative sales experience and knowledge of their
local markets. These programs include technical and sales process training and
instruction in consultative selling techniques. The Company has also developed
sales compensation plans which provide for significant incentives for exceeding
performance targets.
Develop Channel Relationships
The Company is seeking to develop relationships with potential channel
partners including hardware vendors, value-added resellers, system integrators
and Web hosting companies in order to leverage their sales organizations. The
Company believes that by leveraging the sales forces of these companies, it can
attract customers for its services in a cost-effective manner, as well as
provide co-branded Internet service offerings for its channel partners. For
example, two of the Company's Web hosting customers market the Company's service
as part of their overall bundled offering and the Company has been involved in
joint marketing and sales efforts with such customers. The Company is actively
seeking to hire experienced channel managers to focus exclusively on developing
these relationships. The Company also plans to develop seminar programs and
other cooperative sales programs to further develop these relationships.
Marketing
The Company's strategy is to significantly expand its marketing efforts to
stimulate increased demand for the Company's services and build the AboveNet
brand. The Company plans to aggressively 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 to increase customer awareness. The Company
is also developing customer focus groups to encourage business relationships
among its customers.
NETWORK ARCHITECTURE
The Company's high performance network is designed to provide enhanced
connectivity to its customers. The Company's two ISX facilities are connected to
one another with high speed SONET circuits, and connected to the Internet
through public and private peering arrangements.
The Company's ISX facilities are located near MAE West and MAE East and are
connected to local Internet exchange points by multiple high-speed backbone
connections, provided by MCI WorldCom Teleport Communications Group, a division
of AT&T and Sprint. These links to the local exchange points, combined with
private exchanges with ISPs, connect the customers' traffic to the Internet. The
Company has engineered its peering with a geographically diverse fiber path to
provide high reliability, even in the event of a link failure. The Company has
developed dynamic rerouting and load balancing technologies to enhance Internet
operations.
The Company has determined that as voice, video, and other services are
carried across the Internet, the need for ATM in network infrastructures is
reduced. The Company has built their network using DS-3 and OC-3 clear channel
circuits. By using clear channel circuits, the Company is able to make highly
efficient use of these connections, lowering infrastructure costs, and providing
high performance connectivity. Inside of each ISX facility, the Company has
multiple LANs, each connected to the outside network through redundant routers
and network connections. These routers are configured such that in case of
failure of a single connection, or piece of equipment, alternative equipment or
network paths are automatically utilized, without human intervention, or
performance degradation. See "Risk Factors -- Dependence on Third Party
Suppliers."
The Company utilizes a combination of public and private peering in order
to provide a high level of network performance. On September 30, 1998, the
Company had private peering relationships with 42 network providers and 129
public peering relationships, including peering relationships with all of the
largest providers, and is connected to all of the major U.S. Internet exchange
points. The combination of public and
<PAGE> 42
private peering sessions allows the Company to provide high levels of
performance and reliability to their customers. To ensure that this connectivity
is not degraded, the Company has a policy of providing significant excess
capacity on all LAN, WAN and Internet exchange point connections in its network.
The Company's failure to maintain and increase peering relationships would have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors -- Need to Maintain and Increase Peering
Relationships."
The Company's operations are dependent upon its ability to protect its
network infrastructure and customers' equipment against damage from human error,
fire, earthquakes, floods, power loss, telecommunications failures, sabotage,
intentional acts of vandalism, and similar events. Despite precautions taken by,
and planned to be taken by the Company, the occurrence of a natural disaster or
other unanticipated problem at one or more of the Company's ISX facilities could
result in interruptions to the services provided by the Company. Such an event
could significantly impact the ability of suppliers to provide the data
communications capacity required by the Company and could result in
interruptions in the Company's services. See "Risk Factors -- Risk of System
Failure" and "-- Dependence Upon Third Party Suppliers" and "-- Security Risks."
CUSTOMER SERVICE AND QUALITY ASSURANCE
The Company offers a high level of customer service and quality assurance
by understanding the technical requirements and business objectives of its
customers and addressing their needs proactively on an individual basis. By
working closely with its customers, the Company is able to enhance the
performance of its customers' Internet operations, avoid downtime, resolve
quickly any problems that may arise and make appropriate adjustments in services
as customer needs change over time. As the Company works with its customers over
time to ensure that it is offering the appropriate types and quality of service.
The Company uses advanced software tools to aid in its customer monitoring and
service efforts. The Company received its ISO 9002 certification in April 1998.
As of September 30, 1998, the Company had 27 employees dedicated to customer
service and quality assurance.
Customer service begins before a sale, when the Company provides technical
support for complex orders. During the installation phase, the Company assigns a
transition team and a project manager, who also retains responsibility for the
account after installation, to assist the new customer with the installation
process. After installation, the customer's equipment is overviewed by the
Company's Network Operation Center in San Jose, California, which is operated
24x7 by engineers who answer customer calls, monitor site and network operations
and activate teams to solve problems that arise. The Company's customer service
personnel are also available to assist customers whose operations require
specialized procedures.
The Company believes that its quality assurance programs are key to
building its brand name. The objectives of AboveNet's quality assurance system
are to comply with International Standard ISO 9002:1994 Quality Systems; to
achieve and maintain a level of quality that enhances the Company's reputation
with its customers; to ensure compliance with relevant safety and environmental
requirements; and to endeavor to deliver high quality services to customers in
an environment centered on adherence to high legal and ethical standards.
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. The Company believes that the
principal competitive factors in its market are uncongested connectivity,
quality of facilities, level of customer service, price, the financial stability
and credibility of the provider, brand name and the availability of network
management tools. There can be no assurance that the Company will have the
resources or expertise to compete successfully in the future. The Company's
current and potential competitors in the market include: (i) providers of
co-location services, such as Exodus Communications, Inc., GlobalCenter, Inc.,
which was recently acquired by Frontier Corporation, and Hiway Technologies,
Inc. which recently entered into an agreement
<PAGE> 43
to be acquired by Verio Inc.; (ii) national and regional ISPs, such as
Concentric Network Corporation, PSINet, Inc., MCI WorldCom and certain
subsidiaries of GTE Corporation; (iii) global, regional and local
telecommunications companies, such as Sprint, MCI WorldCom and regional bell
operating companies, some of whom supply capacity to the Company; and (iv) large
IT outsourcing firms, such as International Business Machines Corporation and
Electronic Data Systems. Certain of these companies operate in one or more of
these markets. 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 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 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 have a material adverse effect on its business, results of
operations and financial condition.
In addition, these 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. In
addition, the Company expects competition to intensify as the Company's current
and potential competitors incorporate a broader range of bandwidth,
connectivity, and Internet networking services and tools into their service
offerings. 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 shift the amount of service and bandwidth usage from one
provider to another. The Company may also face competition from its suppliers.
The Company's agreements with its suppliers and other partners do not limit or
restrict those parties from offering similar services to the Company's
customers, thereby enabling such parties to compete against the Company.
INTELLECTUAL PROPERTY RIGHTS
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. The Company has generally entered into confidentiality and
invention assignment agreements with its employees in order to limit access to
and disclosure of certain of its proprietary information. There can be no
assurance that these contractual arrangements or the other 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. The Company also relies on certain
technologies that it licenses from third parties. Two key technologies offered
by the Company, MRTG and EtherValve, are licensed from David Rand, the Company's
Chief Technical Officer. The Company has perpetual, irrevocable, royalty-free
worldwide licenses to both technologies. The license to MRTG is non-exclusive
and the license to EtherValve is exclusive subject to one previously granted
license. The Company does not license any other technology which is not
generally available. 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. The Company
expects that participants in its markets will be increasingly subject to
infringement claims as the number of technologies and competitors in the
Company's industry segment grows. 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
<PAGE> 44
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.
GOVERNMENT REGULATION
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, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being considered by federal, state and foreign
legislatures with respect to such issues. 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. For example, although
sections of the Communications Decency Act of 1996 (the "CDA") that, among other
things, proposed to impose criminal penalties on anyone distributing "indecent"
material to minors over the Internet, were held to be unconstitutional by the
U.S. Supreme Court, there can be no assurance that similar laws will not be
proposed and adopted. Legislation similar to the CDA could subject the Company
and/or its customers to potential liability, which in turn could have an adverse
effect on the Company's business, results of operations and financial condition.
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. The vast majority of such laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. Changes to such laws intended to address these issues,
including some recently proposed changes, could create uncertainty in the
marketplace which could reduce demand for the services of the Company or
increase the cost of doing business as a result of costs of litigation or
increased service delivery costs, or could in some other manner have a material
adverse effect on the Company's business, results of operations and financial
condition. 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.
EMPLOYEES
As of September 30, 1998, the Company had 78 employees, including 29 people
in sales and marketing, 36 people in Customer Service, Network and Backbone
Engineering and Product Development; and 13 people in Finance and
Administration. The Company believes that its future success will depend in part
on its continued ability to attract, hire and retain qualified personnel. The
competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting such personnel. See "Risk
Factors -- Risks Associated with Recent and Planned Business Expansion,"
"-- Management of Growth; Dependence on Key Personnel."
FACILITIES
The principal executive and administrative offices of the Company are
located in San Jose, California and consist of approximately 15,000 square feet
that are leased until 2008, with an option by the Company to expand to 20,000
square feet and to extend to 2018. The Company leases its ISX facilities in San
Jose,
<PAGE> 45
California and Vienna, Virginia (in the Washington, D.C. area). The San Jose,
California facility consists of approximately 10,000 square feet and is leased
until 2008 with an option for the Company to extend to 2018, and the Vienna,
Virginia, facility which consists of approximately 17,000 square feet and is
leased until 2007, with an option for the Company to extend to 2012.
The Company is planning to develop a second, significantly larger ISX
facility near its San Jose, California facility by the fall of 1999. There can
be no assurance that such facility will be completed in a timely manner, or at
all. See "Risk Factors -- Risks Associated with Recent and Planned Business
Expansion."
LEGAL PROCEEDINGS
The Company has a pending dispute with one of its customers, Pathway
Communications, Inc. ("Pathway"), involving one of Pathway's consultants. The
consultant misrepresented his identity to the Company to gain access to
Pathway's servers in order to delete files. On September 3, 1998, Pathway filed
a complaint against the Company for negligence, breach of contract, conversion,
and intentional and negligent interference with prospective economic advantage
in the Superior Court of the State of California, County of Santa Clara. The
lawsuit seeks general, special and punitive damages upon proof, as well as costs
and reasonable attorneys' fees. The Company intends to vigorously defend against
such action. However, there can be no assurance that the Company will prevail or
that such litigation will not have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk
Factors -- Security Risks."
<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, and
their ages as of November 16, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sherman Tuan................. 45 Chairman of the Board and Chief Executive Officer
Peter C. Chen, Ph.D.(1)...... 59 Vice Chairman of the Board
Warren J. Kaplan............. 56 President, Chief Operating Officer and Director
David Rand................... 35 Chief Technology Officer
Stephen P. Belomy............ 39 Executive Vice President and Secretary
David Dembitz................ 45 Senior Vice President of Sales and Marketing
David F. Larson.............. 51 Senior Vice President and Chief Financial Officer
Lori Barth................... 45 Vice President of Sales
Jerry Chen................... 34 Vice President of International -- Asia
Kevin Hourigan............... 34 Vice President of Finance and Controller
Jeffrey Monroe............... 31 Vice President of Construction and Real Estate
Wayne Sanders................ 55 Vice President of Corporate Development
Paul Steiner, Ph.D........... 42 Vice President of International -- Europe
Robert A. Burgelman, Ph.D.... 53 Director
Frank R. Kline(1)............ 48 Director
James Sha(2)................. 48 Director
Tom Shao, Ph.D.(2)........... 64 Director
Kimball W. Small(1)(2)....... 63 Director
Fred A. Vierra............... 66 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Mr. Tuan, founder of AboveNet, has served as Chief Executive Officer and a
Director since 1996, and President until January 1998. Mr. Tuan has served as
Chairman of the Board since August 1998. Mr. Tuan was President of InterNex
Information Services, Inc., an Internet infrastructure provider, from November
1994 to October 1995 and from February 1994 to November 1995 was President of
Tiara Computer, Inc., a network equipment manufacturer, which merged with
InterNex Information Services, Inc. in November 1994. From January 1992 to June
1993, Mr. Tuan was Vice President of Worldwide Sales and Marketing of Primus
Technologies, Inc., a provider of problem resolution and knowledge management
software, and President of Celerite Graphics, Inc., its wholly owned subsidiary
that manufactured video chips. Mr. Tuan received an Electrical Engineering
degree from Feng-Chia University in Taiwan.
Dr. Chen has served as Vice Chairman of AboveNet's Board of Directors since
August 1998. Dr. Chen served as Chairman of the Board of Directors from December
1996 to August 1998, and has been a Director of the Company since March 1996.
Dr. Chen is the Founder and Chairman of Crosslink Technology Partners, an
investment firm specializing in funding and developing early stage
semiconductor, healthcare and Internet related technology ventures, where he has
been employed since August 1992. From September 1983 to May 1992, Dr. Chen was
Founder, General Manager and Chief Executive Officer of Mosel Corporation, a
semiconductor manufacturer in Taiwan. Dr. Chen received a B.S. in Engineering
from National Taiwan University and a Ph.D. in Engineering from Cornell
University.
Mr. Kaplan has served as AboveNet's President, Chief Operating Officer and
a Director since January 1998, and as Acting President and Chief Operating
Officer from November 1997 to January 1998. From March 1996 to November 1997,
Mr. Kaplan was an investor and consultant to various Internet software start-up
companies. Mr. Kaplan served as Chief Executive Officer and a director of Simply
Interactive, Inc., a software
<PAGE> 47
company, from June 1996 to December 1996 and was President from April 1996 to
June 1996. Until February 1996, Mr. Kaplan served (i) as a Managing
Director -- International at NETCOM On-Line Communication Services, Inc.
("NETCOM"), an ISP and Web hosting company, from August 1995, (ii) as its
Executive Vice President from February 1994, (iii) as its Secretary from October
1994; and (iv) as a Director since April 1994. Mr. Kaplan also served as
NETCOM's Chief Financial Officer from February 1994 through September 1995. From
September 1989 to December 1993, Mr. Kaplan was Vice President of Operations of
Gefinor (USA) Inc., a merchant banking business, and also served as Senior Vice
President and Chief Financial Officer and Interim Chief Executive Officer of its
majority-owned subsidiary, Sheaffer Pen Company, from September 1989 to August
1991 and September 1989 to August 1990, respectively. Mr. Kaplan received a B.S.
in Accounting from New York University and an M.B.A. in Taxation from Long
Island University.
Mr. Rand has served as AboveNet's Chief Technology Officer since March
1996, initially as a consultant, and since May 1998 as an employee. Mr. Rand has
served as a member of the Internet Engineering Task Force for the past seven
years. Mr. Rand authored rfc 1962 and rfc 1663, developed the EtherValve
technology and developed ASAP and APS, as well as co-developed MRTG. From
September 1995 to May 1998, Mr. Rand was an engineer at Cisco Systems, Inc., a
router manufacturer. From October 1993 to February 1994, Mr. Rand was a software
engineer at Novell, Inc., a network server company.
Mr. Belomy has served as Executive Vice President since January 1998. Mr.
Belomy also served as AboveNet's Chief Financial Officer from January 1998 to
November 1998, and as AboveNet's Director of Operations from January 1997 to
January 1998. From August 1985 to December 1996, Mr. Belomy served as Vice
President of Kimball Small Properties, a commercial real estate developer in San
Jose, California. Mr. Belomy has a B.S. in Engineering from the University of
California at Los Angeles.
Mr. Dembitz has served as AboveNet's Senior Vice President of Sales and
Marketing since April 1998. From February 1996 to April 1997, Mr. Dembitz was
Vice President of Sales and Marketing of ISDNet, a start-up company that
provided remote access solutions, which was acquired in 1997. From June 1993 to
December 1995, Mr. Dembitz was an independent consultant providing networking
consulting services. From January 1990 to June 1993, Mr. Dembitz held various
sales positions, including Senior Manager of Major Account Programs and Channel
Programs, as well as the Senior Manager of Sales Operations for SynOptics
Communications, which was acquired by Bay Networks, a provider of routers,
switches and hubs. Mr. Dembitz received a B.S. in Management and a B.S. in
Economics, as well as an M.B.A. with a minor in Marketing, from the University
of Utah.
Mr. Larson joined AboveNet as its Senior Vice President and Chief Financial
Officer in November 1998. From December 1997 to November 1998, Mr. Larson served
as Vice President and Treasurer of Silicon Valley Group, Inc. ("SVG"), which
designs, manufactures and markets semiconductor processing equipment. From
August 1993 to December 1997, Mr. Larson served as SVG's Director of Planning
and from July 1991 to August 1993, Mr. Larson served as SVG's Corporate
Controller. Mr. Larson received a B.S. with honors (with a concentration in
Accounting) from California Polytechnic State University, San Luis Obispo. Mr.
Larson is a Certified Public Accountant.
Ms. Barth has served as AboveNet's Vice President of Sales since August
1998. From June 1997 to August 1998, Ms. Barth was a principal at Corporate
Performance Concepts, a skills development company, and from June 1992 to June
1997, Ms. Barth was a Vice President at Holden Corporation, a sales and
marketing consulting firm. Ms. Barth received her B.S. in Business
Administration and Computer Science from Central Michigan University.
Mr. Chen has served as AboveNet's Vice President of International-Asia
since October 1998. Previously, Mr. Chen served as Sales and Marketing Manager
from January to December 1996, as Senior Customer Service Manager from January
to December 1997, as San Jose Operations Director from January 1998 to June 1998
and as a Director of Asia Pacific from July 1998 to October 1998. Prior to
joining AboveNet, Mr. Chen was a Director of Postable Systems for Everex
Systems, Inc., a computer manufacturer, from January 1995 to January 1996 and
the Co-founder and Vice President of Intelligent Notebook Systems, a computer
reseller, from May 1994 to January 1996. From July 1991 to May 1994 Mr. Chen was
a sales
<PAGE> 48
manager for Santron Inc., a computer reseller. Mr. Chen received a B.S. in
Electrical Engineering from Feng-Chia University in Taiwan, and an M.B.A. from
the University of Hartford.
Mr. Hourigan was promoted to AboveNet's Vice President of Finance in August
1998, and has served as Controller since February 1998. Mr. Hourigan served as a
consulting associate with Deloitte & Touche LLP from October 1997 to February
1998. From August 1993 to April 1997, Mr. Hourigan served in the following
capacities at NETCOM: Controller (1993-1995) and Director of Internal Audit,
Budgeting and Analysis (1995-1997). From August 1991 to August 1993, Mr.
Hourigan served as Financial Analyst for Hewlett-Packard Company, a computer
manufacturer. Mr. Hourigan received a B.A. in Business Economics and a B.A. in
Law & Society from University of California Santa Barbara and an M.B.A. from
Santa Clara University.
Mr. Monroe has served as AboveNet's Vice President of Construction and Real
Estate since August 1998. Mr. Monroe was a Project Manager for Cupertino
Electric, an electrical contractor, from February 1998 to August 1998. Prior to
that, Mr. Monroe was a Project Manager from April 1992 to January 1998, an
Assistant Manager from 1990 to 1992 and an Estimator from 1989 to 1990 for
Truland Systems Corporation, an electrical engineering and contracting company.
Mr. Monroe completed a four year IBEN Electrical apprenticeship program and is a
licensed electrician in the State of Virginia and Washington, D.C.
Mr. Sanders has served as AboveNet's Vice President of Corporate
Development since August 1998. Mr. Sanders served as AboveNet's Director of
Sales from May 1996 to August 1998. From April 1994 to April 1996 Mr. Sanders
was the Director of Sales for InterNex Communications, Inc., an Internet
infrastructure provider. Prior thereto, Mr. Sanders was the Founder of
InterSell, a computer peripheral manufacturer and distribution company, which
subsequently was split into three companies, from July 1976 to January 1993. The
three companies were: Integrated Marketing, a manufacturing representative firm
where he held the position of Chief Executive Officer and President; Paragon
Sales, a distributor of computer peripherals where he held the position of Chief
Executive Officer; and Intek Manufacturing, a manufacturer of intelligent
printers and smart switch boxes where he held the position of Chief Executive
Officer. Mr. Sanders attended Olympic College in Bremerton, Washington.
Dr. Steiner has served as AboveNet's Vice President of
International -- Europe since August 1998. From August 1995 until August 1998,
Dr. Steiner was the Managing Director of Europe, Africa, Middle East and India,
and from February 1995 until August 1995, Dr. Steiner was a consultant for
NETCOM. From January 1994 to January 1995, Dr. Steiner was an independent
consultant in Palo Alto, California. From April 1986 to December 1993, Dr.
Steiner served as a Managing Director and Partner for HOT Engineering Ltd., a
petroleum engineering software and consulting company in Leoben, Austria. Dr.
Steiner received a B.S. and M.S. in Petroleum Engineering, and a Ph.D. in
Reservoir Engineering from Leoben Mining University in Leoben, Austria, and an
M.B.A. from the University of Michigan.
Dr. Burgelman has served as a Director of the Company since November 1998.
Dr. Burgelman is currently the Edmond W. Littlefield Professor of Management and
Director of the Stanford Executive Program (SEP) at Stanford Business School and
has been a professor at Stanford Business School since August 1981. From 1991 to
1992, Dr. Burgelman also served as Chair of the Division of Business Policy and
Strategy of the Academy of Management and was a Marvin Bower Fellow at Harvard
Business School. From 1996 to 1997 and 1988 to 1989 Dr. Burgelman was a GSB
Trust Faculty Fellow and a BP America Faculty Fellow at Stanford Business
School. Dr. Burgelman earned a Licenciate degree in Applied Economics from
Antwerp University in Belgium, an M.A. in Sociology and a Ph.D. in Management of
Organizations from Columbia University.
Mr. Kline has served as a Director of the Company since August 1998. Mr.
Kline has served as a Managing Partner of Kline Hawkes California, L.P./Kline
Hawkes California SBIC, L.P., a private equity firm, since 1994. From June 1984
to June 1994, Mr. Kline served as a private equity manager of Lambda Fund
Management, Inc., a venture capital firm. Mr. Kline currently serves as a
director of four companies, including: CampusLink Communications Systems, Inc.,
EOS Corporation, SuperShuttle International, Inc. and TranSoft Networks, Inc.
Mr. Kline also serves on the Board of Governors of the National Association of
Small Business Investment Companies. Mr. Kline received a B.S. in Commerce from
Rider College and an M.S. from the University of Massachusetts at Amherst.
<PAGE> 49
Mr. Sha has served as a Director since August 1998. Since January 1998, Mr.
Sha has served as Senior Vice President, Commerce Solutions at Netscape
Communications ("Netscape"), a provider of software and Internet services for
businesses. From April 1996 to December 1997, Mr. Sha was the President and
Chief Executive Officer of Actra Business Systems ("Actra"), a developer of
high-end Internet commerce applications. Actra, a joint venture between Netscape
and GE Information Services, was acquired by Netscape in December 1997. Mr. Sha
served as Vice President and General Manager of integrated application at
Netscape from August 1994 to April 1996. From June 1990 to August 1994, Mr. Sha
was the Vice President of the Unix Product Division at Oracle Corporation, a
software company. Mr. Sha received an M.S. Electrical Engineering from the
University of California at Berkley, an M.B.A. from Santa Clara University and a
B.S. in Electrical Engineering from Taiwan University.
Dr. Shao has served as a member of AboveNet's Board of Directors since
January 1998. Since September 1997, Dr. Shao has served as Managing Director of
Technology Associates Management Co., Ltd., a venture fund manager. Dr. Shao
served as a senior consultant for Technology Associates Corporation of Taiwan, a
venture investment firm, from September 1995 to September 1997. From September
1985 to September 1995, Dr. Shao served as Senior Vice President of DynaTech
Development Corporation, a management consulting and venture investment firm.
Since August 1992, Dr. Shao has served as President of TSS Enterprises, a
privately held high technology management consulting, investing and trading
company. Dr. Shao received a Ph.D. in Applied Mathematics/Computer Science, a
M.S. in Engineering from the University of Illinois, and a B.S. in Engineering
from National Taiwan University.
Mr. Small has served as a member of AboveNet's Board of Directors since
March 1997. Mr. Small is the Founder and President of Kimball Small Properties,
a San Jose, California commercial real estate development company incorporated
in 1978. Mr. Small received a B.S. from the University of California at Los
Angeles.
Mr. Vierra has served as a member of AboveNet's Board of Directors since
October 1998. Mr. Vierra is the Vice Chairman of the Board of Directors and a
consultant to Tele-Communications International, Inc. (TINTA), a cable
television and telecommunications company. Prior to his current position with
TINTA, Mr. Vierra served as the Chief Executive Officer from June 1995 to
January 1998 and as Executive Vice President from December 1991 to June 1995.
Prior to joining TINTA, Mr. Vierra was President and Chief Operating Officer of
the United Artists Entertainment Company, a cable television and motion picture
theatre company, from 1989 to 1991. Mr. Vierra received a B.S. in Business
Administration from the University of Tulsa.
Classified Board
The Company's Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of the Company's Board of Directors
will be elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the Board will be elected
to one-year terms, two will be elected to two-year terms, and three will be
elected to three-year terms. Thereafter, directors will be elected for
three-year terms. Robert A. Burgelman, Frank R. Kline and Tom Shao have been
designated Class I directors whose term expires at the 1999 annual meeting of
stockholders. Peter C. Chen, Warren J. Kaplan and Fred A. Vierra have been
designated Class II directors whose term expires at the 2000 annual meeting of
stockholders. James Sha, Kimball W. Small and Sherman Tuan have been designated
Class III directors whose term expires at the 2001 annual meeting of
stockholders. See "Description of Capital Stock -- Antitakeover Effects of
Provisions of Certain Charter Provisions, Bylaws and Delaware Law."
BOARD COMMITTEES
The Board of Directors has a Compensation Committee and an Audit Committee.
Compensation Committee
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding all forms of compensation provided to the
executive officers and directors of the Company
<PAGE> 50
and its subsidiaries including stock compensation and loans. In addition, the
Compensation Committee reviews and makes recommendations on bonus and stock
compensation arrangements for all employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1996 and
1997 Stock Option Plans, 1998 Stock Incentive Plan and 1998 Employee Stock
Purchase Plan. The current members of the Compensation Committee are Messrs.
Chen, Kline and Small.
Audit Committee
The Audit Committee of the Board of Directors reviews and monitors the
corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's internal audit and control
functions, the results and scope of the annual audit and other services provided
by the Company's independent auditors and the Company's compliance with legal
matters that have a significant impact on the Company's financial reports. The
Audit Committee also consults with the Company's management and the Company's
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of the
Company's financial affairs. In addition, the Audit Committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, the Company's independent auditors. The current members of
the Audit Committee are Messrs. Sha, Shao and Small.
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
Directors of the Company who are not employees receive cash payments of
$2,000 per Board meeting and Committee meeting. From time to time, certain
directors who are not employees of the Company have received grants of options
to purchase shares of the Company's Common Stock. Following this offering,
directors will receive automatic option grants under the Company's 1998 Stock
Incentive Plan. See "-- Stock Incentive Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists of
Messrs. Chen, Kline and Small. No interlocking relationship exists between any
member of the Company's Board of Directors or the Company's Compensation
Committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.
ADVISORY BOARD
The Company has an Advisory Board whose members advise management of the
Company with respect to strategic issues and other business matters. The
Company's Advisory Board currently consists of the following persons:
Robert Berger is an Internet bandwidth development consultant. Mr. Berger
founded InterNex Information Services, Inc. ("InterNex") in 1993 and held
various executive management positions with InterNex until March 1997.
Gregg Carse has worked with CWA International since 1980, during which time
he founded CWA Communications Products, a designer and manufacturer of
telecommunications equipment.
Michael Conley is General Manager of Perspecta, Inc. Prior to that, he
served as a Managing Director of Spyglass Incorporated. Mr. Conley has had
various positions with NetFrame Systems Incorporated from 1989 to 1996 with the
most recent being Vice President and General Manager, Asia Pacific.
Daniel Gatti has been President and Chief Executive Officer of Mayan
Networks, a multiservice carrier class access switch company, since June 1998.
Prior to joining Mayan Networks, Mr. Gatti served as Vice President and General
Manager of 3COM's Network Service Provider Division.
Glenn Kohner is President of ISO-Online Inc. Prior to 1996, Mr. Kohner was
a consultant and business owner.
James Lee is Director of Strategy at the Singapore National IT Research
Institute, Kent Ridge Digital Labs.
<PAGE> 51
Frank McGrath has been Vice President of WorldCom, Inc. since 1988. From
1980 to 1988, Mr. McGrath was Vice President of ITT World Communications.
Greg Moyer is Chief Executive Officer and Creative Director of Flying
Beyond, Inc. Mr. Moyer, from 1989 to 1993, was Creative Director and Lead
Producer of National Meeting Company.
Richard Steranka has held several positions at Cisco Systems, Inc. since
1992. Mr. Steranka is presently Director, Small-Medium Business Channel
Marketing.
Bruce Weber has been President of QMS Quality Management System, Inc. since
1995 and a Senior Executive of Boca Corporate Resources, a successor of Martin,
Randolph and Barnes since 1992, a firm specializing in corporate acquisitions,
restructuring and leveraged buyouts.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during the fiscal
year ended June 30, 1998, by the Company's Chief Executive Officer and the
Company's three other most highly compensated executive officers (collectively,
the "Named Executive Officers"), for services rendered in all capacities to the
Company for that fiscal year.
SUMMARY COMPENSATION TABLE FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------
----------------------- SECURITIES
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) UNDERLYING OPTIONS(#)
--------------------------- --------- -------- ---------------------
<S> <C> <C> <C>
Sherman Tuan
Chief Executive Officer......................... 132,500(1) --(2) 67,500(3)
Warren J. Kaplan
President, Chief Operating Officer.............. 71,635(4) --(5) 202,500(6)
Stephen P. Belomy
Executive Vice President........................ 112,500 -- 42,500
David Rand
Chief Technology Officer........................ 103,333(7)(8) -- 30,000(9)
</TABLE>
- ---------------
(1) Upon the closing of this offering, Mr. Tuan's annual base salary will
increase to $225,000 with a minimum annual increase of 10% each year
thereafter. See "-- Employment Agreements."
(2) Upon the closing of the offering, Mr. Tuan will receive a minimum annual
bonus of $50,000 per year (such bonus not to exceed the amount of Mr. Tuan's
then current salary), with a minimum bonus increase of 10% each year
thereafter. See "-- Employment Agreements."
(3) On August 18, 1998, Mr. Tuan received an option to purchase 131,500 shares
of Common Stock at an exercise price of $12.00 per share which will vest in
equal installments over 48 months.
(4) Upon the closing of the offering, Mr. Kaplan's annual base salary will
increase to $225,000 with a minimum annual increase of 10% each year
thereafter. See "-- Employment Agreements."
(5) Upon the closing of the offering, Mr. Kaplan will receive a minimum annual
bonus of $50,000 per year (such bonus not to exceed the amount of Mr.
Kaplan's then current salary), with a minimum annual bonus increase of 10%
each year thereafter. See "-- Employment Agreements."
(6) Includes an option to purchase 27,500 shares granted for services rendered
as a consultant, of which the option to purchase 9,166 shares has been
cancelled. Mr. Kaplan's option for 175,000 shares contains an anti-dilution
clause which provides that, prior to any underwritten initial public
offering of the Company's securities, Mr. Kaplan is entitled to receive
additional option grants such that his number of option shares will always
be equal to 5% of the Company's outstanding common stock minus 18,333 shares
(the "Anti-Dilution Clause"). Under the terms of the Anti-Dilution Clause,
Mr. Kaplan received a grant of an additional 264,862 option shares with an
exercise price of $0.40 per share on July 31, 1998 and an additional grant
of 30,110 option shares with an exercise price of $0.40 per share on
September 4, 1998. Mr. Kaplan's rights to additional option grants pursuant
to the Anti-Dilution Clause will continue until the consummation of this
offering. See "-- Employment Agreements."
(7) Mr. Rand's employment started on May 1, 1998 at an annual salary of
$140,000.
(8) Includes $80,000 earned as a consultant.
(9) On August 18, 1998, Mr. Rand received an option to purchase 101,250 shares
of Common Stock at an exercise price of $12.00 per share.
