<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 000-25063
ABOVENET COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0424796
(State of incorporation) (IRS Employer Identification No.)
50 W. SAN FERNANDO STREET, SUITE #1010, SAN JOSE, CALIFORNIA 95113
(Address of principal executive offices) (Zip Code)
(408) 367-6666
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) Yes X No ___, and (2) has been
subject to such filing requirements for the past 90 days. Yes No X .
The number of shares outstanding of the Registrant's Common Stock as of
February 5, 1999 was 13,593,703.
================================================================================
<PAGE> 2
ABOVENET COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Condensed Balance Sheets as of December 31, 1998
and June 30, 1998 1
Condensed Statements of Operations for the Three Months
and Six Months Ended December 31, 1998 and
December 31, 1997 2
Condensed Statements of Cash Flows for the Six Months
Ended December 31, 1998 and December 31, 1997 3
Notes to Condensed Financial Statements 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION 21
SIGNATURES 23
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ABOVENET COMMUNICATIONS INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ....................................... $ 8,141,200 $ 67,903,500
Short-term investments ..................................... -- 974,900
Accounts receivable, net of reserves
of $60,000 at June 30, 1998 and
$257,100 at December 31, 1998 ............................ 357,000 1,471,000
Prepaid expenses and other current assets .................. 269,600 737,100
------------ ------------
Total current assets ................................ 8,767,800 71,086,500
Property and equipment, net .................................. 4,436,100 15,007,600
Restricted cash .............................................. 300,000 --
Right to use fiber optic capacity ............................ -- 8,300,000
Deposits and other assets .................................... 189,400 1,337,700
------------ ------------
Total ............................................... $ 13,693,300 $ 95,731,800
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................... $ 2,301,300 $ 2,329,600
Remaining obligation for right to use
fiber optic capacity ..................................... -- 6,425,000
Accrued liabilities ........................................ 619,900 1,016,500
Customer deposits .......................................... 309,400 653,800
Current portion of long-term obligations.................... 476,000 1,937,700
------------ ------------
Total current liabilities ........................... 3,706,600 12,362,600
------------ ------------
Convertible notes payable and advances ....................... 8,000,000 --
------------ ------------
Other long-term obligations .................................. 1,325,300 6,500,100
------------ ------------
Stockholders' equity:
Preferred stock, $0.001 par value, 14,000,000
shares authorized; 4,659,896 shares
issued and outstanding at June 30,
1998, none at December 31, 1998 .......................... 6,606,500 --
Common stock, $0.001 par value,
20,000,000 shares authorized;
364,348 shares issued and
outstanding at June 30, 1998,
13,593,956 at December 31, 1998 .......................... 38,900 89,327,100
Common stock options ....................................... 1,861,500 3,467,400
Deferred stock compensation ................................ (540,100) (76,900)
Accumulated deficit ........................................ (7,305,400) (15,848,500)
------------ ------------
Total stockholders' equity .......................... 661,400 76,869,100
------------ ------------
Total ............................................... $ 13,693,300 $ 95,731,800
============ ============
</TABLE>
See notes to condensed financial statements.
1
<PAGE> 4
ABOVENET COMMUNICATIONS INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ......................... $ 674,600 $ 2,653,100 $ 1,105,500 $ 4,446,200
------------ ------------ ------------ ------------
Costs and expenses:
Data communications and
telecommunications .......... 372,800 1,749,800 628,800 2,829,700
Network operations ............. 222,800 1,250,000 444,600 2,022,800
Sales and marketing ............ 216,400 2,137,000 475,000 3,492,800
General and administrative ..... 276,900 1,248,100 475,800 2,060,800
Depreciation and amortization .. 95,400 543,500 181,800 1,203,300
Stock-based compensation expense 35,100 733,400 49,400 1,169,600
------------ ------------ ------------ ------------
Total costs and expenses 1,219,400 7,661,800 2,255,400 12,779,000
------------ ------------ ------------ ------------
Loss from operations ............. (544,800) (5,008,700) (1,149,900) (8,332,800)
Interest expense ................. (67,000) (345,900) (125,800) (493,500)
Interest and other income ........ 7,400 162,400 9,300 283,200
------------ ------------ ------------ ------------
Net loss ......................... $ (604,400) $ (5,192,200) $ (1,266,400) $ (8,543,100)
============ ============ ============ ============
Basic and diluted loss per share . $ (2.77) $ (1.56) $ (5.91) $ (4.50)
============ ============ ============ ============
Shares used in basic and diluted
loss per share ................. 218,200 3,337,900 214,400 1,897,000
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
2
<PAGE> 5
ABOVENET COMMUNICATIONS INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss ....................................... $ (1,266,400) $ (8,543,100)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 181,800 1,203,300
Stock-based compensation expense ............. 49,400 1,169,600
Noncash interest expense ..................... 112,000 22,900
Changes in assets and liabilities:
Accounts receivable ........................ (112,600) (1,114,000)
Prepaid expenses and other current assets .. (21,600) (467,500)
Restricted cash ............................ (300,000) 300,000
Deposits and other assets .................. (21,000) (271,700)
Accounts payable ........................... 73,100 28,300
Accrued liabilities ........................ 92,700 396,600
Customer deposits .......................... 82,200 344,400
Deferred rent .............................. -- 78,900
------------ ------------
Net cash used in operating activities ...... (1,130,400) (6,852,300)
------------ ------------
Cash flows from investing activities:
Cash paid for right to use fiber optic capacity -- (1,875,000)
Purchase of property and equipment ............. (297,900) (11,774,800)
Purchase of short-term investments ............. -- (974,900)
------------ ------------
Net cash used in investing activities ........ (297,900) (14,624,700)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and advances ....... 2,402,700 7,676,800
Payments on debt ............................... -- (976,600)
Principal payments on capital leases ........... (27,800) (142,600)
Proceeds from issuance of common stock ......... 3,600 68,064,300
Proceeds from issuance of convertible
preferred stock .............................. -- 6,617,400
------------ ------------
Net cash provided by financing activities .... 2,378,500 81,239,300
------------ ------------
Net increase in cash and equivalents ............. 950,200 59,762,300
Cash and equivalents, beginning of period ........ 331,100 8,141,200
------------ ------------
Cash and equivalents, end of period .............. $ 1,281,300 $ 67,903,500
============ ============
Supplemental cash flow information -- Cash
paid for interest .............................. $ 5,200 $ 493,500
============ ============
Noncash investing and financing activities:
Remaining obligation for right to use
fiber optic capacity .......................... $ -- $ 6,425,000
============ ============
Exchange of notes, advances, accrued
interest and warrants for convertible
preferred stock .............................. $ 1,011,100 $ 8,000,000
============ ============
Conversion of preferred stock into Common Stock $ -- $ 21,223,900
============ ============
Issuance of warrants in connection with
issuance of debt and leases .................. $ -- $ 899,500
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 6
ABOVENET COMMUNICATIONS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements have been prepared by
the Company without audit and reflect all material adjustments, consisting only
of normal recurring adjustments, which in the opinion of management are
necessary to present fairly the financial position and the results of operations
for the interim periods. The statements have been prepared in accordance with
the regulations of the Securities and Exchange Commission (SEC), but omit
certain information and footnote disclosure necessary to present the statements
in accordance with generally accepted accounting principles. For further
information, refer to the Financial Statements and Notes thereto included in the
Company's Registration Statement on Form S-1, as amended, initially filed with
the SEC on September 10, 1998. Results for fiscal 1999 interim periods are not
necessarily indicative of results to be expected for the fiscal year ending June
30, 1999.
2. INITIAL PUBLIC OFFERING
On December 15, 1998, the Company sold 5,000,000 shares of Common Stock
in an underwritten public offering and on December 30, 1998 sold an additional
750,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $68,014,000. Simultaneously with the closing
of the public offering, all 7,184,049 shares of the Company's preferred stock
were converted to common stock on a share for share basis. Additionally,
substantially all of the holders of warrants to purchase 123,736 shares of
Series B convertible Preferred Stock exercised such warrants through a net
issuance provision and were issued 104,700 shares of Common Stock.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over estimated useful lives of three to ten
years. Leasehold improvements and assets acquired under capital lease are
amortized over the shorter of the lease term or the useful lives of the
improvements.
Property and equipment are comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1998
------------ ------------
<S> <C> <C>
Property and equipment, at cost:
Telecommunication equipment ................. $ 2,295,300 $ 3,406,800
Leasehold improvements (primarily co-location
facilities) ............................... 224,700 11,605,400
Office equipment ............................ 186,500 695,700
Construction in progress .................... 2,389,400 830,800
------------ ------------
Total ............................... 5,095,900 16,538,700
Less accumulated depreciation and
amortization .............................. (659,800) (1,531,100)
------------ ------------
Property and equipment, net ................... $ 4,436,100 $ 15,007,600
============ ============
</TABLE>
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
4. INDEFEASIBLE RIGHT TO USE FIBER OPTIC CAPACITY
On December 29, 1998, the Company entered into a series of agreements
with affiliates of Global Crossing Ltd. providing for the acquisition of an
indefeasible right to use ("IRU") capacity on a fiber optic cable system between
the U.S. and the United Kingdom. The agreements, which have 25 year terms,
provide for the Company to
4
<PAGE> 7
pay affiliates of Global Crossing Ltd. up to approximately $8.3 million for the
capacity in installments during December 1998 and the first calendar quarter of
1999.
5. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued two
new standards. The first, Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. The second, SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographical 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, and 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.
6. INCOME TAXES
The Company fully reserves its deferred tax assets, including net
operating loss carryforwards. Therefore no income tax benefit is reflected in
the Company's condensed statements of operations.
7. BASIC AND DILUTED LOSS PER SHARE
Basic loss per share excludes dilution and is computed by dividing net
loss by the weighted-average number of common shares outstanding, less shares
subject to repurchase by the Company, for the period. Diluted 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.
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 Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss (numerator), basic and diluted $ (604,400) $(5,192,200) $(1,266,400) $(8,543,100)
=========== =========== =========== ===========
Shares (denominator):
Weighted average common shares ........ 218,200 3,352,500 214,400 1,911,100
Weighted average common shares
outstanding subject to repurchase -- (14,600) -- (14,100)
----------- ----------- ----------- -----------
Shares used in computation, basic and
diluted .......................... 218,200 3,337,900 214,400 1,897,000
=========== =========== =========== ===========
Net loss per share, basic and diluted . $ (2.77) $ (1.56) $ (5.91) $ (4.50)
=========== =========== =========== ===========
</TABLE>
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Act of 1934, as amended. Such statements are 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 "Other Factors Affecting Operating
Results, Liquidity and Capital Resources" below, as well as Risk Factors
included in the Company's Registration Statement on Form S-1, as amended,
initially filed with the Securities and Exchange Commission ("SEC") on September
10, 1998 (the "Registration Statement"). The Company's fiscal year ends on June
30. The fiscal year ended June 30, 1998 is referred to as fiscal 1998 and the
fiscal year ended June 30, 1999 is referred to as fiscal 1999.
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 an expansion of its San Jose ISX facility. The San Jose
facility has approximately 10,000 square feet of co-location space and the
Vienna facility has approximately 17,000 square feet of such space.
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. In most instances, 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 "Other Factors Affecting Operating Results,
Liquidity and Capital Resources -- 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, Sprint, and
WinStar Communications, Inc. 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.
On December 29, 1998, the Company entered into a series of agreements
with affiliates of Global Crossing Ltd. providing for the acquisition of an
indefeasible right to use capacity on a fiber optic cable system between the
U.S. and the United Kingdom (the "IRU"). The agreements, which have 25 year
terms, provide for the Company to pay affiliates of Global Crossing Ltd. up to
approximately $8.3 million for the capacity in installments during December 1998
and the third quarter of fiscal 1999. The Company acquired this capacity as
part of its global ISX strategy and expects the capacity to be available by the
fourth quarter of fiscal 1999. As the principal component of this strategy, the
Company intends to make investments in joint ventures and foreign companies that
can develop ISX facilities in Europe and Asia. In the short term, the Company
plans to resell all or a portion of the additional capacity. The Company may
enter into additional IRUs or other types of arrangements to secure capacity for
6
<PAGE> 9
Europe, Asia and/or the Pacific Rim. Such agreements may require the Company to
make substantial up front payments for long-term capacity that would require the
Company to seek additional debt or equity financing. No assurance can be given
that additional financing will be available or that, if available, will be
available on terms favorable to the Company. See "Other Factors Affecting
Operating Results, Liquidity and Capital Resources - Uncertain Need and
Availability of Additional Funding."
The Company plans to expand its San Jose, California presence and as
such intends to develop a second San Jose ISX facility of approximately 110,000
square feet, including approximately 50,000 square feet of co-location space.
The new facility is targeted to open in the fall of 1999. The Company intends to
initially complete the build-out of approximately 13,000 square feet of
co-location space and to complete the build-out of additional co-location space
incrementally over time based on customer demand. In addition, the Company has
entered into a lease in New York, New York and intends to develop a smaller ISX
facility therein. The New York facility is expected to be approximately 27,000
square feet, including approximately 12,000 square feet of co-location space.
The new facility is targeted to open in the fall of 1999. The Company intends to
initially complete the build-out of approximately 5,000 square feet of
co-location space and to complete the build-out of additional co-location space
incrementally over time based on customer demand. The development and equipping
of these facilities 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.
Also, any build-out of incremental co-location space at the planned facilities
may require additional debt or equity financing. No assurance can be given that
additional financing will be available or that, if available, such financing
will be on terms favorable to the Company. See "Other Factors Affecting
Operating Results, Liquidity and Capital Resources -- Risks Associated with
Recent and Planned Business Expansion," "-- Uncertain Need and Availability of
Additional Financing" and "Business -- Facilities."
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. Prior to the quarter ended June 30, 1998 (the
fourth quarter of fiscal 1998), the Company had undertaken no significant
marketing activities. As a result, the Company expects sales and marketing
expenses to increase substantially in future periods. See "Other Factors
Affecting Operating Results, Liquidity and Capital Resources -- Need to Grow and
Retain Customer Base; Lengthy Sales Cycle."
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 December 31, 1998, the Company had an accumulated deficit of
$15,848,500. 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 "Other Factors Affecting Operating Results, Liquidity
and Capital Resources -- Limited Operating History; History of Losses; Expected
Continued Losses."
7
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data as
a percentage of revenues for the quarters and the six months ended December 31,
1997 and 1998. This data has been derived from the unaudited condensed financial
statements contained in this Form 10-Q which, in the opinion of management
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position and results of operations for
the interim periods. The operating results for any quarter should not be
considered indicative of results of any future period. This information should
be read in conjunction with the Financial Statements and Notes thereto included
in the Company's Registration Statement.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31. DECEMBER 31, DECEMBER 31,
------------ ------------ -------------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues ......................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Data communications and
telecommunications .......... 55.3 66.0 56.9 63.6
Network operations ............. 33.0 47.1 40.2 45.5
Sales and marketing ............ 32.1 80.5 43.0 78.6
General and administrative ..... 41.0 47.0 43.0 46.3
Depreciation and amortization .. 14.1 20.5 16.4 27.1
Stock-based compensation expense 5.3 27.7 4.5 26.3
----- ----- ----- -----
Total costs and expenses 180.8 288.8 204.0 287.4
----- ----- ----- -----
Loss from operations ............. (80.8) (188.8) (104.0) (187.4)
Interest expense ................. (9.9) (13.0) (11.4) (11.1)
Interest and other income ........ 1.1 6.1 0.8 6.4
----- ----- ----- -----
Net loss ......................... (89.6)% (195.7)% (114.6)% (192.1)%
===== ===== ===== =====
</TABLE>
Comparison of the Quarters Ended December 31, 1998, September 30, 1998 and
December 31, 1997
Revenues. The Company derives most of its revenues from monthly
bandwidth charges, with additional revenues from space requirement charges and
one-time installation fees. Revenues for the quarter ended December 31, 1998
were $2,653,100, resulting in an increase of 48% over revenues of $1,793,100 for
the quarter ended September 30, 1998 and representing a 293% increase over
revenues of $674,600 for the quarter ended December 31, 1997. Compared to each
of the earlier quarters, this growth in revenues resulted primarily from an
increase in the Company's customer base, as well as increased bandwidth
utilization by existing customers. At December 31, 1998, the Company had 382
customers compared to 316 customers at September 30, 1998 and 178 customers at
December 31, 1997. One customer, RemarQ Inc. (formerly known as Supernews,
Inc.), accounted for 9% of revenues in the quarter ended December 31, 1998, 11%
of revenues in the quarter ended September 30, 1998, and 13% of revenues in the
quarter ended December 31, 1997. The Company's agreement with RemarQ Inc. 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 MCI WorldCom,
Sprint, and WinStar Communications, Inc. Telecommunications charges consist of
one-time fees for circuit installation and variable recurring circuit charges.
The Company's data communications and telecommunications expenses were
$1,749,800 in the quarter ended December 31, 1998, an increase of 62% from
$1,079,900 in the quarter ended September 30, 1998 and an increase of 369% over
data communications and telecommunications expenses of $372,800 for the quarter
ended December 31, 1997. In comparison to each of the earlier quarters, the
higher data and telecommunications expenses were primarily due to increased
bandwidth usage by the Company's increased customer base. 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.
8
<PAGE> 11
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. For the quarter ended December
31, 1998, network operations expenses were $1,250,000, an increase of 62% over
expenses of $772,800 for the preceding quarter and 461% over network operations
expenses of $222,800 in the quarter ended December 31, 1997. Such increases were
primarily due to the hiring of additional operations and engineering personnel
and the costs associated therewith, with staffing related to the Vienna Virginia
ISX facility representing a significant factor in the increase between the
second and first quarters of fiscal 1999. The Company expects that network
operations expenses will continue to increase in absolute dollars as the Company
hires additional personnel to expand its operations and open its new facilities.
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. For the
quarter ended December 31, 1998, sales and marketing expenses were $2,137,000,
an increase of 58% over expenses of $1,355,800 for the preceding quarter and
888% over sales and marketing expenses of $216,400 for the quarter ended
December 31, 1997. The increases over both the preceding and year-earlier
quarter were primarily the result of compensation and expenses related to
additional sales and marketing personnel and increases in trade show,
advertising and marketing program costs. 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.
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. During the quarter ended December 31, 1998,
general and administrative expenses were $1,248,100, an increase of 54% over
such general and administrative expenses of $812,700 for the preceding quarter
and 351% over general and administrative expenses of $276,900 for the quarter
ended December 31, 1997. These increases were principally due to increased
compensation and related benefits associated with additional personnel,
increases in professional services fees, and 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 were $543,500 in the quarter ended December 31, 1998, a
decrease from $659,800 in the quarter ended September 30, 1998 and significantly
above depreciation and amortization expenses of $95,400 during the quarter ended
December 31, 1997. The decrease in depreciation and amortization expenses from
the quarter ended September 30, 1998 resulted from the Company's recognition
during that quarter of a $186,000 loss on the disposal of certain assets. Such
loss related to the retirement of certain assets and the demolition of
previously capitalized facility improvement costs, in connection with the
expansion of the Company's ISX facility in San Jose, California. The increase in
depreciation and amortization expenses over the year-earlier quarter was due to
capital expenditures incurred during the second half of fiscal 1998 and in
fiscal 1999, related to facility improvement and construction costs in San Jose,
California, the construction of the ISX facility in Vienna, Virginia and
additional telecommunications equipment. The Company expects to incur increased
depreciation and amortization expenses related to its planned new ISX facilities
in San Jose, California and New York, New York as well as the amortization of
the IRU.
Stock-based Compensation. During fiscal 1998 and 1999, the Company
granted stock options to a key executive which had exercise prices which were
below the market prices on the dates of the grants. Additionally, during late
fiscal 1997, fiscal 1998 and fiscal 1999, the Company granted stock options and
warrants to strategic business partners and non-employees. Stock options and
warrants result in stock-based compensation charges, a portion of which is
deferred and expensed over the vesting period. On December 15, 1998, the Company
completed its initial public offering, at which time the vesting of a
significant number of such options accelerated. Consequently, the remaining
deferred compensation costs related to those options were recognized. For the
quarters ended December 31, 1998, September 30, 1998 and December 31, 1997,
stock-based compensation expenses were
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$733,400, $436,200 and $35,100, respectively. At December 31, 1998, the Company
had $76,900 in deferred stock compensation, which will continue to be amortized
through fiscal 2000.
Interest Expense. For the quarters ended December 31, 1998, September
30, 1998, and December 31, 1997, interest expense was $345,900, $147,600 and
$67,000, respectively. Interest expense for the quarters ended December 31, 1998
and September 30, 1998 relates to borrowings the Company entered into during the
quarters ended June 30, 1998 and September 30, 1998 to finance equipment
purchases and improvements to the Company's ISX facilities in San Jose,
California and Vienna, Virginia. Interest expense during the quarter ended
December 31, 1997 was primarily related to the issuance of warrants associated
with the Company's issuance of convertible debt. 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 and its facility in New York, New York.
Interest and Other Income. Interest and other income was $162,400,
$120,800 and $7,400 for the quarters ended December 31, 1998, September 30, 1998
and December 31, 1997, respectively. Compared to the two earlier quarters, the
increased interest income for the quarter ended December 31, 1998 resulted from
interest earned on higher average cash balances. The increased average cash
balances were due in large part to the Company's various equity offerings during
the first and second quarters of fiscal 1999. (See Liquidity and Capital
Resources.)
Comparison of Six Month Periods Ended December 31, 1998 and December 31, 1997
Revenues. For the six months ended December 31, 1998, revenues were
$4,446,200, significantly above revenues of $1,105,500 for the six months ended
December 31, 1997. This growth in revenues was primarily due to the addition of
new customers, as well as increased bandwidth utilization by existing customers.
At December 31, 1998, the Company had 382 customers compared to 178 customers at
December 31, 1997.
Data Communications and Telecommunications. For the six months ended
December 31, 1998, data communications and telecommunications expenses were
$2,829,700 compared to data communications and telecommunications expenses of
$628,800 for the six months ended December 31, 1997. The period to period
increase is primarily due to the growth in the Company's customer base and usage
of additional bandwidth.
Network Operations. For the six months ended December 31, 1998, network
operations expenses were $2,022,800, compared to network operations expenses of
$444,600 for the six months ended December 31, 1997. The increase was primarily
related to additional operations and engineering personnel, additional
facilities rent expense and other costs associated with the expanded operations
in San Jose, California and the addition of the operations in Vienna, Virginia.
Sales and Marketing. For the six months ended December 31, 1998, sales
and marketing expenses were $3,492,800, compared to sales and marketing expenses
of $475,000 for the six months ended December 31, 1997. The increase over the
year-earlier period was primarily the result of costs related to additional
sales and marketing personnel, and increases in trade show, advertising and
marketing program costs.
General and Administrative. For the six months ended December 31, 1998,
general and administrative expenses were $2,060,800, compared to general and
administrative expenses of $475,800 for the six months ended December 31, 1997.
The increased general and administrative expenses were principally due to
additional personnel, increases in fees for professional services, and costs
associated with supporting the Company's expansion.
Depreciation and Amortization. For the six months ended December 31,
1998, depreciation and amortization expenses were $1,203,300, compared to
depreciation and amortization expenses of $181,800 for the six months ended
December 31, 1997. The increase in depreciation and amortization expenses was
primarily due to capital expenditures incurred during the second half of fiscal
1998 and in fiscal 1999, related to facility improvement and construction costs
in San Jose, California, the construction of the ISX facility in Vienna,
Virginia and additional telecommunications equipment. The Company expects to
incur increased depreciation and amortization expenses related to its planned
new ISX facilities in San Jose, California and New York, New York.
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Stock-Based Compensation. For the six-month periods ended December 31,
1998 and December 31, 1997, stock-based compensation expenses were $1,169,600
and $49,400, respectively. Stock-based compensation in fiscal 1999 related
primarily to the acceleration of the vesting of certain options upon the closing
of the Company's initial public offering and to services rendered during fiscal
1999.
Interest Expense. For the six months ended December 31, 1998, interest
expense was $493,500 compared to $125,800 for the six months ended December 31,
1997. Interest expenses during the six months ended December 31, 1998 related to
borrowings to finance equipment purchases and improvements to the Company's ISX
facilities in San Jose, California and Vienna, Virginia. Interest expense during
the six months ended December 31, 1997 primarily related to the issuance of
warrants associated with the Company's issuance of convertible notes.
Interest and Other Income, For the six months ended December 31, 1998
interest and other income was $283,200 compared to $9,300 for the six months
ended December 31, 1997. The year to year increase resulted from interest earned
on higher average cash balances. The increased average cash balances were due in
part to the Company's various equity offerings during the period. (See Liquidity
and Capital Resources.)
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and equivalents of $67,903,500 as of December 31,
1998, compared to the June 30, 1998 balance of $8,141,200, an increase of
$59,762,300.
During the six months ended December 31, 1998, the Company completed its
initial public offering generating net proceeds of $68,014,000 and generated an
additional $6,667,800 from the sale of both Common Stock upon stock options
exercises and the sale of Series D and Series E preferred stock. In addition,
the Company received $7,676,800 from utilization of its equipment financing
facilities during the six months ended December 31, 1998.
Cash used in operating activities for the six months ended December 31,
1998 was $6,852,300 consisting primarily of net losses. In addition, the Company
used cash for the purchase of leasehold improvements and property and equipment
totaling $11,774,800. These purchases included costs associated with the
establishment and expansion of the Company's ISX facility in Vienna, Virginia,
the expansion of the Company's ISX facility in San Jose, California and costs
associated with the development of its second San Jose, California facility. In
addition, the Company used cash to pay the first installment of $1,875,000
toward the purchase of an $8,300,000 25-year IRU for fiber optic capacity.
The Company has a $15,000,000 equipment financing arrangement.
Borrowings under this arrangement are payable in 42 monthly installments.
Borrowings incurred prior to December 31, 1998 bear interest at the rate of
14.7% and borrowings subsequent to December 31, 1998 bear interest at 13.25%. As
of December 31, 1998, approximately $6,000,000 remained available for borrowings
under this arrangement. The Company expects to utilize the available credit for
the development of the planned second ISX facility in San Jose, California. The
Company also has a $2,500,000 equipment lease facility, of which $1,950,000 was
available for future use at December 31, 1998.
The Company has a $750,000 line of credit facility with a bank, none of
which was outstanding at December 31, 1998. Borrowings under the line of credit
facility bear interest at the bank's prime rate plus 1% and the line of credit
facility expires in May 1999.
The Company currently expects to utilize approximately $20,000,000 to
$25,000,000 million for capital expenditures in connection with the development
of the Company's planned second ISX facility in San Jose, California, which is
expected to open in the fall of 1999 and its planned New York, New York facility
which is expected to open in the fall of 1999. The Company intends to complete
the build-out of additional co-location space incrementally over time based on
customer demand. Any build-out of incremental co-location space at the new
facilities may require additional debt or equity financing. In addition, there
can be no assurance that such a facility can be developed within the expected
budget. In addition, the Company will be required to pay the remaining
$6,425,000 for the purchase of the IRU. The Company may enter into IRUs or other
types of arrangements to secure
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capacity for Europe, Asia and/or the Pacific Rim. Such agreements may require
the Company to make substantial up front payments for long-term capacity that
would require the Company to seek additional debt or equity financing. No
assurance can be given that additional financing will be available or that, if
available, will be available on terms favorable to the Company. See "Other
Factors Affecting Operating Results, Liquidity and Capital Resources -- Risks
Associated with Recent and Planned Business Expansion" and "-- Uncertain Need
and Availability of Additional Financing."
The Company believes that it has sufficient working capital and
available bank credit to sustain operations and provide for the expansion of its
business for the next 12 months. 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 "Other Factors Affecting Operating
Results, Liquidity and Capital Resources -- Uncertain Need and Availability of
Additional Funding."
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 its Year 2000 readiness review. See "Other Factors Affecting Operating
Results, Liquidity and Capital Resources - Year 2000 Compliance."
OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES
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 a
net loss of $5,425,000 in fiscal year 1998 and a net loss of $8,543,100 for the
first six months of fiscal 1999. At December 31, 1998, the Company had an
accumulated deficit of $15,848,500. The Company began offering its co-location
and Internet connectivity services to content providers in July 1996, and
introduced its co-location and Internet connectivity services to ISPs in August
1997. The Company began operating its second ISX facility in Vienna, Virginia in
July 1998. The revenue and income potential of the Company's business and market
is unproven, and the Company's limited operating history makes an evaluation of
the Company and its prospects difficult. The Company and its prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving market for co-location and Internet
connectivity services. The Company expects to continue making significant
investments to (i) substantially increase its sales and marketing activities,
(ii) purchase additional indefeasible rights to use capacity on fiber optic
cable systems, and (iii) establish additional ISX facilities in San Jose,
California and in New York, New York. In addition, the Company expects to make
investments in joint ventures or foreign entities developing international ISXs.
The Company believes that it will continue to experience net losses on a
quarterly and annual basis for the foreseeable future, and such losses are
expected to increase significantly from current levels. To achieve or sustain
profitability, among other things, the Company must substantially grow its
customer base, including maintaining existing customer relationships, expand
domestically and internationally, provide scalable, reliable and cost-effective
services, continue to grow its infrastructure to accommodate expanded and new
facilities, additional customers and increased bandwidth use of its network,
expand its channels of distribution, effectively establish its brand name,
retain and motivate qualified personnel and continue to respond to competitive
developments. Failure of the Company's services to achieve widespread market
acceptance would have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company has
experienced significant growth in revenues in recent periods, the Company does
not believe that this growth rate is necessarily indicative of future operating
results, and there can be no assurance that the Company will ever achieve
profitability on a quarterly or an annual basis or, if achieved, will sustain
profitability.
NEED TO GROW AND RETAIN CUSTOMER BASE; LENGTHY SALES CYCLE. The
Company's success is substantially dependent on the continued growth of its
customer base and the retention of its customers. The Company's ability to
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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 operations and financial condition. In addition, the
Company typically experiences a lengthy sales cycle for its services, resulting,
in part, from the importance to customers of securing Internet connectivity for
mission-critical operations and the need to educate certain customers regarding
the benefits of co-location and Internet connectivity services. Changes in the
rate of growth in the Company's customer base, customer renewal rates and the
sales cycle for the Company's services, have caused, and are expected in the
future to cause, significant fluctuations in the Company's results of operations
on a quarterly and an annual basis. In addition, the Company intends to
significantly increase its sales and marketing expenditures. Due to the
typically lengthy sales cycle for the Company's services, such expenses will
occur prior to customer commitments for the Company's services. There can be no
assurance that the increase in the Company's sales and marketing efforts will
result in increased sales of the Company's services.
POTENTIAL FLUCTUATIONS IN RESULTS OF OPERATIONS. The Company has
experienced significant fluctuations in its results of operations on a quarterly
and annual basis. The Company expects to continue to experience significant
fluctuations in its future quarterly and annual results of operations due to a
variety of factors, many of which are outside the Company's control, including:
demand for and market acceptance of the Company's services; capacity utilization
of its ISX facilities; fluctuations in data communications and
telecommunications costs; reliable continuity of service and network
availability; customer retention; the timing and success of marketing efforts by
the Company; the timing and magnitude of capital expenditures, including costs
relating to the expansion of operations; the timely expansion of existing
facilities and completion of new facilities; the ability to increase bandwidth
as necessary; fluctuations in bandwidth used by customers; the timing and
magnitude of expenditures for sales and marketing; introductions of new services
or enhancements by the Company and its competitors; the timing of customer
installations and related payments; the ability to maintain or increase peering
relationships; provisions for customer discounts and credits; the introduction
by third parties of new Internet services; increased competition in the
Company's markets; growth of Internet use and establishment of Internet
operations by mainstream enterprises; changes in the pricing policies of the
Company and its competitors; changes in regulatory laws and policies; economic
conditions specific to the Internet industry; and general economic factors. In
addition, a relatively large portion of the Company's expenses are fixed in the
short-term, particularly with respect to data communications and
telecommunications costs, depreciation, real estate, interest and personnel, and
therefore the Company's future results of operations will be particularly
sensitive to fluctuations in revenues. 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
seasonal 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.
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
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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.
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."
RISKS ASSOCIATED WITH RECENT AND PLANNED BUSINESS EXPANSION. The Company
recently opened its second ISX facility in Vienna, Virginia. In addition, the
Company intends to develop two additional ISX Facilities. The Company intends to
develop a second San Jose, California ISX facility of approximately 110,000
square feet, including approximately 50,000 square feet of co-location space.
The Company recently entered into a lease for this facility. The Company intends
to initially complete the build-out of approximately 13,000 square feet of
co-location space and to complete the build-out of additional co-location space
incrementally over time based on customer demand. This second San Jose,
California facility is targeted to open in the fall of 1999. In addition, the
Company has entered into a lease in New York, New York and intends to develop a
smaller ISX facility therein. The New York facility will be approximately 27,000
square feet, including approximately 12,000 square feet of co-location space and
is targeted to open in the fall of 1999. The Company intends to initially
complete the build-out of approximately 5,000 square feet of co-location space
and to complete the build-out of additional co-location space incrementally over
time based on customer demand. In addition, any build-out of incremental
co-location space at the new facilities may require the Company to obtain
additional debt or equity financing. The Company will need to accomplish a
number of objectives in order to successfully complete the development of the
planned ISX facilities, on a timely basis or at all, including 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 facilities will require careful management of
various risks associated with significant construction projects, including
construction delay, cost estimation errors or overruns, equipment and material
delays or shortages, inability to obtain necessary permits on a timely basis and
other factors, many of which are beyond the Company's control. There can be no
assurance with respect to the cost, timing or extent of any expansion or that
the Company will be successful in expanding its operations, or developing the
ISX facilities planned for San Jose, California and New York, New York, 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, California and New York, New York ISX facilities, 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. See " -- Uncertain Need and Availability of Additional Funding."
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RISK ASSOCIATED WITH INVESTMENTS IN INTERNATIONAL ISXs. 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.
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. In addition, any incremental development of
additional co-location space at the planned ISX facilities in San Jose,
California or New York, New York may require additional debt or equity
financing. On December 29, 1998, the Company entered into a series of agreements
with affiliates of Global Crossing Ltd. providing for the acquisition of an
indefeasible right to use ("IRU") capacity on a fiber optic cable system between
the U.S. and the United Kingdom. The agreements, which have 25 year terms,
provide for the Company to pay affiliates of Global Crossing Ltd. up to
approximately $8.3 million for the capacity in installments during December 1998
and the first quarter of 1999. The Company acquired this capacity as part of its
global ISX strategy. As the principal component of this strategy, the Company
intends to make investments in joint ventures and foreign companies that can
develop ISX facilities in Europe and Asia. In the short term, the Company plans
to resell all or a portion of the additional capacity. The Company may enter
into IRUs or other types of arrangements to secure capacity for Europe, Asia
and/or the Pacific Rim. Such agreements may require the Company to make
substantial up front payments for long-term capacity that would require the
Company to seek additional debt or equity financing. No assurance can be given
that additional financing will be available or that, if available, will be
available on terms favorable to the Company. If adequate funds are not available
to satisfy either short or long-term capital requirements, the Company may be
required to limit its operations and expansion plans significantly, sell assets,
or seek to refinance outstanding obligations, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition.
YEAR 2000 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
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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 of reviewing and
implementing their own Year 2000 compliance programs. Since the Company does not
believe that it will be afforded the opportunity to test the systems of these
providers, it will seek assurances from them that they are Year 2000 compliant.
If the Company's primary vendors experience business interruptions as a result
of the failure to achieve Year 2000 compliance, the Company's ability to provide
Internet connectivity could be impaired, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
The Company does not currently have any information regarding the Year
2000 status of its customers, most of whom are private companies. However, the
Company is in the process of developing a plan to survey all of its customers
regarding their Year 2000 compliance. As is the case with similarly situated
companies, if the Company's customers experience Year 2000 problems, which
result in business interruptions or otherwise impact their operations, the
Company could experience a decrease in the demand for its services, which could
have a material adverse impact on its business, results of operations and
financial condition.
The Company has not incurred any significant expenses to date associated
with its Year 2000 plan and is not aware of any material costs associated with
its anticipated Year 2000 efforts. The Company believes that a material loss of
revenues that could materially adversely affect the Company's business, results
of operations and financial condition would arise only if the Company's major
customers or providers fail to achieve Year 2000 readiness. The Company has not
yet developed a comprehensive contingency plan to address the issues which could
result from such failure.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL. The Company has
recently experienced a period of rapid growth with respect to the expansion of
its ISX facilities and its customer base. The Company's ability to manage
effectively its recent growth and any future growth will require it to continue
to expand its operating and financial procedures and controls, to replace or
upgrade its operational, financial and management information systems and to
attract, train, motivate, manage and retain key employees. The Company is
currently upgrading its financial and management information systems. There can
be no assurance that the Company will be able to implement such new systems
successfully or on a timely basis. The Company also is dependent upon its
ability to increase substantially the size of its sales and marketing
organization. The market for highly qualified sales and marketing personnel is
very competitive. There can be no assurance that the Company will be successful
in meeting its hiring goals or that any new employees will be successful in
expanding the Company's customer base. The Company's growth has placed, and if
it continues, will place, a significant strain on the Company's financial,
management, operational and other resources. If the Company's management is
unable to effectively manage any further growth that may occur, the Company's
business, results of operations and financial condition would be materially
adversely affected.
The Company has recently hired many key employees and officers. 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. 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. Any officer or employee of the Company can terminate his or her
relationship with the Company at any time. The loss of the services of one or
more of the Company's key employees or the Company's failure to attract
additional qualified personnel could have a material adverse effect on the
Company's business, results of operations and financial condition.
RISK OF SYSTEM FAILURE. The Company's operations are dependent upon its
ability to prevent system interruption and protect its network infrastructure
and customers' equipment against damage from human error, fire, earthquakes,
floods, power loss, telecommunications failures, sabotage, intentional acts of
vandalism and similar events. The Company's existing and planned ISX facilities
in San Jose, California are in an area that is subject to earthquakes and, as a
result, are subject to greater risk of system interruption. Despite precautions
taken, and
16
<PAGE> 19
planned to be taken, by the Company, the occurrence of a natural disaster or
other unanticipated problems such as human interference or mistake, unannounced
or unexpected changes in transmission protocols or other technology, could
result in interruptions in the services provided by the Company or significant
damage to customer equipment. In addition, failure of any of the Company's data
communication and telecommunication providers, such as MCI WorldCom, Sprint,
Pacific Bell, Teleport Communications Group, a subsidiary of AT&T, and WinStar
Communications, Inc., to provide the data communication and/or telecommunication
capacity required by the Company, whether as a result of human error, a natural
disaster or other operational disruption, could result in interruptions in the
Company's services. Any damage to or failure of the systems of the Company or
its service providers could result in reductions in, or terminations of,
services supplied to the Company's customers, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company's reputation could be materially adversely
affected. The Company may be subject to legal claims by its customers for
disruption of service or damage to customer equipment. While the Company's
customer contracts generally purport to eliminate the Company's liability for
consequential or punitive damages or for damage to customer equipment not caused
by the Company's gross negligence or willful acts, there can be no assurance
that the Company would not be held liable for such damages. See "-- Year 2000
Risks."
RISKS ASSOCIATED WITH EMERGING MARKET FOR CO-LOCATION AND INTERNET
CONNECTIVITY 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 infrastructure to increase bandwidth available
to its customers, it may encounter equipment or software incompatibility which
may cause delays in implementation. There can be no assurance that the Company
17
<PAGE> 20
will be able to expand or adapt its telecommunications infrastructure to meet
additional demand or its customers' changing requirements, on a timely basis and
at a commercially reasonable cost, or at all.
NEED TO MAINTAIN AND INCREASE PEERING RELATIONSHIPS. The Internet is
comprised of several network providers who operate their own networks and
interconnect their networks at various public and private peering points,
through "peering arrangements" with one another. The Company's establishment and
maintenance of peering relationships is necessary in order to effectively
exchange traffic with ISPs without having to pay the higher costs of transit
services and in order to maintain high network performance levels. These
arrangements are not subject to regulation and are subject to revision in terms,
conditions or costs over time. There is no assurance that ISPs will maintain
peering relationships with the Company. In addition, increasing requirements or
costs may be imposed on the Company in order to maintain peering relationships
with ISPs, particularly national ISPs. Failure to maintain peering relationships
would adversely affect the level of connectivity available to the Company's
customers or cause the Company to incur additional operating expenditures by
paying for transit, either of which could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
if these network providers were to increase the pricing associated with
utilizing their networks, the Company may be required to identify alternative
methods through which it can distribute its customers' content. If the Company
were unable to access on a cost-effective basis alternative networks to
distribute its customers' content or pass through any additional costs of
utilizing these networks to its customers, the Company's business, results of
operations and financial condition would be materially adversely affected.
DEPENDENCE UPON THIRD PARTY SUPPLIERS. The Company's success will depend
upon third party network infrastructure providers, including the capacity leased
from its telecommunications network suppliers. In particular, the Company is
dependent on Sprint, MCI WorldCom and certain other data communication and
telecommunication providers for its backbone capacity and is therefore dependent
on such companies to maintain the operational integrity of its backbone. In
addition, any significant increase in data communication or telecommunication
costs could have a material adverse effect on the Company's business, results of
operations and financial condition. MCI WorldCom is a current competitor and the
Company's other data communications providers are potential competitors of the
Company. Furthermore, the Company relies on a number of public and private
peering interconnections to deliver its services. If the carriers that operate
the Internet exchange points were to discontinue their support of the peering
points and no alternative providers emerged, or such alternative providers
increased the cost of utilizing the Internet exchange points, the distribution
of content through the Internet exchange points, including content distributed
by the Company, would be significantly constrained. Furthermore, as traffic
through the Internet exchange points increases, if commensurate increases in
bandwidth are not added, the Company's ability to distribute content rapidly and
reliably through these networks will be materially adversely affected.
RISKS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS. The Company may in
the future pursue acquisitions of technologies or businesses. Future
acquisitions by the Company may result in the use of significant amounts of
cash, potentially dilutive issuances of equity securities, incurrence of debt,
or amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, results of
operations or financial condition. In addition, acquisitions involve numerous
risks, including difficulties in the assimilation of the operations,
technologies, products and personnel of the acquired company, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key 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
18
<PAGE> 21
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 non-competitive, unnecessary or
obsolete.
SECURITY RISKS. Customer operations at the Company's facilities have in
the past experienced, and may in the future experience, delays or interruptions
in service as a result of the accidental or intentional actions of Internet
users, current and former employees or others. Furthermore, such inappropriate
access to the network by third parties could also potentially jeopardize the
security of confidential information, such as credit card and bank account
numbers, stored in the computer systems of the Company and its customers, which
could result in liability to the Company and the loss of existing customers or
the deterrence of potential customers. Although the Company implements security
procedures and systems, such procedures and systems have been circumvented in
the past, and there can be no assurance that unauthorized access, accidental or
intentional actions and other disruptions will not occur in the future. The
Company was recently sued by a customer alleging that the Company negligently
allowed the customer's consultant access to the customer's servers located at
the Company's San Jose facility. The costs required to minimize security
problems could be prohibitively expensive and the efforts to address such
problems could result in interruptions, delays or cessation of service to the
Company's customers, which could have a material adverse effect on the Company's
business, results of operations and financial condition. Concerns over the
security of Internet transactions and the privacy of users may also inhibit the
growth of the Internet, especially as a means of conducting commercial
transactions.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES. There is currently only
a small body of laws and regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations may be
adopted at the international, federal, state and local levels with respect to
the Internet. A number of laws and regulations have already been proposed or are
currently being considered by federal, state and foreign legislatures. The
nature of any new laws and regulations and the manner in which existing and new
laws and regulations may be interpreted and enforced cannot be fully determined.
The adoption of any future laws or regulations might decrease the growth of the
Internet, decrease demand for the services of the Company, impose taxes or other
costly technical requirements or otherwise
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<PAGE> 22
increase the cost of doing business or in some other manner have a material
adverse effect on the Company or its customers, each of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy is uncertain.
In addition, as the Company's services are available over the Internet in
multiple states and foreign countries, and as the Company facilitates sales by
its customers to end users located in such states and foreign countries, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state or foreign country. Any such new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws may not currently apply to the Company's business,
could have a material adverse effect on the Company's business, results of
operations and financial condition.
RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH THE COMPANY'S
NETWORK. The law relating to the liability of online services companies and
Internet access providers for information carried on or disseminated through
their networks is currently unsettled. It is possible that claims could be made
against online services companies, co-location companies and Internet access
providers under both United States and foreign law for defamation, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of the materials disseminated through their networks. The Company has in
the past received, and may in the future receive, letters from recipients of
information transmitted by the Company's customers objecting to the nature and
content of the materials disseminated through the Company's networks. Several
private lawsuits seeking to impose such liability upon online services companies
and Internet access providers are currently pending. In addition, legislation
has been proposed that imposes liability for or prohibits the transmission over
the Internet of certain types of information. The imposition upon the Company
and other Internet network providers of potential liability for information
carried on or disseminated through their systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources, or to discontinue certain service
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could impact the growth of Internet
use. While the Company carries general liability insurance, it may not be
adequate to compensate or may not cover the Company in the event the Company
becomes liable for information carried on or disseminated through its networks.
Any costs not covered by insurance incurred as a result of such liability or
asserted liability could have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, there can
be no assurance that content distributed by certain of the Company's current or
future customers will not be regulated or banned, which could reduce the
Company's customer base. Certain businesses, organizations and individuals have
in the past sent unsolicited commercial e-mails from servers hosted at the
Company's facilities to massive numbers of people, typically to advertise
products or services. This practice, known as "spamming," can lead to complaints
against service 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.
20
<PAGE> 23
PART II. OTHER INFORMATION
ABOVENET COMMUNICATIONS, INC.
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The effective date of the registration statement for the Company's
initial public offering, filed on Form S-1 under the Securities Act
of 1933 (File No. 333-63141), was December 9, 1998 (the "IPO
Registration Statement"). The class of securities registered was
Common Stock. The offering commenced on December 10, 1998. The
managing underwriters for the offering were CIBC Oppenheimer and
Volpe Brown Whelen & Company.
Pursuant to the IPO Registration Statement, the Company sold
5,750,000 shares of its Common Stock for an aggregate offering price
of $74,750,000.
The Company incurred expenses of approximately $6,736,000, of which
$5,232,500 represented underwriting discounts and commissions and
approximately $1,503,500 represented other expenses related to the
offering. The net offering proceeds to the Company after total
expenses was $68,014,000.
The Company used approximately $1,875,000 of the net proceeds to pay
for the first installment of the purchase of the IRU. The remaining
net proceeds have been invested in cash and cash equivalents. The use
of the proceeds from the offering does not represent a material
change in the use of proceeds described in the prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In the quarter ended December 31, 1998, the following matters were
submitted to the security holders of the Company:
On October 15, 1998, AboveNet Communications, Inc., a California
corporation, as the sole stockholder of the Company, approved the
following items:
1. The merger of AboveNet Communications, Inc., a California
corporation into and with the Company.
2. The adoption of the Company's 1998 Stock Incentive Plan.
3. The adoption of the Company's 1998 Employee Stock Purchase Plan.
4. The Company's Third Amended and Restated Certificate of
Incorporation to be filed upon the closing of the Company's
initial public offering.
21
<PAGE> 24
In November 1998, the Company solicited the approval of its
stockholders through a Written Consent of Stockholders to Amend and
Restate its Certificate of Incorporation to effect a reverse split of
its outstanding Common Stock and to change the automatic conversion
provisions of the Preferred Stock. The number of stockholders giving
their consent was 26,317,356, representing 86% of the 30,775,885
shares outstanding at that time.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Form of Amended and Restated Certificate of Incorporation of
Registrant incorporated herein by reference to Exhibit 3.4 to the
Company's Registration Statement on Form S-1 (File No. 333-63141).
3.2 Bylaws of Registrant - incorporated herein by reference to Exhibit
3.5 to the Company's Registration Statement on Form S-1 (File No.
333-63141).
4.1 Form of Registrant's Common Stock Certificate incorporated herein by
reference to Exhibit 4.2 of the Company's Registration Statement on
Form S-1 (File No. 333-63141).
4.2 Amended and Restated Investors' Rights Agreement dated September 4,
1998 incorporated herein by reference to Exhibit 4.3 of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
4.3 Stock Subscription Warrant No. 1 to purchase shares of Common Stock
of Registrant issued to Transamerica Business Credit Corporation
incorporated herein by reference to Exhibit 4.4(a) of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
4.4 Stock Subscription Warrant No. 2 to purchase shares of Common Stock
of Registrant issued to Transamerica Business Credit Corporation
incorporated herein by reference to Exhibit 4.4(b) of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
4.5 Stock Subscription Warrant No. 3 to purchase shares of Common Stock
of Registrant issued to Transamerica Business Credit Corporation
incorporated herein by reference to Exhibit 4.4(c) of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
4.6 Stock Subscription Warrant No. 4 to purchase shares of Common Stock
of Registrant issued to Transamerica Business Credit Corporation
incorporated herein by reference to Exhibit 4.4(d) of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
4.7 Warrants to purchase shares of Series D Preferred Stock of Registrant
issued to Silicon Valley Bank incorporated herein by reference to
Exhibit 4.5 of the Company's Registration Statement on Form S-1 (File
No. 333-63141).
4.8 Form of Warrant to purchase shares of Common Stock of Registrant
incorporated herein by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
10.31* Atlantic Crossing/AC-1 Submarine Cable System Capacity Purchase
Agreement, dated December 23, 1998, by and between Atlantic Crossing
LTD, a Bermuda corporation, and AboveNet.*
10.32* Atlantic Crossing/AC-1 Submarine Cable System Indefeasible Right of
Use Agreement in Inland Capacity (United Kingdom), dated December 23,
1998, by and between GT U.K. LTD and AboveNet.*
10.33* Atlantic Crossing/AC-1 Submarine Cable System Indefeasible Right of
Use Agreement in Inland Capacity (United States), dated December 23,
1998, by and between GT U.K. LTD and AboveNet.*
27.1 Financial Data Schedule
* Confidential treatment requested as to certain portions of exhibit.
(b) Reports on Form 8-K.
None.
22
<PAGE> 25
ABOVENET COMMUNICATIONS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ABOVENET COMMUNICATIONS, INC.
Date: February 11, 1999 By: /s/ DAVID F. LARSON
---------------------------------------
David F. Larson
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: February 11, 1999 /s/ KEVIN HOURIGAN
-------------------------------------
Kevin Hourigan
Vice President of Finance and Controller
(Principal Accounting Officer)
23
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No Exhibit Title
- ------- -------------
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of
Registrant incorporated herein by reference to Exhibit 3.4 to the
Company's Registration Statement on Form S-1 (File No.
333-63141).
3.2 Bylaws of Registrant - incorporated herein by reference to
Exhibit 3.5 to the Company's Registration Statement on Form S-1
(File No. 333-63141).
4.1 Form of Registrant's Common Stock Certificate incorporated herein
by reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-1 (File No. 333-63141).
4.2 Amended and Restated Investors' Rights Agreement dated September
4, 1998 incorporated herein by reference to Exhibit 4.3 of the
Company's Registration Statement on Form S-1 (File No.
333-63141).
4.3 Stock Subscription Warrant No. 1 to purchase shares of Common
Stock of Registrant issued to Transamerica Business Credit
Corporation incorporated herein by reference to Exhibit 4.4(a) of
the Company's Registration Statement on Form S-1 (File No.
333-63141).
4.4 Stock Subscription Warrant No. 2 to purchase shares of Common
Stock of Registrant issued to Transamerica Business Credit
Corporation incorporated herein by reference to Exhibit 4.4(b) of
the Company's Registration Statement on Form S-1 (File No.
333-63141).
4.5 Stock Subscription Warrant No. 3 to purchase shares of Common
Stock of Registrant issued to Transamerica Business Credit
Corporation incorporated herein by reference to Exhibit 4.4(c) of
the Company's Registration Statement on Form S-1 (File No.
333-63141).
4.6 Stock Subscription Warrant No. 4 to purchase shares of Common
Stock of Registrant issued to Transamerica Business Credit
Corporation incorporated herein by reference to Exhibit 4.4(d) of
the Company's Registration Statement on Form S-1 (File No.
333-63141).
4.7 Warrants to purchase shares of Series D Preferred Stock of
Registrant issued to Silicon Valley Bank incorporated herein by
reference to Exhibit 4.5 of the Company's Registration Statement
on Form S-1 (File No. 333-63141).
4.8 Form of Warrant to purchase shares of Common Stock of Registrant
incorporated herein by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-1 (File No. 333-63141).
10.31* Atlantic Crossing/AC-1 Submarine Cable System Capacity Purchase
Agreement, dated December 23, 1998, by and between Atlantic
Crossing LTD, a Bermuda corporation, and AboveNet.*
10.32* Atlantic Crossing/AC-1 Submarine Cable System Indefeasible Right
of Use Agreement in Inland Capacity (United Kingdom), dated
December 23, 1998, by and between GT U.K. LTD and AboveNet.*
10.33* Atlantic Crossing/AC-1 Submarine Cable System Indefeasible Right
of Use 1.1 Agreement in Inland Capacity (United States), dated
December 23, 1998, by and between GT U.K. LTD and AboveNet.*
27.1 Financial Data Schedule
</TABLE>
* Confidential treatment requested as to certain portions of exhibit.
24
<PAGE> 1
EXHIBIT 10.31
19/11/98
ATLANTIC CROSSING/AC-1
SUBMARINE CABLE SYSTEM
CAPACITY PURCHASE AGREEMENT
THIS AGREEMENT (as amended, supplemented or otherwise modified from time
to time, this "Agreement"), made and entered into as of this 23 day of Dec.,
1998 between ATLANTIC CROSSING LTD., a corporation organized and existing under
the laws of Bermuda and having its principal office in Bermuda (the "Grantor"),
and ABOVE NET COMMUNICATIONS INC. a corporation organized and existing under
the laws of Delaware and having its principal office at 50 West San Fernando,
Suite 1O10, San Jose, California 95113, USA (the "Purchaser).
WITNESSETH:
WHEREAS, the Grantor, (formerly known as Global Telesystems Ltd.),
certain of its subsidiaries, SSI Atlantic Crossing LLC and AT&T Submarine
Systems, Inc., now known as Tyco Submarine Systems Ltd. (together with its
successors and assigns, "TSSL") have entered into the Project Development and
Construction Contract, dated March 18, 1997 (as amended, supplemented or
otherwise modified from time to time, the "Supply Contract"), pursuant to which
TSSL has agreed to design, manufacture, construct, install and deliver a fiber
optic cable system connecting (a) the United States to the United Kingdom, (b)
the United Kingdom to the Netherlands, (c) the Netherlands to Germany and (d)
Germany to the United States (the "System");
WHEREAS, the Grantor, certain of its subsidiaries, SSI Atlantic Crossing
LLC and TSSL have also entered into the Operations, Administration and
Maintenance Agreement, dated as of March 25, 1997 (as amended, supplemented or
otherwise modified from time to time, the "OA&M Agreement"), pursuant to which
TSSL has agreed, in accordance with the terms thereof, to operate, administer
and maintain the System;
WHEREAS, the Purchaser desires to acquire rights with respect to the
Purchased Capacity (as defined herein) on an indefeasible right of use basis
("IRU") and such Purchased Capacity represents capacity on the System between
the System Interface (as defined herein) of the applicable cable stations;
WHEREAS, the Grantor is willing to grant such rights on an IRU basis;
WHEREAS, the Purchased Capacity is comprised of: (a) S Capacity (as
defined herein), which will be conveyed by the Grantor to the Purchaser pursuant
to this Agreement; and (b) to the extent necessary to allow the Purchaser to use
its IRU in the applicable S Capacity, T Capacity (as defined herein), which will
be conveyed by subsidiaries of the Grantor to the Purchaser pursuant to the
Indefeasible Right of Use Agreement, attached hereto as Annex A; and
<PAGE> 2
WHEREAS, in order to obtain inland connection services in the United
States and the United Kingdom for the purpose of extending the Purchased
Capacity inland to a location in New York City and London (the "Inland
Capacity"), the Purchaser has the option of entering into separate agreements
(the "Inland Capacity Agreements") with subsidiaries or affiliates of the
Grantor located in the United States and the United Kingdom (the "Inland
Affiliates");
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants contained herein, covenant and agree with each other as follows:
1. DEFINITIONS. Terms defined in the preamble, in the recitals and Annex B
hereto shall have their respective meanings when used herein and the
following terms shall have the following meanings:
"Access Connection" as defined in Annex B to this Agreement.
"Adjusted Pro Rata Share" as defined in Annex B to this Agreement.
"Advisory Committee" as defined in Paragraph 5 of Annex B to this
Agreement.
"business day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York City or Bermuda are authorized or
required to close.
"Dollars" or "$" means United States dollars.
"European Segment" means Segment S-3a, S-3b and/or S-3c.
"Grantor's Account" means the bank account of the Grantor maintained
with Deutsche Bank AG, Now York Branch, at 31 West 52nd Street, New
York, New York 10019 (account number 10-533026-0016) or such other
account as the Grantor may designate to the Purchaser in writing. Wire
instructions for the above-referenced account are as follows:
<TABLE>
<S> <C>
Account Name: Atlantic Crossing Ltd.
Account Number: 10-533026-0016
Bank Name: Deutsche Bank AG, New York Branch
ABA No.: 026-003-780
Reference: Atlantic Crossing Attn: Lydia Zaininger
</TABLE>
"Maintenance Costs" as defined in Section 4(a) of this Agreement.
"Minimum Capacity Unit" or "MCU means the minimum capacity to be
purchased by the Purchaser in the System [*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 3
"Operator" means TSSL and its successors and assigns as operator under
the OA&M Agreement or any successor operator of the System appointed by
Grantor.
"Payment Date" means, with respect to the IRU granted in respect of any
Purchased Capacity, the date on which the Purchaser pays the Grantor
(for the benefit of the Grantor and the benefit of the Subsidiary
Grantors), in immediately available Dollars, the amount required to be
paid by the Purchaser for such Purchased Capacity in accordance with
Section 3(b) of this Agreement,
"Payment Due Date" means, with respect to the IRU granted in respect of
any Purchased Capacity on Segment S-1 the date set forth under the
heading "Payment Due Date" on Schedule I and in respect of any other
Purchased Capacity, the RFS Date for such Purchased Capacity, provided
that, save in respect of Segment S-1, the Purchaser shall have received
a written certification from the Grantor at least thirty (30) days prior
thereto certifying that, in its good faith judgment, the RFS Date for
such Purchased Capacity will occur by the date specified therein,
accompanied by an invoice(s) for the amount due on such date in
accordance with Section 3(b) of this Agreement.
"Presale Purchaser" means any purchaser who acquires an IRU in capacity
on a Transatlantic Segment from the Grantor which was contracted for
prior to the earlier of (x) the RFS Date for the entire System and (y)
November 30, 1998.
"Purchased Capacity" means the S Capacity set forth on Schedule I
hereto, together with to the extent necessary to allow the Purchaser to
use its IRU in the applicable S Capacity, the applicable T Capacity.
"Purchase Price" means, with respect to the IRU granted in respect of
any Purchased Capacity, the amount payable by the Purchaser to the
Grantor (for the benefit of the Grantor and the benefit of the
Subsidiary Grantors) in respect of such Purchased Capacity and set forth
under the heading "Purchase Price" on Schedule I to this Agreement.
"Residual Capacity" means the Segment S-1 Residual Capacity, the Segment
S-2 Residual Capacity, the Segment S-3a Residual Capacity, the Segment
S-3b Residual Capacity, the Segment S-3c Residual Capacity and the
Segment S-4 Residual Capacity.
"RFS Date" means, with respect to any Segment, the date on which such
Segment will be available for service, which shall be the date on which
the Grantor certifies that (i) such Segment has achieved the standard
described in Attachment 4 to Annex B hereto, (ii) such Segment has been
accepted by Grantor as ready for commercial service under the Supply
Contract and (iii) the independent engineer engaged by Grantor's senior
lenders has concurred with such acceptance. The RFS Date for Segment S-1
(and the related T Segments) was May 22, 1998. The anticipated RFS Date
for Segment S-2 is November 30, 1998. The anticipated
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<PAGE> 4
RFS Date for Segment S-3a, Segment S-3b, Segment S-3c, Segment S-4 and
the entire System is February 22, 1999. The foregoing dates, save for
that with respect to Segment S- 1, are merely estimates as of the date
hereof and shall not be deemed to be representations, covenants or
conditions to obligations.
"Right of Use Agreement" means the Indefeasible Right of Use Agreement,
dated as of the date hereof, made by GT Landing Corp., GT U.K. Ltd.,
Global Telesystems GmbH and GT Netherlands B.V. in favor of purchasers
of capacity on the System (including the Purchaser) and attached as
Annex A to this Agreement, as such agreement may be amended,
supplemented or otherwise modified from time to time in accordance with
Paragraph 9 thereof.
"S Capacity" means capacity on the System available on any S Segment.
"S Segments" the collective reference to Segment S-1, S-2 and S-3a,
S-3b, S-3c and S-4, as necessary.
"Segment S-l" as defined in Annex B to this Agreement.
"Segment S-1 Residual Capacity" as defined in Annex B to this Agreement.
"Segment S-2" as defined in Annex B to this Agreement.
"Segment S-2 Residual Capacity" as defined in Annex B to this Agreement.
"Segment S-3a" as defined in Annex B to this Agreement.
"Segment S-3a Residual Capacity" as defined in Annex B to this
Agreement,
"Segment S-3b" as defined in Annex B to this Agreement.
"Segment S-3b Residual Capacity" as defined in Annex B to this
Agreement.
"Segment S-3c" as defined in Annex B to this Agreement.
"Segment S-3c Residual Capacity" as defined in Annex B to this
Agreement.
"Segment S4" as defined in Annex B to this Agreement.
"Segment S-4 Residual Capacity" as defined in Annex B to this Agreement.
"Segment T-l" as defined in Annex B to this Agreement.
"Segment T-2" as defined in Annex B to this Agreement.
"Segment T-3 as defined in Annex B to this Agreement.
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<PAGE> 5
"Segment T4" as defined in Annex B to this Agreement.
"Segments" the collective reference to the S Segments and the T
Segments.
"Stub Period" as defined in Section 4(a) hereof
"Subsidiary Grantors" the collective reference to GT Landing Corp., GT
U.K. Ltd., Global Telesystems GmbH and GT Netherlands B.V. each a
wholly-owned subsidiary of the Grantor.
"Supplier" means TSSL and its successors and assigns as contractor under
the Supply Contract or any successor contractor of the System appointed
by Grantor.
"T Capacity" means capacity on the System available on any T Segment.
"T Segments" the collective reference to Segment T-1, T-2, T-3 and T-4.
"Transatlantic Segment" means Segment S-1, S-2 or S-4.
"Total Purchase Price" means the aggregate amount payable by the
Purchaser to the Grantor (for the benefit of the Grantor and the benefit
of the Subsidiary Grantors) for the IRU of the Purchased Capacity as set
forth on the bottom of Schedule I to this Agreement opposite the phrase
"Total Purchase Price."
2. IRU FOR PURCHASED CAPACITY.
(a) Purchase Agreement and Grant of IRU. Purchaser hereby agrees to
purchase MCU(s) of Purchased Capacity on the terms and
conditions set forth herein and under the Right of Use
Agreement. Effective on the Payment Date, the Grantor, together
with the applicable Subsidiary Grantors pursuant to the Right of
Use Agreement, grants to the Purchaser, for the term of this
Agreement, an IRU in the Purchased Capacity for which payment
has been made in accordance with Section 3(b) of this Agreement.
Each purchase and grant of the IRU in the Purchased Capacity
takes place in Bermuda.
(b) Annex B. Certain rights and obligations with respect to the IRU
of the Purchased Capacity are described in Annex B hereto, which
is incorporated herein by reference.
(c) Residual Capacity. If the Purchaser is a Presale Purchaser,
then, effective on the date which is 12-1/2 years after the RFS
Date for the entire System, the Grantor, together with the
applicable Subsidiary Grantors pursuant to the Right of Use
Agreement, grants to the Purchaser, at no additional charge and
for the term of this Agreement, an IRU in (i) the Purchaser's
Adjusted Pro Rata Share of the Segment S-1 Residual Capacity,
(ii) the Purchaser's Adjusted Pro Rata Share of
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<PAGE> 6
the Segment S-2 Residual Capacity, (iii) the Purchaser's
Adjusted Pro Rata Share of the Segment S-3a Residual Capacity,
(iv) the Purchaser's Adjusted Pro Rata Share of Segment S-3b
Residual Capacity, (v) the Purchaser's Adjusted Pro Rata Share
of Segment S-3c Residual Capacity and (vi) the Purchaser's
Adjusted Pro Rata Share of Segment S-4 Residual Capacity. The
Grantor shall promptly notify the Purchaser of the amount of
capacity in which the Purchaser obtained an IRU pursuant to this
Section 2(c). If the Purchaser acquires an IRU in any Residual
Capacity, the terms contained herein binding on the Purchaser
with respect to Purchased Capacity shall be binding on the
Purchaser with respect to such Residual Capacity. The
Purchaser's Adjusted Pro Rata Share in any S Segment shall be
allocated in half MCUs, and the Grantor shall be permitted to
round down to the nearest whole MCU.
(d) Presale Upgrade Rights. In addition, if the Grantor and the
Subsidiary Grantors determine to increase the Initial Design
Capacity of the System after the date which is 12-1/2 years
after the RFS Date for the entire System, the Grantor shall
deliver to the Purchaser (only if the Purchaser is a Presale
Purchaser) notice of the proposed increase. If the Purchaser is
a Presale Purchaser, the Purchaser will have the right to
receive a portion of such increased capacity, on terms to be
provided at that time.
3. PAYMENT FOR CAPACITY.
(a) Initial Payment. Upon the execution and delivery of this
Agreement, the Purchaser shall make an initial payment to the
Grantor's Account (for the benefit of the Grantor and the
benefit of the Subsidiary Grantors), in immediately available
Dollars, in an amount equal to 10% of the Total Purchase Price
(the "Initial Payment"). The Initial Payment shall be
non-refundable (except as provided in Section 21 of this
Agreement) and shall be credited toward the payment of the Total
Purchase Price.
(b) Payment of Purchase Price. In exchange for the IRU interest
granted pursuant to this Agreement and the Right of Use
Agreement in any Purchased Capacity, the Purchaser shall, on or
before the Payment Due Date, pay to the Grantor's Account (for
the benefit of the Grantor and the benefit of the Subsidiary
Grantors ), in immediately available Dollars, an amount equal to
the Purchase Price; provided, however, the aggregate payments
made by the Purchaser under paragraphs (a) and (b) of this
Section 3 shall not exceed the Total Purchase Price. Each
payment made under this Section 3(b) shall be non-refundable.
