<PAGE>
As filed with the Securities and Exchange Commission on November 2, 2000
Registration No. 333-48530
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
STORAGENETWORKS, INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 7389 04-3436145
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
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100 Fifth Avenue
Waltham, MA 02451 (781) 434-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Peter W. Bell
President, Chief Executive Officer
and Chairman of the Board
StorageNetworks, Inc.
100 Fifth Avenue
Waltham, MA 02451
(781) 434-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
John M. Westcott, Jr., Esq. Keith F. Higgins, Esq.
Mark G. Borden, Esq. Ropes & Gray
Hale and Dorr LLP One International Place
60 State St. Boston, MA 02110
Boston, MA (617) 951-7000
(617) 526-6000
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated November 2, 2000.
9,000,000 Shares
[Logo of StorageNetworks, Inc.]
Common Stock
-----------
StorageNetworks, Inc. is offering 5,502,726 of the shares to be sold in the
offering. The selling stockholders identified in this prospectus are offering
an additional 3,497,274 shares. StorageNetworks will not receive any of the
proceeds from the sale of shares being sold by the selling stockholders.
Our common stock is quoted on the Nasdaq National Market under the symbol
"STOR". The last reported sale price of the common stock on November 1, 2000
was $63.50 per share.
See "Risk Factors" beginning on page 8 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.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public...................................... $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to StorageNetworks................ $ $
Proceeds, before expenses, to the selling stockholders....... $ $
</TABLE>
To the extent that the underwriters sell more than 9,000,000 shares of common
stock, the underwriters have the option to purchase up to an additional
1,350,000 shares from StorageNetworks at the initial price to public less the
underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on November , 2000.
Goldman, Sachs & Co.
Chase H&Q
Merrill Lynch & Co.
Salomon Smith Barney
Thomas Weisel Partners LLC
-----------
Prospectus dated , 2000.
<PAGE>
[StorageNetworks Logo]
<PAGE>
PROSPECTUS SUMMARY
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 8.
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 storage services and
professional services. Our managed 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 300 of our more
than 580 employees are storage experts who assist businesses in designing and
implementing their data storage strategies. Our customers are organizations
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 our Global
Operations Center through long distance fiber optic connections. Our
proprietary operating system software controls and monitors the S-POP data
centers, these storage networks and our Global Operations Center. This
combination of metropolitan storage networks, long distance fiber networks,
Global Operations Center and proprietary operating system 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
customer's 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, which may be located on-site at a
customer's own facility, we physically store and manage our customers' data,
including both their primary data--the files, databases and records that the
customer generates and uses in the everyday running of its business--and 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 with a complete view of their storage environment
through our proprietary Virtual Storage Portal software, a storage service
management application that permits customers to monitor and control their
storage resources 24 hours per day and seven days per week through a web
browser. The Virtual Storage Portal software enables customers to gain greater
control over their data storage, to monitor our performance and to request
changes or upgrades to our managed storage services.
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
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communications services utilized in delivering our services. As of September
30, 2000, we operated 42 S-POP data centers in 13 metropolitan areas in the
United States and the United Kingdom; and we are planning to further expand the
number of our data centers and markets.
We commenced operations in October 1998 and began operating our first S-POP
data center in May 1999. We have a history of operating losses. We incurred net
losses of $23.9 million in 1999 and $91.8 million for the nine months ended
September 30, 2000, and as of September 30, 2000 we had an accumulated deficit
of $116.3 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. During the first three quarters of 2000, we derived 54% of our
service revenues from providing managed storage services, as compared to 18% in
the year ended December 31, 1999. We believe that managed storage services
revenues will represent more than 75% of our total revenues during 2001. The
average contractual term of our managed storage service level agreements is
approximately three to four years. Therefore, 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 customer's storage
requirements increase or if a customer adds additional services, 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 derived 82% of our service revenues in 1999, and 46% of our
service revenues in the nine-month period ended September 30, 2000, from
professional services. Professional services generally consist of assessments,
designs and implementations of our customers' data storage systems not related
to our managed storage 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 three quarters 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.
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.
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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 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 approximately $8 billion by the end of 2003.
Our Strategy
Our objective is to establish StorageNetworks as a premier data storage
services provider by:
. continuing to develop proprietary technology, such as our Virtual
Storage Portal software and Global Data Storage Network operating
system;
. promoting and extending the StorageNetworks brand;
. expanding and enhancing our service offerings;
. expanding our storage infrastructure and geographical presence;
. targeting both enterprise and Internet-based businesses with the
greatest need for managed storage services.
. rapidly accumulating storage expertise and building best business
processes for data storage; and
. expanding our relationships with web hosting providers, storage hardware
and software vendors and fiber providers.
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 55% 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, S-POP Manager, STORwidth,
STORmanage, STOR-OS and StorageNetworks Powered are service marks of
StorageNetworks. All other trademarks and service marks are the property of
their respective owners.
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The Offering
<TABLE>
<C> <S>
Common stock offered by StorageNetworks............. 5,502,726 shares
Common stock offered by the selling stockholders.... 3,497,274 shares
Common stock to be outstanding after this offering.. 96,713,045 shares
Nasdaq National Market symbol....................... STOR
Use of proceeds..................................... For general corporate
purposes, including
working capital and
capital expenditures,
expanding sales and
marketing and investing
in further technology
advancements.
</TABLE>
The number of shares of our common stock that will be outstanding after
this offering is based on our shares of common stock outstanding on
September 30, 2000 and excludes:
. 9,936,905 shares issuable upon the exercise of outstanding stock options
as of September 30, 2000 at a weighted-average exercise price of $6.00
per share; and
. warrants to purchase 122,682 shares of common stock outstanding on
September 30, 2000 at a weighted average exercise price of $15.70 per
share.
Except as otherwise indicated, all information in this prospectus assumes
no exercise of the underwriters' over-allotment option.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the consolidated financial data for our
business. You should read this data along with "Management's 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. The as adjusted consolidated balance sheet
data reflects the issuance of shares in this offering at an assumed offering
price of $63.50 per share, deducting the estimated underwriting discount and
expenses of this offering.
<TABLE>
<CAPTION>
Period from Nine months
October 5, 1998 ended
(commencement of September 30,
operations) to Year ended -----------------
December 31, 1998 December 31, 1999 1999 2000
----------------- ----------------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues................ $ -- $ 6,258 $ 3,124 $ 26,978
Total costs and
expenses............... 380 31,150 13,306 123,441
Loss from operations.... (380) (24,892) (10,182) (96,463)
Net loss................ (369) (23,914) (9,504) (91,825)
Net loss per share:
Basic and diluted..... $ (0.02) $ (0.98) $ (0.39) $ (1.94)
Weighted average
common shares
outstanding.......... 24,400 24,407 24,400 47,422
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000
--------------------
Actual As Adjusted
-------- -----------
(in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C>
Cash, cash equivalents and short-term investments.......... $325,732 $658,681
Working capital............................................ 297,994 630,943
Total assets............................................... 476,109 809,058
Capital lease obligations, less current portion............ 79,487 79,487
Total stockholders' equity................................. 355,378 688,327
</TABLE>
7
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RISK FACTORS
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 as of September 30, 2000 had 42 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 54%
of revenues for the nine-month period ended September 30, 2000 from these
services. Until recently, revenues from services other than managed data
storage services have constituted a majority of our revenues. For example,
professional services accounted for 51% of our revenues in 1999 compared to 46%
of our revenues for the nine-month period ended September 30, 2000; and sale of
equipment accounted for 37% of revenues in 1999 and 0% of revenues for the
nine-month period ended September 30, 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
broad 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 losses in each quarter
since our inception. We experienced a net loss of $23.9 million in 1999 and
$91.8 million for the nine-month period ended September 30, 2000. As of
September 30, 2000, we had an accumulated deficit of $116.3 million. We cannot
be certain that our revenues will grow or that we will generate sufficient
revenues to achieve profitability. Our failure to increase our revenues would
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 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.
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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 further development of proprietary
technology such as our Virtual Storage Portal software and Global Data Storage
Network operating system, 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 approximately 10 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. 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:
. human error;
. physical or electronic security breaches;
. fire, earthquake, flood and other natural disasters;
. power loss; and
. 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. We have, on
occasion, experienced such problems with our services. 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 is critical to
minimizing the impact of such problems.
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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 our operating system
software, 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 September 30, 2000, 42
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 broad market
acceptance of our services. Our infrastructure may not perform as expected as
the number of customers, data centers and network components increases.
Additionally, we may not be able to respond quickly to unanticipated large
increases in demand by any particular customer. 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 future 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.
Only a small number of our S-POP data centers have achieved positive gross
margins and all of our S-POP data centers may not achieve or maintain
profitability
Our first S-POP data center became operational in May 1999. Half of our S-
POP data centers became operational in the first six months of 2000. We believe
that an S-POP data center, once operational, will take more than 12 months to
achieve positive gross margins. Only a small number of our S-POP data centers
have achieved positive gross margins for any period. Due to our limited
operating history, we have little historical evidence that indicates that all
or a significant number of our S-POP data centers will achieve and sustain
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. As our engagements increase in sophistication and
scale, we face new challenges in implementing new technologies, processes and
storage capacity without disruption. Errors and defects in our infrastructure
and technology or delays in deployment have, from time to time, and may in the
future adversely affect our services. Accordingly, we could experience:
. loss of or delay in revenues and loss of market share;
. loss of customers and credibility;
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. failure to attract new customers or achieve market acceptance;
. increased costs;
. diversion of development resources; and
. 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 other
storage service providers against whom we may not be able to compete
successfully
We currently face competition from storage hardware and software vendors.
Some of these vendors also provide consulting and related services that compete
with our 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.
We also face competition from other storage service providers and
additional direct competitors are likely to enter this market. Additionally,
some hardware and software vendors have announced, and others may develop,
managed storage service offerings that 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:
. temporary shortages or interruptions in supply of storage equipment;
. natural disasters in the geographic markets in which we operate or
other causes of network instability;
. surges in demand for data storage capacity; and
. 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 could fall. Additionally, the above events could cause serious
harm to our overall business.
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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, of the disk storage arrays and related
software that we use in the delivery of our managed data storage services,
during the first nine months of 2000, we purchased 45% from EMC Corporation,
20% from Compaq and 11% from Network Appliance, and during the quarter ended
September 30, 2000, we purchased 1% from EMC, 43% from Compaq and 37% from
Network Appliance. 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.
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
During the nine-month period ended September 30, 2000, we earned
approximately 24% 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 revenues we derive from managed
storage services will increase significantly and during 2001 will represent
more than 75% 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. Since June 2000, when EMC
made the allegations against us described below, we and EMC have entered into
fewer new professional services engagements, and we expect the number of new
engagements to continue to decline.
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:
. Hosting service providers such as AT&T Web Hosting Services, Exodus
Communications, GlobalCenter, COLT Telecom and Equinix, with whom we
have joint marketing and services agreements or volume purchase
agreements;
. Hardware and software suppliers such as Brocade Communications Systems,
Inc., Compaq, Dell, 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;
. 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
. Telecommunications and optical fiber services providers such as Global
Crossing and Metromedia Fiber Network, with whom we have volume purchase
agreements.
12
<PAGE>
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 party's 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. Consolidation in the hosting and
telecommunications service providers industries, such as the announced mergers
between Exodus Communications and GlobalCenter and between SiteSmith and
Metromedia Fiber Network, may affect our ability to develop and maintain
strategic relationships. We cannot predict the manner in which our
relationships with these providers and vendors might change.
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. From 2000 to 2004, we expect to purchase a total of
approximately $700 million of 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 that our total purchases during 2000 for such expansion will be
approximately $120 million. 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 cannot be sure
13
<PAGE>
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.
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 582 on
September 30, 2000. 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 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 75% of our managed storage services revenues recognized in
the quarter ended September 30, 2000 was derived from customers that are
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, revenues and other financial results.
14
<PAGE>
We incurred a significant amount of deferred stock compensation that will
decrease our earnings over the next four years
We recorded deferred stock compensation of $1.1 million in 1998, $20.8
million in 1999 and $580,000 in the nine months ended September 30, 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 $5.1 million in 2000, $5.0
million in 2001, $5.0 million in 2002, $4.0 million in 2003 and $90,000 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
One of our directors and three 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.
Of the members of our Executive Advisory Council, Janpieter Scheerder is
President of Sun Microsystems Network Storage Division; Karl Schubert is Vice
President, Storage Systems Architecture and Storage Systems Engineering for
Dell's 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:
. 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;
. increased expenses associated with marketing and delivering services in
foreign countries;
. general economic conditions in international markets;
. currency exchange rate fluctuations;
15
<PAGE>
. unexpected changes in regulatory requirements resulting in
unanticipated costs and delays;
. political risks in certain countries;
. tariffs, export controls and other trade barriers;
. 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
. potentially adverse tax consequences, including restrictions on the
repatriation of earnings.
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 six patent applications with
respect to our data storage services. We cannot be certain that our current
patent applications 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:
. cease selling services that incorporate the challenged intellectual
property;
. obtain a license from the holder of the infringed intellectual property
right, which may not be available on reasonable terms; and
. redesign our services or our network.
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.
16
<PAGE>
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 EMC's, and interfered with contractual
relationships between EMC and certain of EMC's 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, since the time of the allegations made by EMC in June 2000, the
number of professional services engagements under our subcontractor agreement
with EMC has decreased significantly and it is likely that the number of
engagements will continue to decline. Also, EMC may refuse to sell us
additional hardware for use in our S-POP data centers. We believe EMC's
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 has been volatile and could result in substantial losses for
investors purchasing shares in 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:
. the addition or departure of key personnel;
. variations in our quarterly operating results;
. announcements by us or our competitors of significant contracts, new
products or services offerings or enhancements, acquisitions, joint
ventures or capital commitments;
. our sales of common stock or other securities in the future;
. changes in market valuations of technology companies; and
. fluctuations in stock market prices and volumes.
Volatility in the market price of our common stock may prevent investors
from being able to sell their common stock at or above the 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 management's 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.
17
<PAGE>
Press articles mentioning our business may not provide a balanced, accurate and
complete description of our business and are not an appropriate basis for
investment decisions
A number of press articles 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 have 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.
For example, on July 31, 2000 CBS.MarketWatch.com published an interview
with our Chief Executive Officer, Peter Bell, in which Mr. Bell described our
plans to expand our Global Data Storage Network over the next three years. The
interviewer asked if StorageNetworks would be profitable by then, and Mr. Bell
answered "That's a good time frame." Mr. Bell's statement should not be relied
upon as a prediction of our future operating results and is inconsistent with
the statements in this prospectus as to our future operations. Given the
uncertainties in the market for our services and the early stage of development
of our business, as set forth in the risk factors in this prospectus, we expect
to continue to incur losses on a quarterly and annual basis for the foreseeable
future.
In response to another question in the same interview by
CBS.MarketWatch.com on July 31, 2000, Mr. Bell made the following statement
concerning our competitive position: "Compaq is an investor, as are Sun and
Veritas. We have agreements with Legato, Network Appliance and Brocade. These
companies make storage technology. They're potentially competitive in that they
may partner with others, so we had to put them in the IPO filing." Mr. Bell
thus explained that the manufacturers of storage equipment are not currently
providing managed storage services as we do. However, we continue to describe
such companies as competitors in this prospectus, as we did in the prospectus
for our initial public offering, because our customers have the choice of
purchasing storage equipment directly and managing their own data storage
environment rather than obtaining managed storage services from us.
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, own approximately 55% of our
outstanding common stock following the completion of this offering. These
stockholders, if acting together, would be able to significantly influence 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
18
<PAGE>
stockholders. For example, our Board of Directors is staggered in three
classes, so that only a portion 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
After the completion of this offering, there will be 96,713,045 shares of
our common stock outstanding. Of these shares, the 10,350,000 issued in our
initial public offering and the 9,000,000 shares issued in connection with this
offering will be freely tradeable upon completion of this offering. An
additional 2,499,370 shares will become eligible for sale in the public market
on December 27, 2000 upon expiration of lock-up agreements entered into in
connection with our initial public offering, 233,508 shares will become
eligible for sale on January 20, 2001 and 75,237,310 will become eligible for
sale following 90 days from the date of this prospectus upon expiration of
lock-up agreements with the underwriters of this offering, in each case subject
to the restrictions of 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.
19
<PAGE>
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 in the future, the number of S-POP data centers we expect to operate
by year end, projected revenue percentages, the amount of time necessary for an
S-POP data center to achieve positive gross margins 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.
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 5,502,726 shares of
common stock at an assumed public offering price of $63.50 will be
approximately $332.9 million. If the underwriters' over-allotment option is
exercised in full, the net proceeds will be approximately $414.8 million.
The principal purposes of this offering are to obtain additional working
capital, create a larger public float for our common stock and allow for the
orderly liquidation of a portion of the investments made by certain of our
stockholders.
We presently intend to use the net proceeds from this offering for general
corporate purposes, including working capital, capital expenditures, expanding
sales and marketing capabilities and funding further investments in technology
advancements. Contingent upon the continued growth of our business and the
availability of sufficient financing, from 2000 to 2004, we expect to purchase
a total of approximately $700 million of 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 plan to finance our investment in this capital infrastructure
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 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.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been quoted on the Nasdaq National Market under the
symbol "STOR" since June 30, 2000. The following table sets forth, for the
periods indicated, the high and low sales prices per share of our common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
2000
----
Second Quarter (June 30, 2000 only)........................... $102.00 $ 90.00
Third Quarter................................................. 154.20 79.125
Fourth Quarter (through November 1, 2000)..................... 106.625 50.563
</TABLE>
On November 1, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $63.50 per share. As of the close of business on
November 1, 2000, we had 295 holders of record of our common stock.
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.
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<PAGE>
CAPITALIZATION
The following table sets forth our cash and short-term investments and
capitalization as of September 30, 2000:
. on an actual basis; and
. as adjusted to reflect the sale of 5,502,726 shares of common stock at
an assumed public offering price of $63.50 per share, after deducting
the estimated underwriting discount and offering expenses.
The shares of common stock to be outstanding after the offering exclude:
(1) 9,936,905 shares issuable upon exercise of outstanding options as of
September 30, 2000; and (2) 122,682 shares issuable upon exercise of
outstanding warrants as of September 30, 2000.
<TABLE>
<CAPTION>
As of September 30, 2000
----------------------------------------
Actual As Adjusted
---------------- -------------------
(in thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents and short-
term investments..................... $ 325,732 $ 658,681
Capital lease obligations, less
current portion...................... 79,487 79,487
Stockholders' equity:
Preferred stock, par value $.01;
5,000,000 shares authorized; zero
shares issued and outstanding...... -- --
Common stock, par value $.01;
600,000,000 shares authorized;
91,210,319 shares issued and
outstanding, actual; 96,713,042
shares issued and outstanding, as
adjusted........................... 912 967
Additional paid-in capital.......... 485,973 818,867
Deferred compensation............... (15,349) (15,349)
Accumulated other comprehensive
income............................. 117 117
Accumulated deficit................. (116,275) (116,275)
---------------- ----------------
Total stockholders' equity.......... 355,378 688,327
---------------- ----------------
Total capitalization.............. $ 434,865 $ 767,814
================ ================
</TABLE>
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<PAGE>
DILUTION
Our net tangible book value as of September 30, 2000 was $353.8 million, or
$3.88 per share. 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. 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
net tangible book value per share of common stock immediately after the
completion of the offering. After giving effect to the sale of the 5,502,726
shares of common stock offered by us at an assumed public offering price of
$63.50 per share, and after deducting the estimated underwriting discount and
offering expenses payable by us, our net tangible book value at September 30,
2000 would have been $686.8 million or $7.10 per share of common stock. This
represents an immediate increase in net tangible book value of $3.22 per share
to existing stockholders and an immediate dilution of $56.40 per share to new
investors purchasing shares at the assumed public offering price. The following
table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $63.50
------
Net tangible book value per share before the offering............ $3.88
Increase per share attributable to new investors................. 3.22
-----
Net tangible book value per share after the offering............... 7.10
------
Dilution per share to new investors................................ $56.40
======
</TABLE>
The shares of common stock outstanding used to calculate dilution per share
exclude:
. 9,936,905 shares at a weighted average exercise price of $6.00 were
subject to outstanding options as of September 30, 2000; and
. 122,682 shares at a weighted average exercise price of $15.70 issuable
upon exercise of outstanding warrants outstanding as of September 30,
2000.
To the extent outstanding options or warrants are exercised, there will be
further dilution to new investors.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below
along with "Management's 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 nine-
month periods ended September 30, 1999 and 2000 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which we consider
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the nine months ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 2000. Potentially dilutive
common shares have been excluded from the shares used to compute net loss per
share because their inclusion would be antidilutive.
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
Period from
October 5,
1998
(commencement
of
operations) to
December 31, Year ended
1998 December 31, 1999 1999 2000
-------------- ----------------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Managed storage services
revenues............... $ -- $ 720 $ 232 $ 14,463
Professional services
revenues............... -- 3,203 957 12,515
Equipment revenues...... -- 2,335 1,935 --
---------- ------------ -------- --------
Total revenues........ -- 6,258 3,124 26,978
Costs and expenses:
Cost of managed storage
services revenues,
excluding deferred
stock compensation
amortization amounts... 101 8,400 2,794 48,712
Cost of professional
services revenues,
excluding deferred
stock compensation
amortization amounts... 9 5,343 1,809 14,953
Cost of equipment
revenues............... -- 2,111 1,809 --
Sales and marketing,
excluding deferred
stock compensation
amortization amounts... 39 7,304 3,260 35,505
General and
administrative,
excluding deferred
stock compensation
amortization amounts... 231 5,558 2,597 12,741
Research and
development, excluding
deferred stock
compensation
amortization amounts... -- 1,133 518 7,697
Amortization of deferred
stock compensation*.... -- 1,301 519 3,833
---------- ------------ -------- --------
Total costs and
expenses............. 380 31,150 13,306 123,441
---------- ------------ -------- --------
Loss from operations...... (380) (24,892) (10,182) (96,463)
---------- ------------ -------- --------
Interest income........... 11 1,371 757 9,435
Interest expense.......... -- (393) (79) (4,797)
---------- ------------ -------- --------
Net loss.................. $ (369) $(23,914) $ (9,504) $(91,825)
========== ============ ======== ========
Net loss per share:
Basic and diluted....... $ (0.02) $ (0.98) $ (0.39) $ (1.94)
========== ============ ======== ========
Weighted average common
shares outstanding..... 24,400 24,407 24,400 47,422
========== ============ ======== ========
*Amortization of deferred
stock compensation
Cost of managed storage
services revenues...... $ -- $ 71 $ 42 $ 372
Cost of professional
services revenues...... -- 229 33 415
Sales and marketing..... -- 603 267 1,231
General and
administrative......... -- 251 85 475
Research and
development............ -- 147 92 1,340
---------- ------------ -------- --------
$ -- $ 1,301 $ 519 $ 3,833
========== ============ ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of
December 31, As of
-------------- September 30,
1998 1999 2000
------ ------- ------------- ---
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short term
investments................................. $8,280 $34,815 $ 325,732
Working capital.............................. 8,085 25,053 297,994
Total assets................................. 9,672 67,259 476,109
Capital lease obligations, less current
portion..................................... -- 15,822 79,487
Total stockholders' equity................... 8,668 37,009 355,378
</TABLE>
24
<PAGE>
MANAGEMENT'S 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 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 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 our Global Operations Center through long
distance fiber optic connections. Our proprietary operating system software
controls and monitors the S-POP data centers, these networks and our Global
Operations Center. This combination of the long distance fiber optic
connections, the metropolitan area networks connecting our data centers, Global
Operations Center and proprietary operating system comprises our Global Data
Storage Network. Customers can access a pool of data storage by connecting to
the network from either their own locations at which we have established an S-
POP data center on-site or which is 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. Our proprietary Virtual Storage
Portal storage service management application permits customers to monitor and
control their storage resources, monitor our performance, and to request
changes or upgrades to our managed storage services.
We opened our first S-POP data center in Houston in May 1999. Through
September 30, 2000, we had opened 41 additional S-POP data centers in the
metropolitan areas of Atlanta, Austin, Boston, Chicago, Dallas, Detroit,
Houston, Los Angeles, New York, San Francisco, Seattle, Washington, D.C. and
London. Many metropolitan areas contain more than one S-POP data center. We
expect to add approximately 10 additional S-POP data centers by December 31,
2000 in the metropolitan areas in which we are currently located as well as in
additional areas. 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 Web Hosting Services, GlobalCenter, Exodus,
Equinix, Level 3 Communications, CO Space, Phonoscope, Collocation Solutions
and Switch and Data Facilities, totaled $11.6 million at September 30, 2000.
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
25
<PAGE>
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 are deployed in the S-POP data center and
operations personnel are hired in order to provide services at the S-POP data
center. We believe it will take more than 12 months for an S-POP data center to
achieve positive gross margins.
Since our inception, we have incurred significant losses and negative
operating cash flows. As of September 30, 2000, we had an accumulated deficit
of $116.3 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, research and 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.
Revenues
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
ordering changes to their services through our Virtual Storage Portal storage
service management application and 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 customer's 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. We have entered into
subcontracting agreements with equipment manufacturers and service providers,
including Brocade Communications Systems, Inc., Compaq, Dell, EMC, Exodus
Communications, Hitachi Data Systems, Network Appliance, and Sun Microsystems,
to provide professional services to customers of those companies.
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.
26
<PAGE>
Cost of Revenues
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.
Sales and Marketing
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, fees paid to parties, such as web-
hosting providers and systems integrators, who resell or market our services to
customers, 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. 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 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.
Research and Development
Our research and development expenses consist primarily of salaries and
benefits of our technology and engineering personnel, depreciation of
laboratory and quality assurance equipment, and fees for third party
development costs. We expect to increase our research and development expenses
in absolute dollars in future periods to invest in new technology for future
service offerings, to evolve and improve our existing technology and to develop
new technology.
Amortization of Deferred Stock Compensation
We recorded deferred stock compensation of $1.1 million in 1998, $20.8
million in 1999 and $580,000 in the nine months ended September 30, 2000, for
stock options granted with exercise prices determined to be below the fair
value of our common stock. At September 30, 2000, we have $15.3 million of non-
cash deferred compensation, which will be charged to operations through 2004.
We expect to incur non-cash amortization of $5.1 million in 2000, $5.0 million
in 2001, $5.0 million in 2002, $4.0 million in 2003 and $90,000 in 2004.
27
<PAGE>
Interest Income
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 equity
offerings, including the anticipated proceeds from this offering.
Interest Expense
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
Nine months ended September 30, 1999 and 2000
Revenues
Revenues increased from $3.1 million in the nine months ended September 30,
1999 to $27.0 million in the same period in 2000. Managed storage services
revenues increased from $232,000 in the nine months ended September 30, 1999 to
$14.5 million in the same period in 2000. The increase resulted primarily from
the increase in the number of customers during the 2000 period. We provided
managed storage services to four customers during the 1999 period and 99
customers during the 2000 period. Professional services revenues increased from
$957,000 in the nine months ended September 30, 1999 to $12.5 million in the
same period in 2000. The increase resulted primarily from the increase in the
number of professional service engagements during the 2000 period.
Approximately 62% of our revenues in the nine months ended September 30, 1999
was derived from data storage equipment sales. During the nine months ended
September 30, 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.
Cost of Revenues
Cost of managed storage services revenues increased from $2.8 million in
the nine months ended September 30, 1999 to $48.7 million in the same period in
2000. The increase was caused by the opening of 34 additional S-POP data
centers and the operation of all 42 S-POP data centers during the 2000 period.
We had eight active S-POP data centers during the 1999 period. Accordingly,
costs incurred in the operation of an S-POP data center, such as depreciation
of capital equipment, personnel costs, networking costs and facility costs were
all higher in the 2000 period. Cost of professional services revenues increased
from $1.8 million in the nine months ended September 30, 1999 to $15.0 million
in the same period in 2000. The increase was caused by an increase in the
number of professional services personnel during the 2000 period. Cost of
equipment revenues were $1.8 million in the nine months ended September 30,
1999. Since we did not sell equipment in the 2000 period, we did not incur the
associated costs.
28
<PAGE>
Sales and Marketing
Sales and marketing expenses increased from $3.3 million in the nine months
ended September 30, 1999 to $35.5 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, higher direct sales related compensation
expenses, such as commissions and bonuses, were incurred in the 2000 period.
General and Administrative
General and administrative expenses increased from $2.6 million in the nine
months ended September 30, 1999 to $12.7 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, as well as increased information
technology and facilities costs incurred as a result of our growth in the 2000
period.
Research and Development
Research and development expenses increased from $518,000 in the nine
months ended September 30, 1999 to $7.7 million in the same period in 2000. The
increase was caused primarily by an increase in the number of technology and
engineering personnel in the 2000 period, and higher costs incurred in
connection with technology and research activities, such as equipment and
depreciation.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation increased from $519,000 in the
nine months ended September 30, 1999 to $3.8 million in the same period in
2000. Higher deferred stock compensation balances in the 2000 period are the
result of a larger number of stock options granted with exercise prices deemed
to be less than the fair value of common stock at the dates of grant.
Interest Income
Interest income increased from $757,000 in the nine months ended
September 30, 1999 to $9.4 million in the same period in 2000. The increase
resulted from our higher average cash and investment balances during the 2000
period.
Interest Expense
Interest expense increased from $79,000 in the nine months ended September
30, 1999 to $4.8 million in the same period in 2000. The increase resulted from
higher capital lease obligations under which interest expense is incurred, in
the 2000 period.
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.
29
<PAGE>
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 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 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 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.
Research and Development
Research and development expenses were zero for 1998 and $1.1 million for
1999. The increase in research and development expenses was primarily the
result of the hiring of technology and engineering personnel during 1999 as
well as the initiation of research and 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.
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.
30
<PAGE>
Sequential Quarterly Results Since Inception
The following table presents our operating results for each of the seven
quarters ended September 30, 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.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept.
1999 1999 1999 1999 2000 2000 30, 2000
--------- -------- --------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Managed storage
services revenues.... $ -- $ 66 $ 166 $ 488 $ 1,307 $ 3,673 $ 9,483
Professional services
revenues............. -- 129 828 2,246 3,313 4,365 4,837
Equipment revenues.... 383 245 1,307 400 -- -- --
------- ------- ------- -------- -------- -------- --------
Total revenues...... 383 440 2,301 3,134 4,620 8,038 14,320
Costs and expenses:
Cost of managed
storage services
revenues, excluding
deferred stock
compensation
amortization ........ 386 746 1,662 5,606 11,094 15,702 21,916
Cost of professional
services revenues,
excluding deferred
stock compensation
amortization ........ 115 411 1,283 3,534 4,817 5,149 4,987
Cost of equipment
revenues............. 362 245 1,202 302 -- -- --
Sales and marketing,
excluding deferred
stock compensation
amortization ........ 350 1,058 1,852 4,044 9,606 11,143 14,756
General and
administrative,
excluding deferred
stock compensation
amortization ........ 393 755 1,449 2,961 3,702 4,056 4,983
Research and
development,
excluding deferred
stock compensation
amortization ........ 25 142 351 615 1,827 2,696 3,174
Amortization of
deferred stock
compensation......... 24 142 353 782 1,383 1,194 1,256
------- ------- ------- -------- -------- -------- --------
Total costs and
expenses........... 1,655 3,499 8,152 17,844 32,429 39,940 51,072
------- ------- ------- -------- -------- -------- --------
Loss from operations.... (1,272) (3,059) (5,851) (14,710) (27,809) (31,902) (36,752)
Interest income......... 76 66 615 614 1,599 2,154 5,682
Interest expense........ -- -- (79) (314) (806) (1,569) (2,422)
------- ------- ------- -------- -------- -------- --------
Net loss................ $(1,196) $(2,993) $(5,315) $(14,410) $(27,016) $(31,317) $(33,492)
======= ======= ======= ======== ======== ======== ========
</TABLE>
Revenues
The sequential quarterly growth in managed storage services revenues
resulted primarily from the increase in the number of managed storage services
customers during each quarter.
The sequential quarterly growth in professional services revenues resulted
primarily from the increase in the number of professional service engagements
during each quarter, and, in the quarter ended September 30, 2000, an increase
in revenue per engagement.
Cost of Revenues
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. We operated 42 S-POP data
centers as of September 30, 2000. As a result, our facilities costs
31
<PAGE>
increased each quarter. In addition, we increased the amount of infrastructure
deployed in our S-POP data centers each quarter, resulting in higher networking
and depreciation costs. The sequential quarterly increases in cost of
professional services revenues from the quarter ended March 31, 1999 through
the quarter ended June 30, 2000 were primarily the result of the growth in the
number of our professional services personnel in each quarter. The decrease in
the quarter ended September 30, 2000 resulted primarily from a re-allocation of
personnel from professional services to managed storage services in order to
supply the growth of our managed storage services business. 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, higher direct sales related compensation expenses,
such as commissions and bonuses, incurred in connection with our sequential
growth in quarterly revenues, and 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.
Research and Development
The sequential quarterly increases in research and development expenses
were primarily the result of increases in technology and engineering 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
Prior to our initial public offering ("IPO"), which we completed in July
2000, we financed our operations primarily through private equity financing
transactions and capital lease arrangements. At September 30, 2000, we had cash
and cash equivalents of $274.1 million, short-term investments of $51.6 million
and working capital of $298.0 million.
Net cash used in operating activities totaled $673,000 in 1998, $16.0
million in 1999, and $69.9 million in the first three quarters of 2000. Our use
of cash in 1998, 1999 and the first three quarters 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 582 as of September 30, 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 $47.6 million in the first three quarters of 2000. Our cash
used in investing activities in 1998 resulted primarily from the procurement of
capital equipment to commence operations, including Global Data Storage Network
related equipment to be used in our S-POP data centers. Our cash used in
investing activities in 1999 and in the first three quarters of 2000 resulted
primarily from our purchase
32
<PAGE>
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 $391.4 million in the first three quarters of 2000,
which primarily reflects the proceeds received from equity offerings including
our IPO. 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 three quarters of 2000, we raised
$143.0 million from the sale of convertible preferred stock and $259.9 million
from our IPO.
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 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
S-POP data centers and sales offices located outside the United States and we
intend to increase our international operations 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.
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BUSINESS
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 our Global Operations Center through long
distance fiber optic connections. This combination of metropolitan storage
networks, long distance fiber networks, Global Operations Center and
proprietary operating system constitutes our Global Data Storage Network. We
have also created the Virtual Storage Portal software, a proprietary, web-based
storage management tool that enables our managed storage services customers to
analyze and monitor their storage utilization and availability.
Our Global Data Storage Network includes 42 S-POP data centers in 13
metropolitan areas in the United States and the United Kingdom as of September
30, 2000. We expect to have approximately 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 300 of our more than 580
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.
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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. Today's 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
. shortages in storage capacity arising from unpredictable surges in
volume requirements.
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:
. 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,
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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;
. new communication protocols, or languages, such as Fibre Channel
Protocol, which define how certain signal patterns, such as light
flashes, are interpreted; and
. 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.
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
permits the management of diverse storage devices from multiple vendors through
custom designed software that interacts with all such devices. A global data
network also permits overall control of the various elements of such network
through operating system software.
We believe that there is a significant market opportunity for a company
that has the infrastructure, technology 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 approximately $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 have developed proprietary storage operating system
software and storage service management applications that facilitate the
monitoring and control of our customers' stored data. We believe that our
services provide the following key benefits to our customers:
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
customer's 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. Our Virtual
Storage Portal software allows customers to measure our performance under
our service level agreements.
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In-Depth Data Storage Expertise. We have rapidly assembled a growing
staff of approximately 300 storage experts who focus exclusively on data
storage technology and network implementation. Our technology and
engineering group is continuing to develop proprietary software and
applications that enable us to improve and expand our data storage
services. Our expanding professional staff delivers storage services that
address all aspects of our customers' data storage requirements, including
storage of a customer's 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.
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 customer's 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 customer's overall cost.
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 customer's requirements and whether additional equipment must be
procured to meet the customer's requirements.
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. Customers can add additional storage capacity and
services as their businesses grow or their needs change through our web-
based Virtual Storage Portal storage service management application. Also,
through our Global Data Storage Network operating system and Virtual
Storage Portal software, we can manage and monitor a customer's existing
storage infrastructure.
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:
Continue to Develop Proprietary Technology. We have developed our
proprietary Global Data Storage Network operating system and our Virtual
Storage Portal software, a storage service management application. Each of
these technologies enables the delivery of our
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data storage services and permits us to monitor and control our Global
Data Storage Network. These technologies also provide our customers with
the ability to monitor their storage utilization, availability and
capacity remotely through a web browser. We plan to continue to develop
proprietary technology in order to improve and expand our data storage
services.
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.
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
have expanded our service offerings to include our STORwidth and
STORmanage offerings. 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.
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 includes 42 networked S-POP data centers as of September 30, 2000,
and we expect to increase this number to approximately 50 by the end of
2000.
Target Customers With Greatest Need for Our Managed Storage
Services. We target enterprise and Internet-based 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 company's 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.
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
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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.
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:
. web hosting providers, such as AT&T Web Hosting Services, Exodus
Communications, GlobalCenter, COLT Telecom and Equinix. 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;
. 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;
. 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
. long distance fiber carriers, such as Global Crossing, with whom we
have a preferred supplier agreement, that link our metropolitan
storage networks.
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.
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 a
suite of managed storage services for distributed computing applications, which
we call our STORwidth suite of services. We have recently developed a third
service line, our STORmanage services, through which we utilize our Virtual
Storage Portal software, Global Data Storage Network operating system and
Global Operations Center to provide management and monitoring of a customer's
existing storage infrastructure. In addition, we offer comprehensive
professional services, advising our customers on the best design,
implementation and management of their data storage environment.
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PACS Managed Storage Services
Our PACS services provide:
. professional service expertise for the assessment, implementation and
management of a customer's storage environment;
. storage services that grow as a customer's business grows;
. our Virtual Storage Portal storage service management application;
. continuously monitored secure data centers;
. continuous data availability through enhanced storage and network
reliability;
. redundancy to minimize system downtime;
. fast and reliable connections through our secure Global Data Storage
Network; and
. tested and evaluated high-quality hardware and software that adapt to a
customer's current and future needs.
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 PACS 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.]
DataPACS Primary Data Storage Services. Our DataPACS services provide
hard disk-based storage of a customer's 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.
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 customer's 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
customer's 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.
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 customer's building is
destroyed, our customer's data will be protected and quickly available to
resume operations. Our SafePACS services provide real-time mirrored copies
of the customer's 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.
The following table summarizes the features of our PACS managed storage
service offerings. All four services can be deployed within one to four weeks
depending on the customer's 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
customer's 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 customer's 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 per managed gigabyte per
month when purchasing a typical combination of our managed storage services.
<TABLE>
<CAPTION>
Service Features
-------------------------------------------------------------------------------
<C> <S>
DataPACS Services . Replace or complement the need for on-site storage of
primary data
. Ability to rapidly add capacity to meet both temporary
and permanent requirements
. Point-in-time copies of data for full-size database
testing of new applications
-------------------------------------------------------------------------------
. Replace or complement the need for on-site storage of
NetPACS Services primary data
. Multiple web servers can be attached to a single file
server
. Permits multiple servers to access the same data
-------------------------------------------------------------------------------
BackPACS Services . Scheduled full and incremental backups
. Secured vaulting for disaster recovery
. Reduces system downtime and the time required for backups
. Reduces data consolidation challenges while lowering
risks of data corruption
-------------------------------------------------------------------------------
SafePACS Services . Remote site simultaneous data copying
. Complete data loss protection and protection from data
center or storage hardware failure
. Additional point-in-time copies of remote copy of data
permit application testing and protection from data
corruption
. Geographically diverse data copying infrastructure
</TABLE>
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STORwidth Managed Storage Services
Our STORwidth suite of managed storage services is designed for businesses
that store large amounts of data intended to be accessed by multiple users
simultaneously in multiple locations, such as providers and distributors of
Internet content, application service providers, and streaming media and media
asset management companies. Our STORwidth services facilitate the economical
storage of image, audio and video data which is often stored in multiple
locations and in situations which have more tolerance for temporary loss of an
individual copy of the data.
Our STORwidth services are based on a distributed storage platform that
enables these rich content files to be stored, managed, and replicated through
our Global Data Storage Network or through the Internet. Our STORwidth-CORE
service offering provides customers with primary data storage for content rich
applications. Other STORwidth services will provide or enable content rich data
replications to one or more geographically dispersed locations, permitting the
data to be closer to and more easily accessed by end users. STORwidth services
customers, like our PACS services customers, benefit from having their data
storage continuously monitored through our Global Operations Center and through
our Virtual Storage Portal software, which allows customers to view and manage
their storage.
STORmanage Management Services
STORmanage management services are designed to provide intelligent
management and monitoring of a customer's existing storage infrastructure by
applying storage best practices to enterprise environments. The service is
enabled through our Global Data Storage Network operating system and our
Virtual Storage Portal graphical user interface, and allows enterprise
customers to reduce costs and improve service to their own internal
departments. To deliver this service, we employ a combination of proprietary
data storage management software, personnel and infrastructure that together
provide the management layer we use to manage our Global Data Storage Network.
STORmanage services include specifying and recommending end-to-end
engineered storage systems that are tested by us, installing monitoring
equipment and software on our customers' premises, monitoring and active
management of customer environments, event management and escalation, and all
the reporting capabilities and real-time information provided by the Virtual
Storage Portal software. STORmanage services are designed to significantly
reduce the complexity of managing large, heterogeneous storage environments.
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 customer's storage environment, and tailored to
fit each customer's specific business requirements. We offer expertise in the
following areas:
. primary data storage requirements, to address basic storage needs;
. storage area networks, to solve performance, capacity growth and
distance issues;
. backup and restore strategies, to prevent data loss and enable
efficient data recovery; and
. business continuity strategies, to allow businesses to operate without
interruption.
Our professional service experts implement a three-step process to provide
our customers with optimal storage advice and environments:
. Assessment. Our storage experts evaluate the customer's 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 customer's 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.
. 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.
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 Point 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 the metropolitan areas of Atlanta, Austin,
Boston, Chicago, Dallas, Detroit, 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.
Global Data Storage Network Operating System
Our Global Data Storage Network operating system is software which allows
coordinated management of the various components of our Global Data Storage
Network. The operating system includes software that resides on various
components of the Global Data Storage Network and in our customers' data
storage environments. This software communicates with individual devices both
to collect information regarding status of that device and to set operational
parameters. The software continuously correlates the data collected, allowing
our staff to efficiently manage performance, availability, growth, and changes
in the managed services we provide to our customers. In addition to technical
data, our proprietary software also maintains a repository of customer-specific
information, including organization and application structure, storage assets
information, and service level parameters. Our Global Data
43
<PAGE>
Storage Network operating system supports a variety of user interfaces that are
tailored to end users and customer applications, as well as to our own internal
operations and engineering staff.
Virtual Storage Portal Software
Our Virtual Storage Portal software is a proprietary, web-based, storage
service management tool that allows our managed storage services customers to
analyze and monitor their historical and current utilization, availability and
allocated storage capacity through an easy to use, customizable graphical user
interface. Through the Virtual Storage Portal software, customers can measure
and monitor our service level performance and make requests for changes and
upgrades to their managed storage services. The Virtual Storage Portal software
provides these customers with the following information about their managed
storage resources:
. Availability. Reports show users the availability of services over the
last week and month as well as trends in availability over time.
. 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.
. 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.
. 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 log in and view their storage resources,
without accessing those of other departments.
. Service and change management. Customers can submit change requests
directly to StorageNetworks customer service and operations groups and
view the status of pending requests.
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 customer's 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.
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 our Global Data Storage Network operating system,
Global Operations Center and Virtual Storage Portal software, that enhance our
suite of services. The Global Operations Center improves the efficiency of our
network through remote event and performance monitoring, an advanced warning
and resolution (or ticketing) system, a comprehensive database of customers'
network and technological information, and change, asset and storage
management.
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
44
<PAGE>
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 69 storage professionals, the
majority of whom are located in Waltham, Massachusetts and London.
Customers
We have 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
September 30, 2000, we had contracts for managed storage services with 135
customers. The following is a partial list of those managed storage services
customers:
Adero eFuel, Inc. Quova, Inc.
Allegrix Enmed RestaurantPro.com
AristaSoft Essential.com Revenio
Authoria FleetBoston SiteRock
BestBuy.com Financial SkyDriver
BlueMeteor, inc. Flooz.com SpotLife, Inc.
Bluetrain.com GeoNet STAR ONE AG
BROCADE GlobalNetxchange SwapDrive
Business.com Ibelong Networks TechTarget.com
Cephren, Inc. INC2inc Thomson Investors Network
ClickThings.com Instipro Group, United Messaging
Cogit Inc. Ustreamit
Commerx Jamcracker.com Vastar Resources
Credit Suisse First Juniper Networks Vistaprint
Boston Knight Securities X:drive
CrossCommerce.com, Lycos Yahoo!
Inc. Merrill Lynch YesMail.com
DoubleTwist, Inc. Ofoto ZoneTrader.com
Dynegy Peopleclick.com
eCredit.com Planet Portal
ecoutlook.com Playboy.com
We have entered into subcontractor agreements with equipment manufacturers
and service providers, including Brocade Communications Systems, Inc., Compaq,
Dell, EMC, Exodus Communications, Network Appliance, and Sun Microsystems,
Inc., to provide professional services to customers of these companies. We are
generally compensated under these agreements on a flat hourly rate basis.
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:
. web hosting service providers, such as AT&T Web Hosting Services,
Exodus Communications, GlobalCenter, COLT Telecom and Equinix, who
resell or market our services to customers located in their facilities;
. 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
. 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 September 30, 2000,
we had 100 employees engaged in direct sales and 29 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 Sun's 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.
Christopher F. Corrado, First Vice President and Chief Technology Officer
for the Corporate and Institutional Client Group at Merrill Lynch & Co. Mr.
Corrado previously served as Chief Technology Officer at Deutsche Bank.
Richard Lary, formerly Senior Storage Architect and now a consultant to
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.
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<PAGE>
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 Computer's Storage Division. Dr. Schubert
also serves as Dell's 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:
. engineering and technical expertise and development of proprietary
software;
. brand recognition;
. quality and variety of services offered;
. 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
. price.
Our current competitors include other companies that have directly entered
the storage service provider market, and we are aware of approximately 16 other
companies that provide storage services. Our current competitors also include
storage hardware, software and service vendors such as Compaq, EMC, Hewlett-
Packard, Legato Systems, StorageTek, Sun Microsystems, Inc. and VERITAS
Software, and other announced entrants to the storage services provider market,
including
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EDS, IBM, Intel and Qwest Communications. We estimate that there are in excess
of 50 different companies providing storage hardware or software that directly
or indirectly compete with our services.
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 six patent applications 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 September 30, 2000, we had a total of 582 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.
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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 also entered into a lease for approximately 135,000 square feet of
additional space in Waltham. We are in the process of transferring our
headquarters to this new building, and will retain 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.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth our executives officers and directors, their
ages and their positions with StorageNetworks as of September 30, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Peter W. Bell.......... 36 Chairman of the Board, Chief Executive Officer,
President and Director
William D. Miller...... 40 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 Marketing, Alliances
and International Sales
Michael G. Tardif...... 41 Senior Vice President of Engineering and
Operations
Randall A. Blumenthal.. 32 Director
Robert E. Davoli....... 52 Director
Harold R. Dixon........ 37 Director
Stephen J. Gaal........ 56 Director
Michael D. Lambert..... 53 Director
Roger M. Marino........ 61 Director
William T. Schleyer.... 49 Director
</TABLE>
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 as our Chief
Financial Officer since March, 1999. 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 Marketing,
Alliances and International Sales since August, 2000. Previously, Mr. Clavin
served as our Senior Vice President of Marketing and Corporate Development from
August, 1999 through April, 2000 and as our Executive Vice President of
Operations from April, 2000 to August, 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.
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Michael G. Tardif has served as our Senior Vice President of Engineering
and Operations since October, 2000. Previously, Mr. Tardif served as our Senior
Vice President of Engineering and Strategy from January, 2000 to October, 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.
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. Mr.
Dixon has served as Chairman and Chief Executive Officer of GiantLoop Network
since March, 2000. 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.
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 Pilot House Ventures, 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
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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.
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. Three 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.
and Michael D. Lambert is affiliated with Dell USA, L.P. The current members of
our Board of Directors were designated by the holders of our common stock and
preferred stock prior to our initial public offering pursuant to the terms of a
voting agreement and the then current terms of our certificate of
incorporation. Our outstanding preferred stock converted into common stock,
such voting agreement was terminated, and our certificate of incorporation was
amended and restated, all effective upon the closing of our initial public
offering. There are no existing arrangements or agreements relating to the
designation or election of our directors.
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. The board of directors is divided into three
classes, each of whose members serve for a staggered three-year term. Messrs.
Blumenthal and Lambert serve in the class whose term expires at the annual
meeting of stockholders in 2001; Messrs. Davoli, Marino and Schleyer serve in
the class whose term expires at the annual meeting of stockholders in 2002; and
Messrs. Bell, Dixon, Gaal and Miller 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.
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Audit Committee
The Audit Committee, which consists of Messrs. 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. To fill a vacancy created by a recent resignation,
we intend to appoint a third member of the Audit Committee at the next
regularly scheduled board meeting.
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 person's 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
<TABLE>
<CAPTION>
Long-term Compensation
Annual Compensation Awards
-------------------- ----------------------
Shares of Common Stock
Salary Bonus Underlying Options
---------- --------- ----------------------
<S> <C> <C> <C>
Peter W. Bell...................... $ 175,000 -- --
Chief Executive Officer, President
and Chairman of the Board
William D. Miller.................. 175,000 -- --
Executive Vice President and Chief
Technical Officer
Paul C. Flanagan (1)............... 114,231 $ 80,000 700,000
Executive Vice President of
Finance, Administration and
Corporate Development, Chief
Financial Officer, Treasurer and
Secretary
John C. Clavin (2)................. 66,667 52,500 500,000
Executive Vice President of
Marketing, Alliances and
International Sales
Jeffrey W. Murphy (3).............. 63,718 90,000 700,000
</TABLE>
--------
(1) Mr. Flanagan joined StorageNetworks in March, 1999.
(2) Mr. Clavin joined StorageNetworks in August, 1999.
(3) Mr. Murphy currently serves as our Senior Vice President, International
Sales. From September, 1999 to August, 2000, Mr. Murphy served as our
Senior Vice President, Sales Operations.
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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
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of
Securities Total Options Stock Appreciation
Underlying Granted To for Option Term
Options Employees in Exercise Price Expiration ---------------------
Granted Fiscal Year ($/Share) Date 5% 10%
---------- ------------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 1999 December 31, 1999
----------------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
54
<PAGE>
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. Flanagan's 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. Clavin's written agreement. The
Severance Agreement provides that if Mr. Clavin's 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 nine months' salary if he is
terminated 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 7.5% 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.
The stock options for the purchase of 710,000 shares of common stock held
by Mr. Flanagan and for 700,000 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. During 2000, in addition to the
options shown in the above table as of December 31, 1999, Mr. Flanagan received
an option for 10,000 shares and Mr. Clavin received an option for 200,000
shares.
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 Engineering and Operations, 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 officer's
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.
In August, 2000, pursuant to a secured promissory note, we loaned
$1,200,000 to Mr. Tardif for the purchase of a principal residence in
connection with his relocation to our corporate headquarters. The note is
secured by a mortgage on the property, and has a term of four years and an
interest rate of 6.62%. The loan must be repaid immediately if Mr. Tardif's
employment is terminated.
55
<PAGE>
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 September 30,
2000, options to purchase an aggregate of 8,695,855 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:
. 3,000,000 shares;
. 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. As of September
30, 2000, options to purchase an aggregate of 1,241,050 shares of common stock
were outstanding under the 2000 Stock Plan.
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
56
<PAGE>
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 September 30, 2000,
approximately 550 of our employees would have been eligible to participate in
the purchase plan.
57
<PAGE>
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 employee's base pay during the offering period, such amount
to be up to 10% of the employee's 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 February 1, 2001. 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 employee's
accumulated payroll deductions will be refunded. However, upon termination of
employment because of death, the employee's beneficiary has certain rights to
elect to exercise the option to purchase the shares that the accumulated
payroll deductions in the participant's 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.
58
<PAGE>
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 our initial public offering in July, 2000, each share of Series A
convertible preferred stock automatically converted into four shares of common
stock.
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 our initial public offering in July, 2000, each share of Series B
convertible preferred stock automatically converted into two shares of common
stock.
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 our initial public
offering in July, 2000, each share of Series C convertible preferred stock
automatically converted into two shares of common stock.
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
our initial public offering in July, 2000, each share of Series D convertible
preferred stock converted into one share of common stock.
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.
59
<PAGE>
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. 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 Chairman of the Board, Chief Executive Officer,
President, 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.
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. As of September 30,
2000, we had generated $3.0 million of revenues under this agreement. Thomas
J. Casey, a former director of the Company, is affiliated with GC Dev. Co.,
Inc.
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 September 30, 2000, we have leased approximately $1.8
million worth of equipment pursuant to this master lease agreement. During
1999 we purchased approximately $1.0 million 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.
60
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of September 30, 2000, and as adjusted to
reflect the sale of common stock offered in this prospectus, by:
. each person we know to own beneficially more than 5% of our common
stock;
. each of our directors and the Named Executive Officers;
. all of our directors and executive officers as a group; and
. all stockholders who are selling shares of our common stock.
The number of shares of common stock deemed outstanding prior to this
offering includes 91,210,319 shares of common stock outstanding as of September
30, 2000. The number of shares of common stock deemed outstanding after this
offering also includes the 5,502,726 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 held by holders of 5% of
our common stock and our directors and executive officers that are currently
exercisable or will become exercisable within 60 days of September 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.
<TABLE>
<CAPTION>
Shares Benefically
Shares Benefically Owned Owned after the
Prior to the Offering Offering
----------------------------- ---------------------
Shares
Being
Name and Address of Beneficial Owner Number Percentage Offered Number Percentage
------------------------------------ -------------- --------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
The Goldman Sachs
Group, Inc. (1) 11,490,888 12.59% 578,652 10,912,236 11.28%
85 Broad Street
New York, NY 10004
Roger M. Marino (2)..... 11,315,944 12.41 570,656 10,745,288 11.11
Harold R. Dixon (3)(4).. 8,032,500 8.80 403,739 7,628,762 7.89
Robert E. Davoli (5).... 6,465,900 7.09 - - 6,141,855 6.35
c/o Sigma Partners
20 Custom House Street
Suite 830
Boston, MA 02110
Greylock IX Limited
Partnership............ 6,420,900 7.04 300,000 6,120,000 6.33
One Federal Street
Boston, MA 02110
Entities affiliated with
Sigma Partners (5)..... 6,420,900 7.04 324,045 6,096,855 6.30
20 Custom House Street
Suite 830
Boston, MA 02110
Peter W. Bell (6)....... 5,664,914 6.21 -- 5,664,914 5.86
William D. Miller (7)... 5,547,211 6.08 -- 5,547,211 5.74
GC Dev. Co., Inc. ...... 5,253,940 5.76 265,152 4,988,788 5.16
c/o The Corporation
Trust Company
1209 Orange Street
Wilmington, DE 19801
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Shares Benefically
Shares Benefically Owned Owned after the
Prior to the Offering Offering
----------------------------- ---------------------
Shares
Being
Name and Address of Beneficial Owner Number Percentage Offered Number Percentage
------------------------------------ -------------- ----------------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Dell USA L.P. (8)........ 5,278,940 5.79 200,111 5,078,829 5.25
c/o Dell Computer
Corporation
One Dell Way
Round Rock, TX 78687
Entities affiliated with
PH Ventures II, LLC (9)
........................ 4,586,358 5.03% 205,151 4,381,207 4.53%
The Pilot House
Lewis Wharf
Boston, MA 02110
William T. Schleyer...... 656,636 * - - 656,636 *
Stephen J. Gaal.......... 483,798 * - - 483,798 *
Randall Blumenthal....... - - * - - - - *
c/o Goldman, Sachs & Co.
2765 Sand Hill Road
Menlo Park, CA 94025
Michael D. Lambert....... - - * - - - - *
c/o Dell Computer
Corporation
One Dell Way
Round Rock, TX 78687
Paul C. Flanagan (10).... 237,500 * 100,000 137,500 *
Jeffrey W. Murphy........ 175,500 * 25,000 150,500 *
John C. Clavin........... 156,750 * 100,000 56,750 *
Michael G. Tardif........ 500 * - - 500 *
Sun Microsystems, Inc.... 439,560 * 22,183 417,377 *
Network Appliance, Inc... 219,780 * 11,092 208,688 *
The James P. and Maureen
P. Lampert Living
Trust................... 200,000 * 10,093 189,907 *
John J. Healy............ 200,000 * 10,093 189,907 *
John R. McCarthy......... 200,000 * 10,093 189,907 *
Paul J. Salem............ 200,000 * 10,093 189,907 *
Mark B. Ward............. 200,000 * 10,093 189,907 *
Lighthouse Capital
Partners III LP......... 159,711 * 8,060 151,651 *
Robert F. Rinaldi........ 100,000 * 5,047 94,953 *
Peter Fortenbaugh........ 58,378 * 2,946 55,432 *
The Grey Dog Trust....... 30,000 * 1,514 28,486 *
Other Selling
Stockholders (11)....... 886,501 * 323,461 563,040 *
All executive officers
and directors as a group
(13 persons) (12)....... 38,737,153 42.27 1,199,394 37,537,759 38.64
</TABLE>
-------
* 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. Excludes (i) shares
owned by Goldman Sachs that were acquired in the ordinary course of
market-making transactions or (ii) shares held in client accounts, for
which Goldman Sachs exercises voting or investment authority, or both. GS
is the investment manager of one or more of the Limited Partnerships. Mr.
Blumenthal is a Managing Director of GS. GS and GSG each disclaim
beneficial ownership
62
<PAGE>
of such shares to the extent attributable to partnership interests in the
Limited Partnerships held by GSG and its affiliates. Mr. Blumenthal
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest therein, if any. The Limited Partnerships have entered
into a voting trust agreement with an independent, unaffiliated trust
company, pursuant to which the Limited Partnerships have deposited 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
have the power to dispose or to direct the disposition of their shares and
(ii) each Limited Partnership has the right to receive all dividends paid
on their shares. Also includes 25,000 shares subject to an option that is
exercisable as of September 30, 2000 awarded to Mr. Blumenthal in his
capacity as a director of StorageNetworks. Goldman, Sachs & Co. exercises
investment and voting power over the shares subject to this option
pursuant to a contract between Mr. Blumenthal and Goldman Sachs. Of the
shares being sold, 420,495 shares are being sold by GS Capital Partners
III, L.P., 115,599 shares are being sold by GS Capital Partners III
Offshore, L.P., 23,146 shares are being sold by Stone Street Fund 1999
L.P., and 19,412 shares are being sold by Goldman Sachs Verwaltungs GmbH.
(2) Includes 1,579,542 shares held by Grampek Limited Partnership and
250,000 shares held by LAULIN Limited Partnership, of 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. 478,324 shares are being sold by Mr. Marino,
79,715 shares are being sold by Grampek Limited Partnership and 12,617
shares are being sold by LAULIN Limited Partnership.
(3) Includes 25,000 shares subject to an option that is exercisable as of
September 30, 2000.
(4) Includes 7,500,000 shares held by the Dixon Family Limited Partnership,
of which Mr. Dixon is general partner. 25,234 shares are being sold by
Mr. Dixon and 366,146 shares are being sold by the Dixon Family Limited
Partnership.
(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. Of the shares being sold,
215,043 shares are being sold by Sigma Partners IV, L.P., 64,693 shares
are being sold by Sigma Associates IV, L.P., 7,476 shares are being sold
by Sigma Investors IV, L.P., 29,098 shares are being sold by Sigma
Partners V, L.P., 6,760 shares are being sold by Sigma Associates V,
L.P., and 975 shares are being sold by Sigma Investors V, L.P.
(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 2,412,372 shares held by MAWAM LLP, of which Mr. Miller is
general partner. 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 September 30, 2000.
(9) Includes 521,318 shares held by PH Ventures VIII, LLC, an affiliated
entity.
(10) Includes 48,000 shares held by The 2000 Paul C. Flanagan Irrevocable
Trust. Mr. Flanagan disclaims beneficial ownership with respect to such
shares, except to the extent of his pecuniary interest therein, if any.
(11) Includes 15 stockholders who hold in the aggregate less than 1% of our
common stock outstanding prior to the offering. Does not reflect certain
shares to be issued upon exercise of options at the closing of this
offering.
(12) Includes 437,500 shares subject to vested options or options exercisable
within 60 days of September 30, 2000.
63
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of StorageNetworks consists 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 September 30, 2000, there were
outstanding:
. 91,210,319 shares of common stock held by 280 stockholders of record,
. warrants to purchase 122,682 shares of common stock, and
. options to purchase an aggregate of 9,936,905 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 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,
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.
64
<PAGE>
Warrants and Stock Options
As of September 30, 2000, there were warrants outstanding to purchase
42,682 shares of common stock at a per share exercise price of $2.46 and 80,000
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 one of our
customers. As of September 30, 2000, 8,695,855 shares and 1,241,050 shares were
issuable pursuant to stock option grants under our 1998 Stock Incentive Plan
and 2000 Stock Plan, respectively, at a weighted-average per share exercise
price of $6.00.
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 corporation's voting stock.
Our certificate of incorporation and our by-laws 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.
65
<PAGE>
Delaware's 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
corporation's certificate of incorporation or by-laws, unless a corporation's
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.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 96,713,045
shares of common stock, assuming the issuance of 5,502,726 shares in this
offering and no exercise of outstanding options or warrants after the date
hereof, and assuming no exercise of the underwriters' over-allotment option. Of
these shares, the 10,350,000 shares sold in our initial public offering, and
all of the 9,000,000 shares sold in this offering, will be freely tradeable
without restriction or further registration under the Securities Act; provided,
however, that if shares are purchased by "affiliates" as that term is defined
in Rule 144, their sales of shares would be subject to certain limitations and
restrictions that are described below. Generally, the balance of our
outstanding shares of common stock are "restricted securities" under the
Securities Act, subject to the limitations and restrictions that are described
below.
In connection with our initial public offering, certain stockholders who
acquired capital stock before that offering entered into 180-day lock-up
agreements with the underwriters of that offering. These agreements expire on
December 27, 2000. In connection with this offering, our directors and
officers, all selling stockholders and certain other stockholders will enter
into new 90-day lock-up agreements with us and the underwriters of this
offering. Our outstanding shares of common stock that are subject to lock-up
agreements or are restricted securities immediately after this offering will,
subject to the limitations of Rule 144, become eligible for public sale as
follows:
. 2,499,370 will become eligible for public sale on December 27, 2000;
. 233,508 will become eligible for public sale on January 20, 2001; and
. 75,237,310 will become eligible for public sale following 90 days or
later from the date of this prospectus.
Goldman, Sachs & Co. and we may in our sole discretion, at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
The number of shares which become eligible for sale at various dates are
subject, in most cases, to the limitations of Rule 144. Since many of these
shares were purchased at prices substantially below current market prices, we
believe that a significant number of these shares will be sold when eligible
for sale.
In addition, as of September 30, 2000, options to purchase a total of
9,936,905 shares of common stock were outstanding. We have filed a registration
statement on Form S-8 under the Securities Act to register those shares and
other shares up to an aggregate of 24,320,000 shares of common stock issuable
under our compensatory stock plans. As a result, when the options are exercised
and the shares received on such exercise are vested, such shares will be freely
tradeable under the Securities Act; provided, however, that shares purchased by
"affiliates," as that term is defined in Rule 144, would be subject to
limitations and restrictions that are described below.
Rule 144
In general, under Rule 144, a person (or persons whose shares are
aggregated), 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 (1) one percent of the then
outstanding shares of common stock (approximately 967,130 shares immediately
after this offering) or (2) the average weekly trading volume in the common
stock on the Nasdaq National Market during the four calendar weeks preceding
the date on which notice of such sale is filed, provided certain requirements
concerning availability of public information, manner of sale and notice of
sale are satisfied. In addition, our affiliates must comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell shares of common stock which are not
restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may resell such
shares without compliance with the foregoing requirements.
67
<PAGE>
In meeting the one-and two-year holding periods described above, a holder
of shares can include the holding periods of a prior owner of the shares 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
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who before June 29, 2000 purchased shares from us in
connection with a compensatory stock plan or other written agreement, or who
purchased shares from us after that date upon the exercise of options granted
before that date, are eligible to resell such shares in reliance upon Rule 144.
If such person is not an affiliate, such sale may be made subject only to the
manner of sale provisions of Rule 144. If such a person is an affiliate, such
sale may be made under Rule 144 without compliance with its one-year minimum
holding period, but subject to the other Rule 144 restrictions.
Registration Rights
At September 30, 2000, the holders of approximately 78,997,511 shares of
common stock were entitled to rights with respect to the registration of such
shares under the Securities Act. Certain of the selling stockholders are
selling shares pursuant to the exercise of such rights. 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 to include shares of such common stock therein. Additionally, commencing
January 6, 2001, 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 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.
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<PAGE>
UNDERWRITING
StorageNetworks, the selling stockholders 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., Chase Securities Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc. and
Thomas Weisel Partners LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ..........................................
Chase Securities Inc...........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.............
Salomon Smith Barney Inc.......................................
Thomas Weisel Partners LLC.....................................
----------
Total........................................................
==========
</TABLE>
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 StorageNetworks 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 StorageNetworks and the
selling stockholders. The amounts to be paid by us are shown assuming both no
exercise and full exercise of the underwriters' option to purchase 1,350,000
additional shares.
<TABLE>
<CAPTION>
Paid by StorageNetworks
-----------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling Stockholders
--------------------------------
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public 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 $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price
to public. If all the shares are not sold at the public offering price, the
representatives may change the offering price and the other selling terms.
StorageNetworks has agreed with the underwriters not to dispose of or hedge
any of its common stock or securities convertible into or exchangeable for
common stock during the period from the date of this prospectus continuing
through the date 90 days after the date of this prospectus, except with the
prior written consent of Goldman, Sachs & Co.
69
<PAGE>
In addition, StorageNetworks' executive officers, directors, entities
affiliated with such directors and officers, selling stockholders, and certain
other stockholders which collectively own 76,044,853 shares of common stock,
other than those shares being sold in this offering, have agreed with the
underwriters and StorageNetworks not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for common stock without
the consent of Goldman, Sachs & Co. and StorageNetworks during the period from
the date of this prospectus continuing through the date 90 days after the date
of this prospectus.
The common stock is quoted 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. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option. "Naked" short sales are any
sales in excess of such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the 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.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of
StorageNetworks' common stock, and together with the imposition of the penalty
bid, 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.
As permitted by Rule 103 under the Exchange Act, certain underwriters and
selling group members, if any, that are market makers may act as "passive
market makers" in the common stock which means they may make bids for or
purchases of common stock in the Nasdaq National Market until such time, if
any, when a stabilizing bid for such securities has been made. Rule 103
generally provides that (1) a passive market maker's net daily purchases of the
common stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months, or any 60 consecutive
days ending with the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part, (2) a passive
market maker may not effect transactions or display bids for common stock at a
price that exceeds the highest independent bid for the common stock by persons
who are not passive market makers and (3) bids made by passive market makers
must be identified as such.
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<PAGE>
A prospectus in electronic format will be made 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. 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.
Four investment partnerships of which affiliates of The Goldman Sachs
Group, Inc., an affiliate of Goldman, Sachs & Co. (lead manager of this
offering), are general partner, managing general partner or investment manager
hold 11,465,888 shares of our common stock. Because of the economic interest
based on contributed capital of Goldman Sachs & Co. 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 &
Co. is approximately 2.7% based on the shares of 91,210,319 StorageNetworks
common stock outstanding as of September 30, 2000. 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.
We have provided managed data storage services to Merrill Lynch in the
ordinary course of our business since March, 2000. During the nine months ended
September 30, 2000, approximately 3% of our revenues was derived from services
performed for Merrill Lynch, and our services to Merrill Lynch are ongoing. In
addition, ML IBK Positions, Inc., an affiliate of Merrill Lynch, holds 366,250
shares of our common stock received upon exercise of a warrant issued to
Merrill Lynch on February 29, 2000.
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 148 completed transactions, and has acted as a syndicate member
in an additional 129 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.
StorageNetworks will bear all of its expenses and those of the selling
stockholders for this offering, excluding underwriting discounts and
commissions. StorageNetworks estimates that the total expenses of the offering
other than underwriting discounts and commissions will be approximately
$750,000.
StorageNetworks and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
71
<PAGE>
VALIDITY OF COMMON STOCK
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.
EXPERTS
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 LLP's 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 or incorporated by reference as an exhibit to the
registration statement, each such statement being qualified in all respects by
the document to which it refers. We are also 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 has filed or 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.
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<PAGE>
StorageNetworks, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated balance sheets at December 31, 1998 and 1999 and September
30, 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 nine months ended September 30, 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,
the year ended December 31, 1999 and the nine months ended September 30,
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 nine months ended September 30, 1999 and 2000
(unaudited).............................................................. F-6
Notes to consolidated financial statements................................ F-7
</TABLE>
F-1
<PAGE>
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 Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 5, 2000
F-2
<PAGE>
StorageNetworks, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31, September 30,
---------------- -------------
1998 1999 2000
------ -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $8,280 $ 13 $ 274,086
Short-term investments....................... -- 34,802 51,646
Accounts receivable, net of allowance for
doubtful accounts of $76 and $307 at
December 31, 1999 and September 30, 2000,
respectively................................ 541 3,167 4,541
Inventory.................................... 201 -- --
Prepaid expenses and other current assets.... 67 1,499 8,965
------ -------- ----------
Total current assets........................ 9,089 39,481 339,238
Property and equipment, net.................... 83 25,752 116,108
Restricted cash equivalents.................... -- 359 9,377
Rights to use fiber optic capacity............. -- 900 4,922
Other assets................................... 500 767 6,464
------ -------- ----------
Total assets................................ $9,672 $ 67,259 $ 476,109
====== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................. $ -- $ 3,094 3,072
Accrued expenses............................. 507 6,082 16,768
Deferred revenue............................. 497 810 4,336
Capital lease obligations.................... -- 4,442 17,068
------ -------- ----------
Total current liabilities................... 1,004 14,428 41,244
Capital lease obligations, less current
portion....................................... -- 15,822 79,487
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, 5,000,000 shares issued
and outstanding at December 31, 1999 and
zero shares issued and outstanding at
September 30, 2000 respectively............. 45 50 --
Series B convertible preferred stock, par
value $.01; 10,294,080 shares authorized;
10,162,596 shares issued and outstanding at
December 31, 1999 and zero shares issued and
outstanding at September 30, 2000
respectively................................ -- 102 --
Preferred stock, par value $.01; 5,000,000
shares authorized; zero shares issued and
outstanding................................. --
Common stock, par value $.01; 600,000,000
shares authorized; 24,400,000, 24,531,500
and 91,210,319 shares issued and outstanding
at December 31, 1998 and 1999 and September
30, 2000 respectively....................... 244 245 912
Additional paid-in capital................... 9,992 80,942 485,973
Deferred stock compensation.................. (1,077) (19,880) (15,349)
Accumulated other comprehensive income....... 117
Accumulated deficit.......................... (536) (24,450) (116,275)
------ -------- ----------
Total stockholders' equity.................. 8,668 37,009 355,378
------ -------- ----------
Total liabilities and stockholders' equity.. $9,672 $ 67,259 $ 476,109
====== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
StorageNetworks, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Period from
October 5, 1998
(commencement Nine months ended
of operations) to Year ended September 30,
December 31, December 31, ----------------------
1998 1999 1999 2000
----------------- ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Managed storage
services revenues.... $ -- $ 720 $ 232 $ 14,463
Professional services
revenues............. -- 3,203 957 12,515
Equipment revenues.... -- 2,335 1,935 --
----------- ----------- ---------- ----------
Total revenues.......... -- 6,258 3,124 26,978
COSTS AND EXPENSES:
Cost of managed
storage services
revenues, excluding
deferred stock
compensation
amortization
amounts.............. 101 8,400 2,794 48,712
Cost of professional
services revenues,
excluding deferred
stock compensation
amortization
amounts.............. 9 5,343 1,809 14,953
Cost of equipment
revenues............. -- 2,111 1,809 --
Sales and marketing,
excluding deferred
stock compensation
amortization
amounts.............. 39 7,304 3,260 35,505
General and
administrative,
excluding deferred
stock compensation
amortization
amounts.............. 231 5,558 2,597 12,741
Research and
development,
excluding deferred
stock compensation
amortization
amounts.............. -- 1,133 518 7,697
Amortization of
deferred stock
compensation*........ -- 1,301 519 3,833
----------- ----------- ---------- ----------
Total costs and
expenses............... 380 31,150 13,306 123,441
----------- ----------- ---------- ----------
Loss from operations.... (380) (24,892) (10,182) (96,463)
Interest income......... 11 1,371 757 9,435
Interest expense........ -- (393) (79) (4,797)
----------- ----------- ---------- ----------
Net loss................ $ (369) $ (23,914) $ (9,504) $ (91,825)
=========== =========== ========== ==========
Net loss per share--
basic and diluted...... $ (0.02) $ (0.98) $ (0.39) $ (1.94)
=========== =========== ========== ==========
Weighted average common
shares outstanding..... 24,400,000 24,406,756 24,400,000 47,421,719
*Amortization of
deferred stock
compensation
Cost of managed storage
services revenues...... $ - $ 71 $ 42 $ 372
Cost of professional
services revenues...... - 229 33 415
Sales and marketing.... - 603 267 1,231
General and
administrative......... - 251 85 475
Research and
development............ - 147 92 1,340
----------- ----------- ---------- ----------
$ - $ 1,301 $ 519 $ 3,833
=========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
StorageNetworks, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Stock Accumulated
------------ ------------- -------------- ------------- ------------- Additional Deferred Other
Par Par Par Par Par Paid-in Stock Comprehensive
Shares Value Shares Value Shares Value Shares Value Shares Value Capital Compensation Income
------ ----- ------ ----- ------- ----- ------ ----- ------ ----- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial issuance
of common stock
on October 5,
1998............ 24,400 $244
Sale of Series A
preferred stock,
net............. 4,500 $45 $ 8,915
Deferred
compensation
expense
associated with
stock options... 1,077 $ (1,077)
Net loss........
------ ---- ------ --- ------- ---- ------ --- ------ --- -------- ------------ --------
BALANCE AT
DECEMBER 31,
1998............ 24,400 244 4,500 45 9,992 (1,077)
Issuance of
Series A
preferred
stock........... 500 5 995
Issuance of
Series B
preferred stock,
net............. 10,163 $102 49,849
Issuance of
common stock in
connection with
exercise of
stock options... 132 1 3
Deferred
compensation
expense
associated with
stock options... 20,806 (20,806)
Amortization of
deferred
compensation.... 1,300
Cancellation of
stock options... (703) 703
Net loss........
------ ---- ------ --- ------- ---- ------ --- ------ --- -------- ------------ --------
BALANCE AT
DECEMBER 31,
1999............ 24,532 245 5,000 50 10,163 102 80,942 (19,880)
Issuance of
Series C
preferred stock
(unaudited)..... 6,013 $60 102,940
Issuance of
Series D
preferred stock
(unaudited)..... 1,758 $18 39,982
Issuance of
common stock in
connection with
exercise of
stock options
(unaudited)..... 1,432 14 1,128
Issuance of
Series D
preferred stock
warrants
(unaudited)..... 3,546
Deferred
compensation
expense
associated with
stock options
(unaudited)..... 580 (580)
Issuance of
common stock in
connection with
initial public
offering, net
(unaudited)..... 64,459 645 (5,000) (50) (10,163) (102) (6,013) (60) (1,758) (18) 258,141
Issuance of
common stock in
connection with
exercise of
warrants
(unaudited)..... 787 8 (8)
Amortization of
compensatory
deferred
compensation
(unaudited)..... 3,833
Cancellation of
stock options
(unaudited)..... (1,278) 1,278
Foreign currency
translation
gain............ $ 117
Net loss
(unaudited).....
------ ---- ------ --- ------- ---- ------ --- ------ --- -------- ------------ --------
BALANCE AT
SEPTEMBER
30, 2000
(unaudited)..... 91,210 $912 -- $-- -- $ -- -- $-- -- $-- $485,973 $ (15,349) $ 117
====== ==== ====== === ======= ==== ====== === ====== === ======== ============ ========
<CAPTION>
Accumu- Total
lated Stockholders'
Deficit Equity
---------- -------------
<S> <C> <C>
Initial issuance
of common stock
on October 5,
1998............ $ (167) $ 77
Sale of Series A
preferred stock,
net............. 8,960
Deferred
compensation
expense
associated with
stock options... --
Net loss........ (369) (369)
---------- -------------
BALANCE AT
DECEMBER 31,
1998............ (536) 8,668
Issuance of
Series A
preferred
stock........... 1,000
Issuance of
Series B
preferred stock,
net............. 49,951
Issuance of
common stock in
connection with
exercise of
stock options... 4
Deferred
compensation
expense
associated with
stock options... --
Amortization of
deferred
compensation.... 1,300
Cancellation of
stock options...
Net loss........ (23,914) (23,914)
---------- -------------
BALANCE AT
DECEMBER 31,
1999............ (24,450) 37,009
Issuance of
Series C
preferred stock
(unaudited)..... 103,000
Issuance of
Series D
preferred stock
(unaudited)..... 40,000
Issuance of
common stock in
connection with
exercise of
stock options
(unaudited)..... 1,142
Issuance of
Series D
preferred stock
warrants
(unaudited)..... 3,546
Deferred
compensation
expense
associated with
stock options
(unaudited).....
Issuance of
common stock in
connection with
initial public
offering, net
(unaudited)..... 258,556
Issuance of
common stock in
connection with
exercise of
warrants
(unaudited)..... --
Amortization of
compensatory
deferred
compensation
(unaudited)..... 3,833
Cancellation of
stock options
(unaudited).....
Foreign currency
translation
gain............ 117
Net loss
(unaudited)..... (91,825) (91,825)
---------- -------------
BALANCE AT
SEPTEMBER
30, 2000
(unaudited)..... $(116,275) $ 355,378
========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
StorageNetworks, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
October 5, 1998 Nine months ended
(commencement Year ended September 30,
of operations) to December 31, ------------------
December 31, 1998 1999 1999 2000
----------------- ------------ ------- ---------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................. $ (369) $ (23,914) $(9,504) $ (91,825)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 1 1,797 448 14,957
Amortization of
deferred stock
compensation.......... 1,300 519 3,833
Issuance of stock
warrants ............. -- -- -- 3,546
Changes in operating
assets and
liabilities:
Accounts receivable.... (541) (2,626) (242) (1,374)
Inventory.............. (201) 201 201 --
Prepaid expenses and
other
current assets........ (67) (1,432) (254) (7,466)
Other assets........... (500) (317) (141) (5,735)
Accounts payable....... -- 3,094 1,458 (22)
Accrued expenses....... 507 5,575 1,196 10,686
Deferred revenue....... 497 313 130 3,526
----------- ------------ ------- ---------
Net cash used in
operating activities.... (673) (16,009) (6,189) (69,874)
INVESTING ACTIVITIES:
Purchases of property and
equipment............... (84) (8,716) (3,419) (21,699)
Purchases of short term
investments............. -- (49,676) (39,483) (225,420)
Proceeds from maturities
of short term
investments............. -- 14,874 -- 208,576
Purchase of restricted
cash equivalents........ -- (359) (96) (9,018)
----------- ------------ ------- ---------
Net cash used in
investing activities.... (84) (43,877) (42,998) (47,561)
FINANCING ACTIVITIES:
Proceeds from issuance of
common stock............ 77 -- -- 259,888
Proceeds from exercise of
stock options........... -- 4 -- 1,142
Proceeds from issuance of
preferred stock......... 9,000 51,000 51,000 143,000
Offering costs........... (40) (49) (49) (1,332)
Proceeds from sale-
leaseback transactions.. -- 1,424 456 --
Payments of capital lease
obligations............. -- (760) (157) (11,307)
----------- ------------ ------- ---------
Net cash provided by
financing activities.... 9,037 51,619 51,250 391,391
----------- ------------ ------- ---------
Net increase (decrease)
in cash and cash
equivalents............. 8,280 (8,267) 2,063 273,956
Effect of exchange rates
on cash and cash
equivalents............. -- -- -- 117
Cash and cash equivalents
at beginning of period.. -- 8,280 8,280 13
----------- ------------ ------- ---------
Cash and cash equivalents
at end of period........ $ 8,280 $ 13 $10,343 $ 274,086
=========== ============ ======= =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period
for interest.............. $ -- $ 393 $ 79 $ 4,796
=========== ============ ======= =========
SUPPLEMENTAL DISCLOSURES OF
NON-CASH FINANCING
ACTIVITY:
Capital lease obligations
incurred in connection
with the purchase of
property and equipment.... $ -- $ 20,124 $15,024 $ 83,470
=========== ============ ======= =========
Capital lease obligations
incurred in connection
with the purchase of
rights to use fiber optic
capacity.................. -- $ 900 $ -- $ 4,128
=========== ============ ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
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 Company's 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 funding and its initial
public offering. The Company's 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 September 30, 2000 and for the
nine-month periods ended September 30, 1999 and 2000 are unaudited and reflect
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of the Company's management, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows. Results for
the nine-month period ended September 30, 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 Company's Global Data Storage Network ("managed storage
services"), (ii) professional services,
F-7
<PAGE>
StorageNetworks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and (iii) data storage equipment sales to customers. In general, revenues are
recognized when all of the following conditions are met: Persuasive evidence of
an agreement exists, delivery has occurred or services have been rendered, the
sales price is fixed or determinable and collectibility is reasonably assured.
Revenues from monthly service fees from managed storage services 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 Company's 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
Company's 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.
F-8
<PAGE>
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.
Research and Development Costs
Research and development costs are expensed as incurred and include costs
to develop, enhance and manage the Company's 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.
F-9
<PAGE>
StorageNetworks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Loss
There are no material 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 (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
September
1998 1999 30, 2000
---- ------- -----------
(unaudited)
<S> <C> <C> <C>
Global Data Storage Network related equipment....... $46 $22,952 $122,852
Furniture, fixtures, computer equipment and other... 38 3,380 5,796
Leasehold improvements.............................. -- 367 773
Purchased software.................................. -- 801 3,248
--- ------- --------
84 27,500 132,669
Less accumulated depreciation and amortization...... (1) (1,748) (16,561)
--- ------- --------
$83 $25,752 $116,108
=== ======= ========
</TABLE>
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 supplier's 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 Company's consolidated balance sheet. The $250,000 is payable
in cash or, at the Company's option, in the Company's common stock. The
Construction Rights Fee is included in other assets on the Company's
consolidated balance sheet.
Amortization expense amounted to zero and $50,000 in 1998 and 1999,
respectively.
F-10
<PAGE>
StorageNetworks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
December
31,
----------- September 30,
1998 1999 2000
---- ------ -------------
(unaudited)
<S> <C> <C> <C>
Accrued compensation................................ $-- $1,498 $ 7,051
Accrued data center and office rent................. -- 1,296 1,014
Accrued construction rights fee..................... 250 250 --
Accrued Global Data Storage Network related equip-
ment............................................... -- 1,725 --
Accrued other....................................... 257 1,313 8,703
---- ------ ---------
$507 $6,082 $ 16,768
==== ====== =========
</TABLE>
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 had 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 Company's 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 stockholder's 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
F-11
<PAGE>
StorageNetworks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Company's stock option activity for the
periods ended:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999 September 30, 2000
------------------ -------------------- --------------------
(Unaudited)
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
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 2,768,500 20.37
Exercised............... -- -- (131,500) 0.03 (1,431,926) 0.80
Cancelled............... -- -- (2,672,500) 0.04 (525,669) 4.18
--------- ------ ---------- ------ ---------- ------
Outstanding options at
end of period.......... 2,266,000 $ 0.03 9,126,000 $ 0.73 9,936,905 $ 6.00
========= ====== ========== ====== ========== ======
Exercisable at end of
period................. -- -- 43,000 $ 0.34 925,543 $ 2.20
========= ====== ========== ====== ========== ======
Available for grant at
end of period.......... 1,662,500 11,419,669
========== ==========
</TABLE>
F-12
<PAGE>
StorageNetworks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about the Company's stock
options at December 31, 1999:
<TABLE>
<CAPTION>
Stock Options
Stock Options Outstanding Exercisable
-------------------------------------------- -----------------------------------
Weighted Weighted
Average Average Weighted
Number Contractual Exercise Number Average
Outstanding Life (yrs) Price Exercisable Exercise Price
----------- ----------- -------- ----------- --------------
<S> <C> <C> <C> <C>
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
========= ======
</TABLE>
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
Company's pro forma information follows for the year ended December 31, 1998
and 1999 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1999
------ --------
<S> <C> <C>
Pro forma net loss........................................ $ (369) $(23,816)
Pro forma net loss per share--basic and diluted........... $(0.02) $ (0.98)
</TABLE>
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 Company's
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: volatility--95% dividends--none; expected life--one year; risk-
free interest rate--5.5%.
F-13
<PAGE>
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 Company's deferred tax assets and liabilities
for federal and state income taxes consist of the following at December 31(in
thousands):
<TABLE>
<CAPTION>
1998 1999
Deferred tax assets: ----- -------
<S> <C> <C>
Net operating loss carryforwards............................. $ 20 $10,203
Other........................................................ 130 459
----- -------
150 10,662
Deferred tax liabilities:
Depreciation................................................. -- 1,497
----- -------
Total deferred tax assets, net............................... 150 9,165
Valuation allowance.......................................... (150) (9,165)
----- -------
Net deferred tax asset....................................... $ -- $ --
===== =======
</TABLE>
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.
F-14
<PAGE>
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:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
Year ending December 31, -------------- ----------------
(in thousands)
<S> <C> <C>
2000....................................... $ 6,612 $ 9,505
2001....................................... 6,424 5,027
2002....................................... 6,397 2,805
2003....................................... 5,067 2,696
2004....................................... 115 2,627
Thereafter................................. 1,728 5,475
--------- ----------
Total minimum lease payments............... 26,343 $ 28,135
==========
Less amounts representing imputed inter-
est....................................... (6,079)
---------
Present value of minimum lease payments.... 20,264
Less current portion....................... (4,442)
---------
Capital lease obligations, less current
portion................................... $ 15,822
=========
</TABLE>
The Company's 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
F-15
<PAGE>
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 customer's 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 Company's professional services were zero and $2,624,999 at December 31,
1998 and 1999, respectively. Total assets for the Company's 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 nine months
ended September 30, 2000.
Initial Public Offering
On July 6, 2000, the Company completed its initial public offering ("IPO")
in which it sold 9,000,000 shares of common stock at a price to the public of
$27.00 per share. The net proceeds of the IPO, which the Company received on
July 6, 2000, after deducting underwriting discounts were approximately $226.0
million. Upon the closing of the IPO, all of the Company's outstanding
convertible preferred stock (Series A, B, C and D) automatically converted into
an aggregate of 54,109,118 shares of common stock. In July 2000, the Company's
underwriters exercised their option to purchase an additional 1,350,000 shares
of common stock at $27.00 per share, which resulted in additional net proceeds
to the Company of $33.9 million after deducting underwriting discounts.
Preferred Stock
The Company's amended and restated certificate of incorporation authorizes
the issuance of 5,000,000 shares of preferred stock. 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.
2000 Stock Plan
The 2000 Stock Plan (the "2000 Stock Plan") was adopted by the Board and
approved by our Stockholders in March 2000. 12,000,000 shares of common stock
are reserved for issuance under the 2000 Stock Plan.
2000 Employee Stock Purchase Plan
The 2000 Employee Stock Purchase Plan (the "2000 Stock Purchase Plan") was
adopted by the Board and approved by our Stockholders in March 2000. The 2000
Stock Purchase Plan authorized the issuance of up to a total of 10,000,000
shares of common stock to our participating employees.
F-16
<PAGE>
[StorageNetworks Logo]
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 20
Use of Proceeds.......................................................... 21
Price Range of Common Stock and Dividend Policy.......................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 34
Management............................................................... 50
Related Party Transactions............................................... 59
Principal and Selling Stockholders....................................... 61
Description of Capital Stock............................................. 64
Shares Eligible for Future Sale.......................................... 67
Underwriting............................................................. 69
Validity of Common Stock................................................. 72
Experts.................................................................. 72
Where You Can Find More Information...................................... 72
Index to Consolidated Financial Statements............................... F-1
</TABLE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
9,000,000 Shares
StorageNetworks, Inc.
Common Stock
---------------
[Logo of StorageNetworks, Inc.]
---------------
Goldman, Sachs & Co.
Chase H&Q
Merrill Lynch & Co.
Salomon Smith Barney
Thomas Weisel Partners LLC
Representatives of the Underwriters
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee........................................... $180,680
NASD filing fee................................................ 30,500
Printing and engraving expenses................................ 150,000
Legal fees and expenses........................................ 200,000
Accounting fees and expenses................................... 50,000
Blue Sky fees and expenses (including legal fees).............. 15,000
Transfer agent and registrar fees and expenses................. 5,000
Miscellaneous.................................................. 118,820
--------
Total...................................................... $750,000
========
</TABLE>
StorageNetworks will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and StorageNetworks' charter and by-
laws provide for indemnification of StorageNetworks' directors and officers for
liabilities and expenses that they may incur in such capacities. In general,
directors and officers are indemnified with respect to actions taken in good
faith in a manner reasonably believed to be in, or not opposed to, the best
interests of StorageNetworks and, with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe were
unlawful. Reference is made to StorageNetworks' charter and by-laws filed as
Exhibits 3.1 and 3.2 hereto, respectively.
The Underwriting Agreement provides that the underwriters are obligated,
under some circumstances, to indemnify directors, officers and controlling
persons of StorageNetworks against some liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Reference
is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement,
StorageNetworks has issued the following securities that were not registered
under the Securities Act:
(a) Issuances of Capital Stock.
Preferred Stock Issuances
Between December, 1998 and January, 1999, we issued and sold 5,000,000
shares of Series A convertible preferred stock in a private financing for a
price of $2.00 per share, or an aggregate offering price of $10,000,000. The
purchasers of these shares of Series A convertible preferred stock were Jeffrey
Casale, Richard Dyke, Greylock IX Limited Partnership, John Healy, the James P.
and Maureen P. Lampert Living Trust, Roger Marino, John McCarthy, Robin
Monleon, Robert Rinaldi, Paul Salem, William Scannel, three entities affiliated
with Sigma Partners, James Sullivan, and Mark Ward. Each share of Series A
convertible preferred stock automatically converted into four shares of common
stock upon the closing of our initial public offering ("IPO") on July 6, 2000.
II-1
<PAGE>
On July 1, 1999, we issued 10,162,596 shares of Series B convertible
preferred stock in a private financing for a price of $4.92 per share, or an
aggregate offering price of approximately $50,000,000. The purchasers of these
shares of Series B convertible preferred stock were Frank Bell, Ronald Denelle,
Greylock IX Limited Partnership, four entities affiliated with Goldman, Sachs &
Co., Andrew Hajducky, Scott Harrington, PH Ventures II, LLC, three entities
affiliated with Sigma Partners, William Schleyer and Van Wagoner Capital
Management, Inc. Each share of Series B convertible preferred stock
automatically converted into two shares of common stock upon the closing of our
IPO on July 6, 2000.
On January 20, 2000, we sold an aggregate of 6,012,843 shares of Series C
convertible preferred stock in a private financing for $17.13 per share, or an
aggregate offering price of approximately $103,000,000. The purchasers of these
shares of Series C convertible preferred stock were the Andreesen 1996 Living
Trust, Dell USA L.P., Exodus Communications, Inc., Peter Fortenbaugh, an
affiliate of Global Crossing and GlobalCenter, Michael Healy, Robert Helms,
MLS-I, LP, LLP, Bassam Mohamad, Greg Reyes, Joe Stockwell, Richard Stoltz, and
Adam Wegner. Each share of Series C convertible preferred stock automatically
converted into two shares of common stock upon the closing of our IPO on July
6, 2000.
On February 29, 2000, we sold an aggregate of 1,758,240 shares of Series D
convertible preferred stock in a private financing for $22.75 per share, or an
aggregate offering price of approximately $40,000,000. The purchasers of these
shares of Series D convertible preferred stock were Brocade Communications,
Inc., an affiliate of Compaq Computer Corporation, Network Appliance, Inc., Sun
Microsystems, Inc. and an affiliate of VERITAS Software Corporation. Each share
of Series D convertible preferred stock automatically converted into one share
of common stock upon the closing of our IPO on July 6, 2000.
Common Stock Issuances
On October 5, 1998, we sold an aggregate of 24,400,000 shares of common
stock, which number is adjusted for subsequent stock splits, to individual
accredited investors who are officers of StorageNetworks and/or members of our
board of directors for approximately $.003 per share, or an aggregate offering
price of $76,250.
Issuance of Warrants
On October 27, 1999, we issued warrants to purchase an aggregate of 130,082
shares of Series B convertible preferred stock at an exercise price of $4.92
per share to Leasing Technologies International, Lighthouse Capital Partners,
Pentech Financial Services and Silicon Valley Bank. Upon completion of our IPO,
these warrants were exercisable at an exercise price of $2.46 per share for an
aggregate of 260,164 shares of common stock.
In February, 2000, we issued warrants to purchase an aggregate of 810,000
shares of Series D convertible preferred stock at an exercise price of $22.75,
to Lycos, Yahoo!, and Merrill Lynch. Upon completion of our IPO , these
warrants were exercisable at an exercise price of $22.75 per share for an
aggregate of 810,000 shares of common stock.
As of September 30, 2000, certain of the foregoing warrants have been
exercised by the holders thereof, resulting in the issuance of an aggregate of
787,775 shares of common stock.
(b) Grants and Exercises of Stock Options.
As of September 30, 2000, StorageNetworks had outstanding options to
purchase an aggregate of 9,936,905 shares of common stock under the Amended and
Restated 1998 Stock Incentive Plan and the 2000 Stock Plan exercisable at a
weighted average exercise price of $6.00 per share. From December, 1999 to
September 30, 2000, StorageNetworks issued 1,563,426 shares of common stock
for an average purchase price of $0.73 per share pursuant to the exercise of
employee options. These options and shares were issued pursuant to Rule 701
under the Securities Act.
II-2
<PAGE>
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or Rule 701 under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Amended and Restated By-laws of the Registrant.
4.1* Specimen certificate for shares of common stock.
5.1** Opinion of Hale and Dorr LLP.
10.1* Amended and Restated 1998 Stock Incentive Plan, as amended to
date.
10.2* 2000 Stock Plan.
10.3* 2000 Non-employee Director Option Plan.
10.4* Amended and Restated Sublease with Innovative Associates, Inc. for
100 Fifth Avenue, Waltham, Massachusetts dated July 6, 1999.
10.5* Lease by and between the Registrant and Prospect Hill Acquisition
Trust for 100 Fifth Avenue, Waltham, Massachusetts, dated November
8, 1999.
10.6+* Subcontractor Agreement for Professional Services between the
Registrant and EMC Corporation dated May 4, 1999.
10.7* Value Added Systems Integrator Agreement between the Registrant
and EMC Corporation dated September, 1999.
10.8+* Amendment to Value Added Systems Integrator Agreement between the
Registrant and EMC Corporation dated February 2, 2000.
10.9+* Amended and Restated Definitive Agreement for Joint Marketing and
Services between the Registrant and GlobalCenter, Inc. dated May
31, 2000.
10.10* Master Fiber Network and Colocation Services Agreement between the
Registrant and Global Crossing USA Inc. dated March 9, 1999.
10.11* Master Lease Agreement between the Registrant and Dell Financial
Services dated June 15, 1999.
10.12* Third Amended and Restated Stockholder Rights Agreement dated as
of February 29, 2000 among the Registrant and certain stockholders
of the Registrant named therein.
10.13+* Fiber Optic Network Agreement with Metromedia Fiber Network
Services Inc. dated October 8, 1999.
10.14* Employment Agreement with John Clavin dated July 19, 1999.
10.15* Severance Agreement with John Clavin, as amended, dated August 26,
1999.
10.16** Promissory Note from Michael Tardif to the Registrant, dated
August 18, 2000.
10.17* Employment Agreement with Paul C. Flanagan dated March 15, 1999.
10.18 Statement re: per share earnings (This exhibit has been omitted
because the information is shown in the financial statements or
notes thereto.)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.19* 2000 Employee Stock Purchase Plan.
10.20+* Agreement for Professional Services between the Registrant and
Dell Marketing L.P. dated April 27, 2000.
10.21+** Hobbs Brook Office Park Lease between the Registrant and 275 Wyman
Street Trust dated July, 2000.
21.1* List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-5).
27** Financial Data Schedule.
</TABLE>
--------
+Confidential materials omitted and filed separately with the SEC.
*Incorporated by reference to the Company's Registration Statement on Form S-
1 filed on March 1, 2000 (Registration No. 333-31430).
** Previously filed.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Waltham, Massachusetts
on November 2, 2000.
StorageNetworks, Inc.
By:
----------------------------------
Dean J. Breda
Vice President
and General Counsel
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
* Chief Executive Officer, November 2, 2000
*_____________________________________ President and Director
Peter W. Bell (Principal Executive
Officer)
* Executive Vice President, November 2, 2000
______________________________________ Chief Technical Officer
William D. Miller and Director
* Executive Vice President, November 2, 2000
______________________________________ Chief Financial Officer,
Paul C. Flanagan Treasurer and Secretary
(Principal Financial and
Accounting Officer)
* Director November 2, 2000
______________________________________
Randall A. Blumenthal
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
* Director November 2, 2000
______________________________________
Robert E. Davoli
* Director November 2, 2000
______________________________________
Harold R. Dixon
* Director November 2, 2000
______________________________________
Stephen J. Gaal
* Director November 2, 2000
______________________________________
Michael D. Lambert
* Director November 2, 2000
______________________________________
William T. Schleyer
* Director November 2, 2000
______________________________________
Roger M. Marino
</TABLE>
<TABLE>
<S> <C> <C>
By: /s/ Dean J. Breda
______________________________________
Attorney-in-fact
</TABLE>
II-6
<PAGE>
Schedule II
STORAGENETWORKS
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
----------------
Balance at Charged to Deductions Balance
Beginning Costs and From at End
Description of Year Expenses Other Reserves of Year
----------- ---------- ---------- ----- ---------- -------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts.................... $ 0 $75,718 $ 0 $ 0 $75,718
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances
deducted from asset accounts:
Allowance for doubtful
accounts.................... $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Amended and Restated By-laws of the Registrant.
4.1* Specimen certificate for shares of common stock.
5.1** Opinion of Hale and Dorr LLP.
10.1* Amended and Restated 1998 Stock Incentive Plan, as amended to
date.
10.2* 2000 Stock Plan.
10.3* 2000 Non-employee Director Option Plan.
10.4* Amended and Restated Sublease with Innovative Associates, Inc. for
100 Fifth Avenue, Waltham, Massachusetts dated July 6, 1999.
10.5* Lease by and between the Registrant and Prospect Hill Acquisition
Trust for 100 Fifth Avenue, Waltham, Massachusetts, dated November
8, 1999.
10.6+* Subcontractor Agreement for Professional Services between the
Registrant and EMC Corporation dated May 4, 1999.
10.7* Value Added Systems Integrator Agreement between the Registrant
and EMC Corporation dated September, 1999.
10.8+* Amendment to Value Added Systems Integrator Agreement between the
Registrant and EMC Corporation dated February 2, 2000.
10.9+* Amended and Restated Agreement for Joint Marketing and Services
between the Registrant and GlobalCenter Inc. dated May 31, 2000.
10.10* Master Fiber Network and Colocation Services Agreement between the
Registrant and Global Crossing USA Inc. dated May 31, 2000.
10.11* Master Lease Agreement between the Registrant and Dell Financial
Services dated June 15, 1999.
10.12* Third Amended and Restated Stockholder Rights Agreement dated as
of February 29, 2000 among the Registrant and certain stockholders
of the Registrant named therein.
10.13+* Fiber Optic Network Agreement with Metromedia Fiber Network
Services Inc. dated October 8, 1999.
10.14* Employment Agreement with John Clavin dated July 19, 1999.
10.15* Severance Agreement with John Clavin, as amended, dated August 26,
1999.
10.16** Promissory Note from Michael Tardif to the Registrant, dated
August 15, 2000.
10.17* Employment Agreement with Paul C. Flanagan dated March 15, 1999.
10.18 Statement re: per share earnings (This exhibit has been omitted
because the information is shown in the financial statements or
notes thereto.)
10.19* 2000 Employee Stock Purchase Plan.
10.20+* Agreement for Professional Services between the Registrant and
Dell Marketing L.P. dated April 27, 2000.
10.21+** Hobbs Brook Office Park Lease between the Registrant and 275 Wyman
Street Trust dated July, 2000.
21.1* List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2** Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1** Power of Attorney (see page II-5).
27** Financial Data Schedule.
</TABLE>
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+Confidential materials omitted and filed separately with the SEC.
*Incorporated by reference to the Company's Registration Statement on Form S-
1 filed on March 1, 2000 (Registration No. 333-31430).
** Previously filed.