<PAGE> 52
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended June 30, 1998 to each of the Named Executive Officers. No
stock appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------------ ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM($)(9)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) FISCAL YEAR(6) ($/SHARE)(7) DATE(8) 5% 10%
---- ---------- ---------------- ------------ ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sherman Tuan.......... 62,500(1) 11.18 0.40 12/09/07 15,722 39,844
5,000(2) * 1.20 1/26/08 3,773 9,562
Warren J. Kaplan...... 27,500(3) 4.92 0.20 11/09/07 3,459 8,766
175,000(4) 31.30 0.40 11/09/07 44,023 111,562
Stephen P. Belomy..... 37,500(5) 6.71 0.40 12/09/07 9,433 23,906
5,000(2) * 1.20 1/26/08 3,773 9,562
David Rand............ 25,000(5) 4.47 0.40 12/09/07 6,289 15,937
5,000(2) * 1.20 1/26/08 3,773 9,562
</TABLE>
- ---------------
* Less than one percent.
(1) 6.25% of the shares vest 3 months after the vesting commencement date with a
further 6.25% vesting every 3 months thereafter until the first anniversary
of the vesting commencement date and 1/36 of the remaining shares vesting
each month thereafter. Under the terms of Mr. Tuan's employment agreement,
all of the shares subject to this option will accelerate and become fully
vested in the event that either Mr. Tuan's employment with the Company is
terminated without cause or there is a material breach by the Company of his
employment agreement. See "-- Employment Agreements."
(2) Each of the options granted to Messrs. Tuan, Belomy and Rand on January 27,
1998 were fully vested at the time of grant.
(3) 1/3 of the shares vested on December 10, 1997, 1/3 of the shares vested on
January 10, 1998 and 1/3 of the shares vested on February 9, 1998. The
option was cancelled with respect to 9,166 shares when Mr. Kaplan joined the
Company as President and Chief Operating Officer.
(4) With respect to Mr. Kaplan's option granted on November 10, 1997 at $0.40
per share, 1/5 of the shares were immediately exercisable and 1/36 of the
remaining shares become exercisable each month thereafter. This option
contains an anti-dilution clause which provides that, prior to any
underwritten initial public offering of the Company's securities, Mr. Kaplan
is entitled to receive additional option grants such that his number of
option shares will always be equal to 5% of the Company's outstanding Common
Stock less 18,333 shares (the "Anti-Dilution Clause"). Under the terms of
the Anti-Dilution Clause, Mr. Kaplan received a grant of an additional
264,862 option shares with an exercise price of $0.40 per share on July 31,
1998, and an additional grant of 30,110 option shares with an exercise price
of $0.40 per share on September 4, 1998. Mr. Kaplan's rights to additional
option grants pursuant to the Anti-Dilution Clause will continue until the
consummation of this offering. All of the shares subject to this option will
accelerate and become fully vested upon the closing of the offering. See
"-- Employment Agreements."
(5) 6.25% of the shares vest 3 months after the vesting commencement date with a
further 6.25% vesting every 3 months thereafter until the first anniversary
of the vesting commencement date and 1/36 of the remaining shares vesting
each month thereafter.
(6) Based on an aggregate of 559,125 options granted to employees of the Company
under the 1997 Stock Option Plan and the option granted to Mr. Kaplan on
November 10, 1997 with an exercise price of $0.40 per share. See
"-- Employment Agreements."
(7) The exercise price is equal to the deemed fair market value of the Company's
Common Stock as estimated by the Board of Directors on the date of grant
with the exception of the November 10, 1997 option granted to Mr. Kaplan to
purchase 175,000 shares of Common Stock at an exercise price of $0.40 per
share, which was deemed to be above the fair market value on the date of
grant. The fair market value of the Company's Common Stock was estimated by
the Board of Directors on the basis of the purchase price paid by investors
for shares of the Company's Preferred Stock (taking into account the
liquidation preferences and other rights, privileges and preferences
associated with such Preferred Stock) and an evaluation by the Board of
Directors of the Company's revenues, operating history and prospects.
(8) Each of the options has a ten-year term, subject to earlier termination in
the event of the optionee's earlier cessation of service with the Company.
(9) The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall market conditions and the
option holders' continued employment through the vesting period. Unless the
market price of the Common Stock appreciates over the option term, no value
will be realized from the option grants made to the Named Executive
Officers. The potential realizable values shown in the table are calculated
by assuming that the estimated fair market value of the Company's Common
Stock on the date of grant increases by 5% and 10%, respectively, during
each year of the option term. See footnote 7 for information on how such
fair market value was estimated. The initial public offering price is
significantly higher than the estimated fair market value on the date of
grant, and the potential realizable value of the option grants would be
significantly higher than the numbers shown in the table if future stock
prices were projected to the end of the option term by applying the same
annual rates of stock price appreciation to the initial public offering
price.
<PAGE> 53
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the options exercised
by the Named Executive Officers in fiscal year 1998 and the year-end number and
value of unexercised options with respect to each of the Named Executive
Officers. No stock appreciation rights were exercised by the Named Executive
Officers in fiscal year 1998 or were outstanding at the end of that year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END($)(3)
ACQUIRED ON VALUE ------------------------------ ---------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ --------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sherman Tuan......... -- -- 155,000 87,500 771,500 451,500
Warren J. Kaplan..... 65,833 64,833 14,721 112,777 70,661 541,330
Stephen P. Belomy.... 7,551 37,708 55,781 -- 268,124 --
David Rand........... -- -- 86,250 62,500 427,250 317,500
</TABLE>
- ---------------
(1) Based on the fair market value of the Company's Common Stock on the date of
exercise, less the exercise price payable for such shares.
(2) Certain of the options are immediately exercisable for all the option shares
as of the date of grant but any shares purchased thereunder are subject to
repurchase by the Company at the original exercise price paid per share upon
the optionee's cessation of service to the Company prior to vesting in such
shares.
(3) Based on the fair market value of the Company's Common Stock at fiscal year
end of $5.20 per share less the exercise price payable for such shares. The
fair market value of the Company's Common Stock at the end of fiscal year
1998 was estimated by the Board of Directors on the basis of the purchase
price paid by investors for shares of the Company's Preferred Stock (taking
into account the liquidation preferences and other rights, privileges and
preferences associated with such Preferred Stock) and an evaluation by the
Board of Directors of the Company's revenues, operating history and
prospects. The initial public offering price is significantly higher than
the estimated fair market value at fiscal year-end, and the value of
unexercised options would be higher than the numbers shown in the table if
such value were calculated by subtracting the exercise price from the
initial public offering price.
STOCK INCENTIVE PLAN
In August 1998, the Company's Board of Directors adopted the Company's 1998
Stock Incentive Plan (the "Stock Incentive Plan"). It replaces the Company's
1996 Stock Option Plan and its 1997 Stock Plan (the "Prior Plans"). The Prior
Plans will be terminated effective upon the adoption of the Stock Incentive
Plan. No further grants will be made under the Prior Plans following this
offering, although they will continue to govern all outstanding awards made
thereunder. All awards after this offering will be made under the Stock
Incentive Plan.
The number of shares of Common Stock that are reserved for issuance under
the Stock Incentive Plan pursuant to the direct award or sale of shares or the
exercise of options is equal to 1,562,500. If any options granted under the
Stock Incentive Plan are forfeited or terminate for any other reason without
having been exercised in full, then the unpurchased shares subject to those
options will become available for additional grants of stock options or shares
under the Stock Incentive Plan. If shares granted or purchased under the Stock
Incentive Plan are forfeited, then those shares will also become available for
additional grants under the Stock Incentive Plan. The number of shares reserved
for issuance under the Stock Incentive Plan will be increased automatically on
July 1 of each year by a number equal to the lesser of (i) 312,500 shares or
(ii) 4% of the shares of Common Stock outstanding at that time. Options granted
to any optionee in a single fiscal year shall not cover more than 312,500 shares
except that options granted to a new employee in the fiscal year in which his or
her service as an employee first commences shall not cover more than 625,000
shares.
Under the Stock Incentive Plan, directors of the Company and employees of
and consultants and advisors to the Company, or a subsidiary or affiliate of the
Company, are eligible to purchase shares of Common Stock and to receive awards
of shares or grants of nonstatutory options (collectively, the "Awards").
Employees are also eligible to receive grants of incentive stock options
("ISOs") intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"). The Stock Incentive Plan is administered by the
Compensation Committee of the Board of Directors, which selects the persons to
whom shares will be sold or
<PAGE> 54
awarded or options will be granted, determines the type, number, vesting
requirements and other features and conditions of each sale, award or grant,
interprets the Plan and makes all other decisions relating to the operation of
the Plan.
The exercise price under any nonstatutory stock options ("NSOs") generally
must be at least 85% of the fair market value of the Common Stock on the date of
grant, and the exercise price may vary in accordance with a predetermined
formula while the NSO is outstanding. The exercise price under ISOs cannot be
lower than 100% of the fair market value of the Common Stock on the date of
grant and, in the case of ISOs granted to holders of more than 10% of the voting
power of the Company, not less than 110% of such fair market value. The term of
an ISO cannot exceed 10 years, and the term of an ISO granted to a holder of
more than 10% of the voting power of the Company cannot exceed five years.
The exercise price of Common Stock issued upon exercise of options is
payable in cash equivalents at the time when such shares of Common Stock are
purchased, except that the Stock Option Agreement for an ISO, and with respect
to an NSO, the Committee at any time, may specify that payment may be made in
any of the following forms: (i) by surrendering, or attesting to the ownership
of, shares of Common Stock that are already owned by the optionee; (ii) by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the shares
being purchased under the Stock Incentive Plan and to deliver all or part of the
sales proceeds to the Company; (iii) by delivering (on a form prescribed by the
Company) an irrevocable direction to pledge all or part of the shares being
purchased under the Stock Incentive Plan to a securities broker or lender
approved by the Company, as security for a loan, and to deliver all or part of
the loan proceeds to the Company; (iv) by delivering (on a form prescribed by
the Company) a full-recourse promissory note (however, the par value of the
shares being purchased under the Stock Incentive Plan, if newly issued, shall be
paid in cash or cash equivalents); or (v) any other form that is consistent with
applicable laws, regulations and rules.
Beginning after this offering, each new non-employee director who is
elected to the Company's Board of Directors will automatically be granted as of
the date of election an NSO to purchase 9,375 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. The shares subject to these options will vest in 36 equal installments at
monthly intervals over the three-year period commencing on the date of grant. In
addition, each non-employee director who will continue to serve following any
annual meeting of stockholders will automatically be granted an option as of the
date of such meeting to purchase 3,125 shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of grant.
These options will vest on the first anniversary of grant. These options will
expire on the earliest of (i) the 10th anniversary of grant, (ii) 3 months after
termination of service for any reason other than death or total and permanent
disability or (iii) 12 months after termination of service due to death or
disability. No director will receive the 9,375-share grant and a 3,125-share
grant in the same fiscal year.
The Compensation Committee (in its sole discretion) may permit or require
an optionee to have shares that otherwise would be delivered to such optionee as
a result of the exercise of an option converted into amounts credited to a
deferred compensation account established for such optionee as an entry on the
Company's books. In addition to options, shares may be sold or awarded under the
Plan for such consideration as the Compensation Committee may determine,
including (without limitation) cash, cash equivalents, full-recourse promissory
notes, past services and future services. To the extent that an award consists
of newly issued shares, the recipient must furnish consideration with a value
not less than the par value of such Shares in the form of cash, cash equivalents
or past services rendered to the Company (or a parent or subsidiary), as the
Committee may determine. The holders of shares awarded under the Plan shall have
the same voting, dividend and other rights as the Company's other stockholders
except that the award agreement may require that the holders of shares invest
any cash dividends received in additional shares. Such additional shares are
subject to the same conditions and restrictions as the award with respect to
which the dividends were paid.
Immediately prior to the effective date of a Change in Control, an Award
will become fully exercisable as to all shares subject to such Award, except
that (i) in the case of an ISO, the acceleration of exercisability shall not
occur without the Optionee's written consent; and (ii) if the Company and the
other party to the transaction constituting a Change in Control agree that such
transactions is to be treated as a "pooling of
<PAGE> 55
interest" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of exercisability shall not occur to the
extent that the Company's independent accountants and such other party's
independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interest" accounting. In
addition, all options granted to non-employee directors will become fully
exercisable in the event of the termination of the director's service because of
death, total and permanent disability or retirement at or after age 70.
The Board may amend or terminate the Plan at any time. The Plan shall
remain in effect until it is terminated except that no ISOs shall be granted on
or after the 10th anniversary of the later of (i) the date when the Board
adopted the Plan or (ii) the date when the Board adopted the most recent
increase in the number of Common Shares available under the Plan which was
approved by the Company's stockholders. Amendments may be subject to stockholder
approval to the extent required by applicable laws.
EMPLOYEE STOCK PURCHASE PLAN
In August 1998, the Board of Directors adopted the Company's Employee Stock
Purchase Plan (the "ESPP") to provide employees of the Company with an
opportunity to purchase Common Stock through payroll deductions. Under the ESPP,
156,250 shares of Common Stock have been reserved for issuance. As of July 1 of
each year, the number of shares reserved for issuance under the ESPP will be
increased automatically by the number of shares necessary to cause the number of
shares then available for purchase to be restored to 156,250. The ESPP is
expected to become effective at the time of this Offering. All employees whose
customary employment is for more than five months per calendar year and for more
than 20 hours per week will be eligible to participate in the ESPP commencing
with the effective date of this offering.
Eligible employees may contribute up to 15% of their total cash
compensation to the ESPP. Amounts withheld are applied at the end of every
six-month accumulation period to purchase shares of Common Stock, but not more
than 3,125 shares per accumulation period. The value of the Common Stock
(determined as of the beginning of the offering period) that may be purchased by
any participant in a calendar year is limited to $25,000. Participants may
withdraw their contributions at any time before stock is purchased.
The purchase price is equal to 85% of the lower of (i) the market price of
Common Stock immediately before the beginning of the applicable offering period
or (ii) the market price of Common Stock at the time of the purchase. In
general, each offering period is 24 months long, but a new offering period
begins every six months. Thus up to four overlapping offering periods may be in
effect at the same time. An offering period continues to apply to a participant
for the full 24 months, unless the market price of Common Stock is lower when a
subsequent offering period begins. In that event, the subsequent offering period
automatically becomes the applicable period for purposes of determining the
purchase price. The first accumulation and offering periods are expected to
commence on the effective date of this offering and will end on April 30, 1999,
and October 31, 2000, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into an Employment Agreement (the "Tuan Agreement")
with Sherman Tuan dated as of February 1, 1998. Under the Tuan Agreement, Mr.
Tuan receives certain compensation and benefits including, but not limited to,
an annual base salary of $150,000, bonus, and stock options. Under the Tuan
Agreement, Mr. Tuan's base salary increases upon consummation of this offering
to a minimum of $225,000 and his bonus to a minimum of $50,000. The bonus cannot
exceed the amount of Mr. Tuan's then current salary. In addition, following this
offering, Mr. Tuan is guaranteed a minimum annual salary and bonus increase of
10% each year thereafter. In addition, the Tuan Agreement provides for Mr. Tuan
to receive his base salary for twelve months and for the immediate, full
acceleration of vesting of Mr. Tuan's option shares following either a
termination without Cause or a Material Breach of the Tuan Agreement by the
Company prior to December 31, 1999. For the purposes of the Tuan Agreement,
"Cause" means (i) Mr. Tuan's conviction of, guilty or "no contest" plea to or
confession of guilt of a felony, (ii) a willful act by Mr. Tuan which
constitutes gross misconduct and which is materially injurious to the Company or
(iii) violation by Mr. Tuan of the Company's Proprietary Information and
Inventions Agreement without the prior written consent of the Company. For the
purposes of the Tuan Agreement, "Material Breach" means (a) the failure of the
Company to pay base salary or additional compensation in accordance with the
Tuan Agreement,
<PAGE> 56
(b) the assignment to Mr. Tuan without Mr. Tuan's consent of duties
substantially inconsistent with his duties as set forth in the Tuan Agreement,
(c) the relocation of the Company's principal offices to a geographic location
other than Northern California, or (d) a failure to reelect Mr. Tuan as a member
of the Board.
The Company has entered into an Employment Agreement (the "Kaplan
Agreement") with Warren J. Kaplan dated as of November 10, 1997. Under the
Kaplan Agreement, Mr. Kaplan receives certain compensation and benefits
including, but not limited to an annual base salary of $150,000, bonus (not to
exceed his then current salary), and stock options. The Kaplan Agreement
provides that the Company shall continue to pay Mr. Kaplan his base salary for
twelve months following a termination without cause during the term of the
Kaplan Agreement. Under the Kaplan Agreement, Mr. Kaplan's base salary increases
upon consummation of this offering to a minimum of $225,000 and his bonus to a
minimum of $50,000. The bonus cannot exceed the amount of Mr. Kaplan's then
current salary. In addition, following this offering, Mr. Kaplan is guaranteed a
minimum annual salary and bonus increase of 10% each year thereafter.
Under the terms of the Kaplan Agreement, Mr. Kaplan received an option to
purchase shares of the Company's common stock (the "Option"). The initial Option
was for 175,000 shares. However, the Option contains an anti-dilution clause
which guarantees that, prior to any underwritten initial public offering of the
Company's securities, the number of option shares granted to Mr. Kaplan will
always be equal to 5% of the Company's outstanding Common Stock less 18,333
option shares (the "Anti-Dilution Clause"). Under the terms of the Anti-Dilution
Clause, Mr. Kaplan received an additional 264,862 option shares on July 31,
1998, and an additional 30,110 option shares on September 4, 1998. Mr. Kaplan's
rights to additional grants of option shares under the Anti-Dilution Clause will
continue until the consummation of this offering. The Option is immediately
exercisable with respect to 20% of the option shares and the balance becomes
exercisable in equal monthly installments over the next 36 months of employment
with the Company measured from November 10, 1997, the date of the Kaplan
Agreement. The exercise price is $0.40 per share which was above the fair market
value of the Company's Common Stock on November 10, 1997. All outstanding
options will accelerate and all shares that remain subject to the Company's
right of repurchase will become fully vested and no longer subject to the
Company's right of repurchase in the event of: (i) a Corporate Transaction; (ii)
Mr. Kaplan's employment with the Company being terminated without cause; or
(iii) a material breach by the Company of the terms of the Kaplan Agreement.
For the purposes of the Kaplan Agreement, "Corporate Transaction" means one
of the following events: (a) Sherman Tuan ceases to be the Company's Chief
Executive Officer and is succeeded in such position by any person other than Mr.
Kaplan; (b) an underwritten initial public offering of the Company's securities;
(c) the consummation of a merger or consolidation of the Company 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 the Company immediately prior
to such merger, consolidation or other reorganization; (d) the sale, transfer or
other disposition of all or substantially all of the Company's assets; (e) the
liquidation or dissolution of the Company; or (f) any transaction as a result of
which any person becomes the beneficial owner of securities of the Company
representing at least 50% of the total voting power represented by the Company's
then outstanding voting securities, provided that person is not either a
shareholder of the Company on November 10, 1997 or a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or of a parent
or subsidiary of the Company. A transaction shall not constitute a Corporate
Transaction if its sole purpose is to change the state of the Company's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Company's securities
immediately before such transaction. As a result, at the closing of this
offering, Mr. Kaplan will be fully vested in the Option.
The Company has entered into an Employment Agreement (the "Rand Agreement")
with David Rand effective as of May 1, 1998. Under the Rand Agreement, Mr. Rand
is appointed to the position of Chief Technology Officer of the Company and will
receive an annual base salary of $140,000. The Rand Agreement provides for six
months' severance in the event of termination without cause.
See "Risk Factors -- Management of Growth; Dependence on Key Personnel."
<PAGE> 57
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Certificate of Incorporation limits the liability of
directors to the maximum extent not prohibited by Delaware law. Delaware law
provides that a corporation's certificate of incorporation may contain a
provision eliminating or limiting the personal liability of a director for
monetary damages for breach of their fiduciary duties as directors, except for
liability (i) for any breach of their duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its
directors, officers and employee benefit plan fiduciaries, and may indemnify its
employees and agents to the fullest extent permitted by law. The Company
believes that indemnification under its Bylaws covers at least negligence and
gross negligence on the part of indemnified parties. The Company's Bylaws also
permit the Company to advance expenses incurred by an indemnified director or
officer in connection with the defense of any action or proceeding arising out
of such director's or officer's status or service as a director or officer of
the Company upon any undertaking by such director or officer to repay such
advances if it is ultimately determined that such director or officer is not
entitled to such indemnification.
The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and officers for certain expenses (including attorneys' fees and associated
legal expenses), judgments, fines and amounts paid in settlement amounts if such
settlement is approved in advance by the Company, which approval shall not be
unreasonably withheld, actually and reasonably incurred by any such person in
any action, suit, proceeding or alternative dispute resolution mechanism arising
out of such person's services as a director or officer of the Company, any
subsidiary of the Company or any other company or enterprise to which the person
provides services at the request of the Company. The Company believes that those
provisions and agreements are necessary to attract and retain qualified
directors and officers.
<PAGE> 58
CERTAIN TRANSACTIONS
Since the Company's inception in March 1996, there has not been any
transaction or series of similar transactions to which the Company was or is a
party in which the amount involved exceeded or exceeds $60,000 and in which any
director, executive officer, holder of more than 5% of any class of the
Company's voting securities or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest, other
than the transactions described below.
EQUITY FINANCINGS
Since its inception, the Company has financed its growth primarily through
the sale of Preferred Stock, resulting in the issuance of an aggregate of
1,025,000 shares of Series A Preferred Stock at purchase price of $0.40 per
share; 1,631,896 shares of Series B Preferred Stock at a weighted-average
purchase price of $1.35 per share; 2,003,000 shares of Series C Preferred Stock
at a weighted-average purchase price of $1.93 per share; and 2,115,378 shares of
Series D Preferred Stock at a purchase price of $5.20 per share; and 408,775
shares of Series E Preferred Stock at a purchase price of $10.00 per share. The
purchasers of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock of the
Company include the following directors, executive officers and 5% or greater
stockholders of the Company:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PREFERRED STOCK
-----------------------------------------------------------
NAME SERIES A SERIES B SERIES C SERIES D SERIES E
---- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Hui-Tzu Hu(1)................ -- 150,013 500,000 192,307 --
Kline Hawkes California SBIC,
L.P.(1)(2)................. -- -- -- 769,230 40,000
Techgains Corp. and
Technology Associates
Management Co.,
Ltd.(1)(3)................. -- -- 552,500 192,307 --
Primus Technology Fund(1).... -- -- -- 384,615 112,000
Peter C. Chen(1)(4).......... 275,000 171,078 -- -- --
Warren J. Kaplan(5).......... -- -- 12,500 -- 2,500
Kimball Small(6)............. -- 325,000 -- -- --
Spring Creek
Investments(7)............. -- -- -- 96,153 --
Jerry Chen(8)................ -- 33,750 -- -- --
</TABLE>
- ---------------
(1) Holds 5% or more of the Company's outstanding capital stock. Includes all
shares held by affiliated entities.
(2) Frank R. Kline, a director of the Company, is a private equity manager of
Kline Hawkes California SBIC, L.P.
(3) Tom Shao, a director of the Company, is a Managing Director of Technology
Associates Management Co., Ltd.
(4) Peter C. Chen is a director of the Company.
(5) Includes shares held by Mr. Kaplan and his wife. Warren J. Kaplan is the
President, Chief Operating Officer and a director of the Company.
(6) Kimball Small is a director of the Company.
(7) James Sha, a director of the Company, is a principal of Spring Creek
Investments.
(8) Jerry Chen is an executive officer of the Company.
CONSULTING WARRANTS
The Company issued a warrant to Primus Technology Fund, a holder of more
than 5% of the Company's capital stock, to purchase 8,750 shares of the
Company's Common Stock at a per share exercise price of $5.20 in connection with
services provided by Primus in assisting the Company in establishing operations
in Asia.
In December 1996, the Company granted options to purchase an aggregate of
104,166 shares of Common Stock of the Company at an exercise price of $0.12 per
share to Stephen Belomy, the Company's Executive Vice President and Secretary,
and Kimball Small, a member of the Company's Board of Directors (the "Real
Estate Consulting Options"), in consideration of their providing real estate
consulting services to the Company. In June 1998, the Board of Directors of the
Company fully accelerated the vesting of the outstanding Real Estate Consulting
Options.
REAL PROPERTY AGREEMENTS
Kimball Small Properties co-manages the building in which the Company's San
Jose, California office and ISX facility is located, and has an ownership
interest in the building. Kimball Small, President of Kimball
<PAGE> 59
Small Properties, is a holder of more than 5% of the Company's capital stock and
is a director of the Company.
The Company is currently negotiating a lease for an approximately 100,000
square foot ISX facility in San Jose, California. Kimball Small Properties
co-manages the building in which the new facility is being located and has an
ownership interest in the building. See "Risk Factors -- Risks Associates with
Recent and Planned Business Expansion."
WARRANTS
In connection with the exchange of outstanding notes and warrants for the
Company's Series B Preferred Stock, the Company issued a warrant to the Peter
and Pat Chen Living Trust, owned as community property by Peter C. Chen, a
holder of more than 5% of the Company's capital stock and Vice Chairman of the
Board of Directors, to purchase 26,972 shares of the Company's Common Stock at a
per share exercise price of $2.00.
In connection with the exchange of outstanding notes and warrants for the
Company's Series B Preferred Stock, the Company issued a warrant to Hui-Tzu Hu,
a holder of more than 5% of the Company's capital stock, to purchase 29,375
shares of the Company's Common Stock at a per share exercise price of $2.00.
TECHNOLOGY AGREEMENT
David Rand, the Company's Chief Technology Officer, has granted to the
Company perpetual, non-royalty bearing worldwide licenses to the EtherValve and
MRTG technologies and assigned the APS and ASAP technology to the Company
pursuant to a Technology Agreement dated August 18, 1998. In consideration for
entering into the agreement, Mr. Rand received options to purchase 101,250
shares of Common Stock of the Company at an exercise price of $12.00 per share.
The options vest over four years.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Warren J.
Kaplan, the Company's President and Chief Operating Officer and a member of the
Company's Board of Directors, Sherman Tuan, the Company's Chief Executive
Officer and Chairman of the Company's Board of Directors, and David Rand, the
Company's Chief Technology Officer. See "Risk Factors -- Management of Growth;
Dependence on Key Personnel" and "Management -- Employment Agreements."
INDEMNIFICATION PROVISIONS
The Company's Certificate of Incorporation limits the liability of its
directors for monetary damages arising from a breach of their fiduciary duty as
directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under Delaware
law. The Company has also entered into indemnification agreements with its
officers and directors containing provisions that may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising form willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms. See
"Management -- Limitation of Liability and Indemnification Matters."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between the
Company and its officers, directors, principal stockholders and their
affiliates, will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors on the Board
of Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.
<PAGE> 60
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of it's Common Stock (assuming conversion of
all outstanding Preferred Stock) as of October 31, 1998, and as adjusted to
reflect the sale by the Company of 4,000,000 shares of Common Stock by (i) each
person or entity who is known by the Company to own beneficially more than 5% of
the Company's Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1)(2) OFFERING(1)(2)
------------------- -------------------
DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT NUMBER PERCENT
-------------------------------- --------- ------- --------- -------
<S> <C> <C> <C> <C>
Robert A. Burgelman(3)................................. 9,375 * 9,375 *
Peter C. Chen(4)....................................... 473,050 6.0 473,050 3.9
Warren J. Kaplan(5).................................... 254,845 3.2 495,054 4.0
Frank R. Kline(6)...................................... 809,230 10.3 809,230 6.8
James Sha(7)........................................... 96,153 1.2 96,153 *
Tom Shao(8)............................................ 744,807 9.5 744,807 6.3
Kimball Small(9)....................................... 408,333 5.2 408,333 3.4
Sherman Tuan(10)....................................... 402,750 5.0 402,750 3.3
Fred A. Vierra(11)..................................... 9,375 * 9,375 *
Stephen P. Belomy(12).................................. 130,832 1.7 130,832 1.1
David Rand(13)......................................... 187,500 2.3 187,500 1.6
All directors and officers as a group (18 3,814,843
persons)(14)......................................... 43.7 4,055,052 31.3
5% STOCKHOLDERS
- --------------
Hui-Tzu Hu(15)......................................... 871,695 11.1 871,695 7.4
c/o D-Link Corporation
2F No. 233-2 Pro-Chino Road
Tsin-Tren
Taipei, Taiwan R.O.C.
Kline Hawkes California SBIC, L.P.(16)................. 809,230 10.3 809,230 6.8
11726 San Vicente Blvd.
Suite 300
Los Angeles, California 90049
Techgains Corp. and Technology Associates.............. 744,807 9.5 744,807 7.1
Management Co., Ltd.(17)
2378 W. 239th Street
Torrance, California 90501
Primus Technology Fund(18)............................. 505,365 6.4 505,365 4.3
16th Floor, 35 Sec. 3
Min Chuan E. Road
Taipei, Taiwan R.O.C.
</TABLE>
- ---------------
* Less than 1 percent.
(1) Applicable percentage ownership is based on 7,833,305 shares of Common
Stock and Preferred Stock (on an as converted to Common Stock basis)
outstanding as of October 31, 1998 and 11,833,305 shares immediately
following the completion of this offering (assuming no exercise of the
Underwriters' over-allotment option). Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of Common
Stock subject to options currently exercisable or exercisable within 60
days of October 31, 1998 are deemed to be beneficially owned by the person
holding such options or warrants
<PAGE> 61
for the purpose of computing the percentage ownership of such person but
are not treated as outstanding for purposes of computing the percentage
ownership of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 9,375 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Mr. Burgelman is a director
of the Company.
(4) Includes 26,972 shares issuable pursuant to a warrant to purchase Series B
Preferred Stock. Includes all shares owned as community property with Pat
Chen and all shares owned by the Peter Cheng-Yu and Pat Te-Hui Living
Trust. Mr. Chen is a director of the Company.
(5) Includes 157,263 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Includes 12,500 shares of
Common Stock and 2,500 shares of Series E Preferred Stock owned by Judith
A. Kaplan, Mr. Kaplan's wife. Excludes shares of Common Stock owned by Mr.
Kaplan's adult children. Note also, however, that 240,209 shares of Common
Stock issuable pursuant to options currently subject to vesting after 60
days from October 31, 1998 shall become immediately exercisable and fully
vested upon the closing of this offering which will result in Mr. Kaplan
beneficially owning 495,054 shares, representing 4.0% of the Company's
outstanding Common Stock. Pursuant to the terms of an option, Mr. Kaplan
has rights to receive additional option grants until the consummation of
this offering. See "Management -- Employment Agreements." Mr. Kaplan is a
director and an officer of the Company.
(6) Includes 809,230 shares held by Kline Hawkes California SBIC, L.P. and its
affiliates. Mr. Kline, a director of the Company and a private equity
manager of Kline Hawkes California L.P./Kline Hawkes California SBIC, L.P.,
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest.
(7) Includes 96,153 shares held by Spring Creek Investments. Mr. Sha, a
director of the Company, is a principal of Spring Creek Investments.
(8) Includes 744,807 shares held by Techgains Corp. and Technology Associates
Management Co., Ltd. (collectively, "TAMC"). Mr. Shao is a Managing
Director of TAMC. Mr. Shao, a director of the Company, disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(9) Includes 83,333 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Includes all shares held in
community property with Martha Small. Mr. Small is a director of the
Company.
(10) Includes 220,875 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Mr. Tuan is a director and
an officer of the Company.
(11) Includes 9,375 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Mr. Vierra is a director of
the Company.
(12) Includes 55,781 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Mr. Belomy is an officer of
the Company.
(13) Includes 187,500 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 31, 1998. Mr. Rand is an officer of
the Company.
(14) For shares beneficially owned prior to this offering, the number includes
894,900 shares of Common Stock issuable pursuant to options exercisable
within 60 days of October 31, 1998. For shares beneficially owned after
this offering, the number includes 1,135,109 shares of Common Stock
issuable pursuant to options exercisable within 60 days of October 31,
1998. See also footnotes 4, 6 and 8.
(15) Includes 29,375 shares issuable pursuant to a warrant to purchase Series B
Preferred Stock which will expire on the closing of this offering.
