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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 21, 1998.
REGISTRATION NO. 333-63141
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
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. [ ]
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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. [ ]
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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 OCTOBER 21, 1998
SHARES
[ABOVENET LOGO]
COMMON STOCK
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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 $ and
$ per share. See "Underwriting" for 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.
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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 $ .
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 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 STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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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 assumes (i) the Underwriters'
over-allotment option is not exercised, (ii) the reincorporation of the Company
in the State of Delaware and the associated exchange of one share of Common
Stock and one share of 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 prior to this offering, (iii) the exercise prior to the
closing of this offering of warrants to purchase 197,978 shares of Series B
Preferred Stock and (iv) 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.
3
<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, IntelliChoice, Inc., iXL Holdings, Inc., Liquid
Audio, Inc., 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 will
reincorporate in Delaware prior to this offering. 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.
4
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THE OFFERING
Common Stock offered by the Company....... shares
Common Stock to be outstanding after the
Offering(1)............................... 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).......... $(0.39) $ (5.73) $(12.93) $ (1.96) $ (4.59)
====== ======= ======= ======= =======
Shares used in basic and diluted loss per
share(2)................................... 200 315 420 337 730
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
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PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
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BALANCE SHEET DATA:
Cash and equivalents........................................ $10,626 $10,873 $
Working capital............................................. 7,114 7,361
Total assets................................................ 24,986 25,234
Long-term obligations, net of current portion............... 6,513 6,513
Total stockholders' equity.................................. 12,685 12,932
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(1) Based on shares outstanding as of September 30, 1998. Excludes, as of
September 30, 1998, (i) 2,489,220 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
$2.08 per share and 506,972 shares of Common Stock reserved for issuance
prior to this offering under the 1997 Stock Option Plan, (ii) 91,750 shares
of Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $3.53 per share, (iii) 20,000 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 2,750,000
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 197,978
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 shares of Common Stock by the Company
at the assumed initial public offering price of $
per share (after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company).
5
<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 new ISX facility of approximately 100,000 square feet,
including approximately 50,000 square feet of co-location space, 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
6
<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, the Company's 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 an approximately 100,000 square foot ISX facility, including
approximately 50,000 square feet of co-location space, 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
7
<PAGE> 9
associated with significant construction projects, including construction delay,
cost estimation errors or overruns, equipment and material delays or shortages,
inability to obtain necessary permits on a timely basis and other factors, many
of which are beyond the Company's control. There can be no assurance with
respect to the cost, timing or extent of any expansion or that the Company will
be successful in expanding its operations, or developing the ISX facility
planned for San Jose, California, as well as any new ISX facilities that the
Company may want to establish in the future, on a timely basis, or at all. The
Company's inability to establish its planned facility or to effectively manage
its expansion would have a material adverse effect upon the Company's business,
results of operations and financial condition. Furthermore, the Vienna, Virginia
ISX facility and, if completed, the new San Jose ISX facility, will result in
substantial new fixed and operating expenses, including expenses associated with
hiring, training and managing new employees, purchasing new equipment,
implementing power and redundancy systems, implementing multiple data
communication and telecommunication connections, leasing additional real estate
and depreciation. In addition, the Company will need to continue to implement
and improve its operational and financial systems. If revenue levels do not
increase sufficiently to offset these new expenses, the Company's operating
results will be materially adversely impacted in future periods. There can be no
assurance that the Company will accurately anticipate the customer demand for
new facilities or that the Company will attract a sufficient number of
customers.
The Company also intends to make strategic minority investments in joint
ventures and foreign companies that develop ISX facilities in Europe and Asia
and to license its trademarks and technology to such entities. If the Company
makes such investments, the Company will be dependent on these joint ventures
and foreign companies to establish and operate ISX facilities. The ability of
these joint ventures and foreign companies to successfully establish and operate
ISX facilities is subject to a number of risks over which the Company will have
little or no control, as a result of its anticipated minority ownership in such
entities. There can be no assurance that these entities will be able to obtain
the necessary data communications and telecommunications infrastructure in a
cost-effective manner or compete effectively in international markets. In
addition, there can be no assurance that any of these investments, if made, will
result in the establishment of ISX facilities, or that such investment
relationships will not be disrupted. Furthermore, to the extent that such
entities use the AboveNet brand name and do not provide the same level of
performance and service as the Company, their operations could have a material
adverse effect on the Company's reputation and brand equity. Furthermore,
certain foreign governments have enforced laws and regulations related to
content distributed over the Internet that are more restrictive than those
currently in place in the United States. There can be no assurance that one or
more of these factors will not have a material adverse effect on the Company's
global ISX strategy, business, results of operations and financial condition.
Intense Competition. The market served by the Company is intensely
competitive. There are few substantial barriers to entering the co-location
service business, and the Company expects that it will face additional
competition from existing competitors and new market entrants in the future. The
Company believes that participants in this market must grow rapidly and achieve
a significant presence in the market in order to compete effectively. There can
be no assurance that the Company will have the resources or expertise to compete
successfully in the future. In addition, many of the Company's current and
potential competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than the
Company. As a result, certain of these competitors may be able to develop and
expand their network infrastructures and service offerings more quickly, adapt
to new or emerging technologies and changes in customer requirements more
quickly, take advantage of acquisitions and other opportunities more readily,
devote greater resources to the marketing and sale of their services and adopt
more aggressive pricing and incentive policies than can the Company. In an
effort to gain market share, certain of the Company's competitors have offered
co-location services similar to those of the Company at lower prices than those
of the Company or with incentives not 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.
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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, and its Vice President of Construction and Real Estate and, 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 Chief Financial Officer and 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
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<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-
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<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
11
<PAGE> 13
markets in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. In the event that any
such acquisitions occur, there can be no assurance that the Company's business,
results of operations and financial condition would not be materially adversely
affected.
Dependence on Growth of Internet Use and Internet Infrastructure
Development. The increased use of the Internet for retrieving, sharing and
transferring information among businesses, consumers, suppliers and partners has
only recently begun to develop, and the Company's success will depend in large
part on continued growth in the use of the Internet, which in turn will depend
on a variety of factors including security, reliability, cost, ease of access,
quality of service and necessary increases in bandwidth availability. The
adoption of the Internet for information retrieval and exchange, commerce and
communications, particularly by those enterprises that have historically relied
upon alternative means of commerce and communications, generally will require
the acceptance of a new medium of conducting business and exchanging
information. Demand for and market acceptance of the Internet are subject to a
high level of uncertainty and are dependent on a number of factors, including
growth in consumer access to and acceptance of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences and increases in user bandwidth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, the Company's business, results of operations and
financial condition could be materially adversely affected. The recent growth in
the use of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of routers and switches, telecommunications links and
other components forming the infrastructure of the Internet by ISPs and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of the
Company's services. Potentially increased performance provided by the services
of the Company and others is ultimately limited by and reliant upon the speed
and reliability of the networks operated by third parties. Consequently, the
emergence and growth of the market for the Company's services is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion.
Rapid Technological Change; Evolving Industry Standards. The Company's
future success will depend, in part, on its ability to offer services that
address the increasingly sophisticated and varied needs of its current and
prospective customers and to respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis.
Mission-critical Internet operations are complex and are characterized by
rapidly changing and unproven technology, evolving industry standards, changes
in customer needs, emerging competition and frequent new service introductions.
There can be no assurance that future advances in technology will be beneficial
to, or compatible with, the Company's business, that the Company will be able to
incorporate such advances on a cost-effective or timely basis into its business
or that such advances will not make the Company's services unnecessary or less
cost-effective than using the new technology. Moreover, technological advances
may have the effect of encouraging certain of the Company's current or future
customers to rely on in-house personnel and equipment to furnish the services
currently provided by the Company. In addition, keeping pace with technological
advances in the Company's industry may require substantial expenditures and lead
time. Although the Company currently intends to support emerging standards,
there can be no assurance that industry standards will be established or, that
if they become established, the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
The failure of the Company to conform to prevailing standards, or the failure of
a common standard to emerge, could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
there can be no assurance that products, services or technologies developed by
others will not render the Company's services uncompetitive, unnecessary or
obsolete.
Security Risks. Customer operations at the Company's facilities have in the
past experienced, and may in the future experience, delays or interruptions in
service as a result of the accidental or intentional actions of 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.
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<PAGE> 14
Although the Company implements security procedures and systems, such procedures
and systems have been circumvented in the past, and there can be no assurance
that unauthorized access, accidental or intentional actions and other
disruptions will not occur in the future. The Company was recently sued by a
customer alleging that the Company negligently allowed the customer's consultant
access to the customer's servers located at the Company's San Jose facility. The
costs required to minimize security problems could be prohibitively expensive
and the efforts to address such problems could result in interruptions, delays
or cessation of service to the Company's customers, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet, especially as a means of
conducting commercial transactions. 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
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<PAGE> 15
advertise products or services. This practice, known as "spamming," can lead to
complaints against service providers that enable such activities, particularly
where recipients view the materials received as offensive. There can be no
assurance certain ISPs and other online services companies would not deny
network access to the Company if undesired content or spamming were to be
transmitted from servers hosted by the Company, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Limited Protection of Proprietary Technology; Risk of Infringement. The
Company relies on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in its services. The Company has no patented technology that
would preclude or inhibit competitors from entering the Company's market. There
can be no assurance that the steps taken by the Company to protect its
intellectual property will prove sufficient to prevent misappropriation of the
Company's technology or to deter independent third-party development of similar
technologies. The laws of certain foreign countries may not protect the
Company's services or intellectual property rights to the same extent as do the
laws of the U.S. To date, the Company has not been notified that the Company
infringes the proprietary rights of third parties, but there can be no assurance
that third parties will not claim infringement by the Company with respect to
current or future products. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements might not be available on terms acceptable to the Company or at all.
As a result, any such claim could have a material adverse effect upon the
Company's business, results of operations and financial condition.
Uncertain Need and Availability of Additional Funding. The Company expects
to incur significant expenditures as part of its planned expansion, including
increases in sales and marketing expenses and expenditures for new and expanded
co-location facilities. Although the Company believes that, following this
offering, its cash reserves and available borrowings will be adequate to fund
the Company's operations for at least the next 12 months, there can be no
assurance that such sources will be adequate or that additional funds will not
be required either during or after such 12 month period. 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."
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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 % 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 shares of the Company's Common Stock. Based on the
initial public offering price of per share, the value of the shares held by
the existing stockholders following this offering will be approximately $
million, representing an aggregate increase of approximately $ million over
the amount 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 1,408,354 shares of the Company's Common Stock prior to the
offering. Based upon the initial public offering price of $ per share, the
value of the shares held by these stockholders will be approximately $
million. See "-- Immediate and Substantial Dilution," "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
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<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
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 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, no Restricted Shares will be
eligible for sale in the public market. Following the expiration of 180-day
lock-up agreements with the representatives of the Underwriters,
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 , 1998, there were
outstanding options and warrants to purchase Common
Stock (of which warrants for shares are expected to be exercised on or
before the closing of this offering). 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
Restricted Shares, options and warrants to purchase
shares of Common Stock of the Company 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 $ 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."
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby will be approximately $ (approximately
$ if the Underwriter's over-allotment option is exercised in full)
assuming an initial public offering price of $ 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 $20 to $25 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.
17
<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 197,978 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 shares of Common
Stock offered hereby at an assumed initial public offering price of $ 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; 8,000,000 shares
authorized; 11,494,500 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; 12,000,000 shares
authorized, 815,840 shares issued and outstanding,
actual; 60,000,000 shares authorized, 12,508,318
shares issued and outstanding, pro forma;
60,000,000 shares authorized, shares
issued and outstanding, pro forma as adjusted...... 69 21,540
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
------- -------- -------
Total capitalization.................................... $19,198 $ 19,445 $
======= ======== =======
</TABLE>
- ---------------
(1) Excludes as of September 30, 1998: (i) 2,489,220 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 $2.08 per share and 506,972 shares of Common Stock reserved for
future issuance thereunder and (ii) 91,750 shares of Common Stock issuable
upon exercise of outstanding warrants at a weighted average exercise price
of $3.53 per share and (iii) 20,000 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 2,750,000 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.
18
<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 197,978 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 $1.03 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 $ , or $ per share
after giving effect to the sale of shares of Common Stock offered by the
Company in this offering at an assumed initial public offering price of
$ per share and the application of the estimated net proceeds therefrom.
This represents an immediate increase in pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of $ 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............. $
Pro forma net tangible book value per share as of
September 30, 1998..................................... $ 1.03
Increase per share attributable to new investors..........
-------
Adjusted pro forma net tangible book value per share after
offering..................................................
--------
Net tangible book value dilution per share to new
investors................................................. $
========
</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 $ 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).......... 12,508,318 % $21,540,600 % $
New investors.....................
----------- ----- ----------- -----
Total................... 100.0% $ 100.0%
=========== ===== =========== =====
</TABLE>
- ---------------
(1) Excludes as of September 30, 1998: (i) 2,489,220 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 $2.08 per share and 506,972 shares of Common Stock
reserved for future issuance thereunder and (ii) 91,750 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted average
exercise price of $3.53 per share and (iii) 20,000 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
2,750,000 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.
19
<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)......... $(0.39) $ (5.73) $(12.93) $(1.96) $ (4.59)
====== ======= ======= ====== =======
Shares used in basic and diluted loss per
share(1).................................. 200 315 420 337 730
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.
20
<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 an approximately 100,000 square foot ISX
facility, including approximately 50,000 square feet of co-location space, 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
21
<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. 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 an additional approximately $467,000 in stock-based compensation
expense 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>
22
<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
23
<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.
24
<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 800,000 fully vested shares of Series B Preferred Stock with a fair
value of $0.75 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.
25
<PAGE> 27
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.
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>
26
<PAGE> 28
<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>
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."
27
<PAGE> 29
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.
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 or 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.
28
<PAGE> 30
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 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
expires in May 1999.
The Company currently expects to utilize $20 to $25 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.
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."
29
<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
- ---------------
1International 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.
30
<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-
31
<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'
32
<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
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<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 build an approximately 100,000
square foot San Jose facility, including approximately 50,000 square feet of
co-location space, near its San Jose facility in 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
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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.
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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."
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<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>
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<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 September 30,
1998:
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
INTERNET CONTENT
PROVIDERS WEB HOSTING COMPANIES ISPS
- ------------------------------------------------------------------------------------------------------------
Supernews, Inc. Galaxy-NET Telecom Hurricane Electric
Electronic Arts Inc. iXL Holdings, Inc. LinkAGE Online Limited
Visual Dynamics LLC Astra Labs Internet Gateway Corp.
RealNetworks, Inc. VirtuaLynx Internet, LLC BigBiz Internet Services
IntelliChoice, Inc. WebPresence, Inc. Action Systems, Inc.
Creative Labs, Inc. The Web Zone, Inc. Innetix
Image Lock ProHosting PH Communications
MPX Data Systems, Inc. Bay Area Gold, Inc. Direct Network Access, Ltd.
IQ.commerce Corporation Trakprops, Inc. Got.Net Corporation
Liquid Audio, Inc. CNET Download.com Dacom America
- ------------------------------------------------------------------------------------------------------------
</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.
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<PAGE> 40
WEB HOSTING COMPANIES
iXL Holdings, 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
39
<PAGE> 41
its sales engineers 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
40
<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
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<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
42
<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,
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<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 build an approximately 100,000 square feet
facility near its San Jose, California facility to be completed in 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."
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, and
their ages as of October 12, 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
Executive Vice President, Chief Financial Officer and
Stephen P. Belomy............ 39 Secretary
David Dembitz................ 45 Senior Vice President of Sales and Marketing
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
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 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
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<PAGE> 47
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 and Chief Financial
Officer since January 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.
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 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.
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<PAGE> 48
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.
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 December 1994, 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.
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 distributor company, which
incorporated 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.
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.
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
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<PAGE> 49
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 in 1957.
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. Tom Shao and Frank R. Kline 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. Kimball
W. Small, and Sherman Tuan and James Sha 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 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
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<PAGE> 50
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.
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.
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<PAGE> 51
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) 108,000(3)
Warren J. Kaplan
President, Chief Operating Officer.............. 71,635(4) --(5) 324,000(6)
Stephen P. Belomy
Executive Vice President and Chief Financial
Officer......................................... 112,500 -- 68,000
David Rand
Chief Technology Officer........................ 103,333(7)(8) -- 48,000(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 210,400 shares
of Common Stock at an exercise price of $7.50 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 44,000 shares granted for services rendered
as a consultant, of which the option to purchase 14,667 shares has been
cancelled. Mr. Kaplan's option for 280,000 shares contains an antidilution
clause which provides that, prior to any underwritten initial public
offering of the Company's securities, the number of option shares under the
Option Grant will always be equal to 5% of the Company's outstanding common
stock minus 44,000 shares (the "Anti-Dilution Clause"). Under the terms of
the Anti-Dilution Clause, Mr. Kaplan received an additional 423,780 option
shares with an exercise price of $0.25 per share on July 31, 1998 and an
additional 48,177 option shares with an exercise price of $0.25 per share on
September 4, 1998. 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 162,000 shares
of Common Stock at an exercise price of $7.50 per share.
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<PAGE> 52
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended June 30, 1998 to each of the Named Executive Officers. No
stock appreciation rights were granted during such fiscal year.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
------------------------------------------------------------ ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM($)(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.......... 100,000(1) 11.18 0.25 12/09/07 15,722 39,844
8,000(2) * 0.75 1/26/08 3,773 9,562
Warren J. Kaplan...... 44,000(3) 4.92 0.13 11/09/07 3,597 9,116
280,000(4) 31.30 0.25 11/09/07 44,023 111,562
Stephen P. Belomy..... 60,000(5) 6.71 0.25 12/09/07 9,433 23,906
8,000(2) * 0.75 1/26/08 3,773 9,562
David Rand............ 40,000(5) 4.47 0.25 12/09/07 6,289 15,937
8,000(2) * 0.75 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 14,667 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 $0.25
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, the number
of option shares under the Option Grant will always be equal to 5% of the
Company's outstanding Common Stock less 29,333 shares (the "Anti-Dilution
Clause"). Under the terms of the Anti-Dilution Clause, Mr. Kaplan received
an additional 423,780 option shares with an exercise price of $0.25 per
share on July 31, 1998 and an additional 48,177 option shares with an
exercise price of $0.25 per share on September 4, 1998. 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 894,600 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 $0.25 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 280,000 shares of Common Stock at an exercise price of $0.25 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
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<PAGE> 53
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.
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.......... -- -- 248,000 140,000 771,500 451,500
Warren J. Kaplan...... 105,333 64,833 23,555 180,444 70,665 541,332
Stephen P. Belomy..... 12,083 37,708 89,250 -- 270,000 --
David Rand............ -- -- 138,000 100,000 427,250 317,500
</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 $3.25 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 2,500,000. 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) 500,000 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 500,000 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 1,000,000
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
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<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 15,000 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 5,000 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 15,000-share grant and a 5,000-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
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<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,
250,000 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 250,000. 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 5,000 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,
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<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 280,000 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 under the Option will always
be equal to 5% of the Company's outstanding Common Stock less 29,333 shares (the
"Anti-Dilution Clause"). Under the terms of the Anti-Dilution Clause, Mr. Kaplan
received an additional 423,780 shares on July 31, 1998 and an additional 48,177
shares on September 4, 1998. 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
$0.25 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."
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<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.
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<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
1,640,000 shares of Series A Preferred Stock at purchase price of $0.25 per
share; 1,811,047 shares of Series B Preferred Stock at a weighted-average
purchase price of $0.89 per share; 3,204,800 shares of Series C Preferred Stock
at a weighted-average purchase price of $1.21 per share; and 3,384,613 shares of
Series D Preferred Stock at a purchase price of $3.25 per share; and 654,040
shares of Series E Preferred Stock at a purchase price of $6.25 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)................ -- 240,022 800,000 307,692 --
Kline Hawkes California SBIC,
L.P.(1)(2)................. -- -- -- 1,230,769 64,000
Techgains Corp. and
Technology Associates
Management Co.,
Ltd.(1)(3)................. -- -- 884,000 307,692 --
Primus Technology Fund(1).... -- -- -- 615,384 179,200
Peter C. Chen(1)(4).......... 440,000 273,726 -- -- --
Warren J. Kaplan(5).......... -- -- 20,000 -- 4,000
Kimball Small(6)............. -- 520,000 -- -- --
Spring Creek
Investments(7)............. -- -- -- 153,846 --
Jerry Chen(8)................ -- 54,000 -- -- --
</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 14,000 shares of the
Company's Common Stock at a per share exercise price of $3.25 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
166,666 shares of Common Stock of the Company at an exercise price of $0.075 per
share to Stephen Belomy, the Company's Executive Vice President, Chief Financial
Officer 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.
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<PAGE> 59
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 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 43,156 shares of the Company's Common Stock at a
per share exercise price of $1.25.
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 47,000
shares of the Company's Common Stock at a per share exercise price of $1.25.
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 162,000
shares of Common Stock of the Company at an exercise price of $7.50 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."
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<PAGE> 60
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.
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<PAGE> 61
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 14, 1998, and as adjusted to
reflect the sale by the Company of 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>
Peter C. Chen(3)......................................... 756,882 6.0%
Warren J. Kaplan(4)...................................... 407,753 3.2%
Frank R. Kline(5)........................................ 1,294,769 10.3%
James Sha(6)............................................. 153,846 1.2%
Tom Shao(7).............................................. 1,191,692 9.5%
Kimball Small(8)......................................... 653,333 5.2%
Sherman Tuan(9).......................................... 636,900 4.9%
Fred A. Vierra(10)....................................... 15,000 0.1%
Stephen P. Belomy(11).................................... 209,333 1.7%
David Rand(12)........................................... 300,000 2.3%
All directors and officers as a group (17 persons)(13)... 6,047,758 43.4%
5% STOCKHOLDERS
- ---------------------------------------------------------
Hui-Tzu Hu(14)........................................... 1,394,714 11.1%
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.(15)................... 1,294,769 10.3%
11726 San Vicente Blvd.
Suite 300
Los Angeles, California 90049
Techgains Corp. and Technology Associates................ 1,191,692 9.5%
Management Co., Ltd.(16)
2378 W. 239th Street
Torrance, California 90501
Primus Technology Fund(17)............................... 808,584 6.5%
16th Floor, 35 Sec. 3
Min Chuan E. Road
Taipei, Taiwan R.O.C.
</TABLE>
- ---------------
(1) Applicable percentage ownership is based on 12,533,318 shares of Common
Stock and Preferred Stock (on an as converted to Common Stock basis)
outstanding as of October 14, 1998 and 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 14, 1998 are deemed to be beneficially owned by the person
holding such options or warrants 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.
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<PAGE> 62
(3) Includes 43,156 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.
(4) Includes 251,621 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 14, 1998. Includes 20,000 shares of
Common Stock and 4,000 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 384,332 shares of Common
Stock issuable pursuant to options currently subject to vesting after 60
days from October 14, 1998 shall become immediately exercisable upon the
closing of this offering which will result in Mr. Kaplan beneficially
owning 805,286 shares, representing ____% of the Company's outstanding
Common Stock. Mr. Kaplan is a director and an officer of the Company.
(5) Includes 1,294,769 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.
(6) Includes 153,846 shares held by Spring Creek Investments. Mr. Sha, a
director of the Company, is a principal of Spring Creek Investments.
(7) Includes 1,191,692 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.
(8) Includes 133,333 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 14, 1998. Includes all shares held in
community property with Martha Small. Mr. Small is a director of the
Company.
(9) Includes 358,400 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 14, 1998. Mr. Tuan is a director and
an officer of the Company.
(10) Mr. Vierra is a director of the Company.
(11) Includes 89,250 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 14, 1998. Mr. Belomy is an officer of
the Company.
(12) Includes 300,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 14, 1998. Mr. Rand is an officer of
the Company.
(13) Includes 1,408,354 shares of Common Stock issuable pursuant to options
exercisable within 60 days of October 14, 1998. See also footnotes 3 and 5.
(14) Includes 47,000 shares issuable pursuant to a warrant to purchase Series B
Preferred Stock which will expire on the closing of this offering.
(15) 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.
(16) 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.
(17) Includes 14,000 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.
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<PAGE> 63
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. Immediately after the
completion of this offering and assuming no exercise of the Underwriters' over-
allotment option, there will be an aggregate of shares of Common
Stock outstanding, shares of Common Stock will be issuable upon
exercise of outstanding options and warrants and no shares of Preferred Stock
will be issued and outstanding.
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 12,508,318 shares of Common Stock
outstanding that were held of record by 91 stockholders. There will be
shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and no exercise of options and warrants then
outstanding) 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
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<PAGE> 64
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 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
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<PAGE> 65
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."
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, the holders of 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
Upon this offering, warrants to purchase 102,250 shares of Common Stock of
the Company at a weighted average exercise price of $4.19 will be outstanding.
In addition, a warrant to purchase 20,000 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.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have shares of
Common Stock outstanding. Of this amount, the shares offered hereby will be
available for immediate sale in the public market as of the date of this
Prospectus. Approximately 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 Freely tradable shares sold in offering and shares salable
Effectiveness..... under Rule 144(k) that are not subject to 180-day lockup
180 days............ Lockup released; shares salable under Rule 144, 144(k) or
701
Thereafter.......... 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
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 is unable to estimate the number of shares that will be sold
under Rule 144, since this will depend on the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to this offering, there has been no public market for the Common Stock,
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the offering. Any future sale of
substantial amounts of the Common Stock in the open market may adversely affect
the market price of the Common Stock offered hereby.
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. 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.
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 the date of this Prospectus, the
holders of options exercisable into approximately shares of Common
Stock will be eligible to sell their shares upon the expiration of the 180-day
Lockup Period, or subject in certain cases to vesting of 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 stock plans within 180 days after the date of
this Prospectus, 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
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."
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<PAGE> 67
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.............................................
=========
</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
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
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, each holder
(including such officers and directors) of shares of Common Stock 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. However, CIBC Oppenheimer 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
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<PAGE> 68
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 4,000 shares of the Company's Common
Stock at an exercise price of $3.25 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.
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<PAGE> 69
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.
68
<PAGE> 70
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> 71
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 to 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 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
events assuming that from August 7, 1998 to the effective date of such events,
no other events shall have occurred that would affect the accompanying financial
statements or notes thereto.
Deloitte & Touche LLP
San Jose, California
October 19, 1998
F-2
<PAGE> 72
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, 14,000,000
shares authorized:
Series A convertible preferred stock; 1,640,000
shares designated, issued and outstanding
(none pro forma).............................. 410,000 410,000 410,000 --
Series B convertible preferred stock; 2,840,000
shares designated; 1,600,000, 2,611,047 and
2,611,047 issued and outstanding, respectively
(none pro forma).............................. 1,200,000 2,323,100 2,323,100 --
Series C convertible preferred stock; 3,240,000
shares designated; none, 3,204,800 and
3,204,800 issued and outstanding, respectively
(none pro forma).............................. -- 3,873,400 3,873,400 --
Series D convertible preferred stock; 3,400,000
shares designated; none, none, and 3,384,613
shares issued and outstanding, respectively
(none pro forma).............................. -- -- 10,771,000 --
Series E convertible preferred stock; 2,800,000
shares designated; none, none, and 654,040
shares issued and outstanding, respectively
(none pro forma).............................. -- -- 3,846,400 --
Common stock, $0.001 par value, 20,000,000 shares
authorized; 325,000, 582,957, and 815,840 common
shares issued and outstanding respectively
(12,508,318 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> 73
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......................... $ (0.39) $ (5.73) $ (12.93) $ (1.96) $ (4.59)
======== =========== =========== =========== ===========
Shares used in basic and diluted
loss per share................ 200,000 314,589 419,687 337,000 729,798
======== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 74
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................. -- -- 200,000 5,000 -- -- -- 5,000
Net loss................ -- -- -- -- -- -- (77,600) (77,600)
----------- ----------- ------- ------- ---------- ----------- ------------ ------------
Balances, June 30,
1996.................. -- -- 200,000 5,000 -- -- (77,600) (72,600)
Issuance of common
stock................. -- -- 100,000 2,500 -- -- -- 2,500
Issuance of Series A
convertible preferred
stock................. 1,640,000 410,000 -- -- -- -- -- 410,000
Exercise of common stock
options............... -- -- 25,000 600 -- -- -- 600
Issuance of Series B
convertible preferred
stock................. 800,000 600,000 -- -- -- -- -- 600,000
Issuance of Series B
convertible preferred
stock in conjunction
with acquisition of
DSK, Inc. (Note 8).... 800,000 600,000 -- -- -- -- -- 600,000
Net loss................ -- -- -- -- -- -- (1,802,800) (1,802,800)
----------- ----------- ------- ------- ---------- ----------- ------------ ------------
Balances, June 30,
1997.................. 3,240,000 1,610,000 325,000 8,100 -- -- (1,880,400) (262,300)
Exercise of common stock
options............... -- -- 257,957 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................. 1,011,047 1,011,100 -- -- -- -- -- 1,011,100
Issuance of Series C
convertible preferred
stock................. 3,204,800 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.................. 7,455,847 6,606,500 582,957 38,900 1,861,500 (540,100) (7,305,400) 661,400
Issuance of Series D
convertible preferred
stock*................ 3,384,613 10,771,000 -- -- -- -- -- 10,771,000
Issuance of Series E
convertible preferred
stock*................ 654,040 3,846,400 -- -- -- -- -- 3,846,400
Exercise of common stock
options*.............. -- -- 232,883 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*................. 11,494,500 $21,223,900 815,840 $69,200 $2,613,700 $ (565,800) $(10,656,300) $ 12,684,700
=========== =========== ======= ======= ========== =========== ============ ============
</TABLE>
- ---------------
* Unaudited
See notes to financial statements.
F-5
<PAGE> 75
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> 76
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> 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)
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 197,978 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> 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)
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
791,926 shares of Series B convertible preferred stock at $1.25 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000 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) 1,011,047
shares of Series B convertible preferred stock and (ii) warrants to acquire
197,978 shares of Series B convertible preferred stock at $1.25 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
3,204,800 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 $3.25 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> 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)
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, the Company
F-10
<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)
issued to the bank a warrant to purchase 2,000 shares of the Company's Series D
preferred stock at $2.50 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> 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)
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.................. 1,640,000 1,640,000
Conversion of Series B preferred stock.................. 2,611,047 2,611,047
Conversion of Series C preferred stock.................. 3,204,800 3,204,800
Conversion of Series D preferred stock.................. -- 3,384,613
Conversion of Series E preferred stock.................. -- 654,040
Warrants issued and outstanding......................... 251,728 309,728
Options issued and outstanding.......................... 1,566,266 2,489,220
Options available under the 1996 and 1997 Plans......... 1,190,854 506,972
---------- ----------
Total......................................... 10,464,695 14,800,420
========== ==========
</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 $7.50.
- 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 $0.25, $0.75, $1.25, $3.25
and $7.50 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 1,640,000 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 800,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 8) and
issued 800,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 1,011,047 shares of Series B
convertible preferred stock and 3,204,800 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 3,384,613 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 654,040 shares of Series E convertible preferred stock for
cash of $3,846,400 (net of costs of $223,600).
F-12
<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)
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 197,978 shares
of Series B convertible preferred stock at $1.25 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 2,000 shares of Series D convertible preferred stock at $2.50 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 20,000
shares of common stock at $0.25 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, 20,000
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 809,417 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 1,799,078 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 280,000 shares of common stock with an exercise price of $0.25 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 29,333 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 423,780 and 48,177 shares of common stock at an
exercise price of $0.25 per share on July 31, 1998 and September 4,
F-13
<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)
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 36,000 shares of common stock at a
weighted-average exercise price of $2.88 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 40,000
shares of Common Stock, 20,000 of which have an exercise price of $6.25 per
share and have a term of five years. The remaining 20,000 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 51,750 shares of common stock at a
weighted-average exercise price of $2.62 per share were outstanding; such
warrants expire in 2003. At September 30, 1998, warrants to acquire 89,750
shares of common stock at a weighted-average exercise price of $3.55 per share
were outstanding and additional warrants to acquire 20,000 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> 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)
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.................................................. 912,000 0.03
---------
Balance, June 30, 1996 (110,000 shares vested at a
weighted average exercise price of $0.03 per share).... 912,000 0.03
Granted.................................................. 360,000 0.08
Exercised................................................ (25,000) 0.03
Canceled................................................. (311,000) 0.03
---------
Balance, June 30, 1997 (175,500 shares vested at a
weighted average exercise price of $0.03 per share).... 936,000 0.04
Granted.................................................. 914,091 0.73
Exercised................................................ (257,957) 0.12
Canceled................................................. (25,868) 0.39
---------
Balance, June 30, 1998................................... 1,566,266 0.42
Granted.................................................. 1,160,637 3.93
Exercised................................................ (232,883) 0.13
Canceled................................................. (4,800) 2.50
---------
Balance, September 30, 1998.............................. 2,489,220 $2.08
=========
</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>
$0.03 - $0.13 839,018 8.0 $0.05 453,167 $0.05
0.25 434,000 9.4 0.25 40,000 0.25
0.75 127,448 9.6 0.75 76,250 0.75
2.50 165,800 9.9 2.50 18,000 2.50
- ------------- --------- --- ----- ------- -----
$0.03 - $2.50 1,566,266 8.7 $0.42 587,417 $0.23
============= ========= === ===== ======= =====
</TABLE>
At June 30, 1998, none and 1,190,854 shares were available for future grant
under the 1996 and 1997 Plans, respectively. At September 30, 1998, 506,972
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.
F-15
<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)
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 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 ($0.39 per basic and
diluted share), $1,803,800 ($5.73 per basic and diluted share), and $5,111,000
($12.18 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 estimated
weighted-average minimum value per option as of the grant date for the awards
granted for the period from inception to June 30, 1996 and for the years ended
June 30, 1997 and 1998 were $0.01, $0.02 and $0.12, respectively.
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.................. 200,000 314,589 424,180 337,000 751,494
Weighted average common shares
outstanding subject to
repurchase................... -- -- (4,493) -- (21,696)
-------- ----------- ----------- ----------- -----------
Shares used in computation, basic
and diluted..................... 200,000 314,589 419,687 337,000 729,798
-------- ----------- ----------- ----------- -----------
Net loss per share, basic and
diluted......................... $ (0.39) $ (5.73) $ (12.93) $ (1.96) $ (4.59)
======== =========== =========== =========== ===========
</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): 7,455,847 (11,494,500) shares of convertible preferred stock,
warrants to purchase 199,978 (199,978) shares of convertible preferred stock,
20,000 (23,400) outstanding shares of common stock subject to repurchase, and
options and warrants to purchase 1,618,016 (2,598,970) shares of common stock.
F-16
<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)
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 800,000 fully
vested shares of the Series B preferred stock with a fair value of $0.75 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 200,000 shares of the Company's
common stock at $0.08 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.
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.
F-17
<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)
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.
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 20,000,000 and 14,000,000
respectively. Additionally, the Company designated 3,400,000 and 2,800,000
shares of preferred stock as Series D and E, respectively. In July 1998, the
Company issued 3,384,613 shares of Series D convertible preferred stock in
exchange for the conversion of the $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 654,040 shares of Series E
convertible preferred stock at $6.25 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
F-18
<PAGE> 88
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)
sell shares in an initial public offering. A total of 2.5 million 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 250,000 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 , 1998.
All share and per share amounts in these financial statements have been adjusted
to give effect to the reincorporation and associated one for two and one-half
stock exchange.
F-19
<PAGE> 89
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 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, Taiwan 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> 90
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," "160 peering relationships as of August 31, 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> 91
- ------------------------------------------------------
- ------------------------------------------------------
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.................... 60
Description of Capital Stock.............. 62
Shares Eligible for Future Sale........... 65
Underwriting.............................. 66
Legal Matters............................. 67
Experts................................... 68
Change in Accountants..................... 68
Additional Information.................... 68
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.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
[ABOVENET LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
CIBC OPPENHEIMER
VOLPE BROWN WHELAN & COMPANY
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 92
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........................................ *
NASD filing fee............................................. *
Nasdaq National Market listing fee.......................... *
Printing and shipping fees.................................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Directors and officers liability insurance.................. *
Blue Sky qualification fees and expenses.................... *
Transfer agent and registrar fees........................... *
Miscellaneous fees.......................................... *
--------
Total............................................. $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
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 to
be filed as Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
II-1
<PAGE> 93
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 the one for two and
one-half exchange effected in connection with the Company's reincorporation into
Delaware).
(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.
(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
II-2
<PAGE> 94
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.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation to
be filed prior to completion of the offering.
3.3+ Form of Second Amended and Restated Certificate of
Incorporation to be filed upon completion of offering.
3.4+ Bylaws of Registrant.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 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> 95
<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.
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.
II-4
<PAGE> 96
(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.
(4) 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> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 20th day of October, 1998.
ABOVENET COMMUNICATIONS INC.
By: /s/ SHERMAN TUAN
------------------------------------
Sherman Tuan
Chairman of the Board and Chief
Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that Fred A. Vierra whose signature
appears below, constitutes and appoints, jointly and severally, Warren J.
Kaplan, Sherman Tuan and Stephen B. Belomy, and each of them, his true and
lawful attorneys-in-fact and agents, each with full power of substitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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 October 20, 1998
- ----------------------------------------------------- Chief Executive Officer
Sherman Tuan (Principal Executive Officer )
and Director
/s/ STEPHEN P. BELOMY* Executive Vice President, October 20, 1998
- ----------------------------------------------------- Chief Financial Officer and
Stephen P. Belomy Secretary (Principal Financial
Officer)
/s/ KEVIN HOURIGAN* Vice President Finance (Chief October 20, 1998
- ----------------------------------------------------- Accounting Officer)
Kevin Hourigan
/s/ PETER C. CHEN, PH.D.* Vice Chairman of the Board October 20, 1998
- -----------------------------------------------------
Peter C. Chen, Ph.D.
/s/ WARREN J. KAPLAN* President, Chief Operating October 20, 1998
- ----------------------------------------------------- Officer and Director
Warren J. Kaplan
/s/ FRANK R. KLINE* Director October 20, 1998
- -----------------------------------------------------
Frank R. Kline
/s/ JAMES SHA* Director October 20, 1998
- -----------------------------------------------------
James Sha
</TABLE>
II-6
<PAGE> 98
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<C> <S> <C>
/s/ TOM SHAO, PH.D.* Director October 20, 1998
- -----------------------------------------------------
Tom Shao, Ph.D.
/s/ KIMBALL W. SMALL* Director October 20, 1998
- -----------------------------------------------------
Kimball W. Small
/s/ FRED A. VIERRA Director October 20, 1998
- -----------------------------------------------------
Fred A. Vierra
*By: /s/ SHERMAN TUAN
------------------------------------------------
Sherman Tuan
Attorney-In-Fact
</TABLE>
II-7
<PAGE> 99
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> 100
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.
3.1+ Certificate of Incorporation of Registrant.
3.2+ Form of Amended and Restated Certificate of Incorporation to
be filed prior to completion of the offering.
3.3+ Form of Second Amended and Restated Certificate of
Incorporation to be filed upon completion of offering.
3.4+ Bylaws of Registrant.
4.1+ Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 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> 101
<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.
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.
<PAGE> 1
EXHIBIT 4.4
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
NO. 1
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
ABOVENET COMMUNICATIONS, INC. (THE "COMPANY")
DATE OF INITIAL ISSUANCE: MAY ___, 1998
THIS CERTIFIES THAT for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Forty Five Thousand (45,000) shares of common stock, $0.01 par value,
of the Company (the "Common Stock"), at the Warrant Price, payable as provided
herein. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained, and may be exercised in whole or
in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, $0.01 par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
TERM OF THIS WARRANT - shall mean the period beginning on the date of
initial issuance hereof and ending on June 1, 2003.
WARRANT PRICE - $1.00 per share, subject to adjustment in accordance
with Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated April 29, 1998 executed by the Company
and Transamerica Business Credit Corporation (the "Commitment Letter") to the
original holder of this Warrant, or any transferees from such original holder or
this Holder.
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
<PAGE> 2
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant; (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula (a "Net Exercise"):
WCS x (CMP-WP)
CS = --------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the
Holder
WCS equals the number of shares of Common Stock purchasable under
the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised (at the
date of such calculation)
CMP equals the Current Market Price (at the date of such
calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date an which the
stock transfer books are open.
-2-
<PAGE> 3
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the Company the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company Covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof The Company further covenants and agrees that it will pay when
due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. If
and so long as the Common Stock issuable upon the exercise of this Warrant is
listed on any national securities exchange, the Company will, if permitted by
the rules of such exchange, list and keep listed on such exchange, upon official
notice of issuance, all shares of such Common Stock issuable upon exercise of
this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of
-3-
<PAGE> 4
shares of Common Stock issuable upon the exercise hereof shall be decreased in
proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock arc not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
-4-
<PAGE> 5
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder arc
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES.
-5-
<PAGE> 6
(i) In the case of any proposed reorganization or reclassification of
the capital stock of the Company, then, as a condition of such reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such reorganization
or reclassification) be issued or payable with respect to or in exchange for the
number of shares of such Common Stock purchasable hereunder immediately before
such reorganization or reclassification. In any such case appropriate provision
shall be made with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof shall thereafter be applicable as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of this Warrant.
(ii) For the purpose of this Warrant, "Acquisition" means any sale,
license, or other disposition of all or substantially all of the assets of the
Company, or any reorganization, consolidation, or merger of the Company where
the holders of the Company's securities before the transaction beneficially own
less than 50% of the outstanding voting securities of the surviving entity after
the transaction.
(iii) If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is greater than or equal to three (3) times the Warrant Price, then the
successor entity may, at its option, either assume the obligations of the
Company under this Warrant or not assume the obligations of the Company under
this Warrant. If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is less than three (3) times the Warrant Price, then the successor
entity shall assume the obligations of the Company under this Warrant. If the
successor entity assumes the obligations of the Company under this Warrant
(whether voluntarily or involuntarily), then this Warrant shall be exercisable
for the same class and amount of securities, cash, and/or other property as
would be payable for the Warrant Shares issuable upon exercise of this Warrant
as if such Warrant Shares were outstanding on the closing date for the
Acquisition. If the successor entity does not assume the obligations of the
Company under this Warrant, then this Warrant shall be deemed to have been
automatically exercised pursuant to the Net Exercise described in Section 2.1
immediately prior to the closing of the Acquisition and thereafter the Holder
shall participate in the Acquisition as a holder of the Warrant Shares (or other
securities issuable upon exercise of this Warrant) on the same terms as other
holders of the same class of securities of the Company.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in
-6-
<PAGE> 7
such dividend or other distribution unless this Warrant is exercised prior to
such record date. The provisions of this Section 9 shall not apply to
distributions made in connection with transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 50 W. San Fernando Street #1010, San Jose,
California, 95113, Attention: Controller or to such other address as shall have
been furnished in writing to the Holder by the Company. Any notice so addressed
and mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
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<PAGE> 8
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. "MARKET STAND-OFF" AGREEMENT. The Holder hereby agrees that it will
not, without the prior written consent of the managing underwriter, during the
period commencing on the date of the final prospectus relating to an
underwritten initial public offering of the Company's securities (an "Initial
Offering") and ending on the date specified by the Company and the managing
underwriter (such period not to exceed one hundred eighty (180) days) (i) lend,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by the Holder or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
provisions of this Section 15 shall apply only to the Company's Initial
Offering, shall not apply to the sale of any shares to an underwriter pursuant
to an underwriting agreement, and shall only be applicable to the Holder if all
officers and directors and greater than one percent (1%) shareholders of the
Company enter into similar agreements. The underwriters in connection with the
Company's Initial Offering are intended third party beneficiaries of this
Section 15 and shall have the right, power and authority to enforce the
provisions hereof as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period,
SECTION 16. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 28th day of May, 1998.
ABOVENET COMMUNICATIONS, INC.
[CORPORATE SEAL]
By: /s/ STEPHEN BELOMY
---------------------------------------
Title: Executive Vice President and
Chief Financial Officer
-8-
<PAGE> 9
FORM OF NOTICE OF EXERCISE
(TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase shares of Common
Stock which the undersigned is entitled to purchase by the terms of the within
Warrant according to the conditions thereof, and herewith.
(check one]
[ ] makes payment of $_________ therefor; or
[ ] directs the Company to issue ________ shares,
and to withhold ________ shares in lieu of
payment of the Warrant Price, as described in
Section 2.1 of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
______________________________________________
[Type Name of Holder)
By:___________________________________________
Title:________________________________________
Dated:____________________
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<PAGE> 10
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT)
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ____________ hereby sells, assigns and transfers
unto ____________ all rights of the undersigned under and pursuant to the within
Warrant, and the undersigned does hereby irrevocably constitute and appoint
____________ Attorney to transfer the said Warrant on the books of the Company,
with full power of substitution.
______________________________________________
[Type Name of Holder)
By:___________________________________________
Title:________________________________________
Dated:____________________
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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<PAGE> 11
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _____________________________ hereby sells, assigns
and transfers unto ______________________________ (i) the rights of the
undersigned to purchase _______ shares of Common Stock under and pursuant to the
within Warrant, and (ii) on a non-exclusive basis, all other rights of the
undersigned under and pursuant to the within Warrant, it being understood that
the undersigned shall retain, severally (and not jointly) with the transferee(s)
named herein, all rights assigned on such non-exclusive basis. The undersigned
does hereby irrevocably constitute and appoint _____________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
______________________________________________
[Type Name of Holder)
By:___________________________________________
Title:________________________________________
Dated:____________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-11-
<PAGE> 12
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
No. 2
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
ABOVENET COMMUNICATIONS, INC. (the "Company")
DATE OF INITIAL ISSUANCE: May___, 1998
THIS CERTIFIES THAT for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Forty Five Thousand (45,000) shares of common stock, $0.01 par value,
of the Company (the "Common Stock"), at the Warrant Price, payable as provided
herein. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained, and may be exercised in whole or
in part.
SECTION 1. Definitions.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
Common Stock - shall mean and include the Company's authorized Common
Stock, $0.01 par value, as constituted at the date hereof.
Exchange Act - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
Securities Act - the Securities Act of 1933, as amended.
Term of this Warrant - shall mean the period beginning on the date on
which the Company closes its "Series D" round of equity financing and ending on
the date which is the fifth (5th) anniversary of the date of issuance.
Warrant Price - shall mean the price per share paid by purchasers of
shares of the Company's Series D Preferred Stock, subject to adjustment in
accordance with Section 5 hereof.
Warrants - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated April 29, 1998 executed by the Company
and Transamerica Business Credit Corporation (the "Commitment Letter") to the
original holder of this Warrant, or any transferees from such original holder or
this Holder.
<PAGE> 13
Warrant Shares - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. Exercise of Warrant.
2.1. Procedure for Exercise of Warrant. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula (a "Net Exercise"):
CS = WCS x (CMP-WP)
-------------------
CMP
Where
CS equals the number of shares of Common Stock to be
issued to the Holder
WCS equals the number of shares of Common Stock
purchasable under the Warrant or, if only a portion
of the Warrant is being exercised, the portion of the
Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such
calculation)
WP equals the Warrant Price (as adjusted to the date of
such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
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<PAGE> 14
2.2. Transfer Restriction Legend. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the Company the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. Covenants as to Common Stock. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. If
and so long as the Common Stock issuable upon the exercise of this Warrant is
listed on any national securities exchange, the Company will, if permitted by
the rules of such exchange, list and keep listed on such exchange, upon official
notice of issuance, all shares of such Common Stock issuable upon exercise of
this Warrant.
SECTION 4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. Adjustment of Warrant Price. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following
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<PAGE> 15
the record date for such combination, the Warrant Price shall appropriately
increase so that the number of shares of Common Stock issuable upon the exercise
hereof shall be decreased in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in
Section 5, the Company shall prepare a statement showing the facts requiring
such adjustment and the Warrant Price that shall be in effect after such
adjustment. The Company shall cause a copy of such statement to be sent by mail,
first class postage prepaid, to each Holder of this Warrant at its, his or her
address appearing on the Company's records. Where appropriate, such copy may be
given in advance and may be included as part of the notice required to be mailed
under the provisions of subsection (viii) of this Section 5.
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<PAGE> 16
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event
issuing to the Holder of all or any part of this Warrant which is exercised
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such exercise by reason of the adjustment
required by such event over and above the shares of capital stock issuable upon
such exercise before giving effect to such adjustment exercise; provided,
however, that the Company shall deliver to such Holder a due bill or other
appropriate instrument evidencing such Holder's right to receive such additional
shares upon the occurrence of the event requiring such adjustment.
SECTION 6. Ownership.
6.1. Ownership of This Warrant. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. Transfer and Replacement. This Warrant and all rights hereunder
are transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
-5-
<PAGE> 17
SECTION 7. Mergers, Consolidation, Sales.
(i) In the case of any proposed reorganization or reclassification of
the capital stock of the Company, then, as a condition of such reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such reorganization
or reclassification) be issued or payable with respect to or in exchange for the
number of shares of such Common Stock purchasable hereunder immediately before
such reorganization or reclassification. In any such case appropriate provision
shall be made with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof shall thereafter be applicable as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of this Warrant.
(ii) For the purpose of this Warrant, "Acquisition" means any sale,
license, or other disposition of all or substantially all of the assets of the
Company, or any reorganization, consolidation, or merger of the Company where
the holders of the Company's securities before the transaction beneficially own
less than 50% of the outstanding voting securities of the surviving entity after
the transaction.
(iii) If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is greater than or equal to three (3) times the Warrant Price, then the
successor entity may, at its option, either assume the obligations of the
Company under this Warrant or not assume the obligations of the Company under
this Warrant. If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is less than three (3) times the Warrant Price, then the successor
entity shall assume the obligations of the Company under this Warrant. If the
successor entity assumes the obligations of the Company under this Warrant
(whether voluntarily or involuntarily), then this Warrant shall be exercisable
for the same class and amount of securities, cash, and/or other property as
would be payable for the Warrant Shares issuable upon exercise of this Warrant
as if such Warrant Shares were outstanding on the closing date for the
Acquisition. If the successor entity does not assume the obligations of the
Company under this Warrant, then this Warrant shall be deemed to have been
automatically exercised pursuant to the Net Exercise described in Section 2.1
immediately prior to the closing of the Acquisition and thereafter the Holder
shall participate in the Acquisition as a holder of the Warrant Shares (or other
securities issuable upon exercise of this Warrant) on the same terms as other
holders of the same class of securities of the Company.
SECTION 8. Notice of Dissolution or Liquidation. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. Notice of Extraordinary Dividends. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way
-6-
<PAGE> 18
of a stock dividend payable in shares of its Common Stock, the Company shall
mail notice thereof to the Holder hereof not less than thirty (30) days prior to
the record date fixed for determining shareholders entitled to participate in
such dividend or other distribution, and the Holder hereof shall not participate
in such dividend or other distribution unless this Warrant is exercised prior to
such record date. The provisions of this Section 9 shall not apply to
distributions made in connection with transactions covered by Section 7.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. Special Arrangements of the Company. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. Will Reserve Shares. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. Will Not Amend Certificate. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. Will Bind Successors. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. Notices. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 50 W. San Fernando Street #1010, , San
Jose, California, 95113, Attention: Controller or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
SECTION 13. No Rights as Stockholder; Limitation of Liability. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give
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<PAGE> 19
rise to any liability of the Holder for the Warrant Price hereunder or as a
shareholder of the Company, whether such liability is asserted by the Company or
by creditors of the Company.
SECTION 14. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. "Market Stand-Off" Agreement. The Holder hereby agrees that it will
not, without the prior written consent of the managing underwriter, during the
period commencing on the date of the final prospectus relating to an
underwritten initial public offering of the Company's securities (an "Initial
Offering") and ending on the date specified by the Company and the managing
underwriter (such period not to exceed one hundred eighty (180) days) (i) lend,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by the Holder or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
provisions of this Section 15 shall apply only to the Company's Initial
Offering, shall not apply to the sale of any shares to an underwriter pursuant
to an underwriting agreement, and shall only be applicable to the Holder if all
officers and directors and greater than one percent (1%) shareholders of the
Company enter into similar agreements. The underwriters in connection with the
Company's Initial Offering are intended third party beneficiaries of this
Section 15 and shall have the right, power and authority to enforce the
provisions hereof as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
SECTION 16. Miscellaneous. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this _______ day of _________, 199__.
ABOVENET COMMUNICATIONS, INC.
[CORPORATE SEAL]
By:
---------------------------
Title:
------------------------
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<PAGE> 20
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares
of Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
/ / makes payment of $__________ therefor; or
/ / directs the Company to issue ______
shares, and to withhold ____ shares in
lieu of payment of the Warrant Price, as
described in Section 2.1 of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
------------------------------------
[Type Name of Holder]
By:
--------------------------------
Title:
-----------------------------
Dated:
----------------------------------
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<PAGE> 21
FORM OF ASSIGNMENT
(ENTIRE)
[To be signed only upon transfer of entire Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
------------------------------------
[Type Name of Holder]
By:
--------------------------------
Title:
-----------------------------
Dated:
----------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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<PAGE> 22
FORM OF ASSIGNMENT
(PARTIAL)
[To be signed only upon partial transfer of Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
------------------------------------
[Type Name of Holder]
By:
--------------------------------
Title:
-----------------------------
Dated:
----------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-11-
<PAGE> 1
EXHIBIT 10.28
[LETTERHEAD FOR TRANSAMERICA BUSINESS CREDIT]
Kevin M. Hourigan
Controller
AboveNet Communications, Inc.
50 W. San Fernando Street #1010
San Jose, CA 95113
Dear Kevin:
Transamerica Business Credit Corporation - Technology Finance Division
("Lender") is pleased to offer this commitment (this "Commitment") to Loan the
equipment described below to AboveNet Communications, Inc. ("Borrower"). Except
with respect to the transactions consummated (or to be consummated) under a
commitment letter dated as of April 29, 1998 and the Master Loan and Security
Agreement dated as of May 28, 1998, this Commitment supercedes all prior
correspondence, proposals, and oral or other communications relating to leasing
arrangements between Lender and Borrower.
The outline of this offer is as follows:
Lender: Transamerica Business Credit Corporation - Technology
Finance Division and/or its affiliates, successors or
assigns.
Borrower: AboveNet Communications, Inc,
Equipment Cost: Not to exceed $9,000,000 in the aggregate (in
addition to prior commitment).
Equipment: Network operating center equipment, office equipment
and leasehold improvements (as listed on a capital
expenditure forecast provided to Lender) (the
"Equipment"). All Equipment is subject to Lender
approval prior to funding.
Security: Lender will require, junior only to the prior lien of
Silicon Valley Bank securing a working capital loan
in an amount not to exceed $1,500,000, a perfected
lien and security interest in all assets of Borrower,
now owned or hereafter acquired, including cash,
accounts receivable, inventory, machinery, equipment,
furniture, fixtures, tools, copyrights, licenses,
patents, trademarks, tradenames, other intellectual
property, leases, leasehold improvements, general
intangibles, and all other assets.
Location of Equipment: California, Washington D.C. vicinity and other U.S.
locations as identified
<PAGE> 2
by Borrower.
Anticipated Draw-Down A minimum of $100,000 will be drawn on or before
Schedule: October 15, 1998 and the remaining availability will
be drawn on or before October 31, 1999.
Draw-Down Expiration: No Loans will be funded after October 31, 1999.
Loan Term: Each Loan Term will commence upon delivery of the
equipment or upon each delivery of items of equipment
having an aggregate cost of not less than $50,000,
and will continue through 42 months from the first
day of the month next following or coincident with
commencement of that Loan Term.
Payment Terms: Monthly Rent equal to 2.7395% of Equipment Cost will
be payable monthly in advance. The first and last
Monthly Rent payments will be due and payable on or
before commencement of each Loan Term.
Lender reserves the right to increase the rate set
forth above as of the date each Loan Term commences
proportionally to the change in the weekly average of
the interest rates of 4-year U.S. Treasury Securities
(as published in the Wall Street Journal) from the
week ending August 7, 1998 to the week preceding the
commencement of such Loan Term. As of the date each
Loan Term commences, the Monthly Rent will be fixed
for that entire Loan Term. A schedule of actual
Monthly Rent payment amounts will be provided by the
Lender following commencement of each Loan Term.
Balloon Payment: At the end of each Loan Term, the Borrower will be
obligated to make one final Balloon Payment equal to
12.5% of the original principal amount of such Loan,
plus any other amounts then due and owing to Lender.
Interim Rent: Interim Rent will accrue from the date each Loan Term
commences until the next following first day of a
month (unless the Loan Term commences on the first
day of a month). Interim Rent will be calculated at
the daily equivalent of the currently adjusted
Monthly Rent.
Warrants: As an inducement to the Lender to provide financing
on the terms generally outlined herein, Borrower will
grant to Lender at the time of commitment, Warrants
to purchase 100,000 shares of the common stock of the
Borrower at a price per share of $2.50, with the
price per share with respect to 50,000 shares to be
adjusted to a price equal to 80% of (1) the price per
share paid by investors in the Borrower's Series F
Preferred Stock financing or (2) the "price to
public" in the Borrower's Initial Public Offering.
The Warrants will be exercisable for 5 years from the
date of issuance. The Lender will have the option to
exercise the Warrants without payment of the exercise
price and receive only that number of shares which
represents the value of the difference between the
fair market value of the shares and the exercise
price (i.e., "net issuance" or "cashless exercise").
Insurance. Prior to any delivery of equipment, the Borrower will
furnish confirmation of insurance acceptable to the
Lender covering the Equipment including
2
<PAGE> 3
primary, all risk, physical damage, property damage
and bodily injury with appropriate loss payee and
additional insured endorsements in favor of the
Lender.
Conditions Precedent Each Loan will be subject to the following:
to Lending: 1. No material adverse change in the financial
condition, operations or prospects of the
Borrower prior to funding. The Lender reserves
the right to rescind any unused portion of its
commitment in the event of a material adverse
change in the financial condition, operation or
prospects of the Borrower.
2. Completion of the documentation and final terms
of the proposed financing satisfactory to Lender
and Lender's counsel.
3. Results of all due diligence, including lien,
judgment and tax search and other matters Lender
may request shall be satisfactory to Lender and
Lender's counsel.
4. Receipt by Lender of duly executed loan
documentation in form and substance satisfactory
to Lender and its counsel.
5. Lender shall receive a valid and perfected first
priority lien and security interest in the
Equipment and Lender shall have received
satisfactory evidence that there are no liens on
the Equipment except as expressly permitted
herein.
6. $3,000,000 of this Commitment will be made
available immediately upon satisfaction of
Conditions 1 - 5 above, with the remainder
becoming available upon completion of an equity
financing with gross proceeds in an amount not
less than $40,000,000, provided that such
financing is completed on or before March 31,
1999. If the equity financing does not close
prior to the such date, the Lender reserves the
right to rescind the balance of this Commitment.
Additional There will be no actual or threatened conflict with,
Covenants: or violation of, any regulatory statute, standard or
rule relating to the Borrower, its present or future
operations, or the Equipment.
Borrower will be required to provide quarterly
financial information. All information supplied by
the Borrower will be correct and will not omit any
statement necessary to make the information supplied
not be misleading. There will be no material breach
of the representations and warranties of the Borrower
in the Loan.
Expenses: All costs and expenses incurred by the Lender in
connection with the underwriting and closing of the
Loans will be paid by the Borrower whether or not any
Loans are consummated and funds are advanced by the
Lender. Said expenses will not exceed $7,000 without
prior written consent from the Borrower.
Law: This letter and the proposed Loan are intended to be
governed by and construed in accordance with Illinois
law without regard to its conflict of law provisions.
3
<PAGE> 4
Indemnity: Borrower agrees to indemnify and to hold harmless
Lender, and its officers, directors and employees
against all claims, damages, liabilities and expenses
which may be incurred by or asserted against any such
person in connection with or arising out of this
letter and the transactions contemplated hereby,
other than claims, damages, liability, and expense
resulting from such person's gross negligence or
willful misconduct.
Confidentiality: This letter is delivered to you with the
understanding that neither it nor its substance shall
be disclosed publicly or privately to any third
person except those who are in a confidential
relationship to you (such as your legal counsel and
accountants), or where the same is required by law
and then only on the basis that it not be further
disclosed, which conditions Borrower and its agents
agree to be bound by upon acceptance of this letter.
Without limiting the generality of the foregoing,
none of such persons shall use or refer to Lender or
to any affiliate name in any disclosures made in
connection with any of the transactions without
Lender's prior written consent.
Upon completion of the initial takedown by Borrower,
the Borrower will no longer be required to obtain
Lender's prior written consent to disclose the
transaction contemplated hereby. In addition, the
Borrower agrees to provide camera ready artwork of
typestyles and logos of the Borrower for use in
promotional material by the Lender.
Conditions of Acceptance: This Commitment Letter is intended to be a summary of
the most important elements of the agreement to enter
into a loan transaction with Borrower, and it is
subject to all requirements and conditions contained
in Loan documentation proposed by Lender or its
counsel in the course of closing the Loans described
herein. Not every provision that imposes duties,
obligations, burdens, or limitations on Borrower is
contained herein, but shall be contained in the final
Loan documentation satisfactory to Lender and its
counsel.
EACH OF THE PARTIES HERETO IRREVOCABLY AND
UNCONDITIONALLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
ANY SUIT, ACTION, PROCEEDING OR COUNTERCLAIM ARISING
OUT OF OR RELATED TO THIS LETTER OR THE TRANSACTION
DESCRIBED IN THIS LETTER.
Commitment Fee: A non-refundable Commitment Fee equal to $45,000
(0.50% of the maximum amount of this Commitment) is
due upon acceptance of this Commitment, to be
retained by the Lender as compensation for the
Commitment. The $45,000 Application Fee previously
paid by the Borrower will be applied to the
Commitment Fee.
Commitment Expiration: This commitment shall expire on September 30, 1998
unless prior thereto either extended in writing by
the Lender or accepted as provided below by the
Borrower.
4
<PAGE> 5
Should you have any questions, please call me. If you wish to accept this
Commitment, please so indicate by signing and returning the enclosed duplicate
copy of this letter to me by September 30, 1998.
Yours truly,
TRANSAMERICA BUSINESS CREDIT
CORP - TECHNOLOGY FINANCE
DIVISION
By: /s/ GERALD A. MICHAUD
----------------------------------------
Gerald A. Michaud
Senior Vice President - Marketing
Accepted this 29th day of September, 1998
ABOVENET COMMUNICATIONS, INC.
By: /s/ STEPHEN BELOMY
--------------------------------
Stephen Belomy
Executive Vice President
and Chief Financial Officer
By: /s/ KEVIN HOURIGAN
--------------------------------
Kevin Hourigan
Vice President,
Finances Controller
5
<PAGE> 6
AMENDED AND RESTATED
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of May 28 1998, and amended and restated as of
September 29, 1998, is made by AboveNet Communications, Inc. (the "Borrower"),
a California corporation having its principal place of business and chief
executive office at 50 W. San Fernando Street #1010, San Jose, California,
95113 in favor of Transamerica Business Credit Corporation, a Delaware
corporation (the "Lender"), having its principal office at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it from
time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the Lender
to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings, and
shall be equally applicable to both the singular and plural forms of the terms
defined;
Additional Collateral shall have the meaning specified in Section 2(b).
Agreement shall mean this Master Loan and Security Agreement together with all
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the
parties' choice of Illinois law) or the laws of the United States of America,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or public
holiday or the equivalent for banks in New York City.
Code shall have the meaning specified in Section 8(d).
Collateral shall have the meaning specified in Section 2.
Collateral Access Agreement shall mean any landlord waiver, mortgage waiver,
bailee letter, or similar acknowledgement of any warehouseman or processor in
possession or any Equipment.
Effective Date shall mean the date on which all of the conditions specified in
Section 3.3 shall have been satisfied.
Equipment shall have the meaning specified in Section 2.
Event of Default shall mean any event specified in Section 7.
Financial Statements shall have the meaning specified in Section 6.1.
<PAGE> 7
GAAP shall mean generally accepted accounting principles in the United States
of America, as in effect from time to time.
Loans shall mean the loans and financial accommodations made by the Lender to
the Borrower in accordance with the terms of this Agreement and the Notes.
Loan Documents shall mean, collectively, this Agreement, the Notes, and all
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be modified,
extended, restated, or supplemented from time to time.
Material Adverse Change shall mean, with respect to any Person, a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
Material Adverse Effect shall mean, with respect to any Person, a material
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
Note shall mean each Promissory Note made by the Borrower in favor of the
Lender, as amended, supplemented, or otherwise modified from time to time.
Obligations shall mean all indebtedness, obligations, and liabilities of the
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and all
other professionals' fees), costs, expenses, taxes, or otherwise.
Permitted Liens shall mean such of the following as to which no enforcement,
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons arising by operation of law in the
ordinary course of business for sums which are not yet due and payable, or liens
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Equipment which do not materially impair either the use of the
Equipment in the operation of the business of the Borrower or the value of the
Equipment; (d) attachment or judgment liens that do not constitute an Event of
Default; (e) security interests in and liens granted to current and future
lenders to the Borrower which are subordinate to the security interest and lien
granted to Lender hereunder; (f) subject to a maximum limit of $2,000,000,
purchase money security interests or liens representing equipment leases for
equipment purchased after the date hereof; (g) purchase money security interests
or liens representing equipment leases for equipment purchased prior to the date
hereof and (h) with respect to the Additional Collateral only, senior security
interests and liens in favor of Silicon Valley Bank.
Person shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
Schedule shall mean each Schedule in the form of Schedule A hereto delivered by
the Borrower to the Lender from time to time.
Solvent means, with respect to any Person, that as of the date as to which such
Person's solvency is measured:
<PAGE> 8
(a) the fair saleable value of its assets is in excess of the total amount
of its liabilities (including contingent liabilities as valued in accordance
with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in section 5.5.
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. (a) The Borrower
hereby assigns and grants to the Lender a continuing general, first priority
lien on, and security interest in, all the Borrower's right, title, and interest
in and to the collateral described in the next sentence (the "Collateral") to
secure the payment and performance of all the Obligations. Subject to paragraph
(b) below, the Collateral consists of all equipment set forth on all the
Schedules delivered from time to time under the terms of this Agreement (the
"Equipment"), together with all present and future additions, parts,
accessories, attachments, substitutions, repairs, improvements, and replacements
thereof or thereto, and any and all proceeds thereof, including, without
limitation, proceeds of insurance and all manuals, blueprints, know-how,
warranties, and records in connection therewith, all rights against suppliers,
warrantors, manufacturers, sellers, or others in connection therewith, and
together with all substitutes for any of the foregoing.
(b) In addition to the foregoing, the Borrower hereby assigns and grants
to the Lender a continuing general lien on, and security interest in, all the
Borrower's right, title, and interest in and to the collateral described in the
next sentence (the "Additional Collateral") to secure the payment and
performance of all the Obligations. The Additional Collateral consists of
(i) all present and future machinery, equipment, furniture, fixtures,
leasehold improvements, conveyors, tools, materials, storage and handling
equipment, hydraulic presses, cutting equipment, computer equipment and
hardware, including central processing units, terminals, drives, memory
units, printers, keyboards, screens, peripherals and input or output
devices, molds, dies, stamps, and other equipment of every kind and nature
and wherever situated now or hereafter owned and held for use by the
Borrower or in which the Borrower may have any interest as lessee (to the
extent of such interest), together with all additions and accessions
thereto, all replacements and all accessories and parts therefore, all
manuals, blueprints, know-how, warranties and records in connection
therewith (including, without limitation, any computer software, whether on
tape, disc, card, strip or cartridge or in any other form) and all rights
against suppliers, warrantors, manufacturers, and sellers or others in
connection therewith, together with all substitutes for any of the
foregoing;
(ii) all present and future goods intended for sale, lease or other
disposition by the Borrower including, without limitation, all raw
materials, work in process, systems, accessories, spare parts, finished
goods and other retail inventory, goods in the possession of outside
processors or other third parties, consigned goods (to the extent of the
consignee's interest therein), materials, parts and supplies of any kind,
nature or description which are or might be used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of any
such goods, all documents of title or documents representing the same and
all records, files and writings (including, without limitation, any
computer software, whether on tape, disc, card, strip or cartridge or in
any other form) with respect thereto;
(iii) all of the Borrower's present and future accounts (including
rights to receive payments for goods sold or services rendered arising out
of the sale or delivery of personal property or work done or labor
performed), contract rights, agreements, understandings, open purchase and
sale orders, promissory notes, chattel paper, documents, tax refunds,
rights to receive tax refunds, bonds, certificates, insurance policies,
insurance proceeds, patents, parent
<PAGE> 9
applications, copyrights (registered and unregistered), royalties,
licenses, rights to receive fees, royalties and other payments under
license agreements, permits, franchise rights, authorizations,
customer and supplier lists, rights of indemnification, contribution
and subrogation, leases, computer tapes, programs, discs and software,
trade secrets, computer service contracts, trademarks, trade names,
service marks and names, logos, goodwill, deposits, causes of action,
chooses in action, judgments, designs, blueprints, quotations and
bids, plans, specifications, sales literature, know-how, all other
general intangibles, claims against third parties of every kind or
nature, investment securities, notes, drafts, acceptances, letters of
credit and rights to receive payments under letters of credit, deposit
accounts, book accounts, prepaid expenses, credits and reserves and
all forms of obligations whatsoever owing, instruments, documents of
title, leasehold rights, including in any goods, books, ledgers, files
(including credit and project files) and records (including tax
records) with respect to any collateral or security, together with all
right, title, security and guaranties with respect to thereto,
including any right of stoppage in transit; and
(iv) all proceeds of the foregoing.
SECTION 3. THE CREDIT FACILITY.
SECTION 3.1. BORROWINGS. Each Loan shall be in an amount not
less than $100,000, and in no event shall the sum of the aggregate Loans made
exceed the amount of the Lender's written commitment to the Borrower in effect
from time to time. Notwithstanding anything herein to the contrary, the Lender
shall be obligated to make the initial Loan and each other Loan only after the
Lender, in its good faith business judgment, determines that the applicable
conditions for borrowing contained in Sections 3.3 and 3.4 are satisfied. The
timing and financial scope of Lender's obligation to make Loans hereunder are
limited as set forth in a-the commitment letters executed by Lender and
Borrower, dated as of April 29, 1998 and September 25, 1998, and attached hereto
as Exhibits A and B (the "Commitment Letters").
SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not
directly or indirectly use any proceeds of the Loans, or cause, assist, suffer,
or permit the use of any proceeds of the Loans, for any purpose other than for
the purchase, acquisition, installation, or upgrading of Equipment or the
reimbursement of the Borrower for its purchase, acquisition, installation, or
upgrading of Equipment.
SECTION 3.3. CONDITIONS TO INITIAL LOAN.
(a) The obligation of the Lender to make the initial Loan is subject
to the Lender's receipt of the following, each dated the date of the initial
Loan or as of an earlier date acceptable to the Lender, in form and substance
satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing
all effective Uniform Commercial Code financing statements naming the Borrower
as debtor and all tax lien, judgment, and litigation searches for the Borrower
as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements (Form
UCC-1) duly executed by the Borrower (naming the Lender as secured party and the
Borrower as debtor and in form acceptance for filing in all jurisdictions that
the Lender deems necessary or desirable to perfect the security interests
granted to it hereunder) and, if applicable, termination statements or other
releases duly filed in all jurisdictions that the Lender deems necessary or
desirable to perfect and protect the priority of the security interests granted
to it hereunder in the Equipment related to such initial Loan;
(iii) a Note duly executed by the Borrower evidencing the
amount of such Loan;
(iv) a Collateral Access Agreement duly executed by the
lessor or mortgagee, as the case may be, of premises in Vienna, Virginia where
the Equipment is located;
<PAGE> 10
(v) certificates of insurance required under Section 5.4
of this Agreement together with loss payee endorsements for all
such policies naming the Lender as lender loss payee and as an
additional insured;
(vi) a copy of the resolutions of the Board of Directors
of the Borrower (or a unanimous consent of directors in lieu
thereof) authorizing the execution, delivery, and performance of
this Agreement, the other Loan Documents, and the transactions
contemplated hereby and thereby, attached to which is a
certificate of the Secretary or an Assistant Secretary of the
Borrower certifying (A) that the copy of the resolutions is true,
complete, and accurate, that such resolutions have not been
amended or modified since the date of such certification and are
in full force and effect and (B) the Incumbency, names, and true
signatures of the officers of the Borrower authorized to sign the
Loan Documents to which it is a party;
(vii) the opinion of counsel for the Borrower covering
such matters incident to the transactions contemplated by this
Agreement as the Lender may reasonably require; and
(viii) such other agreements and instruments as the Lender
deems necessary in its good faith business judgment in connection
with the transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the
Borrower after due inquiry, threatened litigation, proceeding, inquiry, or
other action (i) seeking an injunction or other restraining order, damages, or
other relief with respect to the transactions contemplated by this Agreement or
the other Loan Documents or thereby or (ii) which affects or could affect the
business, prospects, operations, assets, liabilities, or condition (financial
or otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have
a Material Adverse Effect in the judgment of the Lender.
(c) The Borrower shall have paid all fees and expenses
required to be paid by it to the Lender as of such date (fees and expenses in
connection closing this transaction are capped at $57,000).
(d) The security interests in the Collateral and the
Additional Collateral granted in favor of the Lender under this Agreement shall
have been duly perfected and, with respect to the Equipment related to the
initial Loan, shall constitute first priority liens.
SECTION 3.4. CONDITIONS PRECEDENT TO EACH LOAN. The
obligation of the Lender to make each Loan is subject to the satisfaction of
the following conditions precedent:
(a) the Lender shall have received the documents, agreements,
and instruments set forth in Section 3.3(a)(i) through (v) applicable to such
Loan, each in form and substance satisfactory to the Lender and its counsel and
each dated the date of such Loan or as of an earlier date acceptable to the
Lender;
(b) the Lender shall have received a Schedule of the Equipment
related to such Loan, in form and substance satisfactory to the Lender and its
counsel, and the security interests in such Equipment related to such Loan
granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens;
(c) all representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct on and as of
the date such Loan as if then made, other than representations and warranties
that expressly relate solely to an earlier date, in which case they shall have
been true and correct as of such earlier date;
(d) no Event of Default or event which with the giving of
notice or the passage of time, or both, would constitute an Event of Default
shall have occurred and be continuing or would result from the making
<PAGE> 11
of the requested Loan as of the date of such request; and
(e) the Borrower shall be deemed to have hereby reaffirmed and
ratified all security interests, liens, and other encumbrances heretofore
granted by the Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS. The
Borrower (a) is duly organized, validly existing, and in good standing under
the laws of the State of its organization, (b) has the power and authority to
own its properties and assets and to transact the business in which it is
presently, or proposes to be, engaged, and (c) is duly qualified and authorized
to do business and is in good standing in every jurisdiction in which the
failure to be so qualified could have a Material Adverse Effect on (i) the
Borrower, (ii) the Borrower's ability to perform its obligations under the
Loan Documents, or (iii) the rights of the Lender hereunder.
SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery,
and performance by the Borrower of each of the Loan Documents to which it is a
party are within the powers of the Borrower, do not contravene the
organizational documents, if any, of the Borrower, and do not (a) violate any
law or regulation, or any order or decree of any court or governmental
authority, (b) conflict with or result in a breach of, or constitute a default
under, any material indenture, mortgage, or deed of trust or any material
lease, agreement, or other instrument binding on the Borrower or any of its
properties, or (c) require the consent, authorization by, or approval of or
notice to or filing or registration with any governmental authority or other
Person. This Agreement is, and each of the other Loan Documents to which the
Borrower is or will be a party, when delivered hereunder or thereunder, will
be, the legal, valid, and binding obligation of the Borrower enforceable
against the Borrower in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, or similar laws affecting creditors'
rights generally and by general principles of equity.
SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent
and will be Solvent upon the completion of all transactions contemplated to
occur hereunder (including, without limitation, the Loan to be made on the
Effective Date); the security interests granted herein constitute and shall at
all times constitute the first and only liens on the Collateral other than
Permitted Liens, and, with respect to the Additional Collateral, the first lien
other than the lien of Silicon Valley Bank; and the Borrower is, or will be at
the time additional Collateral is acquired by it, the absolute owner of the
Collateral with full right to pledge, sell, consign, transfer, and create a
security interest therein, free and clear of any and all claims or liens in
favor of any other Person other than Permitted Liens.
SECTION 4.4. NO JUDGMENTS, LITIGATION. No judgments are outstanding
against the Borrower nor is there now pending or, to the best of the Borrower's
knowledge after diligent inquiry, threatened any litigation, contested claim, or
governmental proceeding by or against the Borrower except judgments and pending
or threatened litigation, contested claims, and governmental proceedings which
would not, in the aggregate, have a Material Adverse Effect on the Borrower.
SECTION 4.5. NO DEFAULTS. The Borrower is not in default
or has not received a notice of default under any material contract, lease, or
commitment to which it is a party or by which it is bound. The Borrower knows
of no dispute regarding any contract, lease, or commitment which could have a
Material Adverse Effect on the Borrower.
SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof,
each item of the Collateral is located at the place of business specified in
the applicable Schedule.
SECTION 4.7. NO EVENTS OF DEFAULT. No Event of Default
has occurred and is continuing nor has any event occurred which, with the
giving of notice or the passage of time, or both, would constitute an Event of
Default.
SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except as
permitted herein,
<PAGE> 12
none of the Collateral is subject to contractual obligations that may restrict
or inhibit the Lender's rights or abilities to sell or dispose of the Collateral
or any part thereof after the occurrence of an Event of Default.
SECTION 4.9. PERFECTION AND PRIORITY OF SECURITY INTEREST. This
Agreement creates a valid and, upon completion of all required filings of
financing statements, perfected first priority and exclusive security interest
in the Collateral, and, subject to Permitted Liens and, in the Additional
Collateral, the senior lien of Silicon Valley Bank securing the payment of all
the Obligations.
SECTION 4.10. MODEL AND SERIAL NUMBERS. The Schedules set forth the
true and correct model number and serial number of each item of Equipment that
constitutes Collateral.
SECTION 4.11. ACCURACY AND COMPLETENESS OF INFORMATION. All data,
reports, and information heretofore, contemporaneously, or hereafter furnished
by or on behalf of the Borrower in writing to the Lender or for purposes of or
in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material
respects on the date as of which such data, reports, and information are dated
or certified and not incomplete by omitting to state any material fact necessary
to make such data, reports, and information not misleading at such time. There
are no facts now known to the Borrower which individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect and which have
not been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written statement previously furnished by the Borrower to the
Lender.
SECTION 4.12. PRICE OF EQUIPMENT. The cost of each item of Equipment
does not exceed the fair and usual price for such type of equipment purchased in
like quantity and reflects all discounts, rebates and allowances for the
Equipment (including, without limitation, discounts for advertising, prompt
payment, testing, or other services) given to the Borrower by the manufacturer,
supplier, or any other person.
SECTION 5. COVENANTS OF THE BORROWER.
SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full force
and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable to the profitable conduct of
its business unless the failure to do so could not reasonably be expected to
have a Material Adverse Effect on the Borrower, (c) continue in, and limit its
operations to, the same general lines of business as those presently conducted
by it, and (d) comply with all applicable laws and regulations of any federal,
state, or local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse Effect
on the Borrower.
SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in any
event within five days after the Borrower learns of the following, the Borrower
will given written notice to the Lender of (a) any proceeding instituted or
threatened to be instituted by or against the Borrower in any federal, state,
local, or foreign court or before any commission or other regulatory body
(federal, state, local, or foreign) involving a sum, together with the sum
involved in all other similar proceedings, in excess of $100,000 in the
aggregate, (b) any contract that is terminated or amended and which has had or
could reasonably be expected to have a Material Adverse Effect on the Borrower,
(c) the occurrence of any Material Adverse Change with respect to the Borrower,
and (d) the occurrence of any Event of Default or event or condition which,
with notice or lapse of time or both, would constitute an Event of Default,
together with a statement of the action which the Borrower has taken or proposes
to take with respect thereto.
SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower will
maintain books and records pertaining to the Collateral in such detail, form,
and scope as the Lender shall require in its commercially reasonable judgment.
The Borrower agrees that the Lender or its agents may enter upon the Borrower's
premises at any time and from time to time during normal business hours after
reasonable notice, and at any time upon the occurrence and continuance of an
Event of Default, for the purpose of inspecting the Collateral and any and all
records pertaining thereto.
<PAGE> 13
SECTION 5.4. INSURANCE. The Borrower will maintain insurance on the
Collateral under such policies of insurance, with such insurance companies, in
such amounts, and covering such risks as are at all times satisfactory to the
lender. All such policies shall be made payable to the Lender, in case of loss,
under a standard non-contributory "lender" or "secured party" clause and are to
contain such other provisions as the Lender may reasonably require to protect
the Lender's interests in the Collateral and to any payments to be made under
such policies. Certificates of insurance policies are to be delivered to the
Lender, premium prepaid, with the loss payable endorsement in the Lender's
favor, and shall provide for not less than thirty days' prior written notice to
the Lender, of any alteration or cancellation of coverage. If the Borrower fails
to maintain such insurance, the Lender may, after notice to the Borrower,
arrange for (at the Borrower's expense and without any responsibility on the
Lender's part for) obtaining the insurance. Unless the Lender shall otherwise
agree with the Borrower in writing, the Lender shall have the sole right, in the
name of the Lender or the Borrower, to file claims under any insurance policies,
to receive and give acquittance for any payments that may be payable thereunder,
and to execute any endorsements, receipts, releases, assignments, reassignments,
or other documents that may be necessary to effect the collection, compromise,
or settlement of any claims under any such insurance policies.
SECTION 5.5. TAXES. The Borrower will pay, when due, all taxes,
assessments, claims, and other charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES ON
COLLATERAL. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR IDENTITY. The Borrower
will not (a) change the location of its chief executive office or establish any
place of business other than those specified herein or (b) move or permit the
movement of any item of Collateral from the location specified in the
applicable Schedule, except that the Borrower may change its chief executive
office and keep Collateral at other locations within the United States provided
that the Borrower has delivered to the Lender (i) prior written notice thereof
and (ii) duly executed financing statements and other agreements and instruments
(all in form and substance satisfactory to the Lender) necessary or, in the
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first priority security interest in the Collateral. Notwithstanding anything
to the contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof and the
Borrower has complied with the provisions of section 5.9.
SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The Collateral shall
be operated by competent, qualified personnel in connection with the Borrower's
business purposes, for the purpose for which the Collateral was designed and in
accordance with applicable operating instructions, laws, and government
regulations, and the Borrower shall use every reasonable precaution to prevent
loss or damage to the Collateral from fire and other hazards. The Collateral
shall not be used or operated for personal, family, or household purposes. The
Borrower shall procure and maintain in effect all orders, licenses,
certificates, permits, approvals, and consents required by federal, state, or
local laws or by any governmental body, agency, or authority in connection with
the
<PAGE> 14
delivery, installation, use, and operation of the Collateral. The Borrower
shall keep all of the Equipment in a satisfactory state of repair and
satisfactory operating condition in accordance with industry standards, and
will make all repairs and replacements when and where necessary and practical.
The Borrower will not waste or destroy the Equipment or any part thereof, and
will not be negligent in the care or use thereof. The Equipment shall not be
annexed or affixed to or become part of any realty without the Lender's prior
written consent.
SECTION 5.9. FURTHER ASSURANCES. The Borrower will, promptly upon request
by the Lender, execute and deliver or use its best efforts to obtain any
document required by the Lender (including, without limitation, warehouseman or
processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination
agreements with respect to the Obligations and the Collateral), give any
notices, execute and file any financing statements, mortgages, or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Collateral without the signature of the Borrower where permitted
by law. A carbon, photographic, or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all costs incurred in
connection with any of the foregoing.
SECTION 5.10. NO DISPOSITION OF COLLATERAL. The Borrower will not in any
way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except
for the lien and security interest grated hereby and Permitted Liens which are
junior to the lien and security interest of the Lender, and the Borrower will
not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise
dispose of any of the Collateral. In the event the Collateral, or any part
thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in
violation of these provisions, the security interest of the Lender shall
continue in such Collateral or part thereof notwithstanding such sale,
transfer, assignment, exchange, or other disposition, and the Borrower will
hold the proceeds thereof in a separate account for the benefit of the Lender.
Following such a sale, the Borrower will transfer such proceeds to the Lender
in kind.
SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. The Borrower will not
enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or
any part thereof.
SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice to the Borrower
(provided that if an Event of Default has occurred and is continuing the Lender
need not give any notice), the Lender shall have the right at any time to make
any payments and do any other acts the Lender may deem necessary to protect its
security interests in the Collateral, including, without limitation, the rights
to satisfy, purchase, contest, or compromise any encumbrance, charge, or lien
which, in the reasonable judgment of the Lender, appears to be prior to or
superior to the security interests granted hereunder, and appear in, and defend
any action or proceeding purported to affect its security interests in, or the
value of, any of the Collateral. The Borrower hereby agrees to reimburse the
Lender for all payments made and expenses incurred under this Agreement
including reasonable fees, expenses, and disbursements of attorneys and
paralegals (including the allocated costs of in-house counsel) acting for the
Lender, including any of the foregoing payments under, or acts taken to protect
its security interests in, any of the Collateral, which amounts shall be
secured under this Agreement, and agrees it shall be bound by any payment
made or act taken by the Lender hereunder absent the Lender's gross negligence
or willful misconduct. The Lender shall have no obligation to make any of the
foregoing payments or perform any of the foregoing acts.
SECTION 5.13. DELIVERY OF ITEMS. The Borrower will (a) promptly (but in no
event later than one Business Day) after its receipt thereof, deliver to the
Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of
credit or instruments related to or otherwise in connection with any property
included in the Collateral, which in any such
<PAGE> 15
case come into the possession of the Borrower, or shall cause the issuer
thereof to deliver any of the same directly to the Lender, in each case with
any necessary endorsement in favor of the Lender and (b) deliver to the Lender
as soon as available copies of any and all press releases and other similar
communications issued by the Borrower.
SECTION 5.14. SOLVENCY. The Borrower shall be and remain Solvent at
all times.
SECTION 5.15. FUNDAMENTAL CHANGES. The Borrower shall not (a) amend
or modify its name, unless the Borrower delivers to the Lender thirty days
prior to any such proposed amendment or modification written notice of such
amendment or modification and within ten days before such amendment or
modification delivers executed Uniform Commercial Code financing statements (in
form and substance satisfactory to the Lender) or (b) merge or consolidate with
any other entity or make any material change in its capital structure, in each
case without the Lender's prior written consent which shall not be unreasonably
withheld.
SECTION 5.16. ADDITIONAL REQUIREMENTS. The Borrower shall take all
such further actions and executive all such further documents and instruments
as the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in
full of all Obligations, the Borrower shall deliver to the Lender the following
financial information:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as available, but
not later than 120 days after the end of each fiscal year of the Borrower and
its consolidated subsidiaries, the consolidated balance sheet, income
statement, and statements of cash flows and shareholders equity for the
Borrower and its consolidated subsidiaries (the "Financial Statements") for
such year, reported on by independent certified public accountants without an
adverse qualification; and
SECTION 6.2 QUARTERLY FINANCIAL STATEMENTS. As soon as available,
but not later than 60 days after the end of each of the first three fiscal
quarters in any fiscal year of the Borrower and its consolidated subsidiaries,
the Financial Statements for such fiscal quarter, together with a certification
duly executed by a responsible officer of the Borrower that such Financial
Statements have been prepared in accordance with GAAP and are fairly stated in
all material respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five days of when due any
amount required to be paid by the Borrower under or in connection with any Note
and this Agreement;
(b) any representation or warranty made or deemed made by the
Borrower under or in connection with any Loan Document or any Financial
Statement shall prove to have been false or incorrect in any material respect
when made;
(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Section 5.4, 5.7, 5.10, 5.14, or
5.15 hereof or (ii) any other term, covenant, or agreement contained in any
Loan Document (other than the other Events of Default specified in this Section
7) and such failure remains unremedied for the earlier of fifteen days from (A)
the date on which the Lender has given the Borrower written notice of such
failure and (B) the date on which the Borrower knew or should have known of
such failure;
(d) any provision of any Loan Document to which the Borrower is a
party shall for any reason cease to be valid and binding on the Borrower, or
the Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
<PAGE> 16
(f) the commencement by or against the Borrower of any bankruptcy,
insolvency, arrangement, reorganization, receivership, or similar proceedings
under any federal or state law and, in the case of any such involuntary
proceeding, such proceeding remains undismissed or unstayed for forty-five days
following the commencement thereof, or any action by the Borrower is taken
authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any
substantial property of the Borrower, or any action by the Borrower authorizing
any such proceeding;
(h) the Borrower shall default in (i) the payment of principal or
interest on any indebtedness in excess of $100,000 (other than the Obligations)
beyond the period of grace, if any, provided in the instrument or agreement
under which such indebtedness was created; or (ii) the observance or
performance of any other agreement or condition relating to any such
indebtedness or contained in any instrument or agreement relating thereto, or
any other event shall occur or condition exist, the effect of which default or
other event or condition is to cause, or to permit the holder or holders of
such indebtedness to cause, with the giving of notice if required, such
indebtedness to become due prior to its stated maturity; or (iii) any loan or
other agreement under which the Borrower has received financing from
Transamerica Corporation or any of its affiliates;
(i) the Borrower suffers or sustains a Material Adverse Change;
(j) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within five Business Days;
(k) any judgment which has had or could reasonably be expected to
have a Material Adverse Effect on the Borrower and such judgment shall not be
stayed, vacated, bonded, or discharged within sixty days;
(l) any material covenant, agreement, or obligation, as determined
in the sole discretion of the Lender, made by the Borrower and contained in or
evidenced by any of the Loan Documents shall cease to be enforceable, or shall
be determined to be unenforceable, in accordance with its terms; the Borrower
shall deny or disaffirm the Obligations under any of the Loan Documents or any
liens granted in connection therewith; or any liens granted on any of the
Collateral in favor of the Lender shall be determined to be void, voidable, or
invalid, or shall not be given the priority contemplated by this Agreement; or
(m) there is a change, other than a change which results from the
sale of newly issued securities to investors, in more than 35% of the ownership
of any equity interests of the Borrower on the date hereof or more than 35% of
such interests become subject to any contractual, judicial, or statutory lien,
charge, security interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred and be
continuing:
(a) The Lender may, without prejudice to any of its other rights
under any Loan Document or Applicable Law, declare all Obligations to be
immediately due and payable (except with respect to any Event of Default set
forth in Section 7(f) hereof, in which case all Obligations shall automatically
become immediately due and payable without necessity of any declaration)
without presentment, representation, demand of payment, or protest, which are
hereby expressly waived.
(b) The Lender may, upon three (3) days' prior notice, take
possession of the Collateral and, for that purpose may enter, with the aid and
assistance of any person or persons, any premises where the Collateral or any
part hereof is, or may be placed, and remove the same.
<PAGE> 17
(c) The obligation of the Lender, if any, to make additional Loans
or financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein (or in any Loan
Document) or otherwise available to it, all the rights and remedies of a
secured party under the applicable Uniform Commercial Code (the "Code") whether
or not the Code applies to the affected Collateral and also may (i) require the
Borrower to, and the Borrower hereby agrees that it will at its expense and
upon request of the Lender forthwith, assemble all or part of the Collateral as
directed by the Lender and make it available to the Lender at a place to be
designated by the Lender that is reasonably convenient to both parties and
(ii) without notice except as specified below, sell the Collateral or any part
thereof in one or more parcels at public or private sale, at any of the
Lender's offices or elsewhere, for cash, on credit, or for future delivery, and
upon such other terms as the Lender may deem commercially reasonable. The
Borrower agrees that, to the extent notice of sale shall be required by law, at
least ten days' notice to the Borrower of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. The Lender shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Lender may
adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.
(e) All cash proceeds received by the Lender in respect of any sale
of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for, or then or at any time thereafter applied in whole or in part
by the Lender against, all or any part of the Obligations in such order as the
Lender shall elect. Any surplus of such cash or cash proceeds held by the
Lender and remaining after the full and final payment of all the Obligations
shall be paid over to the Borrower or to such other Person to which the Lender
may be required under applicable law, or directed by a court of competent
jurisdiction, to make payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
SECTION 9.1. NOTICES. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to the Lender, then to Transamerica Technology Finance
Division, 76 Batterson Park Road, Farmington, Connecticut 06032, Attention:
Assistant Vice President, Lease Administration, with a copy to the Lender at
Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018, Attention: Legal Department, and if to the Borrower, then to AboveNet
Communications, Inc., 50 W. San Fernando Street #1010, San Jose, California
95113, Attention: Controller, with a copy to Gunderson Dettmer,
155 Constitution Drive, Menlo Park, California 94025, Attention: Carla Newell,
Esq. or such other address as shall be designated by the Borrower or the Lender
to the other party in accordance herewith. All such notices and correspondence
shall be effective when received.
SECTION 9.2. HEADINGS. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3. ASSIGNMENTS. The Borrower shall not have the right to
assign any Note or this Agreement or any interest therein unless the Lender
shall have given the Borrower prior written consent and the Borrower and its
assignee shall have delivered assignment documentation in form and substance
satisfactory to the Lender in its sole discretion. The Lender may assign its
rights and delegate its obligations under any Note or this Agreement.
SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment or
waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of
<PAGE> 18
Section 9.3
SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of the essence in each
provision of this Agreement of which time is an element. All terms not defined
herein or in a Note shall have the meaning set forth in the applicable Code,
except where the context otherwise requires. To the extent a term or provision
of this Agreement conflicts with any Note, or any term or provision thereof, and
is not dealt with herein with more specificity, this Agreement shall control
with respect to the subject matter of such term or provision. Acceptance of or
acquiescence in a course of performance rendered under this Agreement shall not
be relevant in determining the meaning of this Agreement even though the
accepting or acquiescing party had knowledge of the nature of the performance
and opportunity for objection.
SECTION 9.6. CONTINUING SECURITY INTEREST. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the indefeasible payment in full of the Obligations, (ii)
be binding upon the Borrower and its successors and assigns and (iii) inure,
together with the rights and remedies of the Lender hereunder, to the benefit of
the Lender and its successors, transferees, and assigns.
SECTION 9.7. REINSTATEMENT. To the extent permitted by law, this
Agreement and the rights and powers granted to the Lender hereunder and under
the Loan Documents shall continue to be effective or be reinstated if at any
time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization or the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. SURVIVAL OF PROVISIONS. All representations, warrants, and
covenants of the Borrower contained herein shall survive the execution and
delivery of this Agreement, and shall terminate only upon the full and final
payment and performance by the Borrower of the Obligations secured hereby.
SECTION 9.9 INDEMNIFICATION. The Borrower agrees to indemnify and hold
harmless the Lender and its directors, officers, agents, employees, and counsel
from and against any and all costs, expenses, claims or liability incurred by
the Lender or such Person hereunder and under any other Loan Document or in
connection herewith or therewith, unless such claim or liability shall be due to
willful misconduct or gross negligence on the part of the Lender or such Person.
SECTION 9.10. COUNTERPART; TELECOPIED SIGNATURES. This Agreement may be
executed in counterparts, each of which when so executed and delivered shall be
an original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.
SECTION 9.11. SEVERABILITY. In case any provision in or obligation under
this Agreement or any Note or any other Loan Document shall be invalid, illegal,
or unenforceable in any jurisdiction, the validity, legality, and enforceability
of the remaining provisions or obligations, or of such provision or obligation
in nay other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or omission
of the Lender to exercise any right or remedy hereunder, whether before or after
the happening of any Event of Default, shall impair any such right or shall
operate as a waiver thereof or as a waiver of any such Event of Default. No
single or partial exercise by the Lender of any right or remedy shall preclude
any other or further exercise thereof, or preclude any other right or remedy.
<PAGE> 19
SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the Lender agree that
this Agreement, the Schedule hereto, and the Commitment Letter are the complete
and exclusive statement and agreement between the parties with respect to the
subject matter hereof, superseding all proposals and prior agreements, oral or
written, and all other communications between the parties with respect to the
subject matter hereof. Should there exist any inconsistency between the terms
of the Commitment Letter and this Agreement, the terms of this Agreement shall
prevail.
SECTION 9.14. SETOFF. In addition to and not in limitation of all rights
of offset that the Lender may have under Applicable Law, and whether or not the
Lender has made any demand or the Obligations of the Borrower have matured, the
Lender shall have the right to appropriate and apply to the payment of the
Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. COVERING LAW. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT
OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW
OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE
COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF THE UNITED
STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND
DELIVER OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH
ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO
INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT
OF THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH
RESPECT TO RIGHTS AND REMEDIES.
<PAGE> 20
IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement to
be duly executed and delivered by its proper and duly authorized officer as of
the date first set forth above.
ABOVENET COMMUNICATIONS, INC.
By:
---------------------------
Name:
Title:
Federal Tax ID:
Accepted as of the
day of September, 1988
- ---
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
---------------------------
Name:
Title:
<PAGE> 21
AMENDED AND RESTATED
INTELLECTUAL PROPERTY SECURITY AGREEMENT
THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT is made and entered into as
of this 28th day of May, 1998 (this "Agreement") and amended and restated as of
September 28, 1998, between ABOVENET COMMUNICATIONS, INC., a California
corporation (the "Grantor"), with and in favor of TRANSAMERICA BUSINESS CREDIT
CORPORATION, a Delaware corporation (the "Lender").
WHEREAS, the Grantor is entering into a Master Loan and Security Agreement
dated as of even date herewith (as amended, supplemented or otherwise modified
from time to time, the "Loan Agreement"; terms which are capitalized herein and
not otherwise defined shall have the meanings given to them in the Loan
Agreement) with the Lender, pursuant to which the Lender agreed to make loans
and advances to the Grantor, subject to the terms and conditions set forth in
the Loan Agreement; and
WHEREAS, under the Loan Agreement, the Grantor has granted to the Lender a
security interest in and lien on substantially all of its assets; and
WHEREAS, it is a condition precedent to the effectiveness of the Loan
Agreement that the Grantor shall have executed and delivered this Agreement and
granted a security interest in all of the Grantor's right, title and interest in
and to all of the Intellectual Property Collateral (as hereinafter defined) in
favor of the Lender, as contemplated hereby.
NOW, THEREFORE, in consideration of the premises hereof and to induce the
Lender to enter into the Loan Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
SECTION 1. Security for Obligations.
(a) Security Interest in Patents. To secure the full and prompt
payment and performance when due (whether at stated maturity, by acceleration or
otherwise) of all of the Obligations, the Grantor hereby grants and conveys to
the Lender a valid security interest in, with a power of sale to the extent
permitted by law, all of its right, title and interest in the United States and
throughout the world, in and to all of the now owned and hereafter acquired
United States and foreign patents and all patent and design patent applications,
and all issues, reissues, re-examinations, continuations, continuations-in-part
or divisions thereof, and all proceeds thereof (hereinafter collectively
referred to as the "Patents"). All unexpired patents and all currently pending
patent applications in which the Grantor has an interest are listed on Schedule
A attached hereto and made a part hereof. Subject to the provisions of Section
2(n), the Grantor hereby further grants, assigns and conveys to the Lender a
valid security interest in all of the right, title and interest of the Grantor
in and to all products, proceeds, income, royalties, damages and payments now or
hereafter due and payable under or in respect of all Patents and, subject to the
provisions of Section 2(n), in and to all rights during the term of this
Agreement to sue, collect and retain for the Lender's benefit damages and
payments for past or future infringements of the Patents.
(b) Security Interest in Trademarks. To secure the payment and
performance of all of the Obligations, the Grantor hereby grants and conveys to
the Lender a valid security interest in, with a power of sale to the extent
permitted by applicable law, all of its right, title and interest, in the United
States and throughout the world, in and to all of its now owned and hereafter
acquired trademarks, service marks and trade names, and all variants thereof
(whether or not such name is the subject of a registration or an application
therefor), and all registrations and applications to register the same, and all
renewals thereof, and the goodwill of the business relating thereto, and all
proceeds thereof (hereinafter collectively referred to as the "Trademarks"). All
United States trademark registrations and all currently pending trademark
applications in which the Grantor has an interest and all foreign trademark
registrations and all currently pending trademark applications in which the
Grantor has an interest, are listed on Schedule B attached hereto and made a
part hereof. Subject to the provisions of Section 2(n), the Grantor hereby
further grants to the Lender a valid security interest in all of its right,
title and interest in and to
<PAGE> 22
(i) all products, proceeds, income, royalties, damages and payments now and
hereafter due and payable under or in respect of all Trademarks, (ii) subject
to the provisions of Section 2(n), all rights during the term of this Agreement
to sue, collect and retain for the Lender's benefit damages and payments for
past or future infringements of the Trademarks and (iii) all rights under or
interest in any trademark license agreements or service mark license agreements
with any other party, whether the Grantor is a licensee or licensor under any
such license agreement, and the right to prepare for sale and sell any and all
assets now or hereafter owned by the Grantor and now or hereafter covered by
such licenses.
(c) Security Interest in Copyrights. To secure the payment and
performance of all of the Obligations, the Grantor hereby grants to the Lender
a valid security interest in all of its right, title and interest, in the
United States and throughout the world, in and to all of its now owned and
hereafter acquired copyrights, and all registrations and applications to
register the same, all renewals thereof, any written agreement, naming the
Grantor as licensor or licensee, granting any right under any copyright, any
work which is or may be subject to copyright protection pursuant to Title 17 of
the U.S. Code, and all physical things embodying such works (including, without
limitation, copies thereof) created or otherwise used in the business of the
Grantor, and all proceeds thereof (hereinafter collectively referred to as the
"Copyrights"). All copyright registrations and all currently pending copyright
applications in which the Grantor has an interest are listed on Schedule C
attached hereto and made a part hereof. Subject to the provisions of Section
2(n), the Grantor hereby further grants to the Lender a valid security interest
in all of its right, title and interest in and to all products, proceeds,
income, royalties, damages and payments now and hereafter due and payable under
or in respect of all Copyrights and, subject to the provisions of Section 2(n),
in and to all rights during the term of this Agreement to sue, collect and
retain for the Lender's benefit damages and payments for past or future
infringements of the Copyrights.
(d) Security Interest in Proprietary Information. To Secure the
payment and performance of all of the Obligations, the Grantor hereby grants to
the Lender a valid security interest in all of its right, title and interest, in
the United States and throughout the world, in and to all of its now owned and
hereafter acquired inventions, discoveries, trade secrets, improvements,
processes, methods, formulae, applications, ideas, know-how, customer lists,
corporate and other business records, license rights, advertising materials,
operating manuals, sales literature, drawings, specifications, descriptions,
name plates, catalogues, dealer contracts, supplier contracts, distributor
agreements, confidential information, consulting agreements, engineering
contracts, proprietary information and goodwill (and all other assets which
uniquely reflect such goodwill), and to all income, royalties, damages and
payments now and hereafter due or payable therefor or in respect thereof
(collectively, the "Proprietary Information" and, together with the Patents, the
Trademarks and the Copyrights, the "Intellectual Property Collateral").
SECTION 2. Representations, Warranties and Covenants of the Grantor.
(a) The Grantor is and will continue to be the owner of all of the
Intellectual Property Collateral, free from any adverse claim, security
interest, lien or encumbrance in favor of any Person except for the security
interest granted to the Lender and except for Permitted Liens.
(b) None of the Intellectual Property Collateral is or shall become
subject to any Lien in favor of any Person other than the Lender and except for
any Permitted Liens, and the Grantor agrees that it shall not license,
transfer, convey or encumber any interest in or to the Intellectual Property
Collateral, except for licenses for use outside of the United States.
Notwithstanding the foregoing, the Grantor shall be permitted to license any of
the Trademarks on a non-exclusive basis in the ordinary course of business to
(i) third parties for the sole purpose of manufacturing, marketing,
advertising, distributing, or selling goods that are not manufactured,
marketed, advertised, distributed, or sold by the Grantor, or (ii) third
parties that do not manufacture, market, advertise, distribute, or sell goods
in the United States or to others for sale in the United States. Any license of
the Intellectual Property Collateral granted by the Grantor (each, a "License")
shall be in writing and shall reserve all rights in the Grantor except those
reasonably necessary in the ordinary course of business to fulfill the
permitted purposes herein. The Grantor shall cause a copy of each License to be
delivered to the Lender within thirty (30) days of execution by all parties
thereto.
2
<PAGE> 23
(c) Except as disclosed in Schedule D hereto, the Grantor has made no
previous assignment, transfer or agreement in conflict herewith or constituting
a present or future assignment, transfer, or encumbrance of any of the
Intellectual Property Collateral.
(d) Except as disclosed in Schedule D hereto, there is no financing
statement or other document or instrument now signed or on file in any public
office granting a security interest in or otherwise encumbering any part of the
Intellectual Property Collateral, except those showing the Lender as secured
party. So long as this Agreement remains in effect, the Grantor will not
execute, and there will not be on file in any public office, any such financing
statement or other document or instruments, except financing statements filed or
to be filed in favor of the Lender or except for those financing statements
disclosed on Schedule D hereto.
(e) Subject to any limitation stated therein or in connection therewith,
all information furnished to the Lender concerning the Intellectual Property
Collateral and proceeds thereof is and will be accurate and correct in all
material respects.
(f) Except as disclosed in Schedule D hereto, all Intellectual Property
Collateral consisting of applications for Patents and for registrations of
Trademarks and Copyrights has been duly and properly filed and all Intellectual
Property Collateral consisting of issued or granted Patents and of registrations
of Trademarks and Copyrights (including, without limitation, any and all
renewals, reissues, continuations or divisions thereof, as the case may be) has
been duly and properly maintained.
(g) Promptly upon the receipt of an official filing receipt indicating
that a patent application or an application for registration of a trademark has
been received by the U.S. Patent and Trademark Office or an application for
registration of a copyright has been received by the U.S. Copyright Office and
upon the issuance of any patent or of any trademark or copyright registration,
the Grantor agrees to notify the Lender in writing, which notice shall identify
such patent, trademark or copyright application or patent, trademark or
copyright registration, and the Grantor shall execute all documents necessary to
perfect a security interest in such patent, trademark or copyright application
or such patent or trademark or copyright registration, and the Grantor shall
annually, or more frequently as the Lender shall request, cause an instrument
sufficient to perfect, protect or establish any Lien hereunder to be recorded in
the U.S. Patent and Trademark Office with respect to all United States patent
applications filed by it or patents issued to it during the prior calendar year
and with respect to all trademark applications filed by it or trademark
registrations issued to it during the prior calendar year, and the Grantor shall
annually, or more frequently as the Lender shall request, cause an instrument
sufficient to perfect, protect or establish any Lien hereunder to be recorded in
the U.S. Copyright Office with respect to United States copyright applications
filed by it or copyright registrations issued to it during the prior calendar
year.
(h) The Grantor shall not take any action or permit any action to be taken
by others subject to the Grantor's control, including licensees, or fail to take
any action, or permit others subject to the Grantor's control, including
licensees, to fail to take any action, subject to the provisions of Section
2(g), which would, in the case of any such actions or failures to act taken
singly or together, adversely affect the validity, grant and enforceability of
the security interest granted to the Lender hereunder. Notwithstanding the
foregoing, the Grantor shall be permitted to abandon any of the Trademarks in
accordance with the terms of Section 2(l).
(i) The Grantor shall promptly notify the Lender, in writing, of any suit,
action, proceeding, claim or counterclaim brought against the Grantor that would
reasonably be expected to affect adversely the Intellectual Property Collateral,
and shall, on request, deliver to the Lender a copy of all pleadings, papers,
orders or decrees theretofore and thereafter filed in any such suit, action or
proceeding, and shall keep the Lender duly advised in writing of the progress of
any such suit.
(j) To the best knowledge and belief of the Grantor after due inquiry, no
infringement or unauthorized use presently is being made of any Intellectual
Property Collateral. In the event of any material infringement of the
Intellectual Property Collateral by others or in the event of any other conduct
detrimental to the Intellectual Property Collateral by others known or brought
to the attention of the Grantor, the Grantor shall promptly notify the Lender in
writing at its address set forth in Section 5(a) of such infringement or
3
<PAGE> 24
other conduct and the full nature, extent, evidence and facts of such
infringement or other conduct known to the Grantor.
(k) If requested by the Lender, the Grantor shall provide the
Lender a complete status report of all Intellectual Property Collateral. Upon
request by the Lender, the Grantor shall deliver to counsel for the Lender
copies of any such Intellectual Property Collateral and other documents
concerning or related to the prosecution, protection, maintenance, enforcement
and issuance of the Intellectual Property Collateral.
(l) The Grantor shall notify the Lender in writing at the
address set forth in Section 5(a) at least sixty days prior to any proposed
voluntary abandonment of any Intellectual Property Collateral (other than items
of Intellectual Property Collateral that are not useful or beneficial to the
business and operations of the Grantor) and obtain the prior written consent of
the Lender to such abandonment.
(m) During the term of this Agreement, the Grantor agrees:
(i) whenever any of the registered Trademarks are used by or
on behalf of the Grantor, if reasonably practicable, to affix or cause
to be affixed a notice that the mark is a registered trademark or
service mark, which notice shall be in a form accepted or required by
the trademark marking laws of each country in which the mark is so
used and registered; and
(ii) whenever any of the underlying works covered by
registered Copyrights are used by or on behalf of the Grantor, if
reasonably practicable, to affix or cause to be affixed a notice that
said underlying works are to be covered, which notice shall be in a
form accepted or required by the copyright laws of such country in
which said underlying works are so used and registered.
(n) Subject to the provisions of Section 4(g), during the
term of this Agreement, all income, royalties, payments and damages due and
payable to the Grantor under or in respect of the Intellectual Property
Collateral shall be paid to the Grantor.
(o) The Grantor agrees, upon the reasonable request by the
Lender, during the term of this Agreement:
(i) to execute, acknowledge and deliver all additional
instruments and documents necessary or desirable to effect the
purposes and intents of this Agreement, in a form reasonably
acceptable to counsel for the Lender; and
(ii) to do all such other acts as may be necessary or
appropriate to carry out the purposes and intents of this Agreement,
and to create, evidence, perfect and continue the security interests
of the Lender in the Intellectual Property Collateral.
SECTION 3. INDEMNITY. The Grantor agrees to indemnify the Lender from
and against any and all claims, losses and liabilities arising out of or
resulting from this Agreement (including, without limitation, enforcement of
this Agreement and any actions taken pursuant to Section 4 or any failure to act
thereunder).
SECTION 4. Rights and Remedies Upon an Event of Default.
(a) If any Event of Default shall have occurred and be
continuing, then and in every such case, subject to any mandatory Requirements
of Law, the Lender, in addition to other rights and remedies provided for herein
and any rights now or hereafter existing under applicable law, shall have all
rights and remedies as a secured creditor under the Uniform Commercial Code in
all relevant jurisdictions and may:
(i) personally, or any agents or attorneys, upon three days'
prior notice take possession of the Intellectual Property Collateral
or any part thereof, from the Grantor or any
<PAGE> 25
other Person who then has possession of any part thereof, with or
without notice or process of law, and for that purpose may enter upon the
Grantor's premises where any of the Intellectual Property Collateral is
located and remove the same and use in connection with such removal any
and all services, supplies, aids and other facilities of the Grantor; and
(ii) sell, assign or otherwise liquidate, or direct the Grantor to
sell, assign or otherwise liquidate, any or all of the Intellectual
Property Collateral or any part thereof, and take possession of the
proceeds of any such sale or liquidation;
(b) Any collateral repossessed by the Lender under or pursuant to
Section 4(a) and any other Intellectual Property Collateral whether or not so
repossessed by the Lender, may be sold, assigned, leased or otherwise disposed
of under one or more contracts or as an entirety, and without the necessity of
gathering at the place of sale the property to be sold, and in general in such
manner, at such time or times, at such place or places and on such terms as the
Lender may, in compliance with any Requirements of Law, determine to be
commercially reasonable. Any such disposition which shall be a private sale or
other private proceedings permitted by such requirements shall be made upon not
less than 10 days' written notice to the Grantor specifying the time at which
such disposition is to be made and the intended sale price or other
consideration therefor, and shall be subject, for the 10 days after the giving
of such notice, to the right of the Grantor or any nominee of the Grantor to
acquire the Intellectual Property Collateral involved at a price or for such
other consideration at least equal to the intended sale price or other
consideration so specified. Any such disposition which shall be a public sale
permitted by such requirements shall be made upon not less than 10 days'
written notice to the Grantor specifying the time and place of such sale and,
in the absence of applicable Requirements of Law, shall be by public auction
(which may, at the option of the Lender, be subject to reserve), after
publication of notice of such auction not less than 10 days prior thereto in
two newspapers of general circulation in the jurisdiction in which such auction
is to be held. To the extent permitted by any such Requirements of Law, the
Lender may bid for and become the purchaser of the Intellectual Property
Collateral or any item thereof, offered for sale in accordance with this
Section without accountability to the Grantor (except to the extent of surplus
money received). If, under mandatory Requirements of Law, the Lender shall be
required to make disposition of the Intellectual Property Collateral within a
period of time which does not permit the giving of notice to the Grantor as
hereinabove specified, the Lender need give the Grantor only such notice of
disposition as shall be reasonably practicable in view of such mandatory
Requirements of Law. The Lender shall not be obligated to make any sale of
Intellectual Property Collateral regardless of notice of sale having been
given. The Lender may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned.
(c) Upon the occurrence and continuance of an Event of Default, the
Lender shall have the right at any time to make any payments and do any other
acts the Lender may deem necessary to protect its security interests in the
Intellectual Property Collateral, including, without limitation, the rights to
pay, purchase, contest or compromise any Lien which, in the reasonable judgment
of the Lender, appears to be prior to or superior to the security interests
granted hereunder, and appear in and defend any action or proceeding purporting
to affect its security interests in, or the value of, the Intellectual Property
Collateral. The Grantor hereby agrees to reimburse the Lender for all payments
made and expenses incurred under this Agreement including reasonable fees,
expenses and disbursements of attorneys and paralegals acting for the Lender,
including any of the foregoing payments under, or acts taken to protect its
security interests in, the Intellectual Property Collateral, which amounts
shall be secured under this Agreement, and agrees it shall be bound by any
payment made or act taken by the Lender hereunder absent the Lender's gross
negligence or willful misconduct. The Lender shall have no obligation to make
any of the foregoing payments or perform any of the foregoing acts.
(d) The Grantor hereby irrevocably authorizes and appoints the
Lender, or any Person or agent the Lender may designate, as the Grantor's
attorney-in-fact, with full authority in the place and stead of the Grantor and
in the name of the Grantor or otherwise, at the Grantor's cost and expense, in
the Lender's good faith business judgment, to take any action and to execute
any instrument that the Lender may deem necessary or advisable to accomplish
the purposes and intents of this Agreement and to exercise all of the following
powers upon and at any time after the occurrence and during the continuance of
an Event of Default, which powers, being
5
<PAGE> 26
coupled with an Interest, shall be irrevocable until all of the Obligations
shall have been paid and satisfied in full:
(i) ask for, demand, collect, bring suit, recover,
compromise, administer, accelerate or extend the time of payment,
issue credits, compromise, receive and give acquittance and
receipts for moneys due and to become due under or in respect of
any of the Intellectual Property Collateral;
(ii) receive, take, endorse, negotiate, sign, assign and
deliver and collect any checks, notes, drafts or other
instruments, documents and chattel paper, in connection with
clause (i) above;
(iii) receive, open and dispose of all mail addressed
to the Grantor and notify postal authorities to change the
address for delivery thereof to such address as the Lender may
designate;
(iv) give customers indebted on the Intellectual
Property Collateral notice of the Lender's interest therein, or
to instruct such customers to make payment directly to the Lender
for the Grantor's account or to request, at any time from
customers indebted on the Intellectual Property Collateral,
verification of information concerning the Intellectual Property
Collateral and the amounts owing thereon;
(v) convey any item of Intellectual Property Collateral
to any purchaser thereof;
(vi) record any instruments under Section 2(g) hereof;
(vii) make any payments or take any acts under Section
4(c) hereof; and
(viii) file any claims or take any action or institute any
proceedings that the Lender may reasonably deem necessary or
desirable for the collection of any of the Intellectual Property
Collateral or otherwise to enforce the rights of the Lender with
respect to any of the Intellectual Property Collateral.
The Lender's authority under this Section 4(d) shall include, without
limitation, the authority to execute and give receipt for any certificate of
ownership or any document, transfer title to any item of Intellectual Property
Collateral, sign the Grantor's name on all financing statements or any other
documents deemed necessary or appropriate to preserve, protect or perfect the
security interest in the Intellectual Property Collateral and to file the same,
prepare, file and sign the Grantor's name on any notice of Lien, assignment or
satisfaction of Lien or similar document in connection with any Intellectual
Property Collateral and prepare, file and sign the Grantor's name on a proof of
claim in bankruptcy or similar document against any customer of the Grantor,
and to take any other actions arising from or incident to the rights, powers
and remedies granted to the Lender in this Agreement. This power of attorney is
coupled with an interest and is irrevocable by the Grantor.
(e) All cash proceeds received by the Lender in respect
of any sale of, collection from, or other realization upon all or any part of
the Intellectual Property Collateral shall be applied by the Lender against the
Obligations in such order as the Lender may determine.
(f) The Lender shall have the right of setoff with
respect to the Intellectual Property Collateral as provided Section 9.14 of the
Loan Agreement.
(g) Upon the occurrence and during the continuance of an
Event of Default, all income, royalties, payments and damages under or in
respect of the Intellectual Property Collateral, if any, received thereafter
shall be held by the Grantor in trust for the benefit of the Lender, separate
from the Grantor's own property or funds and immediately turned over to the
Lender with proper assignments or endorsements. Upon the occurrence and during
the continuance of an Event of Default, the Lender shall have the right to
notify payors of income, royalties, payments and damages under or in respect of
the Intellectual Property Collateral to make
6
<PAGE> 27
payment directly to the Lender.
(h) Each and every right, power and remedy hereby specifically given
to the Lender shall be in addition to every other right, power and remedy
specifically given under this Agreement or under the other Loan Documents or
now or hereafter existing at law or in equity, or by statute, and each and
every right, power and remedy whether specifically herein given or otherwise
existing may be exercised from time to time or simultaneously and as often and
in such order as may be deemed expedient by the Lender. All such rights, powers
and remedies shall be cumulative and the exercise or the beginning of exercise
of one shall not be deemed a waiver of the right to exercise of any other or
others. No delay or omission of the Lender in the exercise of any such right,
power or remedy and no renewal or extension of any of the Obligations shall
impair any such right, power or remedy or shall be construed to be a waiver of
any Default or Event of Default or any acquiescence therein.
SECTION 5. General Provisions.
(a) Notices. All notices, approvals, consents or other communications
required or desired to be given hereunder shall be in writing and sent by
certified or registered mail, return receipt requested, by overnight delivery
service, with all charges prepaid, or by telecopier followed by a hard copy
sent by overnight mail, if to the Lender, then to Transamerica Business Credit
Corporation, 76 Batterson Road, Farmington, Connecticut 06032, Telecopy; (860)
677-6766, Attn.: Gregory Clark, Esq., and if to the Grantor, then to AboveNet
Communications, Inc. 50 W. San Fernando Street #1010, San Jose, California,
95113, Telecopy: (408) 367-6688, Attn.: Mr. Kevin Hourigan, Controller, with a
copy to Gunderson Dettmer, 155 Constitution Drive, Menlo Park, California
94025, Attention: Carla Newell, Esq.. All such notices and correspondence shall
be deemed given (i) if sent by certified or registered mail, three Business
Days after being postmarked, (ii) if sent by overnight delivery service, when
received at the above stated addresses or when delivery is refused and (iii) if
sent by telecopier transmission, when receipt of such transmission is
acknowledged.
(b) Headings. The headings in this Agreement are for purposes of
reference only and shall not affect the meaning or construction of any
provision of this Agreement.
(c) Severability. The provisions of this Agreement are severable, and
if any clause or provision shall be held invalid or unenforceable in whole or
in part in any jurisdiction, then such invalidity or unenforceability shall
affect, in that jurisdiction only, such clause or provision, or part thereof,
and shall not in any manner affect such clause or provision in any other
jurisdiction or any other clause or provision of this Agreement in any
jurisdiction.
(d) Amendments, Waivers and Consents. Any amendment or waiver of any
provision of this Agreement and any consent to any departure by the Grantor
from any provision of this Agreement shall not be effective unless the same
shall be in writing and signed by the Grantor and the Lender and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
(e) Interpretation. Time is of the essence in each provision of this
Agreement of which time is an element. All terms not defined herein or in the
Loan Agreement shall have the meaning set forth in the Code, except where the
context otherwise requires. To the extent a term or provision of this Agreement
conflicts with the Loan Agreement and is not dealt with herein with more
specificity, the Loan Agreement shall control with respect to the subject
matter of such term or provision. Acceptance of or acquiescence in a course of
performance rendered under this Agreement shall not be relevant in determining
the meaning of this Agreement even though the accepting or acquiescing party
had knowledge of the nature of the performance and opportunity for objection.
7
<PAGE> 28
(f) Continuing Security Interest. This Agreement shall create a
continuing security interest in the Intellectual Property Collateral and shall
(i) remain in full force and effect until the payment in full in cash of the
Obligations and the termination of the Loan Agreement, (ii) be binding upon the
Grantor and its successors and assigns and (iii) inure, together with the rights
and remedies of the Lender, to the Lender's successors, transferees and assigns.
Without limiting the generality of the foregoing clause (iii), the Lender may,
in accordance with the terms of the Loan Agreement, assign or otherwise transfer
all or any portion of its rights and obligations under the Loan Documents
(including, without limitation all or any portion of any Loans or any Notes held
by it) to any other Person, and such other Person shall thereupon become vested
with all the benefits in respect thereof granted to the Lender herein or
otherwise, in each case as provided in the Loan Agreement.
(g) Reinstatement. To the extent permitted by law, this Agreement
shall continue to be effective or be reinstated if at any time any amount
received by the Lender in respect of the Obligations is rescinded or must
otherwise be restored or returned by the Lender because the Grantor is the
subject of an Insolvency Event, all as though such payments had not been made.
(h) Survival of Provisions. All representations, warranties and
covenants of the Grantor contained herein shall survive the execution and
delivery of this Agreement, and shall terminate only upon the full and final
payment and performance by the Grantor of the Obligations secured hereby and
termination of the Loan Agreement.
(i) Lender May Perform. If the Grantor fails to perform any
agreement contained herein, the Lender may itself perform, or cause performance
of, such agreement, and the expenses of the Lender incurred in connection
therewith shall be payable by the Grantor and shall constitute Obligations
secured by this Agreement.
(j) No Duty on Lender. The powers conferred on the Lender hereunder
are solely to protect the interest of the Lenders in the Intellectual Property
Collateral and shall not impose any duty upon the Lender to exercise any such
powers. Except for the safe custody of any Intellectual Property Collateral in
its possession and the accounting for money actually received by it hereunder,
the Lender shall have no duty as to any Intellectual Property Collateral, as to
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters related to any Intellectual Property
Collateral, whether or not the Lender has or is deemed to have knowledge of such
matters, or as to the taking of any necessary steps to preserve rights against
any Person or any other rights pertaining to any Intellectual Property
Collateral. The Lender shall be deemed to have exercised reasonable care in the
custody and preservation of any Intellectual Property Collateral in its
possession if such Intellectual Property Collateral is accorded treatment
substantially equal to that which the Lender accords its own property. To the
extent the Intellectual Property Collateral is held by a custodian, the Lender
shall be deemed to have exercised reasonable care if it has selected the
custodian with reasonable care.
(k) Delays; Partial Exercise of Remedies. No delay or omission of
the Lender to exercise any right or remedy hereunder, whether before or after
the happening of any Event of Default, shall impair any such right or shall
operate as a waiver thereof or as a waiver of any such Event of Default. No
single or partial exercise by the Lender of any right or remedy shall preclude
any other or further exercise thereof, or preclude any other right or remedy.
(l) Release; Termination of Agreement. Subject to the provisions of
subsection (g) hereof, upon the payment in full in cash of the Obligations and
the termination of the Loan Agreement, this Agreement shall terminate and all
rights in the Intellectual Property Collateral shall revert to the Grantor. At
such time, the Lender shall, upon the request and at the expense of the Grantor,
(A) execute and deliver to the Grantor such documents as the Grantor shall
reasonably request to evidence such termination and (B) reassign and redeliver
to the Grantor all of the Intellectual Property Collateral hereunder which has
not been sold, disposed of, retained or applied by the Lender in accordance with
the terms hereof. Such reassignment and redelivery shall be without warranty by
or recourse to the Lender, except as to the absence of any prior assignments by
the Lender of its interest in the Intellectual Property Collateral.
8
<PAGE> 29
(m) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but both of which shall
together constitute one and the same agreement.
(n) GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF
THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS, WITHOUT
GIVING EFFECT TO CONFLICT OF LAW PRINCIPLES, EXCEPT TO THE EXTENT THAT FEDERAL
LAW IS APPLICABLE.
(o) SUBMISSION TO JURISDICTION. ALL DISPUTES BETWEEN THE GRANTOR AND
THE LENDER, WHETHER SOUNDING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE
RESOLVED ONLY BY STATE AND FEDERAL COURTS LOCATED IN CHICAGO, ILLINOIS AND THE
COURTS TO WHICH AN APPEAL THEREFROM MAY BE TAKEN; PROVIDED, HOWEVER, THAT THE
LENDER SHALL HAVE THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO
PROCEED AGAINST THE GRANTOR OR ITS PROPERTY IN ANY LOCATION REASONABLY SELECTED
BY THE LENDER IN GOOD FAITH TO ENABLE THE LENDER TO REALIZE ON SUCH PROPERTY,
OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE LENDER. THE
GRANTOR AGREES THAT IT WILL NOT ASSERT ANY PERMISSIVE COUNTERCLAIMS, SETOFFS OR
CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY THE LENDER. THE GRANTOR WAIVES ANY
OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN WHICH THE LENDER HAS
COMMENCED A PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON FORUM NON CONVENIENS.
(p) JURY TRIAL. THE GRANTOR AND THE LENDER EACH HEREBY WAIVES TO THE
FULLEST EXTENT PERMITTED BY LAW ANY RIGHT TO A TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
causing this Agreement to be signed by their respective duly authorized
officers on the day and year first above written.
ABOVENET COMMUNICATIONS, INC.
By:
---------------------------
Name:
Title:
Accepted and Agreed as of the
date first above written:
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By:
--------------------------
Name:
Title:
9
<PAGE> 30
SCHEDULE A
PATENTS AND PARENT APPLICATIONS
<PAGE> 31
SCHEDULE B
TRADEMARKS AND TRADEMARK APPLICATIONS
<PAGE> 32
SCHEDULE C
COPYRIGHT REGISTRATIONS
<PAGE> 33
SCHEDULE D
ASSIGNMENTS, TRANSFERS, AGREEMENTS, FINANCING STATEMENTS, ETC.
<PAGE> 34
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
NO. 3
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
ABOVENET COMMUNICATIONS, INC. (THE "COMPANY")
DATE OF INITIAL ISSUANCE: SEPTEMBER 30, 1998
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Fifty Thousand
(50,000) shares of common stock, $0.01 par value, of the Company (the "Common
Stock"), at the Warrant Price, payable as provided herein. The exercise of this
Warrant shall be subject to the provisions, limitations and restrictions herein
contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, $0.01 par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
TERM OF THIS WARRANT - shall mean the period beginning on the date of
initial issuance hereof and ending on September 29, 2003.
WARRANT PRICE - $2.50 per share, subject to adjustment in accordance
with Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated September 25, 1998 executed by the
Company and Transamerica Business Credit Corporation (the "Commitment Letter")
to the original holder of this Warrant, or any transferees from such original
holder or this Holder.
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
<PAGE> 35
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula (a "Net Exercise"):
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the
Holder
WCS equals the number of shares of Common Stock purchasable under
the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised (at the
date of such calculation)
CMP equals the Current Market Price (at the date of such
calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
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<PAGE> 36
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the Company the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. If
and so long as the Common Stock issuable upon the exercise of this Warrant is
listed on any national securities exchange, the Company will, if permitted by
the rules of such exchange, list and keep listed on such exchange, upon official
notice of issuance, all shares of such Common Stock issuable upon exercise of
this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
- 3 -
<PAGE> 37
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
- 4 -
<PAGE> 38
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with any transfer or
replacement of this Warrant, other than stock transfer taxes (if any) payable in
connection with a transfer of this Warrant, which shall be payable by the
Holder. Holder will not transfer this Warrant and the rights hereunder except in
compliance with federal and state securities laws.
- 5 -
<PAGE> 39
SECTION 7. MERGERS, CONSOLIDATION, SALES.
(i) In the case of any proposed reorganization or reclassification of
the capital stock of the Company, then, as a condition of such reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such reorganization
or reclassification) be issued or payable with respect to or in exchange for the
number of shares of such Common Stock purchasable hereunder immediately before
such reorganization or reclassification. In any such case appropriate provision
shall be made with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof shall thereafter be applicable as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of this Warrant.
(ii) For the purpose of this Warrant, "Acquisition" means any sale,
license, or other disposition of all or substantially all of the assets of the
Company, or any reorganization, consolidation, or merger of the Company where
the holders of the Company's securities before the transaction beneficially own
less than 50% of the outstanding voting securities of the surviving entity after
the transaction.
(iii) If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is greater than or equal to three (3) times the Warrant Price, then the
successor entity may, at its option, either assume the obligations of the
Company under this Warrant or not assume the obligations of the Company under
this Warrant. If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is less than three (3) times the Warrant Price, then the successor
entity shall assume the obligations of the Company under this Warrant. If the
successor entity assumes the obligations of the Company under this Warrant
(whether voluntarily or involuntarily), then this Warrant shall be exercisable
for the same class and amount of securities, cash, and/or other property as
would be payable for the Warrant Shares issuable upon exercise of this Warrant
as if such Warrant Shares were outstanding on the closing date for the
Acquisition. If the successor entity does not assume the obligations of the
Company under this Warrant, then this Warrant shall be deemed to have been
automatically exercised pursuant to the Net Exercise described in Section 2.1
immediately prior to the closing of the Acquisition and thereafter the Holder
shall participate in the Acquisition as a holder of the Warrant Shares (or other
securities issuable upon exercise of this Warrant) on the same terms as other
holders of the same class of securities of the Company.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the
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<PAGE> 40
Holder hereof not less than thirty (30) days prior to the record date fixed for
determining shareholders entitled to participate in such dividend or other
distribution, and the Holder hereof shall not participate in such dividend or
other distribution unless this Warrant is exercised prior to such record date.
The provisions of this Section 9 shall not apply to distributions made in
connection with transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 50 W. San Fernando Street #1010, , San
Jose, California, 95113, Attention: Controller or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
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<PAGE> 41
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. "MARKET STAND-OFF" AGREEMENT. The Holder hereby agrees that it will
not, without the prior written consent of the managing underwriter, during the
period commencing on the date of the final prospectus relating to an
underwritten initial public offering of the Company's securities (an "Initial
Offering") and ending on the date specified by the Company and the managing
underwriter (such period not to exceed one hundred eighty (180) days) (i) lend,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by the Holder or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
provisions of this Section 15 shall apply only to the Company's Initial
Offering, shall not apply to the sale of any shares to an underwriter pursuant
to an underwriting agreement, and shall only be applicable to the Holder if all
officers and directors and greater than one percent (1%) shareholders of the
Company enter into similar agreements. The underwriters in connection with the
Company's Initial Offering are intended third party beneficiaries of this
Section 15 and shall have the right, power and authority to enforce the
provisions hereof as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
SECTION 16. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this _______ day of _________, 199__.
ABOVENET COMMUNICATIONS, INC.
[CORPORATE SEAL]
By: _______________________________
Title: ____________________________
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<PAGE> 42
FORM OF NOTICE OF EXERCISE
[TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares
of Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $__________ therefor;
or
[ ] directs the Company to issue ______
shares, and to withhold ____ shares in
lieu of payment of the Warrant Price,
as described in Section 2.1 of the
Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following denominations:
___________________________________
[Type Name of Holder]
By: _______________________________
Title: ____________________________
Dated:______________________
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<PAGE> 43
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By: _______________________________
Title: ____________________________
Dated:______________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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<PAGE> 44
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By: _______________________________
Title: ____________________________
Dated:______________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
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<PAGE> 45
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
NO. 4
STOCK SUBSCRIPTION WARRANT
TO PURCHASE COMMON STOCK OF
ABOVENET COMMUNICATIONS, INC. (THE "COMPANY")
DATE OF INITIAL ISSUANCE: _____________, 1998
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Fifty Thousand
(50,000) shares of common stock, $0.01 par value, of the Company (the "Common
Stock"), at the Warrant Price, payable as provided herein. The exercise of this
Warrant shall be subject to the provisions, limitations and restrictions herein
contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, $0.01 par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as
amended from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended.
TERM OF THIS WARRANT - shall mean the period beginning on the earlier of
(i) the date on which the Company closes its "Series F" round of equity
financing or (ii) the date upon which the Company closes its initial public
offering of securities and ending on the date which is the fifth (5th)
anniversary of the date of issuance.
WARRANT PRICE - shall mean 80% of (i) the price per share paid by
purchasers of shares of the Company's Series F Preferred Stock or (ii) the
"price to public" for one share of Common Stock in the Company's initial public
offering, whichever occurs first, subject to adjustment in accordance with
Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated September 25, 1998 executed by the
Company and Transamerica Business
<PAGE> 46
Credit Corporation (the "Commitment Letter") to the original holder of this
Warrant, or any transferees from such original holder or this Holder.
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in
whole or in part (but not as to any fractional share of Common Stock), the
Holder shall deliver to the Company at its office referred to in Section 12
hereof at any time and from time to time during the Term of this Warrant: (i)
the Notice of Exercise in the form attached hereto, (ii) cash, certified or
official bank check payable to the order of the Company, wire transfer of funds
to the Company's account, or evidence of any indebtedness of the Company to the
Holder (or any combination of any of the foregoing) in the amount of the Warrant
Price for each share being purchased, and (iii) this Warrant. Notwithstanding
any provisions herein to the contrary, if the Current Market Price (as defined
in Section 5) is greater than the Warrant Price (at the date of calculation, as
set forth below), in lieu of exercising this Warrant as hereinabove permitted,
the Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula (a "Net Exercise"):
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the
Holder
WCS equals the number of shares of Common Stock purchasable under
the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised (at the
date of such calculation)
CMP equals the Current Market Price (at the date of such
calculation)
WP equals the Warrant Price (as adjusted to the date of such
calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of
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<PAGE> 47
such certificate, except that, if the date of such surrender and payment is a
date when the stock transfer books of the Company are closed, such person shall
be deemed to have become the holder of such shares at the close of business on
the next succeeding date on which the stock transfer books are open.
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold or
transferred in the absence of such registration or an exemption
therefrom under said Act."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the Company the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. If
and so long as the Common Stock issuable upon the exercise of this Warrant is
listed on any national securities exchange, the Company will, if permitted by
the rules of such exchange, list and keep listed on such exchange, upon official
notice of issuance, all shares of such Common Stock issuable upon exercise of
this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders of
Common Stock entitled to receive such stock dividend, subdivision or split-up,
the Warrant Price shall be appropriately decreased so that the number of shares
of Common Stock issuable upon the exercise hereof shall be increased in
proportion to such increase in outstanding shares.
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<PAGE> 48
(ii) If, at any time during the Term of this Warrant, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall appropriately increase so that the number
of shares of Common Stock issuable upon the exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first
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<PAGE> 49
class postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above
shall be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided that if the Holder hereof is an instrumentality of a state or
local government or an institutional holder or a nominee for such an
instrumentality or institutional holder an irrevocable agreement of indemnity by
such Holder shall be sufficient for all purposes of this Section 6, and no
evidence of loss or theft or destruction shall be necessary. This Warrant shall
be promptly cancelled by the Company upon the surrender hereof in connection
with any transfer or replacement. Except as otherwise provided above, in the
case of the loss, theft or destruction of a Warrant, the Company shall pay all
expenses, taxes and other charges payable in connection with
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<PAGE> 50
any transfer or replacement of this Warrant, other than stock transfer taxes (if
any) payable in connection with a transfer of this Warrant, which shall be
payable by the Holder. Holder will not transfer this Warrant and the rights
hereunder except in compliance with federal and state securities laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES.
(i) In the case of any proposed reorganization or reclassification of
the capital stock of the Company, then, as a condition of such reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such reorganization
or reclassification) be issued or payable with respect to or in exchange for the
number of shares of such Common Stock purchasable hereunder immediately before
such reorganization or reclassification. In any such case appropriate provision
shall be made with respect to the rights and interests of the Holder of this
Warrant to the end that the provisions hereof shall thereafter be applicable as
nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon the exercise of this Warrant.
(ii) For the purpose of this Warrant, "Acquisition" means any sale,
license, or other disposition of all or substantially all of the assets of the
Company, or any reorganization, consolidation, or merger of the Company where
the holders of the Company's securities before the transaction beneficially own
less than 50% of the outstanding voting securities of the surviving entity after
the transaction.
(iii) If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is greater than or equal to three (3) times the Warrant Price, then the
successor entity may, at its option, either assume the obligations of the
Company under this Warrant or not assume the obligations of the Company under
this Warrant. If, on the closing date for any Acquisition, the Current Market
Price of the Warrant Shares (or other securities issuable upon exercise of this
Warrant) is less than three (3) times the Warrant Price, then the successor
entity shall assume the obligations of the Company under this Warrant. If the
successor entity assumes the obligations of the Company under this Warrant
(whether voluntarily or involuntarily), then this Warrant shall be exercisable
for the same class and amount of securities, cash, and/or other property as
would be payable for the Warrant Shares issuable upon exercise of this Warrant
as if such Warrant Shares were outstanding on the closing date for the
Acquisition. If the successor entity does not assume the obligations of the
Company under this Warrant, then this Warrant shall be deemed to have been
automatically exercised pursuant to the Net Exercise described in Section 2.1
immediately prior to the closing of the Acquisition and thereafter the Holder
shall participate in the Acquisition as a holder of the Warrant Shares (or other
securities issuable upon exercise of this Warrant) on the same terms as other
holders of the same class of securities of the Company.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
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<PAGE> 51
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 50 W. San Fernando Street #1010, , San
Jose, California, 95113, Attention: Controller or to such other address as shall
have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the
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<PAGE> 52
terms hereof. No provision hereof, in the absence of affirmative action by the
Holder to purchase shares of Common Stock, and no mere enumeration herein of the
rights or privileges of the Holder, shall give rise to any liability of the
Holder for the Warrant Price hereunder or as a shareholder of the Company,
whether such liability is asserted by the Company or by creditors of the
Company.
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 15. "MARKET STAND-OFF" AGREEMENT. The Holder hereby agrees that it will
not, without the prior written consent of the managing underwriter, during the
period commencing on the date of the final prospectus relating to an
underwritten initial public offering of the Company's securities (an "Initial
Offering") and ending on the date specified by the Company and the managing
underwriter (such period not to exceed one hundred eighty (180) days) (i) lend,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by the Holder or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
provisions of this Section 15 shall apply only to the Company's Initial
Offering, shall not apply to the sale of any shares to an underwriter pursuant
to an underwriting agreement, and shall only be applicable to the Holder if all
officers and directors and greater than one percent (1%) shareholders of the
Company enter into similar agreements. The underwriters in connection with the
Company's Initial Offering are intended third party beneficiaries of this
Section 15 and shall have the right, power and authority to enforce the
provisions hereof as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may impose stop-transfer
instructions with respect to the Registrable Securities of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
SECTION 16. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this _______ day of _________, 199__.
ABOVENET COMMUNICATIONS, INC.
[CORPORATE SEAL]
By: _______________________________
- 8 -
<PAGE> 53
Title: ____________________________
- 9 -
<PAGE> 54
FORM OF NOTICE OF EXERCISE
[TO BE SIGNED ONLY UPON EXERCISE OF THE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares
of Common Stock which the undersigned is entitled to purchase by the terms of
the within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $__________ therefor; or
[ ] directs the Company to issue ______
shares, and to withhold ____ shares in
lieu of payment of the Warrant Price, as
described in Section 2.1 of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following denominations:
___________________________________
[Type Name of Holder]
By: _______________________________
Title: ____________________________
Dated:______________________
- 10 -
<PAGE> 55
FORM OF ASSIGNMENT
(ENTIRE)
[TO BE SIGNED ONLY UPON TRANSFER OF ENTIRE WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By: _______________________________
Title: ____________________________
Dated:______________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- 11 -
<PAGE> 56
FORM OF ASSIGNMENT
(PARTIAL)
[TO BE SIGNED ONLY UPON PARTIAL TRANSFER OF WARRANT]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
___________________________________
[Type Name of Holder]
By: _______________________________
Title: ____________________________
Dated:______________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- 12 -
<PAGE> 1
EXHIBIT 99.1
[GUNDERSON DETTMER LETTERHEAD]
October 14, 1998
Michael Shire
Forrester Research, Inc.
1033 Massachusetts Ave.
Cambridge, MA 02138
Dear Mr. Shire:
As you may or may not be aware, AboveNet Communications Inc. (the
"Company"), our client, is proposing an initial public offering of its Common
Stock ("IPO"). In connection with the IPO, the Company filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the "SEC"),
containing certain information as to projections and other data concerning the
Internet market. In response to SEC comments to the registration statement, the
Company is hereby requesting your consent to reference selected portions of the
Forrester Report entitled "Telecom Strategies" in their registration statement
and to file such consent as an amendment to the registration statement. The
quoted portions of the report are attached for your review.
<PAGE> 2
Page 2
To acknowledge your consent to the foregoing, please execute the signature
block below and fax this letter back to me at (650) 321-2800. The Company is
filing an amendment to its registration statement on Friday, October 16, 1998
with its responses to the SEC comments and would therefore appreciate your
feedback on this matter by the end of the week if possible. We appreciate your
immediate attention to this matter. If you have any questions or would like
additional information, please call Allison Takahashi at (650) 463-5375.
Best Regards,
/s/ TABETHA L. NAKASONE
-----------------------
Tabetha L. Nakasone
ACKNOWLEDGED AND CONSENTED:
- ---------------------------
FORRESTER RESEARCH, INC.
By: /s/ MICHAEL SHIRER
----------------------------
Signature
Michael Shirer
- -------------------------------
Please print name
Public Relations Manager
- -------------------------------
Title, if applicable
10/16/98
- -------------------------------
Date
<PAGE> 1
EXHIBIT 99.2
October 14, 1998
Janis Dempsey
International Data Corporation
5 Speen Street
Framingham, MA 01701
Dear Ms. Dempsey:
As you may or may not be aware, AboveNet Communications Inc. (the
"Company"), our client, is proposing an initial public offering of its Common
Stock ("IPO"). In connection with the IPO, the Company filed a registration
statement on Form S-1 with the Securities and Exchange Commission (the "SEC"),
containing certain information as to projections and other data concerning the
Internet market. In response to SEC comments to the registration statement, the
Company is hereby requesting your consent to reference selected portions of the
report entitled "The U.S. and Worldwide Forecast for Internet Usage and
Commerce" in their registration statement and to file such consent as an
amendment to the registration statement. The quoted portions of the report are
attached for your review.
<PAGE> 2
Page 2
To acknowledge your consent to the foregoing, please execute the
signature block below and fax this letter back to me at (650) 321-2800. The
Company is filing an amendment to its registration statement on Friday, October
16, 1998 with its responses to the SEC comments and would therefore appreciate
your feedback on this matter by the end of the week if possible. We appreciate
your immediate attention to this matter. If you have any questions or would
like additional information, please call Allison Takabashi at (650) 463-5375.
Best Regards,
/s/ Tabetha L. Nakasone
-----------------------
Tabetha L. Nakasone
ACKNOWLEDGED AND CONSENTED:
INTERNATIONAL DATA CORPORATION
By: /s/ Michael Sullivan-Trainor
----------------------------
Signature
Michael Sullivan-Trainor
----------------------------
Please print name
Vice President
----------------------------
Title, if applicable
10/19/98
----------------------------
Date
