Filed pursuant to Rule
424(b)(1)
Registration No.
333-31430
9,000,000 Shares
[Logo of StorageNetworks,
Inc.]
Common Stock
This is an initial public offering of shares of common stock of
StorageNetworks, Inc. All of the shares of common stock are being sold by
StorageNetworks.
Prior to this offering, there has been no public market for the
common stock. Our common stock has been approved for quotation on the Nasdaq
National Market under the symbol STOR.
See Risk Factors beginning on page 9 to read
about factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities or passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense.
|
|
Per Share
|
|
Total
|
Initial public offering
price |
|
$27.00 |
|
$243,000,000 |
Underwriting
discount |
|
$ 1.89 |
|
$ 17,010,000 |
Proceeds, before expenses,
to StorageNetworks |
|
$25.11 |
|
$225,990,000 |
To the extent that the underwriters sell more than 9,000,000
shares of the common stock, the underwriters have the option to purchase up
to an additional 1,350,000 shares from StorageNetworks at the initial public
offering price less the underwriting discount.
The underwriters expect to deliver the shares on July 6,
2000.
Goldman, Sachs &
Co.
|
Credit Suisse First
Boston
|
|
Thomas Weisel Partners
LLC
|
Wit
SoundView
Prospectus dated June 29,
2000.
[INSIDE FRONT
COVER]
[Map of the world depicting locations of StorageNetworks
S-POP data centers and office locations in the U.S., Europe and Australia.
The StorageNetworks logo appears at the top of the page, and the words
Global Data Storage Network appear across the bottom of the
page.]
This summary does not contain all the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, especially Risk Factors beginning
on page 9.
Our
Business
We are the first company to focus solely on providing data
storage as a service. We are creating the first global data storage network,
allowing our customers to connect their computer systems, or plug
in, to our network to store and access their data in much the same way
they obtain and use electricity or telephone service. We provide both
managed data storage services and professional services. Our managed data
storage services include storage and management of our customers
primary data, tape back-up of our customers data for archival and
restoration purposes, and real time copies of customer data at remote sites.
Through our professional services, we assess, design and implement our
customers data storage environments, addressing our customers
primary data needs as well as disaster recovery and business continuity
plans. We are focused exclusively on data storage, and approximately 270 of
our more than 500 current employees are storage experts who assist
businesses in designing and implementing their data storage strategies. Our
customers are businesses that require large and rapidly growing volumes of
data storage capacity and include established enterprises and Internet-based
businesses in a wide range of industries, such as financial services,
communications, media, retail, wholesale distribution, energy and natural
resources, health and education.
To deliver our managed storage services, we are building and
expanding a dedicated fiber optic network that connects our storage point of
presence, or S-POP, data centers within major metropolitan areas. Our S-POP
data centers contain both disk and tape storage devices and each will have a
data storage capacity of over 100,000 gigabytes of on-line disk storage at
maturity. Our metropolitan storage networks are connected to each other and
to a central monitoring and control center through long distance fiber optic
connections. This combination of metropolitan storage networks and long
distance fiber networks constitutes our Global Data Storage
Network.
Customers connect to our Global Data Storage Network through our
StoragePort access channel. StoragePort devices can be installed either at
the customers own facility, which generally must be located within 30
miles of an S-POP data center, or at a web hosting facility at which we have
established an S-POP data center. At our S-POP data centers, we physically
store and manage our customers data, including both their primary
datathe files, databases and records that the customer generates and
uses in the everyday running of its businessand copies of all or some
of that data, which can be used for archival, record retention, data
distribution, disaster recovery and business continuity
purposes.
We provide our customers a complete view of their storage
environment through our proprietary Virtual Storage Portal software. The
Virtual Storage Portal permits customers to monitor and control their
storage resources 24 hours per day and seven days per week through a web
browser.
Our S-POP data centers are primarily located in facilities
operated by web hosting service providers from whom we license floor space
and purchase power and networking and communications services utilized in
delivering our services. We currently operate 37 S-POP data centers in 11
metropolitan areas in the United States and one in London. We are planning
to expand our data centers throughout the United States and internationally,
and, based upon our current expansion and construction plans, we expect to
operate more than 50 data centers by year end.
We commenced operations in October 1998 and began operating our
first S-POP data center in May 1999. Our revenues from providing managed
storage and professional services in 1999 were $3.9 million and for the
first quarter of 2000 were $4.6 million. During the first quarter of 2000,
we derived 28% of our service revenues from providing managed storage
services, as compared to 18% in 1999. We have a history of operating losses.
We incurred net losses of $23.9 million in 1999 and $27.0 million for the
three months ended March 31, 2000, and as of March 31, 2000 we had an
accumulated deficit of $51.5 million.
We believe that the expansion of our Global Data Storage
Network, the increasing availability and customer acceptance of our services
and recurring revenue from multi-year contracts for managed storage services
will result in an increase in the percentage of our revenues from our
managed storage services. We believe that these revenues will represent
approximately 66% of our total revenues during 2001. The average contractual
term of our managed storage service level agreements is approximately three
to four years. As such, we expect our revenues from managed storage services
to grow at a faster rate than professional services because our service
level agreements will result in a recurring revenue stream that will further
increase as we add new customers. If a customers storage requirements
increase, the revenues from such customer will increase, further
contributing to the growth of managed storage service revenues. Our
estimated revenue mix is based on our assumptions and projections as to the
growth of the storage service provider market, the acceptance of our
services, our ability to attract and retain customers and the continued
economic health of our customers. A variety of factors may affect our
assumptions and projections and there is no guarantee that we will achieve
this revenue mix. We currently derive the majority of our revenues from
providing professional services. Professional services generally consist of
assessments and implementations of our customers data storage systems
not related to our managed storage services. We derived 82% of our service
revenues in 1999, and 72% of our service revenues in the first quarter of
2000, from professional services. During 1999, 37% of our total revenues
were derived from the sale of data storage equipment. We generated no
revenue from equipment sales in the first quarter of 2000 and do not plan to
generate any future revenue from such sales. If we fail to increase the
percentage of revenues derived from managed storage services, or if our
overall revenues, including our revenues from professional services, fail to
increase or decline, our results will be harmed.
On June 21, 2000, we received a letter from EMC Corporation
alleging, among other things, that we and our executives have misrepresented
that EMC is an investor in StorageNetworks even though EMC is not an
investor, misappropriated confidential EMC information, targeted employees
of EMC for employment in violation of contractual commitments not to hire
EMC employees, adopted advertising slogans similar to EMCs, and
interfered with contractual relationships between EMC and certain of
EMCs customers. No legal proceedings have been brought by EMC, but the
letter suggests that EMC may commence legal proceedings against us seeking
substantial damages and/or injunctive relief. In addition, as a result of
this controversy EMC may terminate its professional services subcontractor
agreement with us or refuse to sell us additional hardware for use in our
S-POP data centers. We believe EMCs allegations are without merit and
intend to defend vigorously any legal proceedings which EMC might commence
against us. Neither we nor our executives stated that EMC is an investor in
StorageNetworks. We have already begun purchasing storage equipment from
alternative vendors and suppliers and believe we would have access to
adequate sources of storage hardware and software if EMC were to cease
supplying storage equipment to us. During 1999, approximately 40% of our
total revenues were derived from customers to whom we provided professional
services under our subcontractor agreement with EMC. If EMC were to
terminate our professional services subcontractor agreement, and if we were
unable to replace the professional services revenue from EMC customers with
professional services revenue from other customers, our professional
services revenue would be reduced and our operating results would be harmed.
Our Opportunity
Established enterprises as well as Internet-based businesses are
creating and storing a growing amount of data. Forrester Research estimates
that online storage for Global 2,500 companies will grow at a compound
annual rate of 78% from 1999 to 2003. Designing, implementing and managing
storage systems for this growing amount of data is increasingly complex as a
result of the multiple components of storage systems, which are manufactured
by multiple vendors, and the lack of interoperability standards. According
to Forrester, storage expenditures as a percent of total spending on
computing systems for an average Global 2,500 firm are expected to increase
from 4% in 1999 to 17% in 2003.
To effectively manage their data, companies require storage
flexibility and functionality that is typically unavailable through a
traditional data storage configuration that links a single computer to a
single storage device. New technologies and the increasing availability of
fiber optic bandwidth are making possible the creation of storage area
networks that can link multiple servers to multiple storage resources
through a dedicated high-speed network.
These new technologies have created the opportunity to establish
a storage area network that can free businesses from the need to build and
operate their own internal data storage infrastructures. By storing and
accessing their data through a global storage network established and
managed by a third-party provider, businesses can cost-effectively satisfy
their data storage requirements and thus focus on their core competencies.
We believe that there is significant market opportunity for a company that
has both the infrastructure and expertise necessary to provide comprehensive
data storage services to data-intensive businesses. Dataquest estimates that
the storage utility market will grow to $8 billion by the end of
2003.
Our
Strategy
Our objective is to establish StorageNetworks as a premier data
storage services provider by:
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|
promoting and extending the
StorageNetworks brand;
|
|
|
expanding our storage
infrastructure and geographical presence;
|
|
|
rapidly accumulating
storage expertise and building best business processes for data
storage;
|
|
|
expanding our relationships
with web hosting providers, storage hardware and software vendors and
fiber providers;
|
|
|
expanding and enhancing our
service offerings; and
|
|
|
targeting customers with
the greatest need for managed storage services.
|
Corporate Information and
History
StorageNetworks was incorporated in Delaware on August 14, 1998.
Our principal executive offices are located at 100 Fifth Avenue, Waltham, MA
02451. Our telephone number at that location is (781) 434-6700. Our Internet
address is www.StorageNetworks.com. The information contained on our
web site is not incorporated by reference in this prospectus.
We anticipate that our executive officers and directors, and
entities affiliated with them, will in the aggregate own approximately 68%
of our outstanding common stock following the completion of this offering.
These stockholders, if acting together, would be able to control all matters
requiring shareholder approval.
StorageNetworks, Storage Services for the e-Economy, Global Data
Storage, S-POP, StoragePOP, PACS, DataPACS, NetPACS, BackPACS, SafePACS,
StoragePort, Virtual Storage Portal, VSP, Just Plug In, and S-POP Manager
are service marks of StorageNetworks. All other trademarks and service marks
are the property of their respective owners.
The
Offering
Common stock offered by
StorageNetworks |
|
9,000,000 shares |
Common stock to be
outstanding after this offering |
|
88,527,118
shares |
Nasdaq National Market
symbol |
|
STOR |
Use of proceeds |
|
For general corporate
purposes,
including working capital and capital
expenditures. |
The number of shares of our common stock that will be
outstanding after this offering is based on our shares of common stock
outstanding as of April 30, 2000 and excludes:
|
|
9,529,250 shares issuable
upon the exercise of outstanding stock options as of April 30, 2000 at a
weighted-average exercise price of $2.37 per share;
|
|
|
130,082 shares of Series B
preferred stock issuable upon the exercise of outstanding warrants (which
convert into warrants to purchase 260,164 shares of common stock) at an
exercise price of $4.92 per share; and
|
|
|
810,000 shares of Series D
preferred stock issuable upon the exercise of outstanding warrants (which
convert into warrants to purchase 810,000 shares of common stock) at an
exercise price of $22.75 per share.
|
Except as set forth in the financial statements and related
notes or as otherwise indicated, all information in this prospectus
assumes:
|
|
no exercise of the
underwriters over-allotment option; and
|
|
|
the conversion of all
outstanding shares of our convertible preferred stock into shares of
common stock immediately prior to the closing of the offering.
|
SUMMARY CONSOLIDATED
FINANCIAL DATA
The following tables summarize the consolidated financial data
for our business. You should read this data along with
Managements Discussion and Analysis of Financial Condition and
Results of Operations and our consolidated financial statements and
related notes. Potentially dilutive common shares have been excluded from
the shares used to compute net loss per share because their inclusion would
be antidilutive. Pro forma net loss per share reflects the conversion of all
outstanding preferred stock from the later of the date of issuance or the
beginning of the period presented, even though the effect of the conversion
is antidilutive. The as adjusted consolidated balance sheet data reflects
the issuance of shares in this offering at the initial public offering price
of $27.00 per share and after deducting the underwriting discount and
estimated expenses of this offering.
|
|
Period from
October 5, 1998
(commencement
of operations) to
December 31, 1998
|
|
Year ended
December 31, 1999
|
|
Three months ended
March 31,
|
|
|
|
|
1999
|
|
2000
|
|
|
(in thousands, except
per share data) |
Consolidated Statement
of Operations
Data: |
Revenues |
|
$ |
|
|
$ 6,258 |
|
|
$ 383 |
|
|
$ 4,620 |
|
Total costs and
expenses |
|
380 |
|
|
31,150 |
|
|
1,655 |
|
|
32,429 |
|
Loss from
operations |
|
(380 |
) |
|
(24,892 |
) |
|
(1,272 |
) |
|
(27,809 |
) |
Net loss |
|
(369 |
) |
|
(23,914 |
) |
|
(1,196 |
) |
|
(27,016 |
) |
Net loss per
share: |
Basic and diluted |
|
$ (0.02 |
) |
|
$ (0.98 |
) |
|
$ (0.05 |
) |
|
$ (1.09 |
) |
Weighted average common shares
outstanding |
|
24,400 |
|
|
24,407 |
|
|
24,400 |
|
|
24,765 |
|
Pro forma net loss per
share |
|
|
|
|
|
|
|
|
|
|
$ (0.36 |
) |
Shares used in calculating
pro forma net
loss per share |
|
|
|
|
|
|
|
|
|
|
74,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2000
|
|
|
Actual
|
|
As
Adjusted
|
|
|
(in
thousands) |
Consolidated Balance
Sheet Data: |
Cash, cash equivalents and
short-term investments |
|
$144,893 |
|
$369,883 |
Working capital |
|
128,091 |
|
353,081 |
Total assets |
|
210,906 |
|
435,896 |
Capital lease obligations,
less current portion |
|
25,336 |
|
25,336 |
Total stockholders
equity |
|
158,947 |
|
383,937 |
You should consider carefully the risks described below
before you decide to buy our common stock. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock
could fall, and you may lose all or part of the money you paid to buy our
common stock.
Risks Related to Our
Business
Our business is difficult
to evaluate due to our limited operating history
We commenced operations in October 1998. We did not operate our
first data storage center until May 1999 and currently have only 37 data
centers connected to our Global Data Storage Network. We began offering our
managed data storage services in May 1999 and derived 12% of revenues in
1999 and 28% of revenues for the quarter ended March 31, 2000 from these
services. To date, services other than managed data storage services have
constituted a majority of our revenues. For example, professional services
constituted 51% of our revenues in 1999 and 72% of our revenues for the
quarter ended March 31, 2000; and sale of equipment accounted for 37% of
revenues in 1999 and 0% of revenues for the quarter ended March 31, 2000. We
do not expect to derive any revenues from equipment sales in the future and
expect the percentage of revenues derived from our managed data storage
services to continue to increase. Due to the changing nature of our
business, our limited operating history and the emerging nature of our
markets and services, our historical financial information is not a reliable
indicator of future performance. Therefore it is difficult to evaluate our
business and prospects.
The storage service
provider market is new and our business will suffer if it does not develop
as we expect
The storage service provider market is new and may not grow or
be sustainable. Potential customers may choose not to purchase storage
services from a third party provider due to concerns about security,
reliability, system availability or data loss. It is possible that our
services may never achieve market acceptance. Furthermore, we incur
operating expenses based largely on anticipated revenue trends which are
difficult to predict given the recent emergence of the storage service
provider market. If this market does not develop, or develops more slowly
than we expect, our business, results of operations and financial condition
will be seriously harmed.
We have a history of
losses, and our failure to increase our revenues would prevent us from
achieving and maintaining profitability
We have never been profitable. We have incurred significant
losses in each quarter since our inception. We experienced a net loss of
$23.9 million in 1999 and $27.0 million for the quarter ended March 31,
2000. As of March 31, 2000, we had an accumulated deficit of $51.5 million.
None of our S-POP data centers have been profitable and we do not expect
them to be individually profitable in the near future. We cannot be certain
that our revenues will grow or that we will generate sufficient revenues to
achieve profitability. Our failure to significantly increase our revenues
would seriously harm our business and operating results. We expect to
continue to incur significant and increasing capital, infrastructure, sales
and marketing, product development, administrative and other expenses. We
will incur substantial costs, such as the $100 million in total expenditures
we expect to spend on capital infrastructure in 2000, in extending our
Global Data Storage Network, including establishing, expanding and operating
new and existing S-POP data centers. We believe that we will continue to
incur losses on a quarterly and annual basis for the foreseeable future. We
will need to generate significantly higher revenues in order to achieve and
maintain profitability. If our revenues grow more slowly than we anticipate,
or if our operating or capital expenses increase more than we expect or
cannot be reduced in the event of lower revenues, our business will be
materially and adversely affected.
Our growth strategy will
be unsuccessful if we are unable to expand our Global Data Storage
Network
A key component of our growth strategy is to expand our Global
Data Storage Network. Our planned expansion includes expanding existing
facilities, the opening of storage facilities in the United States and
internationally and the procurement of rights to additional fiber in
metropolitan areas, long distance fiber optic connections across different
metropolitan areas, and other transmission media to connect our customers
and our data centers. Our continued expansion and development of our network
will depend on, among other things, our ability to assess markets, identify
data center locations and obtain rights to fiber and other transmission
media, all in a timely manner, at reasonable cost and on acceptable terms.
Our plans as to the exact location and number of data centers are likely to
change from time to time in response to market conditions. We currently
anticipate establishing in excess of 15 additional S-POP data centers by the
end of 2000, both in metropolitan areas in which we currently operate S-POP
data centers as well as in additional areas, including Austin, Detroit and
Frankfurt. We currently are considering opening data centers in Minneapolis,
Philadelphia, Sydney, Hong Kong, Tokyo, and Toronto, but we have no specific
plans to open centers in those locations by the end of 2000. The locations
of our planned and contemplated S-POP data centers may change for a variety
of reasons, including customer demand, the rates at which we acquire new
customers and the expansion plans of web-hosting providers. Our inability to
continue to build our network, or to effectively manage its expansion, would
have a material adverse effect on our business and financial
condition.
Any failure of our
infrastructure could lead to significant costs, service disruptions and data
loss, which could reduce our revenues and harm our business and
reputation
To be successful, we must provide our customers with secure,
efficient and reliable data storage services. We rely on the expandable
capacity, reliability and security of our network infrastructure to deliver
these services in a manner that our customers may access easily and without
disruption to their businesses. To meet these customer requirements we must
protect our infrastructure against damage caused by occurrences such
as:
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physical or electronic
security breaches;
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|
fire, earthquake, flood and
other natural disasters;
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sabotage and
vandalism.
|
The occurrence of a natural disaster or other unanticipated
problems at one or more of our S-POP data centers could result in service
interruptions, significant damage to equipment or loss of customer data. Any
widespread loss of services would slow the adoption of our services and
cause damage to our reputation, which would seriously harm our
business.
One or more of our
customers may lose data stored at one of our S-POP data centers or lose
access to some or all of such data, which could reduce our revenues and harm
our business and reputation
Due to the size of our network, the amount of equipment involved
and the number of our locations, customers may lose data stored at one of
our S-POP data centers or lose access to some or all of such data as a
result of network or equipment failure or human error on the part of our
employees. Depending on the nature of the data loss or unavailability, and
the degree to which the event results in negative publicity for us or our
customers, our reputation, our ability to attract new
customers, and the value of our stock all could suffer. Our ability to quickly
isolate and recover from the cause of any such loss will be critical to
minimize the impact of this risk.
Our revenues will not
continue to grow, our costs will increase, and our reputation will be
damaged if we are not able to grow our infrastructure as demand
increases
We have had only limited deployment of our Global Data Storage
Network to date. Our Global Data Storage Network consists of S-POP data
centers, the network infrastructure such as fiber optic cable that connects
the S-POP data centers and our control center which monitors data centers
and other network activity. As of June 1, 2000, 37 S-POP data centers were
operational. Our data storage network is undergoing further expansion and we
have not operated our network or provided services to customers on the scale
that we will in the future if there is market acceptance of our services.
Our infrastructure may not expand to levels that customers expect or that we
have committed to provide them in our customer contracts, or may not perform
as expected as the number of customers, data centers and network components
increases. Because our contracts provide customers credits against a portion
of their monthly service fees if our services do not achieve specified
performance levels of data availability, successfully completed back-ups and
data security, we will lose revenues if our network does not perform as we
expect. Moreover, we will need to make additional investments in our
infrastructure to satisfy customers as demand increases. We cannot assure
you that we will be able to make these investments successfully or at an
acceptable cost, and upgrades to our infrastructure may cause delays or
failures in our services. As a result, in the future our infrastructure may
be unable to satisfy customer demand. Our failure to satisfy customer demand
could damage our reputation, significantly reduce demand for our services,
and cause us to receive lower fees than expected and incur unforeseen costs
to remedy our shortfalls.
None of our S-POP data
centers are profitable and they may never achieve
profitability
Our first S-POP data center became operational in May 1999. Most
of our 37 S-POP data centers became operational in the first quarter of
2000. We believe it will take more than 12 months for an S-POP data center
to achieve profitability. However, since none of our S-POP data centers are
profitable, we have no historical evidence that indicates that our S-POP
data centers will ever achieve operating profitability. Our failure to
attract customers and control operating costs could result in poor
utilization of our S-POP data centers and could cause our business to be
materially and adversely affected.
If our network security is
breached, our business and reputation would suffer
Our customers rely on us for the secure storage and transmission
of their data. Third parties may attempt to breach our security. If they are
successful, they could obtain, destroy or damage confidential information of
our customers. We may be liable to our customers for any breach in our
security, and any such breach could harm our reputation. Our failure to
prevent security breaches may have a material adverse effect on our
reputation and operating results.
Because our data storage
services utilize complex technology and are deployed in complex
environments, problems with our services may arise that could seriously harm
our business
Due to the sophisticated nature of our infrastructure and the
amount and complexity of the technology we and our customers employ, our
data storage services are highly complex. In the future, there may be errors
and defects in our infrastructure and technology that may adversely affect
our services. If we are unable to efficiently fix errors or other problems
that may be identified, we could experience:
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loss of or delay in
revenues and loss of market share;
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loss of customers and
credibility;
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failure to attract new
customers or achieve market acceptance;
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diversion of development
resources; and
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legal actions by our
customers.
|
Any one or more of these results could be very costly and, if
not quickly remedied, cause serious harm to our business.
Our competition includes
storage hardware and software vendors and may, in the future, include other
storage service providers, against whom we may not be able to compete
successfully
We currently face competition from storage hardware and software
vendors, which sell storage products and/or consulting and related services.
Many of these vendors have longer operating histories, greater name
recognition and substantially greater financial, technical and marketing
resources than we have. Many of these vendors also have more extensive
customer bases, broader customer relationships and broader industry
alliances than us, including relationships with many of our current and
potential customers.
If we are successful in establishing a storage services provider
market, additional direct competitors are likely to enter this market.
Additionally, hardware and software vendors may also choose to develop
managed storage service offerings which compete with ours. Moreover, we have
relationships with several vendors that we or they could choose to
discontinue if they began to offer competing managed storage
services.
Increased competition from any of these sources could result in
a loss of customers and market share. Additionally, price competition,
particularly from competitors with greater resources, could require us to
reduce the prices for our managed data storage services. Any of these
results could seriously harm our business and financial
condition.
Unexpected events such as
equipment shortages, network instability, demand surges and deterioration in
the financial health of our customers may cause our quarterly and annual
results to fluctuate and our stock price to decline and could cause
long-term harm to our business
In addition to our short operating history and the emerging
nature of the storage service provider market, other factors beyond our
control may cause our quarterly and annual results to fluctuate. The same
factors could cause serious long-term harm to our business. These factors
include:
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temporary shortages or
interruptions in supply of storage equipment;
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|
natural disasters in the
geographic markets in which we operate or other causes of network
instability;
|
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surges in demand for data
storage capacity; and
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the financial condition of
our customers.
|
Our operating expenses are largely based on anticipated revenue
trends. As a result, a delay in generating or recognizing revenues for these
or any other reasons could cause significant variations in our operating
results from quarter to quarter and could result in substantial operating
losses. If these events occur, it is likely that in some future quarters our
operating results will be below the expectations of investors; and, in this
event, the price of our common stock will probably fall. Additionally, the
above events could cause serious harm to our overall business.
We rely on third party
suppliers for the components of our infrastructure and the storage products
we use in delivering our services and any interruption in the supply of
these products and materials could harm our business
We are dependent on other companies to supply the key components
of our network infrastructure and the hardware and software storage products
we use in delivering our services. For example, during 1999, we purchased
greater than 90% of the disk storage arrays and related software that we use
in the delivery of our managed data storage services from EMC Corporation.
We currently purchase a large portion of the software and hardware products
used in our services offerings from approximately 15 storage product
vendors. Any interruption in our ability to obtain these products, or
comparable quality replacements, would substantially harm our business and
results of operations. On June 21, 2000, we received a letter from EMC
Corporation alleging, among other things, that we and our executives have
misrepresented that EMC is an investor in StorageNetworks even though EMC is
not an investor, misappropriated confidential EMC information, targeted
employees of EMC for employment in violation of contractual commitments not
to hire EMC employees, adopted advertising slogans similar to EMCs,
and interfered with contractual relationships between EMC and certain of
EMCs customers. No legal proceedings have been brought by EMC, but the
letter suggests that EMC may commence legal proceedings against us seeking
substantial damages and/or injunctive relief. We believe EMCs
allegations are without merit and intend to defend vigorously any legal
proceedings which EMC might commence against us. However, as a result of
this controversy there is a risk that our supply relationship with EMC will
terminate or not continue in the future on the same terms as it has in the
past.
If our professional
services revenues, including the professional services revenues that we
derive from our subcontractor agreement with EMC Corporation, decline in the
near future, our quarterly results will be harmed
Our revenues from providing professional services were 51% of
our total revenues in 1999 and 72% in the quarter ended March 31, 2000. In
1999, we earned approximately 40% of our total revenues by providing
professional services to customers of EMC Corporation pursuant to a
Subcontractor Agreement with EMC. We expect that the percentage of revenues
we derive from professional services will decline and that the percentage of
our revenue we derive from managed storage services will increase
significantly and during 2001 will represent approximately 66% of our total
revenues. However, if we experience a decrease in revenues from professional
services, through the termination of our agreement with EMC or otherwise,
our total revenues may significantly decrease and our quarterly results in
the near future would be harmed. As a result of the allegations recently
made by EMC against us described above, it is likely that our professional
services relationship with EMC will terminate or not continue in the future
on the same terms as it has in the past.
If any of our business
relationships with hosting service providers, hardware and software vendors
and other service providers and suppliers terminate, our ability to
penetrate the storage services provider market could be adversely
affected
We have formed business relationships, both formally and
informally, with various hosting service providers, hardware and software
vendors and other service providers and suppliers for joint marketing and
storage component purchases. These providers include:
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Hosting service providers
such as AT&T Web Hosting Services, Exodus Communications and
GlobalCenter, with whom we have joint marketing and services agreements or
volume purchase agreements;
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Hardware and software
suppliers such as Brocade Communications Systems, Inc., Compaq, Dell, EMC,
Legato Systems, Network Appliance, Inc., Sun Microsystems, Inc. and
VERITAS Software, with whom we have volume purchasing or financing
agreements or joint marketing and selling agreements;
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Systems integrators such as
KORE Partners, Inc. and SiteSmith and technology providers such as Akamai
Technologies, with whom we have joint marketing or referral selling
agreements; and
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Telecommunications and
optical fiber services providers such as Global Crossing and Metromedia
Fiber Network, with whom we have volume purchase agreements.
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Through certain of these
relationships, we acquire, in volume, various components utilized in our
network. Our volume purchasing enables us to acquire these components at
favorable pricing and with favorable delivery and other terms. Other
arrangements involve joint marketing and selling efforts that are intended
to increase both our and the other partys sales. If these agreements
are terminated, we would lose the benefit of these favorable purchasing
terms and our sales efforts could be adversely affected. Our ability to
quickly penetrate the storage services provider market may be adversely
affected if we are unable to continue these relationships and to develop
other similar relationships in the future.
Our services may not be
accepted by customers or may become obsolete if we do not respond rapidly to
technological and market changes
The storage services provider market will be characterized by
rapid technological change and frequent new product and service
introductions. We may be unable to respond quickly or effectively to these
developments. If competitors introduce products, services or technologies
that are better than ours or that gain greater market acceptance, or if new
industry standards emerge, our services may become obsolete, which would
materially harm our business and results of operations. In developing our
services, we have made, and will continue to make, assumptions about the
standards that our customers and competitors may adopt. If the standards
adopted are different from those which we may now or in the future promote
or support, market acceptance of our services may be significantly reduced
or delayed and our business will be seriously harmed. In addition, the
introduction of services or products incorporating new technologies and the
emergence of new industry standards could render our existing services
obsolete.
Our business will suffer
if we do not enhance and expand our services to meet changing customer
requirements
Our current and prospective customers may require features and
capabilities that our current services do not have. To achieve market
acceptance for our services, we must, in an effective and timely manner,
anticipate and adapt to customer requirements and offer services that meet
customer demands. The development of new or enhanced services is a complex
and uncertain process that requires the accurate anticipation of
technological and market trends. We may experience design, marketing and
other difficulties that could delay or prevent the development, introduction
or marketing of new services as well as enhancements to our existing
services. The introduction of new or enhanced services also requires that we
manage the transition from older services in order to minimize disruption in
customer ordering patterns and ensure that we can deliver services to meet
anticipated customer demand. Our failure to anticipate and meet changing
customer requirements or to effectively manage transitions to new services
would materially adversely affect our business, results of operations and
financial condition.
We may not be able to
obtain additional financing necessary to grow our business
As we grow our business and expand our network infrastructure,
we will need additional financing. Over the next five years, we expect to
spend approximately $700 million on capital infrastructure to expand our
Global Data Storage Network, including the expansion and operation of
existing S-POP data centers and the establishment and operation of
additional S-POP data centers. We expect to spend approximately $100 million
on such expansion during 2000. We plan to finance
this growth primarily with current and future vendor financing, equipment
lease lines and bank lines of credit, as well as other debt or equity
financings. We are currently working toward securing vendor financing,
equipment lease lines and bank lines of credit to be used in our 2000
expansion. We cannot be sure that we will be able to secure additional
financing on acceptable terms. Additionally, holders of any future debt
instruments or preferred stock may have rights senior to those of the
holders of our common stock, and any future issuance of common stock would
result in dilution of existing stockholders equity
interests.
If we do not expand our
direct and indirect sales organizations, we will have difficulty attracting
and retaining customers
Our services require a sophisticated sales effort targeted at a
limited number of key people within our prospective customers
organizations. Because the market for our services is new, many prospective
customers are unfamiliar with the services we offer. As a result, our sales
effort requires highly trained sales personnel. We need to expand our
marketing and sales organization in order to increase market awareness of
our services to a greater number of organizations and, in turn, to generate
increased revenues. We are in the process of developing our direct sales
force and require additional qualified sales personnel. Competition for
these individuals is intense, and we might not be able to hire the kind and
number of sales personnel we need. Moreover, even after we hire these
individuals, they require extensive training in our data storage services.
If we are unable to expand our direct and indirect sales operations and
train new sales personnel as rapidly as necessary, we may not be able to
increase market awareness and sales of our services, which may prevent us
from achieving and maintaining profitability.
The rates we charge for
our services may decline over time, which would reduce our revenues and
adversely affect our profitability
As our business model gains acceptance and attracts the
attention of competitors, we may experience pressure to decrease the fees
for our services, which could adversely affect our revenues and our gross
margin. If we are unable to sell our services at acceptable prices, or if we
fail to offer additional services with sufficient profit margins, our
revenue growth will slow and our business and financial results will
suffer.
Our revenues could decline
and our operating expenses could increase if we fail to manage our growth
properly
We have expanded our operations rapidly since our inception in
1998. We continue to increase the scope of our operations and the size of
our employee base. Our total number of employees grew from 9 on December 31,
1998 to 513 on April 30, 2000, and we plan to hire a significant number of
employees this year. This growth has placed, and our anticipated growth in
future operations will continue to place, a significant strain on our
management systems and resources. For example, to integrate key employees
into our company, these individuals must spend a significant amount of time
learning our business model and management system, in addition to performing
their regular duties. Accordingly, the integration of new personnel has
resulted and will continue to result in some disruption to our ongoing
operations. We will need to continue to improve our financial and managerial
controls, reporting systems and procedures, and will need to continue to
expand, train and manage our work force worldwide. If we fail to do so, our
revenues could decline and our operating expenses could
increase.
Our revenues could decline
if our customers do not renew our services
We provide our managed data storage services through service
level agreements with our customers. The term of these service level
agreements is generally three to four years. Since we
have only recently begun to provide managed data storage services, none of our
service level agreements has expired. Therefore, we have no historical
information with which to forecast future demand for our services from our
existing customer base after existing contracts expire. If our customers
elect not to renew our services, our revenue growth may slow and our
business and financial results may suffer.
A majority of our current
managed storage services customers are emerging Internet-based businesses
that may not pay us for our services on a timely basis and that may not
succeed over the long term
Approximately 58% of our managed storage services revenues
recognized in the quarter ended March 31, 2000 was derived from customers
that are emerging Internet-based businesses, and a significant portion of
our future managed storage services revenues may be derived from this
customer base. The unproven business models of some of these customers makes
their continued financial viability uncertain. Given the short operating
history and emerging nature of many of these businesses, there is a risk
that some of these customers will encounter financial difficulties and fail
to pay for our services or delay payment substantially. The failure of our
emerging business customers to pay our fees on a timely basis or to continue
to purchase our services in accordance with their contractual commitments
could adversely affect our revenue collection periods, our revenues and
other financial results.
We incurred a significant
amount of deferred stock compensation that will decrease our earnings over
the next four years
We recognized deferred stock compensation of $1.1 million in
1998, $20.8 million in 1999 and $580,000 in the three months ended March 31,
2000 for stock options granted at exercise prices determined to be below the
fair market value of our common stock. We will amortize this deferred
compensation through 2004, which will decrease our earnings during those
years. We expect to incur amortization of deferred stock compensation of
$5.2 million in 2000, $5.3 million in 2001, $5.3 million in 2002, $4.0
million in 2003 and $100,000 in 2004.
We depend on our key
personnel to manage our business effectively in a rapidly changing market,
and if we are unable to retain our key employees, our ability to compete
could be harmed
Our future success depends upon the continued services of our
executive officers, in particular Peter W. Bell, our Chief Executive Officer
and President, and William D. Miller, our Executive Vice President and Chief
Technical Officer, and upon the continued services of other key technology,
sales, marketing and support personnel, who have critical industry
experience and relationships that we rely on in implementing our business
plan. None of our officers or key employees is bound by an employment
agreement for any specific term. The loss of the services of any of our
officers or key employees could delay the development and introduction of
and negatively impact our ability to sell our services.
Certain members of our
Executive Advisory Council and Board of Directors are or were employees of,
or affiliated with, entities that may in the future compete directly with
us
Two members of our Board of Directors and four members of our
Executive Advisory Council are affiliated with companies that may in the
future become our competitors. Specifically, Michael Lambert, a director, is
a Senior Vice President of Dell; and another director, Thomas Casey, is a
Managing Director of Global Crossing. Of the members of our Executive
Advisory Council, Richard Lary is Senior Storage Architect of Compaq
StorageWorks; Janpieter Scheerder is President of Sun
Microsystems Network Storage Division; Karl Schubert is Vice President,
Storage Systems Architecture and Storage Systems Engineering for Dell
Computers Storage Division; and Paul Borrill is Vice President and
Chief Technology Officer of VERITAS Software Corporation. In addition, Roger
Marino, a director, was a co-founder and President of EMC Corporation; and
another director, Harold Dixon, was a senior vice president of EMC for
several years. These relationships may create actual or perceived conflicts
of interest for these individuals as a result of their access to information
and business opportunities proprietary to us and possibly useful to these
potential competitors.
We face risks associated
with international operations that could cause our financial results to
suffer
To be successful, we believe we must expand our international
operations. Therefore, we expect to commit significant resources to expand
our international operations and sales and marketing activities. We are
increasingly subject to a number of risks associated with international
business activities that may increase our costs and require significant
management attention. These risks include:
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longer sales cycles due to
cultural differences in the conduct of business and the fact that Internet
infrastructure is less advanced in some foreign jurisdictions;
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increased expenses
associated with marketing and delivering services in foreign
countries;
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general economic conditions
in international markets;
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currency exchange rate
fluctuations;
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unexpected changes in
regulatory requirements resulting in unanticipated costs and
delays;
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political risks in certain
countries;
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tariffs, export controls
and other trade barriers;
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longer accounts receivable
payment cycles and difficulties in collecting accounts receivable due to
language barriers, cultural differences in the conduct of business and
differences in enforcement regimes and dispute resolution mechanisms in
foreign countries; and
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potentially adverse tax
consequences, including restrictions on the repatriation of
earnings.
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If one or more of these
sources of risk were to materialize, our financial results may
suffer.
Risks Related to Legal
Uncertainty
If we are unable to
protect our intellectual property rights, we may not be able to compete
effectively
We do not have any patents and have filed only one patent
application with respect to our data storage services. We cannot be certain
that our current patent application or any future application will be
granted, that any future patent will not be challenged, invalidated or
circumvented, or that rights granted under any patent issued to us will
afford us a competitive advantage. We rely on a combination of copyright,
trademark and trade secret laws and restrictions on disclosure to protect
our intellectual property rights. These legal protections afford only
limited protection. Our intellectual property may be subject to even greater
risk in foreign jurisdictions. The laws of many countries do not protect
proprietary rights to the same extent as the laws of the United
States.
Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Any such litigation could result in substantial
costs and diversion of
resources. Finally, there can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar information or technology. Any failure by us
to adequately protect our intellectual property could have a material
adverse effect on our ability to compete effectively.
Defending against
intellectual property infringement and other claims could be time consuming
and expensive and, if we are not successful, could subject us to significant
damages and disrupt our business
Other companies, including our competitors, may obtain patents
or other proprietary rights that would prevent, limit or interfere with our
ability to make, use or sell our services. As a result, we may be found to
infringe on the proprietary rights of others. In the event of a successful
claim of infringement against us and our failure or inability to license the
infringed technology, our business and operating results would be
significantly harmed. Any litigation or claims, whether or not valid, could
result in substantial costs and diversion of resources. Intellectual
property litigation or claims could force us to do one or more of the
following:
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cease selling services that
incorporate the challenged intellectual property;
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obtain a license from the
holder of the infringed intellectual property right, which may not be
available on reasonable terms; and
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redesign our services or
our network.
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If we are forced to take any of the foregoing actions, our
business may be seriously harmed. Our insurance may not cover potential
claims of this type or may not be adequate to indemnify us for all liability
that may be imposed.
On June 21, 2000, we received a letter from EMC Corporation
alleging, among other things, that we and our executives have misrepresented
that EMC is an investor in StorageNetworks even though EMC is not an
investor, misappropriated confidential EMC information, targeted employees
of EMC for employment in violation of contractual commitments not to hire
EMC employees, adopted advertising slogans similar to EMCs, and
interfered with contractual relationships between EMC and certain of
EMCs customers. No legal proceedings have been brought by EMC, but the
letter suggests that EMC may commence legal proceedings against us seeking
substantial damages and/or injunctive relief. In addition, as a result of
this controversy EMC may terminate its professional services subcontractor
agreement with us described above or refuse to sell us additional hardware
for use in our S-POP data centers. We believe EMCs allegations are
without merit and intend to defend vigorously any legal proceedings which
EMC might commence against us.
Risks Related to the
Securities Markets and This Offering
Our stock price may be
volatile and could result in substantial losses for investors purchasing
shares in this offering
Prior to this offering, you could not buy or sell our common
stock publicly. An active public market for our common stock may not develop
or be sustained after this offering. The market for technology stocks has
been extremely volatile. The following factors could cause the market price
of our common stock in the public market to fluctuate significantly from the
price paid by investors in this offering:
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the addition or departure
of key personnel;
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variations in our quarterly
operating results;
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announcements by us or our
competitors of significant contracts, new products or services offerings
or enhancements, acquisitions, joint ventures or capital
commitments;
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our sales of common stock
or other securities in the future;
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changes in market
valuations of technology companies; and
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fluctuations in stock
market prices and volumes.
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Volatility in the market price of our common stock may prevent
investors from being able to sell their common stock at or above our initial
public offering price. In the past, class action litigation has often been
brought against companies following periods of volatility in the market
price of those companies common stock. We may become involved in this
type of litigation in the future. Litigation is often expensive and diverts
managements attention and resources and could materially adversely
affect our business and results of operations.
Management may use the
proceeds of this offering in ways that do not increase our profits or market
value
Our management will have considerable discretion in the
application of the net proceeds of this offering, and you will not have the
opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. The net proceeds may be used for
corporate purposes that do not increase our profitability or our market
value. Pending application of the proceeds, they may be placed in
investments that do not produce income or that lose value.
You should read the entire
prospectus carefully and should not consider any particular statement in
this prospectus or in published news reports, or any published financial
projections, without carefully considering the risks and other information
contained in this prospectus
A number of press articles in the last six months have mentioned
our services, customers, operating results, our position within our market,
rate of growth, future plans, the prices for our services, the cost savings
and benefits realized by customers using our services, the planned expansion
of our Global Data Storage Network, the growth of the market for our
services and other information about our business. While the information in
these articles was derived in some cases from interviews with our
management, the articles frequently have presented information out of
context and have not disclosed the related risks and uncertainties described
in this prospectus. We had no control over the content of these articles.
You should make your investment decision only after reading the entire
prospectus carefully, including the risks described in this section and
throughout the prospectus.
Examples of published information about us which may not be
accurate and has not been appropriately qualified with related risks include
the following:
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Statements as to the
planned expansion of our Global Data Storage Network, including the
predicted establishment of data centers in Amsterdam, Singapore, Finland,
Hong Kong, Toronto and Tokyo in the near future. Our expansion plans for
2000 include the establishment of data centers in the locations listed
under Continue to Expand our Global Data Storage Network and
Geographic Presence under Business on page 40 of this
prospectus. We are considering opening data centers in Hong Kong, Tokyo
and Toronto by the end of 2000, but do not yet have specific plans. We
will not open data centers prior to the end of 2000 in Amsterdam,
Singapore or Finland.
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The Wall Street Transcript
on February 9, 2000 published an interview with our Chief Executive
Officer, Peter Bell, which took place on January 18, 2000. Mr. Bell was
quoted as saying that we expect excellent quarter over quarter
growth. The market seems to be more robust than weve ever
anticipated, and weve been able to scale the business very quickly.
Were on a very rapid growth rate. These remarks are highly
speculative, because they represent the subjective judgment of Mr. Bell
and not the objective measurement of a third party. StorageNetworks
growth and ability to scale its business are subject to the risks and
uncertainties set forth in the prospectus.
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Mr. Bell was also quoted in
an article in The Boston Globe on January 27, 2000 as saying that
StorageNetworks has a nine-to-12-month lead over its
competitors. This statement was incorrect and is subject to the
competitive risks and uncertainties stated in this prospectus.
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An article in the November
24, 1999 issue of dbusiness.com includes the statement that
StorageNetworks estimates that its own storage services niche is a
$500 million market today, and growing in excess of 50 percent
yearly. The Company did not provide this market data. It is
inaccurate and should not be relied upon.
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The same article in the
November 24, 1999 issue of dbusiness.com included the following statements
concerning the cost savings to our customers through the use of our
storage services: StorageNetworks claims that its S-POP
deployment...offers customers a 64 percent ROI compared to in-house
services. Throw in the productivity and opportunity cost and the ROI jumps
to 24 percent with a cost savings well in excess of $1 million. We
believe our managed storage services offer most customers significant
savings in comparison to the cost of providing their own storage services,
but the analysis in this article is confusing and inaccurate. The level of
savings by any individual customer necessarily depends on that
customers internal resources, cost of capital, technical expertise
and other factors. The precise level of cost savings will thus vary from
customer to customer.
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The Wall Street Journal on
February 16, 2000 included the following statement in an article:
Mr. Bell says his service can save companies 25% off in-house
storage expenses. The savings, if any, achieved by each of our
customers or potential customers through the use of our services in
comparison to the use of in-house storage services are subject to many
variables as noted above and may not be 25%.
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A news release published by
ASP Industry News.com on February 7, 2000 quoted Mr. Bell as saying that
StorageNetworks enabl[ed] Internet companies...to grow exponentially
by completely eliminating the risk of down time or lost data. This
statement is not accurate, as StorageNetworks ability to reduce the
risk of down time and lost data is subject to the risks and uncertainties
set forth in this prospectus.
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An article appearing on
January 27, 2000 in MSNBC stated that we charge about $600,000 a
year to manage a trillion bytes, or a terabyte, of data, equivalent to 500
million pages of printed text. An article in the January 28, 2000
issue of Red Herring quoted Mr. Bell as stating that 85 customers pay an
average of $40,000 per month for our managed storage services. An article
about the Company in the April 10, 2000 issue of Business Week stated that
a company pays StorageNetworks about $50,000 per month for 1
terabyte of storage. The foregoing statements are not accurate as a
general indicator of the price any specific customer may pay for the
Companys services. The prices for our services depend on a number of
variables, including the nature of the customers computer system and
storage needs, the level of service selected by the customer, the amount
of storage used, the location of the customer and the S-POP data center
involved, and the duration of the customers contract.
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An article appearing on
February 11, 2000 in The MetroWest Daily News stated our intention to have
75 locations open by the end of the year. The Companys locations
include both corporate, sales and training offices and S-POP data centers.
The Company expects to have in excess of 50 S-POP data centers and
approximately 70 total locations operational by the end of the year, not
75 locations as was inaccurately stated in the article.
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We have received, and may continue to receive, a high degree
of media coverage, including coverage that is not directly attributable to
statements made by our officers and employees. To the extent any statements
appearing in the media are inconsistent with, or conflict with, information
contained in this prospectus, or relate to information not contained in this
prospectus, they should not be relied upon by prospective
investors.
Insiders will continue to
have substantial control over StorageNetworks after this offering and could
limit your ability to influence the outcome of key transactions, including
changes of control
We anticipate that the executive officers, directors and
entities affiliated with them will, in the aggregate, beneficially own
approximately 68% of our outstanding common stock following the completion
of this offering. These stockholders, if acting together, would be able to
influence significantly all matters requiring approval by our stockholders,
including the election of directors and the approval of mergers or other
business combination transactions.
Provisions of our charter
documents may have anti-takeover effects that could prevent a change in
control even if the change in control would be beneficial to our
stockholders
Provisions of our amended and restated certificate of
incorporation, by-laws, and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our
stockholders. For example, our Board of Directors is staggered in three
classes, so that only one-third of the directors may be replaced at any
annual meeting. Our by-laws limit the persons authorized to call special
meetings of stockholders and require advance notice for stockholders to
submit proposals for consideration at stockholder meetings. Additionally,
our certificate of incorporation permits our Board of Directors to authorize
the issuance of preferred stock without stockholder approval which could
have the effect not only of delaying or preventing an acquisition but also
of adversely affecting the price of our common stock.
There may be sales of a
substantial amount of our common stock after this offering that could cause
our stock price to fall
Following this offering, our current stockholders will hold in
the aggregate a total of 79,527,118 shares of common stock, including common
stock that will be issued upon the automatic conversion of our convertible
preferred stock, which they will be able to sell in the public market in the
near future. In January, 2000 we sold 6,012,843 shares of Series C
convertible preferred stock for aggregate consideration of approximately
$103,000,000. In February, 2000 we sold 1,758,240 shares of Series D
convertible preferred stock for aggregate consideration of approximately
$40,000,000. Based upon the number of shares outstanding as of April 30,
2000, upon the closing of this offering, these shares of Series C and Series
D convertible preferred stock will automatically convert into 13,783,926
shares of the 79,527,118 shares of common stock that will be held by our
current stockholders after this offering. Of the 88,527,118 shares that will
be outstanding upon the closing of this offering, assuming no exercise of
outstanding options or warrants:
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all of the 9,000,000 shares
offered under this prospectus will be freely tradable in the public
market;
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approximately 65,743,192
additional shares may be sold upon the expiration of 180-day lock-up
agreements, subject to the restrictions of Rules 144 and 701 that are
applicable to our affiliates; and
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approximately 13,783,926
additional shares may be sold after the expiration of 180-day lock-up
agreements subject to the restrictions of Rules 144 and 701.
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In general, under Rule 144, shares of our common stock that
have been held for at least a year may be sold 90 days after the date of
this prospectus, subject to volume and manner-of-sale restrictions. Under
Rule 144(k), shares of our common stock that are held by persons who are not
our affiliates may generally be sold without restriction, if those shares
have been held for at least two years. Under Rule 701, shares of our common
stock issued pursuant to a compensatory stock plan may generally be sold 90
days after the date of this prospectus, in reliance upon Rule
144.
Sales of a substantial number of shares of our common stock
within a short period of time after this offering could cause our stock
price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock.
SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as anticipate, believe,
could, estimate, expect,
intend, may, should, will
and would or similar words. For example, statements about the
levels of capital expenditures we plan to make in 2000 and over the next
five years, the number of S-POP data centers we expect to operate by year
end, projected revenue percentages and other forecasts and projections are
forward-looking statements. You should read statements that contain these
words carefully because they discuss our future expectations, contain
projections of our future results of operations or of our financial position
or state other forward-looking information. We believe that it
is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to
accurately predict or control. The factors listed above in the section
captioned Risk Factors, as well as any cautionary language in
this prospectus, provide examples of risks, uncertainties and events that
may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in
these risk factors and elsewhere in this prospectus could have a material
adverse effect on our business, results of operations and financial
position.
The net proceeds from our sale of 9,000,000 shares of common
stock will be approximately $225.0 million. If the underwriters
over-allotment option is exercised in full, the net proceeds will be
approximately $258.9 million.
The principal purposes of this offering are to establish a
public market for our common stock, to increase our visibility in the
marketplace, to facilitate future access to public capital markets, and to
obtain additional working capital.
We presently intend to use the net proceeds from this offering
for general corporate purposes, including capital expenditures
(approximately $30 million), increasing our sales and marketing capabilities
(approximately $30 million), and working capital. Contingent upon the
continued growth of our business and the availability of sufficient
financing, we currently plan to spend approximately $700 million over the
next five years, including in excess of a total of $100 million in 2000, on
the expansion of our Global Data Storage Network, including the expansion
and operation of existing S-POP data centers and the establishment and
operation of additional S-POP data centers. We plan to finance our
investment in this capital infrastructure, which we will use to operate more
than 50 S-POP data centers by the end of 2000, primarily with current and
future vendor financing, equipment lease lines and bank lines of credit, as
well as other financing arrangements. We are currently working toward
securing additional vendor financing and equipment lease lines and bank
lines of credit in order to satisfy our 2000 expansion plans. These plans
are subject to revision based on customer demand for our services, market
conditions and other factors. Although we plan to finance these capital
expenditures primarily through lease obligations and other financings, we
may allocate additional proceeds from this offering to that expansion. We
may also use a portion of the net proceeds to acquire or invest in
complementary businesses or products or to obtain the right to use
complementary technologies. We have no specific understandings, commitments
or agreements with respect to any such acquisition or investment. Pending
these uses, the net proceeds of this offering will be invested in
short-term, interest-bearing, investment-grade securities.
We have never declared or paid any cash dividends on our capital
stock. We presently intend to retain future earnings, if any, to finance the
expansion of our business and do not expect to pay any cash dividends in the
foreseeable future. Payment of future cash dividends, if any, will be at the
discretion of our board of directors after taking into account various
factors, including our financial condition, operating results, current and
anticipated cash needs and plans for expansion.
The following table sets forth our capitalization as of March
31, 2000:
|
|
on a pro forma basis after
giving effect to the conversion of our outstanding convertible preferred
stock into 54,109,118 shares of common stock immediately prior to the
closing of the offering; and
|
|
|
on a pro forma as adjusted
basis to reflect the sale of 9,000,000 shares of common stock at the
initial public offering price of $27.00 per share, after deducting the
underwriting discount and estimated offering expenses.
|
The shares of common stock to be outstanding after the offering
exclude: (1) 9,305,325 shares issuable upon exercise of outstanding options
as of March 31, 2000; (2) 260,164 shares issuable upon exercise of
outstanding warrants to purchase 130,082 shares of Series B convertible
preferred stock; and (3) 810,000 shares issuable upon exercise of
outstanding warrants to purchase 810,000 shares of Series D convertible
preferred stock.
|
|
As of March 31, 2000
|
|
|
Actual
|
|
Pro Forma
|
|
Pro Forma
As Adjusted
|
|
|
(in thousands, except share
data) |
Capital lease obligations,
less current portion |
|
$ 25,336 |
|
|
$ 25,336 |
|
|
$ 25,336 |
|
Stockholders
equity: |
Series A convertible preferred stock, par value $.01;
5,000,000 shares authorized; 5,000,000 shares
issued
and outstanding, actual; no shares issued and
outstanding
pro forma and pro forma as adjusted |
|
50 |
|
|
|
|
|
|
|
Series B convertible preferred stock, par value $.01;
10,294,080 shares authorized; 10,162,596 shares
issued
and outstanding, actual; no shares issued and
outstanding
pro forma and pro forma as adjusted |
|
102 |
|
|
|
|
|
|
|
Series C convertible preferred stock, par value $.01;
6,027,438 shares authorized; 6,012,843 shares
issued and
outstanding, actual; no shares issued and
outstanding
pro forma and pro forma as adjusted |
|
60 |
|
|
|
|
|
|
|
Series D convertible preferred stock, par value $.01;
2,758,240 shares authorized; 1,758,240 shares
issued and
outstanding, actual; no shares issued and
outstanding
pro forma and pro forma as adjusted |
|
17 |
|
|
|
|
|
|
|
Common stock, par value $.01; 600,000,000 shares
authorized; 25,151,875 shares issued and
outstanding,
actual; 79,260,993 shares issued and outstanding,
pro forma; 88,260,993 shares issued and
outstanding,
pro forma as adjusted |
|
252 |
|
|
793 |
|
|
883 |
|
Additional paid-in capital |
|
228,778 |
|
|
228,466 |
|
|
453,366 |
|
Deferred compensation |
|
(18,846 |
) |
|
(18,846 |
) |
|
(18,846 |
) |
Accumulated deficit |
|
(51,466 |
) |
|
(51,466 |
) |
|
(51,466 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
158,947 |
|
|
158,947 |
|
|
383,937 |
|
|
|
|
|
|
|
|
|
|
|
Total
capitalization |
|
$184,283 |
|
|
$184,283 |
|
|
$409,273 |
|
|
|
|
|
|
|
|
|
|
|
Our pro forma net tangible book value as of March 31, 2000 was
$157.0 million, or $1.98 per share. Our pro forma net tangible book value
per share represents the amount of our total tangible assets, reduced by the
amount of our total liabilities, and then divided by the total number of
shares of common stock outstanding after giving effect to the automatic
conversion of all shares of outstanding preferred stock. Dilution in net
tangible book value per share represents the difference between the amount
paid per share by purchasers of shares of common stock in this offering and
the pro forma net tangible book value per share of common stock immediately
after the completion of the offering. After giving effect to the sale of the
9,000,000 shares of common stock offered by us at the initial public
offering price of $27.00 per share, and after deducting the underwriting
discount and estimated offering expenses payable by us, our pro forma net
tangible book value at March 31, 2000 would have been $382.0 million or
$4.33 per share of common stock. This represents an immediate increase in
net tangible book value of $2.35 per share to existing stockholders and an
immediate dilution of $22.67 per share to new investors purchasing shares at
the initial offering price. The following table illustrates this dilution on
a per share basis:
Initial public offering
price per share |
|
|
|
$27.00 |
|
|
|
|
|
Pro
forma net tangible book value per share before the offering |
|
1.98 |
|
|
Increase per share attributable to new investors |
|
2.35 |
|
|
|
|
|
Pro forma net tangible book
value per share after the offering |
|
|
|
4.33 |
|
|
|
|
|
Dilution per share to new
investors |
|
|
|
$22.67 |
|
|
|
|
|
The following table summarizes on a pro forma basis after giving
effect to the offering, as of March 31, 2000, the differences between the
existing stockholders and the new investors with respect to the number of
shares of common stock and preferred stock purchased from us, the total
consideration paid to us and the average price per share paid:
|
|
Number
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Average
Price per
Share
|
Existing
stockholders |
|
79,260,993 |
|
89.8 |
% |
|
$204,104,954 |
|
45.7 |
% |
|
$ 2.58 |
New investors |
|
9,000,000 |
|
10.2 |
|
|
243,000,000 |
|
54.3 |
|
|
27.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
88,260,993 |
|
100.0 |
% |
|
447,104,954 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the preceding tables, the shares of common stock outstanding
exclude:
|
|
9,305,325 shares at a
weighted average exercise price of $1.36 were subject to outstanding
options as of March 31, 2000;
|
|
|
260,164 shares of common
stock issuable upon exercise of outstanding warrants to purchase 130,082
shares of Series B convertible preferred stock at an exercise price of
$4.92 per share; and
|
|
|
810,000 shares of common
stock issuable upon exercise of outstanding warrants to purchase 810,000
shares of Series D convertible preferred stock at an exercise price of
$22.75 per share.
|
To the extent outstanding options or warrants are exercised,
there will be further dilution to new investors.
SELECTED CONSOLIDATED
FINANCIAL DATA
You should read the selected consolidated financial data set
forth below along with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated
financial statements and the related notes. We have derived the consolidated
statement of operations data for 1998 and 1999, and the consolidated balance
sheet data as of December 31, 1998 and 1999 from our consolidated financial
statements that have been audited by Ernst & Young LLP, independent
auditors. The financial data for the three month periods ended March 31,
2000 and 1999 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which StorageNetworks considers necessary for a fair presentation
of the financial position and the results of operations for these periods.
Operating results for the three months ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the entire
year ending December 31, 2000. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein. Potentially dilutive common shares have been
excluded from the shares used to compute net loss per share because their
inclusion would be antidilutive.
|
|
Period from
October 5, 1998
(commencement
of operations) to
December 31,
1998
|
|
Year ended
December 31, 1999
|
|
Three months
ended March 31,
|
|
|
|
|
1999
|
|
2000
|
|
|
(in thousands, except per share
data) |
Consolidated Statement
of Operations Data: |
Revenues: |
Professional services revenues |
|
$ |
|
|
$ 3,203 |
|
|
$ |
|
|
$ 3,313 |
|
Managed storage services revenues |
|
|
|
|
720 |
|
|
|
|
|
1,307 |
|
Equipment revenues |
|
|
|
|
2,335 |
|
|
383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
|
|
|
6,258 |
|
|
383 |
|
|
4,620 |
|
Costs and
expenses: |
Cost of professional services revenues, excluding deferred
stock compensation |
|
9 |
|
|
5,343 |
|
|
115 |
|
|
4,817 |
|
Cost of managed storage services revenues, excluding
deferred stock compensation |
|
101 |
|
|
8,400 |
|
|
386 |
|
|
11,094 |
|
Cost of equipment revenues |
|
|
|
|
2,111 |
|
|
362 |
|
|
|
|
Sales and marketing, excluding deferred stock
compensation |
|
39 |
|
|
7,304 |
|
|
350 |
|
|
9,606 |
|
General and administrative, excluding deferred stock
compensation |
|
231 |
|
|
5,558 |
|
|
393 |
|
|
3,702 |
|
Product development, excluding deferred stock
compensation |
|
|
|
|
1,133 |
|
|
25 |
|
|
1,827 |
|
Amortization of deferred stock compensation* |
|
|
|
|
1,301 |
|
|
24 |
|
|
1,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses |
|
380 |
|
|
31,150 |
|
|
1,655 |
|
|
32,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(380 |
) |
|
(24,892 |
) |
|
(1,272 |
) |
|
(27,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
11 |
|
|
1,371 |
|
|
76 |
|
|
1,599 |
|
Interest expense |
|
|
|
|
(393 |
) |
|
|
|
|
(806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ (369 |
) |
|
$(23,914 |
) |
|
$(1,196 |
) |
|
$(27,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
share: |
Basic and diluted |
|
$ (0.02 |
) |
|
$ (0.98 |
) |
|
$ (0.05 |
) |
|
$ (1.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
24,400 |
|
|
24,407 |
|
|
24,400 |
|
|
24,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Amortization of deferred
stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of professional services revenues |
|
$ |
|
|
$ 229 |
|
|
$ 3 |
|
|
$ 165 |
|
Cost of managed storage services revenues |
|
|
|
|
71 |
|
|
2 |
|
|
77 |
|
Sales and marketing |
|
|
|
|
603 |
|
|
15 |
|
|
478 |
|
General and administrative |
|
|
|
|
251 |
|
|
|
|
|
261 |
|
Product development |
|
|
|
|
147 |
|
|
4 |
|
|
402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$ 1,301 |
|
|
$ 24 |
|
|
$ 1,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
As of
March 31,
|
|
|
1998
|
|
1999
|
|
2000
|
|
|
(in
thousands) |
Consolidated Balance
Sheet Data: |
|
|
|
|
|
|
Cash, cash equivalents and
short term investments |
|
$8,280 |
|
$34,815 |
|
$144,893 |
Working capital |
|
8,084 |
|
25,053 |
|
128,091 |
Total assets |
|
9,672 |
|
67,259 |
|
210,906 |
Capital lease obligations,
less current portion |
|
|
|
15,822 |
|
25,336 |
Total stockholders
equity |
|
8,668 |
|
37,009 |
|
158,947 |
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis
together with our consolidated financial statements and related notes to
those statements and other financial information appearing elsewhere in this
prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in such forward-looking statements due to
various factors, including, but not limited to, those set forth under
Risk Factors and elsewhere in this prospectus.
Overview
We are the first company to focus soley on providing data
storage as a service. We are creating the first global data storage network,
allowing our customers to connect their computer systems, or plug
in, to our network to store and access their data in much the same way
they obtain and consume electricity or telephone service. We are building
and expanding a dedicated fiber network which connects our storage point of
presence, or S-POP, data centers in major metropolitan areas. Our
metropolitan storage networks are then connected to each other and to a
central monitoring and control center through long distance fiber optic
connections. This combination of the long distance fiber optic connections
and the metropolitan area networks connecting our data centers comprises our
Global Data Storage Network. Customers can access a pool of data storage by
connecting to the network from either their own locations, which generally
must be located within 30 miles of an S-POP data center, or from a web
hosting facility where their servers are located and at which we have built
an S-POP data center.
We opened our first S-POP data center in Houston in May 1999.
Since then, we have opened 36 additional S-POP data centers in the
metropolitan areas of Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los
Angeles, New York, San Francisco, Seattle, Washington, D.C. and London. Some
metropolitan areas contain more than one S-POP data center. We expect to add
over 15 additional S-POP data centers in the metropolitan areas in which we
are currently located as well as in additional areas. We have specific plans
to open new centers in Austin, Detroit and Frankfurt. We are considering
several other geographic areas for expansion, both domestically and
internationally, including Hong Kong, Minneapolis, Philadelphia, Sydney,
Tokyo and Toronto. Our actual expansion and construction plans will vary
based upon a number of factors, including customer demand and acquisition,
general business conditions and the expansion and build plans of web-hosting
providers.
We operate our
S-POP data centers in facilities operated by web-hosting service providers
as well as non-web-hosting service providers. In both types of facilities,
we incur similar facility costs, such as charges for floor space, which are
based on the number of square feet occupied and our cost per square foot, as
well as additional costs for power, networking and communications. The
duration of our arrangements with our data center vendors generally ranges
from one to four years. Future minimum payments to our data center vendors,
which include AT&T, GlobalCenter, Exodus, Level 3 Communications, CO
Space, Phonoscope and Long Island Tech Center, totaled $17.9 million at
December 31, 1999.
The costs
incurred to establish and operate an S-POP data center include storage
hardware and software, networking equipment, facility costs and personnel
costs. The total costs incurred may be different from site to site because
some S-POP data centers may have more capital deployed to satisfy customer
demand. S-POP data centers with more customer penetration will have higher
costs of capital since we will have to deploy additional hardware, software
and networking equipment to provide services. It takes up to 90 days to
establish an S-POP data center. During that time, data storage, network,
communications and related equipment is deployed in the S-POP data center
and operations personnel are hired in order to provide services at the S-POP
data center. Therefore, we believe it will take more than 12 months for an
S-POP data
center to achieve operating profitability. To date, none of our S-POP data
centers has achieved profitability, and we have no historical evidence that
would indicate that an S-POP data center will ever achieve operating
profitability.
Since our inception, we have incurred significant losses and
negative operating cash flows. As of March 31, 2000, we had an accumulated
deficit of $51.5 million. We have not achieved profitability on a quarterly
or an annual basis. We expect to significantly increase our investment in
capital infrastructure as we open and operate additional S-POP data centers
and expand existing facilities and we will continue to increase our
operating, sales, marketing, product development and administrative
personnel. Therefore, we believe that we will continue to incur losses on a
quarterly and annual basis for the foreseeable future. The revenue and
income potential of our business is unproven, and our limited operating
history makes an evaluation of our company difficult. We believe that you
should not rely on the period-to-period comparison of our operating results
to predict our future performance. You must consider our prospects in light
of the risks, expenses and difficulties encountered by companies in new and
rapidly evolving industries. We may not be successful in addressing these
risks and difficulties.
In 1999, approximately 40% of our total revenues were derived
from customers to whom we provided professional services under our
subcontractor agreement with EMC Corporation. As a result of a controversy
with EMC, EMC may terminate its subcontractor agreement with us or refuse to
sell us additional hardware for use in our S-POP data centers. We have
already begun purchasing storage equipment from alternative vendors and
suppliers and believe we would have access to adequate sources of storage
hardware and software if EMC were to cease supply storage equipment to us.
If EMC were to terminate the subcontractor relationship for professional
services, and if we were unable to replace the professional services revenue
from EMC customers with professional services revenue from other customers,
our professional services revenues would be reduced and our operating
results would be harmed.
Revenues consist of fees from customer use of our managed
storage services and fees for professional services. In addition, we
generated revenue in 1999 from the sale of equipment to four customers
incidental to the initiation of managed storage services to those
customers.
We provide our managed storage services under service level
agreements with our customers which set forth monthly fees charged on a per
managed gigabyte rate and based on the amount of managed storage services
specified in the agreement and the type and complexity of such services.
Customers cannot decrease the amount of managed storage services and the
associated cost without our consent. However, customers may increase the
amount of storage capacity by paying additional fees. Managed storage
services revenues are recognized monthly as the services are provided.
Installation fees charged for managed storage services are recognized as
revenue on a straight-line basis over the term of the contract, generally
three to four years.
We provide our professional services under statements of work
with our customers, and we work on either a fixed price or time and
materials basis. Our professional services engagements generally consist of
assessments and implementations of a customers data storage systems
not related to our managed storage services. Our professional services
engagements vary in length, generally from one to three months, depending on
the scope of the services provided. Revenues from professional services are
recognized as the services are provided, with revenues on fixed price
contracts recognized using the percentage of completion method of
accounting, adjusted monthly for the cumulative impact of any revision in
estimates.
Equipment sales in 1999 involved the sale of data storage
equipment purchased initially by us and then sold to four customers as an
accommodation to facilitate their subsequent purchase of our managed storage
services. Equipment sales revenue is recognized when the equipment is
delivered to the customer or placed into service. We do not expect to sell
equipment to our customers as part of our regular operations in the
future.
Our cost of managed storage services revenues is comprised
primarily of the following costs related to the operation of our S-POP data
centers: facility costs; depreciation of capital equipment in our network;
salaries and benefits for our field and corporate operations personnel;
networking costs, including telecommunications and access charges and
networking equipment; fiber costs, including amortization of our right to
use fiber optic capacity; and maintenance and utilities. Our cost of
professional services revenues is comprised primarily of salaries and
benefits of consulting personnel. Cost of equipment revenues represents our
cost of data storage equipment sold to customers. Cost of managed storage
services revenues and professional services revenues also include an
allocation of general overhead items such as building rent, equipment
leasing costs and depreciation expense. We expect cost of revenues to
increase significantly in future periods as we continue to expand our Global
Data Storage Network in anticipation of increased sales activity and revenue
growth.
Our sales and marketing expenses are comprised primarily of
salaries and benefits of our product and corporate marketing and sales and
business development personnel, sales commissions, travel, sales and other
promotional materials, trade shows, consulting, and other sales and
marketing programs. Sales and marketing expenses also include an allocation
of general overhead items such as building rent, equipment leasing costs and
depreciation expense. In the future, sales and marketing expenses will also
include payments to parties, such as web-hosting providers and systems
integrators, who resell or market our services to customers. For example, we
have joint marketing arrangements with web-hosting providers including
GlobalCenter, AT&T Web Hosting Services and Exodus Communications, under
which we share with the web-hosting provider a percentage of the storage
services revenue received from customers at the web-hosting facility. The
share of revenue which we pay to the parties under these arrangements
currently ranges from 17.5% to 25%. We expect to continue to increase our
sales and marketing expenses in absolute dollars in future periods as we
increase the size of our sales force, promote our services, and pursue our
business development strategy.
|
General and
Administrative
|
Our general and administrative expenses consist primarily of
salaries and benefits of our administrative personnel, information
technology costs, facility costs associated with regional sales offices and
fees for outside professional advisors. We expect to increase our general and
administrative expenses in absolute dollars in future periods as we continue
to add staff and infrastructure to support our anticipated business growth
and due to the increased costs associated with being a public
company.
Our product and development expenses consist primarily of
salaries and benefits of our product development and engineering personnel,
depreciation of laboratory and quality assurance equipment, and fees for
third party development costs. We expect to increase our product development
expenses in absolute dollars in future periods to invest in new technology
for future service offerings and to evolve and improve our existing
technology.
|
Amortization of
Deferred Stock Compensation
|
We recognized deferred stock compensation of $1.1 million in
1998, $20.8 million in 1999 and $580,000 in the three months ended March 31,
2000, for stock options granted with exercise prices determined to be below
the fair value of our common stock. At March 31, 2000, we have $18.8 million
of non-cash deferred compensation, which will be charged to operations
through 2004. We expect to incur non-cash amortization of $5.2 million in
2000, $5.3 million in 2001, $5.3 million in 2002, $4.0 million in 2003 and
$100,000 in 2004.
Interest income consists of income received from the investment
of proceeds received from our financing offerings. We expect interest income
to increase in the short term as a result of our financing proceeds from our
recent preferred stock offerings as well as the anticipated proceeds from
this offering.
Interest expense consists of the imputed interest recognized
from payments of capital lease obligations. We expect interest expense to
increase in future periods as we continue to finance the expansion of our
Global Data Storage Network.
|
Provision for Income
Taxes
|
We incurred a net taxable loss in 1998 and 1999, and therefore
did not record a provision for income taxes in those periods. As of December
31, 1999, we had federal and state net operating loss carryforwards of $25.5
million available to offset future taxable income, which may be used,
subject to limitations, to offset future state and federal taxable income
through 2004 and 2019, respectively. We have recorded a valuation allowance
against the entire net operating loss carry- forwards because of the
uncertainty that we will be able to realize the benefit of the net operating
loss carryforwards before they expire.
Results of
Operations
Three months ended
March 31, 1999 and 2000
Revenues
Revenues increased from $383,000 in the three months ended March
31, 1999 to $4.6 million in the same period in 2000. Revenues in the three
months ended March 31, 1999 were represented by data storage equipment
sales. During the three months ended March 31, 2000, we had no data storage
equipment sales. We do not expect to sell equipment to our customers as part
of our regular
operations in the future. Professional services revenues and managed storage
services revenues accounted for 72% and 28%, respectively, of our total
revenues for the three months ended March 31, 2000. We did not realize
service revenues during the three months ended March 31, 1999.
Cost of Revenues
Cost of professional services revenues increased from $115,000
in the three months ended March 31, 1999 to $4.8 million in the same period
in 2000. The increase was caused by an increase in the number of
professional services personnel in the 2000 period. Cost of managed storage
services revenues increased from $386,000 in the three months ended March
31, 1999 to $11.1 million in the same period in 2000. The increase was
caused by the opening and operation of the 35 S-POP data centers and our
Global Operations Center, which were on-line during the 2000 period. We had
no active S-POP data centers, and our Global Operations Center was not
operational, during the 1999 period. Therefore, the 2000 period included the
associated costs we incur to operate the S-POP data centers, such as
facility costs, fiber costs, personnel costs, equipment costs, networking
costs and depreciation, whereas the 1999 period only included personnel
costs and some initial equipment and fiber costs. Cost of equipment revenues
were $362,000 in the three months ended March 31, 1999. Since we did not
sell equipment in the 2000 period, we did not incur the associated
costs.
Sales and Marketing
Sales and marketing expenses increased from $350,000 in the
three months ended March 31, 1999 to $9.6 million in the same period in
2000. The increase was caused primarily by an increase in the number of
sales and marketing personnel and an increase in promotional and advertising
activities in the 2000 period. In addition, we incurred $1.7 million of
expense in the 2000 period when we issued immediately exercisable stock
purchase warrants to managed storage services customers.
General and Administrative
General and administrative expenses increased from $393,000 in
the three months ended March 31, 1999 to $3.7 million in the same period in
2000. The increase was caused by an increase in the number of general and
administrative personnel in the 2000 period.
Product Development
Product development expenses increased from $25,000 in the three
months ended March 31, 1999 to $1.8 million in the same period in 2000. The
increase was caused primarily by an increase in the number of product
development personnel in the 2000 period. We added an engineering group
during the 2000 period, which accounted for the majority of the increase in
the number of product development personnel. In addition, in the 2000 period
we incurred depreciation expense on our lab equipment. The 1999 period
included minimal equipment and accordingly our depreciation expense was
lower.
Amortization of Deferred Stock
Compensation
Amortization of deferred stock compensation increased from
$24,000 in the three months ended March 31, 1999 to $1.4 million in the same
period in 2000. The increase was caused by higher deferred stock
compensation, which increased from $1.1 million as of December 31, 1998 to
$19.9 million as of December 31, 1999.
Interest Income
Interest income increased from $76,000 in the three months ended
March 31, 1999 to $1.6 million in the same period in 2000. The increase
resulted from our higher average cash and investment balances during the
2000 period.
Interest Expense
We incurred no interest expense in the three months ended March
31, 1999 and $806,000 of interest expense in the same period in 2000. The
2000 period included interest from our capital lease obligations. We had no
capital lease obligations in the 1999 period and therefore incurred no
related interest expense.
Period from October 5,
1998 (commencement of operations) through December 31, 1998 and the year
ended December 31, 1999
We commenced operations October 5, 1998 but had no revenue until
the first quarter of 1999. Accordingly, our expenses in 1998 were related to
the start-up of our operations and are not a meaningful reflection of the
ongoing operations of our business. The comparison of our full year of
operations in 1999 with the start-up operations in 1998 reflects the growth
in 1999 of our business, the expansion of our Global Data Storage Network,
and the addition of employees, resulting in substantial increases in all
financial statement categories.
Revenues
We recognized no revenue in 1998. In 1999, we recognized
revenues of $6.3 million. Approximately 40% of our total revenues during
1999 were derived from customers to whom we provided professional services
under our subcontractor agreement with EMC Corporation. Professional
services revenues accounted for $3.2 million, or 51% of total revenues for
1999. Managed storage services revenues accounted for $720,000, or 12% of
total revenues for 1999. Equipment revenues represented $2.3 million, or 37%
of total revenues for 1999, although we do not expect to sell equipment to
our customers as part of our regular operations in the future.
Cost of Revenues
Cost of professional services revenues was $9,000 for 1998 and
$5.3 million for 1999. The increase in cost of professional services
revenues was primarily the result of our hiring additional professional
services personnel during 1999. Cost of managed storage services revenues
was $101,000 for 1998 and $8.4 million for 1999. The increase in cost of
managed storage services revenues was attributable to our hiring of managed
storage services personnel and the opening and operation of 16 S-POP data
centers and our Global Operations Center in 1999. Cost of equipment revenues
was zero for 1998 and $2.1 million for 1999. Cost of equipment revenues in
1999 resulted from our sale of data storage equipment to customers as an
accommodation to facilitate their purchase of managed storage
services.
Sales and Marketing
Sales and marketing expenses were $39,000 for 1998 and $7.3
million for 1999. The increase in sales and marketing expenses was primarily
the result of the growth in the number of our sales and marketing personnel
in 1999, as well as increased marketing efforts initiated during
1999.
General and Administrative
General and administrative expenses were $231,000 for 1998 and
$5.6 million for 1999. The increase in general and administrative expenses
in 1999 was primarily attributable to increases in administrative and
management personnel as well as increased information technology, facilities
and recruiting costs and increased costs for outside
consultants.
Product Development
Product development expenses were zero for 1998 and $1.1 million
for 1999. The increase in product development expenses was primarily the
result of the hiring of product development personnel during 1999 as well as
the initiation of product development activities.
Amortization of Deferred Stock
Compensation
In connection with grants of stock options with exercise prices
determined to be below the fair value of our common stock on the dates of
grant, we recorded amortization of deferred stock compensation of $1.3
million in 1999. We did not incur amortization of deferred stock
compensation in 1998. As of December 31, 1999, our unamortized deferred
stock compensation was $19.9 million, of which approximately $5.2 million
will be amortized in 2000. In addition, we have granted stock options in
2000 that will result in increased deferred stock compensation and
amortization expense.
Interest Income
Interest income was $11,000 for 1998 and $1.4 million for 1999.
The increase in interest income was the result of higher average cash and
investment balances due to the preferred stock financings in
1999.
Interest Expense
Interest expense was zero for fiscal 1998 and $393,000 for 1999.
The increase in interest expense was the result of the initiation of capital
lease obligations during 1999.
Sequential Quarterly
Results Since Inception
The following table presents our operating results for each of
the six quarters ended March 31, 2000. The information for each of these
quarters is unaudited. In the opinion of management, all necessary
adjustments consisting of normal recurring adjustments, have been included
to present fairly the unaudited quarterly results when read in conjunction
with our audited financial statements and the related notes appearing
elsewhere in this prospectus. These operating results are not necessarily
indicative of the results of any future period.
|
|
Quarter Ended
|
|
|
Dec. 31,
1998
|
|
March 31,
1999
|
|
June 30,
1999
|
|
Sept. 30,
1999
|
|
Dec. 31,
1999
|
|
March 31,
2000
|
|
|
(in thousands) |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional services revenues |
|
$ |
|
|
$ |
|
|
$ 129 |
|
|
$ 828 |
|
|
$ 2,246 |
|
|
$ 3,313 |
|
Managed storage services revenues |
|
|
|
|
|
|
|
66 |
|
|
166 |
|
|
488 |
|
|
1,307 |
|
Equipment revenues |
|
|
|
|
383 |
|
|
245 |
|
|
1,307 |
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues |
|
|
|
|
383 |
|
|
440 |
|
|
2,301 |
|
|
3,134 |
|
|
4,620 |
|
Costs and
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of professional services revenues,
excluding deferred stock compensation
amortization |
|
9 |
|
|
115 |
|
|
411 |
|
|
1,283 |
|
|
3,534 |
|
|
4,817 |
|
Cost of managed storage services revenues,
excluding deferred stock compensation
amortization |
|
101 |
|
|
386 |
|
|
746 |
|
|
1,662 |
|
|
5,606 |
|
|
11,094 |
|
Cost of equipment revenues |
|
|
|
|
362 |
|
|
245 |
|
|
1,202 |
|
|
302 |
|
|
|
|
Sales and marketing, excluding deferred
stock compensation amortization |
|
39 |
|
|
350 |
|
|
1,058 |
|
|
1,852 |
|
|
4,044 |
|
|
9,606 |
|
General and administrative, excluding
deferred stock compensation amortization
|
|
231 |
|
|
393 |
|
|
755 |
|
|
1,449 |
|
|
2,961 |
|
|
3,702 |
|
Product development, excluding deferred
stock compensation amortization |
|
|
|
|
25 |
|
|
142 |
|
|
351 |
|
|
615 |
|
|
1,827 |
|
Amortization as deferred stock
compensation |
|
|
|
|
24 |
|
|
142 |
|
|
353 |
|
|
782 |
|
|
1,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses |
|
380 |
|
|
1,655 |
|
|
3,499 |
|
|
8,152 |
|
|
17,844 |
|
|
32,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(380 |
) |
|
(1,272 |
) |
|
(3,059 |
) |
|
(5,851 |
) |
|
(14,710 |
) |
|
(27,809 |
) |
Interest income |
|
11 |
|
|
76 |
|
|
66 |
|
|
615 |
|
|
614 |
|
|
1,599 |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
(79 |
) |
|
(314 |
) |
|
(806 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ (369 |
) |
|
$(1,196 |
) |
|
$(2,993 |
) |
|
$(5,315 |
) |
|
$(14,410 |
) |
|
$(27,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sequential quarterly growth in professional services
revenues resulted primarily from the increase in the number of professional
service engagements during each quarter. We performed 7, 29, 61 and 118
professional service engagements during the periods ended June 30, 1999,
September 30, 1999, December 31, 1999 and March 31, 2000,
respectively.
The sequential quarterly growth in managed storage services
revenues resulted primarily from the increase in the number of customers
during each quarter. We provided managed storage services to 3, 4, 10 and 26
customers during the periods ended June 30, 1999, September 30, 1999,
December 31, 1999 and March 31, 2000, respectively.
Cost of
Revenues
The sequential quarterly increases in cost of professional
services revenues were primarily the result of the growth in the number of
our professional services personnel in each quarter. The sequential
quarterly increases in cost of managed storage services revenues were
primarily attributable to the costs incurred in the opening and operation of
S-POP data centers in each quarter. The number of S-POP data centers
increased from 1 during the quarter ended June 30, 1999 to 8, 16 and 35
during the quarters ended September 30, 1999, December 31, 1999 and March
31, 2000, respectively. Cost of equipment revenues varied from quarter to
quarter, due to fluctuations in the timing of sales of equipment
revenues.
Sales and
Marketing
The sequential quarterly increases in sales and marketing
expenses were primarily the result of the growth in the number of our sales
and marketing personnel in each quarter, as well as increased marketing and
promotional efforts.
General and
Administrative
The sequential quarterly increases in general and administrative
expenses were primarily attributable to increases in administrative and
management personnel and expenses necessary to support and scale our
operations as well as increased information technology, facilities and
recruiting costs and increased costs for outside consultants.
Product
Development
The sequential quarterly increases in product development
expenses were primarily the result of increases in product development
personnel as well as increases in consulting services and depreciation of
equipment used to develop and further enhance the technology deployed in our
Global Data Storage Network.
|
Amortization of
Deferred Stock Compensation
|
The sequential quarterly increases in amortization of deferred
stock compensation was attributable to higher deferred stock compensation
recognized each quarter as we granted stock options to employees with
exercise prices determined to be below the fair market value of our common
stock.
Liquidity and Capital
Resources
Since inception, we have financed our operations primarily
through private equity financing transactions totaling approximately $203.0
million in proceeds through March 31, 2000. We have also
financed our operations through capital lease arrangements. At March 31, 2000,
we had cash and cash equivalents of $40.0 million, short-term investments of
$104.9 million and working capital of $128.1 million.
Our operations have required and will continue to require
substantial investments in capital equipment for the expansion and operation
of our Global Data Storage Network, including the purchase of hardware,
software and networking equipment. Capital expenditures were $8.7 million in
1999 and $15.7 million in the first quarter of 2000. In addition, we
incurred $21.0 million in capital lease obligations during 1999 and $13.5
million in the first quarter of 2000. Capital expenditures during 1999 were
primarily made to purchase storage hardware and software and networking
equipment for the expansion of our Global Data Storage Network, computer
equipment and office furniture. We funded these capital expenditures through
a combination of sales of equity securities and capital lease obligations.
Contingent upon the continued growth of our business and the availability of
sufficient financing or funds, we currently expect to incur approximately
$700.0 million in capital expenditures over the next five years including in
excess of $100.0 million in 2000 in connection with the expansion of our
Global Data Storage Network, including establishing, expanding and operating
new and existing S-POP data centers. Capital to be deployed in our S-POP
data centers will vary from site to site depending on the number of
customers receiving services from an S-POP data center. Therefore, our
expansion plans will result in capital expenditures in our currently
operational S-POP data centers as well as in our anticipated S-POP data
centers. We are currently seeking vendor financing, equipment lease
financing, bank equipment lines of credit and other potential debt
financings in order to satisfy our 2000 expansion plans. However, these
plans are subject to revision based on customer demand for our services,
market conditions and other factors.
Net cash used in operating activities totaled $673,000 in 1998,
and $16.0 million in 1999, and $16.8 million in the first quarter of 2000.
Our use of cash in 1998, 1999 and the first quarter of 2000 was primarily
attributable to the operating loss generated by our investment in the growth
of our business, which included an increase in personnel from nine at the
end of 1998 to 276 as of December 31, 1999, to 483 as of March 31, 2000,
offset by non-cash charges such as depreciation and amortization and
increases in accounts payable and accrued expenses.
Net cash used in investing activities totaled $84,000 in 1998,
$43.9 million in 1999 and $85.8 million in the first quarter of 2000. Our
cash used in investing activities in 1998 resulted primarily from the
procurement of capital equipment to commence operations, including computers
and equipment to be used in our first S-POP data center. Our cash used in
investing activities in 1999 and in the first quarter of 2000 resulted
primarily from our purchase of short-term investments offset by maturities
of such investments, as well as additional procurement of capital equipment,
principally Global Data Storage Network related equipment.
Net cash provided by financing activities totaled $9.0 million
in 1998, $51.6 million in 1999 and $142.6 million in the first quarter of
2000, which primarily reflects the proceeds received from private equity
offerings. During 1998, we raised $9.0 million from the sale of convertible
preferred stock and in 1999 we raised $51.0 million from the sale of
convertible preferred stock. In the first quarter of 2000, we raised $143.0
million from the sale of convertible preferred stock.
In October 1999, we entered into a capital lease agreement with
Metromedia Fiber Networks for the acquisition of fiber transport capacity
over a 20-year term. Our minimum commitment is approximately $88.0 to $96.0
million over the term of the agreement, which is approximately $367,000 to
$400,000 per month. During 1999, we secured two equipment lease lines of
credit totaling $20.0 million. At December 31, 1999, $18.6 million was
available under these equipment lines of credit. The equipment lease lines
of credit are available until September 2000 and are payable over 48-month
periods from the initiation of each lease schedule. In addition, we acquired
approximately $18.6 million of capital equipment through vendor financing
arrangements in 1999. Our
future minimum lease payments under capital equipment leases totaled $26.3
million at December 31, 1999. In February 2000, we entered into an agreement
with EMC Corporation whereby we committed to purchase $50.0 million in
storage hardware and software by December 31, 2000, and EMC agreed to engage
in joint marketing and selling efforts and to make various product
enhancements. As of March 31, 2000, we had purchased approximately $32.0
million of storage hardware and software under this agreement. We have
committed to purchase $5.0 million of software over a 24-month period from
VERITAS Software Corporation.
We entered into a number of operating leases and licenses for
our S-POP data centers and field offices during 1999. At December 31, 1999,
our minimum commitment for these leases and licenses totaled $28.1
million.
We expect to experience significant growth in our operating
costs for the foreseeable future in order to execute our business plan. We
also expect to open new domestic and international offices and establish and
operate additional S-POP data centers in order to support the needs of our
existing and anticipated customers. As a result, we estimate that these
operating costs will constitute a significant use of our cash resources. In
addition, we may use cash resources to fund acquisitions of complementary
businesses and technologies; however, we currently have no commitments or
agreements and are not involved in any negotiations regarding any of these
transactions.
We believe that the net proceeds from this offering, together
with our current cash, cash equivalents, short-term investments, equipment
lines of credit and vendor financing arrangements, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for at least the next 18 months. If we are not successful in completing this
offering, we believe we will meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months and longer
if we reduce the rate of our expansion. However, we may need to raise
additional funds to finance more rapid expansion of our business, develop
new services or acquire complementary businesses or technologies. In the
event that additional financing is required, we may not be able to raise it
on terms acceptable to us, if at all.
Quantitative and
Qualitative Disclosures about Market Risk
Nearly all of our revenues to date have been denominated in
United States dollars and are primarily from customers located in the United
States. We have European subsidiaries consisting of an S-POP data center and
sales offices located in England and a sales office located in Germany. We
also have a sales office located in Australia, and we intend to establish
other foreign subsidiaries in the future. Revenues from international
customers to date have not been significant. We incur costs for our overseas
offices in the local currency of those offices for staffing, rent,
telecommunications and other services. As a result, our operating results
could become subject to significant fluctuations based upon changes in the
exchange rates of those currencies in relation to the United States dollar.
Although currency fluctuations are currently not a material risk to our
operating results, we will continue to monitor our exposure to currency
fluctuations and, when appropriate, use financial hedging techniques to
minimize the effect of these fluctuations in the future. We do not currently
utilize any derivative financial instruments or derivative commodity
instruments.
Our interest income is sensitive to changes in the general level
of United States interest rates. We typically do not attempt to reduce or
eliminate our market risk on our investments because substantially all of
our investments are in fixed-rate, short-term securities. The fair value of
our investment portfolio or related income would not be significantly
impacted by either a 100 basis point increase or decrease in interest rates
due to the fixed-rate, short-term nature of our investment
portfolio.
Recent Accounting
Pronouncement
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133,
which is effective, as amended, for all quarters in fiscal years beginning
after June 15, 2000, establishes accounting and reporting standards for
derivative financial instruments and hedging activities related to those
instruments, as well as other hedging activities. As we do not currently
engage in derivative or hedging activities, we do not expect the adoption of
this standard to have a significant impact on our consolidated financial
statements.
We are the first company to focus solely on providing data
storage as a service. We provide managed data storage services and
professional services to our customers. Through our managed data storage
services, we store, manage and archive our customers data. Our
professional services assist customers in assessing their data storage needs
and designing appropriate data storage systems.
We are creating the first global data storage network, allowing
our customers to connect their computer systems, or plug in, to
our network to store and access their data in much the same way they obtain
and use electricity or telephone service. We are building a dedicated fiber
optic network which connects our Storage Point of Presence, or S-POP, data
centers in major metropolitan areas. Each S-POP data center is a storage
facility containing disk and tape storage systems. Our metropolitan storage
networks are connected to each other and to a central monitoring and control
center through long distance fiber optic connections. This combination of
long distance fiber networks and metropolitan storage networks creates our
Global Data Storage Network.
Our Global Data Storage Network currently includes 37 S-POP data
centers in 11 metropolitan areas in the United States and one in London. We
expect to have more than 50 S-POP data centers in operation in the United
States and selected international locations by the end of 2000. We are
focused exclusively on storage, and approximately 270 of our more than 500
current employees are storage experts who assist businesses in designing and
implementing their data storage strategies. Our customers include
established enterprises and Internet-based businesses that require large
volumes of data storage capacity in a wide range of industries, including
financial services, communications, media, retail, wholesale distribution,
energy and natural resources, health and education.
Industry
Background
Rapid Increase in the Volume and Importance of Stored
Data. Established enterprises as well as
Internet-based businesses are creating and storing a significant amount of
data. Continuous access to large customer or enterprise databases is
critical to selling products and managing a business. The volume of data
produced and stored is growing rapidly. Forrester Research estimates that
online storage for Global 2,500 companies will grow from an average of
15,000 gigabytes per company in 1999 to 153,000 gigabytes by 2003,
representing a compound annual growth rate of 78%. Managing and accessing
this volume of data is a significant challenge as 1,000 gigabytes of
electronically stored data is equivalent to approximately 27 million pages
of text. This growth in online storage is being driven primarily by
the:
|
|
need for continuous
availability and redundancy of data;
|
|
|
proliferation of online
commerce;
|
|
|
widespread implementation
of new enterprise applications, including enterprise resource planning,
sales force automation, supply chain and customer relationship management
systems;
|
|
|
creation of data
warehousing and complex data retrieval and compilation
systems;
|
|
|
adoption of new
communication media such as e-mail and Internet-based telephone
communications; and
|
|
|
increasing personalization
of consumer marketing and product development.
|
Data Storage is Increasingly Complex and
Costly. The evolution of computing
environments from single mainframes to distributed computing has led to
complex operating architectures linking multiple application, file, database
and communications servers to networked computers. This evolution has
significantly increased the complexity of data storage, access and
retrieval. Todays data storage requirements include:
|
|
instantaneous access to
large volumes of primary data, the data used and generated by a company on
an ongoing basis to run its business, relating to customers, employees,
inventory, accounts receivable, orders, financial performance and all
other aspects of business operations;
|
|
|
backup copies of essential
information, with no tolerance for loss of data;
|
|
|
redundant copies of data
bases or files at different locations to avoid loss of data during a power
outage, equipment failure or more serious disaster;
|
|
|
management of storage
capacity to meet rapidly expanding needs in a timely and cost-effective
manner; and
|
|
|
access throughout an
enterprise to multiple copies of large databases of valuable data, and the
simultaneous use of such data for a number of functions.
|
Designing, implementing and managing data storage systems in
this complex environment typically requires a business to evaluate and
integrate the multiple components of the storage systems, which include
storage devices, communication equipment, software and transmission media.
These diverse components are available through multiple vendors and are
difficult to integrate due to the lack of interoperability standards. The
heightened complexity of storage systems also makes it difficult for
information technology personnel to fully understand and remain current on
new developments in storage technology, which often results in an incomplete
evaluation and an untested decision. As a result, companies that implement
and manage their own operating environment for data storage can frequently
suffer from:
|
|
difficulty in managing the
increasing complexity of data storage and use;
|
|
|
inadequate business
continuity, disaster recovery and data replication plans;
|
|
|
potentially unmanageable
and unpredictable information technology expenditures; and
|
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shortages in storage
capacity arising from unpredictable surges in volume
requirements.
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The increasing complexity of designing, implementing and
managing data storage systems has led to an increase in the aggregate amount
of expenditures on these systems, even though the cost of some components of
the system have decreased. Forrester Research estimates that storage
expenditures as a percent of total spending on computing systems for an
average Global 2,500 firm are expected to increase from 4% in 1999 to 17% in
2003.
The Need for Networked Storage
Systems. To efficiently manage the rapidly
increasing volume of data that is collected and stored, companies require
storage flexibility and functionality that is typically unavailable through
a traditional data storage configuration that links a single computer to a
single storage device. New technologies and the increasing availability of
fiber optic bandwidth are making possible the creation of storage area
networks that can link multiple servers to multiple storage resources
through a dedicated high-speed network. Storage area networks enable
high-speed data access and movement, more flexible configurations, improved
utilization of storage capacity, centralized storage management and online
storage resource deployment. New, enabling technologies that permit the
rapid transfer of data include:
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fiber optical networking,
technologies that transfer data by transferring light pulses through a
thin fiber optic cable rather than through electrical signals over much
thicker copper cables, thereby providing greater speed, distance and
security for data transfers and allowing equipment separated across a
metropolitan area to operate as if it were located in the same computer
room;
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new communication
protocols, or languages, such as Fibre Channel Protocol, which define how
certain signal patterns, such as light flashes, are interpreted;
and
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dense wavelength
division multiplexing, which allows multiple optical signals to be
transferred concurrently on the same strand of fiber glass, typically
across a metropolitan area, significantly increasing the economic
efficiency of a metropolitan optical network.
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These new technologies have created the opportunity to establish
a storage area network that can free businesses from the need to build and
operate their own internal data storage infrastructures. By storing and
accessing their data through a global storage network established and
managed by a third-party provider, businesses can cost-effectively satisfy
their data storage requirements and focus their resources on their core
competencies. A global storage network can provide users with functionality
and flexibility that they could not achieve independently and a competitive
advantage over other businesses that do not have access to a global data
network. Through such a network, businesses would have access to all of the
technologies and components which make up a storage area network without
incurring the cost of purchasing such components. A global data network
reduces the cost of managing data, which can be several times the actual
cost of the data storage equipment, by relieving businesses from the need to
hire information technology experts and instead entrusting the management of
data to storage focused professionals who are more efficient at implementing
and managing storage and more familiar with the most recent technological
developments in storage. A global data network also permits the management
of diverse storage devices from multiple vendors through custom designed
software that interacts with all such devices.
We believe that there is a significant market opportunity for a
company that has both the infrastructure and expertise necessary to provide
comprehensive data storage services to data-intensive businesses. Dataquest
estimates that the overall storage utility market will grow from under $10
million in 1999 to $8 billion by the end of 2003.
StorageNetworks
Services
Through our Global Data Storage Network we deliver a full range
of managed data storage services, including storage of customers
primary data, tape back-up and restoration of data, and multiple, offsite
copies of primary data, that can be deployed more quickly, flexibly and
cost-effectively than can be achieved by our customers on their own. By
managing our customers data storage needs efficiently and securely, we
allow them to concentrate on running their core businesses. We believe that
our services provide the following key benefits to our
customers:
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Trusted Storage
Services. Our services offer a high degree
of reliability built around continuous availability, a dedicated network
and secure facilities. We average only two to four brief periods per year
of downtime for maintenance and system upgrades that are scheduled in
advance in order to minimize disruption to the customer. We commit to
deliver a customers storage needs through comprehensive service
level agreements that guarantee that our services will meet or exceed
specific performance criteria, including data and system availability,
successful performance of back-ups and overall infrastructure and data
security.
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In-Depth Data Storage
Expertise. We have rapidly assembled a
growing staff of approximately 270 storage experts who focus exclusively
on data storage technology and network implementation. Our expanding
professional staff delivers storage services that address
all aspects of our customers data storage requirements, including
storage of a customers primary data, storage area network design and
deployment, and backup, restore and business continuity strategies. We
have developed a knowledge management system to create replicable best
business practices that build upon previous experiences and proven
services.
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A More Cost-Effective
Alternative. We offer customers data
storage services that would be very difficult for them to achieve on their
own, at prices that would be extremely difficult to replicate. Our network
permits customers to access, rather than purchase on their own, the
highest availability storage devices, spreading the cost over multiple
users while providing the same capability. In addition, the availability
of dedicated fiber optic cable in metropolitan areas is limited, and the
cost is prohibitive to many customers. We purchase fiber optic cable in
large volumes and, through available technology, share individual cables
between multiple customers, further lowering our costs. Our Global Data
Storage Network also reduces the cost of managing data, which can be
several times the actual cost of the data storage equipment, by relieving
our customers of the need to hire information technology experts or
attempting to manage their data on a part-time basis with unqualified
system administrators or operators. We believe that, because our staff of
storage professionals focuses exclusively on storage and undergoes
extensive training in storage technologies, we are more efficient at
implementing and managing storage technologies than are our customers. Our
Global Data Storage Network also assists our customers in implementing
web-based applications that require their data be distributed globally.
Global distribution provides end users of the customers application
with rapid browser response, enhancing satisfaction and avoiding
loss of those end users. The many locations in our Global Data Storage
Network enable this capability, even if a customer does not have staff or
facilities in these disparate geographical locations, greatly reducing the
customers overall cost.
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Rapid Implementation of
Services. We offer immediate, networked
storage services that can be implemented more quickly than the customer
could accomplish internally. Our relationships with hosting, hardware,
software and communications vendors permit us to procure network
components rapidly and enhance the capacity and capability of our network.
We can deliver managed storage services in one to four weeks, depending on
the customers requirements and whether additional equipment must be
procured to meet the customers requirements.
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Highly Flexible and Expandable Storage
Options. Our customers can choose from our
range of managed storage services, including primary data storage, tape
back-up and restoration of data, and multiple, offsite copies of primary
data, to select the type of service that best suits their particular
needs. Also, customers can add additional storage capacity and services as
their businesses grow or their needs change.
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The StorageNetworks
Strategy
Our objective is to establish StorageNetworks as a premier data
storage services provider. Key elements of our strategy to achieve this
objective include the following:
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Maintain Market Position and Extend Brand
Awareness. We believe we have played a
significant role in creating and defining the storage services provider
market and plan to further extend our brand name and enhance our position
in this market. To promote our brand, we intend to expand our corporate
marketing and advertising efforts and our joint marketing and sales
efforts with web hosting providers and storage equipment manufacturers and
providers. We plan to pursue additional relationships with other similar
businesses. Our joint marketing and sales arrangements include agreements
through which web hosting and application service providers market and
resell our services to their end user customers, agreements with hardware
and software manufacturers through which we work with those manufacturers
to promote and
sell our services to potential purchasers of the manufacturers
products, and referral and joint selling agreements with system
integrators and other service providers. Our goal is to equate the
StorageNetworks brand with trusted enterprise data storage
services.
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Continue to Expand our Global Data Storage Network
and Geographical Presence. We plan to
continue to invest in and expand our Global Data Storage Network. As we
add new cities and countries to our network, we will increase the number
of customers to whom we can provide services. This expanded network will
support our customers increasing storage needs by allowing them to
balance, replicate, share, move and store their data more efficiently than
they could do on their own. Our Global Data Storage Network currently
includes 37 networked S-POP data centers, and we expect to increase this
number to more than 50 by the end of 2000, including new facilities in
Austin, Detroit, and Frankfurt. We are currently considering new
facilities in Minneapolis, Philadelphia, Sydney, Hong Kong, Tokyo, and
Toronto, but we have no specific plans to open centers in those locations
by the end of 2000.
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Rapidly Accumulate Storage Expertise and Build
Best Practices. To maintain our competitive
position in the data storage services provider market, we plan to continue
to attract and retain highly qualified storage professionals. We intend to
continue to leverage the knowledge base created by these professionals to
develop and apply company-wide best business practices and storage
services methodologies. We have created internal systems that allow us to
continually monitor the services we are providing our customers in order
to identify innovative and repeatable services that can be expanded
readily to meet customer requirements. We believe that storage
professionals are attracted to StorageNetworks because we are focused
exclusively on storage. By offering our storage experts a role that
generates revenue and plays a significant part in the growth and success
of our business, StorageNetworks provides these experts with career
opportunities and advancement typically unavailable in other
organizations, where storage is regarded as a cost of doing business
rather than a primary focus.
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Expand Industry
Relationships. We intend to continue to
invest in and enhance our existing relationships with web hosting
providers, storage hardware and software vendors, and optical fiber
providers, as well as to pursue new relationships. We have established
relationships with businesses in the following areas to promote our brand,
expand our customer base and enhance our managed storage
services:
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web hosting providers, such
as AT&T Web Hosting Services, Exodus Communications and GlobalCenter.
We have entered into joint marketing and services agreements with these
providers, pursuant to which they resell or market our data storage
services to their clients and receive a percentage or portion of the
revenues attributable to such services;
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storage hardware and
software vendors, such as Brocade Communications Systems, Inc., Compaq,
Dell, Legato Systems, Network Appliance, Inc., Sun Microsystems, Inc. and
VERITAS Software. We have entered into volume purchase agreements or have
purchase arrangements with several of these vendors pursuant to which they
provide us with products that we use to create our comprehensive storage
services. Our technology and engineering group is also working with these
vendors to qualify or modify their products to meet our
requirements;
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Intra-city optical fiber
providers, such as Metromedia Fiber Network, with whom we have entered
into a volume purchase agreement for access to dark fiber, which is
installed fiber optic cable that does not carry a signal, allowing us to
build private and secure connections to our customers and between our
S-POP data centers; and
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long distance fiber
carriers, such as Global Crossing, with whom we have a preferred supplier
agreement, that link our metropolitan storage networks.
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Many of these entities or
their affiliates are also stockholders of our company. Our stockholders
include an affiliate of Dell, an affiliate of GlobalCenter and Global
Crossing, Exodus Communications, an affiliate of Compaq, Sun Microsystems,
Inc., Brocade Communications Systems, Inc., Network Appliance, Inc. and
VERITAS Software.
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Expand and Enhance Our Storage Service
Offerings. We plan to expand and enhance
our current storage service offerings. We continually assess our existing
service offerings and seek to develop proprietary technology that improves
our customers ability to access our services. Recently, we
introduced a storage management tool, our Virtual Storage Portal software,
that allows our customers to monitor and manage their storage utilization,
availability and capacity remotely through a web browser. We believe that
by offering valuable new services and continuing to improve our existing
services, we will increasingly be viewed by our customers as their single
trusted source of managed storage services.
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Target Customers With Greatest Need for Our
Managed Storage Services. We target
businesses that generate and rely upon large and rapidly growing volumes
of critical
data businesses that we believe are particularly well
served by our services. When time to market is critical to a
companys success, the speed with which we make our services
available, typically between one and four weeks, is of particular value.
For businesses with rapidly growing and more complex data needs, we can
quickly add additional storage capacity and capability. We believe that by
targeting customers with the greatest need for our services, and by
continuing to successfully deploy our managed storage services to them, we
will be able to further expand our customer base.
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Service
Offerings
We offer a comprehensive suite of managed data storage services
that is designed to provide businesses with reliable and secure data storage
services that can be readily expanded to meet and manage their critical data
storage needs. We call these offerings our PACS services, which stands for
Protection, Availability, Continuity,
Scalability and Security of data. We also offer comprehensive
professional services, advising our customers on the best design,
implementation and management of their data storage environment.
PACS Managed Storage
Services
Our PACS services provide:
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professional service
expertise for the assessment, implementation and management of a
customers storage environment;
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storage services that grow
as a customers business grows;
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continuously monitored
secure data centers;
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continuous data
availability through enhanced storage and network reliability;
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redundancy to minimize
system downtime;
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fast and reliable
connections through our secure Global Data Storage Network;
and
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tested and evaluated
high-quality hardware and software that adapt to a customers current
and future needs.
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Our customers purchase our PACS services through comprehensive
service level agreements with typical terms of three to four years. Our
service level agreements guarantee that our services will meet or exceed
specific performance criteria, including data and system availability,
successful performance of back-ups and overall infrastructure and data
security. Customers commit to pay for a minimum usage level over the
contract term. Typical contracts also include terms that permit customers to
add additional managed storage capacity for additional fees over the term of
the contract.
The following diagram illustrates how our services address the
needs of our customers:
[Diagram displays SafePACS,
BackPACS and DataPACS/NetPACS services next to Organization Need for Zero
Data Loss, Data Protection and Storage on Demand, respectively.]
Our current managed storage service offerings are as
follows:
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DataPACS Primary Data Storage
Services. Our DataPACS services provide
hard disk-based storage of a customers primary data, the data used
and generated by a customer in its business operations. Through this
service, customers can directly access their data stored at our S-POP data
centers. As our customers businesses grow, our DataPACS services can
be expanded to meet their needs, adding storage devices, capacity and
servers to the network without disrupting access to existing stored data.
Pricing for DataPACS services is based on a dollar per managed gigabyte
per month basis. List prices for DataPACS services begin at $125 per
managed gigabyte per month, with discounts available for volume
usage.
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NetPACS Network Attached Storage
Services. Our NetPACS services provide hard
disk-based storage of primary data for customers with multiple networked
servers. Rather than being directly attached to the storage devices, the
customers servers are connected to one or more NetPACS file servers
by a separate local area network. List prices for NetPACS services begin
at $125 per managed gigabyte per month, with discounts available for
volume usage.
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BackPACS Data Backup and Restore
Services. Our BackPACS services make copies
of customer data, usually on magnetic tape media, that are archived and
remotely stored. Backup copies of data are useful to restore an
application or data file that may have been inadvertently deleted by a
user, or corrupted due to a software failure. Our BackPACS services free a
customers skilled information technology professionals from
performing non-productive and costly backup procedures. Pricing for
BackPACS services is based on a dollar per backed-up gigabyte, or BGB,
basis. A BGB is a unit of storage written to tape media. Each month, a
typical customer using BackPACS services consumes backed-up gigabyte
quantities estimated between four and twelve times the number of DataPACS
managed gigabytes used in that month. List prices for BackPACS services
begin at $17 per backed-up gigabyte, with discounts available for volume
usage. Customers contract for a minimum amount of BGBs per month and pay
additional fees for usage beyond their minimum commitment.
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SafePACS Remote Real-Time Data Copying
Services. Our SafePACS services protect
customers from site failure, due to events such as building fires or
natural disasters, which may destroy or render unusable the data center
that houses their primary data. Even if a customers building is
destroyed, our customers data will be protected and quickly
available to resume operations. Our SafePACS services provide real-time
mirrored copies of the customers primary data, using remote site
simultaneous data storage replication technologies, for the highest level
of data protection. SafePACS services are also billed on a dollar per
managed gigabyte per month basis. List prices for SafePACS services begin
at $190 per managed gigabyte per month, with discounts available for
volume usage.
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The following table summarizes the features of our managed
storage service offerings. All four services can be deployed within one to
four weeks depending on the customers requirements and whether
additional equipment must be procured. The actual prices paid by our
customers for our managed storage services depend on a number of variables,
including the nature of the customers computing system and storage
needs, the level of service selected by the customer, the amount of storage
capacity used by the customer, the location of the customer and the S-POP
data center from which the services are provided, and the duration of the
customers service level agreement. Currently, a customer located
within a web-hosting facility at which we have an S-POP data center, and
with a standard computing environment that can be serviced by a standard
storage architecture, pays approximately $70.00 per managed gigabyte per
month when purchasing a typical combination of our managed storage
services.
Service |
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Features |
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DataPACS
Services |
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Replace or complement
the need for on-site storage of primary data |
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Ability to rapidly
add capacity to meet both temporary and permanent
requirements |
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Point-in-time copies
of data for full-size database testing of new
applications |
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NetPACS
Services |
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Replace or complement
the need for on-site storage of primary data |
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Multiple web servers
can be attached to a single file server |
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Permits multiple
servers to access the same data |
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BackPACS
Services |
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Scheduled full and
incremental backups |
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Secured vaulting for
disaster recovery |
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Reduces system
downtime and the time required for backups |
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Reduces data
consolidation challenges while lowering risks of data
corruption |
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SafePACS
Services |
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Remote site
simultaneous data copying |
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Complete data loss
protection and protection from data center or storage
hardware failure |
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Additional
point-in-time copies of remote copy of data permit application
testing and protection from data corruption |
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Geographically
diverse data copying infrastructure |
Professional
Services
We offer a full range of professional services that can be
purchased on a stand alone basis or as part of our managed storage services
offerings. Our experts have extensive experience in helping customers design
their primary data storage systems and optimize their existing storage
infrastructure. Our professional services experts offer in-depth storage
networking knowledge that can be applied directly to each customers
storage environment, and tailored to fit each customers specific
business requirements. We offer expertise in the following
areas:
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primary data
storage requirements, to address basic storage needs;
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storage area
networks, to solve performance, capacity growth and distance
issues;
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backup and
restore strategies, to prevent data loss and enable efficient data
recovery; and
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business
continuity strategies, to allow businesses to operate without
interruption.
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Our professional service experts implement a three-step process
to provide our customers with optimal storage advice and
environments:
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Assessment. Our storage
experts evaluate the customers information technology environment in
connection with its business goals and make specific recommendations for
improving efficiency, minimizing risks and maximizing the business
benefits of the customers data storage infrastructure.
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Implementation. Our
storage experts conduct extensive pre-deployment testing of storage
infrastructure and recommendations to minimize interruptions during actual
deployment.
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Management. We provide
full-service, managed data services through our suite of PACS service
offerings, which include ongoing consultation with customers regarding
their present and future storage needs.
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Infrastructure
Global Data Storage
Network
Our Global Data Storage Network is a high-speed network that
supports multiple communications protocols, or languages, such as Fibre
Channel, Gigabit Ethernet and Escon, that define how certain signal
patterns, such as light flashes, will be interpreted. Protocols are similar
to human languages, in which the same sound will mean different things
depending upon the language in use. Computer systems and storage devices can
use one or more of these protocols to transfer data. The Global Data Storage
Network provides secure, fast and reliable connections between our customers
and our S-POP data centers. The Global Data Storage Network links our S-POP
data centers together across regional boundaries for redundancy and data
transfer, links our S-POP data centers to web-hosting service providers,
application service providers and disaster recovery service providers, and
links us and our customers to various global fiber optic
networks.
Storage Points of
Presence (S-POP) Data Centers
All but two of our S-POP data centers are located in facilities
operated by web hosting service providers. S-POP data centers located at web
hosting facilities provide us access to an installed base of potential
customers. Our S-POP data centers are located in Atlanta, Boston, Chicago,
Dallas, Denver, Houston, Los Angeles, New York, San Francisco, Seattle,
Washington, D.C., and London. A typical S-POP data center at maturity is
designed with a storage capacity of over 100,000 gigabytes of online disk
storage and contains all the tools, diagnostic equipment, and available
spare equipment to maintain a high availability environment.
Our S-POP data centers feature continuous security monitoring
and have redundant power with uninterruptible power supply and back-up
diesel generator power, primary and secondary cooling systems, and water
detection and fire suppression systems. Our S-POP data centers also have
redundant array of independent disks systems, tape storage devices and
storage management software. Several layers of access control and event
monitoring protect each center.
Each S-POP data center is monitored locally by our trained
storage service professionals, and is also continuously monitored from our
Global Operations Center, which is located at our corporate headquarters in
Waltham, Massachusetts. Remote monitoring and management is provided via our
S-POP Manager control center, which is connected to the Global Operations
Center over our dedicated network.
StoragePort Access
Channel
Our StoragePort access channel is a plug in device
that allows our customers access to our storage services. These devices are
located either at the customers own facilities, which generally, based
upon current technology, must be within 30 miles of an S-POP data center, or
at a web hosting facility and allow our customers to access our managed
storage services simply by plugging their servers into a StoragePort access
channel.
Virtual Storage Portal
Software
Our Virtual Storage Portal software is a proprietary, web-based,
storage management tool that allows customers using our DataPACS and
SafePACS services to monitor their historical and current utilization,
availability and allocated storage capacity. The Virtual Storage Portal
software provides these customers with the following information about their
managed storage resources:
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Availability. Reports show
users the availability of services over the last week and month as well as
trends in availability over time.
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Capacity and
provisioning. Reports show changes in capacity
allocation and help customers predict future storage capacity
requirements. These reports allow businesses to allocate storage usage
among their various departments.
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Utilization,
performance and response time. Reports create
graphical views of storage utilization over time, which allows users to
perform application load balancing to redistribute usage. These features
also allow users to predict future utilization requirements.
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Security. Secure login
procedures prevent unauthorized users from viewing or controlling storage
resources while audit reports identify all account activity. Accounts can
be set up so that various departments within an enterprise can login and
view their storage resources, without accessing those of other
departments.
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Service and
change management. Customers can submit change
requests directly to StorageNetworks customer service and operations
groups and view the status of pending requests.
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Technology and
Engineering
Our technology and engineering group designs, develops and
maintains services that meet or exceed the performance guarantees set forth
in our service level agreements. We investigate and test products from
multiple vendors and integrate them into reliable services that can be
rapidly implemented. These integrated services configurations are collected
and stored in our knowledge management system and can be easily replicated
for customers with similar technology infrastructures. This group is also
responsible for the expansion and continued development of the Global Data
Storage Network infrastructure, maintaining its security and integrity, and
for developing management tools, such as the Virtual Storage Portal
software, that enhance our suite of services.
Our technology and engineering professionals work closely with
and support our professional services, marketing, sales and operations
groups, keeping those groups abreast of new storage services that we can
offer and to receive feedback on existing services. The technology and
engineering group has established systems for incorporating best practices
that can be applied by our professionals worldwide to ensure that
consistent, high quality service is delivered to each customer. Members of
the group also maintain regular communication with vendors, standards bodies
and research institutions to remain current on emerging technologies,
helping us influence the design, standardization and development of storage
technologies and products. The technology and engineering group is comprised
of 46 storage professionals, the majority of whom are located in Waltham,
Massachusetts, and we are currently establishing labs in Colorado Springs,
Colorado and London.
Customers
We have established a diversified base of established enterprise
and Internet-based customers in a wide range of industries, including
financial services, communications, energy and natural resources, health and
education. As of June 2, 2000, we had contracts for managed storage services
with 73 customers. The following is a list of those managed storage services
customers who have consented to be named in this prospectus:
Allegrix
AristaSoft
BestBuy.com
BlueMeteor,
inc.
Bluetrain.com
BROCADE
Business.com
Cephren, Inc.
ClickThings.com
Computer.com
Commerx
Credit Suisse First
Boston
Cybersites
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eCircles.com
eCredit.com
ecoutlook.com
Enmed
FleetBoston
Financial
GeoNet
Huddle247
Ibelong
Networks
INC2inc
Juniper
Networks
Knight
Securities
Lycos
Merrill Lynch
mValue.com
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Ofoto
Planet Portal
RestaurantPro.com
Revenio
Techtarget.com
Tufans
Technology
Ustreamit
Vastar
Resources
Vistaprint
x-Collaboration
X:drive
Yahoo!
YesMail.com
ZoneTrader.com
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We have a Subcontractor Agreement with EMC under which we
perform professional services for various EMC customers. Pursuant to this
Agreement, we are engaged by EMC through separate statements of work to
deliver professional services to these customers. We are compensated by EMC
on a flat hourly rate basis. This Agreement may be terminated without cause
by us or by EMC upon written notice to the other party. In 1999, under this
Agreement we performed these services for over 60 customers and our revenue
from these services accounted for approximately 40% of our total revenues.
As a result of allegations recently made by EMC against us, it is likely
that our professional services relationship with EMC will terminate or not
continue in the future on the same terms as it has in the past. We have
entered into similar agreements with other equipment manufacturers,
including Brocade Communications Systems, Inc., Compaq, Dell and Network
Appliance, to provide professional services to customers of these
companies.
Marketing, Sales and
Business Development
We market our services through a marketing program that uses a
variety of media and channels, including a direct sales force, sales
channels and referral programs.
Our sales and marketing channels and referral programs
include:
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web hosting service
providers, such as AT&T Web Hosting Services, Exodus Communications
and GlobalCenter, who resell or market our services to customers located
in their facilities;
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storage hardware and
software vendors, such as Brocade Communications Systems, Inc., Compaq,
Dell, Legato Systems, Network Appliance, Inc., Sun Microsystems, Inc. and
VERITAS Software, with whom we share sales leads and opportunities;
and
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providers of complementary
services, including system integrators such as KORE Partners, Inc. and
SiteSmith and technology providers such as Akamai Technologies, who market
our services in conjunction with their own services.
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Our marketing goal is to develop sales opportunities by
increasing businesses awareness of the value proposition of a storage
services provider and the StorageNetworks brand. We will continue to invest
in building greater StorageNetworks brand recognition in the U.S. and
internationally, through brand expansion and focus, public relations
programs, interactions with industry analysts, trade shows, advertising,
seminars, direct mail and speaking engagements.
We sell our services in the U.S, U.K., Germany and Australia
directly though our sales force and indirectly through our sales and
marketing channels. Our direct sales team targets large and emerging
e-commerce and enterprise businesses that have mission-critical data storage
needs. Our business development professionals focus on building strong
relationships with our existing and prospective sales and referral channels.
As of April 30, 2000, we had 110 employees engaged in direct sales and 16 in
business development. We believe that our sales and business development
programs are critical to our success and will continue to aggressively hire
additional professionals for those teams.
Executive Advisory
Council
Our Executive Advisory Council consists of a cross section of
executives and consultants in the storage industry, formed to assist us in
identifying and responding to key industry trends. The Executive Advisory
Council is chartered with helping our executive team shape our business in
accordance with industry developments, gain high-level access to potential
strategic customers, vendors and resources, and stimulate third-party
validation of our services. The members of the Executive Advisory Council
act as consultants to StorageNetworks and meet on a quarterly basis. In
connection with their service, the members receive stock option awards, a
stipend for each meeting they attend, and are reimbursed for expenses
incurred in connection with those meetings. We purchase equipment from
several of the companies with which members of the Executive Advisory
Council are affiliated, including Compaq, Sun Microsystems, Inc., VERITAS
Software Corporation, Dell Computers and Cisco Systems.
Our Executive Advisory Council includes:
Andreas Bechtolsheim, Vice President of
Engineering of the Gigabit Switching Group at Cisco Systems. Mr.
Bechtolsheim was a co-founder and Vice President of Technology of Sun
Microsystems, Inc., where he was a chief architect of Suns workstation
product line.
Paul Borrill, Vice President and Chief Technical
Officer of VERITAS Software Corporation. Previously, Mr. Borrill served as
Vice President and Chief Architect of Quantum Corporation.
F. Roy Carlson, Jr., Vice President of Engineering
at Maxtor Network Systems Group. Mr. Carlson previously served as Chief
Executive Officer of Advanced Computing Systems Company and was also a
Professor of Computer Science at the University of Southern California,
where he also served as Director of the Engineering Computer Laboratory,
Chairman of the Computer Science Department, and Executive Director and
Associate Dean of the School of Engineering.
Richard Lary, Senior Storage Architect, Compaq
StorageWorks. Mr. Lary holds numerous patents in the storage
industry.
Barry X Lynn, President and Chief Executive
Officer of Be eXceL, Inc. Mr. Lynn is a director of MERANT PLC, a director
of Integrated Data Systems Corporation, and a principal of Where Eagles
Soar, Inc. Previously, Mr. Lynn was Executive Vice President/Chief
Information Officer of Wells Fargo and Company and founder and President of
Wells Fargo Securities, Inc.
Fred Moore, founder and President of Horison
Information Strategies. Mr. Moore was a founding partner of IN
fusion and was Editor-in-Chief of Storage Management Solutions for West World
Productions. Previously Mr. Moore worked for Storage Technology as the first
Systems Engineer and then as Corporate Vice President of Strategic
Marketing.
Michael Peterson, President and Senior Analyst
of Strategic Research Corporation and founder of the Storage Networking
Industry Association.
Janpieter Scheerder, President of Sun Microsystems
Network Storage Division with over 20 years of experience in data
storage.
Martin Schoffstall, co-founder and Chief Executive
Officer of Conducent. Previously Mr. Schoffstall was Chief Technology
Officer and co-founder of PSINet. He is also a founding director of Go2Net
and a director of Ascend Communications.
Karl D. Schubert, Ph.D., Vice President, Storage
Systems Architecture and Storage Systems Engineering for Dell
Computers Storage Division. Dr. Schubert also serves as Dells
Enterprise Systems Group Chief Technical Officer. Dr. Schubert previously
worked at IBM, including with its Open Systems Storage Subsystems
Division.
Rich Seifert, President of Networks &
Communications Consulting and one of the original designers of Ethernet. Mr.
Seifert was a founder and director of Mysticom, Ltd. and was previously
responsible for hardware technology at Industrial Networks, Inc.
Timothy Wright, Chief Information Officer of
Lycos, Inc. Prior to joining Lycos, Mr. Wright served as Chief Information
Officer of The Learning Company.
Competition
The data storage market is highly competitive. While there are
substantial financial barriers to entry in the storage services provider
market, we expect that we will continue to face competition from traditional
storage alternatives and will face additional competition from new market
entrants. We believe that the principal competitive factors affecting the
market include:
|
|
quality and variety of
services offered;
|
|
|
engineering and technical
expertise and development of proprietary software;
|
|
|
security, reliability, ease
of use and rapid deployment of services;
|
|
|
relationships with web
hosting providers, equipment vendors, and communication services
providers;
|
|
|
ability to attract and
retain skilled professionals;
|
|
|
quality of customer service
and support;
|
|
|
financial resources;
and
|
Our current primary competitors are storage hardware, software
and service vendors such as Compaq, EMC, which has recently announced an
initiative to supply equipment to Internet service providers and companies
that manage the networks of web-based businesses, Hewlett-Packard, Legato
Systems, StorageTek, Sun Microsystems, Inc. and VERITAS Software, and other
announced entrants to the storage services provider market, including EDS,
Qwest Communications and Intel. We estimate that there are in excess of 50
different companies providing storage hardware or software that directly or
indirectly competes with our services. We are aware of approximately five
other companies that have directly entered the storage service provider
market.
We believe that we may face future, direct competition from
storage hardware, software and service vendors who may elect to establish
competitive service offerings or organizations, including:
|
|
telecommunications
companies;
|
|
|
web hosting and internet
service providers; and
|
|
|
application service
providers.
|
Many of the storage vendors and other established businesses
that have or may enter the storage service provider market have
significantly greater financial resources, larger development, sales and
marketing staffs, longer operating histories, greater name-recognition,
larger client bases and more established relationships in the data storage
industry. As a result, these competitors may be able to rapidly establish or
expand data storage service offerings and related infrastructure more
quickly, adapt to new technologies and customer requirements faster, take
advantage of acquisition and other opportunities more readily, and adopt
more aggressive pricing policies than we may be able to.
Intellectual
Property
We rely on a combination of trademark, trade secret and
copyright laws and contractual restrictions to protect the proprietary
aspects of our services. These legal protections afford only limited
protection. We have no patents and have filed only one patent application
with the United States Patent and Trademark office with respect to our
services. We seek to limit disclosure of our intellectual property by
requiring employees, consultants, and business associates with access to our
proprietary information to execute confidentiality agreements with us and by
restricting access to our proprietary information. Due to rapid
technological change, we believe that factors such as the expertise and
technological and creative skills of our personnel, new services and
enhancements to our existing services are more important to establishing and
maintaining our proprietary technology position than the various available
legal protections.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our services or to
obtain and use information that we regard as proprietary. The laws of many
countries do not protect proprietary rights to the same extent as the laws
of the United States. Litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the proprietary rights of others or to defend
against claims of infringement. Any such litigation could result in
substantial costs and diversion of resources and could have a material
adverse effect on our business, operating results and financial condition.
There can be no assurance that our means of protecting our proprietary
rights will be adequate or that our competitors will not independently
develop similar information or technology. Any failure by us to adequately
protect our intellectual property could have a material adverse effect on
our business, operating results and financial condition.
Employees
As of April 30, 2000, we had a total of 513 full-time employees.
We expect to hire substantial numbers of new employees through 2000 and the
foreseeable future.
Our future success will depend on our ability to attract, retain
and motivate highly qualified technical and management personnel, for whom
competition is intense. Our employees are not represented by any collective
bargaining representative. We believe our relations with our employees are
good.
Facilities
Our headquarters are currently located in approximately 33,000
square feet of leased office space located in Waltham, Massachusetts. The
lease for this space terminates on January 14, 2005.
We have begun negotiations to lease approximately 135,000 square
feet of additional space in Waltham. We intend to transfer our headquarters
to this new building following execution of a lease for this facility, while
retaining the existing facility in Waltham.
We have numerous operating leases and licenses for our S-POP
data centers and field sales offices.
Legal
Proceedings
We are not a party to any material legal
proceedings.
Executive Officers and
Directors
The following table sets forth our executives officers and
directors, their ages and their positions with StorageNetworks as of April
30, 2000.
Name
|
|
Age
|
|
Position
|
Peter W. Bell |
|
35 |
|
Chairman of the Board,
Chief Executive Officer, President and
Director |
William D.
Miller |
|
39 |
|
Executive Vice President,
Chief Technical Officer and Director |
Paul C. Flanagan |
|
35 |
|
Executive Vice President of
Finance, Administration and Corporate
Development, Chief Financial Officer, Treasurer and Secretary |
John C. Clavin |
|
38 |
|
Executive Vice President of
Operations |
Jeffrey W.
Murphy |
|
44 |
|
Senior Vice President of
Sales Operations |
Barry L.
Kallander |
|
42 |
|
Senior Vice President of
Global Services |
Michael G.
Tardif |
|
41 |
|
Senior Vice President of
Technology and Engineering |
Randall A.
Blumenthal |
|
31 |
|
Director |
Thomas J. Casey |
|
48 |
|
Director |
Robert E. Davoli |
|
51 |
|
Director |
Harold R. Dixon |
|
36 |
|
Director |
Stephen J. Gaal |
|
56 |
|
Director |
Michael D.
Lambert |
|
53 |
|
Director |
Roger M. Marino |
|
61 |
|
Director |
William T.
Schleyer |
|
48 |
|
Director |
Peter W. Bell co-founded StorageNetworks and has
served as our Chief Executive Officer and President since October, 1998 and
as our Chairman of the Board since January, 2000. From July, 1997 to July,
1998, Mr. Bell served as the Vice President of Worldwide Sales at Andataco,
Inc., an integrator of storage technology products. From July, 1996 to July,
1997, Mr. Bell served as the Executive Vice President of Sales, Services and
Marketing at NetXchange, a provider of internet telephony software. Between
November, 1986 and June, 1996, Mr. Bell held a variety of management
positions in marketing, operations and sales at EMC Corporation, a vendor of
storage hardware, software and services, including Director of Sales, Open
Storage Group.
William D. Miller co-founded StorageNetworks and
has served as our Executive Vice President and Chief Technical Officer and
as a member of our board of directors since October, 1998. From 1994 to
1998, Mr. Miller managed strategic accounts for Andataco, Inc., an
integrator of storage technology products.
Paul C. Flanagan has served as our Executive Vice
President of Finance, Administration and Corporate Development since April,
2000, and Chief Financial Officer since March, 1999. Previously, Mr.
Flanagan served as Senior Vice President of Finance and Administration from
March, 1999 to April, 2000. From May, 1997 to February, 1999, Mr. Flanagan
served as Vice President of Finance for Lasertron, Inc., a manufacturer of
fiber optic components for telecommunications. From December, 1995 to May,
1997, Mr. Flanagan served as Vice President of Finance and Administration
for Vitol Gas and Electric, LLC, an energy commodity trading company. From
September, 1986 to December, 1995, Mr. Flanagan was employed by Ernst &
Young LLP, a public accounting firm.
John C. Clavin has served as our Executive Vice
President of Operations since April, 2000. Previously, Mr. Clavin served as
our Senior Vice President of Marketing and Corporate Development from
August, 1999 through April, 2000. From 1994 to 1999, Mr. Clavin served as
the Vice President of Client Services at The Boston Company Asset
Management, LLC, an institutional money management firm. From 1984 to 1988
and from 1991 to 1994, Mr. Clavin held senior level positions at EMC
Corporation, a vendor of storage hardware, software and
services.
Jeffrey W. Murphy has served as our Senior Vice
President of Sales Operations since September, 1999. From February, 1994 to
September, 1999, Mr. Murphy held a variety of positions at SAP America Inc.,
a developer and supplier of integrated business application software,
including Senior Vice President and General Manager for the Services Sector
of SAP North America, Vice President East and Director of Sales.
Barry L. Kallander has served as our Senior Vice
President of Global Services, since September, 1999. From January, 1997 to
September, 1999, Mr. Kallander served as Vice President and General Manager
of Litton Enterprise Solutions, Inc., a provider of technology outsourcing
and consulting solutions, where he was responsible for their
technology-based solutions, including enterprise resource planning, Y2K,
outsourcing and electronic commerce. From 1995 to December, 1996, Mr.
Kallander held various positions, including Vice President and General
Manager at PRC Engineering Systems, Inc., a provider of technology-based
solutions to utility clients.
Michael G. Tardif joined StorageNetworks as our
Senior Vice President of Engineering and Strategy in January, 2000. From
March, 1995 to January, 2000, Mr. Tardif served as Vice President of
Information Technology Infrastructure at The Goldman Sachs Groups, Inc., an
investment banking firm. From January, 1989 to March, 1995, Mr. Tardif
served as President and Chief Technology Officer at Xtensible Technologies
Corporation, a software systems integration and engineering firm
specializing in development and deployment of systems
applications.
Randall A. Blumenthal has served as a director of
StorageNetworks since July, 1999. Mr. Blumenthal is a Managing Director at
Goldman, Sachs & Co., an investment banking firm, where he focuses on
Internet, software and technology services investing. Mr. Blumenthal served
as a Vice President at Goldman, Sachs & Co. from 1996 to 1999 and as an
Associate from 1992 to 1996.
Thomas J. Casey has served as a director of
StorageNetworks since January, 2000. Since 1998, Mr. Casey has served as
Vice Chairman and Managing Director of Global Crossing, a provider of global
long distance telecommunications facilities and services, Managing Director
of Global Crossing Ltd., which builds and offers services over an integrated
global fiber optic network, and President of Pacific Capital Group, an
investment company. From 1995 to 1998, Mr. Casey held the positions of
Managing Director and co-manager of the Global Communications Group at
Merrill Lynch, an institutional money management firm. Prior to his
association with Merrill Lynch, Mr. Casey was a Partner and co-manager of
the telecommunications and media group of the law firm of Skadden, Arps,
Slate, Meagher and Flom. Mr. Casey is a member of the board of directors of
Global Crossing Ltd. and Value America Inc.
Robert E. Davoli has served as a director of
StorageNetworks since December, 1998, and as a member of the Compensation
Committee since August, 1999. Mr. Davoli has been a general partner of Sigma
Partners, a venture capital firm, since 1995. Prior to his association with
Sigma Partners, he was President and Chief Executive Officer of Epoch
Systems, a vendor of client-server data management software products. Mr.
Davoli serves on the board of directors of Vignette Corporation, Versata,
Inc., and Internet Security Systems, Inc.
Harold R. Dixon has served as a director of
StorageNetworks since October, 1998 and as a member of the Compensation
Committee since August, 1999. From 1986 to January, 2000, Mr. Dixon held
various positions at EMC Corporation, a vendor of storage hardware, software
and services, most recently serving as Senior Vice President, Global Sales
and Services. While at EMC, Mr. Dixon also served as Vice President of
Sales, Americas, and Vice President and Sales Manager, Canada.
Stephen J. Gaal has served as a director of
StorageNetworks since October, 1998. Mr. Gaal is the founder and Managing
Director of Gaal & Company, Inc., which provides advisory services to
emerging technology companies in the areas of business and financing strategy
and planning. Between 1987 and 1996, Mr. Gaal held the positions of
Principal, Partner, and Managing Director of TA Associates, a venture
capital and private equity firm. Mr. Gaal also serves on the board of
directors of Versant Corporation and Workgroup Technology
Corporation.
Michael D. Lambert has served as a director of
StorageNetworks since January, 2000. Mr. Lambert is Senior Vice President of
the Enterprise Systems Group of Dell Computer Corporation, a direct provider
of computer systems and services. In this position, his responsibilities
include the development and delivery of Internet-related consulting and
hosting services, and the oversight of engineering, product marketing and
manufacturing of servers, storage and related products. From 1993 to 1996,
Mr. Lambert held the position of Vice President of Sales and Marketing,
North America, for Compaq Computer Corporation, a developer and manufacturer
of computer hardware, software and services.
Roger M. Marino has served as a director of
StorageNetworks since December, 1998. Mr. Marino is currently a private
investor. From May, 1997 to September, 1999, Mr. Marino held the positions
of General Manager and owner of the Pittsburgh Penguins, a National Hockey
League team. Mr. Marino was a founder and former president of EMC
Corporation, a vendor of storage hardware, software and
services.
William T. Schleyer has served as a director of
StorageNetworks since March, 1999. Mr. Schleyer is a Principal in Broadband
Ventures Group, LLC, a venture capital company that invests in the broadband
and Internet industries. In 1997, he served as President and Chief Operating
Officer of MediaOne, the broadband services division of U.S. West Media
Group, a provider of broadband telecommunications services. From 1994 to
1996, Mr. Schleyer was President and Chief Operating Officer of Continental
Cablevision, Inc., a provider of broadband communications services. Mr.
Schleyer serves on the board of directors of CableLabs, Inc., Wink
Communications, Inc., Rogers Communications, Inc., ANTEC and Darwin
Partners.
Pursuant to the terms of a voting agreement and our certificate
of incorporation, the holders of our preferred and common stock have
designated the members of our Board of Directors. Four of our directors,
Peter W. Bell, William D. Miller, Harold R. Dixon, and Roger M. Marino,
beneficially own more than five percent of our common stock. Four other
directors are affiliated with beneficial holders of more than five percent
of our common stock. Robert E. Davoli is affiliated with Sigma Partners,
Randall A. Blumenthal is affiliated with Goldman Sachs & Co., Thomas J.
Casey is affiliated with GC Dev. Co., Inc. and Michael D. Lambert is
affiliated with Dell USA, L.P. The rights of these holders to nominate
members of our Board of Directors will expire upon the closing of this
offering.
Election of Executive
Officers and Directors
Each executive officer is elected by, and serves at the
discretion of, the board of directors. All directors are elected at the
annual meeting or at any special meeting of the stockholders and hold office
until their successors are duly elected and qualified. Following this
offering, the board of directors will be divided into three classes, each of
whose members will serve for a staggered three-year term. Messrs.
Blumenthal, Casey and Lambert will serve in the class whose term expires at
the annual meeting of stockholders in 2001; Messrs. Davoli, Marino and
Schleyer will serve in the class whose term expires at the annual meeting of
stockholders in 2002; and Messrs. Bell, Dixon, Gaal and Miller will serve in
the class whose term expires at the annual meeting of stockholders in 2003.
Upon the expiration of the term of a class of directors, directors in such
class will be elected for three-year terms at the annual meeting of
stockholders in the year in which such term expires.
Compensation of
Directors
We reimburse our non-employee directors for reasonable
out-of-pocket expenses incurred in attending meetings of the board of
directors. On January 26, 2000, each non-employee director received a
fully-vested option to purchase 25,000 shares of our common stock at an
exercise price of $8.00 per share. Shares issuable upon exercise of such
options are subject to a repurchase right for two years from the date of
grant. On April 28, 1999, we granted an option to purchase 200,000 shares of
our common stock at a price of $0.05 per share, to Mr. Schleyer, our first
outside director.
Compensation Committee
Interlocks and Insider Participation
The board of directors has established a Compensation Committee
and an Audit Committee. Our Compensation Committee consists of Messrs.
Davoli, Gaal and Lambert. No interlocking relationship exists between any
member of our board of directors or our Compensation Committee and any
member of the board of directors or Compensation Committee of any other
company, and no such interlocking relationship has existed in the past. The
Compensation Committee reviews executive salaries, administers bonuses,
incentive compensation and stock plans, and approves the salaries and other
benefits of our executive officers. In addition, the Compensation Committee
consults with our management regarding our benefit plans and compensation
policies and practices. There are no family relationships among any of our
directors and executive officers.
Audit
Committee
The Audit Committee, which consists of Messrs. Casey, Gaal and
Schleyer, reviews the professional services provided by our independent
auditors, the independence of such auditors from our management, our annual
financial statements and our system of internal accounting controls. The
Audit Committee also reviews such other matters with respect to our
accounting, auditing and financial reporting practices and procedures as it
may find appropriate or may be brought to its attention.
Executive
Compensation
The table below sets forth, for the fiscal year ended December
31, 1999, the compensation earned by:
|
|
our Chief Executive
Officer, President and Chairman of the Board; and
|
|
|
the four other most highly
compensated executive officers who received annual compensation in excess
of $100,000.
|
We refer to these officers collectively as our Named Executive
Officers.
In accordance with the rules of the Securities and Exchange
Commission, the compensation set forth in the table below does not include
medical, group life or other benefits which are available to all of our
salaried employees, and perquisites and other benefits, securities or
property which do not exceed the lesser of $50,000 or 10% of the
persons salary and bonus shown in the table. In the table below,
columns required by the regulations of the Securities and Exchange
Commission have been omitted where no information was required to be
disclosed under those columns.
Summary Compensation
Table
|
|
Annual
Compensation
|
|
Long-term
Compensation Awards
|
|
|
Salary
|
|
Bonus
|
|
Shares of Common Stock
Underlying Options
|
Peter W. Bell
Chief Executive Officer, President and Chairman of
the Board |
|
$175,000 |
|
|
|
|
|
William D. Miller
Executive Vice President and Chief Technical Officer |
|
175,000 |
|
|
|
|
|
Paul C. Flanagan
Executive Vice President of Finance, Administration
and Corporate Development and Chief Financial
Officer |
|
114,231 |
(1) |
|
$80,000 |
|
700,000 |
John C. Clavin
Executive Vice President of Operations |
|
66,667 |
(2) |
|
52,500 |
|
500,000 |
Jeffrey W. Murphy
Senior Vice President, Sales Operations |
|
63,718 |
(3) |
|
90,000 |
|
700,000 |
(1)
|
Mr. Flanagan joined
StorageNetworks in March, 1999.
|
(2)
|
Mr. Clavin joined
StorageNetworks in August, 1999.
|
(3)
|
Mr. Murphy joined
StorageNetworks in September, 1999.
|
Stock
Options
The following table contains information concerning the grant of
options to purchase shares of our common stock to each of the Named
Executive Officers during the fiscal year ended December 31, 1999. These
options were granted under our Amended and Restated 1998 Stock Incentive
Plan. Options granted under the 1998 Plan to employees vest over a four-year
period with 25% vesting at the first anniversary date of the vesting start
date and the remaining shares vesting in quarterly installments over the
next three years. The options granted to the Named Executive Officers also
provide for acceleration of vesting upon the occurrence of certain events,
as described under Agreements with Executive Officers.
Percentages are based on options to purchase an aggregate of 9,664,000
shares granted in 1999.
Potential realizable values are net of exercise price, but
before taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are based on
the exercise price of the options and are provided in accordance with the
rules of the Commission. They do not represent our estimate or projection of
the future common stock price.
Option Grants in Last
Fiscal Year
|
|
Number of
Securities
Underlying
Options
Granted
|
|
Percent of
Total Options
Granted To
Employees in
Fiscal Year
|
|
Exercise Price
($/Share)
|
|
Expiration
Date
|
|
Potential Realizable
Value at Assumed
Annual Rates of
Stock Appreciation
for Option Term
|
|
|
|
|
|
|
5%
|
|
10%
|
Peter W. Bell |
|
|
|
|
|
|
|
|
|
|
|
|
|
William D.
Miller |
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul C. Flanagan |
|
500,000 |
|
5.2 |
% |
|
$.05 |
|
04/28/09 |
|
$ 15,722 |
|
$ 39,844 |
|
|
200,000 |
|
2.0 |
|
|
.50 |
|
11/04/09 |
|
62,889 |
|
159,374 |
John C. Clavin |
|
500,000 |
|
5.2 |
|
|
.25 |
|
08/04/09 |
|
78,612 |
|
199,218 |
Jeffrey W.
Murphy |
|
700,000 |
|
7.2 |
|
|
.25 |
|
09/15/09 |
|
110,057 |
|
278,905 |
Fiscal Year-End Option
Values
The following table sets forth information for each of the Named
Executive Officers with respect to the value of options outstanding as of
December 31, 1999. The value of unexercised in-the-money options represents
the positive spread between the exercise price of the stock options and the
deemed fair market value of our common stock as of December 31, 1999, which
our board of directors determined was $3.00 per share.
Aggregated Year-End Option
Table
|
|
Number of Securities
Underlying
Unexercised Options at
December 31, 1999
|
|
Value of Unexercised
In-The-Money Options at
December 31, 1999
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
Peter W. Bell |
|
0 |
|
0 |
|
0 |
|
0 |
William D.
Miller |
|
0 |
|
0 |
|
0 |
|
0 |
Paul C. Flanagan |
|
0 |
|
700,000 |
|
0 |
|
$1,975,000 |
John C. Clavin |
|
0 |
|
500,000 |
|
0 |
|
1,375,000 |
Jeffrey W.
Murphy |
|
0 |
|
700,000 |
|
0 |
|
1,925,000 |
Agreements with Executive
Officers
In March, 1999 we entered into an Employment Agreement with Paul
C. Flanagan. The Employment Agreement provides for an annual base salary of
$150,000 and bonus compensation targeted at $45,000 per year if we achieve
certain annual operating plan targets. If Mr. Flanagans employment is
terminated without cause within one year subsequent to a change in control,
he will continue to receive his base salary as a severance payment until the
earlier of 180 days after termination of employment or his commencement of
employment with another party. He will also receive a lump sum payment of
the portion of his expected annual bonus, prorated for the portion of the
calendar year he was employed prior to termination.
In July, 1999 we entered into an Employment Agreement and
Severance Agreement with John C. Clavin. The Employment Agreement provides
for an annual base salary of $160,000 and bonus compensation of up to
$90,000 per year if we and Mr. Clavin achieve certain objectives. The base
salary after the first year cannot be reduced below $160,000 without Mr.
Clavins written agreement. The Severance Agreement provides that if
Mr. Clavins employment is terminated prior to July 9, 2003 without
cause or if Mr. Clavin terminates his employment for good reason, Mr. Clavin
will receive severance payments and partial acceleration of vesting of his
stock option for the purchase of 500,000 shares of common stock. The
severance payment will be 12 months salary if he is
terminated during the first year, nine months salary if during the
second year, six months salary if during the third year and three
months salary if during the fourth year, and the option vesting will
decline from 10% of any unvested portion to 2.5%. The amount of severance
and accelerated vesting for years two through four may be increased to 12
months salary and 10% vesting if there has been a significant change
in our management at the time of such termination.
We have a Severance Agreement with Jeffrey W. Murphy, Senior
Vice President of Sales, which provides for severance payments equal to six
months salary continuation if his employment is terminated without
cause prior to the first anniversary of his employment. Such payments would
cease upon Mr. Murphys obtaining new employment or providing
consulting services on a full-time basis. In addition, the vesting of Mr.
Murphys stock option for the purchase of 700,000 shares of common
stock would accelerate as to 175,000 shares.
The stock options for the purchase of 700,000 shares of common
stock held by Mr. Flanagan and for 500,000 shares of common stock held by
Mr. Clavin become exercisable over a four-year period from the date of
grant; but upon a merger, consolidation or sale of substantially all of our
assets, any then unvested portion of such options becomes immediately
exercisable. In addition, the stock option agreement with Mr. Flanagan
covering options for 500,000 shares of common stock provides that if Mr.
Flanagan is terminated without cause prior to full vesting and there has
been a significant change in our management at the time of such termination,
any then unvested portion of such options becomes immediately
exercisable.
The stock options for the purchase of 700,000 shares of common
stock held by Mr. Murphy and for 540,000 shares of common stock held by
Michael G. Tardif, Senior Vice President of Technology and Engineering,
become exercisable over a four-year period from the date of grant; but if,
within 12 months of a merger, consolidation or sale of substantially all of
our assets such officers employment is terminated without cause or
such officer terminates his employment for good reason (defined to include a
reduction in responsibilities, salary, bonus or benefits, or, in the case of
Mr. Murphy, a relocation), such options immediately become exercisable as if
such officer had continued to be employed for an additional two years
following such termination. In addition, the stock option agreement with Mr.
Tardif provides that if he is terminated without cause or if he terminates
his employment for good reason prior to January 12, 2001, his option shall
become exercisable as to 25% of the shares as of the date of such
termination.
Benefit
Plans
Amended and Restated 1998 Stock Incentive
Plan. The Amended and Restated 1998 Stock
Incentive Plan was adopted by our board of directors and approved by our
stockholders in November 1998. Up to 10,920,000 shares of common stock are
issuable under the 1998 plan. The 1998 plan provides for the grant of
incentive stock options, nonstatutory options, restricted stock awards and
other stock-based awards. Our employees, consultants, advisors, directors
and officers are eligible to receive awards under the 1998 plan. Under
present law, only employees are eligible to receive incentive stock options.
As of April 30, 2000, options to purchase an aggregate of 9,529,250 shares
of common stock were outstanding under the 1998 plan. No restricted stock
has been granted under the plan.
The 1998 plan is administered by the board of directors. The
board of directors with the assistance of management selects the recipients
of awards and determines the:
|
|
number of shares of common
stock covered by options and the dates upon which such options become
exercisable;
|
|
|
exercise price of
options;
|
|
|
duration of options;
and
|
|
|
number of shares of common
stock subject to any restricted stock or other stock-based awards and the
terms and conditions of such award, including the conditions for
repurchase, issue, price and repurchase price.
|
In the event of a merger or other acquisition event, our board
of directors will provide for outstanding awards to be assumed or
substituted for by the acquiror. If the acquiror does not assume or
substitute for outstanding awards, our board of directors shall provide that
all unexercised options will become exercisable in full prior to the
completion of the event and terminate upon completion of the
event.
2000 Stock Plan. Our 2000
Stock Plan was adopted by our board of directors and approved by our
stockholders in March, 2000. 12,000,000 shares of common stock are reserved
for issuance under the 2000 Stock Plan. In addition, there will be an annual
increase of shares available for awards under the 2000 plan beginning on
March 1, 2001 of the lesser of:
|
|
4% of the outstanding
shares on the date of the increase; or
|
|
|
a lesser amount determined
by the board.
|
The 2000 plan provides for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code,
non-qualified stock options, restricted stock awards and other stock-based
awards.
Our officers, employees, directors, consultants and advisors and
those of our subsidiaries are eligible to receive awards under the 2000
plan. Under present law, however, incentive stock options may only be
granted to employees. No participant may receive any award for more than
1,000,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of
shares of common stock at a specified option price and subject to such other
terms and conditions as are specified in connection with the option grant.
We may grant options at an exercise price less than, equal to or greater
than the fair market value of our common stock on the date of grant. Under
present law, incentive stock options and options intended to qualify as
performance-based compensation under Section 162(m) of the Internal Revenue
Code may not be granted at an exercise price less than the fair market value
of the common stock on the date of grant or less than 110% of the fair
market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of the company. The 2000 plan
permits our board of directors to determine how optionees may pay the
exercise price of their options, including by cash, check or in connection
with a cashless exercise through a broker, by surrender to us of
shares of common stock, by delivery to us of a promissory note, or by any
combination of the permitted forms of payment.
Our board of directors administers the 2000 plan. Our board of
directors has the authority to adopt, amend and repeal the administrative
rules, guidelines and practices relating to the plan and to interpret its
provisions. It may delegate authority under the 2000 plan to one or more of
our executive officers. Our board of directors may authorize the
compensation committee or another committee appointed by the board to
administer the 2000 plan, including the granting of options to our executive
officers. Subject to any applicable limitations contained in the 2000 plan,
our board of directors, our
compensation committee or any other committee or executive officer to whom our
board of directors delegates authority, as the case may be, selects the
recipients of awards and determines the:
|
|
number of shares of common
stock covered by options and the dates upon which such options become
exercisable;
|
|
|
exercise price of
options;
|
|
|
duration of options;
and
|
|
|
number of shares of common
stock subject to any restricted stock or other stock-based awards and the
terms and conditions of such awards, including the conditions for
repurchase, issue price and repurchase price.
|
No award may be granted under the 2000 plan after the tenth
anniversary of the effective date, but the vesting and effectiveness of
awards previously granted may extend beyond that date. Our board of
directors may at any time amend, suspend or terminate the 2000 plan, except
that no award granted after an amendment of the 2000 plan and designated as
subject to Section 162(m) of the Internal Revenue Code by our board of
directors shall become exercisable, realizable or vested, to the extent such
amendment was required to grant such award, unless and until such amendment
is approved by our stockholders.
2000 Employee Stock Purchase
Plan. Our 2000 Employee Stock Purchase Plan was
adopted by our board of directors and approved by our stockholders in March
2000. The purchase plan authorizes the issuance of up to a total of
1,000,000 shares of our common stock to participating employees. On March 1
of each year, commencing with March 1, 2001, the aggregate number of shares
available for purchase under the plan is automatically increased by the
number of shares necessary to cause the number of shares then available for
purchase to be restored to 1,000,000, subject to a maximum of 10,000,000
shares over the life of the plan.
All of our employees, including directors who are employees, and
all employees of any participating subsidiaries:
|
|
whose customary employment
is more than 20 hours per week for more than five months in a calendar
year,
|
|
|
whose customary employment
is at least five months in any calendar year, and
|
|
|
who hold less than five
percent of the total combined voting power of the Company
|
are eligible to participate
in the purchase plan. As of December 31, 1999, approximately 275 of our
employees would have been eligible to participate in the purchase
plan.
On the first day of an offering period, we will grant to each
eligible employee who has elected to participate in the purchase plan an
option to purchase shares of common stock. The employee may authorize an
amount to be deducted from such employees base pay during the offering
period, such amount to be up to 10% of the employees base pay or such
lesser amount as shall be determined by the board. On the last day of the
offering period, the employee is deemed to have exercised the option, at the
option exercise price, to the extent of accumulated payroll deductions.
Under the terms of the purchase plan, the option exercise price is an amount
equal to 85% of the closing price per share of the common stock on either
the first day or the last day of the offering period, whichever is lower.
The first offering period under the purchase plan is expected to commence on
November 1, 2000. Each offering period is expected to be six
months.
An employee who is not a participant on the last day of the
offering period, as a result of voluntary withdrawal or termination of
employment or for any reason, is not entitled to exercise any option, and
the employees accumulated payroll deductions will be refunded.
However, upon termination of employment because of death, the
employees beneficiary has certain rights to elect to exercise the
option to purchase the shares that the accumulated payroll deductions in the
participants account would purchase at the date of death.
Because participation in the purchase plan is voluntary, we
cannot now determine the number of shares of our common stock to be
purchased by any of our current executive officers, by all of our current
executive officers as a group, or by our non-executive employees as a
group.
2000 Non-Employee Director Option
Plan. Our 2000 Non-Employee Director Option
Plan was adopted by our board of directors and approved by our stockholders
in March 2000. This option plan authorizes the issuance of up to a total of
400,000 shares of our common stock to participating directors who are not
also employees or officers of StorageNetworks. On March 1 of each year,
commencing with March 1, 2001, the aggregate number of shares available for
the grant of options under the plan is automatically increased by the number
of shares necessary to cause the total number of shares then available for
grant to be 400,000.
Each director who is not also an employee or officer shall be
automatically granted an option to purchase 25,000 shares of common stock on
the date the person is first elected to the board.
In addition, each non-employee director will be automatically
granted an option to purchase 10,000 shares immediately following each
annual meeting of stockholders. The option exercise price per share for all
options granted under the option plan will be equal to the fair market value
of our common stock on the date of grant. Under the plan, options are fully
exercisable on the date of grant. Stock issued upon exercise of options is
subject to repurchase by the Company prior to completion of the applicable
vesting period. The term of each option is 10 years from the date of grant.
Our board of directors has discretion to establish the terms of options
granted under the plan. No options to purchase shares have been granted to
date under the director plan.
RELATED PARTY
TRANSACTIONS
Preferred Stock
Issuances
Series A Preferred Stock. In
December, 1998 and January, 1999, we sold an aggregate of 5,000,000 shares
of Series A convertible preferred stock at a price of $2.00 per share, for
an aggregate offering price of $10,000,000. In this private placement, we
sold 2,500,000 shares to Roger M. Marino, who is one of our directors and a
holder of more than five percent of our outstanding common stock, 1,000,000
shares to Greylock IX Limited Partnership, which is the beneficial owner of
more than five percent of our outstanding common stock, 1,000,000 shares to
entities affiliated with Sigma Partners, which, in the aggregate, own more
than five percent of our outstanding common stock, and the remaining 500,000
shares to eleven individual accredited investors. Upon the closing of this
offering, each share of Series A convertible preferred stock will
automatically convert into four shares of common stock. Based on the initial
offering price of $27.00 per share of common stock, these 5,000,000 shares
of Series A convertible preferred stock will convert into 20,000,000 shares
of common stock worth an aggregate of $540,000,000.
Series B Preferred Stock. In July,
1999, we issued 10,162,596 shares of Series B convertible preferred stock at
a price of $4.92 a share, for an aggregate offering price of approximately
$50,000,000. In this private placement, among sales to other investors
including Greylock IX Limited Partnership and affiliates of Sigma Partners,
each of which are beneficial owners of more than five percent of our
outstanding common stock, we sold 5,081,298 shares to entities affiliated
with Goldman, Sachs & Co., who, in the aggregate, beneficially own more
than five percent of our outstanding common stock, 2,032,520 shares to PH
Ventures II, LLC, which, with its affiliates, beneficially owns more than
five percent of our outstanding common stock, 203,252 shares to William T.
Schleyer, one of our directors, and 21,341 shares to certain members of the
immediate family of Peter W. Bell, our President, Chief Executive Officer
and Chairman of our Board of Directors. Upon the closing of this offering,
each share of Series B convertible preferred stock will automatically
convert into two shares of common stock. Based on the initial offering price
of $27.00 per share of common stock, these 10,162,596 shares of Series B
convertible preferred stock will convert into 20,325,192 shares of common
stock worth an aggregate of $548,780,184.
Series C Preferred Stock. In
January, 2000, we sold an aggregate of 6,012,843 shares of Series C
convertible preferred stock at a price of $17.13 per share, for an aggregate
offering price of approximately $103,000,000. In this private placement, in
addition to sales to individual accredited investors, we sold 2,626,970
shares to GC Dev. Co., Inc. and 2,626,970 shares to Dell USA L.P., each of
which is a beneficial owner of more than five percent of our outstanding
common stock. Upon the closing of this offering, each share of Series C
convertible preferred stock will automatically convert into two shares of
common stock. Based on the initial offering price of $27.00 per share of
common stock, these 6,012,843 shares of Series C convertible preferred stock
will convert into 12,025,686 shares of common stock worth an aggregate of
$324,693,522.
In January, 2000, simultaneous with the closing of our sale of
Series C preferred stock, Messrs. Bell and Miller (and an entity related to
Mr. Miller) each sold 2,335,086 shares of common stock to a group of
existing holders of Series A and Series B preferred stock at a price of
$8.56 per share for total proceeds of $20,000,000 each.
Series D Preferred Stock. In
February, 2000 we sold an aggregate of 1,758,240 shares of Series D
convertible preferred stock at a price of $22.75 per share, for an aggregate
offering price
of approximately $40,000,000. All of the shares sold in this private placement
were sold to institutional investors, all of whom are vendors of storage
hardware and software. Upon the closing of this offering, each share of
Series D convertible preferred stock will convert into approximately one
share of common stock. Based on the initial offering price of $27.00 per
share of common stock,
each share of Series D convertible preferred stock will convert into
approximately 1,758,240 shares of common stock worth an aggregate of
approximately $47,472,480.
Stockholder Agreement. In
connection with our sales of Series A, B, C and D convertible preferred
stock, we entered into a stockholder rights agreement pursuant to which
holders of Series A, B, C and D convertible preferred stock and common stock
are entitled to registration rights with respect to their preferred and
common shares.
All of our current directors were designated by the holders of
our preferred and common stock. Of these directors, Robert E. Davoli is
affiliated with Sigma Partners, Randall A. Blumenthal is affiliated with
Goldman, Sachs & Co., Thomas J. Casey is affiliated with GC Dev. Co.,
Inc., and Michael D. Lambert is affiliated with Dell USA, L.P.
Common Stock
Issuances
In October, 1998, we sold an aggregate of 24,400,000 shares of
common stock at a price of approximately $.003 per share, as adjusted for
subsequent stock splits, for an aggregate offering price of $76,250 as
follows: 8,000,000 shares to Peter W. Bell, our President, Chief Executive
Officer, Chairman of the Board, and beneficial owner of more than five
percent of our outstanding common stock, 8,000,000 shares to William D.
Miller, our Executive Vice President, Chief Technical Officer, Director and
beneficial owner of more than five percent of our outstanding common stock,
8,000,000 shares to Harold R. Dixon, a member of our board of directors and
the beneficial owner of more than five percent of our outstanding common
stock, and 400,000 shares to Stephen J. Gaal, a member of our board of
directors. Based on the initial offering price of $27 per share of common
stock, the 24,400,000 shares of common stock that we sold in October, 1998
would be worth an aggregate of $658,800,000.
Other Transactions with
Stockholders and Related Parties
We are a party to a joint marketing and services agreement with
GlobalCenter, Inc., an affiliate of one of our five percent stockholders, GC
Dev. Co., Inc. Under the terms of this agreement, GlobalCenter markets our
data storage services under a co-branded name to its customers and we pay to
GlobalCenter a share of the monthly revenues generated by this agreement.
During 1999, this agreement did not generate any revenues.
In January, 2000, we entered into a fiber network and colocation
services agreement with Global Crossing USA Inc., an affiliate of one of our
five percent stockholders, GC Dev. Co., Inc., in which we have agreed, in
certain circumstances, to use long-distance fiber optic connections and
related services and colocation facilities provided by Global Crossing USA
Inc.
In June, 1999, we entered into a master lease agreement with
Dell Financial Services L.P., an affiliate of one of our five percent
stockholders, Dell USA L.P., under which we may lease certain equipment from
Dell Financial Services L.P. As of March 31, 2000, we have leased
approximately $512,000 worth of equipment pursuant to this master lease
agreement. During 1999 we purchased approximately $1,000,000 of computers
and related equipment from Dell Computer Corp., an affiliate of Dell USA
L.P.
In May, 2000, we entered into an agreement for professional
services with Dell Marketing L.P., an affiliate of one of our five percent
stockholders, Dell USA L.P., under which Dell Marketing L.P. may engage us
to perform professional services for Dell Marketing L.P. or for customers of
Dell.
All transactions to date between us and our officers, directors,
principal stockholders and their affiliates were entered into on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans between us and our
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of
the independent and disinterested directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of April 30, 2000,
by:
|
|
each person we know to own
beneficially more than 5% of our common stock;
|
|
|
each of our directors and
the Named Executive Officers; and
|
|
|
all of our directors and
executive officers as a group.
|
The number of shares of common stock deemed outstanding prior to
this offering includes 79,527,118 shares of common stock outstanding as of
April 30, 2000, after giving effect to the conversion of all shares of
redeemable convertible preferred stock into common stock. The number of
shares of common stock deemed outstanding after this offering also includes
the 9,000,000 shares that are being offered for sale by us in the offering.
Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting or investment power with respect to shares.
Shares issuable upon the exercise of options that are currently exercisable
or will become exercisable within 60 days of April 30, 2000 are considered
outstanding for the purposes of computing the percentage ownership of the
person holding such option but are not considered outstanding for purposes
of computing the percentage ownership of any other person. Unless otherwise
indicated below, to our knowledge, all persons named in the table have sole
voting and investment power with respect to their shares of common stock,
except to the extent authority is shared by spouses under applicable law.
Unless otherwise indicated, the address of each person owning more than 5%
of the outstanding shares of common stock is c/o StorageNetworks, Inc., 100
Fifth Avenue, Waltham, Massachusetts 02451.
|
|
|
|
Percentage of
Common Stock
Outstanding
|
Name and Address of
Beneficial Owner
|
|
Number of Shares
Beneficially Owned
|
|
Before
Offering
|
|
After
Offering
|
Entities affiliated with
The Goldman Sachs Group, Inc. (1) |
|
11,465,888 |
|
14.42 |
% |
|
12.95 |
% |
85 Broad Street |
|
|
|
|
|
|
|
|
New York, NY 10004 |
|
|
|
|
|
|
|
|
Roger M. Marino
(2) |
|
11,307,444 |
|
14.22 |
|
|
12.77 |
|
Harold R. Dixon
(3)(4) |
|
8,025,000 |
|
10.09 |
|
|
9.07 |
|
Greylock IX Limited
Partnership |
|
6,420,900 |
|
8.07 |
|
|
7.25 |
|
One Federal Street
Boston, MA 02110 |
|
|
|
|
|
|
|
|
Entities affiliated with
Sigma Partners (5) |
|
6,420,900 |
|
8.07 |
|
|
7.25 |
|
20 Custom House Street
Suite 830
Boston, MA 02110 |
|
|
|
|
|
|
|
|
Peter W. Bell
(6) |
|
5,664,914 |
|
7.12 |
|
|
6.40 |
|
William D. Miller
(7) |
|
5,664,914 |
|
7.12 |
|
|
6.40 |
|
GC Dev. Co., Inc.
|
|
5,253,940 |
|
6.61 |
|
|
5.93 |
|
1209 Orange Street |
|
|
|
|
|
|
|
|
Wilmington, DE 19801 |
|
|
|
|
|
|
|
|
Dell USA L.P.
(8) |
|
5,278,940 |
|
6.64 |
|
|
5.96 |
|
c/o Dell Computer
Corporation |
|
|
|
|
|
|
|
|
One Dell Way |
|
|
|
|
|
|
|
|
Round Rock, TX 78687 |
|
|
|
|
|
|
|
|
Entities affiliated with PH
Ventures II, LLC (9) |
|
4,586,358 |
|
5.77 |
|
|
5.18 |
|
The Pilot House |
|
|
|
|
|
|
|
|
Lewis Wharf |
|
|
|
|
|
|
|
|
Boston, MA 02110 |
|
|
|
|
|
|
|
|
Randall Blumenthal
(1)(3) |
|
11,490,888 |
|
14.44 |
|
|
12.97 |
|
c/o Goldman, Sachs & Co.
2765 Sand Hill
Road |
|
|
|
|
|
|
|
|
Menlo Park, CA 94025 |
|
|
|
|
|
|
|
|
Robert E. Davoli
(5) |
|
6,445,900 |
|
8.11 |
|
|
7.28 |
|
c/o Sigma Partners |
|
|
|
|
|
|
|
|
20 Custom House Street |
|
|
|
|
|
|
|
|
Suite 830 |
|
|
|
|
|
|
|
|
Boston, MA 02110 |
|
|
|
|
|
|
|
|
Thomas J. Casey
(10) |
|
5,278,940 |
|
6.64 |
|
|
5.96 |
|
360 N. Crescent Drive |
|
|
|
|
|
|
|
|
Beverly Hills, CA
90210 |
|
|
|
|
|
|
|
|
Michael D. Lambert
(11) |
|
5,278,940 |
|
6.64 |
|
|
5.96 |
|
c/o Dell Computer
Corporation |
|
|
|
|
|
|
|
|
One Dell Way |
|
|
|
|
|
|
|
|
Round Rock, TX 78687 |
|
|
|
|
|
|
|
|
William T. Schleyer
(12) |
|
683,636 |
|
* |
|
|
* |
|
Stephen J. Gaal |
|
476,298 |
|
* |
|
|
* |
|
Paul C. Flanagan
|
|
125,000 |
|
* |
|
|
* |
|
John C. Clavin |
|
|
|
* |
|
|
* |
|
Barry L.
Kallander |
|
|
|
* |
|
|
* |
|
Jeffrey W.
Murphy |
|
|
|
* |
|
|
* |
|
Michael G.
Tardif |
|
|
|
* |
|
|
* |
|
All executive officers and
directors as a group
(15 persons) (13) |
|
60,441,874 |
|
75.93 |
|
|
68.22 |
|
*
|
Less than 1% of the
outstanding common stock
|
(1)
|
Includes 8,332,028 shares
held by GS Capital Partners III, L.P., 2,290,574 shares held by GS Capital
Partners III Offshore, L.P., 384,650 shares held by Goldman, Sachs &
Co. Verwaltungs GmbH and 458,636 shares held by Stone Street Fund 1999,
L.P. (collectively, the Limited Partnerships). Goldman, Sachs
& Co. (GS) is an indirect wholly-owned subsidiary of The
Goldman Sachs Group, Inc. (GSG). GSG and GS may be deemed to
own beneficially and indirectly in the aggregate 11,465,888 shares held by
the Limited Partnerships of which affiliates of GS and GSG are the general
partner, managing general partner or managing partner. GS is the
investment manager of one or more of the Limited Partnerships. Mr.
Blumenthal is a Managing Director of GS. Mr. Blumenthal, GS and GSG each
disclaim beneficial ownership of such shares, except to the extent of
their pecuniary interest therein. The Limited Partnerships plan to enter
into a voting trust agreement with an independent, unaffiliated trust
company, pursuant to which the Limited Partnerships will deposit all of
their shares of common stock into a voting trust. Generally the voting
trustee will vote such shares with the majority of votes cast or, in
certain circumstances, in proportion to the votes cast or abstained from
voting. Under the voting trust agreement, (i) the Limited Partnerships
will have the power to dispose or to direct the disposition of their
shares and (ii) each Limited Partnership will have the right to receive
all dividends paid on their shares.
|
(2)
|
Includes 1,579,542 shares
held by Grampek Limited Partnership and 250,000 shares held by LAULIN
Limited Partnership, each of which Mr. Marino is general partner. Mr.
Marino disclaims beneficial ownership with respect to such shares, except
to the extent of his pecuniary interest therein, if any.
|
(3)
|
Includes 25,000 shares
subject to an option that is exercisable as of April 30, 2000.
|
(4)
|
Includes 7,500,000 shares
held by the Dixon Family Limited Partnership, of which Mr. Dixon is
general partner.
|
(5)
|
Includes 4,261,042 shares
held by Sigma Partners, IV, L.P., 1,281,884 shares held by Sigma
Associates IV, L.P., 148,130 shares held by Sigma Investors IV, L.P.,
576,578 shares held by Sigma Partners V, L.P., 133,950 shares held by
Sigma Associates V, L.P., 19,316 shares held by Sigma Investors V, L.P.
Mr. Davoli is a partner of Sigma Partners, an affiliated entity of these
limited partnerships. Mr. Davoli disclaims beneficial ownership with
respect to such shares, except to the extent of his pecuniary interest
therein, if any.
|
(6)
|
All such shares are held by
the PWB Limited Partnership, of which Mr. Bell is general partner. Mr.
Bell disclaims beneficial ownership with respect to such shares, except to
the extent of his pecuniary interest therein, if any.
|
(7)
|
Includes 2,443,276 shares
held by MAWAM LLP, of which Mr. Miller is general partner and 71,142
shares held by MAWAM Perpetual Family Trust. Mr. Miller disclaims
beneficial ownership with respect to such shares, except to the extent of
his pecuniary interest therein, if any.
|
(8)
|
Includes 25,000 shares
subject to an option held by an affiliated entity that is exercisable as
of April 30, 2000.
|
(9)
|
Includes 521,318 shares
held by PH Ventures VIII, LLC, an affiliated entity.
|
(10)
|
Includes 5,253,940 shares
held by G.C. Dev. Co., Inc. and 25,000 shares held by Mr. Casey. Mr. Casey
is the Vice Chairman and Managing Director of Global Crossing
Telecommunications Ltd., an affiliate of G.C. Dev. Co., Inc. Mr. Casey
disclaims beneficial ownership with respect to such shares, except to the
extent of his pecuniary interest therein, if any.
|
(11)
|
Includes 5,253,940 shares
and an option exercisable within 60 days of April 30, 2000 to purchase
25,000 shares held by Dell U.S.A. L.P. Mr. Lambert is Senior Vice
President of the Enterprise Systems Group of Dell Computer Corporation, an
affiliate of Dell U.S.A. L.P. Mr. Lambert disclaims beneficial ownership
of such shares, except to the extent of his pecuniary interest therein, if
any.
|
(12)
|
Includes 30,000 shares held
by The Grey Dog Trust, with which Mr. Schleyer is affiliated.
Mr. Schleyer disclaims beneficial ownership with respect to the shares held
by The Grey Dog Trust, except to the extent of his pecuniary interest
therein, if any.
|
(13)
|
Includes 75,000 shares
subject to vested options or options exercisable within 60 days of April
30, 2000.
|
DESCRIPTION OF CAPITAL
STOCK
After this offering, the authorized capital stock of
StorageNetworks will consist of 600,000,000 shares of common stock, $.01 par
value per share, and 5,000,000 shares of preferred stock, $.01 par value per
share. As of April 30, 2000, there were outstanding:
|
|
79,527,118 shares of common
stock held by 124 stockholders of record, assuming the conversion into
common stock of all outstanding shares of convertible preferred
stock,
|
|
|
warrants to purchase shares
of convertible preferred stock which convert into warrants to purchase
1,070,164 shares of common stock, and
|
|
|
options to purchase an
aggregate of 9,529,250 shares of common stock.
|
Based upon the number of shares outstanding as of that date, and
giving effect to the issuance of the shares of common stock offered by
StorageNetworks in this offering, there will be 88,527,118 shares of common
stock outstanding upon the closing of this offering.
The following summary of provisions of our securities, various
provisions of our amended and restated certificate of incorporation and our
amended and restated by-laws and provisions of applicable law is not
intended to be complete and is qualified by reference to the provisions of
applicable law and to our amended and restated certificate of incorporation
and amended and restated by-laws included as exhibits to the Registration
Statement of which this prospectus is a part.
Common
Stock
Holders of common stock are entitled to one vote for each share
held on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Accordingly, holders of a majority of the shares
of common stock entitled to vote in any election of directors may elect all
of the directors standing for election. Holders of common stock are entitled
to receive proportionately any dividends declared by the board of directors,
subject to any preferential dividend rights of outstanding preferred stock.
Upon the liquidation, dissolution or winding up of StorageNetworks, the
holders of common stock are entitled to receive ratably the net assets of
StorageNetworks available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of common stock have no preemptive, subscription, redemption
or conversion rights. The rights, preferences and privileges of holders of
common stock are subject to the rights of the holders of shares of any
series of preferred stock which StorageNetworks may designate and issue in
the future. Certain holders of common stock have the right to require
StorageNetworks to register their shares of common stock under the
Securities Act in certain circumstances.
Preferred
Stock
Under the terms of our amended and restated certificate of
incorporation to be filed as of the closing of this offering, the board of
directors is authorized to issue shares of preferred stock in one or more
series without stockholder approval. The board has discretion to determine
the rights, preferences, privileges and restrictions, including voting
rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences of each series of preferred stock.
The purpose of authorizing the board of directors to issue
preferred stock and determine its rights and preferences is to eliminate
delays associated with a stockholder vote or specific issuances. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could
make it more difficult for a third party to acquire, or could discourage a
third party from acquiring, a majority of the outstanding voting stock of
StorageNetworks. StorageNetworks has no present plans to issue any shares of
preferred stock.
Warrants and Stock
Options
Upon the closing of the offering, based on warrants outstanding
as of April 30, 2000, there will be warrants outstanding to purchase 260,164
shares of common stock at a per share exercise price of $2.46 and 810,000
shares of common stock at a per share exercise price of $22.75. These
warrants are held by equipment leasing and financial services companies and
three of our customers. As of April 30, 2000, 9,529,250 shares were issuable
pursuant to stock option grants under our 1998 Stock Incentive Plan, at a
weighted-average per share exercise price of $2.37.
Delaware Law and Certain
Charter and By-Law Provisions; Anti-Takeover Effects
StorageNetworks is subject to the provisions of Section 203 of
the General Corporation Law of Delaware. In general, the statute prohibits a
publicly held Delaware corporation from engaging in a business
combination with an interested stockholder for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes mergers,
asset sales and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an interested
stockholder is a person who, together with affiliates and associates,
owns, or within three years did own, 15% or more of the corporations
voting stock.
Our certificate of incorporation and our by-laws to be effective
on the closing of this offering divide our board of directors into three
classes, as nearly equal in size as possible, with staggered three-year
terms, and provide that:
|
|
directors may be removed
only for cause by the affirmative vote of the holders of at least
66 2
/3% of the shares of our
capital stock entitled to vote; and
|
|
|
any vacancy on the board of
directors, however occurring, including a vacancy resulting from an
enlargement of the board, may only be filled by vote of a majority of the
directors then in office.
|
This classification of the
board of directors and the limitations on the removal of directors and
filling of vacancies could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring,
StorageNetworks.
Our certificate of incorporation and our by-laws also provide
that:
|
|
any action required or
permitted to be taken by the stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before
such meeting and may not be taken by written action in lieu of a meeting;
and
|
|
|
special meetings of the
stockholders may only be called by the Chairman of the Board of directors,
the President, or by the board of directors.
|
Our amended and restated by-laws provide that, in order for any
matter to be considered properly brought before a meeting, a
stockholder must comply with requirements regarding advance notice to us.
These provisions could delay until the next stockholders meeting
stockholder actions which are favored by the holders of a majority of our
outstanding voting securities. These provisions may also discourage another
person or entity from making a tender offer for our common stock, because
such a person or entity, even if it acquired a majority of our outstanding
voting securities, would be able to take action as a stockholder (such as
electing new directors or approving a merger) only at a duly called
stockholders meeting, and not by written consent.
Delawares corporation law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter
is required to amend a corporations certificate of incorporation or
by-laws, unless a corporations certificate of incorporation or by-laws
requires a greater percentage. Our certificate of incorporation requires the
affirmative vote of the holders of at least 66 2
/3% of the shares of our
capital stock entitled to vote in order to amend or repeal any of the
foregoing provisions of our amended and restated certificate of
incorporation. Generally our by-laws may be amended or repealed by a
majority vote of the board of directors or the holders of a majority of the
shares of our capital stock issued and outstanding and entitled to vote. To
amend our by-laws regarding special meetings of stockholders, written
actions of stockholders in lieu of a meeting, and the election, removal and
classification of members of the board of directors requires the affirmative
vote of the holders of at least 66 2
/3% of the shares of our
capital stock entitled to vote. The stockholder vote would be in addition to
any separate class vote that might in the future be required pursuant to the
terms of any series of preferred stock that might be outstanding at the time
any such amendments are submitted to stockholders.
Limitation of Liability
and Indemnification
Our certificate of incorporation provides that our directors and
officers shall be indemnified by us to the fullest extent authorized by
Delaware law. This indemnification would cover all expenses and liabilities
reasonably incurred in connection with their services for or on behalf of
us. In addition, our certificate of incorporation provides that our
directors will not be personally liable for monetary damages to us for
breaches of their fiduciary duty as directors, unless they violated their
duty of loyalty to us or our stockholders, acted in bad faith, knowingly or
intentionally violated the law, authorized illegal dividends or redemptions
or derived an improper personal benefit from their action as
directors.
Transfer Agent and
Registrar
The transfer agent and registrar for the common stock is
American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR
FUTURE SALE
Prior to this offering there has been no market for our common
stock. Based on shares outstanding as of April 30, 2000, after we complete
this offering, we will have 88,527,118 shares of common stock outstanding,
assuming no exercise of outstanding options or warrants. Of these shares,
the 9,000,000 shares to be sold in this offering, plus any shares issued
upon exercise of the underwriters over-allotment option, will be
freely tradable without restriction or further registration under the
Securities Act of 1933, as amended, except that any shares purchased by our
affiliates, as that term is defined in Rule 144 under the Securities Act,
may generally only be sold in compliance with the limitations of Rule 144
described below. In general, affiliates include officers, directors and 10%
stockholders.
The remaining 79,527,118 shares of common stock are
restricted securities within the meaning of Rule 144. They are
held by existing stockholders and were issued and sold by us in reliance on
exemptions from the registration requirements of the Securities Act.
Restricted securities may be sold in the public market only if registered or
if they qualify for an exemption from registration under Rule 144 or Rule
701 under the Securities Act, which are summarized below. Substantially all
of these restricted shares will be subject to the lock-up
agreements described below on the effective date of this offering. Upon
expiration of the lock-up agreements, 65,743,192 shares will become eligible
for sale in the public market subject to the limitations of either Rule 144
or Rule 701. In addition, holders of stock options could exercise options
and sell the shares issued upon exercise as described below under
Stock Options.
Sales of Restricted
Shares
Days After Date of this
Prospectus
|
|
Approximate Shares
Eligible for Future Sale
|
|
Comment
|
On effectiveness |
|
9,000,000 |
|
Freely tradable sold in
offering |
|
|
|
|
|
180 days after the date of
this
Prospectus |
|
65,743,192 |
|
Shares salable upon expiration of
lock-up period, subject to restrictions
under Rule 144 or 701 that are
applicable to our affiliates |
|
|
|
|
|
More than 180 days after
the date of
this Prospectus |
|
13,783,926 |
|
Shares salable subject to restrictions
of Rule 144, 144(k) or 701 |
The foregoing table takes into account the lock-up agreements
described below, and assumes that Goldman, Sachs & Co. does not release
any stockholders from these agreements.
In general, under Rule 144, a person, including an affiliate,
who has beneficially owned shares for at least one year is entitled to sell,
within any three-month period, a number of such shares that does not exceed
the greater of:
|
|
one percent of the then
outstanding shares of common stock, approximately 885,660 shares
immediately after this offering, or
|
|
|
the average weekly trading
volume of the common stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is
filed.
|
Sales under Rule 144 are also
subject to requirements concerning availability of public information,
manner of sale and notice of sale. In addition, our affiliates must comply
with the restrictions and requirements of Rule 144, other than the one-year
holding period requirement, to sell shares of common stock that are not
restricted securities.
Under Rule 144(k), a person who is not deemed to be an
affiliate of ours and has not been an affiliate at any time during the three
months prior to the sale, and who has beneficially owned shares for at least
two years, may resell such shares without compliance with the foregoing
requirements. In meeting the one- and two-year holding periods described
above, a holder of shares can include the holding periods of a prior owner
who was not an affiliate. The one- and two-year holding periods described
above do not begin to run until the full purchase price or other
consideration is paid by the person acquiring the shares from the issuer or
an affiliate.
Rule 701 provides that currently outstanding shares of common
stock acquired under our employee compensation plans, and shares of common
stock acquired upon exercise of presently outstanding options granted under
these plans, may be resold beginning 90 days after the date of this
prospectus:
|
|
by persons, other than
affiliates, subject only to the manner-of-sale provisions of Rule 144,
and
|
|
|
by affiliates under Rule
144 without compliance with its one-year minimum holding period, subject
to the limitations described above in the discussion of Rule
144.
|
Stock
Options
At April 30, 2000, approximately 144,657 shares of common stock
were issuable pursuant to exercisable options granted under our 1998 Stock
Incentive Plan. All of these shares are subject to lock-up
agreements.
We intend to file registration statements on Form S-8 under the
Securities Act as soon as practicable following the date of this prospectus,
to register up to 24,320,000 shares of common stock issuable under our stock
plans, including the 9,529,250 shares of common stock subject to outstanding
options as of April 30, 2000. These registration statements are expected to
become effective upon filing. Shares issued upon the exercise of stock
options after the effective dates of the Form S-8 registration statements
will be eligible for resale in the public market without restriction,
subject to Rule 144 limitations applicable to affiliates.
Warrants
Based on warrants outstanding at April 30, 2000, upon the
closing of this offering, there will be warrants outstanding to purchase
260,164 shares of common stock at a per share exercise price of
approximately $2.46 per share. 97,562 of these shares will be eligible for
resale in the public market on October 27, 2000 and 162,602 of these shares
will be eligible for resale in the public market on October 29, 2000,
subject to the requirements of Rule 144. Upon the closing of this offering
there will also be warrants outstanding to purchase 810,000 shares of common
stock at a per share exercise price of approximately $22.75, which will be
eligible for resale in the public market on February 28, 2001, subject to
the requirements of Rule 144. The exercise price for all of these warrants
may be paid in cash or in shares of common stock issuable upon exercise of
such warrants, valued at the fair market value of the common stock on the
date of exercise.
Lock-Up
Agreements
As of April 30, 2000, all officers and directors and certain
stockholders holding an aggregate of approximately 79,327,118 shares of
StorageNetworks common stock have agreed, subject to specified
exceptions, not to offer, pledge, sell, contract to sell or grant any option
to purchase, or otherwise transfer or dispose of, directly or indirectly our
common stock or any securities convertible into or exercisable for our
common stock for a period of 180 days after the date of this prospectus,
without the prior written consent of Goldman, Sachs & Co. Goldman Sachs
may, in its discretion, release the restrictions contained in the lock-up
agreement. Goldman Sachs has no pre-established
conditions to waiving the terms of the lock-up agreements and any decision by
it to waive such conditions would depend on a number of factors, including
market conditions, the performance of our common stock in the market and our
financial condition at that time. Goldman Sachs has consented to release up
to 235,302 of the shares subject to the lock-up agreements of Mr. Miller and
an entity affiliated with Mr. Miller, in order for Mr. Miller and this
affiliated entity to transfer these shares to The Nostro Regalo Foundation,
a charitable entity.
Registration
Rights
After this offering, the holders of approximately 78,509,118
shares of common stock will be entitled to rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between us and the holders of such registrable securities, if we
propose to register any of our securities under the Securities Act, either
for our own account or for the account of other security holders exercising
registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such common stock
therein. Additionally, beginning six months after the closing of this
offering, such holders are also entitled to demand registration rights
pursuant to which they may require us on up to three occasions to file a
registration statement under the Securities Act at our expense with respect
to shares of our common stock, and we are required to use our best efforts
to effect such registration. Further, holders may require us at least once
in every 12-month period to file additional registration statements on Form
S-3 at our expense. All of these registration rights are subject to
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such
registration.
StorageNetworks and the underwriters named below have entered
into an underwriting agreement with respect to the shares being offered.
Subject to the conditions in the underwriting agreement, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. Goldman, Sachs & Co., Credit Suisse First Boston,
Thomas Weisel Partners LLC and Wit SoundView Corporation are the
representatives of the underwriters.
Underwriters
|
|
Number of
Shares
|
Goldman, Sachs &
Co. |
|
3,975,000 |
Credit Suisse First Boston
Corporation |
|
2,146,500 |
Thomas Weisel Partners
LLC |
|
1,351,500 |
Wit SoundView
Corporation |
|
477,000 |
Banc of America Securities
LLC |
|
100,000 |
Chase Securities
Inc. |
|
100,000 |
Dain Rauscher
Incorporated |
|
100,000 |
Deutsche Banc Securities
Inc. |
|
100,000 |
A.G. Edwards & Sons,
Inc. |
|
100,000 |
Edward D. Jones & Co.,
L.P. |
|
100,000 |
Salomon Smith Barney
Inc. |
|
100,000 |
Wasserstein Perella
Securities, Inc. |
|
100,000 |
Robert W. Baird & Co.
Incorporated |
|
50,000 |
Legg Mason Wood Walker,
Incorporated |
|
50,000 |
Morgan Keegan &
Company, Inc. |
|
50,000 |
Needham & Company,
Inc. |
|
50,000 |
The Williams Capital Group,
L.P. |
|
50,000 |
|
|
|
Total |
|
9,000,000 |
|
|
|
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy up to an
additional 1,350,000 shares from us to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in approximately the
same proportion as set forth in the table above.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by us. Such amounts
are shown assuming both no exercise and full exercise of the
underwriters option to purchase 1,350,000 additional
shares.
Paid by
StorageNetworks
|
|
|
|
|
No Exercise
|
|
Full Exercise
|
Per Share |
|
$
1.89 |
|
$
1.89 |
Total |
|
$17,010,000 |
|
$19,561,500 |
StorageNetworks estimates that its share of the total expenses
of this offering, excluding underwriting discounts and commissions, will be
approximately $1,000,000.
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the cover of this
prospectus. Any shares sold by the underwriters to securities dealers may be
sold at a discount of up to $1.13 per share from the initial public offering
price. Any such securities dealers may resell any shares purchased from the
underwriters to certain other brokers or dealers at a discount of up to $.10
per share from the initial public offering price. If all the shares are not
sold at the initial public offering price, the representatives may change
the offering price and the other selling terms.
StorageNetworks, its directors, officers and holders of
substantially all of its stock have agreed with the underwriters not to
dispose of or hedge any of their common stock or securities convertible into
or exchangeable for common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs &
Co.
At the request of StorageNetworks, the underwriters have
reserved up to 1,000,000 shares of common stock to be sold at the initial
public offering price to directors, officers, employees, strategic partners
and friends of StorageNetworks through a directed share program. The number
of shares available for sale to the general public in the offering will be
reduced to the extent these persons purchase these reserved shares. Any
reserved shares not purchased will be offered to the general public on the
same basis as the other shares offered by this prospectus.
Prior to this offering, there has been no public market for the
shares. The initial public offering price was negotiated among us and the
representatives. Among the factors considered in
determining the initial
public offering price of the shares, in addition to prevailing market
conditions, were our historical performance, estimates of our business
potential and our earnings prospects, an assessment of our management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
The common stock has been approved for quotation on the Nasdaq
National Market under the symbol STOR.
In connection with this offering, the underwriters may purchase
and sell shares of common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to
purchase in this offering. Stabilizing transactions consist of certain bids
or purchases made for the purpose of preventing or retarding a decline in
the market price of the common stock while this offering is in
progress.
The underwriters also may impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of the
underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the
price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
Four investment partnerships of which affiliates of The Goldman
Sachs Group, Inc., an affiliate of Goldman, Sachs (lead manager of this
offering), are general partner, managing general partner or investment
manager hold 1,303,292 shares of our common stock and 5,081,298 shares of
Series B preferred stock which are convertible into 10,162,596 shares of
common stock upon the closing of the offering. Because of the economic
interest based on contributed capital of Goldman Sachs and its employees in
those investment partnerships, the aggregate beneficial ownership interest
(as determined in accordance with the Conduct Rules of the National
Association of Securities Dealers, Inc.) of StorageNetworks attributable to
Goldman, Sachs is approximately 3.4%. Of the aggregate number of shares
owned, these partnerships purchased 1,303,292 shares of common stock, at a
price of $8.56 per share, from two of our executive officers in January 2000
at the time of our private placement of Series C preferred
stock.
Thomas Weisel Partners LLC, one of the representatives of the
underwriters, was organized and registered as a broker-dealer in December
1998. Since December 1998, Thomas Weisel Partners has been named as a lead
or co-managing underwriter in 166 filed public offerings of equity
securities, of which 122 have been completed, and has acted as a syndicate
member in an additional 95 public offerings of equity securities. Thomas
Weisel Partners does not have any material relationship with us or any of
our officers, directors or other controlling persons, except with respect to
its contractual relationship with us pursuant to the underwriting agreement
entered into in connection with this offering.
A prospectus in electronic format is available on the web sites
maintained by one or more of the lead managers of this offering and may also
be made available on web sites maintained by other underwriters. For
example, in accordance with procedures previously approved by the
Commission, Wit Capital Corporation, an affiliate of Wit SoundView
Corporation, has established a separate area of its web site for this
offering, which includes a notice complying with Rule 134 and an electronic
version of the preliminary prospectus. Wit Capital will e-mail its members
to notify them of the offering and the availability of the electronic
prospectus. After receiving conditional offers, Wit Capital will allocate
shares to its members on a modified first-come, first-served basis, which
takes into account the time a member makes a conditional offer as well as
various other factors. The underwriters may agree to allocate a number of
shares to underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the lead managers to
underwriters that may make Internet distributions on the same basis as other
allocations.
StorageNetworks has agreed to indemnify the several underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933.
The validity of the shares of common stock to be issued in the
offering will be passed upon for us by Hale and Dorr LLP, Boston,
Massachusetts. Legal matters for the underwriters will be passed upon by
Ropes & Gray, Boston, Massachusetts.
Ernst & Young LLP, independent auditors, have audited our
consolidated financial statements and schedule at December 31, 1998 and
1999, and for the period October 5, 1998 (commencement of operations) to
December 31, 1998 and the year ended December 31, 1999, as set forth in
their report. We have included our financial statements and schedule in the
prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLPs report, given on their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with the Securities and Exchange Commission, a
registration statement on Form S-1 under the Securities Act with respect to
the shares to be sold in this offering. As permitted by the rules and
regulations of the Commission, this prospectus omits certain information
contained in the registration statement. For further information with
respect to StorageNetworks and the common stock to be sold in this offering,
you should refer to the registration statement and to its exhibits and
schedules. Statements contained in this prospectus regarding the contents of
any agreement or other document are not necessarily complete. You should
refer in each instance to the copy of the agreement filed as an exhibit to
the registration statement, each such statement being qualified in all
respects by the document to which it refers. When we complete the offering,
we will also be required to file annual, quarterly and special reports,
proxy statements and other information with the Commission.
You can read the registration statement and the exhibits and
schedules filed with the registration statement or any reports, statements
or other information StorageNetworks files, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10007
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may
also obtain copies of the documents from such offices upon payment of the
prescribed fees. You may call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. You may also
request copies of the documents upon payment of a duplicating fee, by
writing to the Commission. In addition, the Commission maintains a web site
that contains reports, proxy and information statements and other
information regarding registrants (including us) that file electronically
with the Commission, which you can access at
http://www.sec.gov.
We intend to send to our stockholders annual reports containing
our audited consolidated financial statements.
StorageNetworks,
Inc.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
Page
|
Report of Independent
Auditors |
|
F-2 |
|
Consolidated balance sheets
at December 31, 1998 and 1999 and March 31, 2000
(unaudited) |
|
F-3 |
|
Consolidated statements of
operations for the period from October 5, 1998 (commencement of
operations) through December 31, 1998, the
year ended December 31, 1999 and the
three-months ended March 31, 1999 and 2000
(unaudited) |
|
F-4 |
|
Consolidated statements of
stockholders equity for the period from October 5, 1998
(commencement of operations) through December
31, 1998 and the year ended
December 31, 1999 and the three-months ended
March 31, 2000 (unaudited) |
|
F-5 |
|
Consolidated statements of
cash flows for the period from October 5, 1998 (commencement of
operations) through December 31, 1998, the
year ended December 31, 1999 and the
three-months ended March 31, 1999 and 2000
(unaudited) |
|
F-6 |
|
Notes to consolidated
financial statements |
|
F-7 |
REPORT OF INDEPENDENT
AUDITORS
Board of Directors and
Stockholders
StorageNetworks,
Inc.
We have audited the accompanying consolidated balance sheets of
StorageNetworks, Inc. (the Company) as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders
equity, and cash flows for the period October 5, 1998 (commencement of
operations) to December 31, 1998 and the year ended December 31, 1999. These
financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of StorageNetworks, Inc. at December 31, 1998 and 1999, and the
consolidated results of their operations and their cash flows for the period
October 5, 1998 (commencement of operations) to December 31, 1998 and the
year ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
Boston,
Massachusetts
February 5, 2000
StorageNetworks,
Inc.
CONSOLIDATED BALANCE
SHEETS
|
|
December 31,
|
|
March
31,
|
|
|
1998
|
|
1999
|
|
2000
|
|
|
|
|
|
|
(unaudited) |
ASSETS |
CURRENT ASSETS: |
Cash and
cash equivalents |
|
$8,280,035 |
|
|
$
13,317 |
|
|
$ 40,037,553 |
|
Short-term investments |
|
|
|
|
34,802,137 |
|
|
104,855,920 |
|
Accounts
receivable, net of allowance for doubtful accounts of
$75,718 and $338,087 at December 31, 1999 and March
31, 2000, respectively |
|
540,512 |
|
|
3,166,925 |
|
|
5,342,921 |
|
Inventory |
|
201,405 |
|
|
|
|
|
|
|
Prepaid
expenses and other current assets |
|
66,684 |
|
|
1,498,601 |
|
|
4,476,559 |
|
|
|
|
|
|
|
|
|
|
|
Total current
assets |
|
9,088,636 |
|
|
39,480,980 |
|
|
154,712,953 |
|
Property and equipment,
net |
|
83,434 |
|
|
25,751,463 |
|
|
50,743,149 |
|
Restricted cash
equivalents |
|
|
|
|
359,127 |
|
|
359,127 |
|
Rights to use fiber optic
capacity |
|
|
|
|
900,200 |
|
|
2,627,428 |
|
Deferred customer
acquisition costs |
|
|
|
|
|
|
|
1,418,400 |
|
Other assets |
|
500,000 |
|
|
767,095 |
|
|
1,044,490 |
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
$9,672,070 |
|
|
$67,258,865 |
|
|
$210,905,547 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY |
CURRENT
LIABILITIES: |
|
|
|
|
|
|
|
|
|
Accounts
payable |
|
$
|
|
|
$ 3,093,598 |
|
|
$ 7,679,740 |
|
Accrued
expenses |
|
506,706 |
|
|
6,081,723 |
|
|
10,280,674 |
|
Deferred
revenue |
|
497,480 |
|
|
810,108 |
|
|
1,672,548 |
|
Capital
lease obligations |
|
|
|
|
4,442,144 |
|
|
6,989,356 |
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities |
|
1,004,186 |
|
|
14,427,573 |
|
|
26,622,318 |
|
Capital lease obligations,
less current portion |
|
|
|
|
15,822,482 |
|
|
25,335,768 |
|
Commitments and
contingencies |
STOCKHOLDERS
EQUITY: |
|
|
|
|
|
|
|
|
|
Series A
convertible preferred stock, par value $.01; 5,000,000
shares authorized; 4,500,000 shares issued and outstanding
at December 31, 1998 and 5,000,000 shares issued and
outstanding at December 31, 1999 and March 31, 2000
respectively; liquidation value $10,000,000 |
|
45,000 |
|
|
50,000 |
|
|
50,000 |
|
Series B
convertible preferred stock, par value $.01;
10,294,080 shares authorized; 10,162,596 shares issued
and outstanding; liquidation value $49,999,987 |
|
|
|
|
101,626 |
|
|
101,626 |
|
Series C
convertible preferred stock, par value $.01; 6,027,438
shares authorized; 6,012,843 shares issued and
outstanding; liquidation value $103,000,000 |
|
|
|
|
|
|
|
60,128 |
|
Series D
convertible preferred stock, par value $.01; 2,758,240
shares authorized; 1,758,240 shares issued and
outstanding; liquidation value $40,000,000 |
|
|
|
|
|
|
|
17,582 |
|
Common
stock, par value $.01; 600,000,000 shares
authorized; 24,400,000, 24,531,500 and 25,151,875 shares
issued and outstanding at December 31, 1998 and 1999
and March 31, 2000 respectively |
|
244,000 |
|
|
245,315 |
|
|
251,519 |
|
Additional paid-in capital |
|
9,991,616 |
|
|
80,941,604 |
|
|
228,778,455 |
|
Deferred
stock compensation |
|
(1,076,350 |
) |
|
(19,879,675 |
) |
|
(18,845,614 |
) |
Accumulated deficit |
|
(536,382 |
) |
|
(24,450,060 |
) |
|
(51,466,235 |
) |
|
|
|
|
|
|
|
|
|
|
Total
stockholders equity |
|
8,667,884 |
|
|
37,008,810 |
|
|
158,947,461 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
and stockholders equity |
|
$9,672,070 |
|
|
$67,258,865 |
|
|
$210,905,547 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
StorageNetworks,
Inc.
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
Period from
October 5, 1998
(commencement
of operations) to
December 31,
1998
|
|
Year ended
December 31,
1999
|
|
Three months ended March
31,
|
|
|
|
|
1999
|
|
2000
|
|
|
|
|
|
|
(unaudited) |
REVENUES: |
Professional services revenues |
|
$
|
|
|
$ 3,202,811 |
|
|
$
|
|
|
$ 3,312,682 |
|
Managed storage services revenues |
|
|
|
|
720,225 |
|
|
|
|
|
1,306,936 |
|
Equipment revenues |
|
|
|
|
2,334,785 |
|
|
383,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
|
|
6,257,821 |
|
|
383,464 |
|
|
4,619,618 |
|
COSTS AND
EXPENSES: |
Cost of professional services revenues,
excluding deferred stock compensation
amortization amounts |
|
8,790 |
|
|
5,343,373 |
|
|
115,225 |
|
|
4,816,589 |
|
Cost of managed storage services
revenues, excluding deferred stock
compensation amortization amounts |
|
101,221 |
|
|
8,399,709 |
|
|
385,987 |
|
|
11,094,232 |
|
Cost of equipment revenues |
|
|
|
|
2,110,718 |
|
|
361,588 |
|
|
|
|
Sales and marketing, excluding deferred
stock compensation amortization
amounts |
|
39,445 |
|
|
7,304,441 |
|
|
350,019 |
|
|
9,606,384 |
|
General and administrative, excluding
deferred stock compensation
amortization amounts |
|
230,505 |
|
|
5,558,194 |
|
|
393,570 |
|
|
3,701,544 |
|
Product development, excluding deferred
stock compensation amortization
amounts |
|
|
|
|
1,133,299 |
|
|
25,163 |
|
|
1,827,173 |
|
Amortization of deferred stock
compensation* |
|
|
|
|
1,300,385 |
|
|
23,975 |
|
|
1,383,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses |
|
379,961 |
|
|
31,150,119 |
|
|
1,655,527 |
|
|
32,429,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
(379,961 |
) |
|
(24,892,298 |
) |
|
(1,272,063 |
) |
|
(27,809,662 |
) |
Interest income |
|
11,329 |
|
|
1,371,121 |
|
|
76,381 |
|
|
1,599,014 |
|
Interest expense |
|
|
|
|
(392,501 |
) |
|
|
|
|
(805,527 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ (368,632 |
) |
|
$(23,913,678 |
) |
|
$(1,195,682 |
) |
|
$(27,016,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per
sharebasic and diluted |
|
$
(0.02 |
) |
|
$
(0.98 |
) |
|
$
(0.05 |
) |
|
$
(1.09 |
) |
Weighted average common
shares
outstanding |
|
24,400,000 |
|
|
24,406,756 |
|
|
24,400,000 |
|
|
24,764,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Amortization of deferred
stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
professional services revenues |
|
$
|
|
|
$ 228,352 |
|
|
$
2,835 |
|
|
$ 164,935 |
|
Cost of managed
storage services revenues |
|
|
|
|
71,068 |
|
|
2,524 |
|
|
77,213 |
|
Sales and
marketing |
|
|
|
|
603,225 |
|
|
14,666 |
|
|
477,582 |
|
General and
administrative |
|
|
|
|
251,100 |
|
|
|
|
|
261,348 |
|
Product
development |
|
|
|
|
146,640 |
|
|
3,950 |
|
|
402,280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$ 1,300,385 |
|
|
$ 23,975 |
|
|
$ 1,383,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
StorageNetworks,
Inc.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
|
Common
Stock
|
|
Series A
Preferred Stock
|
|
Series B
Preferred Stock
|
|
Series C
Preferred Stock
|
|
Series D
Preferred Stock
|
|
Additional
Paid-in
Capital
|
|
Deferred
Stock
Compensation
|
|
Accumu-
lated
Deficit
|
|
Total
Stockholders
Equity
|
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
|
Shares
|
|
Par
Value
|
Initial issuance of common
stock
on October 5, 1998 |
|
24,400,000 |
|
$244,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ (167,750 |
) |
|
$
76,250 |
|
Sale of Series A preferred
stock,
net |
|
|
|
|
|
4,500,000 |
|
$45,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 8,915,266 |
|
|
|
|
|
|
|
|
8,960,266 |
|
Deferred compensation
expense
associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,076,350 |
|
|
$ (1,076,350 |
) |
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(368,632 |
) |
|
(368,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31,
1998 |
|
24,400,000 |
|
244,000 |
|
4,500,000 |
|
45,000 |
|
|
|
$
|
|
|
|
|
|
|
|
|
|
9,991,616 |
|
|
(1,076,350 |
) |
|
(536,382 |
) |
|
8,667,884 |
|
Issuance of Series A
preferred
stock |
|
|
|
|
|
500,000 |
|
5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
995,000 |
|
|
|
|
|
|
|
|
1,000,000 |
|
Issuance of Series B
preferred
stock, net |
|
|
|
|
|
|
|
|
|
10,162,596 |
|
101,626 |
|
|
|
|
|
|
|
|
|
49,849,305 |
|
|
|
|
|
|
|
|
49,950,931 |
|
Issuance of common stock in
connection with exercise of
stock options |
|
131,500 |
|
1,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,973 |
|
|
|
|
|
|
|
|
3,288 |
|
Deferred compensation
expense
associated with stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,806,710 |
|
|
(20,806,710 |
) |
|
|
|
|
|
|
Amortization of deferred
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300,385 |
|
|
|
|
|
1,300,385 |
|
Cancellation of stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(703,000 |
) |
|
703,000 |
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,913,678 |
) |
|
(23,913,678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31,
1999 |
|
24,531,500 |
|
245,315 |
|
5,000,000 |
|
50,000 |
|
10,162,596 |
|
101,626 |
|
|
|
|
|
|
|
|
|
80,941,604 |
|
|
(19,879,675 |
) |
|
(24,450,060 |
) |
|
37,008,810 |
|
Issuance of Series C
preferred
stock (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
6,012,843 |
|
$60,128 |
|
|
|
|
|
102,939,872 |
|
|
|
|
|
|
|
|
103,000,000 |
|
Issuance of Series D
preferred
stock (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,758,240 |
|
$17,582 |
|
39,982,418 |
|
|
|
|
|
|
|
|
40,000,000 |
|
Issuance of common stock in
connection with exercise of
stock options (unaudited) |
|
620,375 |
|
6,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019,264 |
|
|
|
|
|
|
|
|
1,025,468 |
|
Issuance of Series D
preferred
stock warrants (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,546,000 |
|
|
|
|
|
|
|
|
3,546,000 |
|
Deferred compensation
expense
associated with stock options
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
580,272 |
|
|
(580,272 |
) |
|
|
|
|
|
|
Amortization of deferred
compensation (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,383,358 |
|
|
|
|
|
1,383,358 |
|
Cancellation of stock
options
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(230,975 |
) |
|
230,975 |
|
|
|
|
|
|
|
Net loss
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,016,175 |
) |
|
(27,016,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT MARCH 31, 2000
(unaudited) |
|
25,151,875 |
|
$251,519 |
|
5,000,000 |
|
$50,000 |
|
10,162,596 |
|
$101,626 |
|
6,012,843 |
|
$60,128 |
|
1,758,240 |
|
$17,582 |
|
$228,778,455 |
|
|
$(18,845,614 |
) |
|
$(51,466,235 |
) |
|
$158,947,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
StorageNetworks,
Inc.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
|
Period from
October 5, 1998
(commencement
of operations) to
December 31, 1998
|
|
Year ended
December 31,
1999
|
|
Three months ended
March 31,
|
|
|
|
|
1999
|
|
2000
|
|
|
|
|
|
|
(unaudited) |
OPERATING
ACTIVITIES: |
Net
loss |
|
$ (368,632 |
) |
|
$(23,913,678 |
) |
|
$(1,195,682 |
) |
|
$(27,016,175 |
) |
Adjustments to reconcile net loss to net cash used
in operating activities: |
Depreciation and amortization |
|
434 |
|
|
1,797,355 |
|
|
17,196 |
|
|
2,538,483 |
|
Amortization of deferred stock
compensation |
|
|
|
|
1,300,385 |
|
|
23,975 |
|
|
1,383,358 |
|
Issuance
of stock warrants |
|
|
|
|
|
|
|
|
|
|
3,546,000 |
|
Changes
in operating assets and liabilities: |
Accounts
receivable |
|
(540,512 |
) |
|
(2,626,413 |
) |
|
(90,798 |
) |
|
(2,175,996 |
) |
Inventory |
|
(201,405 |
) |
|
201,405 |
|
|
(43,668 |
) |
|
|
|
Prepaid
expenses and other
current assets |
|
(66,684 |
) |
|
(1,431,917 |
) |
|
(45,706 |
) |
|
(2,977,958 |
) |
Other
assets |
|
(500,000 |
) |
|
(317,095 |
) |
|
(39,013 |
) |
|
(289,895 |
) |
Accounts
payable |
|
|
|
|
3,093,598 |
|
|
477,768 |
|
|
4,586,142 |
|
Accrued
expenses |
|
506,706 |
|
|
5,575,017 |
|
|
3,900 |
|
|
4,198,951 |
|
Deferred
revenue |
|
497,480 |
|
|
312,628 |
|
|
220,030 |
|
|
862,440 |
|
Deferred
customer acquisition costs |
|
|
|
|
|
|
|
|
|
|
(1,418,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
used in operating activities |
|
(672,613 |
) |
|
(16,008,715 |
) |
|
(671,998 |
) |
|
(16,763,050 |
) |
INVESTING
ACTIVITIES: |
Purchases
of property and equipment |
|
(83,868 |
) |
|
(8,715,651 |
) |
|
(279,253 |
) |
|
(15,726,981 |
) |
Purchases
of short term investments |
|
|
|
|
(49,676,401 |
) |
|
|
|
|
(154,115,968 |
) |
Proceeds
from maturities of short term
investments |
|
|
|
|
14,874,264 |
|
|
|
|
|
84,062,185 |
|
Purchase
of restricted cash equivalents |
|
|
|
|
(359,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
used in investing activities |
|
(83,868 |
) |
|
(43,876,915 |
) |
|
(279,253 |
) |
|
(85,780,764 |
) |
FINANCING
ACTIVITIES: |
Proceeds
from issuance of common stock |
|
76,250 |
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options |
|
|
|
|
3,288 |
|
|
|
|
|
1,025,468 |
|
Proceeds
from issuance of preferred stock |
|
9,000,000 |
|
|
50,999,987 |
|
|
1,000,000 |
|
|
143,000,000 |
|
Offering
costs |
|
(39,734 |
) |
|
(49,056 |
) |
|
|
|
|
|
|
Proceeds
from sale-leaseback transactions |
|
|
|
|
1,424,570 |
|
|
|
|
|
|
|
Payments
of capital lease obligations |
|
|
|
|
(759,877 |
) |
|
|
|
|
(1,457,418 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities |
|
9,036,516 |
|
|
51,618,912 |
|
|
1,000,000 |
|
|
142,568,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents |
|
8,280,035 |
|
|
(8,266,718 |
) |
|
48,749 |
|
|
40,024,236 |
|
Cash and
cash equivalents at beginning of
period |
|
|
|
|
8,280,035 |
|
|
8,280,035 |
|
|
13,317 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents at end of period |
|
$8,280,035 |
|
|
$
13,317 |
|
|
$8,328,784 |
|
|
$40,037,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW
INFORMATION: |
Cash paid during the period
for interest |
|
$
|
|
|
$ 392,501 |
|
|
|
|
|
$ 790,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF
NON-CASH
FINANCING ACTIVITY: |
Capital lease obligations
incurred in connection with the
purchase of property and equipment |
|
$
|
|
|
$20,124,303 |
|
|
|
|
|
$11,774,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
incurred in connection with the
purchase of rights to use fiber optic
capacity |
|
|
|
|
$ 900,200 |
|
|
|
|
|
$ 1,743,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to
consolidated financial statements.
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31,
1999
1. Business
StorageNetworks, Inc. (the Company) was founded in
1998 to be a provider of remote, online data storage services to established
enterprises, Internet-based business and other users of information
technology. The Company is building a Global Data Storage Network
infrastructure consisting of a network of Storage Point of Presence
(S-POP) data centers. Each S-POP data center is a consolidated
storage repository, containing disk and tape storage systems and is
connected to the Companys customers over a metropolitan area fiber
optic network. The Company also provides professional services within the
areas of storage management, disaster recovery and business
continuity.
The Company is subject to risks common to technology-based
companies including, but not limited to, the development of new technology,
development of new markets, dependence on key personnel, and the ability to
obtain additional capital as needed to meet its business objectives. The
Company has a limited operating history and has never achieved
profitability. To date, the Company has been funded principally by private
equity financing. The Companys ultimate success is dependent upon its
ability to raise additional capital and to successfully develop and market
its services.
2. Summary of Significant Accounting
Policies
Basis of
Presentation
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.
Interim Consolidated
Financial Statements
The consolidated financial statements as of March 31, 2000 and
for the three-month periods ended March 31, 1999 and 2000 are unaudited and
reflect all adjustments (consisting of normal recurring adjustments) which
are, in the opinion of the Companys management, necessary for a fair
presentation of the Companys financial position, results of operations
and cash flows. Results for the three month period ended March 31, 2000 are
not necessarily indicative of results to be expected for the full fiscal
year ended December 31, 2000.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue
Recognition
Revenues consist of (i) monthly service fees and installation
fees from customer use of the Companys Global Data Storage Network
(managed storage services), (ii) professional services,
and (iii) data storage equipment sales to customers. Revenues from managed
storage services
monthly service fees are
recognized as the managed storage service levels are provided. Revenues from
managed storage services installation fees are recognized on a straight-line
basis over the term of the contract, generally three to four years. Revenues
from professional services engagements are recognized as the services are
provided. Revenues on fixed-price contracts are recognized using the
percentage of completion method of accounting and are adjusted monthly for
the cumulative impact of any revision in estimates. The Company determines
the percentage of completion of its contracts by comparing costs incurred to
date to total estimated costs. Contract costs include all direct labor and
expenses related to the contract performance. Equipment sales are recognized
when the equipment is delivered to the customer or placed into
service.
Cash
Equivalents
Cash equivalents consist of highly liquid investments with
original maturities of 90 days or less at the time of purchase. As of
December 31, 1998 and 1999, cash equivalents consisted principally of money
market funds at one financial institution.
Restricted Cash
Equivalents
Restricted cash equivalents represent amounts that are
restricted as to their use in accordance with financing and leasing
arrangements.
Short-Term
Investments
The Company classifies it investments as held-to-maturity in
accordance with Statement of Financial Accounting Standards No. 115
Accounting for Investments in Debt and Equity Securities. At
December 31, 1999, short-term investments consisted of corporate obligations
with original maturities greater than three months but less than one year.
Held-to-maturity investments are carried at amortized cost, which
approximates market.
Concentrations of
Credit Risk
Carrying amounts of financial instruments held by the Company,
which include cash equivalents, accounts receivable, accounts payable and
accrued expenses, approximate fair value due to their short duration.
Financial instruments that potentially expose the Company to a concentration
of credit risk principally consist of cash and cash equivalents, investments
and accounts receivable.
The Companys customer base is primarily composed of
businesses throughout the United States. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential losses. As
a result of a sub-contracting agreement with a customer, that customer
accounted for 40% of the Companys consolidated total revenues for the
year ended December 31, 1999.
Inventory
Inventory is stated at the lower of cost (first-in first-out
basis) or market (net realizable value) and consists of customer storage
equipment.
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Property and
Equipment
Property and equipment are stated at cost and depreciated on a
straight-line basis over their respective estimated useful lives, which are
generally three to five years. Equipment recorded under capital leases and
leasehold improvements are amortized using the straight-line method over the
shorter of the respective lease term or estimated useful life of the
asset.
Product Development
Costs
Product development costs are expensed as incurred and include
costs to develop, enhance and manage the Companys proprietary
technology.
Income
Taxes
The Company accounts for income taxes using the liability method
under which deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
Stock-Based
Compensation
The Company accounts for its stock-based compensation plan
utilizing the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25).
The Company has adopted the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, Accounting For Stock-Based
Compensation (SFAS 123).
Impairment of
Long-Lived Assets
The Company continually reviews the carrying value of long-lived
assets, including property and equipment to determine whether there are any
indications of impairment losses. Recoverability of long-lived assets is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value
of the assets.
Advertising
Expenses
All advertising costs are expensed as incurred. Advertising
costs were not material in the period October 5, 1998 (commencement of
operations) through December 31, 1998 and the year ended December 31,
1999.
Net Loss Per
Share
Basic net loss per share is computed by dividing the net loss
for the period by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share does not differ from
basic loss per share since potential common shares to be issued upon the
exercise of stock options and the conversion of preferred stock are
anti-dilutive for the periods presented.
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
Comprehensive
Loss
There are no differences between consolidated net loss and
comprehensive loss for any period presented.
Segment
Information
The Company has adopted Statement of Financial Accounting
Standards No. 131, Disclosure about Segments of an Enterprise and
Related Information (SFAS 131), which requires companies
to report selected information about operating segments, as well as
enterprise-wide disclosures about products, services, geographical areas and
major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and
assessing performance.
3. Property and
Equipment
Property and equipment consist of the following:
|
|
December
31,
|
|
|
1998
|
|
1999
|
|
March 31,
2000
|
|
|
|
|
|
|
(unaudited) |
Global Data Storage Network
related equipment |
|
$45,873 |
|
|
$22,951,663 |
|
|
$49,003,492 |
|
Furniture, fixtures,
computer equipment and other |
|
37,995 |
|
|
3,380,371 |
|
|
3,819,507 |
|
Leasehold
improvements |
|
|
|
|
366,436 |
|
|
458,130 |
|
Purchased
software |
|
|
|
|
800,782 |
|
|
1,719,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
83,868 |
|
|
27,499,252 |
|
|
55,000,369 |
|
Less accumulated
depreciation and amortization |
|
(434 |
) |
|
(1,747,789 |
) |
|
(4,257,220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$83,434 |
|
|
$25,751,463 |
|
|
$50,743,149 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense amounted to $434 and $1,747,355 in 1998 and
1999, respectively.
Included in the December 31, 1999 amounts above are property and
equipment under capital leases with a cost of $20,124,303 and accumulated
depreciation of $1,414,341.
4. Construction Rights
Fee
In 1998, the Company entered into an agreement with a fiber
optic network supplier whereby the Company committed $500,000 (the
Construction Rights Fee) to the fiber optic network supplier in
return for an obligation by the supplier to construct, upon request by the
Company, fiber networks to customers of the Company that are in locations
outside of the suppliers existing fiber optic network. The
Construction Rights Fee is available for and is being amortized on a
straight-line basis over the ten-year term of the agreement. At December 31,
1999, the Company has paid $250,000 for the Construction Rights Fee. The
remaining $250,000 is due by October 31, 2000, and is included in accrued
expenses on the Companys consolidated balance sheet. The $250,000 is
payable in cash or, at the Companys option, in the Companys
common stock. The Construction Rights Fee is included in other assets on the
Companys consolidated balance sheet.
Amortization expense amounted to zero and $50,000 in 1998 and
1999, respectively.
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
5. Accrued Expenses
Accrued expenses consist of the following:
|
|
December
31,
|
|
|
1998
|
|
1999
|
|
March 31,
2000
|
|
|
|
|
|
|
(unaudited) |
Accrued
compensation |
|
$
|
|
$1,497,605 |
|
$ 3,762,783 |
Accrued data center and
office rent |
|
|
|
1,296,113 |
|
2,783,199 |
Accrued construction rights
fee |
|
250,000 |
|
250,000 |
|
|
Accrued Global Data Storage
Network related equipment |
|
|
|
1,724,692 |
|
|
Accrued other |
|
256,706 |
|
1,313,313 |
|
3,734,692 |
|
|
|
|
|
|
|
|
|
$506,706 |
|
$6,081,723 |
|
$10,280,674 |
|
|
|
|
|
|
|
6. Stockholders
Equity
Stock
Split
On January 26, 2000, the Board of Directors and Stockholders
approved a two-for-one common stock split, effected in the form of a stock
dividend. All share and per share information in the accompanying
consolidated financial statements and notes to the consolidated financial
statements has been retroactively restated to reflect the effect of this
stock split.
Common
Stock
The Company has authorized 600,000,000 shares of common stock,
$.01 par value. The voting, dividend and liquidation rights of the holders
of common stock are subject to, and qualified by, the rights of the holders
of preferred stock. The holders of common stock are entitled to one vote for
each share held. The Board of Directors may declare dividends subject to
preferential dividend rights of any outstanding preferred stock. Holders of
common stock are entitled to receive all assets available for distribution
on the dissolution or liquidation of the Company, subject to any
preferential rights of any outstanding preferred stock. At December 31,
1999, the Company has reserved 51,505,356 shares of common stock for the
conversion of preferred stock and the exercise of options to purchase common
stock.
Convertible Preferred
Stock
The Companys authorized capital includes convertible
preferred stock, par value $0.01, from which shares of Series A, Series B
and Series C have been designated and issued.
Each share of preferred stock is convertible at the
stockholders option. Each share of Series A, B and C preferred stock
may be converted into shares of common stock at conversion prices of $0.50,
$2.46 and $8.57, respectively, per convertible share, as adjusted from time
to time by a conversion factor (the Conversion Price). The
shares of convertible preferred stock will automatically convert into common
stock at the then effective Conversion Price upon the closing of a public
offering of common stock pursuant to an effective registration statement
under the Securities Act of 1933 resulting in at least $50,000,000 of gross
proceeds to the Company.
The holder of convertible preferred stock shall be entitled to
receive, when and if declared by the Board of Directors of the Company,
dividends in the same amount per share as would be
payable on the number of shares of common stock into which the preferred stock
is then convertible, payable in preference and priority to any payment of
any cash dividend on common stock or any other class of stock or series
thereof.
Preferred shares are entitled to a number of votes on any matter
submitted to the stockholders of the Company equal to the number of shares
of common stock into which they are then convertible.
Upon any liquidation of the Company, the holder of each share of
Series A, B and C preferred stock shall be first entitled, before any
distribution or payment is made to holders of common stock, to be paid
$2.00, $4.92 and $17.13, respectively, per share, subject to adjustment for
stock splits, stock dividends, combinations or other similar
re-capitalizations.
Stock Option
Plan
The Company has adopted the StorageNetworks, Inc. Amended and
Restated 1998 Stock Incentive Plan (the Stock Incentive Plan),
which is administered by the Board of Directors (the Board).
Under the terms of the Stock Incentive Plan, the Board may grant stock
awards to officers, employees and consultants of the Company. The Stock
Incentive Plan permits the grant of incentive stock options and nonqualified
stock options. As of December 31, 1999, the Company has reserved 10,920,000
shares of common stock for issuance under the Stock Incentive Plan.
Incentive stock options may not be granted at less than 100% of the fair
market value of the common stock on the date of the grant and may not expire
more than ten years from the date of the grant. Stock options granted under
the Stock Incentive Plan generally will become exercisable over a four-year
period in equal annual installments unless the Board specifies a different
vesting schedule. The Stock Incentive Plan has a term of ten years, subject
to earlier termination or amendment by the Board, and options outstanding
under the Stock Incentive Plan prior to its termination remain outstanding
after such termination.
The following table presents the activity of the Stock Incentive
Plan for the periods ended:
|
|
December 31,
1998
|
|
December 31,
1999
|
|
March 31,
2000
|
|
|
|
|
|
|
(Unaudited) |
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
Outstanding options at
beginning of
period |
|
|
|
$ |
|
2,266,000 |
|
|
$0.03 |
|
9,126,000 |
|
|
$0.73 |
Granted |
|
2,266,000 |
|
0.03 |
|
9,664,000 |
|
|
0.70 |
|
882,200 |
|
|
8.00 |
Exercised |
|
|
|
|
|
(131,500 |
) |
|
0.03 |
|
(620,375 |
) |
|
1.65 |
Cancelled |
|
|
|
|
|
(2,672,500 |
) |
|
0.04 |
|
(82,500 |
) |
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at
end of period |
|
2,266,000 |
|
$ 0.03 |
|
9,126,000 |
|
|
$0.73 |
|
9,305,325 |
|
|
$1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of
period |
|
|
|
|
|
43,000 |
|
|
$0.34 |
|
86,875 |
|
|
$6.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at
end of period |
|
|
|
|
|
1,662,500 |
|
|
|
|
862,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
The following table summarizes information about the
Companys stock options at December 31, 1999:
Stock Options
Outstanding
|
|
Stock Options
Exercisable
|
Number
Outstanding
|
|
Weighted
Average
Contractual
Life (yrs)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
1,552,500 |
|
9.06 |
|
$0.03 |
|
15,000 |
|
$0.03 |
1,298,000 |
|
9.46 |
|
0.05 |
|
|
|
|
678,000 |
|
9.46 |
|
0.15 |
|
|
|
|
2,964,000 |
|
9.66 |
|
0.25 |
|
|
|
|
874,000 |
|
9.84 |
|
0.50 |
|
28,000 |
|
0.50 |
1,759,500 |
|
9.96 |
|
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9,126,000 |
|
|
|
|
|
43,000 |
|
|
|
|
|
|
|
|
|
|
|
Stock-Based
Compensation
As discussed in Note 2, the Company applies APB 25 and related
interpretations in accounting for its Stock Incentive Plan. For the years
ended December 31, 1998 and 1999, the Company recorded $1,076,350 and
$20,806,710 in deferred compensation for options to purchase common stock
granted at exercise prices determined to be below the fair value of common
stock. Compensation expense of $1,300,385 was recognized during the year
ended December 31, 1999. As required under SFAS 123, the following pro forma
net loss and net loss per share presentations reflect the amortization of
the option grant fair value as expense. For purposes of this disclosure, the
estimated fair value of the options is amortized to expense over the
options vesting periods. The Companys pro forma information
follows for the year ended December 31, 1998 and 1999:
|
|
1998
|
|
1999
|
Pro forma net
loss |
|
$(368,706 |
) |
|
$(23,816,021 |
) |
Pro forma net loss per
sharebasic and diluted |
|
$ (0.02 |
) |
|
$
(0.98 |
) |
The weighted average grant date fair value was $0.01 and $2.61
for stock options granted in 1998 and 1999, respectively, and the
weighted-average remaining contractual life for options outstanding as of
December 31, 1999 is 9.6 years. The fair value of stock options granted
during 1998 and 1999 was estimated at the date of the option grant using the
Black-Scholes option pricing model with the following assumptions: risk free
interest rate of 5.5%, expected life of the options of four years, and a
dividend rate of zero.
The effects on pro forma disclosures of applying SFAS 123 are
not likely to be representative of the effects on pro forma disclosures in
future years as the periods presented include only one and two years of
option grants under the Stock Incentive Plan.
Stock
Warrants
On October 27, 1999, in connection with two equipment lease
lines, the Company issued warrants to purchase a total of 130,082 shares of
the Companys series B convertible preferred stock at $4.92 per share.
The warrants expire on October 27, 2009. The fair value of the warrants was
not material and was calculated using the Black-Scholes option pricing
model, with the following assumptions: volatility95%
dividendsnone; expected lifeone year; risk-free interest
rate5.5%.
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
7. Income Taxes
As of December 31, 1999, the Company had federal and state net
operating loss carryforwards of approximately $25,500,000. The net operating
loss carryforwards will expire at various dates beginning in the years 2004
through 2019 if not utilized.
Significant components of the Companys deferred tax assets
and liabilities for federal and state income taxes consist of the following
at December 31:
Deferred tax assets: |
|
1998
|
|
1999
|
Net operating loss
carryforwards |
|
$ 20,000 |
|
|
$10,203,000 |
|
Other |
|
130,000 |
|
|
459,000 |
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
10,662,000 |
|
Deferred tax
liabilities: |
Depreciation |
|
|
|
|
1,497,000 |
|
|
|
|
|
|
|
|
Total deferred tax assets,
net |
|
150,000 |
|
|
9,165,000 |
|
Valuation
allowance |
|
(150,000 |
) |
|
(9,165,000 |
) |
|
|
|
|
|
|
|
Net deferred tax
asset |
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
The Company believes that, based on a number of factors, the
available objective evidence creates sufficient uncertainty regarding the
realization of the deferred tax assets such that a full valuation allowance
has been recorded. The Company will continue to assess the realization of
the deferred tax assets based on actual and forecasted operating
results.
Federal tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in
the ownership of the Company, which constitutes an ownership
change as defined by Internal Revenue Code, Section 382. The Company
has not determined if an ownership change, as defined, has occurred. The
Company plans to compute exact limitations upon realization of taxable
earnings and associated utilization of the net operating loss
carryforwards.
StorageNetworks,
Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS(Continued)
8. Commitments and Contingencies
Leases
The Company has entered into a number of operating leases for
its facilities. The leases expire from 2000 through 2009. As of December 31,
1999, the Company had collateralized letters of credit aggregating $359,127
for these leases. The related funds are included in restricted cash
equivalents on the accompanying consolidated balance sheet. The Company also
leases certain data center infrastructure and equipment under capital
leases. Certain of these capital leases were entered into as sales-leaseback
transactions. No gain or loss was recorded in any such transaction due to
the short holding period from the time the assets were purchased until the
time of the sale-leaseback. Future minimum lease payments as of December 31,
1999 are as follows:
Year ending December 31, |
|
Capital Leases
|
|
Operating Leases
|
2000 |
|
$ 6,612,030 |
|
|
$ 9,504,620 |
2001 |
|
6,424,097 |
|
|
5,027,424 |
2002 |
|
6,397,196 |
|
|
2,804,482 |
2003 |
|
5,067,175 |
|
|
2,696,040 |
2004 |
|
115,200 |
|
|
2,627,271 |
Thereafter |
|
1,728,000 |
|
|
5,474,939 |
|
|
|
|
|
|
Total minimum lease
payments |
|
26,343,698 |
|
|
$28,134,776 |
|
|
|
|
|
|
Less amounts representing
imputed interest |
|
(6,079,072 |
) |
|
|
|
|
Present value of minimum
lease payments |
|
20,264,626 |
|
Less current
portion |
|
(4,442,144 |
) |
|
|
|
|
Capital lease obligations,
less current portion |
|
$15,822,482 |
|
|
|
|
|
The Companys rent expense was approximately $3,600 and
$2,369,000 for the years ended December 31, 1998 and 1999,
respectively.
Fiber Optic Capacity
Lease
In October 1999, the Company entered into a capital lease
agreement for the acquisition of dark fiber transport capacity. The Company
executes a lease schedule each time dark fiber is leased under the
agreement. The term of the agreement is 20 years from the initiation of the
first lease schedule, which occurred in December 1999. The present value of
the minimum lease payments from the lease schedules executed under this
agreement are recorded as rights to use fiber optic capacity in the
accompanying consolidated balance sheet. The range of the total minimum
commitment is approximately $88,000,000 to $96,000,000 over the lease
term.
Purchase
Commitment
On February 2, 2000, the Company entered into an agreement with
a vendor whereby the Company committed to purchase $50,000,000 of Global
Data Storage Network related equipment by December 31, 2000.
9. Segment
Information
The Company provides remote, online data storage services to its
customers in its S-POP data centers. The Company establishes these S-POP
data centers using a consistent operating model
with similar economic characteristics. As a result, the Company considers its
managed storage services as one reportable segment under the aggregation
criteria of SFAS No. 131. The Company also provides professional services
such as data storage assessment and implementation services to customers
that operate their own storage area network. Professional services represent
another reportable segment. The Company does not consider its sales of
storage equipment to be a reportable segment because such sales are
infrequent in volume and are only executed as an accommodation to certain
customers to facilitate the customers purchase of managed storage
services. The operations of each reportable segment are reported separately
in the accompanying consolidated statements of operations. Total assets
pertaining to the Companys professional services were zero and
$2,624,999 at December 31, 1998 and 1999, respectively. Total assets for the
Companys managed storage services totaled $45,873 and $23,164,532 at
December 31, 1998 and 1999, respectively.
10. Subsequent Events
(unaudited)
Series D Convertible
Preferred Stock
On February 29, 2000, the Company issued 1,758,240 shares of
Series D convertible preferred stock at $22.75 per share for total
consideration of $40,000,000. The terms and conditions of the Series D
preferred stock are substantially the same as those of the Series A, B and C
convertible preferred stock.
Series D Stock
Warrants
On February 29, 2000, the Company issued warrants to three
customers to purchase 810,000 shares of Series D convertible preferred stock
at $22.75 per share. The fair value of the warrants was determined to be
$3,546,000 and was calculated using the Black-Scholes option pricing model
with the following assumptions: volatility 95%, dividends
none, expected life 1
/4 year, risk-free interest
rate 5.5%. All of the warrants are immediately exercisable.
Warrants with a fair value of $1,891,200 issued to customers with
non-cancelable managed services contracts have been deferred and will be
amortized over the contract term. The remaining warrants with a fair value
of $1,654,800 are included in sales and marketing expenses for the quarter
ended March 31, 2000.
[INSIDE BACK
COVER]
[Graphic illustration of StorageNetworks PACS managed
storage services, with the following descriptions at the bottom of the
page:
DataPACS/NetPACS - Services that allow customers to complement
or replace the need for on-site storage of primary data.
BackPACS - A service that provides customers with back-up copies
of their data for long-term record keeping purposes, for retrieval and
restoration purposes if their original data is lost, or for the ability to
continue business operations in the case of a disaster.
SafePACS - A service that provides customers with an additional
copy or copies of their data that can be accessed immediately for testing or
disaster recovery purposes.]
No dealer, salesperson or other person is authorized to give
any information or to represent anything not contained in this prospectus.
You must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only
under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its
date.
TABLE OF CONTENTS
Through and including July 24, 2000 (the 25th day after the date
of this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
9,000,000 Shares
StorageNetworks,
Inc.
Common Stock
[Logo of StorageNetworks,
Inc.]
Goldman, Sachs &
Co.
Credit Suisse First
Boston
Thomas Weisel Partners
LLC
Wit
SoundView
Representatives of the
Underwriters