(16) The General Partner of Kline Hawkes California SBIC, a California limited
partnership, is Kline Hawkes California SBIC GP, a limited partnership. The
General Partner of Kline Hawkes California SBIC GPLP is Kline Hawkes
Management SBIC, Inc. The controlling shareholder of Kline Hawkes
Management SBIC, Inc. is Frank R. Kline, Jr.
(17) Includes all shares held by TAMC. Mr. Shao is a Managing Director of TAMC.
Mr. Shao, a director of the Company, disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.
(18) Includes 8,750 shares issuable pursuant to a warrant to purchase Common
Stock of the Company. In addition, includes all shares owned by Primus
Holdings (BVI) Inc., an affiliated fund. The members of the Board of
Directors of Primus Technology Fund are Kuo Yang Construction Co. Inc.,
Thomas Chen, The Fubon Group and Tung Ho Steel Enterprise Corp.
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, the Company will be authorized to
issue 60,000,000 shares of Common Stock, $0.001 par value, and 5,000,000 shares
of undesignated Preferred Stock, $0.001 par value. The following description of
the Company's capital stock and certain provisions of the Company's Certificate
of Incorporation and Bylaws does not purport to be complete and is subject to
and qualified in its entirety by the Company's Certificate of Incorporation and
Bylaws, which are included as exhibits to the Registration Statement of which
this Prospectus forms a part, and by applicable provisions of Delaware law.
COMMON STOCK
As of September 30, 1998, there were 7,817,680 shares of Common Stock
outstanding that were held of record by 91 stockholders. There will be
11,817,680 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of options and warrants
outstanding as of September 30, 1998 or granted thereafter) after giving effect
to the sale of Common Stock offered to the public hereby. The holders of Common
Stock are entitled to one vote per share held of record in all matters submitted
to a vote of stockholders. Holders of Common Stock do not have cumulative voting
rights, and, therefore, holders of a majority of the shares voting for the
election of directors can elect all of the directors. In such event, the holders
of the remaining shares will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between the Company and its debtholders. The Company has never declared or paid
cash dividends on its capital stock, expects to retain future earnings, if any,
for use in the operation and expansion of its business, and does not anticipate
paying cash dividends in the foreseeable future. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets legally available for
distribution after payment of all debts and other liabilities and subject to the
prior rights of holders of Preferred Stock then outstanding, if any.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's stockholders. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the stockholders and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including the loss of voting
control to others. The Company has no current plans to issue any shares of
Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW
The Company's Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called annual or special meeting and may not
be effected by written consent. In addition, the Company has a classified Board
of Directors such that approximately one-third of the members of the Board of
Directors are elected at each annual meeting of the stockholders. The Company's
Bylaws provide that, except as otherwise required by law, special meetings of
the stockholders can only be called pursuant to a resolution adopted by a
majority of the Board of Directors, or by the president of the Company, or by
the Chairman of the Board or at the request of stockholders holding at least a
majority of the Company's outstanding stock. In
<PAGE> 63
addition, the Bylaws establish an advance notice procedure for stockholder
proposals to be brought before an annual meeting of stockholders, including
proposed nominations of persons for election to the Board. Stockholders at an
annual meeting may only consider proposals or nominations specified in the
notice of meeting or brought before the meeting by or at the direction of the
Board of Directors or by a stockholder who was a stockholder of record on the
record date for the meeting, who is entitled to vote at the meeting and who has
delivered timely written notice in proper form to the Company's Secretary of the
stockholder's intention to bring such business before the meeting. The
Certificate of Incorporation provides that the affirmative vote of holders of at
least a majority of the total votes eligible to be cast in the election of
directors (the "Voting Stock") is required to amend, alter, change or appeal
certain of its provisions. The Bylaws provide that the affirmative vote of the
holders of at least 80 percent of the Voting Stock is required to amend, alter
or repeal any of its provisions.
The foregoing provisions of the Company's Certificate of Incorporation and
Bylaws are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions which may
involve an actual or threatened change of control of the Company. Such
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. Such provisions are also intended to discourage certain tactics that
may be used in proxy fights but could, however, have the effect of discouraging
others from making tender offers for the Company's shares and, consequently, may
also inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. These provisions may also have
the effect of preventing changes in the management of the Company. See "Risk
Factors -- Antitakeover Effects of Certain Charter Provisions, Bylaws and
Delaware Law."
EFFECT OF DELAWARE ANTITAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (a) by persons who are directors and also
officers and (b) by the employee stock plans in which employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and an interested stockholder; (ii) any
sale, lease, exchange, mortgage, transfer, pledge or other disposition of 10% or
more of the assets or stock of the corporation involving an interested
stockholder; (iii) subject to certain exceptions, any transaction which results
in the issuance or transfer by the corporation of any stock of the corporation
to an interested stockholder; (iv) any transaction involving the corporation
which has the effect of increasing the proportionate share of the stock of any
class or series, or convertible into the stock of any class or series, of the
corporation which is owned by an interested stockholder; or (v) the receipt by
an interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation or any entity or person affiliated with or controlling or controlled
by such entity or person. See "Risk Factors -- Antitakeover Effects of Certain
Charter Provisions, Bylaws and Delaware Law."
<PAGE> 64
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, the holders of approximately 7,359,131 shares of
Common Stock will be entitled upon expiration of the lock-up agreements with the
Underwriters to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of the agreement between the Company
and the holders of such registrable securities, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other securities holders exercising registration
rights, such holders are entitled to notice of such registration and are
entitled to include shares of such Common Stock therein. Holders of registration
rights may also require the Company to file a registration statement under the
Securities Act at the Company's expense with respect to their shares of Common
Stock, and the Company is required to use its best efforts to effect such
registration. Further, holders may require the Company to file registration
statements on Form S-3 at the Company's expense when such form becomes available
for use by the Company. All such registration rights are subject to certain
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares to be included in such registration. In
addition, Warren J. Kaplan, the Company's President and Chief Operating Officer,
has the right to require the Company to register any shares issued or issuable
pursuant to options granted to him on Form S-8.
WARRANTS
As of September 30, 1998, warrants to purchase 57,343 shares of Common
Stock of the Company at a weighted average exercise price of $5.65 will be
outstanding. In addition, a warrant to purchase 12,500 shares of Common Stock at
an exercise price of 80% of the initial public offering price will also be
outstanding.
TRANSFER AGENT
The Transfer Agent and Registrar for the Common Stock is Boston EquiServe
L.P. Its address is 150 Royall Street, Canton, Massachusetts, and its telephone
number at this location is (781) 575-3010.
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 11,817,680 shares
of Common Stock outstanding. Of this amount, the 4,000,000 shares offered hereby
will be available for immediate sale in the public market as of the date of this
Prospectus. Approximately 7,817,680 additional shares will be available for sale
in the public market following the expiration of 180-day lockup agreements with
the Representatives of the Underwriters or the Company, subject in some cases to
compliance with the volume and other limitations of Rule 144.
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
------------------ ------------------------ -------
<S> <C> <C>
Upon Effectiveness... 4,062,500 Freely tradable shares sold in offering and shares
salable under Rule 144(k) that are not subject to
180-day lockup
90 days.............. 9,182 Shares salable under Rule 701
180 days............. 5,221,845 Lockup released; shares salable under Rule 144,
144(k) or 701
Thereafter........... 2,524,153 Restricted securities held for one year or less
</TABLE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this Prospectus a number of shares that does not exceed the greater
of (i) 1% of the then outstanding shares of Common Stock (approximately 118,177
shares immediately after this offering) or (ii) the average weekly trading
volume during the four calendar weeks preceding such sale, subject to the filing
of a Form 144 with respect to such sale. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Persons deemed to be affiliates must always sell pursuant to Rule 144, even
after the applicable holding periods have been satisfied.
The Company, its directors, executive officers, stockholders with
registration rights and certain other stockholders have agreed pursuant to the
Underwriting Agreement and other agreements that they will not sell any Common
Stock without the prior consent of CIBC Oppenheimer Corp. or the Company for a
period of 180 days from the date of this Prospectus (the "180-day Lockup
Period"), except that the Company may, without such consent, grant options and
sell shares pursuant to the Company's stock plans. The Company has agreed with
the Underwriters that the Company will not release any shares subject to lock-up
agreements with the Company without the prior consent of CIBC Oppenheimer Corp.
Any employee or consultant to the Company who purchased his or her shares
under the 1992 plan or pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
nonaffiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with the Rule 144 holding period restrictions, in each case commencing 90
days after the date of this Prospectus. As of September 30, 1998, options to
purchase 1,555,756 shares of Common Stock were outstanding, all of which would
be bound by 180-day market stand-off obligations provided by their terms or
pursuant to the terms of the plans governing such options.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock issued or reserved for
issuance under the Company's 1997 Stock Option Plan, the Company's 1998 Stock
Incentive Plan and the Company's Employee Stock Purchase Plan and shares of
Common Stock issued or issuable under the Option held by Mr. Kaplan, thus
permitting the resale of such shares by nonaffiliates in the public market
without restriction under the Securities Act. The Company intends to register
these shares on Form S-8, along with options that have not been issued under the
Company's stock plans as of the date of this Prospectus.
In addition, after this offering, the holders of approximately 7,359,131
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares under the Securities Act. Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock -- Registration Rights."
<PAGE> 66
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), and each of the Underwriters, for
whom CIBC Oppenheimer Corp. and Volpe Brown Whelan & Company, LLC, are acting as
the representatives (the "Representatives"), has severally agreed to purchase
from the Company, the respective number of shares of Common Stock set forth
opposite the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
CIBC Oppenheimer Corp. .....................................
Volpe Brown Whelan & Company, LLC...........................
---------
Total............................................. 4,000,000
=========
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to
the public initially at the public offering price set forth on the cover page of
this Prospectus and at such price less a concession of not in excess of $
per share to certain securities dealers, of which a concession not in excess of
$ per share may be reallowed to certain other securities dealers. After this
offering, the public offering price, allowances, concessions and other selling
terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase Common Stock are subject to certain conditions,
including that if any of the Common Stock is purchased by the Underwriters
pursuant to the Underwriting Agreement, all such shares must be so purchased
(other than those covered by the over-allotment option described below).
The Company has granted to the Underwriters an option, exercisable for up
to 30 days after the date of this Prospectus, to purchase up to an aggregate of
600,000 additional shares of Common Stock to cover over-allotments, if any. If
the Underwriters exercise such option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares to be purchased by each of them bears to the
4,000,000 shares of Common Stock offered hereby. The Company will be obligated,
pursuant to the over-allotment option granted to the Underwriters, to sell
Common Stock to the Underwriters to the extent that such over-allotment option
is exercised.
Each officer and director who holds shares of the Company and, as of
September 30, 1998, holders of approximately 7,622,262 shares of Common Stock
(including such officers and directors) and all warrantholders of the Company
and optionholders of the Company holding options exercisable within the 180-day
Lockup Period have agreed, for the 180 day Lockup Period, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell (including
without limitation in a short sale), dispose of, loan, pledge or grant any
rights with respect to any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock owned as of the date
of this Prospectus directly by such holders or with respect to which they have
the power of disposition, without the prior written consent of CIBC Oppenheimer
Corp. or the Company. The Company has agreed with the Underwriters that the
Company will not release any shares subject to lock-up agreements with the
Company without the prior consent of CIBC Oppenheimer Corp. CIBC Oppenheimer
<PAGE> 67
Corp. may, in its sole discretion and at any time or from time to time without
notice, release all or any portion of the securities subject to lock-up
agreements. There are no agreements between the Representatives and any of the
Company's stockholders providing consent by the Representatives to the sale of
shares prior to the expiration of the 180-day Lockup Period.
In addition, the Company has agreed that during the 180-day Lockup Period,
the Company will not, without the prior written consent of CIBC Oppenheimer
Corp., subject to certain exceptions, issue, offer to sell, sell, contract to
sell (including without limitation in a short sale), dispose of, loan, pledge or
grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock or any securities convertible
into, exercisable for or exchangeable for shares of Common Stock other than the
Company's sale of shares in this offering, the issuance of Common Stock upon the
exercise of outstanding options, and the Company's issuance of options and
shares under existing employee stock option and stock purchase plans. See
"Shares Eligible for Future Sale."
The Company has agreed to indemnify the Representatives and the several
Underwriters against certain liabilities, including, without limitation,
liabilities under the Securities Act, and to contribute, under certain
circumstances, to certain payments that the Underwriters may be required to make
in respect thereof.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of shares of Common Stock offered hereby to accounts
over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated among the Company
and the Representatives. Among the factors considered in determining the initial
public offering price, in addition to prevailing market conditions, will be the
history of and the prospects for the industry in which the Company competes, the
historical results of operations of the Company, the Company's capital
structure, estimates of the business potential and earnings prospects of the
Company, an overall assessment of the Company, an assessment of the Company's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses. There can be no assurance that an
active trading market will develop for the Common Stock or as to the price at
which the Common Stock may trade in the public market from time to time
subsequent to this offering made hereby.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended, (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the Common Stock originally sold by such syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo
Park, California. An investment partnership comprised of members of that firm
beneficially owns a warrant to purchase 2,500 shares of the Company's Common
Stock at an exercise price of $5.20 per share. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by
Pillsbury Madison & Sutro LLP, Palo Alto, California. Pillsbury Madison & Sutro
LLP has acted and continues to act as counsel to the Company in connection with
certain legal matters.
<PAGE> 68
EXPERTS
The financial statements of the Company as of June 30, 1997 and 1998 and
for the period from March 8, 1996 (inception) to June 30, 1996 and each of the
years in the two-year period ended June 30, 1998 included in this Prospectus and
the related financial statement schedule included elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In April 1998, the Company appointed Deloitte & Touche LLP to replace the
former accountants as its principal accountants. There were no disagreements
with the former accountants during the period from inception to April 30, 1998
or during any subsequent interim period preceding their replacement on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements, if not resolved to the former
accountants' satisfaction, would have caused them to make reference to the
subject matter of the disagreement in connection with their reports. The former
accountants issued an unqualified opinion on the financial statements as of and
for the year ended June 30, 1997 and the period from inception to June 30, 1997.
The Company did not consult with Deloitte & Touche LLP on any accounting or
financial reporting matters in the periods prior to their appointment. The
change in accountants was approved by the Board of Directors.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules to the Registration Statement. For
further information with respect to the Company and such Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as a part of the Registration Statement. Statements contained in
this Prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; reference is made in each instance to
the copy of such contract or document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference to
such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Commission. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov.
<PAGE> 69
ABOVENET COMMUNICATIONS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Balance Sheets as of June 30, 1997 and 1998 and September
30, 1998 (Unaudited)...................................... F-3
Statements of Operations for the Period from March 8, 1996
(Inception) to June 30, 1996, the Years Ended June 30,
1997 and 1998 and the Three Months Ended September 30,
1997 and 1998 (Unaudited)................................. F-4
Statements of Stockholders' Equity (Deficiency) for the
Period from March 8, 1996 (Inception) to June 30, 1996,
the Years Ended June 30, 1997 and 1998 and the Three
Months Ended September 30, 1998 (Unaudited)............... F-5
Statements of Cash Flows for the Period from March 8, 1996
(Inception) to June 30, 1996, the Years Ended June 30,
1997 and 1998 and the Three Months Ended September 30,
1997 and 1998 (Unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 70
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
We have audited the accompanying balance sheets of AboveNet Communications
Inc. as of June 30, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the period from March 8,
1996 (inception) to June 30, 1996 and for each of the two years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of AboveNet Communications Inc. as of June 30,
1997 and 1998, and the results of its operations and its cash flows for the
period from March 8, 1996 (inception) to June 30, 1996 and for each of the two
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
San Jose, California
August 7, 1998
( , 1998 as to Note 12)
------------------------
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
The financial statements included herein reflect the approval by the
Company's stockholders of the Company's 1-for-1.6 reverse stock split of the
Company's common and preferred stock as described in Note 12 to the financial
statements. The above report is in the form that will be signed by Deloitte &
Touche LLP upon the effectiveness of such event assuming that from August 7,
1998 to the effective date of such event, no other events shall have occurred
that would affect the accompanying financial statements or notes thereto.
DELOITTE & TOUCHE LLP
San Jose, California
November 13, 1998
F-2
<PAGE> 71
ABOVENET COMMUNICATIONS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
------------------------- SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1998
----------- ----------- ------------- -------------
(UNAUDITED) (NOTE 1)
(UNAUDITED)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents.............................. $ 331,100 $ 8,141,200 $ 10,625,600 $ 10,873,100
Short-term investments............................ -- -- 983,200 983,200
Accounts receivable, net of reserve for doubtful
accounts of $15,000, $60,000, $130,000 and
$130,000, respectively.......................... 41,100 357,000 625,500 625,500
Prepaid expenses and other current assets......... -- 269,600 668,100 668,100
----------- ----------- ------------- ------------
Total current assets....................... 372,200 8,767,800 12,902,400 13,149,900
Property and equipment, net......................... 766,400 4,436,100 11,115,500 11,115,500
Restricted cash..................................... -- 300,000 --
Deposits and other assets........................... 32,700 189,400 968,100 968,100
----------- ----------- ------------- ------------
Total...................................... $ 1,171,300 $13,693,300 $ 24,986,000 $ 25,233,500
=========== =========== ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable.................................. $ 312,000 $ 2,301,300 $ 2,656,900 $ 2,656,900
Accrued liabilities............................... 109,700 619,900 928,900 928,900
Customer deposits................................. 85,000 309,400 442,100 442,100
Advances.......................................... 739,900 -- -- --
Current portion of long-term obligations.......... 71,500 476,000 1,760,700 1,760,700
----------- ----------- ------------- ------------
Total current liabilities.................. 1,318,100 3,706,600 5,788,600 5,788,600
----------- ----------- ------------- ------------
Convertible notes payable and advances.............. -- 8,000,000 -- --
----------- ----------- ------------- ------------
Other long-term obligations......................... 115,500 1,325,300 6,512,700 6,512,700
----------- ----------- ------------- ------------
Commitments and contingencies (Note 9)
Stockholders' equity (deficiency):
Preferred stock, $0.001 par value, 8,750,000
shares authorized:
Series A convertible preferred stock; 1,025,000
shares designated, issued and outstanding
(none pro forma).............................. 410,000 410,000 410,000 --
Series B convertible preferred stock; 1,775,000
shares designated; 1,000,000, 1,631,896 and
1,631,896 issued and outstanding, respectively
(none pro forma).............................. 1,200,000 2,323,100 2,323,100 --
Series C convertible preferred stock; 2,025,000
shares designated; none, 2,003,000 and
2,003,000 issued and outstanding, respectively
(none pro forma).............................. -- 3,873,400 3,873,400 --
Series D convertible preferred stock; 2,125,000
shares designated; none, none, and 2,115,378
shares issued and outstanding, respectively
(none pro forma).............................. -- -- 10,771,000 --
Series E convertible preferred stock; 1,750,000
shares designated; none, none, and 408,775
shares issued and outstanding, respectively
(none pro forma).............................. -- -- 3,846,400 --
Common stock, $0.001 par value, 12,500,000 shares
authorized; 203,125, 364,348 and 509,895 common
shares issued and outstanding, respectively
(7,817,680 pro forma)........................... 8,100 38,900 69,200 21,540,600
Common stock options.............................. -- 1,861,500 2,613,700 2,613,700
Deferred stock compensation....................... -- (540,100) (565,800) (98,800)
Accumulated deficit............................... (1,880,400) (7,305,400) (10,656,300) (11,123,300)
----------- ----------- ------------- ------------
Total stockholders' equity (deficiency).... (262,300) 661,400 12,684,700 12,932,200
----------- ----------- ------------- ------------
Total...................................... $ 1,171,300 $13,693,300 $ 24,986,000 $ 25,233,500
=========== =========== ============= ============
</TABLE>
See notes to financial statements.
F-3
<PAGE> 72
ABOVENET COMMUNICATIONS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 8, 1996 THREE MONTHS ENDED
(INCEPTION) YEAR ENDED JUNE 30, SEPTEMBER 30,
TO ------------------------- -------------------------
JUNE 30, 1996 1997 1998 1997 1998
------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 78,600 $ 551,600 $ 3,436,400 $ 430,900 $ 1,793,100
-------- ----------- ----------- ----------- -----------
Costs and expenses:
Data communications and
telecommunications......... -- 558,600 2,199,800 256,000 1,079,900
Network operations............ 19,400 416,700 1,571,800 221,800 772,800
Sales and marketing........... 19,100 382,600 1,618,700 258,600 1,355,800
General and administrative.... 66,100 433,700 1,621,500 198,900 812,700
Depreciation and
amortization............... 51,600 132,700 475,500 86,400 659,800
Stock-based compensation
expense.................... -- -- 1,276,400 14,300 436,200
Joint venture termination
fee........................ -- 431,100 -- -- --
-------- ----------- ----------- ----------- -----------
Total costs and
expenses............ 156,200 2,355,400 8,763,700 1,036,000 5,117,200
-------- ----------- ----------- ----------- -----------
Loss from operations............ (77,600) (1,803,800) (5,327,300) (605,100) (3,324,100)
Interest expense................ -- (7,400) (160,800) (58,800) (147,600)
Interest income................. -- 8,400 63,100 1,900 120,800
-------- ----------- ----------- ----------- -----------
Net loss........................ $(77,600) $(1,802,800) $(5,425,000) $ (662,000) $(3,350,900)
======== =========== =========== =========== ===========
Basic and diluted loss per
share......................... $ (0.62) $ (9.17) $ (20.68) $ (3.14) $ (7.35)
======== =========== =========== =========== ===========
Shares used in basic and diluted
loss per share................ 125,000 196,618 262,304 210,625 456,123
======== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 73
ABOVENET COMMUNICATIONS INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
CONVERTIBLE TOTAL
PREFERRED STOCK COMMON STOCK COMMON DEFERRED STOCKHOLDERS'
------------------------- ----------------- STOCK STOCK ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT (DEFICIENCY)
----------- ----------- ------- ------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, March 8, 1996
(inception)........... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock................. -- -- 125,000 5,000 -- -- -- 5,000
Net loss................ -- -- -- -- -- -- (77,600) (77,600)
----------- ----------- ------- ------- ---------- ----------- ------------ ------------
Balances, June 30,
1996.................. -- -- 125,000 5,000 -- -- (77,600) (72,600)
Issuance of common
stock................. -- -- 62,500 2,500 -- -- -- 2,500
Issuance of Series A
convertible preferred
stock................. 1,025,000 410,000 -- -- -- -- -- 410,000
Exercise of common stock
options............... -- -- 15,625 600 -- -- -- 600
Issuance of Series B
convertible preferred
stock................. 500,000 600,000 -- -- -- -- -- 600,000
Issuance of Series B
convertible preferred
stock in conjunction
with acquisition of
DSK, Inc. (Note 8).... 500,000 600,000 -- -- -- -- -- 600,000
Net loss................ -- -- -- -- -- -- (1,802,800) (1,802,800)
----------- ----------- ------- ------- ---------- ----------- ------------ ------------
Balances, June 30,
1997.................. 2,025,000 1,610,000 203,125 8,100 -- -- (1,880,400) (262,300)
Exercise of common stock
options............... -- -- 161,223 30,800 -- -- -- 30,800
Issuance of warrants in
connection with
issuance of debt...... -- 112,000 -- -- 45,000 -- -- 157,000
Issuance of Series B
convertible preferred
stock................. 631,896 1,011,100 -- -- -- -- -- 1,011,100
Issuance of Series C
convertible preferred
stock................. 2,003,000 3,873,400 -- -- -- -- -- 3,873,400
Compensatory stock
arrangements.......... -- -- -- -- 1,816,500 (1,816,500) -- --
Amortization of deferred
stock compensation.... -- -- -- -- -- 1,276,400 -- 1,276,400
Net loss................ -- -- -- -- -- -- (5,425,000) (5,425,000)
----------- ----------- ------- ------- ---------- ----------- ------------ ------------
Balances, June 30,
1998.................. 4,659,896 6,606,500 364,348 38,900 1,861,500 (540,100) (7,305,400) 661,400
Issuance of Series D
convertible preferred
stock*................ 2,115,378 10,771,000 -- -- -- -- -- 10,771,000
Issuance of Series E
convertible preferred
stock*................ 408,775 3,846,400 -- -- -- -- -- 3,846,400
Exercise of common stock
options*.............. -- -- 145,547 30,300 -- -- -- 30,300
Issuance of warrants in
connection with
issuance of debt*..... -- -- -- -- 290,300 -- -- 290,300
Compensatory stock
arrangements*......... -- -- -- -- 461,900 (461,900) -- --
Amortization of deferred
stock compensation*... -- -- -- -- -- 436,200 -- 436,200
Net loss*............... -- -- -- -- -- -- (3,350,900) (3,350,900)
----------- ----------- ------- ------- ---------- ----------- ------------ ------------
Balances, September 30,
1998*................. 7,184,049 $21,223,900 509,895 $69,200 $2,613,700 $ (565,800) $(10,656,300) $ 12,684,700
=========== =========== ======= ======= ========== =========== ============ ============
</TABLE>
- ---------------
* Unaudited
See notes to financial statements.
F-5
<PAGE> 74
ABOVENET COMMUNICATIONS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 8, 1996 THREE MONTHS ENDED
(INCEPTION) YEAR ENDED JUNE 30, SEPTEMBER 30,
TO ------------------------- -------------------------
JUNE 30, 1996 1997 1998 1997 1998
------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (77,600) $(1,802,800) $(5,425,000) $ (662,000) $(3,350,900)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 51,600 132,700 475,500 86,400 659,800
Stock-based compensation expense........ -- -- 1,276,400 14,300 436,200
Noncash interest expense................ -- -- 133,200 56,000 --
Joint venture termination fee........... -- 431,100 -- -- --
Changes in assets and liabilities:
Accounts receivable................... (12,000) (29,100) (315,900) (58,400) (268,500)
Prepaid expenses and other current
assets............................. -- -- (269,600) -- (398,500)
Restricted cash....................... -- -- (300,000) -- 300,000
Deposits and other assets............. -- (32,700) (111,700) (21,000) (488,400)
Accounts payable...................... 13,100 298,900 1,989,300 224,000 355,600
Accrued liabilities................... -- 109,700 510,200 5,600 309,000
Customer deposits..................... -- 85,000 224,400 24,300 132,700
Deferred rent......................... -- 30,400 18,200 -- 36,400
--------- ----------- ----------- ----------- -----------
Net cash used in operating
activities....................... (24,900) (776,800) (1,795,000) (330,800) (2,276,600)
--------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment........ (101,100) (474,500) (3,666,000) (170,700) (7,339,200)
Purchase of short-term investments........ -- -- -- -- (983,200)
--------- ----------- ----------- ----------- -----------
Net cash used in investing
activities....................... (101,100) (474,500) (3,666,000) (170,700) (8,322,400)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and
advances................................ 210,000 739,900 13,395,000 250,000 7,093,900
Payments on debt.......................... -- -- (70,000) -- (570,700)
Principal payments on capital leases...... -- (49,600) (84,700) (8,000) (87,500)
Proceeds from issuance of common stock.... 5,000 3,100 30,800 -- 30,300
Proceeds from issuance of convertible
preferred stock......................... -- 800,000 -- -- 6,617,400
--------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities....................... 215,000 1,493,400 13,271,100 242,000 13,083,400
--------- ----------- ----------- ----------- -----------
Net increase in cash and equivalents........ 89,000 242,100 7,810,100 (259,500) 2,484,400
Cash and equivalents, beginning of period... -- 89,000 331,100 331,100 8,141,200
--------- ----------- ----------- ----------- -----------
Cash and equivalents, end of period......... $ 89,000 $ 331,100 $ 8,141,200 $ 71,600 $10,625,600
========= =========== =========== =========== ===========
Supplemental cash flow information -- Cash
paid for interest......................... $ -- $ 7,400 $ 27,600 $ 2,700 $ 147,600
========= =========== =========== =========== ===========
Noncash investing and financing activities:
Acquisition of equipment under capital
lease................................... $ -- $ 206,200 $ 479,200 $ -- $ --
========= =========== =========== =========== ===========
Acquisition of leasehold improvements in
conjunction with DSK, Inc.
acquisition............................. $ -- $ 168,900 $ -- $ -- $ --
========= =========== =========== =========== ===========
Exchange of notes, advances, accrued
interest and warrants for convertible
preferred stock......................... $ -- $ 210,000 $ 4,884,500 $ -- $ 8,000,000
========= =========== =========== =========== ===========
Issuance of warrants in connection with
issuance of debt........................ $ -- $ -- $ 45,000 $ -- $ 290,300
========= =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 75
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- AboveNet Communications Inc. (the Company), a California
corporation, was formed on March 8, 1996 (inception). The Company provides
managed co-location and Internet connectivity solutions for mission critical
Internet operations.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk -- Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. However, the Company's credit risk is mitigated by the Company's
credit evaluation process and the reasonably short collection terms. The Company
does not require collateral or other security to support accounts receivable and
maintains reserves for potential credit losses. To date, such losses have not
been significant.
Cash and Equivalents -- The Company considers all highly liquid investments
with an original maturity of ninety days or less to be cash equivalents.
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets acquired
under capital lease are amortized over the shorter of the lease term or the
useful lives of the improvement.
Deposits and other assets -- Deposits and other assets at September 30,
1998 include deferred registration costs and deferred financing costs of
approximately $305,000 and $335,000, respectively.
Restricted Cash -- Restricted cash consists of certificates of deposit
which are restricted from use pursuant to certain capital lease agreements.
Revenue Recognition -- Revenue consists primarily of service revenue for
which revenue is recognized in the period in which the services are provided.
The services primarily include bandwidth and space requirement charges which are
recognized monthly as well as installation fees which are recognized as revenue
in the period of installation. Advance customer deposits received are deferred
until the period in which the services are rendered.
Income Taxes -- Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees."
Impairment of Long-Lived Assets and Long-Lived Assets To Be Disposed
Of -- The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed
F-7
<PAGE> 76
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Net Income (Loss) per Share -- Basic income (loss) per share excludes
dilution and is computed by dividing net income (loss) by the weighted-average
number of common shares outstanding, less shares subject to repurchase by the
Company, for the period. Diluted income (loss) per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Common shares equivalents are
excluded from the computation in loss periods as their effect would be
antidilutive.
Unaudited Pro Forma Information -- Upon the closing of the initial public
offering contemplated by this Prospectus, each of the outstanding shares of
preferred stock will convert into one share of common stock and the Series B
convertible preferred stock warrants must be exercised or expire (see Note 6).
Also, approximately $467,000 of deferred stock compensation will be expensed
upon the closing of the offering (see Note 6). The pro forma balance sheet
presents the Company's balance sheet as if these transactions (including the
exercise and subsequent conversion of warrants to acquire 123,736 shares of
Series B preferred stock) had occurred at September 30, 1998.
Unaudited Interim Financial Information -- The interim financial
information as of September 30, 1998 and for the three months ended September
30, 1997 and 1998 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Operating results for the three months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1999.
Reclassifications -- Certain prior year amounts have been reclassified to
conform to the current year presentation. Such reclassifications had no effect
on stockholders equity (deficiency) or net loss.
Recently Issued Accounting Standards -- In June 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires an
enterprise to report, by major components and as a single total, the change in
its net assets during the period from nonowner sources; and SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. The Company will adopt both statements in fiscal 1999. The
Company has not yet identified its SFAS No. 131 reporting segments. Adoption of
these statements will not impact the Company's financial position, results of
operations or cash flows.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for the
Company in fiscal 2000. The Company anticipates that accounting for transactions
under SOP 98-1 will not have a material impact on the Company's financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2000. Although the Company has not fully assessed the implications of SFAS No.
133, the Company does not believe adoption of this statement will have a
material impact on the Company's financial position or results of operations.
F-8
<PAGE> 77
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
2. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------- SEPTEMBER 30,
1997 1998 1998
--------- ---------- -------------
<S> <C> <C> <C>
Property and equipment, at cost:
Telecommunication equipment................. $ 774,300 $2,295,300 $ 3,243,000
Leasehold improvements...................... 168,900 224,700 8,222,400
Office equipment............................ 7,500 186,500 367,600
Construction in progress.................... -- 2,389,400 256,000
--------- ---------- -------------
Total............................... 950,700 5,095,900 12,089,000
Less accumulated depreciation and
amortization................................ (184,300) (659,800) (973,500)
--------- ---------- -------------
Property and equipment, net................... $ 766,400 $4,436,100 $ 11,115,500
========= ========== =============
</TABLE>
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
3. CONVERTIBLE NOTES PAYABLE AND ADVANCES
In June 1997, the Company received $739,900 in cash advances from certain
individuals, including stockholders and employees. In July and August 1997, the
Company received an additional $250,000 in cash advances. In August 1997, the
advances were converted into notes payable of $989,900 and warrants to acquire
494,953 shares of Series B convertible preferred stock at $2.00 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000, or $0.23 per share, and were recorded as a noncash interest
charge in 1998.
On December 31, 1997, the Company entered into exchange agreements with the
note holders. Pursuant to the exchange agreements, the above notes, accrued
interest of $21,200 and the related warrants were exchanged for (i) 631,896
shares of Series B convertible preferred stock and (ii) warrants to acquire
123,736 shares of Series B convertible preferred stock at $2.00 per share.
During fiscal 1998, the Company received $3,873,400 of cash advances from
certain potential investors. In May 1998, these advances were converted into
2,003,000 shares of Series C convertible preferred stock.
On June 30, 1998, in anticipation of the Company's pending sale of
preferred stock, the Company received $8 million in cash, of which $1 million
represented a noninterest bearing cash advance and $7 million represented
convertible notes payable. The notes bore interest at 6%, were due on July 15,
1998 and were convertible into Series D convertible preferred stock at $5.20 per
share. On July 15, 1998, the convertible notes and advance were converted into
Series D convertible preferred stock (see Note 6).
F-9
<PAGE> 78
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
4. OTHER LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
<CAPTION>
JUNE 30,
--------------------- SEPTEMBER 30,
1997 1998 1998
-------- ---------- -------------
<S> <C> <C> <C>
Credit facility.................................. $ -- $1,201,600 $7,724,800
Capital lease facility........................... 156,600 551,100 463,600
Deferred rent.................................... 30,400 48,600 85,000
-------- ---------- ----------
Total obligations................................ 187,000 1,801,300 8,273,400
Current portion of long-term obligations......... (71,500) (476,000) (1,760,700)
-------- ---------- ----------
Long-term obligations.................. $115,500 $1,325,300 $6,512,700
======== ========== ==========
</TABLE>
CREDIT FACILITY
At June 30, 1998, the Company had a $6 million credit facility (the "Credit
Facility"), $1,271,600 of which had been drawn as of June 30, 1998. Proceeds
from borrowings on the Credit Facility may be used solely for the purpose of
acquiring network operating center equipment, office equipment and leasehold
improvements. Borrowings outstanding under the Credit Facility are payable in 42
monthly installments, bear interest at 14.7% and are collateralized by the
equipment and improvements purchased with the proceeds of the borrowing. The
ability to borrow on the Credit Facility expires June 30, 1999. At June 30,
1998, the outstanding borrowings on the Credit Facility are due as follows:
fiscal 1999, $252,000; fiscal 2000, $301,800; fiscal 2001, $349,300 and fiscal
2002, $298,500.
During the three months ended September 30, 1998, the Company and the
financing company amended the Credit Facility to increase the total facility to
$15.0 million, $6.0 million of which will become available upon completion of an
underwritten public offering. At September 30, 1998, $8.4 million had been drawn
on the Credit Facility.
CAPITAL LEASE FACILITY
At June 30, 1998, the Company had $1.45 million available on a $2 million
capital lease facility for which the Company leases certain equipment under
noncancelable capital leases. Leases outstanding at June 30, 1998 expire on
various dates through 2001 (see Note 9). In August 1998, the Company increased
its capital lease facility to $2.5 million. At September 30, 1998, the Company
had approximately $1.95 million available under this facility.
LINE OF CREDIT
The Company has a revolving line of credit from a bank which provides for
borrowings up to $750,000 through May 1999. Borrowings under the line bear
interest at the bank's prime rate plus 1% per annum (9.5% at June 30, 1998) and
are collateralized by substantially all of the Company's assets. As of June 30,
1998, the Company had no borrowings outstanding on the line of credit. The line
of credit agreement limits the Company's ability to pay cash dividends without
the bank's consent and requires, among other things, that the Company satisfy
certain financial covenants. As of June 30, 1998 and September 30, 1998, the
Company was not in compliance with the profitability covenant of its revolving
line of credit agreement. The Company has obtained a waiver with respect to this
covenant from the bank as of June 30, 1998, and is in the process of
renegotiating the covenant terms with the bank. In connection with the line of
credit agreement, in June 1998,
F-10
<PAGE> 79
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
the Company issued to the bank a warrant to purchase 1,250 shares of the
Company's Series D preferred stock at $4.00 per share. The warrant had an
estimated fair value of $1,900 or $1.52 per share.
5. INCOME TAXES
The Company's deferred income tax assets are comprised of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1998
-------- ----------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards.......................... $516,900 $1,975,900
Stock compensation expense on nonqualified stock
options................................................ -- 512,300
Accruals deductible in different periods.................. 57,000 121,100
Depreciation and amortization............................. (14,800) (68,800)
-------- ----------
559,100 2,540,500
Valuation allowance......................................... (559,100) (2,540,500)
-------- ----------
Total............................................. $ -- $ --
======== ==========
</TABLE>
The Company's effective rate differs from the federal statutory tax rate as
follows:
<TABLE>
<CAPTION>
MARCH 8, 1996 YEAR ENDED
(INCEPTION) JUNE 30,
TO JUNE 30, --------------
1996 1997 1998
------------- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit.................... 6.0 6.0 6.0
Joint venture termination fee.......................... -- (9.8) --
Other.................................................. (8.8) (1.8) (1.2)
Valuation allowance.................................... (32.2) (29.4) (39.8)
----- ----- -----
Effective tax rate................................... --% --% --%
===== ===== =====
</TABLE>
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of June 30, 1997 and 1998.
At June 30, 1998, the Company had net operating loss carryforwards of
approximately $4.9 million for federal and state income tax purposes. These
carryforwards begin to expire in 2003 for state and 2010 for federal purposes.
Additionally, Section 382 of the Internal Revenue Code and the applicable
California law impose annual limitations on the use of net operating loss
carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
F-11
<PAGE> 80
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
6. STOCKHOLDERS' EQUITY (DEFICIENCY)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At June 30, 1998 and September 30, 1998, the Company has reserved the
following shares of common stock for issuance in connection with:
<TABLE>
<CAPTION>
JUNE 30, 1998 SEPTEMBER 30, 1998
------------- ------------------
<S> <C> <C>
Conversion of Series A preferred stock.................. 1,025,000 1,025,000
Conversion of Series B preferred stock.................. 1,631,896 1,631,896
Conversion of Series C preferred stock.................. 2,003,000 2,003,000
Conversion of Series D preferred stock.................. -- 2,115,378
Conversion of Series E preferred stock.................. -- 408,775
Warrants issued and outstanding......................... 157,330 193,579
Options issued and outstanding.......................... 978,916 1,555,756
Options available under the 1996 and 1997 Plans......... 744,283 316,858
--------- ---------
Total......................................... 6,540,425 9,250,242
========= =========
</TABLE>
CONVERTIBLE PREFERRED STOCK
Significant terms of the Series A, B, C, D and E convertible preferred
stock are as follows (see Note 12):
- At the option of the holder, each share of preferred stock is convertible
at any time into one share of common stock, subject to adjustment for
certain dilutive issuances. Shares automatically convert into common
stock upon the completion of a public offering with aggregate proceeds
greater than $20,000,000 and at a price per share of not less than $12.00
(see Note 12).
- Series A, B, C, D and E convertible preferred stock have no preference as
to dividends but have a noncumulative right to participate in and receive
the same dividends as may be declared for common stockholders.
- In the event of a liquidation, dissolution or winding up of the Company
(which includes the acquisition of the Company by another entity), the
holders of Series A, B, C, D and E convertible preferred stock have a
liquidation preference over common stock of $0.40, $1.20, $2.00, $5.20
and $12.00 per share, respectively. Upon payment of the preferred stock
liquidation preference (aggregating $6,374,300 and $22,279,600 at June
30, 1998 and September 30, 1998 respectively), the remaining proceeds
will be allocated to the preferred and common stockholders on an as
converted basis.
- Each share of preferred stock has voting rights equivalent to the number
of shares of common stock into which it is convertible.
In fiscal 1997, the Company issued 1,025,000 shares of Series A convertible
preferred stock for cash of $200,000 and the conversion of advances of $210,000.
Also in fiscal 1997, the Company issued 500,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 8) and
issued 500,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 631,896 shares of Series B
convertible preferred stock and 2,003,000 shares of Series C convertible
preferred stock upon conversions of notes, advances and accrued interest of
$1,011,100 and $3,873,400, respectively (see Note 3). During the three months
ended September 30, 1998, the Company issued 2,115,378 shares of Series D
convertible preferred stock for cash of $2,771,000 (net of costs of $229,000)
and the conversion of notes and advances of $8,000,000. During the same quarter,
the Company issued 408,775 shares of Series E convertible preferred stock for
cash of $3,846,400 (net of costs of $223,600).
F-12
<PAGE> 81
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
CONVERTIBLE PREFERRED STOCK WARRANTS
As discussed in Note 3, pursuant to certain exchange agreements entered
into on December 31, 1997, the Company issued warrants to acquire 123,736 shares
of Series B convertible preferred stock at $2.00 per share. These warrants
expire on the earlier of (i) January 1, 2002, (ii) an underwritten public
offering or (iii) a change in control. Also, as discussed in Note 4, warrants to
purchase 1,250 shares of Series D convertible preferred stock at $4.00 per share
were outstanding at June 30, 1998.
COMMON STOCK SUBJECT TO REPURCHASE
In fiscal 1998, upon the exercise of an option the Company sold 12,500
shares of common stock at $0.40 per share to an employee subject to repurchase
whereby the Company has the right to repurchase such shares at their original
purchase price. This right lapses over four years. At June 30, 1998, 12,500
shares were subject to such repurchase rights.
1996 STOCK OPTION PLAN
In March 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). As of June 30, 1998, there were 505,885 options authorized for issuance
under the 1996 Plan. The 1996 Plan is administered by the Board of Directors and
encompasses nonstatutory and incentive stock options. Nonstatutory stock options
may be granted to employees and consultants, whereas incentive stock options may
only be granted to employees.
The 1996 Plan provides for the granting of incentive stock options at not
less than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory options may be granted at not less than 85% of the fair
market value of the underlying stock at the date of grant. Options under the
1996 Plan generally vest over four years and expire ten years from the date of
grant.
1997 STOCK OPTION PLAN
In fiscal 1998, the Company adopted the 1997 Stock Option Plan (the "1997
Plan"), authorizing 1,124,423 shares of common stock to be issued as options.
Upon a change in control, all shares granted under the 1997 Plan shall
immediately vest. Other provisions of the 1997 Plan are generally the same as
the 1996 Plan.
NONPLAN OPTION GRANT
In connection with its hiring of the Company's President and Chief
Operating Officer in November 1997, the Company granted to this officer options
to purchase 175,000 shares of common stock with an exercise price of $0.40 per
share. The option is immediately exercisable with respect to 20% of the option
shares and the balance becomes exercisable in equal monthly installments over
the next 36 months of employment with the Company measured from November 1997.
However, vesting accelerates upon the closing of an underwritten public
offering. In addition, the option grant contains an antidilution clause which
guarantees that, prior to any underwritten initial public offering of the
Company's common stock, the number of shares under the option grant will always
be equal to 5% of the Company's outstanding common stock on a fully diluted
basis less 18,333 shares. As a result of various sales of equity securities and
option grants since the initial grant in November 1997, the officer was issued
options to acquire an additional 264,862 and 30,110 shares of common stock at an
exercise price of $0.40 per share on July 31, 1998 and September 4,
F-13
<PAGE> 82
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
1998, respectively. In connection with this award, the Company recognized
$362,100 and $375,600 in stock-based compensation expense during fiscal 1998 and
the three months ended September 30, 1998, respectively.
OPTIONS AND WARRANTS GRANTED TO NONEMPLOYEES
The Company has granted options and warrants to nonemployees for services
performed and to be performed after the date of grant. In connection with these
awards, the Company recognized $310,100 in stock-based compensation expense
during fiscal 1998 ($33,300 during the three months ended September 30, 1998).
At June 30, 1998 and September 30, 1998, all services relating to these awards
has been rendered and the options and warrants were fully exercisable.
In connection with the Credit Facility (see Note 4), in fiscal 1998, the
Company issued warrants to acquire 22,500 shares of common stock at a
weighted-average exercise price of $4.61 per share. The fair value of these
warrants are being recognized as interest expense through June 30, 1999. During
the three months ended September 30, 1998, in connection with the amendment to
the Credit Facility (see Note 4), the Company issued warrants to acquire 25,000
shares of Common Stock, 12,500 of which have an exercise price of $10.00 per
share and have a term of five years. The remaining 12,500 warrants will have an
exercise price equal to 80% of an initial public offering price, or, if an
initial public offering is not completed, 80% of the price per share of the next
equity financing and will expire five years after the per share price is
determined. The estimated fair value of these warrants of $290,300 is included
in Deposits and other assets at September 30, 1998 and will be amortized to
interest expense over the repayment period.
At June 30, 1998, warrants to acquire 32,344 shares of common stock at a
weighted-average exercise price of $4.19 per share were outstanding; such
warrants expire in 2003. All of these warrants were issued during the year ended
June 30, 1998 (none issued in fiscal 1996 or 1997) and had an estimated
weighted-average fair value of $2.46 per share at the date of grant. At
September 30, 1998, warrants to acquire 56,093 shares of common stock at a
weighted-average exercise price of $5.68 per share were outstanding and
additional warrants to acquire 12,500 shares of common stock will have an
exercise price equal to 80% of an initial public offering price, or, if an
initial public offering is not completed, 80% of the price per share of the next
equity financing.
DEFERRED STOCK COMPENSATION
At June 30, 1998 and September 30, 1998, the Company had $540,100 and
$565,800, respectively, in deferred stock compensation related to options
granted to employees. This amount will be amortized to stock-based compensation
expense through fiscal 2000; however, as the vesting of the options granted
under the Nonplan Option Grant discussed above accelerates upon the closing of
an initial public offering, any unamortized deferred compensation relating to
this grant ($467,000 at September 30, 1998) will be recognized in the period the
offering closes.
F-14
<PAGE> 83
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
Stock option activity under the Plans and the Nonplan Option Grant are
summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance, March 8, 1996 (inception)....................... -- $ --
Granted.................................................. 570,000 0.04
---------
Balance, June 30, 1996 (68,750 shares vested at a
weighted average exercise price of $0.04 per share).... 570,000 0.04
Granted.................................................. 225,000 0.13
Exercised................................................ (15,625) 0.04
Canceled................................................. (194,375) 0.04
---------
Balance, June 30, 1997 (109,687 shares vested at a
weighted average exercise price of $0.04 per share).... 585,000 0.06
Granted.................................................. 571,306 1.17
Exercised................................................ (161,223) 0.19
Canceled................................................. (16,167) 0.62
---------
Balance, June 30, 1998................................... 978,916 0.67
Granted.................................................. 725,387 6.29
Exercised................................................ (145,547) 0.21
Canceled................................................. (3,000) 4.00
---------
Balance, September 30, 1998.............................. 1,555,756 $3.33
=========
</TABLE>
The following table summarizes information as of June 30, 1998 concerning
currently outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
----------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ------------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.04 - $0.20 524,386 8.0 $0.08 283,229 $0.08
0.40 271,250 9.4 0.40 25,000 0.40
1.20 79,655 9.6 1.20 47,656 1.20
4.00 103,625 9.9 4.00 11,250 4.00
------- -------
$0.04 - $4.00 978,916 8.7 0.67 367,135 0.37
======= =======
</TABLE>
At June 30, 1998, none and 744,283 shares were available for future grant
under the 1996 and 1997 Plans, respectively. At September 30, 1998, 316,858
shares remained available for future grant under the 1997 Plan.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related interpretations.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income (loss) and earnings (loss) per share had the
Company adopted the fair value method since the
F-15
<PAGE> 84
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
Company's inception. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method with the following weighted average assumptions: expected life, one
year following vest; no stock volatility; risk free interest rate of 6%; and no
dividends during the expected term. The Company's calculations are based on a
multiple award valuation approach, and forfeitures are recognized as they occur.
If the computed minimum values of the Company's stock-based awards to employees
had been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $78,000 ($0.62 per basic and
diluted share), $1,803,800 ($9.17 per basic and diluted share), and $5,111,000
($19.49 per basic and diluted share) for the period from inception to June 30,
1996 and for the years ended June 30, 1997 and 1998, respectively.
The number and estimated weighted-average minimum and fair value per option
for employee and nonemployee awards, respectively, granted are as follows:
<TABLE>
<CAPTION>
INCEPTION TO JUNE 30, YEAR ENDED JUNE 30,
--------------------- -------------------
1996 1997 1998
--------------------- -------- --------
<S> <C> <C> <C>
Employee Options:
Number of shares...................................... 551,250 -- 501,625
Estimate weighted-average minimum value............... $0.01 $-- $0.20
Nonemployee Options:
Number of shares...................................... 18,750 225,000 69,681
Estimated weighted-average fair value................. $0.01 $0.03 $0.15
</TABLE>
7. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
INCEPTION YEAR ENDED JUNE 30, SEPTEMBER 30,
TO JUNE 30, ------------------------- -------------------------
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net loss (numerator), basic and
diluted......................... $(77,600) $(1,802,800) $(5,425,000) $ (662,000) $(3,350,900)
======== =========== =========== =========== ===========
Shares (denominator):
Weighted average common shares
outstanding.................. 125,000 196,618 265,112 210,625 469,683
Weighted average common shares
outstanding subject to
repurchase................... -- -- (2,808) -- (13,560)
-------- ----------- ----------- ----------- -----------
Shares used in computation, basic
and diluted..................... 125,000 196,618 262,304 210,625 456,123
-------- ----------- ----------- ----------- -----------
Net loss per share, basic and
diluted......................... $ (0.62) $ (9.17) $ (20.68) $ (3.14) $ (7.35)
======== =========== =========== =========== ===========
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following at June 30, 1998 (at September 30, 1998 in
parenthesis): 4,659,896 (7,184,049) shares of
F-16
<PAGE> 85
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
convertible preferred stock, warrants to purchase 124,986 (124,986) shares of
convertible preferred stock, 12,500 (14,625) outstanding shares of common stock
subject to repurchase, and options and warrants to purchase 1,011,260
(1,624,349) shares of common stock.
8. JOINT VENTURE TERMINATION FEE
In fiscal 1996, the Company entered into a joint venture agreement (the
"Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the
Company's services. The Company paid $33,700 to DSK during the year ended June
30, 1997 related to the Agreement.
In April 1997, the Company terminated the Agreement and hired the majority
stockholders of DSK as either employees or consultants by issuing 500,000 fully
vested shares of the Series B preferred stock with a fair value of $1.20 per
share, or $600,000, for the outstanding shares of common stock of DSK. The
Company recorded the transaction by allocating the value of the shares issued to
property and equipment (at DSK's net book value of $168,900, which approximated
fair market value), with the balance of $431,100 reflected as a joint venture
termination fee.
Additionally, in April 1997, the Company granted to certain of the former
owners of DSK options to acquire a total of 125,000 shares of the Company's
common stock at $0.12 per share for real estate consulting services to be
performed. In June 1998, the Company accelerated the vesting of all the DSK
options awarded. In conjunction with this award, the Company recognized $604,200
of stock-based compensation expense during fiscal 1998.
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through 2002. Minimum future lease payments
under noncancelable operating and capital leases as of June 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- --------- -----------
<S> <C> <C>
1999....................................................... $ 248,300 $ 968,800
2000....................................................... 196,900 1,055,000
2001....................................................... 180,400 1,099,700
2002....................................................... -- 1,132,500
2003....................................................... -- 1,185,700
Thereafter................................................. -- 5,002,900
--------- -----------
Total minimum lease payments............................... 625,600 $10,444,600
===========
Less amount representing interest.......................... (74,500)
---------
Present value of minimum lease payments.................... 551,100
Less current portion....................................... (224,000)
---------
Long term portion.......................................... $ 327,100
=========
</TABLE>
Rent expense under the operating leases for the period from March 8, 1996
(inception) to June 30, 1996 and for the years ended June 30, 1997 and 1998 was
approximately none, $61,500, and $444,905, respectively.
F-17
<PAGE> 86
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
During the three months ended September 30, 1998, the Company entered into
an agreement to lease optical fiber. This lease is expected to commence in early
calendar 1999 upon the installation and acceptance of the connected fiber. The
lease will require annual payments of $420,000 for 20 years from installation.
This arrangement will be accounted for as a capital lease upon initiation of the
lease term.
PURCHASE COMMITMENTS
In fiscal 1998, the Company entered into noncancelable commitments to
purchase property and equipment related to the expansion of its operations
facilities. As of June 30, 1998, approximately $1.7 million was committed for
fiscal 1999 purchases under these agreements.
TELECOMMUNICATIONS AND PEERING ARRANGEMENTS
The Company has guaranteed to pay certain monthly usage levels or fees with
various communications or interconnect providers. Minimum payments under these
agreements at June 30, 1998 are as follows: $3.9 million in fiscal 1999 and $1.3
million in fiscal 2000.
The Company is a party to numerous peering agreements with other internet
providers to allow for the exchange of internet traffic. These agreements do not
have fee commitments and generally have a one year term with automatic renewals.
The Company does not record any revenue or expense associated with these
non-cash transactions as such transactions do not represent the culmination of
the earnings process and the fair value of such transactions are not reasonably
determinable.
LEGAL MATTERS
The Company is involved in various claims and legal actions arising out of
the normal course of business. Management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
10. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the President of an entity which is
the co-manager of the Company's primary facilities. Rent expense in fiscal 1996,
1997 and 1998 and for the three months ended September 30, 1998 for these
facilities was none, $16,400, $265,200, and $153,100 respectively. The Company
believes that its lease arrangements were at an arm's length basis.
11. MAJOR CUSTOMERS
Two customers accounted for 32% and 25% of revenues in fiscal 1996, while
another customer accounted for 12% and 14% of revenues in fiscal 1997 and 1998,
respectively.
At June 30, 1998, two customers accounted for approximately 22% and 13% of
trade receivables, while four other customers accounted for 13%, 13%, 11% and
10% of trade receivables at June 30, 1997.
12. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company changed the authorized number of
shares of the Common and Preferred Stock to 12,500,000 and 8,750,000
respectively. Additionally, the Company designated 2,125,000 and 1,750,000
shares of preferred stock as Series D and E, respectively. In July 1998, the
Company issued 2,115,378 shares of Series D convertible preferred stock in
exchange for the conversion of the
F-18
<PAGE> 87
ABOVENET COMMUNICATIONS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996,
THE YEARS ENDED JUNE 30, 1997 AND 1998,
AND THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
$8,000,000 notes payable and advances outstanding at June 30, 1998 and
additional cash of $2,771,000 (net of costs of $229,000). On September 4, 1998,
the Company sold 408,775 shares of Series E convertible preferred stock at
$10.00 per share for proceeds of $3,846,400 (net of costs of $223,600).
On August 27, 1998, the Board of Directors adopted, subject to stockholder
approval, the 1998 Stock Incentive Plan (the "1998 Stock Plan"). The 1998 Stock
Plan will serve as the successor equity incentive program to the Company's
existing 1997 Plan effective upon the execution of an underwriting agreement to
sell shares in an initial public offering. A total of 1,562,500 shares of Common
Stock have been reserved for issuance under the 1998 Stock Plan.
Additionally, on August 27, 1998, the Board of Directors adopted, subject
to stockholder approval, the 1998 Employee Stock Purchase Plan (the "1998
Purchase Plan"). Under the 1998 Purchase Plan, eligible employees are allowed to
have salary withholdings of up to 10% of their base compensation to purchase
shares of common stock at a price equal to 85% of the lower of the market value
of the stock at the beginning or end of defined purchase periods. The initial
purchase period commences upon the execution and final pricing of the
underwriting agreement for the initial public offering of the Company's common
stock. The Company has reserved 156,250 shares of common stock for issuance
under this plan.
On August 27, 1998, the Board of Directors approved, subject to stockholder
approval, a change in the authorized number of shares of the common and
preferred stock upon the closing of the initial public offering to 60,000,000
and 5,000,000, respectively.
On September 3, 1998, the Board of Directors approved, subject to
stockholder approval, the reincorporation of the Company in the State of
Delaware and the associated exchange of one share of common stock and preferred
stock of the Company for every two and one-half shares of common stock and
preferred stock, respectively, of the Company's California predecessor entity.
Such reincorporation and stock exchange became effective on November 5, 1998.
On November 11, 1998, the Board of Directors adopted, subject to
stockholder approval, a 1-for-1.6 reverse split of the outstanding shares of
common and preferred stock. Additionally, on November 11, 1998, the Board of
Directors approved, subject to stockholder approval, an amendment to the
Certificate of Incorporation to require the automatic conversion of preferred
stock into common stock in connection with any public offering occurring prior
to March 31, 1999 regardless of the offering price. The Company's stockholders
approved these amendments on , 1998.
All share and per share amounts in these financial statements have been
adjusted to give effect to the reincorporation, the associated 1-for-2.5
exchange and the subsequent 1-for-1.6 reverse stock split.
F-19
<PAGE> 88
Narrative Description of Inside Front Cover
Inside Front Cover
Top Center -- [AboveNet logo -- depicting the Company's name inserted through a
spherical circle]
Caption beneath logo and centered to page: "Global ISX Strategy"
A world map with North and South America in the center. The United States is
clearly defined by being shaded in blue. To the left is the Asian continent and
Australia. To the right is the European continent. Across the United States map
are two curved lines connecting two ISX facilities, one located on the
East and one located on the West coast of the United States. From the facility
on the West Coast is a series of lines connected to locations in the Asian
continent and Australia. From the facility on the East Coast is a series of
lines connected to locations in European countries. Some lines are green,
indicating connections to customers, and others are yellow indicating targeted
customers.
Below the world map is a green box captioned "Existing Customer Connections In:"
and listed below the caption are: Australia, France, Hong Kong, Korea, Taiwan
and United Kingdom. To the right is a yellow box captioned "Targeted Customer
Connections In:." Listed underneath the caption are: Germany, Japan,
Philippines, Singapore, Sweden, and The Netherlands.
To the right of the boxes is the following text: "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."
<PAGE> 89
Narrative Description of Inside Cover Gate Fold
Landscape Gate Fold, Inside Cover Page; Title Heading Center [AboveNet spherical
logo]; caption to the right of Logo -- "The Internet Service Exchange"
Below the caption is a large shaded circle with "AboveNet ISX" in the middle of
the circle. Inside the circle are two smaller circles centered vertically from
one another. One circle is on top of "AboveNet ISX" caption. The other circle is
below "AboveNet ISX" caption. The top circle is marked "ISPs." The bottom circle
is marked "Content Providers/Web Hosting Companies." Connecting the two inner
circles are two rings with arrows indicating connectivity between the ISPs and
Content Providers/Web Hosting Companies.
Intersecting the large circle are three boxes. One box is to the left of the
circle overlapping the circle on the left side. The box is captioned
"Co-Location Services." Beneath the caption are four bullet points stating the
following: "Designed for high scalability and flexibility," "Supports most
leading Internet hardware and software system vendor platforms," "Fault-
tolerant facilities," "Redundant power systems."
The second box intersects the top center of the circle and is captioned
"Internet Connectivity." Beneath the caption are four bullets points stating the
following: "Designed to provide highly scalable, non-stop, uncongested Internet
operations," "171 peering relationships as of September 30, 1998," "Enhanced
access for ISPs to Content Providers," "Commitment to maintaining excess network
capacity."
The third box is to the right of the circle and intersects the circle on the
right side. The box is captioned "Management Services and Tools." Beneath the
caption are four bullet points stating the following: "24 x 7 network support,"
"Remote access and management capabilities," "Real-time monitoring and
management of bandwidth," "Proactive services and tools to identify and resolve
problems."
The following text is below the large circle: "The convergence of Content
Providers and ISPs at AboveNet's ISX enables AboveNet's ISP customers to provide
their users with "one hop" connectivity, through AboveNet's local area network,
to the co-located Content Provider's site.
Right Side of Landscape Gate Fold shows a series of photographs. The top
photograph is of a room with a series of monitors and computers with a person
standing behind a counter talking to another person in front of the counter.
Underneath the picture is the caption "24 x 7 Professionally Staffed ISX
Facility." To the right will be a picture that shows network switching and
router units housed in racks. That picture is captioned "Telecom and Datacom
Connectivity." Below is a series of three pictures captioned "Co-Location
Offerings." The left picture shows a person working on a computer server which
is housed in one of the Company's cabinet. The picture is captioned "Cabriolet
Cabinet." The middle picture shows a series of network servers placed on racks
with a person typing on a keyboard housed on one of the racks. The picture is
captioned "Open Rack." To the right is a picture showing a corridor with cages
along the right side. The picture is captioned "Cage." Below the three pictures
is a picture showing a series of power generators with an individual standing in
front of the generators. The picture is captioned "Fault-Tolerant and Redundant
Power Systems."
To the right of bottom picture is the following text: "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.''
2
<PAGE> 90
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT, AS OF ANY DATE SUBSEQUENT TO THE DATE
OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 17
Dividend Policy........................... 17
Capitalization............................ 18
Dilution.................................. 19
Selected Financial and Operating Data..... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 21
Business.................................. 30
Management................................ 45
Certain Transactions...................... 57
Principal Stockholders.................... 59
Description of Capital Stock.............. 61
Shares Eligible for Future Sale........... 64
Underwriting.............................. 65
Legal Matters............................. 66
Experts................................... 67
Change in Accountants..................... 67
Additional Information.................... 67
Index to Financial Statements............. F-1
</TABLE>
---------------------
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION
OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,000,000 SHARES
[ABOVENET LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CIBC OPPENHEIMER
VOLPE BROWN WHELAN & COMPANY
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 91
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 17,425
NASD filing fee............................................. 6,250
Nasdaq National Market listing fee.......................... 50,000
Printing and shipping fees.................................. 200,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 350,000
Blue Sky qualification fees and expenses.................... 5,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous fees.......................................... 211,325
----------
Total............................................. $1,200,000
==========
</TABLE>
- ---------------
ITEM 14. 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 Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides 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 Company 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 Company for acts of 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. The Registrant has entered into
Indemnification Agreements with its officers and directors, a form of which is
attached as Exhibit 10.1 hereto and incorporated herein by reference. The
Indemnification Agreements provide the Registrant's officers and directors with
further indemnification to the maximum extent permitted by the Delaware General
Corporation Law. Reference is made to Section 7 of the Underwriting Agreement
filed as Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
II-1
<PAGE> 92
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since March 8, 1996, the Registrant's predecessor company has issued and
sold the following securities (which numbers do not reflect either the one for
two and one-half exchange effected in connection with the Company's
reincorporation into Delaware or the 1-for-1.6 reverse stock split to be
effected prior to this offering).
(1) August 28, 1996, Registrant sold and issued an aggregate of 4,100,000
shares of Series A Preferred Stock, at a purchase price of $0.10 per
share, for cash in the aggregate amount of $410,000 to a group of
investors pursuant to a Series A Preferred Stock Purchase Agreement.
(2) On March 14, 1997, Registrant sold and issued an aggregate of
2,000,000 shares of Series B Preferred Stock, at a purchase price of
$0.30 per share, for cash in the aggregate of $600,000 to a group of
investors pursuant to a Series B Preferred Stock Purchase Agreement.
(3) On April 30, 1997, Registrant terminated a joint venture agreement
with DSK, Inc. by issuing 2,000,000 shares of Series B Preferred
Stock.
(4) On August 7, 1997, Registrant issued promissory notes in the principal
amount of $989,000 and warrants to acquire 1,979,804 shares of Series
B Preferred Stock at $0.50 per share. On December 31, 1997, Registrant
entered into exchange agreements with the noteholders. Pursuant to the
exchange agreements, the above notes, accrued interest of $21,200 and
the related warrants were exchanged for (i) 2,527,640 shares of Series
B Preferred Stock and (ii) warrants to acquire 494,951 shares of
Series B Preferred Stock at $0.50 per share.
