<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2000
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CO SPACE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 04-3464914
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
200 WHEELER ROAD
BURLINGTON, MASSACHUSETTS 01803
(617) 788-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
------------------------
DONATO A. DENOVELLIS
CO SPACE, INC.
200 WHEELER ROAD
BURLINGTON, MASSACHUSETTS 01803
(617) 788-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
GILBERT G. MENNA, P.C. JOHN D. WATSON, JR., ESQ.
DAVID W. WATSON, P.C. LATHAM & WATKINS
GOODWIN, PROCTER & HOAR LLP 1001 PENNSYLVANIA AVE., N.W.
EXCHANGE PLACE SUITE 1300
BOSTON, MASSACHUSETTS 02109-2881 WASHINGTON, D.C. 2004-2505
(617) 570-1000 (202) 637-2200
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED(1) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C>
Common Stock, $.01 par value per share............... $125,000,000 $33,000
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</TABLE>
(1) This Registration Statement also relates to rights to purchase shares of
Series Z Junior Participating Cumulative Preferred Stock of the Registrant,
par value $.001 per share, at a cash exercise price to be determined prior
to the effectiveness of this Registration Statement, subject to adjustment.
The rights to purchase preferred stock will be attached to all shares of
Common Stock outstanding as of, and issued subsequent to, a day prior to
effectiveness of this Registration Statement pursuant to the terms of the
Registrant's Stockholder Rights Agreement to be adopted prior to the
effectiveness of this Registration Statement. Until the occurrence of
certain events described in the Stockholder Rights Agreement, the rights to
purchase preferred stock are not exercisable, are evidenced by the
certificate for the Common Stock and will be only transferred with the
Common Stock.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
------------------------
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 SEC, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR A
SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 5, 2000
PRELIMINARY PROSPECTUS
SHARES
[CO-SPACE INC. LOGO]
COMMON STOCK
------------------------------
This is an initial public offering of shares of common stock of CO
Space, Inc. We are selling all of the shares of common stock offered under this
prospectus.
It is currently estimated that the initial public offering price will be between
$ and $ per share. We have applied to have our common stock approved for
listing on the Nasdaq National Market under the symbol "COSP."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
------------------------------
The underwriters may purchase up to an additional shares of common
stock from us at the initial public offering price less the underwriting
discount to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on , 2000.
------------------------------
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
THOMAS WEISEL PARTNERS LLC
WASSERSTEIN PERELLA SECURITIES, INC.
The date of this prospectus is , 2000.
<PAGE> 3
PROSPECTUS SUMMARY
The items in the following summary are described in more detail later in
this prospectus. This summary provides an overview of selected information and
does not contain all the information you should consider. Therefore, you should
also read the more detailed information set out in this prospectus and the
financial statements.
OUR COMPANY
We offer a Complete Collocation(TM) solution to our Internet,
telecommunications and data storage customers that combines high-quality
collocation facilities with a comprehensive suite of value-added services. Our
OpenCenter(TM) collocation facilities provide a fully conditioned environment
with high levels of security, reliable, high-capacity power supply and
multi-stage fire detection and suppression systems in which our customers can
locate their telecommunications, computer, network, data storage and other
related equipment. Our value-added services encompass network design and
integration, Internet and telecommunications network interconnection, access and
transport services, data backup and equipment monitoring. The combination of our
facilities and services enables our customers to outsource the location and
operations of their equipment and we believe cost-effectively deepen their own
service offerings, expand their geographic reach and shorten their time to
market.
We differentiate ourselves from our competition by designing flexible
facilities that can accommodate a wide variety of Internet, telecommunications
and data storage equipment and by offering what we believe to be the broadest
array of services available. In addition, unlike many of our competitors, we are
a licensed common carrier, enabling us to enter into interconnection agreements
with local and long-distance telephone companies. This accelerates our
customers' access to multiple carrier networks and expands their network service
options.
Our facilities are located in major metropolitan areas. As of March 31,
2000, we had entered into leases for nine sites, four of which are operational
and one of which is under construction. We intend to have approximately eight
facilities operational by the end of 2000. Beyond 2000, our strategy is to
aggressively expand our presence by opening additional facilities targeting key
communications centers in the U.S. and abroad.
The names CO Space(TM), Complete Collocation(TM), OpenCenter(TM), CO
FlexSpace(TM), CO Connect(TM) and CO Services(TM) are trademarks or service
marks that belong to us. This prospectus also contains the trademarks and trade
names of other entities, which are the property of their respective owners.
OUR SOLUTION
The intense competition in the Internet, telecommunications and data
storage markets has led many service providers to outsource the housing,
maintenance and support of their equipment and network operations in order to
reduce capital expenditures, lower operating costs and speed time to market. We
believe that historically the outsourcing alternatives available have not
provided the services and flexibility that our target customers require.
Our Complete Collocation(TM) solution is designed to address the individual
and evolving needs of our customers. It combines our high-quality collocation
facilities with what we believe is the broadest range of value-added services
available. The key elements of our Complete Collocation(TM) solution include:
- STATE-OF-THE-ART FACILITIES. Our OpenCenters(TM) are designed and
constructed to exceed the highest standards of telecommunications
carriers. These facilities provide our customers with a fully conditioned
environment with high levels of security, a reliable, high-capacity power
supply, multi-stage fire detection and suppression systems, and
comprehensive systems monitoring.
<PAGE> 4
- CUSTOMER EQUIPMENT FLEXIBILITY. