<PAGE>
CO SPACE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants................................................... F-2
Consolidated Balance Sheets as of December 31, 1998, 1999 (audited) and March 31,
2000 (unaudited).................................................................. F-3
Consolidated Statements of Operations for the period from November 10, 1998
(date of inception) to December 31, 1998, for the year ended December 31,
1999 (audited) and for the three months ended March 31, 1999, and 2000
(unaudited)....................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from
November 10, 1998 (date of inception) to December 31, 1998, for the year ended
December 31, 1999 (audited) and for the three months ended March 31, 2000
(unaudited) ...................................................................... F-5
Consolidated Statements of Cash Flows for the period from November 10, 1998
(date of inception) to December 31, 1998, for the year ended December 31,
1999 (audited) and for the three months ended March 31, 1999 and 2000
(unaudited)....................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CO Space, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of CO
Space, Inc. and Subsidiaries at December 31, 1998 and 1999, and the results of
their operations and their cash flows for the period from November 10, 1998
(date of inception) to December 31, 1998 and for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
--------------------------------
Boston, Massachusetts
April 5, 2000
The accompanying notes are an integral part of these consolidated
financial statements.
F-2.
<PAGE>
CO SPACE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------- ---------
1998 1999 2000
-------- --------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ $ 17,564 $ 11,006
Accounts receivable....................................... 75 8
Prepaid expenses.......................................... 134 227
-------- --------- ----------
Total current assets................................... 17,773 11,241
Property and equipment, net................................. 12,304 17,440
Other assets................................................ 338 1,417
-------- --------- ----------
Total assets........................................... $ - $ 30,415 $ 30,098
======== ========= ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ $ 2,462 $ 3,750
Due to related party...................................... 85
Accrued expenses.......................................... 597 1,512
Deferred revenue.......................................... 550
Current portion of notes payable.......................... 458 472
Current portion of capital lease obligations.............. 185 212
-------- --------- ----------
Total current liabilities.............................. 85 3,702 6,496
-------- --------- ----------
Deferred revenue............................................ 800
Notes payable............................................... 1,371 1,248
Capital lease obligations, net of current portion........... 233 219
-------- --------- ----------
Long term liabilities.................................. 1,604 2,267
-------- --------- ----------
Total liabilities...................................... 85 5,306 8,763
-------- --------- ----------
Commitments and contingencies
Redeemable convertible preferred stock:
Series A Redeemable Convertible Preferred Stock, $0.01 par
value; 4,343,500 shares authorized; 4,322,500 issued and
outstanding at December 31, 1999 and March 31, 2000
(liquidation preference of $4,322,500 at December 31,
1999 and March 31, 2000)................................ 4,470 4,561
Series B Redeemable Convertible Preferred Stock, $0.01
par value; 18,666,669 shares authorized; 18,000,002 and
18,666,669 issued and outstanding at December 31, 1999
and March 31, 2000, respectively (liquidation preference
of $27,360,003 and $28,933,337 at December 31, 1999 and
March 31, 2000, respectively)........................... 26,914 28,467
Stockholders' equity (deficit):
Common stock, $0.01 par value; 28,125,169 shares
authorized; 3,000,000 and 4,965,000 issued and
outstanding at December 31, 1999 and March 31, 2000,
respectively............................................ 30 50
Additional paid-in capital................................ 501 11,134
Full recourse notes receivable............................ (766)
Deferred compensation..................................... (764) (10,750)
Accumulated deficit....................................... (85) (6,042) (11,361)
-------- --------- ----------
Total stockholders' equity (deficit)................... (85) (6,275) (11,693)
-------- --------- ----------
Total liabilities, redeemable convertible preferred
stock and stockholders' equity (deficit)............. $ - $ 30,415 $ 30,098
======== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3.
<PAGE>
CO SPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10,
1998 (DATE OF THREE MONTHS ENDED
INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1998 1999 1999 2000
------------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Revenues............................................. $ $ 258 $ 209
------------- ------------ ----------- -----------
Operating expenses:
Costs of revenues.................................. 2,439 $ 10 2,308
Selling and marketing.............................. 488 7 852
General and administrative......................... 85 2,970 85 1,694
Depreciation and amortization...................... 267 249
Amortization of stock-based compensation........... 89 529
------------- ------------ ----------- -----------
Loss from operations............................. (85) (5,995) (102) (5,423)
Interest income, net................................. 38 104
------------- ------------ ----------- -----------
Net loss......................................... (85) (5,957) (102) (5,319)
Accretion of preferred stock redemption premium and
issuance costs..................................... (331) (648)
------------- ------------ ----------- -----------
Net loss attributable to common stockholders......... $ (85) $ (6,288) $ (102) $ (5,967)
============= ============ =========== ===========
Net loss per share attributable to common
stockholders
Basic and diluted................................. $ (0.03) $ (2.10) $ (0.03) $ (1.68)
============= ============ =========== ===========
Weighted average common shares........................ 3,000,000 3,000,000 3,000,000 3,539,835
============= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4.
<PAGE>
CO SPACE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM NOVEMBER 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998,
THE YEAR ENDED DECEMBER 31, 1999 AND THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FULL TOTAL
ADDITIONAL RECOURSE DEFERRED STOCKHOLDER'S
PAID-IN NOTES STOCK-BASED ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION DEFICIT (DEFICIT)
--------- ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loss........................... $ (85) $ (85)
----------- -------------
Balance at December 31, 1998....... (85) (85)
Issuance of common stock for
contribution of predecessor
entities in April 1999,
adjusted for 1,000-for-1
common stock split on
May 12, 1999..................... 3,000,000 $ 30 $ (30)
Issuance of Series A Redeemable
Convertible Preferred Stock
warrant.......................... 8 8
Accretion of preferred stock
redemption premium and
issuance costs................... (331) (331)
Issuance of Common Stock Warrant... 1 1
Deferred stock-based...............
Compensation....................... 853 $ (853)
Amortization of deferred
stock-based compensation......... 89 89
Net Loss........................... $ (5,957) (5,957)
--------- ------ ---------- ------------ ----------- -------------
Balances at December 31, 1999...... 3,000,000 30 501 (764) (6,042) (6,275)
Issuance of common stock........... 1,965,000 20 766 $ (766) 20
Accretion of redemption premium
and issuance costs............... (648) (648)
Deferred stock-based
compensation..................... 10,515 (10,515)
Amortization of deferred
stock-based compensation......... 529 529
Net loss........................... (5,319) (5,319)
--------- ------ ---------- ---------- ------------ ----------- -------------
Balances at March 31, 2000
(unaudited)...................... 4,965,000 $ 50 $ 11,134 $ (766) $ (10,750) $ (11,361) $ (11,693)
========= ====== ========== ========== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5.
<PAGE>
CO SPACE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10,
1998 (DATE OF THREE MONTHS ENDED
INCEPTION) TO YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1998 1999 1999 2000
------------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $ (85) $ (5,957) $ (102) $ (5,319)
Adjustments to reconcile net loss to net cash used
in Operating activities:
Depreciation and amortization.................... 267 249
Amortization of stock-based compensation......... 89 529
Interest expense recorded for warrants issued.... 2
Changes in assets and liabilities:
(Increase) decrease in accounts receivable..... (75) 67
(Increase) decrease in prepaid expenses........ (134) (93)
(Increase) decrease in other assets............ (338) (1,079)
Increase in accounts payable................... 2,462 709 1,288
Increase in accrued expenses................... 597 915
Increase in deferred revenue................... 1,350
------------- ------------ ----------- -----------
Net cash used in operating activities.......... (85) (3,087) 607 (2,093)
------------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (12,055) (787) (5,297)
------------- ------------ ----------- -----------
Net cash used in investing activities.......... (12,055) (787) (5,297)
------------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable.......... 1,998 180
Principal payments on capital lease obligations
and notes payable.............................. (259) (184)
Borrowings from related party.................... 85 376
Repayment to related party....................... (461)
Proceeds from issuance of capital stock, net of
issuance costs................................. 31,052 1,016
------------- ------------ ----------- -----------
Net cash provided by financing activities...... 85 32,706 180 832
------------- ------------ ----------- -----------
Net increase in cash and cash equivalents.......... 17,564 (6,558)
Cash and cash equivalents, beginning of period..... 17,564
------------- ------------ ----------- -----------
Cash and cash equivalents, end of period........... $ $ 17,564 $ $ 11,006
============= ============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................... $ 92 $ 80
============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Acquisition of property and equipment under
capital leases................................. $ 516 $ 88
============ ===========
Accretion of preferred stock, redemption
premium and issuance costs..................... $ 331 $ 648
============ ===========
Issuance of common stock for full recourse
notes receivable............................... $ 766
===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6.
<PAGE>
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF THE BUSINESS
CO Space, Inc. and subsidiaries (the "Company") provides critical operations
collocation space and services to customers in the Internet,
telecommunications and data storage businesses.
The Company began operations in November 1998 under the name of CO Space
Services, LLC. The Company was reorganized and CO Space, Inc. was
incorporated on April 12, 1999, at which time 3,000,000 common shares were
issued in exchange for a contribution of the business assets of CO Space
Services, LLC; CO Space Boston, LLC; and CO Space San Diego, LLC, all of
which were commonly controlled entities, accordingly, the contribution of the
business assets was accounted for at historical cost (see Note 6).
The interim financial information at March 31, 2000 and for the three months
ended March 31, 1999 and 2000 and the related notes are unaudited and have
been prepared by CO Space, Inc. pursuant to the rules and regulations of the
Securities and Exchange Commission and include all the accounts of the
Company. Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States, have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, the
unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the Company's financial position at March 31, 2000, its
results of operations and cash flows for the three months ended March 31,
1999 and 2000 and its statement of equity for the three months ended
March 31, 2000.
The Company operates its business in one reportable segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and could impact future results of operations and cash flows.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at date of acquisition to be cash equivalents. Cash and cash
equivalents consisted of cash deposited with banks and money market funds of
$3 and $17,561, respectively, at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable and accounts payable approximate their
fair values due to their short maturities. Based on borrowing rates currently
F-7.
<PAGE>
available to the Company for loans with similar terms, the carrying value of
notes payable and capital lease obligations approximates fair value.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMER
Financial instruments which potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable. To minimize
risk, ongoing credit evaluations of customers' financial condition are
performed, although collateral generally is not required. At December 31,
1999, one customer accounted for 100% of accounts receivable. For the year
ended December 31, 1999 one customer accounted for 99% of total revenues.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Equipment held under
capital leases and leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the related asset. Upon
retirement or sale, the cost of assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is credited or charged to operations. Repairs and maintenance costs
are expensed as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Employee and director stock awards under the Company's compensation plans are
accounted for in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. The Company provides the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), and related interpretations.
Stock-based awards to non-employees are accounted for under the provisions of
SFAS No. 123.
REVENUE RECOGNITION
Revenues consist of fees from the licensing of collocation facilities,
provision of technical services, and installation fees. Fee revenues are
generally recognized as the services are provided. Installation fees and
related expenses are recognized over the customer contract period. To date
such installation revenues and expenses have not been material.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $6 and $33 for the period November 10, 1998 (date of
inception) to December 31, 1998 and the year ended December 31, 1999,
respectively.
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The carrying value of redeemable convertible preferred stock is increased by
periodic accretions so that the carrying amount will equal the redemption
amount at the redemption date. These increases are effected through charges
against additional paid in capital and are presented on the statements of
operations as an increase to net loss to compute net loss attributable to
common stockholders.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect in the years in which the differences are
expected to reverse. Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
F-8.
<PAGE>
NET LOSS PER COMMON SHARE
Basic net loss per common share is based upon the weighted average number of
common shares outstanding during each period (see Note 6). Diluted net loss
per common share gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted net loss per common
share does not assume the issuance of potential common shares that have an
anti-dilutive effect.
COMPREHENSIVE INCOME
For the period from November 10, 1998 (date of inception) to December 31,
1998, the year ended December 31, 1999 and for the three months ended March
31, 1999 and 2000, there were no differences between net loss and
comprehensive loss.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, ("SFAS"), No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting
and reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The Company will adopt SFAS No. 133
in 2001, in accordance with SFAS No. 137, which deferred the effective date
of SFAS No. 133. The adoption of this standard in 2001 is not expected to
have a material impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the Staff's view in applying generally
accepted accounting principles to selected revenue recognition issues. The
application of the guidance in SAB No. 101 will be required in the Company's
fourth quarter of 2000, in accordance with SAB No. 101B. The Company has
evaluated the application of SAB No. 101 and determined that it will have no
impact on reported revenues and net loss.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ESTIMATED USEFUL LIFE --------------------------- -----------
YEARS 1998 1999 2000
------------------------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Office equipment and furniture 3-5 $ -- $ 420 $ 897
Leasehold improvements Lesser of lease term or 20 -- 9,317 12,913
Operating equipment. 5 -- 2,834 4,147
----------- ---------- -----------
-- 12,571 17,957
Less -- accumulated depreciation and Amortization -- (267) (517)
----------- ---------- -----------
$ -- $ 12,304 $ 17,440
=========== ========== ===========
</TABLE>
At December 31, 1999, property and equipment under capital leases consist of
office equipment and operating equipment with a cost basis of $516.
Amortization of property and equipment under capital leases totaled $99 for
the year ended December 31, 1999, respectively.
F-9.
<PAGE>
4. NOTES PAYABLE
During July 1999, the Company entered into a loan agreement (collateralized
by the underlying equipment) with a bank for $1,998 at a weighted average
interest rate of 12.6% to finance equipment purchases. The loan is payable in
equal monthly installments of $55 through February 2003, and payments of $118
and $52 in March and April of 2003, respectively.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 1999, the Company authorized 23,010,169 shares of preferred stock and
designated 4,343,500 shares as Series A redeemable convertible preferred
stock (the "Series A Preferred Stock"). In May 1999, the Company issued
4,322,500 of Series A Preferred Stock at $1.00 per share resulting in
proceeds of $4,323. In November 1999, 18,666,669 shares were designated as
Series B redeemable convertible preferred stock (the "Series B Preferred
Stock"). In November and December 1999, the Company issued a total of
18,000,002 shares of Series B Preferred Stock at $1.50 per share resulting in
net proceeds to the Company of $26,730 after issuance costs.
The Series A and Series B Preferred Stock have the following characteristics:
VOTING
The holders of the Series A and B Preferred Stock are entitled to vote,
together with the holders of common stock, on all matters submitted to
stockholders for a vote. Each preferred stockholder is entitled to the
number of votes equal to the number of shares of common stock into which
each preferred share is convertible at the time of such vote.
DIVIDENDS
The holders of the Series A and B Preferred Stock are entitled to
receive, when and as declared by the Board of Directors and out of funds
legally available, noncumulative dividends only if such dividends are
contemporaneously declared on each series of preferred stock and the
common stock.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, the holders of the then outstanding Series B
Preferred Stock have a preference equal to the greater of (X) the sum of
(i) its issue price plus 8% compounded interest, (ii) any accrued and
unpaid dividends, and (iii) an additional amount, if any, that Series B
preferred stockholders would have been entitled to in such liquidation
on an as if converted basis after payment of preferences to the Series A
preferred stockholders and other stockholders, if any, with a preference
in liquidation over the common stock or (Y) the amount the Series B
preferred stockholders would have been entitled to on an as if converted
basis, including all declared but unpaid dividends thereon immediately
prior to such liquidation; provided, however, if the calculation of (X)
exceeds $3.00 per Series B preferred share, the Series B preferred
stockholders shall be entitled to the greater of $3.00 or the amount
calculated pursuant to (Y). Remaining proceeds, if any, are distributed
first to the Series A preferred stockholders in an amount equal to the
greater of the sum of (A)(i) its issue price and (ii) declared and
unpaid dividends or (B) the amount the Series A preferred stockholders
would have been entitled to on an as if converted basis, and then to
common stockholders, if any.
CONVERSION
Each share of Series A and B Preferred Stock is convertible at the
option of the holder into one share of common stock. Each share of
outstanding preferred stock is automatically converted into one share of
common stock upon the affirmative vote of two-thirds of the holders of
that series, or upon the closing of a public offering resulting in gross
proceeds of at least $50 million at an offering price of at least $6.00
per share. The number of conversion shares is subject to adjustment if
common stock is sold under defined circumstances for less than $1.00 for
Series A and $1.50 for Series B, respectively. If a preferred
F-10.
<PAGE>
stockholder does not exercise preemptive rights in an equity financing of
at least $1 million, such shares are converted into a new series of
preferred stock with substantially the same rights, but with no further
anti-dilution protection.
REDEMPTION
The preferred stock is mandatorily redeemable in March (Series B) and
May (Series A) 2005, 2006 and 2007 at 33 1/3%, 50% and 100%,
respectively, of the then outstanding shares. The redemption price for
each series is, at the election of the holder, the sum of (i) its issue
price, (ii) 8% compound interest and (ii) accrued and unpaid dividends;
or the fair market value of the common stock.
If the Company does not have sufficient funds available to redeem all
shares of preferred stock to be redeemed at the Redemption Date, then
the Company shall redeem such shares ratably to the extent possible and
shall redeem the remaining shares as soon as sufficient funds are
available.
6. COMMON STOCK
On May 11, 1999, the Company authorized a 1,000-for-1 stock split, effected
through a stock dividend increasing the outstanding shares to 3,000,000. All
share data, except par value per share, has been retroactively adjusted for
all periods presented to reflect this stock split.
The Company issued 3,000,000 shares of common stock, $0.01 par value, on
April 12, 1999 to RTE Holdings, LLC in exchange for business assets
contributed by RTE Holdings, LLC (see Note 1). The 3,000,000 shares issued
have been presented as if they had been issued prior to April 12, 1999,
representing RTE Holdings, LLC's ownership interests in the three contributed
entities since their inception on November 10, 1998.
Under certain conditions, the Company has the option to repurchase certain
shares issued to RTE Holdings, LLC at a price of $1.00 per share. As of
December 31, 1999, 1,035,416 shares of the 3,000,000 shares issued to RTE
Holdings, LLC is subject to this option. The right to repurchase the shares
terminates in even quarterly increments through May 11, 2001.
As of December 31, 1999, 25,125,169 shares of common stock were reserved for
issuance under option plans, warrant agreements and conversion of the
preferred stock.
On March 7, 2000, the Company exchanged 1,965,000 options for the purchase of
common stock at an exercise price of $0.40 per share for an equivalent number
of restricted shares of common stock at a purchase price of $0.40 per share.
The recipients of the restricted stock paid a total of $19,650 in cash and
issued the Company full-recourse notes totaling $766,350.
Each share of common stock is entitled to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are available and
when declared by the Board of Directors, only if such dividends are
contemporaneously declared on each series of preferred stock and common stock.
7. WARRANTS
In connection with the promissory note with a related party described in Note
12, the Company issued a warrant to purchase 15,000 shares of common stock at
$1.50 per share. The warrant is immediately exercisable and expires in 2005.
The value of the warrant of $1 was recorded as interest expense in 1999.
In connection with the bank loan described in Note 4, the Company issued a
warrant to purchase 21,000 shares of Series A Preferred Stock at an exercise
price of $1.00. The warrant is immediately exercisable and expires in July
2006. The value of the warrant of $8 is being amortized to interest expense
over the term of the note.
F-11.
<PAGE>
The fair value of all warrant issuances were calculated using the
Black-Sholes option pricing model with the following assumptions: no
dividends; expected life is the contractual term; risk-free interest rates of
6.5%; volatility of 50%.
8. STOCK--BASED COMPENSATION PLANS
In 1999, the Company adopted the 1999 Stock Plan (the "Plan") under which
2,100,000 shares of the Company's common stock were reserved for issuance to
employees, directors, creditors and consultants. Options granted under the
Plan may be incentive stock options or nonqualified stock options. The
exercise price of incentive stock options shall not be less than the fair
market value per share of the Company's common stock on the grant date.
Employee options vest 25% one year after the date of grant and the remainder
in twelve equal quarterly installments thereafter. If an individual owns
stock representing more than 10% of the outstanding shares, the exercise
price of each stock option granted shall be at least 110% of fair market
value, as determined by the Board of Directors. The term of the options is up
to 10 years. Stock options granted to date have a term of 7 years. No
stock-based awards were granted prior to 1999.
The following table summarizes the activity of the Company's stock option
plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- ----------------
<S> <C> <C>
Outstanding -- beginning of period, January 1, 1999........................ --
Granted.................................................................... 1,144,546 $ 0.40
----------------- ----------------
Outstanding -- end of period, December 31, 1999............................ 1,144,546 0.40
=================
Weighted average fair value for financial reporting purposes at grant date. $ 1.35
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- ------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING WEIGHTED AVERAGE WEIGHED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
$0.40 1,144,546 7 years $0.40 210,616 $0.40
</TABLE>
During 1999, the Company recorded deferred compensation of $853 which
represents the difference between the exercise price and the fair value of
the underlying common stock for financial reporting purposes of $1.35 per
share on the date of grant. The deferred compensation will be amortized to
expense over the four-year vesting period.
Compensation cost of $89 has been recognized for stock-based compensation in
1999 for grants to employees below fair value. Compensation cost of $39 has
been recognized for 306,846 options granted to vendors and consultants for
the year ended December 31, 1999. At December 31, 1999, 96,230 of these
options were unvested. Had compensation cost for options issued to employees
and directors been determined based on the fair value at the grant dates, as
prescribed by SFAS No. 123, for awards in 1999, the Company's net loss would
have been greater by $55. Because options vest over several years and
additional option grants are expected to be made in future years, the above
pro forma results are not representative of the pro forma results for future
years.
For purposes of pro forma disclosure, the fair value of each option was
estimated on the date of grant using the minimum value method with the
following assumptions for grants in 1999: no dividend yield; risk-free
interest rate of 6.5%; and expected lives of four years.
During the first quarter, the Company granted options for the purchase of
1,507,800 shares of common stock at an exercise price of $0.40 per share. The
company recognized stock-based compensation expense of $529,000 for
F-12.
<PAGE>
three months ended March 31, 2000 related to options granted by the company
for the difference between the exercise price and the deemed fair value of
the underlying common stock.
On March 30, 2000, the Board of Directors approved the Employee Stock
Purchase Plan. A total of 1,000,000 shares of common stock are available for
issuance under this plan. The first offering under this plan will begin on
the effective date of the Company's initial public offering of its common
stock. No common stock has been issued under this plan.
9. INCOME TAXES
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Net operating loss carryforwards.......................... $ 35 $ 2,502
Depreciation and amortization............................. -- (87)
------------ ------------
Net deferred tax assets................................... 35 2,415
Deferred tax asset valuation allowance.................... (35) (2,415)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The Company has provided a valuation allowance for the full amount of its net
deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards
cannot be sufficiently assured at December 31, 1999.
At December 31, 1999, the Company has federal net operating loss
carryforwards of approximately $6,161,866 available to reduce future taxable
income which expires in 2019.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may result in a limitation on the amount
of net operating loss carryforwards and research and development credit
carryforwards which can be used in future years.
10. COMMITMENTS AND CONTINGENCIES
The Company leases its office space and certain equipment under noncancelable
operating leases. Total expense under these operating leases was
approximately $0 and $619 for the period November 1, 1998 (date of inception)
to December 31, 1998 and for the year ended December 31, 1999, respectively.
Certain noncancelable operating leases totaling $62.9 million were in
negotiations at December 31, 1999 and were executed on January 10, 2000.
Future minimum lease payments under capital leases and noncancelable
operating leases at December 31, 1999, and noncancelable operating leases
executed on January 10, 2000 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES OPERATING LEASES
YEAR ENDING AS OF EXECUTED ON
DECEMBER 31, DECEMBER 31, 1999 JANUARY 10, 2000 CAPITAL LEASES
---------------------------------------------- ----------------- ---------------- --------------
<S> <C> <C> <C>
2000......................................... $ 2,885 $ 1,496 $ 225
2001......................................... 3,351 2,759 214
2002......................................... 3,369 2,831 34
2003......................................... 3,422 2,905 --
2004......................................... 3,484 2,979 --
Thereafter................................... 44,112 49,968 --
----------- ---------- ------------
$ 60,623 $ 62,938 473
=========== ========== ===========
</TABLE>
F-13.
<PAGE>
<TABLE>
<CAPTION>
OPERATING LEASES OPERATING LEASES
YEAR ENDING AS OF EXECUTED ON
DECEMBER 31, DECEMBER 31, 1999 JANUARY 10, 2000 CAPITAL LEASES
---------------------------------------------- ----------------- ---------------- --------------
<S> <C> <C> <C>
Less: portion representing interest (55)
-----------
$ 418
===========
</TABLE>
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal
defenses and that the ultimate outcome of these actions will not have a
material effect on the Company's financial position and results of
operations.
11. NET LOSS PER SHARE:
A reconciliation between basic and diluted net loss per share is as follows:
<TABLE>
<CAPTION>
PERIOD FROM NOV. 1,
1998 (DATE OF YEAR ENDED MARCH 31,
INCEPTION) TO DECEMBER 31, -------------------------
DECEMBER 31, 1999 1999 1999 2000
------------------- ------------ ---------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Historical:
Net loss attributable to common stockholders........ $ (85) $ (6,288) $ (102) $ (5,967)
=========== =========== ========== ==========
Weighted average common shares...................... 3,000,000 3,000,000 3,000,000 3,539,835
=========== =========== ========== ==========
Net loss per share attributable to common
shareholders -- Basic and diluted................. $ (0.03) $ (2.10) $ (0.03) $ (1.68)
=========== =========== ========== ==========
</TABLE>
As of December 31, 1998, 1999 and March 31, 2000 (unaudited), options to
purchase 0,1,144,546 and 659,846 shares of common stock, respectively, and
warrants to purchase 0, 15,000 and 15,000 shares of common stock,
respectively, were outstanding, but were not included in the computation of
the diluted net loss per share attributable to common shareholders and pro
forma diluted net loss per common share because the Company was in a loss
position and the inclusion of such shares would be anti-dilutive.
12. RELATED PARTY TRANSACTIONS
During 1999, the Company repaid to its founders approximately $461 of which
$376 was borrowed in 1999, including the promissory note discussed below, and
reimbursed them for approximately $90 of expenses incurred during 1999 on
behalf of the Company.
In October 1999, the Company entered into a promissory note with its common
stockholder for $225. The promissory note was paid in full in November 1999.
In conjunction with the promissory note, the Company issued a warrant for the
purchase of common stock (see Note 7)
As of December 31, 1999, the Company leases approximately 40,000 square feet
of its collocation space in a 280,000 square foot facility owned by a
stockholder.
A real estate broker affiliated with the Company's founders receives
commissions from property owners with whom the Company enters into leases for
its operating facilities. Total commissions received by the broker during
1999 for Company-related transactions were $344.
13. EMPLOYEE BENEFIT PLAN
The Company sponsors a savings plan for its employees which is designed to be
qualified under Section 401(k) by the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deductions within statutory and plan limits. The Company did not contribute
to the plan in 1999.
F-14.
<PAGE>
14. EVENTS SUBSEQUENT TO DECEMBER 31, 1999:
The Company issued 666,667 shares of Series B Preferred Stock at $1.50 per
share from January 1, 2000 through March 10, 2000 for total proceeds of $1
million.
On January 11, 2000, the Company amended the 1999 Stock Plan to increase the
aggregate number of shares which may be issued pursuant to the plan to
4,000,000. The Plan was subsequently amended on March 30, 2000 to increase
the aggregate number of shares issuable to 5,500,000.
On April 5, 2000, the Company acquired the personnel and a portion of the
assets and liabilities of KennTech, a consulting firm with which the Company
formerly contracted for the selection, design and construction program
management of collocation facilities, for 100,000 shares of the Company's
common stock and $300 in cash. This acquisition was recorded as a purchase.
In April and May, the Company granted options to purchase 587,000 shares and
141,500 shares of common stock, respectively, for exercise prices of $2.30
and $7.00.
On May 26, 2000, CO Space entered into an agreement with InterNAP Network
Services in which InterNAP common stock would be exchanged for all
outstanding shares and rights to acquire shares of CO Space's capital stock.
On June 20, 2000, InterNAP completed its acquisition of CO Space, Inc. The
acquisition was recorded using the purchase method of accounting under
Accounting Principle Board Opinion No. 16 (APB 16). The aggregate purchase
price of CO Space, plus related charges, was approximately $275,307,000, and
was comprised of the issuance of InterNAP's common stock, cash paid, and
liabilities incurred. InterNAP issued 6,881,005 shares of common stock,
and assumed 322,769 options to purchase common stock to effect the
transaction.
F-15.