(5) On May 11, 1998, Registrant sold and issued an aggregate of 8,012,000
shares of Series C Preferred Stock, at a weighted-average purchase
price of $0.48 per share, for cash in the aggregate amount of
$3,882,400 to a group of investors pursuant to a Series C Preferred
Stock Purchase Agreement.
(6) On June 30, 1998, Registrant issued promissory notes, in the principal
amount of $7,000,000, convertible into Series D Preferred Stock (the
"Series D Notes") to a group of investors pursuant to a Note Purchase
Agreement. On July 15, 1998, Registrant sold and issued an aggregate
of 8,461,538 shares of Series D Preferred Stock, at a purchase price
of $1.30 per share, for cash and cancellation of indebtedness in the
aggregate amount of $10,999,999.40 to a group of investors pursuant to
a Series D Preferred Stock Purchase Agreement. All of the Series D
Notes were converted into shares of Series D Preferred Stock on July
15, 1998.
(7) On September 4, 1998, Registrant sold and issued an aggregate of
1,628,000 shares of Series E Preferred Stock, at a purchase price of
$2.50 per share, for cash in the aggregate amount of $4,070,000 to a
group of investors pursuant to a Series E Preferred Stock Purchase
Agreement. In addition, the Registrant issued 7,100 shares of Series E
Preferred in consideration for placement agent services.
(8) The Registrant has sold and issued 1,289,607 shares of its Common
Stock for an aggregate purchase price of $63,300 to employees,
directors and consultants pursuant to direct issuances and to
exercises of options under its 1996 and 1997 Stock Option Plans and
non-plan options.
(9) During May 1998, Registrant issued warrants for 15,000 shares of
Common Stock, with an exercise price of $.50 per share, to Jerry
Weissman at Power Presentations for services to the Company. During
the same time period, Registrant issued warrants for 24,375 shares of
Common Stock, with an exercise price of $1.00 per share, to DEF Public
Relations, Heidrich & Struggles and Greg Moyer at Flying Beyond for
services to the Company.
(10) During May 1998, Registrant issued warrants, in connection with
various financing arrangements, to purchase 90,000 shares of Common
Stock, with a weighted-average exercise price of $1.15 per share to
Transamerica and 5,000 warrants of Series D Preferred Stock, with an
exercise price of $1.00 per share to Silicon Valley Bank.
II-2
<PAGE> 93
(11) In July 1998, Registrant sold and issued warrants for 35,000 shares of
its Common Stock, at an exercise price of $1.30 per share, to Primus
Technology for services in connection with developing Registrant's
Asian business opportunities. During the same time period, Registrant
issued warrants for 10,000 shares of Common Stock, at a purchase price
of $1.30 per share, for cash in the aggregate amount of $500 to
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.
(12) In September 1998, Registrant issued warrants to purchase 100,000
Shares of Common Stock in connection with a financing arrangement, to
TransAmerica Business Credit Corporation. The exercise price for
50,000 shares is equal to $2.50 per share and the exercise price for
the remaining 50,000 shares is equal to 80% of the price of this
offering or, if this offering is not completed, 80% of the price of
the next equity financing.
(13) In October 1998, the Company issued warrants with an exercise price
equal to $4.00 per share to purchase 26,250 shares to various
consultants in connection with the construction of its new ISX.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensation benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and now with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between Registrant and
AboveNet Communications Inc., a California corporation.
3.2+ Amended and Restated Certificate of Incorporation.
3.3 Form of Second Amended and Restated Certificate of
Incorporation to be filed upon completion of offering.
3.4 Form of Third Amended and Restated Certificate of
Incorporation to be filed prior to completion of the
offering.
3.5+ Bylaws of Registrant.
4.1+ Reference is made to Exhibits 3.2, 3.3, 3.4, 3.5, 10.2,
10.3, 10.4 and 10.5.
4.2 Form of Registrant's Common Stock Certificate.
4.3+ Amended and Restated Investors' Rights Agreement dated
September 4, 1998.
4.4+ Warrants to purchase shares of Common Stock of Registrant
issued to Transamerica Business Credit Corporation.
4.5+ Warrants to purchase shares of Series D Preferred Stock of
Registrant issued to Silicon Valley Bank.
4.6+ Form of Warrant to purchase shares of Common Stock of
Registrant.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP ("Gunderson Dettmer").
10.1+ Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.2+ 1996 Stock Option Plan.
10.3+ 1997 Stock Option Plan.
10.4 1998 Stock Incentive Plan.
10.5 1998 Employee Stock Purchase Plan.
10.6+ Employment Agreement between Registrant and Warren J.
Kaplan.
10.7+ Employment Agreement between Registrant and Sherman Tuan.
</TABLE>
II-3
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.8+ Employment Agreement between Registrant and David Rand.
10.9+ Stock Option Agreement between Registrant and Warren J.
Kaplan.
10.10+ Technology Agreement between Registrant and David Rand.
10.11+ Lease Equipment Agreement between Registrant and Cisco
Systems Capital Corporation.
10.12+ Loan and Security Agreement between Registrant and Silicon
Valley Bank.
10.13+ Master Loan and Security Agreements between Registrant and
Transamerica Business Credit Corporation.
10.14+ Promissory Note by Registrant to Transamerica Business
Credit Corporation.
10.15+ Office Lease between 50 West San Fernando Associates and
Registrant dated May 15, 1996 (San Jose Office, 10th Floor).
10.16+ First Amendment to Lease Agreement between 50 West San
Fernando Associates and Registrant, dated December 12, 1996
(San Jose Office, 10th Floor).
10.17+ Second Amendment to Lease between 50 West San Fernando
Associates and Registrant, dated February 23, 1998 (San Jose
Office, 10th Floor).
10.18+ Office Lease between 50 West San Fernando Associates and
Registrant, dated May 15, 1996 (San Jose Office, 18th
Floor).
10.19+ First Amendment to Lease Agreement between 50 West San
Fernando Associates and Registrant, dated December 12, 1996
(San Jose Office, 18th Floor).
10.20+ Second Amendment to Lease between 50 West San Fernando
Associates and Registrant, dated February 24, 1998 (San Jose
Office, 18th Floor).
10.21+ Consent of Landlord between Registrant and Halcyon Software
California Inc., dated March 31, 1998 (San Jose Office,
Suite 1012).
10.22+ Consent of Landlord between 50 West San Fernando Associates
and KPMG Peat Marwick LLP, dated April 6, 1998 and April 12,
1998 (Registrant sublease from KPMG Peat Marwick LLP, San
Jose Office, 10th Floor).
10.23+ Sublease between KPMG Peat Marwick (USA) LLP and Registrant,
dated March 13, 1998 (Registrant sublease from KPMG Peat
Marwick LLP (USA), San Jose Office, 10th Floor).
10.24+ Deed of Lease between Gosnell Properties, Inc. and
Registrant dated September 3, 1997 (Suite B-290, Vienna,
VA/"D.C.").
10.25+ Deed of Lease between Gosnell Properties, Inc. and
Registrant dated January 30, 1998 (Suite 110, Vienna,
VA/"D.C.").
10.26+ Network Access Agreement between Goodnet and Registrant
dated June 11, 1996.
10.27** Fiber Optic Private Network Agreement Product Order between
Metromedia Fiber Network Services, Inc. and Registrant,
dated September 1, 1998.
10.28+ Amended and Restated Master Loan and Security Agreement
between Registrant and Transamerica Business Credit
Corporation.
10.29 Loan Modification Agreement between Registrant and Silicon
Valley Bank dated as of October 26, 1998.
16.1+ Letter Regarding Change in Certifying Accountants.
23.1 Consent of Gunderson Dettmer (included in Exhibit 5.1).
23.2* Consent of Deloitte & Touche LLP, Independent Accountants.
23.3* Independent Auditors' Report on Schedule.
27.1 Financial data schedule.
99.1+ Consent of Forrester Research, Inc.
99.2+ Consent of International Data Corporation.
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
** Confidential treatment requested as to certain portions of exhibit.
II-4
<PAGE> 95
(b) Financial Statement Schedule
(i) Schedule II. Valuation and Qualifying Accounts.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Registrant's
Restated Certificate of Incorporation, the Registrant's Bylaws, and Registrant's
indemnification agreements or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus 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.
II-5
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, State of California, on this 16th day of November, 1998.
ABOVENET COMMUNICATIONS INC.
By: /s/ SHERMAN TUAN
------------------------------------
Sherman Tuan
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<C> <S> <C>
/s/ SHERMAN TUAN Chairman of the Board and November 16, 1998
- ----------------------------------------------------- Chief Executive Officer
Sherman Tuan (Principal Executive Officer
and Director)
/s/ STEPHEN P. BELOMY* Executive Vice President and November 16, 1998
- ----------------------------------------------------- Secretary (Principal
Stephen P. Belomy Financial Officer)
/s/ KEVIN HOURIGAN* Vice President Finance November 16, 1998
- ----------------------------------------------------- (Chief Accounting Officer)
Kevin Hourigan
/s/ PETER C. CHEN, PH.D.* Vice Chairman of the Board November 16, 1998
- -----------------------------------------------------
Peter C. Chen, Ph.D.
/s/ WARREN J. KAPLAN* President, Chief Operating November 16, 1998
- ----------------------------------------------------- Officer and Director
Warren J. Kaplan
/s/ ROBERT A. BURGELMAN* Director November 16, 1998
- -----------------------------------------------------
Robert A. Burgelman
/s/ FRANK R. KLINE* Director November 16, 1998
- -----------------------------------------------------
Frank R. Kline
/s/ JAMES SHA* Director November 16, 1998
- -----------------------------------------------------
James Sha
/s/ TOM SHAO, PH.D.* Director November 16, 1998
- -----------------------------------------------------
Tom Shao, Ph.D.
/s/ KIMBALL W. SMALL* Director November 16, 1998
- -----------------------------------------------------
Kimball W. Small
</TABLE>
II-6
<PAGE> 97
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<C> <S> <C>
/s/ FRED A. VIERRA* Director November 16, 1998
- -----------------------------------------------------
Fred A. Vierra
*By: /s/ SHERMAN TUAN
------------------------------------------------
Sherman Tuan
Attorney-In-Fact
</TABLE>
II-7
<PAGE> 98
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND DEDUCTIONS/ END OF
PERIOD EXPENSES WRITE - OFF PERIOD
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
PERIOD FROM MARCH 8, 1996 (INCEPTION) TO
JUNE 30, 1996
Accounts receivable allowance........... $ -- $ -- $ -- $ --
YEAR ENDED JUNE 30, 1997
Accounts receivable allowance........... $ -- $ 15,000 $ -- $ 15,000
YEAR ENDED JUNE 30, 1998
Accounts receivable allowance........... $ 15,000 $ 58,787 $13,787 $ 60,000
</TABLE>
S-1
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ----------------------- ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement.
2.1+ Form of Agreement and Plan of Merger between Registrant and
AboveNet Communications Inc., a California corporation.
3.2+ Amended and Restated Certificate of Incorporation.
3.3 Form of Second Amended and Restated Certificate of
Incorporation to be filed upon completion of offering.
3.4 Form of Third Amended and Restated Certificate of
Incorporation to be filed prior to completion of the
offering.
3.5+ Bylaws of Registrant.
4.1+ Reference is made to Exhibits 3.2, 3.3, 3.4, 3.5, 10.2,
10.3, 10.4 and 10.5.
4.2 Form of Registrant's Common Stock Certificate.
4.3+ Amended and Restated Investors' Rights Agreement dated
September 4, 1998.
4.4+ Warrants to purchase shares of Common Stock of the
Registrant issued to Transamerica Business Credit
Corporation.
4.5+ Warrants to purchase shares of Series D Preferred Stock of
the Registrant issued to Silicon Valley Bank.
4.6+ Form of Warrant to purchase shares of Common Stock of the
Registrant.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP ("Gunderson Dettmer").
10.1+ Form of Indemnification Agreement entered into by Registrant
with each of its directors and executive officers.
10.2+ 1996 Stock Option Plan.
10.3+ 1997 Stock Option Plan.
10.4 1998 Stock Incentive Plan.
10.5 1998 Employee Stock Purchase Plan.
10.6+ Employment Agreement between the Registrant and Warren J.
Kaplan.
10.7+ Employment Agreement between the Registrant and Sherman
Tuan.
10.8+ Employment Agreement between the Registrant and David Rand.
10.9+ Stock Option Agreement between the Registrant and Warren J.
Kaplan.
10.10+ Technology Agreement between the Registrant and David Rand.
10.11+ Lease Equipment Agreement between Registrant and Cisco
Systems Capital Corporation.
10.12+ Loan and Security Agreement between the Registrant and
Silicon Valley Bank.
10.13+ Loan and Security Agreements between the Registrant and
Transamerica Business Credit Corporation.
10.14+ Promissory Note by Registrant to Transamerica Business
Credit Corporation.
10.15+ Office Lease between 50 West San Fernando Associates and
Registrant dated May 15, 1996 (San Jose Office, 10th Floor).
10.16+ First Amendment to Lease Agreement between 50 West San
Fernando Associates and Registrant, dated December 12, 1996
(San Jose Office, 10th Floor).
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ----------- ----------------------- ------------
<S> <C> <C>
10.17+ Second Amendment to Lease between 50 West San Fernando
Associates and Registrant, dated February 23, 1998 (San Jose
Office, 10th Floor).
10.18+ Office Lease between 50 West San Fernando Associates and
Registrant, dated May 15, 1996 (San Jose Office, 18th
Floor).
10.19+ First Amendment to Lease Agreement between 50 West San
Fernando Associates and Registrant, dated December 12, 1996
(San Jose Office, 18th Floor).
10.20+ Second Amendment to Lease between 50 West San Fernando
Associates and Registrant, dated February 24, 1998 (San Jose
Office, 18th Floor).
10.21+ Consent of Landlord between Registrant and Halcyon Software
California Inc., dated March 31, 1998 (San Jose Office,
Suite 1012).
10.22+ Consent of Landlord between 50 West San Fernando Associates
and KPMG Peat Marwick LLP, dated April 6, 1998 and April 12,
1998 (Registrant sublease from KPMG Peat Marwick LLP, San
Jose Office, 10th Floor).
10.23+ Sublease between KPMG Peat Marwick (USA) LLP and Registrant,
dated March 13, 1998 (Registrant sublease from KPMG Peat
Marwick LLP (USA), San Jose Office, 10th Floor).
10.24+ Deed of Lease between Gosnell Properties, Inc. and
Registrant dated September 3, 1997 (Suite B-290, Vienna,
VA/"D.C.").
10.25+ Deed of Lease between Gosnell Properties, Inc. and
Registrant dated January 30, 1998 (Suite 110, Vienna,
VA/"D.C.").
10.26+ Network Access Agreement between Goodnet and Registrant
dated June 11, 1996.
10.27** Fiber Optic Private Network Agreement Product Order between
Metromedia Fiber Network Services, Inc. and Registrant,
dated September 1, 1998.
10.28+ Amended and Restated Master Loan and Security Agreement
between Registrant and Transamerica Business Credit
Corporation.
10.29 Loan Modification Agreement between Registrant and Silicon
Valley Bank dated as of October 26, 1998.
16.1+ Letter Regarding Change in Certifying Accountants.
23.1 Consent of Gunderson Dettmer (included in Exhibit 5.1).
23.2* Consent of Deloitte & Touche LLP, Independent Accountants.
23.3* Independent Auditors' Report on Schedule.
27.1 Financial data schedule.
99.1+ Consent of Forrester Research, Inc.
99.2+ Consent of International Data Corporation.
</TABLE>
- ---------------
* To be filed by amendment.
+ Previously filed.
** Confidential treatment requested as to certain portions of exhibit.
<PAGE> 1
EXHIBIT 3.3
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF ABOVENET COMMUNICATIONS INC.,
a Delaware corporation
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
AboveNet Communications Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law") originally incorporated on August 6, 1998.
DOES HEREBY CERTIFY:
FIRST: The name of the corporation is AboveNet Communications Inc.
SECOND: That the Board of Directors of the Corporation adopted resolutions
proposing to amend and restate the Certificate of Incorporation of the
Corporation (the "Certificate"), declaring said amendment and restatement to be
advisable and in the best interests of the Corporation and its stockholders and
authorizing the appropriate officer of the Corporation to solicit the consent of
the stockholders therefor, which resolution setting forth the proposed amendment
and restatement is as follows:
"RESOLVED, that the Certificate of Incorporation of the Corporation (the
"Certificate") be amended and restated in its entirety as follows:
ARTICLE I
The name of this corporation is AboveNet Communications Inc.
ARTICLE II
The address of the registered officer of the corporation in the State of
Delaware is 15 East North Street, in the City of Dover, 19901, County of Kent.
The name of the corporation's registered agent is Incorporating Services, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by this
corporation are to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. This corporation is authorized to issue two classes
of stock to be designated, respectively, "Common Stock" and "Preferred Stock."
The total number
<PAGE> 2
of shares that this corporation is authorized to issue is twenty-one million two
hundred fifty thousand (21,250,000) shares. Twelve million five hundred thousand
(12,500,000) shares shall be Common Stock, par value $0.001 per share, and eight
million seven hundred fifty thousand (8,750,000) shares shall be Preferred
Stock, par value $0.001 per share.
At the time this Amended and Restated Certificate of Incorporation becomes
effective (the "Effective Time"), each share of Preferred Stock and each share
of Common Stock then issued and outstanding shall be automatically reclassified,
combined and changed into 0.625 of a fully paid and non-assessable share of
Preferred Stock and Common Stock, respectively, of this corporation (the
"Reverse Stock Split"). Each outstanding stock certificate of this corporation,
which immediately prior to the Effective Time represented one or more shares of
Preferred Stock or Common Stock, shall, immediately after the Effective Time,
represent 0.625 of such number of shares of Preferred Stock or Common Stock,
respectively. No fractional shares shall be issued by this corporation under
such combination. In lieu of any fractional share to which a holder would
otherwise be entitled, this corporation shall pay cash equal to such fraction
multiplied by the fair market value of the Common Stock as determined by the
Board of Directors of this corporation. All provisions of this Amended and
Restated Certificate of Incorporation, including the number of shares authorized
herein, reflect the Reverse Stock Split.
B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred
Stock authorized by these Amended and Restated Certificate of Incorporation may
be issued from time to time in one or more series. The rights, preferences,
privileges, and restrictions granted to and imposed on the Series A Preferred
Stock, which series shall consist of 1,025,000 shares (the "Series A Preferred
Stock"), the Series B Preferred Stock, which series shall consist of 1,775,000
shares (the "Series B Preferred Stock"), the Series C Preferred Stock, which
series shall consist of 2,025,000 shares (the "Series C Preferred Stock"), the
Series D Preferred Stock, which series shall consist of 2,125,000 shares (the
"Series D Preferred Stock") and the Series E Preferred Stock, which series shall
consist of 1,750,000 shares (the "Series E Preferred Stock") are as set forth
below in this Article IV(B). The Board of Directors is hereby authorized to fix
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon additional series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights that have been or
may be granted to the Preferred Stock or series thereof in Certificates of
Designation or this corporation's Amended and Restated Certificate of
Incorporation ("Protective Provisions"), but notwithstanding any other rights of
the Preferred Stock or any series thereof, the rights, privileges, preferences
and restrictions of any such additional series may be subordinated to, pari
passu with (including, without limitation, inclusion in provisions with respect
to liquidation and acquisition preferences, redemption and/or approval of
matters by vote or written consent), or senior to any of those of any present or
future class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series (other than the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock), prior or subsequent to the issue
of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the
2
<PAGE> 3
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
1. Dividend Provisions. Subject to the rights of any series of
Preferred Stock that may from time to time come into existence, the holders of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall be entitled
to receive dividends (as determined on a per annum basis and on an as converted
basis for the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock), out of
any assets legally available therefor, in an amount equal to that paid on any
other outstanding shares of this corporation, payable when, as, and if declared
by the Board of Directors. Such dividends shall not be cumulative.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of this
corporation, either voluntary or involuntary, subject to the rights of series of
Preferred Stock that may from time to time come into existence, the holders of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of
this corporation to the holders of Common Stock by reason of their ownership
thereof, (i) in the case of the Series A Preferred Stock, an amount per share
equal to the sum of (A) $0.40 for each outstanding share of Series A Preferred
Stock (the "Original Series A Issue Price") and (B) an amount equal to declared
but unpaid dividends on such share, (ii) in the case of the Series B Preferred
Stock, an amount per share equal to the sum of (A) $1.20 for each outstanding
share of Series B Preferred Stock (the "Original Series B Issue Price") and (B)
an amount equal to declared but unpaid dividends on such share, (iii) in the
case of the Series C Preferred Stock, an amount per share equal to the sum of
(A) $2.00 for each outstanding share of Series C Preferred Stock (the "Original
Series C Issue Price") and (B) an amount equal to declared but unpaid dividends
on such share, (iv) in the case of the Series D Preferred Stock, an amount per
share equal to the sum of (A) $5.20 for each outstanding share of Series D
Preferred Stock (the "Original Series D Issue Price") and (B) an amount equal to
declared but unpaid dividends on such share and (v) in the case of the Series E
Preferred Stock, an amount per share equal to the sum of (A) $12.00 for each
outstanding share of Series E Preferred Stock (the "Original Series E Issue
Price") and (B) an amount equal to declared but unpaid dividends on such share.
If upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amounts, then, subject to the rights of series of
Preferred Stock that may from time to time come into existence, the entire
assets and funds of this corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock in proportion to the full preferential amount each such holder
is otherwise entitled to receive under this subsection (a).
(b) Upon the completion of the distribution required by subsection
(a) of this Section 2 and any other distribution that may be required with
respect to series of Preferred
3
<PAGE> 4
Stock that may from time to time come into existence, all of the remaining
assets of this corporation available for distribution to stockholders shall be
distributed among the holders of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred
Stock and Common Stock pro rata based on the number of shares of Common Stock
held by each (assuming full conversion of all such Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock).
(c) (i) For purposes of this Section 2, a liquidation, dissolution
or winding up of this corporation shall be deemed to be occasioned by, or to
include (unless the holders of at least a majority of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock (voting together as a single class and not as
separate series and on an as-converted basis) then outstanding shall determine
otherwise), (A) the acquisition of this corporation by another entity by means
of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer, directly or indirectly, of the beneficial ownership of fifty percent
(50%) or more of the outstanding voting power of this corporation; or (B) a sale
or other disposition (specifically excluding any pledge or other security
interest granted that has not been foreclosed) of all or substantially all of
the assets of this corporation.
(ii) In any of such events, if the consideration received by this
corporation is other than cash, its value will be deemed its fair market value.
Any securities shall be valued as follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability covered by (B) below:
(1) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange or system over the thirty (30)
day-period ending three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty (30) day-period ending three (3) days prior to
the closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by this
corporation and the holders of at least a majority of the voting power of all
then outstanding shares of Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free marketability (other than
restrictions arising solely by virtue of a stockholder's status as an affiliate
or former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by this corporation and the holders
of at least a majority of the voting power of all then outstanding shares of
such Preferred Stock.
4
<PAGE> 5
(iii) In the event the requirements of this subsection 2(c) are
not complied with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such time as
the requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock shall revert to and be the same as such rights,
preferences and privileges existing immediately prior to the date of the first
notice referred to in subsection 2(c)(iv) hereof.
(iv) This corporation shall give each holder of record of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock written notice of such impending
transaction not later than twenty (20) days prior to the stockholders' meeting
called to approve such transaction, or twenty (20) days prior to the closing of
such transaction, whichever is earlier, and shall also notify such holders in
writing of the final approval of such transaction. The first of such notices
shall describe the material terms and conditions of the impending transaction
and the provisions of this Section 2, and this corporation shall thereafter give
such holders prompt notice of any material changes. The transaction shall in no
event take place sooner than twenty (20) days after this corporation has given
the first notice provided for herein or sooner than ten (10) days after this
corporation has given notice of any material changes provided for herein;
provided, however, that such periods may be shortened upon the written consent
of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock (voting
together as a single class and not as separate series and on an as-converted
basis) that are entitled to such notice rights or similar notice rights and that
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
3. Redemption. The Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock, the Series D Preferred Stock and the Series
E Preferred Stock are not redeemable.
4. Conversion. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of this
corporation or any transfer agent for such stock, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing the
Original Issue Price for such series by the Conversion Price applicable to such
share, determined as hereafter provided, in effect on the date the certificate
is surrendered for conversion. The initial Conversion Price per share for shares
of Series A Preferred Stock shall be the Original Series A Issue Price, the
initial Conversion Price per share for shares of Series B Preferred Stock
5
<PAGE> 6
shall be the Original Series B Issue Price, the initial Conversion Price per
share for shares of Series C Preferred Stock shall be the Original Series C
Issue Price, the initial Conversion Price per share for shares of Series D
Preferred Stock shall be the Original Series D Issue Price and the initial
Conversion Price per share for shares of Series E Preferred Stock shall be the
Original Series E Issue Price; provided, however, that the Conversion Price for
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall be subject to
adjustment as set forth in subsection 4(d).
(b) Automatic Conversion. Each share of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock shall automatically be converted into shares of Common
Stock at the Conversion Price at the time in effect for such series immediately
upon the earlier of (i) this corporation's sale of its Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement on
Form S-1 or Form SB-2 under the Securities Act of 1933, as amended, with
aggregate proceeds of at least $20,000,000; provided, however, that if any such
sale is not completed prior to March 31, 1999, the price to the public must be
at least $12.00 per share, (as adjusted to reflect subsequent stock dividends,
stock splits or recapitalizations), or (ii) the date specified by written
consent or agreement of the holders of a majority of the then outstanding shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock (voting together as a
single class and not as separate series and on an as-converted basis).
(c) Mechanics of Conversion. Before any holder of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock shall be entitled to convert the same into
shares of Common Stock, he or she shall surrender the certificate or
certificates therefor, duly endorsed, at the office of this corporation or of
any transfer agent for the Preferred Stock, and shall give written notice to
this corporation at its principal corporate office, of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. This corporation
shall, as soon as practicable thereafter, issue and deliver at such office to
such holder of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act of
1933, as amended, the conversion may, at the option of any holder tendering
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the persons entitled to receive the
Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock shall not be deemed to have converted such Series A Preferred Stock,
Series B Preferred Stock, Series C
6
<PAGE> 7
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Conversion Price Adjustments of Preferred Stock for Certain
Dilutive Issuances, Stock Splits and Combinations. The Conversion Price of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock shall be subject to
adjustment from time to time as follows:
(i) (A) If this corporation shall issue, after the date upon
which any shares of Series E Preferred Stock were first issued (the "Purchase
Date"), any Additional Stock (as defined below) without consideration or for a
consideration per share less than the Conversion Price for the Series D
Preferred Stock or Series E Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price for such series in
effect immediately prior to each such issuance shall forthwith (except as
otherwise provided in this clause (i)) be adjusted to a price equal to the price
paid per share for such Additional Stock.
(B) No adjustment of the Conversion Price for the Series D
Preferred Stock or Series E Preferred Stock shall be made in an amount less than
one cent per share, provided that any adjustments that are not required to be
made by reason of this sentence shall be carried forward and shall be either
taken into account in any subsequent adjustment made prior to three (3) years
from the date of the event giving rise to the adjustment being carried forward,
or shall be made at the end of three (3) years from the date of the event giving
rise to the adjustment being carried forward. Except to the limited extent
provided for in subsections (E)(3) and (E)(4), no adjustment of such Conversion
Price pursuant to this subsection 4(d)(i) shall have the effect of increasing
such Conversion Price above the Conversion Price in effect immediately prior to
such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by this corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair value thereof as determined by the Board of
Directors irrespective of any accounting treatment.
(E) In the case of the issuance (whether before, on or
after the Purchase Date) of options to purchase or rights to subscribe for
Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities, the following provisions shall apply for all
purposes of this subsection 4(d)(i) and subsection 4(d)(ii):
(1) The shares of Common Stock deliverable upon
exercise of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in subsections 4(d)(i)(C) and (d)(i)(D)), if
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<PAGE> 8
any, received by this corporation upon the issuance of such options or rights
plus the minimum exercise price provided in such options or rights for the
Common Stock covered thereby.
(2) The shares of Common Stock deliverable upon
conversion of, or in exchange for, any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by this corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the minimum additional
consideration, if any, to be received by this corporation upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
subsections 4(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the consideration
payable to this corporation upon exercise of such options or rights or upon
conversion of or in exchange for such convertible or exchangeable securities,
including, but not limited to, a change resulting from the antidilution
provisions thereof (unless such options or rights or convertible or exchangeable
securities were merely deemed to be included in the numerator and denominator
for purposes of determining the number of shares of Common Stock outstanding for
purposes of subsection 4(d)(i)(A)), the Conversion Price of the Series D
Preferred Stock or Series E Preferred Stock, to the extent in any way affected
by or computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Conversion Price of the Series D Preferred Stock or Series E Preferred
Stock, to the extent in any way affected by or computed using such options,
rights or securities or options or rights related to such securities (unless
such options or rights were merely deemed to be included in the numerator and
denominator for purposes of determining the number of shares of Common Stock
outstanding for purposes of subsection 4(d)(i)(A)), shall be recomputed to
reflect the issuance of only the shares of Common Stock (and convertible or
exchangeable securities that remain in effect) actually issued upon the exercise
of such options or rights, upon the conversion or exchange of such securities or
upon the exercise of the options or rights related to such securities.
(5) The consideration deemed paid therefor pursuant to
subsections 4(d)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either subsection
4(d)(i)(E)(3) or (4).
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E)) by this
corporation after the Purchase Date other than:
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(A) Common Stock issued pursuant to a transaction described
in subsection 4(d)(iii) hereof;
(B) Common Stock issuable or issued to employees,
consultants, directors or vendors (if in transactions with primarily
non-financing purposes) of this corporation directly or pursuant to warrants, a
stock option plan or restricted stock plan approved by the Board of Directors of
this corporation;
(C) shares of Common Stock issued or issuable (I) in a firm
commitment underwritten public offering before or in connection with which all
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock are
converted to Common Stock or (II) upon exercise of warrants or rights granted to
underwriters in connection with such a public offering;
(D) shares of Common Stock issued or issuable upon
conversion of the Preferred Stock;
(E) shares of Common Stock issued or issuable upon exercise
of warrants issued to banks or equipment lessors;
(F) shares of Common Stock issued or issuable in connection
with business combinations or corporate partnering transactions not primarily
for equity financing purposes approved by the Board of Directors (which approval
of the Board of Directors shall include the consent of the director elected
pursuant to the first sentence of Section 5(b) hereof);
(G) shares of Common Stock issued or issuable to
BancAmerica Robertson Stephens in connection with its role as a placement agent
for this corporation's Series E Preferred Stock; or
(H) shares of Common Stock issued or issuable as a result
of a conversion price adjustment as set forth in subsection 4(l) hereof.
(iii) In the event this corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of such series shall be increased in proportion to such
increase of the aggregate of shares of Common Stock outstanding and those
issuable with respect to such Common Stock Equivalents.
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<PAGE> 10
(iv) If the number of shares of Common Stock outstanding at any
time after the Purchase Date is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
shall be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.
(e) Other Distributions. In the event this corporation shall declare
a distribution payable in securities of other persons, evidences of indebtedness
issued by this corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 4(d)(iii), then, in each such
case for the purpose of this subsection 4(e), the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of this corporation into which their shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock are convertible as of the
record date fixed for the determination of the holders of Common Stock of this
corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or in Section 2) provision shall be made so that the holders of
the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall thereafter be
entitled to receive upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock the number of shares of stock or other securities or property of
this corporation or otherwise, to which a holder of Common Stock deliverable
upon conversion would have been entitled on such recapitalization. In any such
case, appropriate adjustment shall be made in the application of the provisions
of this Section 4 with respect to the rights of the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.
(g) No Impairment. This corporation will not, by amendment of its
Amended and Restated Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by this corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock against impairment.
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(h) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion of
any share or shares of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock.
In lieu of any fractional shares to which any holder would otherwise be
entitled, this corporation shall pay an amount of cash to such holder equal to
such fraction multiplied by the fair market value of one share of this
corporation's Common Stock as determined by this corporation's Board of
Directors. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock
pursuant to this Section 4, this corporation, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
This corporation shall, upon the written request at any time of any holder of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for the Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock at the time in effect, and (C) the number of shares of
Common Stock and the amount, if any, of other property that at the time would be
received upon the conversion of a share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock.
(i) Notices of Record Date. In the event of any taking by this
corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, this
corporation shall mail to each holder of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock, at least twenty (20) days prior to the date specified therein,
a notice specifying the date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. This corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E
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Preferred Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, in addition to such other remedies as shall
be available to the holder of such Preferred Stock, this corporation will take
such corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes, including, without limitation,
engaging in best efforts to obtain the requisite stockholder approval of any
necessary amendment to these Amended and Restated Certificate of Incorporation.
(k) Notices. Any notice required by the provisions of this Section 4
to be given to the holders of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of this corporation.
(l) Additional Adjustment. In the event that prior to December 31,
1998 this corporation shall not have consummated an initial public offering of
its Common Stock in a firm commitment underwritten public offering pursuant to a
registration statement on Form S-1 or Form SB-2 under the Securities Act of
1933, as amended, at a pre-money valuation of not less than $100,000,000, with
at least two managing underwriters that are reasonably acceptable to the holders
of a majority of the then outstanding shares of Series D Preferred Stock, the
Conversion Price in effect for each share of Series D Preferred Stock shall be
adjusted to $4.45 per share (as adjusted to reflect subsequent stock dividends,
stock splits or recapitalization) (the "Adjusted Series D Conversion Price").
The Adjusted Series D Conversion Price shall be subject to further adjustment
pursuant to Section 4(d) above in the event that this corporation shall have
issued any Additional Stock between the Purchase Date and December 31, 1998 as
if the Series D Conversion Price had at all times been the Adjusted Series D
Conversion Price.
5. Voting Rights.
(a) General Voting Rights. The holders of each share of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall have the right to one vote
for each share of Common Stock into which such Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series
E Preferred Stock could then be converted, and with respect to such vote, such
holder shall have full voting rights and powers equal to the voting rights and
powers of the holders of Common Stock, and shall be entitled, notwithstanding
any provision hereof, to notice of any stockholders' meeting in accordance with
the bylaws of this corporation, and shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote. Fractional votes shall not, however, be
permitted and any fractional voting rights available on an as-converted basis
(after aggregating all shares into which shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock held by each holder could
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be converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
(b) Voting for the Election of Directors. As long as at least a
majority of the shares of Series D Preferred Stock originally issued remain
outstanding, the holders of such shares of Series D Preferred Stock shall be
entitled to elect one (1) director of this corporation at each annual election
of directors. As long as at least a majority of the shares of Series E Preferred
Stock originally issued remain outstanding, the holders of such shares of Series
E Preferred Stock shall be entitled to elect one (1) director of this
corporation at each annual election of directors. The holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock and Common Stock (voting together
as a single class and not as separate series, and on an as-converted basis)
shall be entitled to elect any remaining directors of this corporation.
In the case of any vacancy (other than a vacancy caused by removal) in
the office of a director occurring among the directors elected by the holders of
a class or series of stock pursuant to this Section 5(b), the remaining
directors so elected by that class or series may by affirmative vote of a
majority thereof (or the remaining director so elected if there be but one, or
if there are no such directors remaining, by the affirmative vote of the holders
of a majority of the shares of that class or series), elect a successor or
successors to hold office for the unexpired term of the director or directors
whose place or places shall be vacant. Any director who shall have been elected
by the holders of a class or series of stock or by any directors so elected as
provided in the immediately preceding sentence hereof may be removed during the
aforesaid term of office, either with or without cause, by, and only by, the
affirmative vote of the holders of the shares of the class or series of stock
entitled to elect such director or directors, given either at a special meeting
of such stockholders duly called for that purpose or pursuant to a written
consent of stockholders, and any vacancy thereby created may be filled by the
holders of that class or series of stock represented at the meeting or pursuant
to unanimous written consent.
6. Protective Provisions.
(a) Subject to the rights of series of Preferred Stock that may from
time to time come into existence, so long as at least 500,000 shares of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and/or Series E Preferred Stock originally issued
remain outstanding or at least 50% of the Series D Preferred Stock originally
issued remains outstanding, this corporation shall not without first obtaining
the approval (by vote or written consent, as provided by law) of the holders of
at least a majority of the then outstanding shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock (voting together as a single class and not as separate
series, and on an as-converted basis):
(i) alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock so as to affect
adversely the shares;
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(ii) increase or decrease (other than by conversion) the total
number of authorized shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock;
(iii) sell, convey, or otherwise dispose of all or substantially
all of its property or business or merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or effect any
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of this corporation is disposed of; or
(iv) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security or any bonds, debentures, notes or other obligations
convertible into or exchangeable for or having option rights with respect to any
equity security, having a preference over the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock with respect to dividends, liquidation, redemption or voting.
(b) Subject to the rights of Preferred Stock that may from time to
time come into existence, so long as at least 50% of the Series D Preferred
Stock originally issued remains outstanding, this corporation shall not, without
first obtaining approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding Series D Preferred Stock,
voting on an as-converted basis;
(i) authorize or issue, or obligate itself to issue, any other
equity security, including any other security convertible into or exercisable
for any equity security or any bonds, debentures, notes or other obligations
convertible into or exchangeable for or having option rights with respect to any
equity security, having a preference over, or being on a parity with, the Series
D Preferred Stock with respect to dividends, liquidation, redemption or voting;
(ii) amend this corporation's Amended and Restated Certificate of
Incorporation or bylaws;
(iii) permit any subsidiary to issue or sell or obligate itself
to issue or sell any stock of such subsidiary, except to this corporation or any
wholly owned subsidiary of this corporation; or
(iv) increase the authorized number of directors of this
corporation to greater than nine (9).
7. Status of Converted Stock. In the event any shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be converted pursuant to
Section 4 hereof, the shares so converted shall be cancelled and shall not be
issuable by this corporation. The Amended and Restated Certificate of
Incorporation of this corporation shall be appropriately amended to effect the
corresponding reduction in this corporation's authorized capital stock.
C. Common Stock. The rights, preferences, privileges and restrictions
granted to and imposed on the Common Stock are as set forth below in this
Article IV(C).
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1. Dividend Rights. Subject to the prior rights of holders of all classes
of stock at the time outstanding having prior rights as to dividends, the
holders of the Common Stock shall be entitled to receive, when and as declared
by the Board of Directors, out of any assets of this corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Upon the liquidation, dissolution or winding up of
this corporation, the assets of this corporation shall be distributed as
provided in Section 2 of Division (B) of Article IV hereof.
3. Redemption. The Common Stock is not redeemable.
4. Voting Rights. The holder of each share of Common Stock shall have the
right to one vote for each such share, and shall be entitled to notice of any
stockholders' meeting in accordance with the bylaws of this corporation, and
shall be entitled to vote upon such matters and in such manner as may be
provided by law and by this these Amended and Restated Certificate of
Incorporation.
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the corporation.
ARTICLE VI
The number of directors of the corporation shall be fixed from time to time
by a Bylaw or amendment thereof duly adopted by the Board of Directors or by the
stockholders. A director appointed by the Board of Directors to fill a vacancy
shall serve for the remainder of the term of the vacated directorship he or she
is filling.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws of
the corporation shall so provide. At all elections of directors, the
stockholders of this corporation shall be entitled to cumulative voting in such
election of directors in accordance with Section 214 of the General Corporation
Law and the Bylaws of this corporation.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
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ARTICLE IX
Any action required to be taken or that may be taken at any annual or
special meeting of the stockholders of this corporation may be taken without a
meeting.
ARTICLE X
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Certificate to authorize corporation action
further eliminating or limiting the personal liability of directors then
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article X by
the stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE XI
To the fullest extent permitted by applicable law, this corporation is also
authorized to provide indemnification of (and advancement of expenses to) such
agents (and any other persons to which Delaware law permits this corporation to
provide indemnification) through Bylaw provisions, agreements with such agents
or other persons, vote of stockholders or disinterested directors or otherwise,
in excess of the indemnification and advancement otherwise permitted by Section
145 of the General Corporation Law of the State of Delaware, subject only to
limits created by applicable Delaware law (statutory or non-statutory), with
respect to actions for breach of duty to this corporation, its stockholders, and
others.
Any repeal or modification of any foregoing provisions of this Article XI
shall not adversely affect any right or protection of a director, officer, agent
or other person existing at the time of, or increase the liability of any
director of this corporation with respect to any acts or omissions of such
director, officer or agent occurring prior to such repeal or modification.
ARTICLE XII
This corporation reserves the right to amend, alter, change or repeal any
provision contained in this Amended and Restated Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation."
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* * *
17
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THIRD: That thereafter said amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and Section 245 of the General
Corporation Law by obtaining a majority vote of the Common Stock, in favor of
said amendment and restatement.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
____ day of November, 1998.
-----------------------------------------
Warren J. Kaplan, President
ATTEST:
- --------------------------------
Stephen P. Belomy, Secretary
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EXHIBIT 3.4
THIRD AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
ABOVENET COMMUNICATIONS INC.
A DELAWARE CORPORATION
(PURSUANT TO SECTIONS 228, 242 AND 245
OF THE DELAWARE GENERAL CORPORATION LAW)
AboveNet Communications Inc., a corporation organized and existing under
the General Corporation Law of the State of Delaware (the "General Corporation
Law")
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated on August 6,
1998, pursuant to the General Corporation Law.
SECOND: That the Board of Directors duly adopted resolutions proposing
to amend and restate the Amended and Restated Certificate of Incorporation of
the Corporation, declaring said amendment and restatement to be advisable and in
the best interests of the Corporation and its stockholders, and authorizing the
appropriate officers of the Corporation to solicit the consent of the
stockholders therefor, which resolution setting forth the proposed amendment and
restatement is as follows:
"RESOLVED, that the Amended and Restated Certificate of Incorporation of
the Corporation be amended and restated in its entirety as follows:
ARTICLE I
The name of the corporation is AboveNet Communications Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 15 East North Street, in the City of Dover, County of Kent. The name
of its registered agent at such address is Incorporating Services, Ltd.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
The Corporation is authorized to issue two classes of stock to be
designated common stock ("Common Stock") and preferred stock ("Preferred
Stock"). The number of
<PAGE> 2
shares of Common Stock authorized to be issued is Sixty Million (60,000,000),
par value $0.001 per share, and the number of Preferred Stock authorized to be
issued is Five Million (5,000,000), par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series, without further stockholder approval. The Board of Directors is hereby
authorized, in the resolution or resolutions adopted by the Board of Directors
providing for the issue of any wholly unissued series of Preferred Stock, within
the limitations and restrictions stated in this Third Amended and Restated
Certificate of Incorporation (the "Restated Certificate"), to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, and the liquidation preferences of any wholly unissued series of
Preferred Stock, and the number of shares constituting any such series and the
designation thereof, or any of them, and to increase or decrease the number of
shares of any series subsequent to the issue of shares of that series, but not
below the number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
ARTICLE V
Except as otherwise provided in this Restated Certificate, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors.
The Board of Directors shall be and is divided into three classes, Class
I, Class II and Class III. Such classes shall be as nearly equal in number of
directors as possible. Each director shall serve for a term ending on the third
annual meeting following the annual meeting at which such director was elected;
provided, however, that the directors first elected to Class I shall serve for a
term ending on the annual meeting of stockholders for fiscal year 1999, the
directors first elected to Class II shall serve for a term ending on the annual
meeting of stockholders for fiscal year 2000, and the directors first elected to
Class III shall serve for a term ending on the annual meeting of stockholders
for fiscal year 2001. The foregoing notwithstanding, each director shall serve
until his successor shall have been duly elected and qualified, unless he shall
resign, become disqualified, disabled or shall otherwise be removed.
At each annual election, directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless by
reason of any intervening changes in the authorized number of directors, the
Board shall designate one or more directorships whose term then expires as
directorships of another class in order more nearly to achieve equality of
number of directors among the classes.
2
<PAGE> 3
Notwithstanding the rule that the three classes shall be as nearly equal
in number of directors as possible, in the event of any change in the authorized
number of directors each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he is a member until
the expiration of his current term, or his prior death, resignation or removal.
If any newly created directorship may, consistently with the rule that the three
classes shall be as nearly equal in number of directors as possible, be
allocated to either class, the Board shall allocate it to that of the available
class whose term of office is due to expire at the earliest date following such
allocation.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII
Except as otherwise provided in this Restated Certificate, any action
required or permitted to be taken by the stockholders of the Corporation must be
effected at an annual or special meeting of the stockholders of the Corporation,
and no action required to be taken or that may be taken at any annual or special
meeting of the stockholders of the Corporation may be taken by written consent.
ARTICLE IX
A director of the Corporation shall, to the fullest extent permitted by
the General Corporation Law as it now exists or as it may hereafter be amended,
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (i) for
any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law, or (iv) for any transaction from which the director
derived any improper personal benefit. If the General Corporation Law is
amended, after approval by the stockholders of this Article, to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law, as so amended.
Any amendment, repeal or modification of this Article IX, or the
adoption of any provision of this Restated Certificate inconsistent with this
Article IX, by the stockholders of the Corporation shall not apply to or
adversely affect any right or protection of a director of the Corporation
existing at the time of such amendment, repeal, modification or adoption.
ARTICLE X
In addition to any vote of the holders of any class or series of the
stock of the Corporation required by law or by this Restated Certificate, the
affirmative vote of the holders of a majority of the voting power of all of the
then outstanding shares of capital stock of the Corporation entitled to vote
generally in the
3
<PAGE> 4
election of directors, voting together as a single class, shall be required to
amend or repeal any provision of this Restated Certificate not specified in the
preceding sentence.
ARTICLE XI
To the fullest extent permitted by applicable law, the Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of the Corporation (and any other persons to which General Corporation Law
permits the Corporation to provide indemnification) through bylaw provisions,
agreements with such agents or other persons, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the General Corporation Law,
subject only to limits created by applicable General Corporation Law (statutory
or non-statutory), with respect to actions for breach of duty to the
Corporation, its stockholders, and others.
Any amendment, repeal or modification of the foregoing provisions of
this Article XI shall not adversely affect any right or protection of a
director, officer, agent, or other person existing at the time of, or increase
the liability of any director of the Corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to, such amendment,
repeal or modification.
* * * *
THIRD: The foregoing amendment and restatement was approved by the
holders of the requisite number of shares of said corporation in accordance with
Section 228 of the General Corporation Law.
FOURTH: That said amendment and restatement was duly adopted in
accordance with the provisions of Section 242 and 245 of the General Corporation
Law.
4
<PAGE> 5
IN WITNESS WHEREOF, the undersigned has signed this Restated Certificate
this ____ day of November, 1998.
-------------------------------------------
Warren J. Kaplan
President and Chief Operating Officer
ATTEST:
- ----------------------------------
Stephen P. Belomy
Secretary
<PAGE> 1
EXHIBIT 4.2
================================================================================
ABOVENET
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
- -------------------------------- --------------------------------
COMMON STOCK COMMON STOCK
SHARES SHARES
ABOV
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR
IN BOSTON, MA OR NEW YORK, NY CERTAIN DEFINITIONS
- -------------------------------- --------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, OF $.001 PAR VALUE, OF
ABOVENET COMMUNICATIONS, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile signatures of the duly authorized officers of the
Corporation.
Dated:
/s/ SHERMAN TUAN /s/ WARREN J. KAPLAN
- --------------------- --------------------
CHAIRMAN OF THE BOARD PRESIDENT
================================================================================
COUNTERSIGNED AND REGISTERED:
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY /s/ M RINGER
------------------------------------
AUTHORIZED SIGNATURE
AMERICAN BANK NOTE COMPANY.
39256 001
<PAGE> 1
EXHIBIT 5.1
[GUNDERSON DETTMER LETTERHEAD]
November 16, 1998
AboveNet Communications Inc.
50 W. San Fernando Street, Suite 1010
San Jose, California 95113
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 (File No.
333-63141) originally filed by AboveNet Communications Inc. (the "Company") with
the Securities and Exchange Commission (the "Commission") on September 10, 1998,
as thereafter amended or supplemented (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 4,000,000 shares of the Company's Common Stock (the "Shares"). The
Shares, which include an over-allotment option granted by the Company to the
Underwriters to purchase up to 600,000 additional shares of the Company's Common
Stock, are to be sold to the Underwriters by the Company as described in the
Registration Statement for resale to the public. As your counsel in connection
with this transaction, we have examined the proceedings taken and are familiar
with the proceedings proposed to be taken by you in connection with the sale and
issuance of the Shares.
It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
and validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.
Very truly yours,
/s/ Gunderson Dettmer Stough Villeneuve
Franklin & Hachigan, LLP
---------------------------------------
GUNDERSON DETTMER STOUGH VILLENEUVE
FRANKLIN & HACHIGAN, LLP
<PAGE> 1
EXHIBIT 10.4
ABOVENET COMMUNICATIONS INC.
1998 STOCK INCENTIVE PLAN
(AS ADOPTED EFFECTIVE _______ __, 1998)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 1. INTRODUCTION..........................................................................................1
ARTICLE 2. ADMINISTRATION........................................................................................1
2.1 Committee Composition...................................................................................1
2.2 Committee Responsibilities..............................................................................1
2.3 Committee for Non-Officer Grants........................................................................1
ARTICLE 3. SHARES AVAILABLE FOR GRANTS...........................................................................2
3.1 Basic Limitation........................................................................................2
3.2 Annual Increase in Shares...............................................................................2
3.3 Additional Shares.......................................................................................2
ARTICLE 4. ELIGIBILITY...........................................................................................2
4.1 Nonstatutory Stock Options and Restricted Shares........................................................2
4.2 Incentive Stock Options.................................................................................2
ARTICLE 5. OPTIONS 2
5.1 Stock Option Agreement..................................................................................2
5.2 Number of Shares........................................................................................3
5.3 Exercise Price..........................................................................................3
5.4 Exercisability and Term.................................................................................3
5.5 Effect of Change in Control.............................................................................3
5.6 Modification or Assumption of Options...................................................................3
5.7 Buyout Provisions.......................................................................................3
ARTICLE 6. PAYMENT FOR OPTION SHARES.............................................................................4
6.1 General Rule............................................................................................4
6.2 Surrender of Stock......................................................................................4
6.3 Exercise/Sale...........................................................................................4
6.4 Exercise/Pledge.........................................................................................4
6.5 Promissory Note.........................................................................................4
6.6 Other Forms of Payment..................................................................................4
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS..........................................................5
7.1 Initial Grants..........................................................................................5
7.2 Annual Grants...........................................................................................5
7.3 Accelerated Exercisability..............................................................................5
7.4 Exercise Price..........................................................................................5
7.5 Term....................................................................................................5
7.6 Affiliates of Outside Directors.........................................................................5
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 8. RESTRICTED SHARES.....................................................................................6
8.1 Restricted Stock Agreement..............................................................................6
8.2 Payment for Awards......................................................................................6
8.3 Vesting Conditions......................................................................................6
8.4 Voting and Dividend Rights..............................................................................6
ARTICLE 9. PROTECTION AGAINST DILUTION...........................................................................6
9.1 Adjustments.............................................................................................6
9.2 Dissolution or Liquidation..............................................................................7
9.3 Reorganizations.........................................................................................7
ARTICLE 10. DEFERRAL OF DELIVERY OF SHARES.......................................................................7
ARTICLE 11. AWARDS UNDER OTHER PLANS.............................................................................7
ARTICLE 12. LIMITATION ON RIGHTS.................................................................................8
12.1 Retention Rights........................................................................................8
12.2 Stockholders' Rights....................................................................................8
12.3 Regulatory Requirements.................................................................................8
ARTICLE 13. WITHHOLDING TAXES....................................................................................8
13.1 General.................................................................................................8
13.2 Share Withholding.......................................................................................8
ARTICLE 14. FUTURE OF THE PLAN...................................................................................8
14.1 Term of the Plan........................................................................................8
14.2 Amendment or Termination................................................................................9
ARTICLE 15. DEFINITIONS..........................................................................................9
ARTICLE 16. EXECUTION...........................................................................................11
</TABLE>
ii
<PAGE> 4
ABOVENET COMMUNICATIONS INC.
1998 STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION.
The Plan was adopted by the Board effective ________ __, 1998. The purpose
of the Plan is to promote the long-term success of the Company and the creation
of stockholder value by (a) encouraging Employees, Outside Directors and
Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Outside Directors and Consultants with
exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares or Options (which may constitute incentive stock options or
nonstatutory stock options).
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Delaware (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION.
2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission may
establish for administrators acting under plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may establish
for outside directors acting under plans intended to qualify for exemption
under section 162(m)(4)(C) of the Code.
2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards under the
Plan, (b) determine the type, number, vesting requirements and other features
and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.
2.3 COMMITTEE FOR NON-OFFICER GRANTS. The Board may also appoint a
secondary committee of the Board, which shall be composed of one or more
directors of the Company who need not satisfy the requirements of Section 2.1.
Such secondary committee may administer the Plan with respect to Employees and
Consultants who are not considered officers or directors of the Company under
section 16 of the Exchange Act, may grant Awards under the Plan to such
Employees and Consultants and may determine all features and conditions of such
Awards.
<PAGE> 5
Within the limitations of this Section 2.3, any reference in the Plan to the
Committee shall include such secondary committee.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options and Restricted Shares awarded under the Plan shall not exceed (a)
1,562,500 plus (b) the additional Common Shares described in Sections 3.2 and
3.3. The limitations of this Section 3.1 and Section 3.2 shall be subject to
adjustment pursuant to Article 9.
3.2 ANNUAL INCREASE IN SHARES. As of the first day of each fiscal year,
commencing with July 1, 1999, the aggregate number of Options and Restricted
Shares that may be awarded under the Plan shall automatically increase by a
number equal to the lesser of (a) 4% of the total number of Common Shares then
outstanding or (b) 312,500.
3.3 ADDITIONAL SHARES. If Options are forfeited or terminate for any other
reason before being exercised, then the corresponding Common Shares shall again
become available for the grant of Options or Restricted Shares under the Plan.
If Restricted Shares or Common Shares issued upon the exercise of Options are
forfeited, then such Common Shares shall again become available for the grant of
NSOs and Restricted Shares under the Plan. The aggregate number of Common Shares
that may be issued under the Plan upon the exercise of ISOs shall not be
increased when Restricted Shares or other Common Shares are forfeited.
ARTICLE 4. ELIGIBILITY.
4.1 NONSTATUTORY STOCK OPTIONS AND RESTRICTED SHARES. Only Employees,
Outside Directors and Consultants shall be eligible for the grant of NSOs and
Restricted Shares.
4.2 INCENTIVE STOCK OPTIONS. Only Employees who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant of
ISOs. In addition, an Employee who owns more than 10% of the total combined
voting power of all classes of outstanding stock of the Company or any of its
Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the
requirements set forth in section 422(c)(6) of the Code are satisfied.
ARTICLE 5. OPTIONS.
5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
provisions of the various Stock Option Agreements entered into under the Plan
need not be identical. Options may be granted in consideration of a reduction in
the Optionee's other compensation. A Stock Option Agreement may provide that a
new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
2
<PAGE> 6
5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the number
of Common Shares subject to the Option and shall provide for the adjustment of
such number in accordance with Article 9. Options granted to any Optionee in a
single fiscal year of the Company shall not cover more than 312,500 Common
Shares, except that Options granted to a new Employee in the fiscal year of the
Company in which his or her service as an Employee first commences shall not
cover more than 625,000 Common Shares. The limitations set forth in the
preceding sentence shall be subject to adjustment in accordance with Article 9.
5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise
Price; provided that the Exercise Price under an ISO shall in no event be less
than 100% of the Fair Market Value of a Common Share on the date of grant and
the Exercise Price under an NSO shall in no event be less than 85% of the Fair
Market Value of a Common Share on the date of grant. In the case of an NSO, a
Stock Option Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the NSO is outstanding.
5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify the
date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO shall in no event exceed 10 years from
the date of grant. A Stock Option Agreement may provide for accelerated
exercisability in the event of the Optionee's death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the
event of the termination of the Optionee's service.
5.5 EFFECT OF CHANGE IN CONTROL. Each Option shall become exercisable as
to all or part of the Common Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company, subject to the following
limitations:
(a) In the case of an ISO, the acceleration of exercisability shall
not occur without the Optionee's written consent.
(b) If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be
treated as a "pooling of interests" for financial reporting purposes, and
if such transaction in fact is so treated, then the acceleration of
exercisability shall not occur to the extent that the Company's independent
accountants and such other party's independent accountants separately
determine in good faith that such acceleration would preclude the use of
"pooling of interests" accounting.
5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the grant of new options for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy out
for a payment in cash or cash equivalents an Option previously granted or (b)
authorize an Optionee to
3
<PAGE> 7
elect to cash out an Option previously granted, in either case at such time and
based upon such terms and conditions as the Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES.
6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time
when such Common Shares are purchased, except as follows:
(a) In the case of an ISO granted under the Plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made
in any form(s) described in this Article 6.
(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.
6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is applicable,
all or any part of the Exercise Price may be paid by surrendering, or attesting
to the ownership of, Common Shares that are already owned by the Optionee. Such
Common Shares shall be valued at their Fair Market Value on the date when the
new Common Shares are purchased under the Plan. The Optionee shall not
surrender, or attest to the ownership of, Common Shares in payment of the
Exercise Price if such action would cause the Company to recognize compensation
expense (or additional compensation expense) with respect to the Option for
financial reporting purposes.
6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable, all
or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.
6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to
pledge all or part of the Common Shares being purchased under the Plan to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.
6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) a full-recourse promissory
note. However, the par value of the Common Shares being purchased under the
Plan, if newly issued, shall be paid in cash or cash equivalents.
6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.
4
<PAGE> 8
ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS.
7.1 INITIAL GRANTS. Each Outside Director who first becomes a member of
the Board after the date of the Company's initial public offering shall receive
a one-time grant of an NSO covering 9,375 Common Shares (subject to adjustment
under Article 9). Such NSO shall be granted on the date when such Outside
Director first joins the Board and shall become exercisable in 36 equal
installments at monthly intervals over the 36-month period commencing on the
date of grant.
7.2 ANNUAL GRANTS. Upon the conclusion of each regular annual meeting of
the Company's stockholders held in the year 1999 or thereafter, each Outside
Director who will continue serving as a member of the Board thereafter shall
receive an NSO covering 3,125 Common Shares (subject to adjustment under Article
9), except that such NSO shall not be granted in the fiscal year in which the
same Outside Director received the NSO described in Section 7.1. NSOs granted
under this Section 7.2 shall become exercisable in full on the first anniversary
of the date of grant.
7.3 ACCELERATED EXERCISABILITY. All NSOs granted to an Outside Director
under this Article 7 shall become exercisable in full in the event of:
(a) The termination of such Outside Director's service because of
death, total and permanent disability or retirement at or after age 70; or
(b) A Change in Control with respect to the Company, except as
provided in the next following sentence. If the Company and the other party
to the transaction constituting a Change in Control agree that such
transaction is to be treated as a "pooling of interests" for financial
reporting purposes, and if such transaction in fact is so treated, then the
acceleration of exercisability shall not occur to the extent that the
Company's independent accountants and such other party's independent
accountants separately determine in good faith that such acceleration would
preclude the use of "pooling of interests" accounting.
7.4 EXERCISE PRICE. The Exercise Price under all NSOs granted to an
Outside Director under this Article 7 shall be equal to 100% of the Fair Market
Value of a Common Share on the date of grant, payable in one of the forms
described in Sections 6.1, 6.2, 6.3 and 6.4.
7.5 TERM. All NSOs granted to an Outside Director under this Article 7
shall terminate on the earliest of (a) the 10th anniversary of the date of
grant, (b) the date three months after the termination of such Outside
Director's service for any reason other than death or total and permanent
disability or (c) the date 12 months after the termination of such Outside
Director's service because of death or total and permanent disability.
7.6 AFFILIATES OF OUTSIDE DIRECTORS. The Committee may provide that the
NSOs that otherwise would be granted to an Outside Director under this Article 7
shall instead be granted to an affiliate of such Outside Director. Such
affiliate shall then be deemed to be an Outside Director for purposes of the
Plan, provided that the service-related vesting and termination
5
<PAGE> 9
provisions pertaining to the NSOs shall be applied with regard to the service of
the Outside Director.
ARTICLE 8. RESTRICTED SHARES.
8.1 RESTRICTED STOCK AGREEMENT. Each grant of Restricted Shares under the
Plan shall be evidenced by a Restricted Stock Agreement between the recipient
and the Company. Such Restricted Shares shall be subject to all applicable terms
of the Plan and may be subject to any other terms that are not inconsistent with
the Plan. The provisions of the various Restricted Stock Agreements entered into
under the Plan need not be identical.
8.2 PAYMENT FOR AWARDS. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the extent
that an Award consists of newly issued Restricted Shares, the Award recipient
shall furnish consideration with a value not less than the par value of such
Restricted Shares in the form of cash, cash equivalents or past services
rendered to the Company (or a Parent or Subsidiary), as the Committee may
determine.
8.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events. All
Restricted Shares shall become vested in the event that a Change in Control
occurs with respect to the Company, except as provided in the next following
sentence. If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of vesting shall not occur to the extent that
the Company's independent accountants and such other party's independent
accountants separately determine in good faith that such acceleration would
preclude the use of "pooling of interests" accounting.
8.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may require
that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject
to the same conditions and restrictions as the Award with respect to which the
dividends were paid.
ARTICLE 9. PROTECTION AGAINST DILUTION.
9.1 ADJUSTMENTS. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares in an amount that has a
material effect on the price of Common Shares, a combination or consolidation of
the outstanding Common Shares (by reclassification or otherwise) into a lesser
number of Common Shares, a recapitalization, a spin-off or a similar occurrence,
the Committee shall make such adjustments as it, in its sole discretion, deems
6
<PAGE> 10
appropriate in one or more of (a) the number of Options and Restricted Shares
available for future Awards under Article 3, (b) the limitations set forth in
Section 5.2, (c) the number of NSOs to be granted to Outside Directors under
Article 7; (d) the number of Common Shares covered by each outstanding Option or
(e) the Exercise Price under each outstanding Option. Except as provided in this
Article 9, a Participant shall have no rights by reason of any issue by the
Company of stock of any class or securities convertible into stock of any class,
any subdivision or consolidation of shares of stock of any class, the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class.
9.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised,
Options shall terminate immediately prior to the dissolution or liquidation of
the Company.
9.3 REORGANIZATIONS. In the event that the Company is a party to a merger
or other reorganization, outstanding Options and Restricted Shares shall be
subject to the agreement of merger or reorganization. Such agreement shall
provide for (a) the continuation of the outstanding Awards by the Company, if
the Company is a surviving corporation, (b) the assumption of the outstanding
Awards by the surviving corporation or its parent or subsidiary, (c) the
substitution by the surviving corporation or its parent or subsidiary of its own
awards for the outstanding Awards, (d) full exercisability or vesting and
accelerated expiration of the outstanding Awards or (e) settlement of the full
value of the outstanding Awards in cash or cash equivalents followed by
cancellation of such Awards.
ARTICLE 10. DEFERRAL OF DELIVERY OF SHARES
The Committee (in its sole discretion) may permit or require an Optionee to
have Common Shares that otherwise would be delivered to such Optionee as a
result of the exercise of an Option converted into amounts credited to a
deferred compensation account established for such Optionee by the Committee as
an entry on the Company's books. Such amounts shall be determined by reference
to the Fair Market Value of such Common Shares as of the date when they
otherwise would have been delivered to such Optionee. A deferred compensation
account established under this Article 10 may be credited with interest or other
forms of investment return, as determined by the Committee. An Optionee for whom
such an account is established shall have no rights other than those of a
general creditor of the Company. Such an account shall represent an unfunded and
unsecured obligation of the Company and shall be subject to the terms and
conditions of the applicable agreement between such Optionee and the Company. If
the conversion of Options is permitted or required, the Committee (in its sole
discretion) may establish rules, procedures and forms pertaining to such
conversion, including (without limitation) the settlement of deferred
compensation accounts established under this Article 10.
ARTICLE 11. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards may
be settled in the form of Common Shares issued under this Plan. Such Common
Shares shall be treated for all purposes under the Plan like Restricted Shares
and shall, when issued, reduce the number of Common Shares available under
Article 3.
7
<PAGE> 11
ARTICLE 12. LIMITATION ON RIGHTS.
12.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee,
Outside Director or Consultant. The Company and its Parents, Subsidiaries and
Affiliates reserve the right to terminate the service of any Employee, Outside
Director or Consultant at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).
12.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, in the case of an Option, the time when he or she
becomes entitled to receive such Common Shares by filing a notice of exercise
and paying the Exercise Price. No adjustment shall be made for cash dividends or
other rights for which the record date is prior to such time, except as
expressly provided in the Plan.
12.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.
ARTICLE 13. WITHHOLDING TAXES.
13.1 GENERAL. To the extent required by applicable federal, state, local or
foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.
13.2 SHARE WITHHOLDING. The Committee may permit a Participant to satisfy
all or part of his or her withholding or income tax obligations by having the
Company withhold all or a portion of any Common Shares that otherwise would be
issued to him or her or by surrendering all or a portion of any Common Shares
that he or she previously acquired. Such Common Shares shall be valued at their
Fair Market Value on the date when taxes otherwise would be withheld in cash.
ARTICLE 14. FUTURE OF THE PLAN.
14.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on _______ __, 1998. The Plan shall remain in effect until it is
terminated under Section 14.2, except that no ISOs shall be granted on or after
the 10th anniversary of the later of (a) the date when the Board adopted the
Plan or (b) the date when the Board adopted the most recent increase in the
number of Common Shares available under Article 3 which was approved by the
Company's stockholders.
8
<PAGE> 12
14.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the Plan
after the termination thereof. The termination of the Plan, or any amendment
thereof, shall not affect any Award previously granted under the Plan.
ARTICLE 15. DEFINITIONS.
15.1 "AFFILIATE" means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity.
15.2 "AWARD" means any award of an Option or a Restricted Share under the
Plan.
15.3 "BOARD" means the Company's Board of Directors, as constituted from
time to time.
15.4 "CHANGE IN CONTROL" shall mean:
(a) The consummation of a merger or consolidation of the Company 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 stockholders of the
Company immediately prior to such merger, consolidation or other
reorganization;
(b) The sale, transfer or other disposition of all or substantially
all of the Company's assets; or
(c) Any transaction as a result of which any person is the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing at least 50% of the
total voting power represented by the Company's then outstanding voting
securities. For purposes of this Subsection (d), the term "person" shall
have the same meaning as when used in sections 13(d) and 14(d) of the
Exchange Act but shall exclude (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or of a Parent or
Subsidiary and (ii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their
ownership of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.
15.5 "CODE" means the Internal Revenue Code of 1986, as amended.
15.6 "COMMITTEE" means a committee of the Board, as described in Article 2.
9
<PAGE> 13
15.7 "COMMON SHARE" means one share of the common stock of the Company.
15.8 "COMPANY" means AboveNet Communications Inc., a Delaware corporation.
15.9 "CONSULTANT" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan, except as provided in Section 4.2.
15.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.
15.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
15.12 "EXERCISE PRICE" means the amount for which one Common Share may be
purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement.
15.13 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
shall be conclusive and binding on all persons.
15.14 "ISO" means an incentive stock option described in section 422(b) of
the Code.
15.15 "NSO" means a stock option not described in sections 422 or 423 of
the Code.
15.16 "OPTION" means an ISO or NSO granted under the Plan and entitling the
holder to purchase Common Shares.
15.17 "OPTIONEE" means an individual or estate who holds an Option.
15.18 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an
Employee. Service as an Outside Director shall be considered employment for all
purposes of the Plan, except as provided in Section 4.2.
15.19 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
15.20 "PARTICIPANT" means an individual or estate who holds an Award.
15.21 "PLAN" means this AboveNet Communications Inc. 1998 Stock Incentive
Plan, as amended from time to time.
15.22 "PREDECESSOR PLAN" means the Company's existing 1997 Stock Plan.
15.23 "RESTRICTED SHARE" means a Common Share awarded under the Plan.
10
<PAGE> 14
15.24 "RESTRICTED STOCK AGREEMENT" means the agreement between the Company
and the recipient of a Restricted Share that contains the terms, conditions and
restrictions pertaining to such Restricted Share.
15.25 "STOCK OPTION AGREEMENT" means the agreement between the Company and
an Optionee that contains the terms, conditions and restrictions pertaining to
his or her Option.
15.26 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.
ARTICLE 16. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused its
duly authorized officer to execute this document in the name of the Company.
ABOVENET COMMUNICATIONS INC.
By:
-------------------------------------
Title:
----------------------------------
11
<PAGE> 1
EXHIBIT 10.5
ABOVENET COMMUNICATIONS INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
(AS ADOPTED EFFECTIVE _______ __, 1998)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 1. PURPOSE OF THE PLAN ................................................................................1
SECTION 2. ADMINISTRATION OF THE PLAN .........................................................................1
(a) Committee Composition....................................................................1
(b) Committee Responsibilities...............................................................1
SECTION 3. ENROLLMENT AND PARTICIPATION........................................................................1
(a) Offering Periods.........................................................................1
(b) Accumulation Periods.....................................................................1
(c) Enrollment ..............................................................................1
(d) Duration of Participation................................................................1
(e) Applicable Offering Period...............................................................2
SECTION 4. EMPLOYEE CONTRIBUTIONS .............................................................................2
(a) Frequency of Payroll Deductions..........................................................2
(b) Amount of Payroll Deductions.............................................................2
(c) Changing Withholding Rate................................................................2
(d) Discontinuing Payroll Deductions.........................................................3
(e) Limit on Number of Elections.............................................................3
SECTION 5. WITHDRAWAL FROM THE PLAN ...........................................................................3
(a) Withdrawal ..............................................................................3
(b) Re-Enrollment After Withdrawal...........................................................3
SECTION 6. CHANGE IN EMPLOYMENT STATUS.........................................................................3
(a) Termination of Employment................................................................3
(b) Leave of Absence.........................................................................3
(c) Death ...................................................................................3
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES................................................................4
(a) Plan Accounts ...........................................................................4
(b) Purchase Price ..........................................................................4
(c) Number of Shares Purchased...............................................................4
(d) Available Shares Insufficient............................................................4
(e) Issuance of Stock........................................................................4
(f) Unused Cash Balances.....................................................................5
(g) Stockholder Approval.....................................................................5
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP......................................................................5
(a) Five Percent Limit.......................................................................5
(b) Dollar Limit ............................................................................5
</TABLE>
i
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<TABLE>
<S> <C>
SECTION 9. RIGHTS NOT TRANSFERABLE ............................................................................6
SECTION 10. NO RIGHTS AS AN EMPLOYEE ..........................................................................6
SECTION 11. NO RIGHTS AS A STOCKHOLDER.........................................................................6
SECTION 12. SECURITIES LAW REQUIREMENTS........................................................................6
SECTION 13. STOCK OFFERED UNDER THE PLAN.......................................................................7
(a) Authorized Shares........................................................................7
(b) Anti-Dilution Adjustments................................................................7
(c) Reorganizations .........................................................................7
SECTION 14. AMENDMENT OR DISCONTINUANCE........................................................................7
SECTION 15. DEFINITIONS .......................................................................................7
(a) Accumulation Period......................................................................7
(b) Board ...................................................................................7
(c) Code ....................................................................................7
(d) Committee ...............................................................................7
(e) Company .................................................................................7
(f) Compensation ............................................................................8
(g) Corporate Reorganization.................................................................8
(h) Eligible Employee........................................................................8
(i) Exchange Act ............................................................................8
(j) Fair Market Value........................................................................8
(k) IPO .....................................................................................8
(l) Offering Period .........................................................................9
(m) Participant .............................................................................9
(n) Participating Company....................................................................9
(o) Plan ....................................................................................9
(p) Plan Account ............................................................................9
(q) Purchase Price ..........................................................................9
(r) Stock ...................................................................................9
(s) Subsidiary ..............................................................................9
SECTION 16. EXECUTION .........................................................................................9
</TABLE>
ii
<PAGE> 4
ABOVENET COMMUNICATIONS INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. PURPOSE OF THE PLAN.
The Plan was adopted by the Board on August 27, 1998, to be effective
as of the date of the IPO. The purpose of the Plan is to provide Eligible
Employees with an opportunity to increase their proprietary interest in the
success of the Company by purchasing Stock from the Company on favorable terms
and to pay for such purchases through payroll deductions. The Plan is intended
to qualify under section 423 of the Code.
SECTION 2. ADMINISTRATION OF THE PLAN.
(a) COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board.
(b) COMMITTEE RESPONSIBILITIES. The Committee shall interpret the Plan
and make all other policy decisions relating to the operation of the Plan. The
Committee may adopt such rules, guidelines and forms as it deems appropriate to
implement the Plan. The Committee's determinations under the Plan shall be final
and binding on all persons.
SECTION 3. ENROLLMENT AND PARTICIPATION.
(a) OFFERING PERIODS. While the Plan is in effect, two overlapping
Offering Periods shall commence in each calendar year. The Offering Periods
shall consist of the 24-month periods commencing on each May 1 and November 1,
except that the first Offering Period shall commence on the date of the IPO and
end on October 31, 2000.
(b) ACCUMULATION PERIODS. While the Plan is in effect, two Accumulation
Periods shall commence in each calendar year. The Accumulation Periods shall
consist of the six-month periods commencing on each May 1 and November 1, except
that the first Accumulation Period shall commence on the date of the IPO and end
on April 30, 1999.
(c) ENROLLMENT. Any individual who, on the day preceding the first day
of an Offering Period, qualifies as an Eligible Employee may elect to become a
Participant in the Plan for such Offering Period by executing the enrollment
form prescribed for this purpose by the Committee. The enrollment form shall be
filed with the Company at the prescribed location not later than one business
day prior to the commencement of such Offering Period.
(d) DURATION OF PARTICIPATION. Once enrolled in the Plan, a Participant
shall continue to participate in the Plan until he or she ceases to be an
Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end
of the Accumulation Period in which his or her employee contributions were
discontinued under Section 4(d) or 8(b). A Participant who
<PAGE> 5
discontinued employee contributions under Section 4(d) or withdrew from the Plan
under Section 5(a) may again become a Participant, if he or she then is an
Eligible Employee, by following the procedure described in Subsection (c) above.
A Participant whose employee contributions were discontinued automatically under
Section 8(b) shall automatically resume participation at the beginning of the
earliest Accumulation Period ending in the next calendar year, if he or she then
is an Eligible Employee.
(e) APPLICABLE OFFERING PERIOD. For purposes of calculating the
Purchase Price under Section 7(b), the applicable Offering Period shall be
determined as follows:
(i) Once a Participant is enrolled in the Plan for an
Offering Period, such Offering Period shall continue to apply to him or
her until the earliest of (A) the end of such Offering Period, (B) the
end of his or her participation under Subsection (d) above or (C)
re-enrollment for a subsequent Offering Period under Paragraph (ii) or
(iii) below.
(ii) In the event that the Fair Market Value of Stock on the
last trading day before the commencement of the Offering Period for
which the Participant is enrolled is higher than on the last trading
day before the commencement of any subsequent Offering Period, the
Participant shall automatically be re-enrolled for such subsequent
Offering Period.
(iii) Any other provision of the Plan notwithstanding, the
Company (at its sole discretion) may determine prior to the
commencement of any new Offering Period that all Participants shall be
re-enrolled for such new Offering Period.
(iv) When a Participant reaches the end of an Offering Period
but his or her participation is to continue, then such Participant
shall automatically be re-enrolled for the Offering Period that
commences immediately after the end of the prior Offering Period.
SECTION 4. EMPLOYEE CONTRIBUTIONS.
(a) FREQUENCY OF PAYROLL DEDUCTIONS. A Participant may purchase shares
of Stock under the Plan solely by means of payroll deductions. Payroll
deductions, as designated by the Participant pursuant to Subsection (b) below,
shall occur on each payday during participation in the Plan.
(b) AMOUNT OF PAYROLL DEDUCTIONS. An Eligible Employee shall designate
on the enrollment form the portion of his or her Compensation that he or she
elects to have withheld for the purchase of Stock. Such portion shall be a whole
percentage of the Eligible Employee's Compensation, but not less than 1% nor
more than 15%.
(c) CHANGING WITHHOLDING RATE. If a Participant wishes to change the
rate of payroll withholding, he or she may do so by filing a new enrollment form
with the Company at the prescribed location at any time. The new withholding
rate shall be effective as soon as
2
<PAGE> 6
reasonably practicable after such form has been received by the Company. The new
withholding rate shall be a whole percentage of the Eligible Employee's
Compensation, but not less than 1% nor more than 15%.
(d) DISCONTINUING PAYROLL DEDUCTIONS. If a Participant wishes to
discontinue employee contributions entirely, he or she may do so by filing a new
enrollment form with the Company at the prescribed location at any time. Payroll
withholding shall cease as soon as reasonably practicable after such form has
been received by the Company. (In addition, employee contributions may be
discontinued automatically pursuant to Section 8(b).) A Participant who has
discontinued employee contributions may resume such contributions by filing a
new enrollment form with the Company at the prescribed location. Payroll
withholding shall resume as soon as reasonably practicable after such form has
been received by the Company.
(e) LIMIT ON NUMBER OF ELECTIONS. No Participant shall make more than 2
elections under Subsection (c) or (d) above during any Accumulation Period.
SECTION 5. WITHDRAWAL FROM THE PLAN.
(a) WITHDRAWAL. A Participant may elect to withdraw from the Plan by
filing the prescribed form with the Company at the prescribed location at any
time before the last day of an Accumulation Period. As soon as reasonably
practicable thereafter, payroll deductions shall cease and the entire amount
credited to the Participant's Plan Account shall be refunded to him or her in
cash, without interest. No partial withdrawals shall be permitted.
(b) RE-ENROLLMENT AFTER WITHDRAWAL. A former Participant who has
withdrawn from the Plan shall not be a Participant until he or she re-enrolls in
the Plan under Section 3(c). Re-enrollment may be effective only at the
commencement of an Offering Period.
SECTION 6. CHANGE IN EMPLOYMENT STATUS.
(a) TERMINATION OF EMPLOYMENT. Termination of employment as an Eligible
Employee for any reason, including death, shall be treated as an automatic
withdrawal from the Plan under Section 5(a). (A transfer from one Participating
Company to another shall not be treated as a termination of employment.)
(b) LEAVE OF ABSENCE. For purposes of the Plan, employment shall not be
deemed to terminate when the Participant goes on a military leave, a sick leave
or another bona fide leave of absence, if the leave was approved by the Company
in writing. Employment, however, shall be deemed to terminate 90 days after the
Participant goes on a leave, unless a contract or statute guarantees his or her
right to return to work. Employment shall be deemed to terminate in any event
when the approved leave ends, unless the Participant immediately returns to
work.
(c) DEATH. In the event of the Participant's death, the amount credited
to his or her Plan Account shall be paid to a beneficiary designated by him or
her for this purpose on the prescribed form or, if none, to the Participant's
estate. Such form shall be valid only if it was filed with the Company at the
prescribed location before the Participant's death.
3
<PAGE> 7
SECTION 7. PLAN ACCOUNTS AND PURCHASE OF SHARES.
(a) PLAN ACCOUNTS. The Company shall maintain a Plan Account on its
books in the name of each Participant. Whenever an amount is deducted from the
Participant's Compensation under the Plan, such amount shall be credited to the
Participant's Plan Account. Amounts credited to Plan Accounts shall not be trust
funds and may be commingled with the Company's general assets and applied to
general corporate purposes. No interest shall be credited to Plan Accounts.
(b) PURCHASE PRICE. The Purchase Price for each share of Stock
purchased at the close of an Accumulation Period shall be the lower of:
(i) 85% of the Fair Market Value of such share on the last
trading day in such Accumulation Period; or
(ii) 85% of the Fair Market Value of such share on the last
trading day before the commencement of the applicable Offering Period
(as determined under Section 3(e)) or, in the case of the first
Offering Period under the Plan, 85% of the price at which one share of
Stock is offered to the public in the IPO.
(c) NUMBER OF SHARES PURCHASED. As of the last day of each Accumulation
Period, each Participant shall be deemed to have elected to purchase the number
of shares of Stock calculated in accordance with this Subsection (c), unless the
Participant has previously elected to withdraw from the Plan in accordance with
Section 5(a). The amount then in the Participant's Plan Account shall be divided
by the Purchase Price, and the number of shares that results shall be purchased
from the Company with the funds in the Participant's Plan Account. The foregoing
notwithstanding, no Participant shall purchase more than 3,125 shares of Stock
with respect to any Accumulation Period nor more than the amounts of Stock set
forth in Sections 8(b) and 13(a). The Committee may determine with respect to
all Participants that any fractional share, as calculated under this Subsection
(c), shall be (i) rounded down to the next lower whole share or (ii) credited as
a fractional share.
(d) AVAILABLE SHARES INSUFFICIENT. In the event that the aggregate
number of shares that all Participants elect to purchase during an Accumulation
Period exceeds the maximum number of shares remaining available for issuance
under Section 13(a), then the number of shares to which each Participant is
entitled shall be determined by multiplying the number of shares available for
issuance by a fraction, the numerator of which is the number of shares that such
Participant has elected to purchase and the denominator of which is the number
of shares that all Participants have elected to purchase.
(e) ISSUANCE OF STOCK. Certificates representing the shares of Stock
purchased by a Participant under the Plan shall be issued to him or her as soon
as reasonably practicable after the close of the applicable Accumulation Period,
except that the Committee may determine that such shares shall be held for each
Participant's benefit by a broker designated by the Committee (unless the
Participant has elected that certificates be issued to him or her). Shares may
be registered in the name of the Participant or jointly in the name of the
Participant and his or her spouse as joint tenants with right of survivorship or
as community property.
4
<PAGE> 8
(f) UNUSED CASH BALANCES. An amount remaining in the Participant's Plan
Account that represents the Purchase Price for any fractional share shall be
carried over in the Participant's Plan Account to the next Accumulation Period.
Any amount remaining in the Participant's Plan Account that represents the
Purchase Price for whole shares that could not be purchased by reason of
Subsection (c) above, Section 8(b) or Section 13(a) shall be refunded to the
Participant in cash, without interest.
(g) STOCKHOLDER APPROVAL. Any other provision of the Plan
notwithstanding, no shares of Stock shall be purchased under the Plan unless and
until the Company's stockholders have approved the adoption of the Plan.
SECTION 8. LIMITATIONS ON STOCK OWNERSHIP.
(a) FIVE PERCENT LIMIT. Any other provision of the Plan
notwithstanding, no Participant shall be granted a right to purchase Stock under
the Plan if such Participant, immediately after his or her election to purchase
such Stock, would own stock possessing more than 5% of the total combined voting
power or value of all classes of stock of the Company or any parent or
Subsidiary of the Company. For purposes of this Subsection (a), the following
rules shall apply:
(i) Ownership of stock shall be determined after applying the
attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that
he or she has a right or option to purchase under this or any other
plan; and
(iii) Each Participant shall be deemed to have the right to
purchase 5,000 shares of Stock under this Plan with respect to each
Accumulation Period.
(b) DOLLAR LIMIT. Any other provision of the Plan notwithstanding, no
Participant shall purchase Stock with a Fair Market Value in excess of the
following limit:
(i) In the case of Stock purchased during an Offering Period
that commenced in the current calendar year, the limit shall be equal
to (A) $25,000 minus (B) the Fair Market Value of the Stock that the
Participant previously purchased in the current calendar year (under
this Plan and all other employee stock purchase plans of the Company or
any parent or Subsidiary of the Company).
(ii) In the case of Stock purchased during an Offering Period
that commenced in the immediately preceding calendar year, the limit
shall be equal to (A) $50,000 minus (B) the Fair Market Value of the
Stock that the Participant previously purchased (under this Plan and
all other employee stock purchase plans of the Company or any parent or
Subsidiary of the Company) in the current calendar year and in the
immediately preceding calendar year.
5
<PAGE> 9
(iii) In the case of Stock purchased during an Offering
Period that commenced in the second preceding calendar year, the limit
shall be equal to (A) $75,000 minus (B) the Fair Market Value of the
Stock that the Participant previously purchased (under this Plan and
all other employee stock purchase plans of the Company or any parent or
Subsidiary of the Company) in the current calendar year and in the two
preceding calendar years.
For purposes of this Subsection (b), the Fair Market Value of Stock shall be
determined in each case as of the beginning of the Offering Period in which such
Stock is purchased. Employee stock purchase plans not described in section 423
of the Code shall be disregarded. If a Participant is precluded by this
Subsection (b) from purchasing additional Stock under the Plan, then his or her
employee contributions shall automatically be discontinued and shall resume at
the beginning of the earliest Accumulation Period ending in the next calendar
year (if he or she then is an Eligible Employee).
SECTION 9. RIGHTS NOT TRANSFERABLE.
The rights of any Participant under the Plan, or any Participant's
interest in any Stock or moneys to which he or she may be entitled under the
Plan, shall not be transferable by voluntary or involuntary assignment or by
operation of law, or in any other manner other than by beneficiary designation
or the laws of descent and distribution. If a Participant in any manner attempts
to transfer, assign or otherwise encumber his or her rights or interest under
the Plan, other than by beneficiary designation or the laws of descent and
distribution, then such act shall be treated as an election by the Participant
to withdraw from the Plan under Section 5(a).
SECTION 10. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan or in any right granted under the Plan shall confer
upon the Participant any right to continue in the employ of a Participating
Company for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Participating Companies or of the
Participant, which rights are hereby expressly reserved by each, to terminate
his or her employment at any time and for any reason, with or without cause.
SECTION 11. NO RIGHTS AS A STOCKHOLDER.
A Participant shall have no rights as a stockholder with respect to any
shares of Stock that he or she may have a right to purchase under the Plan until
such shares have been purchased on the last day of the applicable Accumulation
Period.
SECTION 12. SECURITIES LAW REQUIREMENTS.
Shares of Stock shall not be issued under the Plan unless the issuance
and delivery of such shares comply with (or are exempt from) all applicable
requirements of law, including (without limitation) the Securities Act of 1933,
as amended, the rules and regulations promulgated thereunder, state securities
laws and regulations, and the regulations of any stock exchange or other
securities market on which the Company's securities may then be traded.
6
<PAGE> 10
SECTION 13. STOCK OFFERED UNDER THE PLAN.
(a) AUTHORIZED SHARES. The number of shares of Stock available for
purchase under the Plan shall be 156,250 (subject to adjustment pursuant to this
Section 13). On the first day of each fiscal year of the Company, commencing
with July 1, 1999, the aggregate number of shares of Stock available for
purchase during the life of the Plan shall automatically be increased by the
number of shares necessary to cause the number of shares then available for
purchase to be restored to 156,250 (subject to adjustment pursuant to this
Section 13).
(b) ANTI-DILUTION ADJUSTMENTS. The aggregate number of shares of Stock
offered under the Plan, the 3,125-share limitation described in Section 7(c) and
the price of shares that any Participant has elected to purchase shall be
adjusted proportionately by the Committee for any increase or decrease in the
number of outstanding shares of Stock resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, any other increase
or decrease in such shares effected without receipt or payment of consideration
by the Company, the distribution of the shares of a Subsidiary to the Company's
stockholders or a similar event.
(c) REORGANIZATIONS. Any other provision of the Plan notwithstanding,
immediately prior to the effective time of a Corporate Reorganization, the
Offering Period and Accumulation Period then in progress shall terminate and
shares shall be purchased pursuant to Section 7, unless the Plan is continued or
assumed by the surviving corporation or its parent corporation. The Plan shall
in no event be construed to restrict in any way the Company's right to undertake
a dissolution, liquidation, merger, consolidation or other reorganization.
SECTION 14. AMENDMENT OR DISCONTINUANCE.
The Board shall have the right to amend, suspend or terminate the Plan
at any time and without notice. Except as provided in Section 13, any increase
in the aggregate number of shares of Stock to be issued under the Plan shall be
subject to approval by a vote of the stockholders of the Company. In addition,
any other amendment of the Plan shall be subject to approval by a vote of the
stockholders of the Company to the extent required by an applicable law or
regulation.
SECTION 15. DEFINITIONS.
(a) "ACCUMULATION PERIOD" means a six-month period during which
contributions may be made toward the purchase of Stock under the Plan, as
determined pursuant to Section 3(b).
(b) "BOARD" means the Board of Directors of the Company, as constituted
from time to time.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of the Board, as described in Section
2.
(e) "COMPANY" means AboveNet Communications Inc., a Delaware
corporation.
7
<PAGE> 11
(f) "COMPENSATION" means (i) the total compensation paid in cash to a
Participant by a Participating Company, including salaries, wages, bonuses,
incentive compensation, commissions, overtime pay and shift premiums, plus (ii)
any pre-tax contributions made by the Participant under section 401(k) or 125 of
the Code. "Compensation" shall exclude all non-cash items, moving or relocation
allowances, cost-of-living equalization payments, car allowances, tuition
reimbursements, imputed income attributable to cars or life insurance, severance
pay, fringe benefits, contributions or benefits received under employee benefit
plans, income attributable to the exercise of stock options, and similar items.
The Committee shall determine whether a particular item is included in
Compensation.
(g) "CORPORATE REORGANIZATION" means:
(i) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization; or
(ii) The sale, transfer or other disposition of all or
substantially all of the Company's assets or the complete liquidation
or dissolution of the Company.
(h) "ELIGIBLE EMPLOYEE" means any employee of a Participating Company
if his or her customary employment is for more than five months per calendar
year and for more than 20 hours per week. The foregoing notwithstanding, an
individual shall not be considered an Eligible Employee if his or her
participation in the Plan is prohibited by the law of any country which has
jurisdiction over him or her or if he or she is subject to a collective
bargaining agreement that does not provide for participation in the Plan.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(j) "FAIR MARKET VALUE" means the market price of Stock, determined by
the Committee as follows:
(i) If the Stock was traded on The Nasdaq National Market on
the date in question, then the Fair Market Value shall be equal to the
last-transaction price quoted for such date by The Nasdaq National
Market;
(ii) If the Stock was traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing
price reported by the applicable composite transactions report for such
date; or
(iii) If none of the foregoing provisions is applicable, then
the Fair Market Value shall be determined by the Committee in good
faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal or as reported
directly to the Company by Nasdaq or a stock exchange. Such determination shall
be conclusive and binding on all persons.
(k) "IPO" means the initial offering of Stock to the public pursuant to
a registration statement filed by the Company with the Securities and Exchange
Commission.
8
<PAGE> 12
(l) "OFFERING PERIOD" means a 24-month period with respect to which the
right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).
(m) "PARTICIPANT" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 3(c).
(n) "PARTICIPATING COMPANY" means (i) the Company and (ii) each present
or future Subsidiary designated by the Committee as a Participating Company.
(o) "PLAN" means this AboveNet Communications Inc. 1998 Employee Stock
Purchase Plan, as it may be amended from time to time.
(p) "PLAN ACCOUNT" means the account established for each Participant
pursuant to Section 7(a).
(q) "PURCHASE PRICE" means the price at which Participants may purchase
Stock under the Plan, as determined pursuant to Section 7(b).
(r) "STOCK" means the Common Stock of the Company.
(s) "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
SECTION 16. EXECUTION.
To record the adoption of the Plan by the Board on ________ __, 1998,
the Company has caused its authorized officer to execute the same.
ABOVENET COMMUNICATIONS INC.
By:
-------------------------------
Title:
----------------------------
9
<PAGE> 1
EXHIBIT 10.27
FIBER OPTIC PRIVATE NETWORK AGREEMENT
Product Order
This Product Order ("Product Order") together with the Exhibits and the General
Terms and Conditions attached hereto constitute the Fiber Optic Private Network
Agreement ("Agreement") which is effective as of September 1, 1998 by and
between Metromedia Fiber Network Services, Inc. ("MFN") 1 North Lexington
Avenue, 4th Floor, White Plains, New York 10601, and AboveNet Communications,
Inc. ("Carrier") whose address is 50 West San Fernando, Suite 1010, San Jose,
California 95113. Definitions of terms used in this Agreement appear in this
Product Order, Exhibits and in the General Terms and Conditions.
1. Carrier orders and MFN will provide Leased Fiber as follows:
1.1 Lease Term: 240 Months
1.2 Number of Leased Fibers: Two (2) strands of single mode fiber in a
Point to Point configuration.
1.3 Carrier locations ("Location(s)"):
1.3(a) 8100 Boone Boulevard, Basement 2nd Level, Vienna, Virginia
[*]
1.4 Leased Fiber Specifications: See Exhibit A
1.5 Installation Charge and Lease Payments:
1.5(a) One Time Installation Charge: N/A
1.5(b) Monthly Lease Payment:
1.5.b.1. Dark Fiber [*]
1.5.b.2. Dark Fiber Maintenance [*]
1.5.b.3. Prepayment of 4 months
Monthly Lease Payment: [*]
1.6 Carrier will pay all Applicable Taxes (as provided in the Agreement)
on the Installation Charge and all Lease Payments as and when due.
1.7 Payment Terms for 1.5.b.3: Due upon signature of contract.
2. Estimated Installation Completion Date(s): [*]
3. Notice addresses and contact persons:
3.1 Metromedia Fiber Network Services, Inc.
1 North Lexington Avenue, 4th Floor
White Plains, New York 10601
Attention: Vice President -- Marketing
*Confidential portion has been omitted and filed separately with the Commission.
<PAGE> 2
If declaring a default or termination, a copy of the notice must be
sent to:
Metromedia Fiber Network Services, Inc.
1 North Lexington Avenue, 4th Floor
White Plains, New York 10601
Attention: Vice President - Legal Affairs
3.2 AboveNet Communications, Inc.
50 West San Fernando, Suite 1010
San Jose, California 95113
Dave Rand, Chief Technology Officer
4. Early Termination Charge:
4.1 If this Product Order is terminated pursuant to Section 11.1 of the
General Terms and Conditions, Carrier will pay to MFN an Early
Termination Charge (plus applicable sales or other taxes) for the
Leased Fiber determined as follows:
o 1st year termination -- 100% of all unpaid Leased Fiber
Monthly Lease Payments for the first year, plus 80% of all
unpaid Leased Fiber Monthly Lease Payments for the second
year, plus 60% of all unpaid Leased Fiber Monthly Lease
Payments for the third year, plus 40% of all unpaid Leased
Fiber Monthly Lease Payments for the fourth year, plus 20%
of all unpaid Leased Fiber Monthly Lease Payments for the
fifth year, plus 10% of all unpaid Leased Fiber Monthly
Lease Payments for the sixth through twentieth years.
o 2nd year termination -- 80% of all unpaid Leased Fiber
Monthly Lease Payments for the second year, plus 60% of
all unpaid Leased Fiber Monthly Lease Payments for the
third year, plus 40% of all unpaid Leased Fiber Monthly
Lease Payments for the fourth year, plus 20% of all unpaid
Leased Fiber Monthly Lease Payments for the fifth year,
plus 10% of all unpaid Leased Fiber Monthly Lease Payments
for the sixth through twentieth years.
o 3rd year termination -- 60% of all unpaid Leased Fiber
Monthly Lease Payments for the third year, plus 40% of all
unpaid Leased Fiber Monthly Lease Payments for the fourth
year, plus 20% of all unpaid Leased Fiber Monthly Lease
Payments for the fifth year, plus 10% of all unpaid Leased
Fiber Monthly Lease Payments for the sixth through
twentieth years.
o 4th year termination -- 40% of all unpaid Leased Fiber
Monthly Lease Payments for the fourth year, plus 20%
of all unpaid Leased Fiber Monthly Lease Payments for
the fifth year, plus 10% of all unpaid Leased Fiber
Monthly Lease Payments for the sixth through
twentieth years.
o 5th year termination -- 20% of all unpaid Leased Fiber
Monthly Lease Payments for the fifth year, plus 10%
of all unpaid Leased Fiber Monthly Lease Payments for
the sixth through twentieth years.
o 6th through 20th year termination -- 10% of all unpaid
Leased Fiber Monthly Lease Payments for the sixth through
twentieth years.
<PAGE> 3
4.2 If only a Prepaid Lease Payment is paid or payable and no Monthly
Lease Payments, then the Early Termination Charge will be equal to
the unamortized portion of the Prepaid Lease Payment over the Lease
Term as of the date of termination.