(c) Additional Service Payment. The Purchaser shall be required to
make, at the request of the Grantor, additional payments in
respect of the right of use granted under this Agreement, or the
Right of Use Agreement, for access connection rearrangement
requested by the Purchaser as set forth in Schedule II to this
Agreement and such other reasonable costs in respect of
additional services or equipment to be provided hereunder or in
connection herewith.
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<PAGE> 7
(d) Taxes. All payments made by the Purchaser under this Section 3
shall be made without any deduction or withholding for or on
account of any tax, duty or other charges of whatever nature
imposed by any taxing or governmental authority (collectively
"Taxes"). If the Purchaser is or was required by law to make any
deduction or withholding from any payment due hereunder to the
Grantor (for the benefit of the Grantor and the benefit of the
Subsidiary Grantors ), then, notwithstanding anything to the
contrary contained in this Agreement, the gross amount payable
by the Purchaser to the Grantor (for the benefit of the Grantor
and the benefit of the Subsidiary Grantors) will be increased so
that, after any such deduction or withholding for Taxes, the net
amount received by the Grantor (for the benefit of the Grantor
and the benefit of the Subsidiary Grantors) will not be less
than the Grantor (for the benefit of the Grantor and the benefit
of the Subsidiary Grantors) would have received had no such
deduction or withholding been required. If any taxing or
government authority asserts that the Purchaser should have made
a deduction or withholding for on account of any Taxes with
respect to all or a portion of any payment made hereunder, the
Purchaser hereby agrees to indemnify the Grantor for such Taxes
and hold the Grantor harmless on an after-tax basis from and
against any Taxes, interest or penalties levied or asserted in
connection therewith.
4. OPERATION AND MAINTENANCE OF SYSTEM.
(a) Maintenance Payments. The Purchaser shall pay to the Grantor
(for the benefit of the Grantor and the benefit of the
Subsidiary Grantors), in immediately available Dollars, amounts
("Maintenance Cost") which are based on its allocated share of
the costs for operating, maintaining and repairing the System in
accordance with Paragraph 8 of Annex B. Maintenance Costs shall
be payable quarterly in advance on each January 1, April 1, July
1 and October 1, commencing with the first January 1 after the
applicable Payment Due Date, except that on the applicable
Payment Due Date for the Purchased Capacity the Purchaser shall
make a proportional payment for the period (the "Stub Period")
from the applicable Payment Due Date to the first January 1
thereafter. Each payment made by the Purchaser under this
Section shall be subject to the provisions of Section 3(d) of
this Agreement and shall be non-refundable.
(b) Maintenance. (i) The Grantor shall use reasonable efforts to
cause the System to be maintained in efficient working order and
in accordance with industry standards. The Grantor represents
that the OA&M Agreement is in full force and effect and that it
requires and at all times shall require TSSL to provide routine,
preventive and corrective maintenance for the System in
accordance with performance standards that at least meet prudent
industry standards. Grantor will use reasonable commercial
efforts to cause TSSL to perform its obligations under the OA&M
Agreement and the Supply Contract.
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<PAGE> 8
(ii) The Grantor together with the Subsidiary Grantors will
have sole responsibility for negotiating, executing and
administering contracts and all other aspects related to
the construction, operation, maintenance and repair of
the System.
(iii) Should any condition exist in any Segment that may
impair the integrity of the System, the Grantor shall
initiate and coordinate planned maintenance (or shall
cause such action to occur), on such relevant Segment
which may include the deactivation of such Segment. The
Grantor shall, to the extent reasonably practicable,
advise the Purchaser in writing at least sixty (60) days
(or such shorter period as may be necessary), prior to
initiating a planned maintenance operation, of the
timing, scope and costs of such planned maintenance
operation.
(iv) In the event of disruption of service due to force
majeure or other emergency, the Grantor shall cause
service to be restored as quickly as reasonably
possible, and the Grantor shall take such measures as
are reasonably necessary to obtain such objective.
5. INVOICES; DEFAULT INTEREST.
(a) Invoices. The Grantor (and/or the Subsidiary Grantors) or its
authorized agent (which may include the Operator), shall render
invoices under this Agreement in Dollars, and the Purchaser
shall pay such amount in Dollars. The Purchaser shall make: all
payments by means of a wire transfer to Grantor's Account (for
the benefit of the Grantor and the Subsidiary Grantors). Any
payments required to be made pursuant to this Agreement shall,
save for the Initial Payment which shall be made in accordance
with the provisions of Section 3(a), be made on the later of (i)
the date when due or (ii) five (5) business days after an
invoice is received from Grantor by Purchaser.
(b) Default Interest. Any invoice rendered under this Agreement
which is not paid when due, shall accrue interest at the annual
rate of six percent (6%) above the rate for U.S. dollar LIBOR
for one month as quoted in The Wall Street Journal on the first
business day of the month in which such payment is due. Such
interest shall accrue from the day following the date payment
was due until it is paid in full. In the event that applicable
law does not allow the imposition of "default interest" at the
rate established in accordance with this Section 5(b), such
"default interest" shall be at the highest rate permitted by
applicable law. For purposes of this Section, "paid" shall mean
that funds are available for immediate use by the Grantor.
6. DEFAULT
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<PAGE> 9
(a) If the Purchaser fails to make any payment required by this
Agreement on the date that it is due, or if the Purchaser is
otherwise in breach of this Agreement, and such payment default
continues unremedied for a period of at least five (5) days or
such other breach continues for a period of at least thirty (30)
days, the Grantor, or its authorized agent, may notify the
Purchaser in writing of such payment default or other breach and
if full payment is not received or such other breach is not
fully remedied within fifteen (15) days of such notification,
the Grantor: (i) may suspend all service provided to Purchaser
hereunder and under the Right of Use Agreement (including
suspending Purchaser's right to use the Purchased Capacity),
until such payment default or other breach has been cured
(including payment of default interest, if any) and (ii) shall
be entitled to pursue any and all rights and legal and equitable
remedies (including its rights and remedies to enforce the
Purchaser's obligations under this Agreement).
(b) If the Grantor is in breach of this Agreement and such breach
continues for a period of at least thirty (30) days, the
Purchaser may notify the Grantor in writing of such breach and
if such breach is not fully remedied within fifteen (15) days of
such notification, the Purchaser shall, for so long as such
breach continues, be entitled to pursue any and all rights and
legal and equitable remedies, including its rights and remedies
to enforce Grantor's obligations under this Agreement.
7. USE OF CAPACITY.
(a) The operation of the Purchased Capacity and any equipment
associated therewith shall be such as not to interrupt,
interfere with, or impair service over any of the facilities
comprising the System, or impair privacy of any communications
over such facilities, cause damage to plant or create hazards to
employees, affiliates or connecting companies of the Grantor,
any Subsidiary Grantor, the Purchaser, or any other user, owner
or operator of the System or the public. The Purchaser shall
bear the cost of any additional protective apparatus reasonably
required to be installed because of the use of such facilities
by the Purchaser, any lessees or permitted transferees of the
Purchaser, or any customer or customers of the Purchaser or of
any such lessee or transferee. The Grantor will use reasonable
efforts to cause all other purchasers of capacity in the System
to undertake obligations comparable to those of the Purchaser
set forth in this Section, and the Purchaser shall cause all
permitted users of the IRU in the Purchased Capacity to
undertake comparable obligations.
(b) The Purchased Capacity granted to the Purchaser shall be made
available to the Grantor (or its subsidiaries, its agents or the
Operator), at such times agreeable to the Purchaser and the
Grantor, to permit the Grantor and the Subsidiary Grantors to
conduct such tests and adjustments as may be necessary for such
capacity to be maintained in efficient working order.
8. DURATION OF AGREEMENT.
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<PAGE> 10
(a) This Agreement shall become effective on the day and year set
forth in the preamble hereto and shall continue in operation
until the twenty-fifth (25th) anniversary of the RFS Date for
the System.
(b) The termination of this Agreement (whether under this Section or
otherwise) shall not relieve the Purchaser from any liabilities
arising prior to such termination.
(c) Upon the termination of this Agreement, so long as Purchaser is
not in default hereunder, the Purchaser may elect to extend its
rights in the System, for so long as the System exists or has
not been retired, by giving written notice to Grantor and paying
to Grantor one (1) Dollar. Such election to extend shall not
affect or delay the termination of the Grantor's obligations
under this Agreement. Upon such election to extend and payment,
the Purchaser, together with all other purchasers of capacity on
the System that also elect to so extend, shall become the sole
owners of the System. The ownership interests of the Purchaser
and such other purchasers shall be in proportion to the amount
of capacity covered by IRU's previously granted to the Purchaser
and such other purchasers. The Grantor shall execute and deliver
such documentation as may be reasonably required to effect such
transfer of ownership. Without limitation to the generality of
the foregoing provisions, Grantor shall have no obligation to
operate or maintain the System during such extension.
(d) The parties hereto shall discuss with each other and the other
purchasers of capacity on the System establishing a procedure
for the early retirement of the System if such retirement
appears to be commercially appropriate.
9. APPROVALS; LICENSES.
The performance of this Agreement by each party hereto is contingent upon the
obtaining and continuance of such approvals, consents, governmental
authorizations, licenses and permits as may be required or reasonably deemed
necessary by such party for performance by such party hereunder and as may be
satisfactory to it. The parties shall use (and in the case of the Grantor, shall
cause the Subsidiary Grantors to use) reasonable efforts to obtain and continue,
and to have continued, such approvals, consents, licenses and permits. No
license under patents is granted by the Grantor or any of the Subsidiary
Grantors or shall be implied or arise by estoppel in the Purchaser's favor with
respect to any apparatus, system or method used by the, Purchaser in connection
with the use of the capacity granted to it hereunder or under the Right of Use
Agreement.
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10. DISCLAIMER.
(a) The Grantor and the Subsidiary Grantors have entered into the
Supply Contract to obtain plant, equipment and services
necessary to allow the Purchased Capacity to be placed into
operation on the applicable scheduled RFS Date. Neither the
Grantor, any Subsidiary Grantor or any of their respective
affiliates warrants or guarantees that the RFS Date for any
Segment or the System will occur and the Grantor, the Subsidiary
Grantors and their respective affiliates will otherwise have no
obligation under this Agreement or the Right of Use Agreement or
otherwise unless and until the applicable RFS Date occurs. THE
PURCHASER ACKNOWLEDGES AND AGREES THAT THE GRANTOR AND THE
SUBSIDIARY GRANTORS ARE NOT LIABLE FOR THE SUPPLIER'S FAILURE TO
PERFORM. UNLESS SPECIFICALLY SET FORTH IN THIS AGREEMENT, ANY
OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING BUT NOT
LIMITED TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE ARE SPECIFICALLY DISCLAIMED.
(b) In order to make it more convenient for the Purchaser to connect
the Purchased Capacity to inland networks, the Grantor and the
Subsidiary Grantors have permitted certain Inland Carriers to
collocate at the cable stations located at each T Segment.
Neither the Grantor, any Subsidiary Grantor or any of their
respective affiliates warrants or guarantees any agreement
between the Purchaser and any Inland Carrier and neither the
Grantor, any Subsidiary Grantor or any of their respective
affiliates shall have any liability to the Purchaser for any
failure of any Inland Carrier to perform the terms and
conditions of any such agreement.
11. LIMITATIONS OF LIABILITY.
(a) Except as otherwise provided in this Agreement or in the Right
of Use Agreement, in no event shall the Purchaser, the Grantor
or any Subsidiary Grantor be liable to the other for
consequential, incidental, indirect or special damages,
including, but not limited to, loss of revenue, loss of business
opportunity, or the costs associated with the use of external
restoration facilities, including, without limitation, for any
loss or damage sustained by reason of any failure in or
breakdown of the System or the facilities associated with the
System, the failure of any Inland Carrier to perform the terms
and conditions of any agreement to which it and the Purchaser
are parties or for any interruption of service, whatever the
cause and however long it shall last.
(b) None of the parties shall be liable to any other party for any
loss or damage which may be suffered by such party by reason of
any circumstances beyond the control of the other parties and
having an adverse effect on the provision of any part of the
System in which the Purchaser is entitled to capacity or has any
other right or interest under this Agreement or under the Right
of Use Agreement.
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(c) (i) Neither the Grantor nor any Subsidiary Grantor shall be
liable to the Purchaser for any loss or damage which may be
suffered by the Purchaser as a result of, related to, or in
connection with, the Purchaser's compliance or non-compliance
with any applicable state, federal, foreign governmental,
international (foreign or domestic) or other law related to,
the transfer of the IRU in, or the use of, the Purchased
Capacity.
(ii) The Purchaser shall not be liable to the Grantor or any
Subsidiary Grantor for any loss or damage which may be suffered
by Grantor as a result of, related to, or in connection with,
Grantor's non-compliance with any applicable state, federal,
foreign governmental, international (foreign or domestic) or
other law related to the transfer by Grantor of the IRU to the
Purchaser in, or Grantor's operation, ownership or use of, the
System.
12. SETTLEMENT OF DISPUTES.
(a) The parties hereto shall endeavor to settle amicably by mutual
discussions any disputes, differences, or claims whatsoever
related to this Agreement.
(b) Failing such amicable settlement, any controversy, claim or
dispute arising under or relating to this Agreement, including
the existence, validity, interpretation, performance,
termination or breach thereof, shall finally be settled by
arbitration in accordance with the International Arbitration
Rules of the American Arbitration Association ("AAA"). There
shall be three (3) arbitrators (the "Arbitration Tribunal"), the
first of which shall be appointed by the claimant in its notice
of arbitration, the second of which shall be appointed by the
respondent within thirty (30) days of the appointment of the
first arbitrator and the third of which shall be jointly
appointed by the party-appointed arbitrators within thirty (30)
days thereafter. The language of the arbitration shall be
English. The Arbitration Tribunal will not have authority to
award punitive damages to either party. Each party shall bear
its own expenses, but the parties shall share equally the
expenses of the Arbitration Tribunal and the AAA. This Agreement
shall be enforceable, and any arbitration award shall be final,
and judgment thereon may be entered in any court of competent
jurisdiction. The arbitration shall be held in New York, New
York, USA.
13. INCREASE OF INITIAL DESIGN CAPACITY.
The Grantor and the Subsidiary Grantors shall have authority to
increase, at their own cost and expense, the Initial Design Capacity of
the System.
14. GOVERNING LAW.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA.
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15. WAIVER OF IMMUNITY.
The parties hereto acknowledge that this Agreement is commercial in
nature, and each party hereto expressly and irrevocably waives any claim
or right which it may have to immunity (whether sovereign immunity, act
of state or otherwise) for itself or with respect to any of its assets
in connection with an arbitration, arbitral award or other proceeding to
enforce this Agreement, including, without limitation, immunity from
service of process, immunity of any of its assets from pre- or
post-judgment attachment or execution and immunity from the jurisdiction
of any court or arbitral tribunal.
16. EXPORT CONTROL.
The parties hereto acknowledge that to the extent any products, software
or technical information provided under this Agreement or the Right of
Use Agreement are or may be subject to any applicable export laws and
regulations, the parties hereto agree that they will not use,
distribute, transfer or transmit the products, software or technical
information (even if incorporated into other products) except in
compliance with such export laws and regulations (or licenses or orders
issued pursuant thereto). If requested by either party hereto the other
party agrees to sign all necessary export-related documents as may be
required to comply therewith.
17. REPRESENTATIONS: INDEMNITY.
(a) The Grantor hereby represents and warrants to Purchaser that (i)
Grantor is a corporation duly organized and validly existing
under the laws of Bermuda; (ii) the execution, delivery and
performance of this Agreement by Grantor has been duly
authorized by all necessary corporate action on the part of
Grantor and this Agreement is a valid, binding and enforceable
obligation of Grantor enforceable in accordance with its terms
and (iii) the execution, delivery and performance of this
Agreement by Grantor does not violate, conflict with or
constitute a breach of, the organizational documents or any
order, decree or judgment of any court, tribunal or governmental
authority binding on Grantor.
(b) Purchaser hereby represents and warrants to Grantor that (i)
Purchaser is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of
organization; (ii) the execution, delivery and performance of
this Agreement by Purchaser has been duly authorized by all
necessary corporate action on the part of Purchaser and this
Agreement is a valid, binding and enforceable obligation of
Purchaser enforceable in accordance with its terms; and (iii)
the execution, delivery and performance of this Agreement by
Purchaser does not violate, conflict with or constitute a breach
of, the organizational documents or any order, decree or
judgment of any court, tribunal or governmental authority
binding on Purchaser.
13
<PAGE> 14
(c) Each Party hereby represents and warrants to the other party
that it has obtained all approvals, consents, governmental
authorizations, licenses and permits as may be required to enter
into this Agreement, and grant or acquire, as the case may be,
the IRU in the Purchased Capacity.
(d) The foregoing representations and warranties shall survive the
execution and delivery of this Agreement.
(e) Subject to Section 11, the Purchaser agrees to indemnify and
hold harmless the Grantor and the Subsidiary Grantors and their
respective officers, directors, employees, agents and
representatives from and against any loss, damage, expense or
cost arising out of or in connection with: (i) any breach or
violation by the Purchaser of applicable law or governmental
regulation and (ii) any claims of whatever nature by third
parties with respect to the services provided by the Purchaser.
(f) Subject to Section 11 the Grantor agrees to indemnify and hold
harmless the Purchaser and its officers, directors, employees,
agents and representatives from and against any loss, damage,
expense or cost arising out of or in connection with: (i) any
breach or violation by the Grantor or any Subsidiary Grantor of
applicable law or governmental regulation, and (ii) any claims
of whatever nature by third parties with respect to the services
provided by the Grantor or any Subsidiary Grantor.
18. RELATIONSHIP OF THE PARTIES.
This Agreement shall not form a joint venture or partnership or similar
business arrangement between the parties hereto and the Subsidiary
Grantors, and nothing contained herein or in the Right of Use Agreement
shall be deemed to constitute a partnership or joint venture or similar
business arrangement.
19. NO THIRD PARTY BENEFICIARIES.
This Agreement does not provide and is not intended to provide third
parties (including, but not limited to, customers of the Purchaser, any
permitted transferee of the Purchased Capacity or any other permitted
user of the Purchased Capacity) with any remedy, claim, liability,
reimbursement, cause of action, or any other right, except for the
Subsidiary Grantors. Furthermore, the Purchaser acknowledges that,
except as set forth in the Right of Use Agreement, it is not a third
party beneficiary of any agreement entered into by the Grantor or the
Subsidiary Grantors including, but not limited to, the Supply Contract
and the OA&M Agreement,
20. ASSIGNMENT.
(a) This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto, the
Subsidiary Grantors and their respective
14
<PAGE> 15
successors and permitted assigns; provided that, except for the
collateral assignment of the Grantor's and/or any Subsidiary
Grantor's rights under this Agreement to one or more of the
Grantor's lenders, and except as provided in paragraphs (b) and
(c) of this Section, neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned,
transferred or otherwise disposed of or delegated by either
party hereto without the prior written consent of the other
party.
(b) The Grantor and the Subsidiary Grantors shall be permitted to
assign, transfer or otherwise dispose of any or all of their
rights hereunder and under the Right of Use Agreement and
delegate any or all of their obligations hereunder and under the
Right of Use Agreement to any present or future affiliated
company of the Grantor or to an entity controlled by, under the
same control as, or controlling, the Grantor. The Grantor shall
give the Purchaser notice of any such assignment, transfer or
other disposition or any such delegation.
(c) The Purchaser shall solely be responsible for complying with all
of the terms binding on the "Purchaser" hereunder and shall not
be permitted to assign, transfer or otherwise dispose of any or
all of its rights hereunder or under the Right of Use Agreement
or delegate any or all of its obligations hereunder or under the
Right of Use Agreement to any person or entity except (i) the
Purchaser may enter into one (1) or more lease or license
agreements to lease or license the rights to use any Purchased
Capacity to a lessee or licensee so long as such lease(s) or
license(s) involve in the aggregate less than one (1) MCU of
Purchased Capacity and do not affect the Purchaser's obligations
hereunder and (ii) the Purchaser may transfer its rights (but
not its obligations) to use any Purchased Capacity to a Carrier
Party, so long as the transfer involves less than one (1) MCU of
Purchased Capacity, subject to paragraph (d) of this Section,
provided that simultaneously with transferring such rights to
such Carrier Party, such Carrier Party executes a document
acknowledging:
(i) that it has acquired from the Purchaser rights to use
Purchased Capacity which were conveyed to the Purchaser
under or in connection with a capacity purchase
agreement with the Grantor (the "CPA");
(ii) that the Purchaser has an ongoing obligation under the
CPA to make certain payments to the Grantor (including,
without limitation, in respect of operation,
administration and maintenance expenses) and otherwise
comply with the terms thereof, and that the failure of
the Purchaser to make any such payments when due or the
occurrence of any other breach by the Purchaser of the
terms of the CPA could result in the suspension of the
Purchaser's right to the Purchased Capacity in
accordance with the terms of the CPA; and
(iii) that such Carrier Party is not a third party beneficiary
of the CPA or the Right of Use Agreement.
15
<PAGE> 16
(d) The Purchaser may only transfer to a single Carrier Party,
whether pursuant to one (1) or more transfers, its rights (but
not its obligations) to use in the aggregate one (1) or more
MCU's of Purchased Capacity on terms and conditions which are
mutually agreed between the Grantor and: the Purchaser and in
accordance with Paragraph 6 of Annex B to this Agreement.
Any transfer by the Purchaser of its obligations or its rights to use
any Purchased Capacity which is in violation of this Section shall be
void and of no force and effect.
21. CONDITION TO PURCHASER'S OBLIGATIONS.
The Purchaser's obligation to pay for an IRU with respect to any
Purchased Capacity shall terminate if the RFS Date for such Purchased
Capacity has not occurred by June 30, 1999. In any such event, the
Grantor shall refund all amounts of Purchase Price paid by the Purchaser
with respect to such Purchased Capacity as to which Purchaser's
obligation has terminated within thirty (30) days after the applicable
date.
22. NOTICES.
Each notice, demand, certification or other communication given or made
under this Agreement shall be in writing and shall be delivered by hand
or sent by registered mail or by facsimile transmission to the address
of the respective party as shown below (or such other address as may be
designated in writing to the other party hereto in accordance with the
terms of this Section):
If to the Purchaser: Above Net Communications, Inc.
50 West San Fernando
Suite 1010
San Jose, CA 95113
United States of America
Attn: David Rand
Fax No.: 408-367-6688
If to the Grantor: Atlantic Crossing Ltd.
Wessex House
45 Reid Street
Hamilton HM12, Bermuda
Attn: President
Fax No.: 441-296-8606
Any change to the name, address and facsimile numbers may be made at any
time by giving fifteen (15) days prior written notice in accordance
with this Section. Any such notice, demand or other communication shall
be deemed to have been received, if
16
<PAGE> 17
delivered by hand, at the time of delivery or, if posted, at the
expiration of seven (7) days after the envelope containing the same
shall have been deposited in the post maintained for such purpose,
postage prepaid, or, if sent by facsimile, at the date of transmission
if confirmed receipt is followed by postal notice.
23. SEVERABILITY.
If any provision of this Agreement is found by an arbitral, judicial or
regulatory authority having jurisdiction to be void or unenforceable,
such provision shall be deemed to be deleted from this Agreement and the
remaining provisions shall continue in full force and effect.
24. HEADINGS.
The Section headings of this Agreement are for convenience of reference
only and are not intended to restrict, affect or influence the
interpretation or construction of provisions of such Section.
25. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which when
executed and delivered shall be deemed an original. Such counterparts
shall together (as well as separately) constitute one and the same
instrument.
26. ENTIRE AGREEMENT.
This Agreement together with the Schedules, Annexes and Attachments
thereto supersedes all prior oral or written understandings between the
parties hereto and constitutes the entire agreement with respect to the
subject matter herein. This Agreement shall not be modified or amended
except by a writing signed by authorized representatives of the parties
hereto.
17
<PAGE> 18
27. PUBLICITY AND CONFIDENTIALITY.
(a) The provisions of this Agreement and any non-public information,
written or oral, with respect to this Agreement ("Confidential
Information") will be kept confidential and shall not be
disclosed, in whole or in part, to any person other than
affiliates, officers, directors, employees, agents or
representatives of a party (collectively, "Representatives") who
need to know such Confidential Information for the purpose of
negotiating, executing and implementing this Agreement. Each
party agrees to inform each of its Representatives of the
non-public nature of the Confidential Information and to direct
such persons to treat such Confidential Information in
accordance with the terms of this Section 27. Nothing herein
shall prevent a party from disclosing Confidential Information
(i) upon the order of any court or administrative agency, (ii)
upon the request or demand of, or pursuant to any regulation of,
any regulatory agency or authority, (iii) to the extent
reasonably required in connection with the exercise of any
remedy hereunder, (iv) to a party's legal counsel or independent
auditors, (v) to prospective lenders to the Grantor, and (vi) to
any actual or proposed assignee, transferee or lessee of all or
part of its rights hereunder provided that such actual or
proposed assignee agrees in writing to be bound by the
provisions of this Section 27.
(b) The foregoing shall not restrict either party from publicly
announcing that it has entered into this Agreement with the
parties hereto, but without including any details contained in
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
on the date first written above.
ATLANTIC CROSSING LTD.
By:
-----------------------------------
Name:
Title:
ABOVE NET COMMUNICATIONS, INC.
By: /s/ DAVE RAND
-----------------------------------
Name: Dave Rand
Title: CTO
18
<PAGE> 19
Schedule I
Description of Purchased Capacity
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Date of Transaction Payment Due Date Appropriate S-Segment Number of Whole MCUs Price per Whole MCU Purchase Price
and Related T-Segments (d)x(e)
Note (1)
<S> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*]
</TABLE>
Total Purchase Price [*]
Less Initial Payment [*]
Net Purchase Price Due [*]
Notes:
(1) [*]
(2) [*]
(3) [*]
ABOVENET COMMNICATIONS, INC.
BY: /s/ DAVE RAND
------------------------
DATE: 12/23/98
-------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
19
<PAGE> 20
Schedule II
AC- I Additional Charges
<TABLE>
<CAPTION>
Function Fees
<S> <C>
Access Connection Initial Service [*]
Access Connection Rearrangement per [*]
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 21
ANNEX A
INDEFEASEBLE RIGHT OF USE AGREEMENT
THIS AGREEMENT (as amended, supplemented or otherwise modified from
time to time, this "Agreement") is made and entered into as of this_____ day of
_______, 199__, between and among Above Net Communications Inc. (the
"Purchaser") and GT Landing Corp., GT U.K. Ltd., Global Telesystems GmbH and GT
Netherlands B.V. (collectively, the "Subsidiary Grantors").
WITNESSETH:
WHEREAS, each Subsidiary Grantor is a wholly-owned subsidiary of
Atlantic Crossing Ltd. (the "Parent") who is the grantor under the Capacity
Purchase Agreement (as amended, supplemented or otherwise modified from time to
time, the "Capacity Purchase Agreement") to which a copy of this Agreement is
attached;
WHEREAS, capitalized terms used in this Agreement and not otherwise
defined in this Agreement shall have the meanings assigned to them in the
Capacity Purchase Agreement;
WHEREAS, upon completion of the construction and installation of the
System, GT Landing Corp. will have an IRU in the whole of Segment T-1, GT U.K.
Ltd. will own Segment T-2, Global Telesystems GmbH will own Segment T-3 (except
with respect to that portion of Segment T-3 which comprises Subsegment T-3B in
which Global Telesystems GmbH shall have rights) and GT Netherlands B.V. will
own Segment T4 (except with respect to that portion of Segment T-4 which
comprises Subsegment T-4B in which GT Netherlands B.V. shall have rights);
WHEREAS, subject to and in accordance with the terms of the Capacity
Purchase Agreement, the Parent is conveying certain S Capacity to the Purchaser
on an indefeasible right of use basis;
WHEREAS, each Subsidiary Grantor desires to grant to the Purchaser, at
no additional charge and for so long as the Purchaser maintains an IRU in any S
Capacity, an indefeasible right of use with respect to its respective T Segment
to the extent required by the Purchaser to use its MU in such S Capacity; and
WHEREAS, the Subsidiary Grantors acknowledge and agree that the
Purchaser has relied upon this Agreement in entering into the Capacity Purchase
Agreement;
NOW, THEREFORE, the Subsidiary Grantors covenant and agree as follows:
1. Upon the effectiveness of the grant to the Purchaser of an indefeasible
right of use with respect to any S Capacity (including in any Residual
Capacity) in accordance with the Capacity Purchase Agreement, each
Subsidiary Grantor grants to the Purchaser, at no
<PAGE> 22
additional charge and for so long as the Purchaser maintains an IRU in such
S Capacity, an indefeasible right of use with respect to its respective T
Segment to the extent required by the Purchaser to use its IRU in the S
Capacity.
2. Subject to Sections 10 and 11 of the Capacity Purchase Agreement, each
Subsidiary Grantor shall use commercially reasonable efforts to maintain,
or cause the Operator to maintain, its respective T Segment in accordance
with the provisions, set forth in the Capacity Purchase Agreement.
3. The performance of this Agreement by each of the Subsidiary Grantors is
contingent upon the continuance of the Capacity Purchase Agreement and upon
the obtaining and continuance of such approvals, consents, governmental
authorizations, licenses and permits as may be required or deemed necessary
by such parties and as may be satisfactory to them. The Subsidiary Grantors
shall use all reasonable efforts to obtain and continue such approvals,
consents, governmental authorizations, licenses and permits. No license
under patents is granted by the Subsidiary Grantor or shall be implied or
arise by estoppel in the Purchaser's favor with respect to any apparatus,
system or method used by the Purchaser in connection with the use of the T
Segment(s) granted hereunder.
4. The Subsidiary Grantors and the Parent have entered into the Supply
Contract to obtain plant, equipment and services necessary to allow the T
Segments to be placed into operation on the applicable scheduled RFS Date.
The Subsidiary Grantors do not warrant or guarantee that the RFS Date will
occur for any T Segment and the Subsidiary Grantors will otherwise have no
obligation under this Agreement or otherwise unless and until the
applicable RFS Date occurs. UNLESS SPECIFICALLY SET FORTH IN THIS
AGREEMENT, ANY OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING BUT NOT
LIMITED TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE ARE SPECIFICALLY DISCLAIMED.
5. In no event shall any Subsidiary Grantor be liable to the Purchaser for
consequential, incidental, indirect or special damages, including, but not
limited to, loss of revenue, loss of business opportunity, or the costs
associated with the use of restoration facilities.
6. This Agreement shall not form a joint venture or partnership or similar
business arrangement between the parties hereto or between the parties
hereto, the Parent and the Purchaser, and nothing contained herein shall be
deemed to constitute a partnership or joint venture or similar business
arrangement.
7. This Agreement does not provide and is not intended to provide third
parties (including, but not limited to, customers of the Purchaser, any
permitted transferee of the Purchased Capacity or any other permitted user
of Purchased Capacity) with any remedy, claim, liability, reimbursement,
cause of action, or any other right.
<PAGE> 23
8. This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the Purchaser and the Subsidiary Grantors and their
respective successors and permitted assigns under the Capacity Purchase
Agreement.
9. This Agreement shall not be modified or amended except by a writing signed
by authorized representatives of the parties hereto.
10. This Agreement shall become effective on the date set forth above and shall
continue in effect for the duration of the Capacity Purchase Agreement, and
shall immediately terminate without any further action upon the termination
of the Capacity Purchase Agreement.
11. The provisions of Sections 10, 11, 12, 14, 23 and 25 of the Capacity
Purchase Agreement are hereby incorporated herein by reference, mutatis
mutandis, and shall be deemed a part of this Agreement as if fully set
forth herein.
<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Agreement effective on
the date first written above.
ATLANTIC CROSSING LTD.
By:
--------------------------------------
Name:
Title:
GT LANDING CORP.
By:
--------------------------------------
Name:
Title:
GT U.K. LTD.
By:
--------------------------------------
Name:
Title:
GLOBAL TELESYSTEMS GmbH
By:
--------------------------------------
Name:
Title:
GT NETHERLANDS B.V.
By:
--------------------------------------
Name:
Title:
ABOVE NET COMMUNICATIONS, INC
By: /s/ DAVE RAND
-------------------------------------
Name: Dave Rand
Title: CTO
<PAGE> 25
ANNEX B
ATLANTIC CROSSING
SUBMARINE CABLE SYSTEM
----------
DETAILS RELATING TO CAPACITY PURCHASE AGREEMENT
----------
<PAGE> 26
ATLANTIC CROSSING
SUBMARINE CABLE SYSTEM
ANNEX B
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PARAGRAPH PAGE
- --------- ----
<S> <C>
1. DEFINITIONS ................................................................ 2
2. CABLE SYSTEM CONFIGURATION AND SEGMENTS .................................... 4
3. OWNERSHIP AND PROVISION OF SEGMENTS AND ADDITIONAL PROPERTY ................ 6
4. ACCESS/INLAND CONNECTION SERVICES .......................................... 7
5. THE SYSTEM ADVISORY COMMITTEE .............................................. 8
6. TRANSFER OF RIGHTS TO USE PURCHASED CAPACITY ............................... 9
7. INTENTIONALLY OMITTED ...................................................... 9
8. OPERATIONS, ADMINISTRATION AND MAINTENANCE OF SEGMENTS AND ACCESS
CONNECTIONS ................................................................ 9
9. KEEPING AND INSPECTION OR BOOKS ............................................ 11
10. TERMINATION, REALIZATION OF ASSETS ........................................ 11
</TABLE>
ATTACHMENTS
Attachment 1 - Configuration of the Atlantic Crossing Submarine Cable System
Attachment 2 - Terms of Reference for Assignments, Routing and Restoration
Attachment 3 - Terms of Reference for Operation and Maintenance
Attachment 4 - RFS Date
<PAGE> 27
ATLANTIC CROSSING SUBMARINE CABLE SYSTEM
ANNEX B TO CAPACITY PURCHASE AGREEMENT
1. DEFINITIONS.
Definitions are as described in the specific Paragraphs or in the
Capacity Purchase Agreement to which this Annex B is attached. Except as
otherwise provided, the following definitions shall apply throughout
this Annex B:
Adjusted Pro Rata Share (for apportionment of Residual Capacity): with
respect to each of the Segment S-1 Residual Capacity, Segment S-2
Residual Capacity, Segment S-3a Residual Capacity, Segment S-3b Residual
Capacity, Segment S-3c Residual Capacity and Segment S-4 Residual
Capacity, a fraction:
(i) the numerator of which equals the sum of (A) the number of
[*] on the applicable S Segment in which the Purchaser acquired
an IRU from the Grantor pursuant to this Agreement and which
were deemed contracted for prior to October 10, 1997, multiplied
by 3, (B) the number of [*] on the applicable S Segment in which
the Purchaser acquired an IRU from the Grantor pursuant to this
Agreement and which were contracted for on and after October 10,
1997 but prior to June 1, 1998, multiplied by 2 and (C) the
number of [*] on the applicable S Segment in which the Purchaser
acquired an IRU from the Grantor pursuant to this Agreement and
which were contracted for on and after June 1, 1998 but prior to
the earlier of (x) the RFS Date for the entire System and (y)
November 30, 1998; and
(ii) the denominator of which equals the sum of (A) the number
of [*] on the applicable S Segment that all purchasers acquired
an IRU in from the Grantor and which were deemed contracted for
prior to October 10, 1997, multiplied by 3, (B) the number of
[*] on the applicable S Segment that all purchasers acquired an
IRU and which were contracted for on and after October 10, 1997
but prior to June 1, 1998 multiplied by 2 and (C) the number of
[*] on the applicable S Segment that all purchasers acquired an
IRU in from the Grantor and which were contracted for on and
after June 1, 1998 but prior to the earlier of (x) the RFS Date
for the entire System and (y) November 30, 1998.
The Adjusted Pro Rata Share shall be calculated by the Grantor and shall
be conclusive absent manifest error.
Basic System Module: A Basic System Module of the System shall consist
of a digital line section in each direction with interface in accordance
with ITU Recommendations G.703 and G.707 to G.709 and containing [*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 28
Cable Landing Point: Cable Landing Point shall be the beach joint at
each cable landing location or the mean high water mark of ordinary
spring tides if there is no beach joint.
Carrier Party: Any entity authorized or permitted under the laws of its
respective country, to acquire and use facilities for the provision of
international telecommunication services.
Initial Design Capacity: The Initial Design Capacity of each Segment of
the System shall consist of [*] fiber pairs providing a minimum of [*]
Basic System Modules (eight will be used for service and the remaining
eight will be used for restoration) initially supplying [*] or any
increase as determined from time to time by the Grantor in its sole
discretion.
Inland Carrier: An entity authorized or permitted under the laws of its
respective country to provide for inland communications services.
Maintenance Authority: An entity designated by the Grantor which shall
be primarily responsible for the operations and maintenance of the wet
plant as set forth in Paragraph 8(b).
Segment S-1 Residual Capacity, Segment S-2 Residual Capacity, Segment
S-3a Residual Capacity, Segment S-3b Residual Capacity, Segment S-3c
Residual Capacity and Segment S-4 Residual Capacity: With regard to each
of the S Segments, as of the date which is [*] years after the RFS Date
for the entire System, [*] that portion of the service capacity on the
applicable S Segment which is available as of such date to be sold by
the Grantor to prospective purchasers, together with, to the extent
necessary to use such S Capacity, the applicable T Capacity. The amount
of Residual Capacity for each such S Segment shall be determined solely
by the Grantor and shall not, in any event, include any capacity on the
applicable S Segment which the Grantor has determined should be reserved
for restoration purposes.
System Interface: The nominal [*] digital/optical input/output ports on
the digital/optical distribution frame (including the digital/optical
distribution frame itself) where the Basic System Module connects with
other transmission facilities or equipment.
Terminal Parties: The Terminal Parties are GT U.K. Ltd., Global
Telesystems GmbH, GT Landing Corp. and GT Netherlands B.V., each of
which are wholly-owned subsidiaries of the Grantor.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 29
2. CABLE SYSTEM CONFIGURATION AND SEGMENTS
(a) The configuration of the System shall be as shown in Attachment
1.
(b) In accordance with the arrangements contained in this Annex B,
the System shall be regarded as consisting of the following
Segments:
Segment S-1: A submarine cable linking Segments T-2 and T-1.
Segment S-2: A submarine cable linking Segments T-1 and T-3.
Segment S-3a: A submarine cable linking Segments T-4 and T-2.
Segment S-3b: A submarine cable linking Segments T-3 and T-4.
Segment S-3c: A submarine cable linking Segments T-2
and T-3 (which goes through Segment T-4).
Segment S-4: The portion of the System linking Segments
T-1 and T-4
Segment T-1: A cable station in Brookhaven, New York,
United States, together with that portion of
the System which is located between such cable
station and the point which is one-half mile
beyond the United States territorial limit.
Segment T-2: A cable station in Whitesands, United
Kingdom, together with that portion of the
System which is located between such cable
station and the point which is one-half mile
beyond the United Kingdom territorial limit.
Segment T-3: A cable station in Sylt, Germany, together
with that portion of the System which is
located between such cable station and the
point which is one-half mile beyond the Germany
territorial
limit.
Segment T-4: A cable station in Beverwijk, Netherlands,
together with that portion of the System which
is located between such cable station and the
point which is one-half mile beyond the
Netherlands territorial limit.
It is assumed that under the current law of the United Kingdom, the
United States, the Netherlands and Germany, the territorial waters of
such country extend twelve nautical miles seaward from the coast of such
country. If such assumption shall prove to be
<PAGE> 30
incorrect, or if a law shall change such assumption and in fact the
territorial waters of any such country extend beyond twelve nautical
miles, the parties hereto shall adjust the T Segment of the applicable
Terminal Party..
(c) Except as provided herein, Segments T-I and T-2 shall include,
as appropriate:
(i) the transmission cable and equipment associated with the
submersible plant between the point which is one-half mile
beyond the territorial waters of the United Kingdom or the
United States, as appropriate, up to the [*] digital/optical
or input/output ports on the digital/optical distribution frame
(including the digital/optical distribution frame itself) where
the Basic System Module connects with other transmission
facilities or equipment;
(ii) the land, civil works and buildings at the specified
locations for the cable landing and for the cable route
including cable rights-of-way and ducts between the applicable
cable station and its respective Cable Landing Point, and common
services and equipment at each of the locations, together with
equipment in each of those cable stations which is solely
associated with the System; and
(iii) the sea earth cable and electrode system and/or the land
earth system, or an appropriate share thereof, associated with
the terminal power feeding equipment.
(d) Except as provided herein, Segment T-3 consists of Subsegment
T-3A and Subsegment T-3B.
Subsegment T-3A shall consist of:
(i) the transmission cable and equipment associated with the
submersible plan between the point which is one-half mile beyond
the territorial waters of Germany up to the nominal [*]
digital/optical or input/output ports on the digital/optical
distribution frame (including the digital/optical distribution
frame itself) where the Basic System Module connects with other
transmission facilities or equipment, together with equipment in
the cable station which is solely associated with the System;
(ii) the sea earth cable an electrode system and/or the land
earth system associated with the terminal power feeding
equipment; and
(iii) all of Global Telesystems GmbH's leasehold interest or
other rights in Subsegment T-3B.
Subsegment T-3B shall consist of all the land, civil works and building
in Sylt, Germany for the cable landing and the cable rights of way and
ducts between the cable station and the Cable Landing Point.
(e) Except as provided herein, Segment T-4 consists of Subsegment
T-4A and Subsegment T-4B.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 31
Subsegment T-4A shall consist of:
(i) the transmission cable and equipment associated with the
submersible plant between the point which is one-half mile
beyond the territorial waters of the Netherlands up to the
nominal [*] digital/optical or input/output ports on the
digital/optical distribution frame (including the
digital/optical distribution frame itself) where the Basic
System Module connects with other transmission facilities or
equipment, together with equipment in the cable station which is
solely associated with the System;
(ii) the sea earth cable an electrode system and/or the land
earth system associated with the terminal power feeding
equipment; and
(iii) all of GT Netherlands B.V.'s leasehold interest or other
rights in Subsegment T-4B.
Subsegment T-4B shall consist of all the land, civil works and building
in Beverwijk, Netherlands for the cable landing and the cable rights of
way and ducts between the cable station and the Cable Landing Point.
(f) Each S Segment shall also include the transmission cable
equipped with appropriate repeaters and joint housings between
the respective T Segments.
3. OWNERSHIP AND PROVISION OR SEGMENTS AND ADDITIONAL PROPERTY
(a) Segments S-1, S-2, S-3a, S-3b, S-3c and S-4 shall be owned and
provided by the Grantor.
(b) GT Landing Corp., a wholly-owned United States subsidiary of the
Grantor, shall own (or shall have a right of use for) and
provide Segment T-1. Segment T-2 shall be owned and provided by
GT UK Ltd., a wholly-owned United Kingdom subsidiary of the
Grantor. Subsegment T-3A shall be owned and provided by Global
Telesystems GmbH, a wholly-owned German subsidiary of the
Grantor. Subsegment T-4A shall be owned and provided by GT
Netherlands B.V. a wholly owned Netherlands subsidiary of the
Grantor.
(c) Global Telesystems GmbH has procured rights in Subsegment T-3B
of the System from Deutsche Telekom and or its subsidiary
Deutsche Telekom Immobilen und Service GmbH.
(d) GT Netherlands B.V. has procured rights in Subsegment T-4B of
the System from KPN Telecom.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 32
4. ACCESS /INLAND CONNECTION SERVICES
(a) Access connection services refers to the transmission facilities
and the equipment required for interconnection between the
demarcation equipment point associated with the System and the
demarcation point associated with inland communications services
("Access Connections"). Within the Cable Stations, the Operator
of the System shall provide [*] Access Connections. Each Access
Connection provides full-time digital private line transmission
on a two point basis. Access Connections may be changed or
modified upon written request of the Purchaser and shall be
provided subject to the availability of equipment, facilities
and personnel necessary to establish the Access Connection in
accordance with the schedule of fees set forth at Schedule II to
the Capacity Purchase Agreement.
(b) This Annex and the Capacity Purchase Agreement is a master
agreement under which service orders for Access Connections
("Service Orders") may be placed by the Purchaser. All Service
Orders will be governed by the terms and conditions of the
Capacity Purchase Agreement and this Annex B. Access Connections
shall be ordered by the Purchaser in accordance with the
Interconnection Services Ordering Procedures manual ("ISOP
Manual") which the Grantor shall publish from time to time. The
Purchaser shall submit all Service Orders under this Agreement
to the Grantor (or its designated agent). When the Service Order
is received, the Purchaser shall be notified of such receipt and
the Grantor shall make a reasonable effort to make (or cause to
have made) the Access Connection available on the date requested
by the Purchaser if requested in accordance with this Annex B
and in accordance with the ISOP Manual. Each Service Order must
provide such information as may be reasonably required in order
to design, install and maintain the Access Connection ordered.
(c) Once placed, the Service Order will be processed in accordance
with the ISOP Manual and a due date will be established.
(d) The provisions of Section 7 of the Capacity Purchase Agreement
shall apply to all Access Connections hereunder.
(ii) (e) The Purchaser may obtain inland connection services
("Inland Connections") for the purpose of extending the
Purchaser's Capacity inland, by entering into one of the
following types of agreements, all of which shall be
subject to the provisions of Sections 10 and 11 of the
Capacity Purchase Agreement to which this Annex is
attached through an agreement with entities related to
the Grantor which have acquired rights in additional
inland capacity so that the Purchased Capacity can be
extended to certain points of interface in certain
cities.
(f) Deutsche Telekom is the provider of Inland Connections from the
cable station located in Sylt, Germany.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 33
5. THE SYSTEM ADVISORY COMMITTEE
(a) For the purpose of directing the progress of the System, an
advisory committee (the "Advisory Committee") shall be formed
consisting of the Grantor, each Terminal Party, certain Carrier
Parties having purchased [*] Purchaser shall have no obligation
to serve on the Advisory Committee. The Grantor shall appoint a
Chairman (or several Co-Chairmen and each such appointee(s)
shall serve as a Chairman until such time as the Grantor shall
appoint a replacement Chairman. The Co-Chairmen may appoint one
secretary as an assistant to the Chairman. The Advisory
Committee shall make recommendations to the Grantor (for the
benefit of the Grantor and the Terminal Parties) in respect of
the construction and installation of the System and the
operation and maintenance thereof, which the Grantor may accept
or reject in its sole discretion.
(b) The Advisory Committee will meet on the call of the Chairman or
Co-Chairmen or whenever requested by one or more of its members.
The Chairman or Co-Chairmen shall give the Advisory Committee at
least thirty (30) days advance written notice of each meeting,
together with a copy of the draft agenda. In case of emergency,
such notice period may be reduced upon the request of the
Grantor. Documents to be discussed at any meeting of the
Advisory Committee shall be made available to the Advisory
Committee members at least fourteen (14) days before the
meeting, but the Advisory Committee may agree to discuss
documents distributed on less than fourteen (14) days notice.
(c) To aid the Advisory Committee in the performance of its duties,
the following Expert Working Groups (hereafter "EWG's") shall be
formed (whose members need not be on the Advisory Committee),
and said EWG's, under the direction of the Advisory Committee,
shall be responsible for making recommendations to the Advisory
Committee for their respective areas of interest listed in
Attachment 2 and Attachment 3 and any other areas of interest
designated by the Advisory Committee:
(i) Assignments, Routing and Restoration (the "A&R EWG");
and
(ii) Operations and Maintenance (the "O&M EWG").
(d) The Chairman or Co-Chairmen of the Advisory Committee and the
Grantor in consultation with the Advisory Committee may
establish such other groups as they shall determine in their
discretion to provide assistance in the Advisory Committee's
performance of its responsibilities hereunder. The Chairman or
Co-Chairmen of the Advisory Committee and the Grantor in
consultation with the Advisory Committee shall appoint the
Chairman or several Co-Chairmen of the A&R and O&M EWGs. Each of
which EWGs shall meet at least once annually and more
frequently, if necessary, until two (2) years following the RFS
Date for the System, and thereafter as may be appropriate.
Meetings of such groups may be called to consider specific
questions at the discretion of its Chairman or Co-Chairmen, or
whenever requested by the Grantor or a majority of the members
of
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 34
the Advisory Committee. On or about two (2) years after the RFS
Date for the System, the Advisory Committee shall determine
whether any of its EWGs should remain in existence or be
disbanded.
(e) The Grantor shall perform or cause to have performed customary
duties and responsibilities pertaining to a Network
Administrator/Customer Care Center for the System.
6. TRANSFER OF RIGHTS TO USE PURCHASED CAPACITY.
(a) The Purchaser shall be permitted to transfer its right to use
the Purchased Capacity only in accordance with Section 20 of the
Capacity Purchase Agreement. In the event Purchaser transfers
(as permitted by said Section 20) its right to use in the
aggregate one (1) of more MCUs of Purchased Capacity to a single
Carrier Party the Purchaser shall immediately notify the Network
Administrator/Customer Care Center of the identity of the
transferee Carrier Party and shall provide all other information
reasonably requested by the Network Administrator/Customer Care
Center.
(b) Subject to clause (a) of this Paragraph 6, the Purchaser may
transfer its rights to use in the aggregate one (1) or more MCUs
of Purchased Capacity to a single Carrier Party at anytime by
giving immediate notice to the Network Administrator/Customer
Care Center.
(c) The Purchaser may not transfer its rights to use in the
aggregate one (1) or more MCUs of Purchased Capacity to a single
Carrier Party without written notification to the Network
Administrator/Customer Care Center.
(d) Confirmation of such transfer of the rights to use in the
aggregate one (1) or more MCUs of Purchased Capacity to a single
Carrier Party shall be provided by the Network
Administrator/Customer Care Center within 7 days after
completion.
7. INTENTIONALLY OMITTED.
8. OPERATIONS, ADMINISTRATION AND MAINTENANCE OF SEGMENTS AND ACCESS
CONNECTIONS
(a) The operation and maintenance of the dry plant for Segments T-1,
T-2, T-3 and T-4 (and to the extent applicable the Access
Connections) shall include the following functions:
(i) monitoring and routine maintenance of terminal
equipment; and
(ii) testing, troubleshooting, fault location and replacement
of faulty terminal equipment using existing spare parts
inventory.
(b) The designated Maintenance Authority shall be responsible for
the operations and maintenance of the wet plant for Segments
S-1, S-2, S-3a, S-3b, S-3c and S-4 and
<PAGE> 35
Segments T-1, T-2, T-3 and T4, which shall include the following
functions:
(i) determining the need for System repair;
(ii) planning and directing maintenance work;
(iii) providing ship owners and ship operators with the
System's documentation necessary for repairs;
(iv) being responsible for delivery, control and allocation
of System spares between shore storage depots and cable
ships; and
(v) providing trained personnel to perform repair functions
and supplemental cable ship personnel.
(c) Maintenance Costs include but are not limited to the following:
(i) dry maintenance including the land segment to the beach
joint;
(ii) wet maintenance;
(iii) cable protection and at sea repairs;
(iv) common equipment costs associated with the Atlantic
Crossing equipment at the cable stations; and
(v) operating costs associated with operating each cable
station.
(d) If the only IRU in S Capacity acquired by the Purchaser is on
Segment S-3a, Segment S-3b or Segment S-3c or if the Purchaser
has acquired unmatched capacity on Segment S-3a, Segment S-3b,
or Segment S-3c, then Maintenance Costs for such capacity shall
mean, for any calendar year, an amount equal to 110% of the
Purchaser's allocated share of 20% of the actual costs of
operating, maintaining and repairing the System for the calendar
year preceding such period; provided that in no event shall the
Purchaser be required to pay Maintenance Costs in respect of
such capacity pursuant to this (d) for any calendar year in an
amount in excess of [*] acquired in such capacity. The
Purchaser's allocable share will be determined first by dividing
an amount equal to 20% of the aggregate amount of such actual
costs by the number [*] sold in such S Capacity as of such date
to all users of such S Capacity and then multiplying the
quotient by the number of MCUs in which the Purchaser acquired
an IRU. The assumed Maintenance Costs for the first full
calendar year will be assumed to be [*] (and a pro rata portion
thereof for the period from the applicable RFS Date to the first
January 1 quarterly payment date thereafter) for each of
Segments S-3a, S-3b and S-3c. The Maintenance Costs for the Stub
Period [*] shall be a pro rata portion of the Maintenance Costs
[*] for the relevant full calendar year or partial calendar year
as applicable.
(e) Except as provided in clause (d) above, Maintenance Costs shall
mean, for any calendar year, an amount equal to the difference
between (x) 110% of the Purchaser's allocated share of the
actual costs of operating, maintaining and repairing the System
for the calendar year preceding such period and (y) the
Purchaser's allocated share of the Maintenance Costs payable
pursuant to clause
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 36
(d) above for such period, if any, provided that in no event
shall the Purchaser be required to pay Maintenance Costs
pursuant to this clause(e) for any calendar year in an amount in
excess of [*] (increasing by [*] for each calendar year
occurring after the 1998 calendar year, compounded annually)
[*] The Purchaser's allocable share will be determined first by
dividing the actual costs of operating, maintaining and
repairing the System by the number [*] sold on the entire System
as of such date to all users of the System and then multiplying
the quotient by the number of MCUs in which the Purchaser
acquired an IRU. The assumed Maintenance Costs for the first
full calendar year will be assumed to be [*] (and a pro rata
portion thereof for the period from the applicable RFS Date to
the first January 1 quarterly payment date thereafter). The
Maintenance Costs for the Stub Period [*] shall be a pro rata
portion of the Maintenance Costs [*] for the relevant full
calendar year or partial calendar year as applicable.
(f) Within 30 days after the end of each calendar year, Grantor
shall provide the Purchaser with an itemized statement of the
actual Maintenance Costs for the prior calendar year. If it is
determined that the amount paid by the Purchaser was more or
less than the actual Maintenance Costs for such period, the
Purchaser shall receive a credit for such excess to be applied
against, or pay such shortfall on, the next quarterly payment
date or if necessary in the case of any excess, to subsequent
quarterly payment dates.
9. KEEPING AND INSPECTION OF BOOKS
The Grantor shall keep and maintain, or cause to have kept and
maintained, copies of such books, records, and accounts relating to
bills, for a period of five (5) years from the date of billing and shall
afford the Purchaser the right to review such books, records and
accounts during such period.
10. TERMINATION; REALIZATION OF ASSETS
(a) The Purchaser understands and agrees to abide by all rules,
regulations and requirements reasonably set forth by each entity
having rights in any S Segment or T Segment, including, but not
limited to, equipment and floor spacing equipment,
specifications and equipment.
(b) Nothing contained in this Annex B or the Capacity Purchase
Agreement to which this Annex B is attached shall be deemed to
vest in the Purchaser any salvage rights in any Segment.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 37
ATTACHMENT I
CONFIGURATION OF THE SYSTEM
Segment S-4 is the portion of the system between Segments T-1 and T-4.
Segment S-3c is the portion of the System between Segments T-2 and T-3.
<PAGE> 38
2
- Report regularly, as appropriate, to the Advisory
Committee on the A&R EWG activities
o The A&R EWG shall carry out such other responsibilities as the
Advisory Committee may direct.
o All decisions made by the A&R EWG shall be subject in the first
place to consultation among the members of the A&R EWG and the
Grantor who shall make every reasonable effort to reach
agreement. In the event agreement cannot be reached, the issue
shall be decided by the Grantor.
<PAGE> 39
ATTACHMENT 3
TERMS OF REFERENCE FOR THE OPERATIONS AND
MAINTENANCE EXPERTS WORKING GROUP
The responsibilities of the O&M EWG shall include the following:
o Recommend to the Grantor any project changes pertaining to the
technical, operational and maintenance aspects that O&M EWG
deems appropriate for the construction of the System.
o Recommend to the Grantor the required quantity of spare
equipment for submersible and terminal equipment. Make
recommendations with respect to depot storage and location of
spare equipment in consultation with the Maintenance
Authorities.
o Provide assistance and support as may be requested by the
Grantor.
o Make recommendations with respect to the testing, operation and
maintenance methods to be used for the System as proposed by the
suppliers or Maintenance Authorities, as appropriate.
o Study other matters and make recommendations with respect to
problems affecting maintenance of the System as may be
identified by the Maintenance Authorities.
o Oversee TSSL under the OA&M Agreement.
o Report on a regular basis to, or when requested by, the Advisory
Committee.
o The O&M EWG shall carry out such other responsibilities as the
Advisory Committee may direct.
o All decisions made by this EWG shall be subject in the first
place to consultation among the members thereof and the Grantor
who shall make every reasonable effort to reach agreement. In
the event agreement cannot be reached, the issue shall be
decided by the Grantor.
<PAGE> 40
ATTACHMENT 4
RFS STANDARD
RFS Standard means (i) for any Segment that (a) such Segment has the
ability to carry commercial traffic between the two landing points of such
Segment meeting performance criteria of ITU-T G.826 and has line monitoring and
protection switching capability and (b) TSSL tested and provided [*]
interconnectivity capability to the Segment terminal equipment according to
ITU-T G.826, and (ii) for the System, (a) that the System has the ability to
carry commercial traffic throughout the System meeting performance criteria of
ITU-T G.826 with self healing ring protection capability and per Segment
protection capability, has line monitoring and per Segment protection switching
capability and has network management capability and (b) TSSL has tested and
provided [*] interconnectivity capability to the System terminal equipment
according to ITU-T G.826.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 1
EXHIBIT 10.32
19/11/98
ATLANTIC CROSSING/AC-1
SUBMARINE)CABLE SYSTEM
INDEFEASIBLE RIGHT OF USE AGREEMENT
IN
INLAND CAPACITY
(United Kingdom)
THIS AGREEMENT (as amended, supplemented or other modified from time to
time, this "Agreement"), made and entered into as of this 23 day Of December
1998, by and among GT U.K. LTD., ("Grantor") and ABOVE NET COMMUNICATIONS, INC,
a corporation organized and existing under the laws of Delaware, (the
"Purchaser").
W I T N E S S E T H
WHEREAS, the Purchaser and Atlantic Crossing Ltd. ("ACL") are parties to
the Capacity Purchase Agreement, dated as of November, 1998 (as amended,
supplemented or otherwise modified from time to time, the "Capacity Purchase
Agreement'), to which this Agreement is attached;
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings given to them in the Capacity Purchase Agreement;
WHEREAS, subject to the terms and conditions set forth in the Capacity
Purchase Agreement, the Purchaser intends to acquire an IRU in the Purchased
Capacity which represents capacity on the System between the System Interface
points at the Cable Stations;
WHEREAS, Grantor has acquired (or will acquire) rights to capacity in
order to give the Purchaser the option to extend the Purchased Capacity acquired
on the System beyond the Cable Station to a certain point(s) of interface in the
city specified on Schedule I hereto;
WHEREAS, the Purchaser desires to acquire rights with respect to the
Inland Capacity (as defined herein) set forth on Schedule I hereto on an
indefeasible right of use basis ("IRU") and such Inland Capacity represents
capacity between the System Interface point of the Cable Station and the point
of interface in the applicable city set forth on Schedule I hereto;
WHEREAS Grantor wishes to grant Inland Capacity on such an indefeasible
right of use basis; and
1
<PAGE> 2
WHEREAS, the IRU in the Inland Capacity provided hereunder, together
with the IRU in the S and T Capacity provided under the Capacity Purchase
Agreement, convey to the Purchaser service between such S Capacity, and the
point of interface at the applicable city set forth on Schedule I hereto;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants contained herein covenant and agree with each other as follows:
1. DEFINITIONS. Terms defined in the preamble and in the recitals hereto
shall have their respective meanings when used herein and the following terms
shall have the following meanings:
"Backhaul Agreement" means any agreement between Grantor and a
Backhaul Provider, pursuant to which Grantor acquire rights in Inland
Capacity.
"Backhaul Provider" means any entity providing Grantor rights to
Inland Capacity.
"business day" means a day other than a Saturday, Sunday or
other day on which commercial banks in New York City or Bermuda are
authorized or required by law to close.
"Cable Station" means the cable station described on Schedule I
hereto.
"Dollars " or "$" means United States dollars.
"Grantor's Account" means the bank account of Grantor maintained
with Deutsche Bank AG, New York Branch, at 31 West 52nd Street, New
York, New York 10019 (account number 105330260016) or such other account
as Grantor may designate to the Purchaser in writing. Wire instructions
for the above-referenced account are as follows:
<TABLE>
<S> <C>
Account Name; Atlantic Crossing Ltd.
Account Number: 105330260016
Bank Name: Deutsche Bank AG, New York Branch
ABA No.: 026 003 780
Reference: Atlantic Crossing Attn: Lydia Zaininger
</TABLE>
"Inland Capacity" means capacity on a fiber optic
telecommunications system which connects the System Interface at the
Cable Station to the Inland Point of Interface.
"Inland Capacity Purchase Price" means, with respect to the IRU
granted in respect of any Inland Capacity set forth on Schedule I
hereto, the amount payable by the Purchaser in respect of such Inland
Capacity and set forth under the heading "Purchase Price" on Schedule I
hereto.
2
<PAGE> 3
"Inland Point of Interface" means the point of interface in the
applicable city set forth on Schedule I hereto.
"Minimum Capacity Unit" or "MCU" means the minimum capacity to
be purchased by the Purchaser in the Inland Capacity. An STM-1 is
designated as the MCU for purposes of this Agreement.
"Payment Date" means, with respect to the IRU granted in respect
of any Inland Capacity set forth on Schedule I hereto, the date on which
the Purchaser pays Grantor, in immediately available Dollars, the amount
required to be paid by the Purchaser for such Inland Capacity in
accordance with Section 3(b) of this Agreement.
"Payment Due Date" means, with respect to the IRU granted in
respect of any Inland Capacity set forth on Schedule I hereto, the later
of (i) the earliest Payment Due Date for any Purchased Capacity (as such
term is defined in the Capacity Purchase Agreement) connecting therewith
and (ii) the RFS Date.
"RFS Date" means, with respect to any Inland Capacity, the date
on which such Inland Capacity will be available for service and has
achieved the RFS Standard described in Attachment 2.
"Total Purchase Price" means the aggregate amount payable by the
Purchaser for the IRU in the Inland Capacity and set forth on the bottom
of Schedule I to this Agreement opposite the phrase "Total Purchase
Price."
2. IRU FOR INLAND CAPACITY. Effective on the Payment Date, Grantor
grants to the Purchaser, for the term of this Agreement, an IRU in the Inland
Capacity set forth on Schedule I hereto for which payment has been, made in
accordance with Paragraph 3(b) of this Agreement.
3. PAYMENT FOR CAPACITY. (a) Initial Payment. Except as otherwise
provided in Schedule I to this Agreement, upon the execution and delivery of
this Agreement, the Purchaser shall make an initial payment to the Grantor's
Account in immediately available Dollars, in an amount equal to 10% of the Total
Purchase Price (the "Initial Payment"). The Initial Payment shall be
non-refundable (except as provided in Section 17 of this Agreement) and shall be
credited toward the payment of the Total Purchase Price.
(b) Payment of Inland Capacity Purchase Price. In exchange for the IRU
interest granted pursuant to this Agreement in any Inland Capacity, the
Purchaser shall, on or before the Payment Due Date, pay to the Grantor's,
Account in immediately available Dollars, an amount equal to the Inland Capacity
Purchase Price; provided, however, the aggregate payments made by the Purchaser
under paragraphs (a) and (b) of this Section 3 shall not exceed the Total
Purchase Price. Each payment made under this Section 3(b) shall be
non-refundable.
3
<PAGE> 4
(c) Taxes. All payments made by the Purchaser under this Section 3 shall
be made without any deduction or withholding for or on account of any tax, duty
or other charges of whatever nature imposed by any taxing or governmental
authority (collectively "Taxes"). If the Purchaser is or was required by law to
make any deduction or withholding from any payment due hereunder to Grantor,
then, notwithstanding anything to the contrary contained in this Agreement, the
gross amount payable by the Purchaser to Grantor will be increased so that,
after any such deduction or withholding for Taxes, the net amount received by
Grantor will not be less than Grantor would have received had no such deduction
or withholding been required. If any taxing or government authority asserts that
the Purchaser should have made a deduction or withholding for on account of any
Taxes with respect to all or a portion of any payment made hereunder, the
Purchaser hereby agrees to indemnify the Grantor for such Taxes and hold the
Grantor harmless on an after-tax basis from and against any Taxes, interest or
penalties levied or asserted in connection therewith.
4. OPERATION AND MAINTENANCE OF INLAND CAPACITY.
(a) Except as otherwise set forth in this Agreement, the Purchaser shall
not be required to make any additional payments for costs associated with
operating, maintaining and repairing the Inland Capacity in which an IRU has
been granted hereunder.
(b) Grantor shall use reasonable efforts to cause the Inland Capacity in
which an IRU has been granted hereunder to be maintained in efficient working
order and in accordance with industry standards. Grantor represents that at all
times it shall use commercially reasonable efforts to require the applicable
Backhaul Provider with which it has contracted to provide routine, preventive
and corrective maintenance for the Inland Capacity in accordance with
performance standards that at least meet prudent industry standards. Grantor
will use reasonable commercial efforts to cause the Backhaul Provider with which
it has contracted to perform its obligations under the applicable Backhaul
Agreement.
(c) Grantor will have sole responsibility for negotiating, executing and
administering contracts related to the acquisition of rights in any Inland
Capacity from Backhaul Providers.
(d) Should any condition exist in any Inland Capacity in which an IRU
has been granted hereunder that may impair the integrity of such Inland
Capacity, Grantor shall take reasonable actions to cause to be initiated
maintenance on such Inland Capacity and Grantor shall take reasonable actions to
cause to be initiated planned maintenance on such Inland Capacity in each case
which may include the deactivation of such Inland Capacity. Grantor shall, to
the extent reasonably practicable, advise the Purchaser in writing at least 30
days (or such shorter period as may be agreed) prior to the initiation of a
planned maintenance operation of the timing and scope of such planned
maintenance operation.
4
<PAGE> 5
(e) In the event of disruption of service, Grantor shall use
commercially reasonable efforts to cause service to be restored as quickly as
reasonably possible, and Grantor shall take such measures as are reasonably
necessary to obtain such objective.
5. INVOICES; DEFAULT INTEREST. (a) Invoices. Grantor or its authorized
agent shall render invoices under this Agreement in Dollars, and the Purchaser
shall pay such amount in Dollars. The Purchaser shall make all payments by means
of a wire transfer to the Grantor's Account. Any payments required to be made
pursuant to this Agreement shall, save for the Initial Payment which shall be
made in accordance with the provisions of Section 3(a), be made on the later of
(i) the date when due or (ii) five business days after an invoice is received
from Grantor by Purchaser.
(b) Any invoice rendered under this Agreement which is not paid when
due, shall accrue interest at the annual rate of six percent (6%) above the rate
for U.S. dollar LIBOR for one month as quoted in The Wall Street Journal on the
first business day of the month in which such payment is due. Such interest
shall accrue from the day following the date payment was due until it is paid in
full. In the event that applicable law does not allow the imposition of "default
interest" at the rate established in accordance with this Section 5(b), such
"default interest" shall be at the highest rate permitted by applicable law. For
purposes of this Section, "paid" shall mean that funds are available for
immediate use by Grantor.
6. DEFAULT. (a) If the Purchaser fails to make any payment required by
this Agreement on the date that it is due or if the Purchaser is otherwise in
breach of this Agreement, and such payment default continues unremedied for a
period of at least five (5) days or such other breach continues for a period of
at least thirty (30) days, Grantor or its authorized agent may notify the
Purchaser in writing of such payment default or other breach and if full payment
is not received or such other breach is not fully remedied within fifteen (15)
days of such notification, Grantor (i) may suspend all service provided to
Purchaser hereunder (including suspending Purchaser's right to use the Inland
Capacity), until such payment default or other breach has been cured (including
payment of default interest, if any) and (ii) shall be entitled to pursue any
and all rights and legal and equitable remedies (including its rights and
remedies to enforce the Purchaser's obligations under this Agreement).
(b) If the Grantor is in breach of this Agreement and such breach
continues for a period of at least thirty (30) days, the Purchaser may notify
the Grantor in writing of such breach and if such breach is not fully remedied
within fifteen (15) days of such notification, the Purchaser shall, for so long
as such breach continues, be entitled to pursue any and all rights and legal and
equitable remedies, including its rights and remedies to enforce Grantor's
obligations under this Agreement.
7. USE OF CAPACITY. (a) The use of the Inland Capacity granted hereunder
and any equipment associated therewith shall be such as not to interrupt,
interfere with, or impair service over any of the facilities comprising the
System or the Inland Capacity, or impair privacy
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<PAGE> 6
of any communications over such facilities, cause damage to plant or create
hazards to employees, affiliates or connecting companies of ACL, the Grantor,
any Backhaul Provider or any other user, owner or operator of the System or the
Inland Capacity or the public. The Purchaser shall bear the cost of any
additional protective apparatus reasonably required to be installed because of
the use of such facilities by the Purchaser, any lessees or permitted
transferees of the Purchaser, or any customer or customers of the Purchaser or
of any such lessee or transferee. The Grantor will use reasonable efforts to
cause all other purchasers of capacity in Inland Capacity provided hereunder to
undertake obligations comparable to those of the Purchaser set forth in this
Section, and the Purchaser shall cause all permitted users of the IRU in the
Inland Capacity granted hereunder to undertake comparable obligations.
(b) The IRU in the Inland Capacity granted hereunder shall be made
available to Grantor or the Backhaul Providers (or any of their subsidiaries or
agents), at such times agreeable to the Purchaser and Grantor or the Backhaul
Providers, as the case may be, to permit Grantor or the Backhaul Providers to
conduct such tests and adjustments as may be necessary for such capacity to be
maintained in efficient working order.
8. DURATION 0F AGREEMENT. (a)This shall become effective on the day and
year set forth in the preamble hereto an operation until the twenty-fifth (25th)
Anniversary of the RFS Date for the System (the "Term")
(b) The termination of this Agreement (whether under this Section or
otherwise) shall not relieve the Purchaser from any liabilities arising prior to
such termination.
9. APPROVALS: LICENSES. The performance of this Agreement by each party
hereto is contingent upon the obtaining and the continuance of such approvals,
consents, governmental authorizations, licenses and permits as may be required
or reasonably deemed necessary by such party for performance by such party
hereunder and as may be satisfactory to it. The parties shall use reasonable
efforts to obtain and continue, and to have continued, such approvals, consents,
licenses and permits. No license under patents is granted by Grantor or shall be
implied or arise by estoppel in the Purchaser's favor with respect to any
apparatus, system or method used by the Purchaser in connection with the use of
the Inland Capacity granted to it hereunder.
10. DISCLAIMER. (a) Grantor has entered (or will enter)into Backhaul
Agreements to obtain plant, equipment and services necessary to allow the Inland
Capacity to be placed into operation on the applicable scheduled RFS Date.
Neither Grantor nor any of its respective affiliates warrants or guarantees that
the RFS Date for any Inland Capacity will occur and Grantor and their respective
affiliates will otherwise have no obligation under this Agreement or otherwise
unless and until the applicable RFS Date occurs. THE PURCHASER ACKNOWLEDGES AND
AGREES THAT THE GRANTOR IS NOT LIABLE FOR ANY BACKHAUL PROVIDER'S FAILURE TO
PERFORM. UNLESS SPECIFICALLY SET FORTH IN THIS AGREEMENT, ANY OTHER WARRANTIES,
EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE WARRANTIES OF
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<PAGE> 7
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE SPECIFICALLY
DISCLAIMED.
(b) The Purchaser has entered into the Capacity Purchase Agreement with
ACL in order to acquire an IRU in certain capacity on the System. The Purchaser
acknowledges and agrees that Grantor does not warrant or guarantee the
performance of the Capacity Purchase Agreement (or the Right of Use Agreement)
and shall have no liability with respect thereto.
11. LIMITATIONS OF LIABILITY. (a) Except as otherwise provided in this
Agreement, in no event shall any party hereto be liable to the other for
consequential, incidental, indirect or special damages, including, but not
limited to, loss of revenue, loss of business opportunity or the costs
associated with the use of external restoration facilities, including, without
limitation, for any loss or damage sustained by reason of any failure in or
breakdown of any Inland Capacity or the facilities associated therewith, the
failure of any Backhaul Provider to perform the terms and conditions of any
Backhaul Agreement to which it is a party or for any interruption of service,
whatever the cause and however long it shall last.
(b) Grantor shall not be liable to the Purchaser for any loss or damage
which may be suffered by the Purchaser by reason of any circumstances beyond the
control of Grantor and having an adverse effect on the provision of any part of
the Inland Capacity in which the Purchaser is entitled to capacity or has any
other right or interest under this Agreement.
(c)(i) Grantor shall not be liable to the Purchaser for any loss or
damage which may be suffered by the Purchaser as a result of, related to, or in
connection with, the Purchaser's compliance or non-compliance with any
applicable state, federal, foreign governmental, international (foreign or
domestic) or other law related to the transfer of the IRU in, or the use of, the
Inland Capacity granted hereunder.
(ii) The Purchaser shall not be liable to Grantor for any loss or damage
which may be suffered by Grantor as a result of, related to, or in connection
with, Grantor's non-compliance with any applicable state, federal, foreign
governmental, international (foreign or domestic) or other law related to the
transfer by Grantor of the IRU to the Purchaser in, or Grantor's operation,
ownership or use of, the Inland Capacity.
12. EXPORT CONTROL. The parties hereto acknowledge that to the extent
any products, software or technical information provided under this Agreement
are or may be subject to any applicable export laws and regulations, the parties
hereto agree that they will not use, distribute, transfer or transmit the
products, software or technical information (even if incorporated into other
products) except in compliance with such export laws and regulations (or
licenses or orders issued pursuant thereto). If requested by either party hereto
the other party agrees to sign all necessary export-related documents as may be
required to comply therewith.
13. REPRESENTATIONS; INDEMNITY. (a) Grantor hereby represents and
warrants to Purchaser that (i) it is a corporation duly organized, validly
existing and in good
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<PAGE> 8
standing under the laws of the jurisdiction of its organization; (ii) the
execution, delivery and performance of this Agreement by Grantor has been duly
authorized by all necessary corporate action on the part of Grantor and this
Agreement is a valid, binding and enforceable obligation of Grantor enforceable
in accordance with its terms and (iii) the execution, delivery and performance
of this Agreement by Grantor does not violate, conflict with or constitute a
breach of, the organizational documents or any order, decree or judgment of any
court, tribunal or governmental authority binding on Grantor.
(b) Purchaser hereby represents and represents to Grantor that (i)
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization; (ii) the execution delivery
and performance of this Agreement by Purchaser has been duly authorized by all
necessary corporate action on the part of Purchaser and this Agreement is a
valid, binding and enforceable obligation of Purchaser enforceable in accordance
with its terms; and (iii) the execution, delivery and performance of this
Agreement by Purchaser does not violate, conflict with or constitute a breach
of, the organizational documents or any order, decree or judgment of any court,
tribunal or governmental authority binding on Purchaser.
(c) Each party hereby represents and warrants to the other party that it
has obtained all approvals, consents, governmental authorizations, licenses and
permits as may be required to enter into this Agreement, and grant or acquire,
as the case may be, the IRU in the Inland Capacity granted hereunder.
(d) The foregoing representations and warranties shall survive the
execution and delivery of this Agreement.
(e) Subject to Section 11, the Purchaser agrees to indemnify and hold
harmless Grantor and its officers, directors, employees, agents and
representatives (each, an "indemnitee") from and against any loss, damage,
expense or cost arising out of or in connection with (i) any breach or violation
by the Purchaser of applicable law or governmental regulation, and (ii) any
claims of whatever nature by a third party for damages with respect to the
provision of services by the Purchaser.
(f) Subject to Section 11, Grantor agrees to indemnify and hold
harmless the Purchaser and its officers, directors, employees, agents and
representatives from and against any loss, damage, expense or cost arising out
of or in connection with: (i) any breach or violation by Grantor of applicable
law or governmental regulation, and (ii) any claims of whatever nature by third
parties with respect to the services provided by Grantor.
14. RELATIONSHIP OF THE PARTIES. This Agreement shall not form a joint
venture or partnership or similar business arrangement between the parties
hereto, and nothing contained herein shall be deemed to constitute a partnership
or joint venture or similar business arrangement.
15. NO THIRD PARTY BENEFICIARIES. This Agreement does not provide
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<PAGE> 9
and is not intended to provide third parties (including, but not limited to,
customers of the Purchaser, any permitted transferee of the Inland Capacity
acquired hereunder or any other permitted user of the Inland Capacity) with any
remedy, claim, liability, reimbursement, cause of action, or any other right.
Furthermore, the Purchaser acknowledges that it is not a third party beneficiary
of any agreement entered into by Grantor including, but not limited to, the
Backhaul Agreements.
16. ASSIGNMENT. (a) This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided that, except for the
collateral assignment of the Grantor's rights under this Agreement to one or
more of the Grantor's lenders and except as provided in paragraphs (b) and (c)
of this Section, neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned, transferred or otherwise disposed of or
delegated by any party hereto without the prior written consent of the other
party.
(b) Grantor shall be permitted to assign, transfer or otherwise dispose
of any or all of its rights hereunder and delegate any or all of its obligations
hereunder to any present or future affiliated company of Grantor, or to an
entity controlled by, under the same control as, or controlling Grantor.
(c) The Purchaser shall solely be responsible for complying with all of
the terms binding on the "Purchaser" hereunder and shall not be permitted to
assign, transfer or otherwise dispose of any or all of its rights hereunder or
delegate any or all of its obligations hereunder to any person or entity except
the Purchaser may transfer its rights (but not its obligations) to use any
Inland Capacity in which an IRU was granted hereunder to a Carrier Party,
provided that simultaneously with transferring such rights to such Carrier
Party, such Carrier Party executes a document acknowledging:
(i) that it has acquired from the Purchaser rights to use Inland
Capacity which were conveyed to the Purchaser under an Indefeasible
Right of Use Agreement with Grantor (the "IRU Agreement");
(ii) that the Purchaser has an ongoing obligation under the IRU
Agreement to comply with the terms thereof, and that the occurrence of
any breach by the Purchaser of the terms of the IRU Agreement could
result in the suspension of Purchaser's right to the Inland Capacity in
accordance with the terms of the IRU Agreement; and
(iii) such Carrier Party is not a third party beneficiary of the
IRU Agreement.
(d) In the event that the Purchaser transfers its rights in any Inland
Capacity granted hereunder to any Carrier Party the Purchaser shall immediately
notify the network administrator/customer care center of the identity of the
transferee Carrier Party and shall provide all other information reasonably
requested by the network administrator/customer care center.
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<PAGE> 10
(e) Confirmation of such transfers of capacity shall be provided by the
network administrator/customer care center within 7 days after completion.
Any transfer by the Purchaser of its obligations or its rights to use any Inland
Capacity which is in violation of this Section 16 shall be void and of no force
and effect.
17. CONDITION TO PURCHASER'S OBLIGATIONS. The Purchaser's obligation to
pay for an IRU with respect to any Inland Capacity connecting with any Purchased
Capacity on any Segment other than Segment S-1 (for which the RFS Date has
already occurred) shall terminate if the RFS Date for such Purchased Capacity
has not occurred by June 30, 1999. In any such event, Grantor shall refund all
amounts of Inland Capacity Purchase Price paid by the Purchaser with respect to
such Inland Capacity as to which Purchaser's obligation has terminated within
thirty (30) days after the applicable date.
18. NOTICES. Each notice, demand, certification or other communication
given or made under this Agreement shall be in writing and shall be delivered by
hand or sent by registered mail or by facsimile transmission to the address of
the respective party as set forth below its signature hereto (or such other
address as may be designated in writing to the other party hereto in accordance
with the terms of this Section). Any change to the name, address and facsimile
numbers may be made at any time by giving fifteen (15) days prior written notice
in accordance with this Section. Any such notice, demand or other communication
shall be deemed to have been received, if delivered by hand, at the time of
delivery or, if posted, at the expiration of seven (7) days after the envelope
containing the same shall have been deposited in the post maintained for such
purpose, postage prepaid, or, if sent by facsimile at the date of transmission
if confirmed receipt is followed by postal notice.
19. INCORPORATION BY REFERENCE. The provisions of Sections 12, 14, 15,
23, 24, 25 and 26 of the Capacity Purchase Agreement are hereby incorporated
herein by reference, mutatis mutandis, and shall be deemed a part of this
Agreement as if fully set forth herein.
20. PUBLICITY AND CONFIDENTIALITY. (a) The provisions of this Agreement
and any non-public information, written or oral, with respect to this Agreement
("Confidential Information") will be kept confidential and shall not be
disclosed, in whole or in part, to any person other than affiliates, officers,
directors, employees, agents or representatives of a party (collectively,
"Representatives") who need to know such Confidential Information for the
purpose of negotiating, executing and implementing this Agreement. Each party
agrees to inform each of its Representatives of the non-public nature of the
Confidential Information and to direct such persons to treat such Confidential
Information in accordance with the terms of this Section 20. Nothing herein
shall prevent a party from disclosing Confidential Information (i) upon the
order of any court or administrative agency, (ii) upon the request or demand of,
or pursuant to any regulation of, any regulatory agency or authority, (iii) to
the extent reasonably required in
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connection with the exercise of any remedy hereunder, (iv) to a party's legal
counsel or independent auditors, (v) to prospective lenders to the Grantor, and
(vi) to any actual or proposed assignee, transferee or lessee of all or part of
its rights hereunder provided that such actual or proposed assignee agrees in
writing to be bound by the provisions of Section 20.
(b) The foregoing shall not restrict either party from publicly
announcing that it has entered into this Agreement with the parties hereto, but
including any details contained in this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement effective
on the date first written above.
ABOVE NET COMMUNICATIONS, INC
By: /s/ DAVE RAND
--------------------------------
Name:
Address: 50 W. San Fernando
Ste. 1010
San Jose, CA 95113 USA
Attention: David Rand
Facsimile: (408) 367 6688
GT U.K. LTD.
By:
--------------------------------
Address: c/o Wiggin & Co.
The Quadrangle
Imperial Square
Cheltenham
Gloucestershire GL501YX
UK
Facsimile: (441) 242 224 223
With a copy to:
Atlantic Crossing Ltd.
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
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Attention: President
Facsimile: 441 296 8606
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DESCRIPTION OF INLAND CAPACITY
<TABLE>
<CAPTION>
(e)
(a) (b) (c) (d) (c) x(d)
Date of Transaction Inland Capacity Number of Whole MCUs Price Per Whole MCU Purchase Price
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
Total Purchase Price [*]
Less Initial Payment [*]
Net Purchase Price Due [*]
Note 1: [*]
ABOVENET COMMUNICATIONS, INC.
BY: /s/ DAVID RAND
-----------------------
DATE: 12/23/98
---------------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 15
ATTACHMENT I
RFS STANDARD
RFS Standard means for any Inland Capacity that (a) the fiber optic
telecommunications system carrying such capacity has the ability to carry,
commercial traffic between the System Interface at the Cable Station to the
Inland Point of Interface meeting performance criteria of ITU-T G. 826 and, has
protection switching capability and (b) the interface to the System shall be
STM-1 (optical interface) as specified in ITU Recommendation G.957 and 1+1
protected or equivalent.
<PAGE> 1
EXHIBIT 10.33
19.11.98
ATLANTIC CROSSING/AC-1
SUBMARINE CABLE SYSTEM
INDEFEASIBLE RIGHT OF USE AGREEMENT
IN
INLAND CAPACITY
(United States)
THIS AGREEMENT (as amended, supplemented or otherwise modified from time
to time, this "Agreement"), made and entered into as of this 23 day of December
1998, by and among GT LANDING CORP. ("Grantor") and ABOVE NET COMMUNICATIONS,
INC., a corporation organized and existing under the laws of Delaware (the
"Purchaser").
W I T N E S S E T H:
WHEREAS, the Purchaser and Atlantic Crossing Ltd. ("ACL") are parties to
the Capacity Purchase Agreement, dated as of ABOVE NET COMMUNICATIONS, INC.,
1998 (as amended, supplemented or otherwise modified from time to time, the
"Capacity Purchase Agreement"), to which this Agreement is attached;
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings given to them in the Capacity Purchase Agreement;
WHEREAS, subject to the terms and conditions set forth in the Capacity
Purchase Agreement, the Purchaser intends to acquire an IRU in the Purchased
Capacity which represents capacity on the System between the System Interface
points at the Cable Stations;
WHEREAS, Grantor has acquired (or will acquire) rights to capacity in
order to give the Purchaser the option to extend the Purchased Capacity acquired
on the System beyond the Cable Station to a certain point(s) of interface in the
city specified on Schedule I hereto;
WHEREAS; the Purchaser desires to acquire rights with respect to the
Inland Capacity (as defined herein) set forth on Schedule I hereto on an
indefeasible right of use basis ("IRU") and such Inland Capacity represents
capacity between the System Interface point of the Cable Station and the point
of interface in the applicable city set forth on Schedule I hereto;
WHEREAS, Grantor wishes to grant Inland Capacity on such an indefeasible
right of use basis; and
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WHEREAS, the IRU in the Inland Capacity provided hereunder, together
with the IRU in the S and T Capacity provided under the Capacity Purchase
Agreement, convey to the Purchaser service between such S Capacity and the point
of interface at the applicable city set forth on Schedule I hereto;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants contained herein covenant and agree with each other as follows:
1. DEFINITIONS. Terms defined in the preamble and in the recitals hereto
shall have their respective meanings when used herein and the following terms
shall have the following meanings:
"Backhaul Agreement" means any agreement between Grantor and a
Backhaul Provider, pursuant to which Grantor acquires rights in Inland
Capacity.
"Backhaul Provider' means any entity providing Grantor rights to
Inland Capacity.
"business day" means a day other than a Saturday, Sunday or
other day on which commercial banks in New York City or Bermuda are
authorized or required by law to close.
"Cable Station" means the cable station described on Schedule I
hereto.
"Dollars" or "$" means United States dollars.
"Grantor's Account" means the bank account of Grantor maintained
with Deutsche Bank AG, New York Branch, at 31 West 52nd Street, New York
New York 10019 (account number 105330260016) or such other account as
Grantor may designate to the Purchaser in writing. Wire instructions for
the above-referenced account are as follows-
<TABLE>
<S> <C>
Account Name: Atlantic, Crossing Ltd.
Account Number: 105330260016
Bank Name: Deutsche Bank AG, New York Branch
ABA No.: 026 003 780
Reference: Atlantic Crossing Attn: Lydia Zaininger
</TABLE>
"Inland Capacity" means capacity on a fiber optic
telecommunications system which connects the System Interface at the
Cable Station to the Inland Point of Interface.
"Inland Capacity Purchase Price" means, with respect to the IRU
granted in respect of any Inland Capacity set forth on Schedule I
hereto, the amount payable by the Purchaser in respect of such Inland
Capacity and set forth under the heading 'Purchase Price" on Schedule I
hereto.
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<PAGE> 3
"Inland Point of Interface" means the point of interface in the
applicable city set forth on Schedule I hereto.
"Minimum Capacity Unit" or "MCU" means the minimum capacity to
be purchased by the Purchaser in the Inland Capacity. An STM-1 is
designated as the MCU for purposes of this Agreement.
"Payment Date" means, with respect to the IRU granted in respect
of any Inland Capacity set forth on Schedule I hereto, the date on which
the Purchaser pays Grantor, in immediately available Dollars, the amount
required to be paid by the Purchaser for such Inland Capacity in
accordance with Section 3(b) of this Agreement.
"Payment Due Date" means, with respect to the IRU granted in
respect of any Inland Capacity set forth on Schedule I hereto, the later
of (i) the earliest Payment Due Date for any Purchased Capacity (as such
term is defined in the Capacity Purchase Agreement) connecting therewith
and (ii) the RFS Date.
"RFS Date" means, with respect to any Inland Capacity, the date
on which such Inland Capacity will be available for service and has
achieved the RFS Standard described in Attachment 2.
"Total Purchase Price" means the aggregate amount payable by the
Purchaser for the IRU in the Inland Capacity and set forth on the bottom
of Schedule I to this Agreement opposite the phrase "Total Purchase
Price."
2. IRU FOR INLAND CAPACITY. Effective on the Payment Date, Grantor
grants to the Purchaser, for the term of this Agreement, an IRU in the Inland
Capacity set forth on Schedule I hereto for which payment has been made in
accordance with Paragraph 3(b) of this Agreement.
3. PAYMENT FOR CAPACITY. (a) Initial Payment. Except as otherwise
provided in Schedule I to this Agreement, upon the execution and delivery of
this Agreement, the Purchaser shall make an initial payment to the Grantor's
Account in immediately available Dollars, in an amount equal to 10% of the Total
Purchase Price (the "Initial Payment"). The Initial Payment shall be
non-refundable (except as provided in Section 17 of this Agreement) and shall be
credited toward the payment of the Total Purchase Price.
(b) Payment of Inland Capacity Purchase Price. In exchange for the IRU
interest granted pursuant to this Agreement in any Inland Capacity, the
Purchaser shall, on or before the Payment Due Date, pay to the Grantor's Account
in immediately available Dollars, an amount equal to the Inland Capacity
Purchase Price; provided, however, the aggregate payments made by the Purchaser
under paragraphs (a) and (b) of this Section 3 shall not exceed the Total
Purchase
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<PAGE> 4
Price. Each payment made under this Section 3(b) shall be non-refundable.
(c) Taxes. All payments made by the Purchaser under Ns Section 3 shall
be made without any deduction or withholding for or on account of any tax, duty
or other charges of whatever nature imposed by any taxing or governmental
authority (collectively "Taxes"). If the Purchaser is or was required by law to
make any deduction or withholding from any payment due hereunder to Grantor,
then, notwithstanding anything to the contrary contained in this Agreement, the
gross amount payable by the Purchaser to Grantor will be increased so that,
after any such deduction or withholding for Taxes, the net amount received by
Grantor will not be less than Grantor would have received had no such deduction
or withholding been required. If any taxing or government authority asserts that
the Purchaser should have made a deduction or withholding for on account of any
Taxes with respect to all or a portion of any payment made hereunder, the
Purchaser hereby agrees to indemnify the Grantor for such Taxes and hold the
Grantor harmless on an after-tax basis from and against any Taxes, interest or
penalties levied or asserted in connection therewith.
4. OPERATION AND MAINTENANCE OF INLAND CAPACITY.
(a) Except as otherwise set forth in this Agreement, the Purchaser shall
not be required to make any additional payments for costs associated with
operating, maintaining and repairing the Inland Capacity in which an IRU has
been granted hereunder.
(b) Grantor shall use reasonable efforts to cause the Inland Capacity in
which an IRU has been granted hereunder to be maintained in efficient working
order and in accordance with industry standards. Grantor represents that at all
times it shall use commercially reasonable efforts to require the applicable
Backhaul Provider with which it has contracted to provide routine, preventive
and corrective maintenance for the Inland Capacity in accordance with
performance standards that at least meet prudent industry standards. Grantor
will use reasonable commercial efforts to cause the Backhaul Provider with which
it has contracted to perform its obligations under the applicable Backhaul
Agreement.
(c) Grantor will have sole responsibility for negotiating, executing and
administering contracts related to the acquisition of rights in any Inland
Capacity from Backhaul Providers.
(d) Should any condition exist in any Inland Capacity in which an IRU
has been granted hereunder that may impair the integrity of such Inland
Capacity, Grantor shall take reasonable actions to cause to be initiated
maintenance on such Inland Capacity and Grantor shall take reasonable actions to
cause to be initiated planned maintenance on such Inland Capacity in each case
which may include the deactivation of such Inland Capacity. Grantor shall, to
the extent reasonably practicable, advise the Purchaser in writing at least 30
days (or such shorter period as may be agreed) prior to the initiation of a
planned maintenance operation of the timing and scope of such planned
maintenance operation.
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<PAGE> 5
(e) In the event of disruption of service, Grantor shall use
commercially reasonable efforts to cause service to be restored as quickly as
reasonably possible, and Grantor shall take such measures as are reasonably
necessary to obtain such objective.
5. INVOICES; DEFAULT INTEREST. (a) Invoices. Grantor or its authorized
agent shall render invoices under this Agreement in Dollars, and the Purchaser
shall pay such amount in Dollars. The Purchaser shall make all payments by means
of a wire transfer to the Grantor's Account. Any payments required to be made
pursuant to this Agreement shall, save for the Initial Payment which shall be
made in accordance with the provisions of Section 3(a), be made on the later of
(i) the date when due or (ii) five business days after an invoice is received
from Grantor by Purchaser.
(b) Any invoice rendered under this Agreement which is not paid when
due, shall accrue interest at the annual rate of six percent (6%) above the
rate for U.S. dollar LIBOR for one month as quoted in The Wall Street Journal on
the first business day of the month in which such payment is due. Such interest
shall accrue from the day following the date payment was due until it is paid in
full. In the event that applicable law does not allow the imposition of "default
interest" at the rate established in accordance with this Section 5(b), such
"default interest" shall be at the highest rate permitted by applicable law. For
purposes of this Section, "paid" shall mean that funds are available for
immediate use by Grantor.
6. DEFAULT. (a) If the Purchaser fails to make any payment required by
this Agreement on the date that it is due or if the Purchaser is otherwise in
breach of this Agreement, and such payment default continues unremedied for a
period of at least five (5) days or such other breach continues for a period of
at least thirty (30) days, Grantor or its authorized agent may notify the
Purchaser in writing of such payment default or other breach and if full payment
is not received or such other breach is not fully remedied within fifteen (15)
days of such notification, Grantor (i) may suspend all service provided to
Purchaser hereunder (including suspending Purchaser's right to use the Inland
Capacity), until such payment default or other breach has been cured (including
payment of default interest, if any) and (ii) shall be entitled to pursue any
and all rights and legal and equitable remedies (including its rights and
remedies to enforce the Purchaser's obligations under this Agreement).
(b) If the Grantor is in breach of this Agreement and such breach
continues for a period of at least thirty (30) days, the Purchaser may notify
the Grantor in writing of such breach and if such breach is not fully remedied
within fifteen (15) days of such notification, the Purchaser shall, for so long
as such breach continues, be entitled to pursue any and all rights and legal and
equitable remedies, including its rights and remedies to enforce Grantor's
obligations under this Agreement.
7. USE OF CAPACITY. (a) The use of the Inland Capacity granted hereunder
and any equipment associated therewith shall be such as not to interrupt,
interfere with, or impair
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<PAGE> 6
service over any of the facilities comprising the System or the Inland Capacity,
or impair privacy of any communications over such facilities, cause damage to
plant or create hazards to employees, affiliates or connecting companies of ACL,
the Grantor, any Backhaul Provider or any other user, owner or operator of the
System or the Inland Capacity or the public. The Purchaser shall bear the cost
of any additional protective apparatus reasonably required to be installed
because of the use of such facilities by the -Purchaser, any lessees or
permitted transferees of the Purchaser, or any customer or customers of the
Purchaser or of any such lessee or transferee. The Grantor will use reasonable
efforts to cause all other purchasers of capacity in Inland Capacity provided
hereunder to undertake obligations comparable to those of the Purchaser set
forth in this Section, and the Purchaser shall cause all permitted users of the
MU in the Inland Capacity granted hereunder to undertake comparable obligations.
(b) The IRU in the Inland Capacity granted hereunder shall be
made available to Grantor or the Backhaul Providers (or any of their
subsidiaries or agents), at such times agreeable to the Purchaser and Grantor or
the Backhaul Providers, as the case may be, to permit Grantor or the Backhaul
Providers to conduct such tests and adjustments as may be necessary for such
capacity to be maintained in efficient working order.
8. DURATION OF AGREEMENT. (a) This Agreement shall become effective on
the day and year set forth in the preamble hereto and shall continue in
operation until the twenty-fifth (25) anniversary of the RFS Date for the System
(the "Term").
(b) The termination of this Agreement (whether under this Section or
otherwise) shall not relieve the Purchaser from any liabilities arising prior to
such termination.
9.APPROVALS; LICENSES. The performance of this Agreement by each party
hereto is contingent upon the obtaining and the continuance of such approvals,
consents, governmental authorizations, licenses and permits as may be required
or reasonably deemed necessary by such party for performance by such party
hereunder and as may be satisfactory to it. The parties shall use reasonable
efforts to obtain and continue, and to have continued, such approvals, consents,
licenses and permits. No license under patents is granted by Grantor or shall be
implied or arise by estoppel in the Purchaser's favor with respect to any
apparatus, system or method used by the Purchaser-in connection with the use of
the Inland Capacity granted to it hereunder.
10. DISCLAIMER. (a) Grantor has entered(or will enter)into Backhaul
Agreements to obtain plant, equipment and services necessary to allow the Wand
Capacity to be placed into operation on the applicable scheduled RFS Date.
Neither Grantor nor any of its respective affiliates warrants or guarantees that
the RFS Date for any Inland Capacity will occur and Grantor and their respective
affiliates will otherwise have no obligation under this Agreement or otherwise
unless and until the applicable RFS Date occurs. THE PURCHASER ACKNOWLEDGES AND
AGREES THAT THE GRANTOR IS NOT LIABLE FOR ANY BACKHAUL PROVIDER'S FAILURE TO
PERFORM. UNLESS SPECIFICALLY SET
6
<PAGE> 7
FORTH IN THIS AGREEMENT, ANY OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING
BUT NOT LIMITED TO, THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE ARE SPECIFICALLY DISCLAIMED.
(b) The Purchaser has entered into the Capacity Purchase Agreement -with
ACL in order to acquire an IRU in certain capacity on the System. The Purchaser
acknowledges and agrees that Grantor does not warrant or guarantee the
performance of the Capacity Purchase Agreement (or the Right of Use Agreement)
and shall have no liability with respect thereto.
11. LIMITATIONS OF LIABILITY. (a) Except as otherwise provided in this
Agreement, in no event shall any party hereto be liable to the other for
consequential, incidental, indirect or special damages, including, but not
limited to, loss of revenue, loss of business opportunity or the costs
associated with the use of external restoration facilities, including, without
limitations for any loss or damage sustained by reason of any failure in or
breakdown of any Inland Capacity, or the facilities associated therewith, the
failure of any Backhaul Provider to perform the terms and conditions of any
Backhaul Agreement to which it is a party or for any interruption of service,
whatever the cause and however long it shall last.
(b) Grantor shall not be liable to the Purchaser for any loss or damage
which may be suffered by the Purchaser by reason of any circumstances beyond the
control of Grantor and having an adverse effect on the provision of any part of
the Inland Capacity in which the Purchaser is entitled to capacity or has any
other right or interest under this Agreement.
(c)(i) Grantor shall not be liable to the Purchaser for any loss or
damage which may be suffered by the Purchaser as a result of, related to, or in
connection with, the Purchaser's compliance or non-compliance with any
applicable state, federal, foreign governmental, international (foreign or
domestic) or other law related to the transfer of the IRU in, or the use of, the
Inland Capacity granted hereunder.
(ii) The Purchaser shall not be liable to Grantor for any loss or damage
which may be suffered by Grantor as a result of, related to, or in connection
with, Grantor's non-compliance with any applicable state, federal, foreign
governmental, international (foreign or domestic) or other law related to the
transfer by Grantor of the IRU to the Purchaser in, or Grantor's operation,
ownership or use of, the Inland Capacity.
12. EXPORT CONTROL. The parties hereto acknowledge that to the extent
any products, software or technical information provided under this Agreement
are or may be subject to any applicable export laws and regulations, the parties
hereto agree that they will not use, distribute, transfer or transmit the
products, software or technical information (even if incorporated into other
products) except in compliance with such export laws and regulations (or
licenses or orders issued pursuant thereto). If requested by either party hereto
the other party agrees to sign all necessary export-related documents as may be
required to comply therewith.
7
<PAGE> 8
13. REPRESENTATIONS; INDEMNITY. (a) Grantor hereby represents and
warrants to Purchaser that (i) it is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization; (ii) the execution, delivery and performance of this Agreement by
Grantor has been duly authorized by all necessary corporate action on the part
of Grantor and this Agreement is a valid, binding and enforceable obligation of
Grantor enforceable in accordance with its terms and (iii) the execution,
delivery and performance of this Agreement by Grantor does not violate, conflict
with or constitute a breach of, the organizational documents or any order,
decree or judgement of any court, tribunal or governmental authority binding on
Grantor.
(b) Purchaser hereby represents and represents to Grantor that (i)
Purchaser is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of organization; (ii) the execution, delivery
and performance of this Agreement by Purchaser has been duly authorized by all
necessary corporate action on the part of Purchaser and this Agreement is a
valid, binding and enforceable obligation of Purchaser enforceable in accordance
with its terms; and (iii) the execution, delivery and performance of this
Agreement by Purchaser does not violate, conflict with or constitute a breach
of, the organizational documents or any order, decree or judgment of any court,
tribunal or governmental authority binding on Purchaser.
(c) Each party hereby represents and warrants to the other party that it
has obtained all approvals, consents, governmental authorizations, licenses and
permits as may be required to enter into this Agreement, and grant or acquire,
as the case may be, the IRU in the Inland Capacity granted hereunder.
(d) The foregoing representations and warranties shall survive the
execution and delivery of this Agreement.
(e) Subject to Section 11, the Purchaser agrees to indemnify and hold
harmless Grantor and its officers, directors, employees, agents and
representatives (each, an "indemnitee") from and against any loss, damage,
expense or cost arising out of or in connection with (i) any breach or violation
by the Purchaser of applicable law or governmental regulation, and (ii) any
claims of whatever nature by a third party for damages with respect to the
provision of services by the Purchaser.
(f) Subject to Section 11, Grantor agrees to indemnify and hold
harmless the Purchaser and its officers, directors, employees, agents and
representatives from and against any loss, damage, expense or cost arising out
of or in connection with: (i) any breach or violation by Grantor of applicable
law or governmental regulation, and (ii) any claims of whatever nature by third
parties with respect to the services provided by Grantor.
14. RELATIONSHIP OF THE PARTIES. This Agreement shall not form a joint
venture or partnership or similar business arrangement between the parties
hereto, and
8
<PAGE> 9
nothing contained herein shall be deemed to constitute a partnership or joint
venture or similar business arrangement.
15. NO THIRD PARTY BENEFICIARIES. This Agreement does not provide and is
not intended to provide third parties Purchaser, any permitted transferee of the
Inland limited to, customers of the Capacity acquired hereunder or any other
permitted user of the Inland Capacity) with any remedy, claim liability,
reimbursement, cause of action, or any other right. Furthermore, the Purchaser
acknowledges that it is not a third party beneficiary of any agreement entered
into by Grantor including, but not limited to, the Backhaul Agreements.
16. ASSIGNMENT. (a) This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided that, except for the
collateral assignment of the Grantor's rights under this Agreement to one or
more of the Grantor's lenders and except as provided in paragraphs (b) and (c)
of this Section, neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned, transferred or otherwise disposed of or
delegated by any party hereto without the prior written consent of the other
party.
(b) Grantor shall be permitted to assign, transfer or otherwise dispose
of any or all of its rights hereunder and delegate any or all of its obligations
hereunder to any present or future affiliated company of Grantor, or to an
entity controlled by, under the same control as, or controlling Grantor.
(c) The Purchaser shall solely be responsible for complying with all of
the terms binding on the "Purchaser" hereunder and shall not be permitted to
assign, transfer or otherwise dispose of any or all of its rights hereunder or
delegate any or all of its obligations hereunder to any person or entity except
the Purchaser may transfer its rights (but not its obligations) to use any
Inland Capacity in which an IRU was granted hereunder to a Carrier Party,
provided that simultaneously with transferring such rights to such Carrier
Party, such Carrier Party executes a document acknowledging:
(i) that it has acquired from the Purchaser rights to use Inland
Capacity which were conveyed to the Purchaser under an Indefeasible
Right of Use Agreement with Grantor (the "IRU Agreement");
(ii) that the Purchaser has an ongoing obligation under the IRU
Agreement to comply with the terms thereof, and that the occurrence of
any breach by the Purchaser of the terms of the IRU Agreement could
result in the suspension of Purchaser's right to the Inland Capacity in
accordance with the terms of the IRU Agreement; and
(iii) such Carrier Party is not a third patty beneficiary of the
IRU Agreement.
9
<PAGE> 10
(d) In the event that the Purchaser transfers its rights in any Inland
Capacity granted hereunder to any Carrier Party the Purchaser shall immediately
notify the network administrator/customer care center of the identity of the
transferee Carrier Party and shall provide all other information reasonably
requested by the network administrator/customer care center.
(e) Confirmation of such transfers of capacity shall be provided by the
network administrator/customer care center within 7 days after completion.
Any transfer by the Purchaser of its obligations or its rights to use any Inland
Capacity which is in violation of this Section 16 shall be void and of no force
and effect.
17. CONDITION TO PURCHASER'S OBLIGATIONS. The Purchaser's obligation to
pay for an IRU with respect to any Inland Capacity connecting with any Purchased
Capacity on any Segment other than Segment S-1 (for which the RFS Date has
already occurred) shall terminate if the RFS Date for such Purchased Capacity
has not occurred by June 30, 1999. In any such event, Grantor shall refund all
amounts of Inland Capacity Purchase Price paid by the Purchaser with respect to
such Inland Capacity as to which Purchaser's obligation has terminated within
thirty (30) days after the applicable date.
18. NOTICES. Each notice, demand, certification or other communication
given or made under this Agreement shall be in writing and shall be delivered by
hand or sent by registered mail or by facsimile transmission to the address of
the respective party as set forth below its signature hereto (or such other
address as may be designated in writing to the other party hereto in accordance
with the terms of this Section). Any change to the name, address and facsimile
numbers may be made at any time by giving fifteen (15) days prior written notice
in accordance with this Section. Any such notice, demand or other communication
shall be deemed to have been received, if delivered by hand, at the time of
delivery or, if posted, at the expiration of seven (7) days after the envelope
containing the same shall have been deposited in the post maintained for such
purpose, postage prepaid, or, if sent by facsimile, at the date of transmission
if confirmed receipt is followed by postal notice.
19. INCORPORATION BY REFERENCE. The provisions of Sections 12, 14, 15,
23, 24, 25 and 26 of the Capacity Purchase Agreement are hereby incorporated
herein by reference, mutatis mutandis, and shall be deemed a part of this
Agreement as if fully set forth herein.
20. PUBLICITY AND CONFIDENTIALITY. (a) The provisions of this Agreement
and any non-public information, written or oral, with respect to this Agreement
("Confidential Information") will be kept confidential and shall not be
disclosed, in whole or in part, to any person other than affiliates, officers,
directors, employees, agents or representatives of
10
<PAGE> 11
a party (collectively, "Representatives") who need to know such Confidential
Information for the purpose of negotiating, executing and implementing this
Agreement. Each party agrees to inform each of its Representatives of the
non-public nature of the Confidential Information and to direct such persons to
treat such Confidential Information in accordance with the terms of this Section
20. Nothing herein shall prevent a party from disclosing Confidential
Information (i) upon the order of any court or administrative agency, (ii) upon
the request or demand of, or pursuant to any regulation of, any regulatory
agency or authority, (iii) to the extent reasonably required in connection with
the exercise of any remedy hereunder, (iv) to a party's legal counsel or
independent auditors, (v) to prospective lenders to the Grantor, and (vi) to any
actual or proposed assignee, transferee or lessee of all or part of its rights
hereunder provided that such actual or proposed assignee agrees in writing to be
bound by the provisions of this Section 20.
(b) The foregoing shall not restrict either party from
publicly announcing that it has entered into this Agreement with the parties
hereto, but without including any details contained in this Agreement.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties have executed this Agreement effective
on the date first written above.
ABOVE NET COMMUNICATIONS, INC.
By: DAVE RAND
------------------------------------
Name:
Address: 50 West San Fernando
Ste. 1010
San Jose, CA 95113, USA
Attention: David Rand
Facsimile: (408) 367-6688
GT LANDING CORP.
By:
------------------------------
Address: 150 El Camino Drive,
Suite 204
Beverly Hills, CA 90212
Attention: K. Eugene Shutler
Facsimile: (310) 281-4942
With a copy to:
Atlantic Crossing Ltd.
Wessex House
45 Reid Street
Hamilton HM 12
Bermuda
12
<PAGE> 13
Attention: President
Facsimile: 441 296 8606
13
<PAGE> 14
SCHEDULE I
DESCRIPTION OF INLAND CAPACITY
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Date of Transaction Inland Capacity Number of Whole MCUs Price Per Whole (c) x (d)
MCU Purchase Price
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
TOTAL PURCHASE PRICE [*]
LESS INITIAL PAYMENT [*]
NET PURCHASE PRICE [*]
Note 1: [*]
ABOVENET COMMUNICATIONS, INC.
BY: /s/ [SIG]
---------------------------
BY: 12/23/98
---------------------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 15
Schedule I
DESCRIPTION OF INLAND CAPACITY
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Date of Transaction Payment Due Date Appropriate S-Segment Number of Whole MCUs Price per Whole MCU Purchase Price
and Related T-Segments (d)x(e)
Note(1)
<S> <C> <C> <C> <C> <C>
[*] [*] [*] [*] [*] [*]
</TABLE>
TOTAL PURCHASE PRICE [*]
LESS INITIAL PAYMENT [*]
NET PURCHASE PRICE DUE [*]
NOTES:
(1) [*]
(2) [*]
(3) [*]
ABOVENET COMMUNICATIONS, INC,
BY: /s/ [SIG]
-------------------------
DATE: 12/23/98
-------------------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
15
<PAGE> 16
SCHEDULE I
DESCRIPTION OF INLAND CAPACITY
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Date of Transactions Inland Capacity Number of Whole MCUs Price Per Whole (c) x (d)
MCU Purchase Price
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
TOTAL PURCHASE PRICE [*]
LESS INITIAL PAYMENT [*]
NET PURCHASE PRICE DUE [*]
NOTE 1: [*]
ABOVENET COMMUNICATIONS, INC,
BY: /s/ [SIG]
-------------------------
DATE: 12/23/98
-------------------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 17
SCHEDULE I
DESCRIPTION OF INLAND CAPACITY
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Date of Transaction Inland Capacity Number of Whole MCUs Price Per Whole (c) x (d)
MCU Purchase Price
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
</TABLE>
TOTAL PURCHASE PRICE [*]
LESS INITIAL PAYMENT [*]
NET PURCHASE PRICE DUE [*]
NOTE 1: [*]
ABOVENET COMMUNICATIONS, INC,
BY: /s/ [SIG]
-------------------------
DATE: 12/23/98
-------------------------
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE FIRST SIX MONTHS OF FISCAL 1999 AS FILED
IN THE COMPANY'S FORM 10Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 67,903,500
<SECURITIES> 974,900
<RECEIVABLES> 1,728,100
<ALLOWANCES> 257,100
<INVENTORY> 0
<CURRENT-ASSETS> 71,086,500
<PP&E> 16,538,700
<DEPRECIATION> 1,531,100
<TOTAL-ASSETS> 95,731,800
<CURRENT-LIABILITIES> 12,362,600
<BONDS> 0
0
0
<COMMON> 89,327,100
<OTHER-SE> (12,458,000)
<TOTAL-LIABILITY-AND-EQUITY> 95,731,800
<SALES> 0
<TOTAL-REVENUES> 4,446,200
<CGS> 0
<TOTAL-COSTS> 12,779,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 493,500
<INCOME-PRETAX> (8,543,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,543,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,543,100)
<EPS-PRIMARY> (4.50)
<EPS-DILUTED> (4.50)
</TABLE>