5. Special Requirements:
5.1 MFN will provide collocation to Carrier for Carrier's
telecommunication equipment in conjunction with Leased Fiber under separate
agreement based on the following pricing (this pricing is in addition to 1.5 of
this Product Order):
5.1(a) Collocation space for one (1) 7 foot by 23 inch wide
rack housing customers telecommunications equipment, and
DC power consisting of -48V DC @ 20 amps with dual A and
B feeds, at (6) six MFN Regeneration/Junction Sites
along the New York to Washington DC backbone:
[*] 240 Month Term
5.1(b) Carrier will be responsible for all collocation at 8100
Boone Boulevard, Vienna, Virginia. [*]
5.2 Carrier will provide all building entrances and risers at 8100 Boone
Boulevard, Vienna, Virginia [*]
5.3 If Carrier wishes to lease additional fiber strands between the
Locations, Carrier will deliver a written request therefore to MFN
on or before the first anniversary of the effective date of this
Product Order. Such written request will include the number of fiber
strands requested, up to four (4) additional fiber strands. If
additional fiber strands are available, MFN will prepare and deliver
to Carrier a Product Order for such additional fiber strands which
will include the price and Estimated Installation Completion Date.
MFN will use commercially reasonable efforts to provide access to
such additional fiber strands within sixty (60) to ninety (90) days
after delivery of such written request. The Monthly Lease Payment
for such additional fiber strands will be [*] per fiber strand, per
month.
The persons signing this Agreement are authorized by the respective parties to
do so. Signature constitutes acceptance of all terms and conditions in this
Product Order, the Exhibits and the General Terms and Conditions.
AboveNet Communications, Inc. Metromedia Fiber Network Services, Inc.
By: /s/ DAVE RAND By: /s/ HOWARD M. FINKELSTEIN
--------------------------------- ---------------------------------
Name: Dave Rand Howard M. Finkelstein
-------------------------------
Title: CTO President
------------------------------
Date: 8/31/98 Date: 9/2/98
------------------------------- -------------------------------
*Confidential portion has been omitted and filed separately with the Commission.
<PAGE> 4
FIBER OPTIC PRIVATE NETWORK AGREEMENT
EXHIBIT A
LEASED FIBER SPECIFICATIONS
<PAGE> 5
FIBER OPTIC PRIVATE NETWORK AGREEMENT
GENERAL TERMS AND CONDITIONS
1. TERM AND LEASE
1.1 MFN hereby leases to Carrier optical fiber ("Leased Fiber") on MFN's fiber
optic cable network ("Network") and/or constructed and installed
specifically for Carrier and the equipment and interfaces described in the
Product Order ("Equipment"), as provided in the Product Order. The Leased
Fiber and Equipment leased by Carrier will be referred to as the "Product".
The lease term ("Lease Term") and other specific terms pertaining to the
Product are set forth in the Product Order. The term "Party" will refer,
individually, to either MFN or Carrier and the term "Parties" will refer to
both of them. The term "Agreement" will mean and include the Product Order
and all Exhibits thereto and these General Terms and Conditions.
1.2 MFN will use commercially reasonable efforts to complete installation of
and provide Carrier with access to the Product on or about the Estimated
Installation Completion Date specified in the Product Order at the
Locations specified in the Product Order ("Turnover Date"). For a period of
time not to exceed ten (10) business days after the Turnover Date (the
"Acceptance Test Period"). Carrier will conduct such testing as it
reasonably deems necessary to ensure that the Product conforms in all
material respects to the material technical specifications set forth in the
relevant Exhibits ("Specifications"). Carrier will use commercially
reasonable efforts to complete such acceptance testing and notify MFN in
writing within five (5) business days after the Turnover Date, but in any
event within the Acceptance Test Period, of acceptance or of any
"Deficiencies" (as defined herein) in the Product. Deficiencies exist if
the Product does not conform in all material respects to the relevant
Specifications. Upon receipt of such notification from Carrier, MFN will
promptly undertake correction of such Deficiencies and restore access to
and use of the Product to Carrier. The "Service Date." whereupon the Lease
Term commences, will be the earlier of (i) completion of testing and
acceptance of Product by Carrier, (ii) expiration of the Acceptance Test
Period or, (iii) if Carrier has identified Deficiencies, then the first
date upon which Product conforms in all material respects with the relevant
Specifications.
1.3 [*]
[*]
*Confidential portion has been omitted and filed separately with the Commission.
<PAGE> 6
[*]
1.4 Carrier will obtain all necessary approvals for access into the Location
buildings and for the use of any required building riser conduit or other
required building facilities at all Locations. Unless otherwise provided
for in the Product Order, if there is no existing and available riser
conduit or other required facilities within such buildings then MFN will
perform all construction and installation of such riser conduit and Carrier
will reimburse MFN for the entire cost to construct and install such riser
conduit plus fifteen percent (15%) plus applicable sales or other taxes.
1.5 Upon the expiration of the Lease Term, or any earlier termination of this
Agreement, Carrier will promptly remove from any property owned, leased or
licensed by MFN all Carrier property, equipment and other materials used
in connection with the Product within forty five (45) days from such
expiration or termination. Carrier will complete such removal in a manner
that does not interfere with or damage the Product or the Network. If
Carrier fails to remove its property within such period, such property will
be deemed abandoned, and MFN will make such disposition of the property as
it deems necessary or advisable at Carrier's sole expense.
1.6 [*]
[*]
*Confidential portion has been omitted and filed separately with the Commission.
<PAGE> 7
2. TERMS OF PAYMENT
2.1 Unless otherwise provided for in the Product Order, Carrier agrees to pay
the One Time Installation Charge upon the execution of this Agreement and
to prepay an amount equal to the Leased Fiber Monthly Lease Payment for
four (4) months or such portion of the Prepaid Lease Payment as provided in
the Product Order, for the Location(s), and any Security Deposit for the
Equipment, if applicable. Carrier will also pay to MFN all applicable sales
or other taxes other than taxes on or measured by MFN's income or capital,
("Applicable Taxes"), unless Carrier is eligible for an exemption and
Carrier provides to MFN an exemption certificate or other documentation.
Commencing on the Service Date and continuing each month thereafter for the
duration of the Lease Term, Carrier will pay the Monthly Lease Payment (and
the Monthly Maintenance Payment for the Equipment, if applicable) plus
Applicable Taxes in advance for each month. If service commences after the
first day of any month or terminates before the last day of a month, then
the payment for such partial month will be pro rated based on the number of
days of the Lease Term during that month to the number of days in that
month. Carrier will include such pro rata payment for the initial partial
month in the first monthly payment at the commencement of the Lease Term.
The Prepaid Lease Payment, if any, will be paid as provided in the Product
Order.
2.2 The Monthly Lease Payment for the Leased Fiber and, if applicable, the
Monthly Maintenance Payment for the Equipment and any payment pursuant to
the Collocation License (together, the "Payment") will be increased (but
not decreased) each year during the Lease Term by the percentage increase,
if any, in the Consumer Price Index - Urban Wage Earners and Clerical
Workers (U.S. City Average, All Items, Base 1982-1984 equals 100) (the
"Index"), as published by the United States Department of Labor, Bureau of
Labor Statistics (the "Bureau"). The Index for the calendar month which is
four (4) months prior to the Service Date will be compared with the Index
for the calendar month which is four (4) months prior to each anniversary
of the Service Date during the Lease Term and the Payment will be increased
in accordance with the percentage increase, if any, between such Indexes.
2.3 If Carrier fails to pay any sum when due pursuant to this Agreement, then,
in addition to such sum, Carrier will pay interest on such unpaid sum at
the lower of the highest legal rate of interest permitted in the State of
New York or one and one-half percent (1.5%) per month.
3. MAINTENANCE, RESTORATION AND REPAIR OF THE NETWORK AND PRODUCT MONITORING
3.1 MFN will provide remote monitoring of the Network and the Product to the
extent that the Product is incorporated into the Network. MFN will use
commercially reasonable efforts to maintain the Product in accordance with
the Specifications (subject to reasonable wear and tear) and the Network in
good operating condition at all times during the Lease Term. Carrier shall
pay for maintenance as set forth in Section 1.5(b) of the Product Order
and as set forth in Section 3.4 hereof.
3.2 An "Outage" will mean the complete interruption of communications on one or
more of Carrier's Leased Fibers resulting from physical damage to, or
severance of, or a break in, or other failure of any Product. If an Outage
or any other material degradation of service on any Leased Fibers occurs
Carrier will immediately notify MFN by telephone at (888) 636-2778 or
through such other notification procedure as Parties may establish.
Provided that MFN personnel or contractors have access to affected Carrier
facilities immediately upon notification, MFN will respond and commence
work within two (2) hours after the time of notification by Carrier and
restore effective use of the Product as expeditiously as
<PAGE> 8
practicable, but in no event more than four (4) hours after receipt by MFN
of Carrier's notification, subject to "Force Majeure" as provided in
Section 11 hereof.
3.3 Except for any Outage caused by or resulting from (i) Force Majeure as set
forth in Section 11 hereof; (ii) the act or omission of Carrier, its
employees, agents or contractors, or any of Carrier's equipment or
facilities used in connection with the Product; or (iii) planned Outages by
reason of Services which have been scheduled and approved in advance by
Carrier ("Excepted Outages") in the event of an Outage, Carrier will
receive from MFN a credit ("Outage Credit") calculated at 5% of the Leased
Fiber Monthly Lease Payment for the affected Leased Fiber strands for each
four (4) hours of Outage, up to a maximum of the Leased Fiber Monthly Lease
Payment for one (1) full month. Except in the case of a Prepaid Lease
Payment or termination as provided in this Section 3.3, the Outage Credit
will be applied against future payments which may become due and payable by
Carrier to MFN. The Outage Credit will be determined by dividing the total
Leased Fiber Monthly Lease Payment by the number of Locations and dividing
this result by the number of Leased Fiber strands to determine the Leased
Fiber Monthly Lease Payment per Leased Fiber Strand. This result is then
multiplied by five percent (5%) and by the number of four (4) hour Outage
periods. For example, if the Leased Fiber Monthly Lease Payment for six (6)
Locations is $60,000.00, the Leased Fiber Monthly Lease Payment for each
Location would be $10,000.00, and if there were four (4) Leased Fiber
strands for each Location, the result would be $2,500.00 per Fiber Strand.
If the Outage affected two (2) strands at one Location for eight (8) hours,
the Outage Credit would be $2,500 x 5% x 2 = $125.00. For the purposes of
determining the Outage Credit pursuant to this Section 3.3, if the Product
Order provides for a Prepaid Lease Payment, then the Monthly Lease Payment
will be determined by dividing the Prepaid Lease Payment by the total
number of months of the Lease Term. The Outage Credit will be in the form
of a cash payment to Carrier by MFN if the Carrier has paid the Prepaid
Lease Payment in full or if this Agreement is terminated by either Party as
provided in Section 34 hereof. Outage Credits will not be credited or
payable for any period of time during which MFN personnel or contractors
are denied access to Carrier Locations or other facilities to remedy an
Outage.
3.4 If an Outage occurs and continues for a period longer than fifteen (15)
days for any reason other than "Force Majeure" as defined in this
Agreement, then at any time thereafter, unless and until such Outage is
corrected, either Party can terminate this Agreement and the Product Order
with respect to the Product subject to the Outage by written notice of such
termination delivered to the other Party. Notwithstanding the foregoing, if
such Outage occurs and continues by reason of a breach by a Party of its
obligations under this Agreement, such breaching Party will not have any
right to terminate this Agreement. The Outage Credit and right to terminate
will be the sole and exclusive remedy of Carrier and liability of MFN for
any Outage regardless of the cause of such Outage.
3.5 If all or part of the Product requires restoration, replacement or repair
by reason of an act or omission of Carrier, its employees, agents, or
contractors or any of Carrier's equipment or facilities used in connection
with the Product, such repair, replacement and/or restoration will be made
by MFN, at Carrier's sole expense, in accordance with MFN's then current
time and materials rates plus Applicable Taxes. In addition, Carrier will
not receive any Outage Credit by reason of the foregoing.
3.6 MFN may assign or subcontract to any third party any or all of its
performance obligations (including maintenance) under this Agreement and
Product Order at any time, without the consent of Carrier, provided that
MFN will remain obligated for such performance in accordance with the
terms of this Agreement.
3.7 MFN will have the right to inspect Carrier's use of the Product at any
time and from time to time during normal business hours upon at least
twenty four (24) hours' prior notice by MFN.
<PAGE> 9
4. USE AND OWNERSHIP OF THE PRODUCT
4.1 Carrier will not, by itself or through any agent or contractor, make any
repair to or replacement of the Product or the Network or any other
equipment or facilities provided by MFN in connection with the Product or
otherwise. Carrier will not install any equipment to be used with the
Product or use the Product in any manner which damages or interferes with
the Product or the Network.
4.2 Carrier will use the Product in full compliance with all applicable
federal, state and local laws, rules and regulations and all applicable
franchises, rights of way, leases, licenses, contracts and other
obligations to third parties with respects to the Network or Product.
Carrier will obtain and maintain in effect during the Lease term all
rights, leases, licenses, permits and governmental or non-governmental
approvals necessary for use of the Product by Carrier and its customers.
4.3 Carrier acknowledges and agrees that the Product is provided for use (1)
exclusively by Carrier and/or affiliated entities which control or are
controlled by or commonly controlled with Carrier ("Affiliates") named in
the Product Order (if applicable the term "Carrier" as used in this
Agreement will include any such Affiliates of Carrier), (2) customers of
Carrier and (3) only in the ordinary course of business of Carrier. For
the purposes of this Agreement, the ordinary course of business of Carrier
will not include the lease, license, sale or other transfer of the Leased
Fiber as "dark fiber" (as such term is uncommonly understood in the
telecommunications industry). Carrier will not under any circumstances (a)
permit or provide access to or use of the Product, in whole or part, to
any third party (other than a customer of Carrier in the ordinary course
of business of Carrier), pursuant to (by way of example and not in
limitation) sublease, license, sublicense or resale, or any other right to
use, or (b) share or otherwise utilize in conjunction with a third party
(including without limitation in any joint venture or as part of any
outsourcing activity), without the prior written consent of MFN, which
consent may be given or withheld in MFN's sole discretion. Any breach of
this Section 4.3 will be deemed to be a material breach of this Agreement
and in the event of such material breach MFN will have the right to
immediately terminate this Agreement, any applicable Product Orders and
Carrier's access to the Network, in addition to any and all rights and
remedies.
4.4 MFN retains all right, title and interest in and to the Product and the
Network to the points within the locations specified in the Product Order
at which MFN's facilities end and Carrier's facilities begin, subject only
to the grant of access and use provided to Carrier pursuant to this
Agreement.
4.5 MFN reserves the right to utilize unused external building access and
space within the building conduit(s) occupied by the Product at the
locations and otherwise, provided that such use does not interfere with or
hinder Carrier's use of its Product as permitted hereunder.
5. AUTHORIZATIONS; RELOCATION; CONDEMNATION
5.1 "Authorization(s)" will mean all material and applicable governmental or
non-governmental licenses, easements, rights of way, conduit, pole
attachment and any other facilities or property rights, licenses,
contracts, franchises, approvals, permits, orders, consents, and all other
rights required for MFN to operate and maintain the Network or provide the
Product to Carrier pursuant to this Agreement.
<PAGE> 10
5.2 MFN will use commercially reasonable efforts to have or obtain by the
Service Date, all Authorizations and to maintain or renew all such
Authorizations through the Initial Term and to replace such Authorizations
with reasonably suitable replacement Authorizations if any expire or are
terminated or discontinued during the Initial Term. If any Authorizations
are modified, terminated or discontinued and not replaced, and the loss of
such Authorizations threatens to cause or does cause material financial
harm to MFN, or prevents or materially interferes with MFN's control,
possession and/or use of the Network or ability to lease the Product or
materially and adversely affects the use by Carrier of the Product, then
MFN will at its option either (i) provide Carrier with comparable Product
or fiber optic capacity on portions of MFN's then existing Network (and/or
other MFN Networks, including networks belonging to or controlled by MFN
Affiliates) or on networks of third parties, or (ii) terminate this
Agreement with respect to the affected Product and rebate to Carrier the
pro rata portion of all Prepaid Lease Payments allocable to the terminated
Product and amortized over the remainder of the Lease Term. The foregoing
will be MFN's sole and exclusive liability and Carrier's sole and exclusive
remedy with respect to the foregoing.
5.3 If MFN receives notice of any request, intent or plan by any governmental
or non-governmental third party, to relocate any material part of the
Product or any material segment of MFN's Network used in the provision of
the Product, MFN will notify Carrier of such request, intent, or plan. If
MFN is required by any such third party to relocate any segment of MFN's
network used in providing the Product, MFN will give Carrier at least
sixty (60) days (or such lesser period of notice that MFN may have
received) prior written notice of any relocation ("Relocation Notice").
Together with the Relocation Notice, MFN will provide an estimate of the
cost of such relocation. MFN will relocate the Leased Fibers, and, to the
extent MFN is not reimbursed for the cost of such relocation by a third
party, governmental entity or otherwise, Carrier will pay its pro rata
share of the costs associated with the relocation of the Product; except,
however, to the extent that such relocation is the direct result of any
negligent or willful act or omission of MFN. MFN will use its
commercially reasonable efforts to secure an agreement for reimbursement
from any third party, governmental entity or otherwise, requiring any
relocation of the Network and the Product.
5.4 If any portion of the Network or the Product and/or the Authorizations in
or upon which the Product has been installed, become the subject of a
condemnation proceeding which is not dismissed within one hundred eighty
(180) days after the date of filing of such proceeding and which could
reasonably be expected to result in a taking by any governmental agency or
other party having the power of eminent domain for public purpose or use,
both Parties will be entitled, to the extent permitted under applicable
law, to participate in any condemnation proceedings for compensation by
either joint or separate awards for the economic value of their respective
interests in the Leased Fibers that are subject to such condemnation
proceeding.
6. WARRANTIES
6.1 MFN warrants to Carrier that upon the Service Date Product will operate in
accordance with the Specifications related thereto.
EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, MFN DISCLAIMS ALL
WARRANTIES WHETHER EXPRESS OR IMPLIED INCLUDING ANY AND ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE (i)
NETWORK OR PRODUCT, (ii) THE LEASE GRANTED PURSUANT HERETO, (iii) MAINTENANCE
SERVICES (iv) CONSTRUCTION AND INSTALLATION SERVICES, IF ANY, AND (v) ANY OTHER
SERVICE(S) (HEREINAFTER (iii) THROUGH (v)
<PAGE> 11
WILL COLLECTIVELY BE REFERRED TO AS "SERVICES") PROVIDED BY OR ON BEHALF OF MFN
HEREUNDER.
7. LIABILITY/INDEMNIFICATION
7.1 Except for the gross negligence or willful misconduct of a Party hereto
and except where a specific remedy is provided in this Agreement, the liability
of each Party to the other Party for damages will be limited to the total
Installation Charges the Payments paid or payable by Carrier for the Lease Term
during which the damages were incurred. In no event will either Party be liable
to the other Party for any incidental, indirect, special, consequential,
exemplary, or punitive damages arising out of or relating to this Agreement,
the lease granted hereunder, the Network, Product or Services provided
hereunder, including damages based on loss of revenues, profits or lost
business opportunities, regardless of whether the respective Party had been
advised of or could have foreseen the possibility of such damages.
7.2 Each Party agrees to indemnify, defend and hold the other, its officers,
directors, employees, agents and contractors harmless from and against all
loss, damage, liability, cost and expense (including reasonable attorney's fees
and expenses) by reason of any claims or actions by third parties for (i)
bodily injury, including death, (ii) damage, loss or destruction or any real or
tangible personal property (including without limitation the Network and
Product) which third party claims arise out of or relate to (a) any Product or
Services provided by or on behalf of MFN hereunder, (b) a Party's performance
of or failure to perform any term, condition or obligation under this
Agreement, (c) any act or omission of a Party's directors, agents, employees,
contractors, representatives or invitees, or (d) Carrier's or its customer's use
of the Product and conduct of their respective businesses including without
limitation the content of any video, voice or data carried by Carrier or its
customers on the Product or Network.
7.3 Except as otherwise set forth in this Agreement, nothing contained herein
will operate as a limitation on the right of either Party to bring an action
for damages against any third party based on any act or omission of such third
party as such act or omission may affect the construction, operation, or use of
the Product. Each Party agrees to execute such documents and provide such
commercially reasonable assistance, at the claiming Party's sole expense, as
may be reasonably necessary to enable the claiming Party to pursue any such
action against such third party.
8. CONFIDENTIALITY
1.1 The Parties acknowledge and agree that this Agreement and the information
each Party has provided or will provide in connection with this Agreement
or that the other Party learns or obtains from a source other than public
domain or from a source (including a Party) not in violation of any
obligation of confidentiality, including, without limitation, the terms and
conditions thereof, are and will be confidential and proprietary to the
Party providing such information (the "Providing Party"). The Party in
receipt of or learning or obtaining the confidential information (the
"Receiving Party") agrees not to distribute, use or disclose to any third
party the confidential information of the Providing Party.
8.2 Except as may be required by applicable legal requirements in the course
of defending or prosecuting a legal, insurance or other claim or as
required by applicable law, rule or regulation, each Party will restrict
dissemination of confidential information to only those persons who must
have access to such confidential information in order to perform their
respective rights or obligations hereunder. Each Party will promptly
notify the other Party of any such required disclosure to enable such
other Party to seek protective relief therefrom and shall cooperate as
such other Party may request in connection therewith.
<PAGE> 12
8.3 Customer may disclose the identity of MFN as a supplier of Customer, each
with the prior written consent from the other; which consent will not be
unreasonably withheld or delayed; provided, that no such disclosure
shall imply any endorsement of the disclosing Party or contain any
misleading reference to the nature of the relationship between the
Parties.
8.4 Each Party acknowledges and agrees that the information of a Party
described in this Section 8 constitutes valuable property of such Party
and that such Party will suffer irreparable injury not compensable by
money damages for which such Party will not have an adequate remedy at
law in the event of a breach by the other Party of the provisions of
this Section 8 and therefore such Party shall be entitled to injunctive
relief to prevent or curtail any such breach, threatened or actual. The
foregoing shall be without prejudice to or limitation on any other
rights a Party may have under this Agreement, at law or in equity.
9. NOTICES
Unless otherwise provided herein, all notices and communications
concerning this Agreement will be in writing and sent to the address (and
contact person) specified in the Product Order, or at such other address as may
be designated in writing by a Party. Unless otherwise provided herein, notices
will be sent by certified US Postal Service, return receipt requested, or by
commercial overnight delivery service, or by facsimile, and will be deemed
delivered, if sent by US Postal Service, five (5) days after deposit, if sent
by facsimile, upon verification or receipt or, if sent by commercial overnight
delivery service, one (1) business day after deposit therewith.
10. RENEWAL TERM
Provided that Carrier is not in breach of any of its material obligations under
this Agreement and subject to the conditions of this Agreement, Carrier may
renew the term of this Agreement for the Product for one (1) additional renewal
term upon the terms and conditions of this Agreement, except for the length of
such renewal term and the Installation and Lease Fee payments, which the
Parties will negotiate in good faith following Carrier's written request for
renewal delivered to MFN no earlier than one year before the scheduled
expiration date of the initial term and no later than ninety (90) days before
such expiration date.
11. TERMINATION/FORCE MAJEURE
11.1 If any of the following events of default occur, the non-breaching Party
(if MFN) will have the right to deny access by Carrier to the Product or Network
and (if either Party) to terminate this Agreement by written notice following
the expiration of any periods of time included in the following, such
termination to be effective in the on the date set forth in the written notice
of termination:
(a) If Carrier terminates any Product Order at any time before the
expiration of the Lease Term (whether before or after the Turnover Date) or
fails to make any payment hereunder within five (5) days or receipt of written
notice of late payment from MFN, MFN will have the right to terminate this
Agreement and deny access by Carrier to the Product or Network immediately
without further notice to Carrier.
(b) If a Party breaches any material term or condition of this
Agreement and such breach remains uncured thirty (30) days after delivery to the
breaching Party of written notice of such breach, unless the breach is of a
nature or involves circumstances requiring more than thirty (30) days to cure,
the time period may be extended for such time as will be reasonably required,
provided the defaulting party proceeds diligently to cure the breach.
<PAGE> 13
(c) A Party applies for or consents to the appointment of a receiver,
trustee or similar officer for it or any substantial part of its property or
assets, or any such appointment is made without such application or consent by
such Party and remains undischarged for a period of sixty (60) days; or
(d) A Party consents to the institution of a petition, application,
answer, consent, default of otherwise of any bankruptcy, insolvency or
reorganization and any such proceeding as instituted against such Party remains
undischarged for a period of sixty (60) days.
11.2 If any Authorization is modified, terminated or discontinued and not
replaced as provided in Section 5.2 of these General Terms and Conditions, and
MFN has not notified Carrier in writing within sixty (60) days after the
occurrence of such modification, termination or discontinuance that MFN will
provide additional or substitute Product or capacity as provided in Section
5.2, then and thereafter either party has the right, exercisable in its sole
discretion, to terminate the Product Order with respect to the affected Product
upon thirty (30) days prior written notice (or such other notice as is
practicable under the circumstances) without liability whatsoever by either
Party to the other Party or any party claiming by, through or under such other
Party other than the return to Carrier, of the unamortized portion of any
Prepaid Lease Payment as of the date of such termination as provided in Section
5.2.
11.4 Neither Party will be in breach of this Agreement resulting from
delay or prevention of performance of such Party which is caused by any act
attributable to an occurrence or an event of "Force Majeure" as defined herein.
Neither Party will, however, be relieved of liability for failure of
performance due to a claimed Force Majeure hereunder if such failure is due to
causes arising out of its own negligence or to removable or remedial causes
that it fails to remove or remedy using commercially reasonable efforts and
within a reasonable period of time.
11.5 The term "Force Majeure" will mean any cause beyond the control of
Carrier (of MFN, as applicable) which, by the exercise of due foresight,
Carrier (or MFN) could not reasonably have been expected to avoid, and which by
the exercise of reasonable diligence, Carrier (or MFN) will be unable to
overcome, including but no limited to action by governmental authority
including without limitation moratorium on any activities related to this
Agreement, third party labor dispute, flood, earthquake, fire, lightning,
epidemic war, riot, civil disturbance, sabotage and the like. The party
affected by an event of Force Majeure (the "Affected Party") will notify the
other party (the "Other Party") promptly of any occurrence or condition which,
in the Affected Party's reasonable opinion, warrants an extension of time. Such
notice will specify in detail the anticipated length of delay, the cause of the
delay and a timetable by which any remedial measures will be implemented.
12. ASSIGNMENT; SUCCESSION
12.1 Carrier will not assign any right nor delegate any duty under this
Agreement, in whole or in part, whether by operation of law or otherwise,
without the prior written consent of MFN. Upon any permitted assignment (or
delegation) hereunder, Carrier will remain jointly and severally responsible
for the performance under this Agreement, unless released in writing by MFN.
Any permitted assignee will expressly assume all liabilities hereunder prior to
the effectiveness of such assignment. Any attempted assignment or delegation
without such consent will be null and void and may be deemed by MFN, in its
sole discretion, to constitute a material breach of this Agreement.
12.2 This Agreement and Product Order will be binding upon and inure to
the benefit of the Parties hereto and their respective successors and permitted
assigns.
<PAGE> 14
13. GOVERNING LAW
13.1 THIS AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ITS PRINCIPLES
OF CONFLICTS OF LAWS.
14. SURVIVAL
The Parties' respective representation, warranties, and covenants, together
with obligations of indemnification, confidentiality and limitations on
liability will survive the expiration, termination or rescission of this
Agreement and continue in full force and effect.
15. ENTIRE AGREEMENT
This Agreement, Product Order, Exhibits and all addenda attached hereto
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede any and all prior negotiations,
understandings, and agreement with respect hereto, whether oral or written.
16. REMEDIES CUMULATIVE
Except as otherwise expressly provided, the rights and remedies set forth
in this Agreement will be in addition to, and cumulative of, all other rights
and remedies at law or in equity.
17. REPRESENTATIONS, WARRANTIES AND COVENANTS
Each Party represents, warrants and covenants to the other that (a) it is a
corporation, limited liability company, partnership, or other legal entity,
duly organized, validly existing and in good standing under the laws of the
state of its organization, (b) it has all requisite power and authority to
enter into and perform its obligations under this Agreement and Product Order
and (c) this Agreement, when executed, will become the legal, valid and binding
obligation of such Party.
18. MISCELLANEOUS
18.1 The covenants, undertakings, and agreements set forth in this Agreement
will be solely for the benefit of and will be enforceable only by the Parties
hereto or their respective successors or permitted assigns.
18.2 The headings of the Sections in this Agreement are strictly for
convenience and will not in any way be construed as amplifying or limiting any
of the terms, provisions or conditions thereof.
18.3 In the event any term of this Agreement will be held valid, illegal or
unenforceable, in whole or in part, neither the validity of the remaining part
of such term nor the validity of the remaining terms of this Agreement will be
in any way affected thereby.
18.4 This Agreement may be amended only by a written instrument executed by the
Parties.
18.5 No failure to exercise and no delay in exercising, on the part of either
Party hereunder, any right, power or privilege hereunder will operate as a
waiver hereof, except as expressly provided herein.
18.6 This Agreement may be executed in multiple counterparts, each of which
will constitute one and the same instrument.
<PAGE> 15
AboveNet Communications, Inc.
By: /s/ DAVE RAND
---------------------------------
Name: Dave Rand
Title: CTO
METROMEDIA FIBER NETWORK SERVICES, INC.
By: /s/ HOWARD M. FINKELSTEIN
---------------------------------
Name: Howard M. Finkelstein
Title: President
<PAGE> 1
EXHIBIT 10.29
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 26, 1998,
by and between Abovenet Communications, Inc. ("Borrower") and Silicon Valley
Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, a Loan and Security Agreement, dated May 22, 1998, as may be
amended from time to time, (the "Loan Agreement"). The Loan Agreement provided
for, among other things, a Committed Revolving Line in the original principal
amount of Seven Hundred Fifty Thousand Dollars ($750,000). Defined terms used
but not otherwise defined herein shall have the same meanings as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement and the
Intellectual Property Security Agreement, dated May 22, 1998.
Hereinafter, the above-described security documents and guarantees, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Waiver of Covenant Default.
1. Bank hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
Maximum Quarterly Loss covenant as of the quarter ended September
30, 1998. Bank's waiver of Borrower's compliance of this covenant
shall apply only to the foregoing period. Accordingly, for the
quarter ending December 31, 1998, Borrower shall be in compliance
with this covenant, as amended herein.
Bank's agreement to waive the above-described default (1) in no
way shall be deemed an agreement by the Bank to waive Borrower's
compliance with the above-described covenant as of all other
dates and (2) shall not limit or impair the Bank's right to
demand strict performance of this covenant as of all other dates
and (3) shall not limit or impair the Bank's right to demand
strict performance of all other covenants as of any date.
B. Modification(s) to Loan Agreement.
1. The Sub-Section (iii) of Section 6.7 entitled "Financial
Covenants" is hereby amended to read, in its entirety, as
follows:
(iii) Maximum Quarterly Losses. Borrower shall not suffer
quarterly losses in excess of: $6,351,000 for the quarter ending
December 31, 1998; and $7,062,000 for the quarter ending March
31, 1999.
1
<PAGE> 2
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
ABOVENET COMMUNICATIONS, INC. SILICON VALLEY BANK
By: /s/ KEVIN HOULIGAN By: /s/ [ILLEGIBLE]
---------------------------------- ----------------------------------
Name: Kevin Houligan Name: [ILLEGIBLE]
-------------------------------- --------------------------------
Title: VP, Finance & Controller Title: VP
------------------------------- -------------------------------
2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,625,600
<SECURITIES> 983,200
<RECEIVABLES> 755,500
<ALLOWANCES> 130,000
<INVENTORY> 0
<CURRENT-ASSETS> 12,902,400
<PP&E> 12,089,000
<DEPRECIATION> 973,500
<TOTAL-ASSETS> 24,986,000
<CURRENT-LIABILITIES> 5,788,600
<BONDS> 0
0
19,132,900
<COMMON> 69,200
<OTHER-SE> 2,047,900
<TOTAL-LIABILITY-AND-EQUITY> 24,986,000
<SALES> 1,793,100
<TOTAL-REVENUES> 1,793,100
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,117,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,800
<INCOME-PRETAX> (662,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (662,000)
<EPS-PRIMARY> (3.14)
<EPS-DILUTED> (3.14)
</TABLE>
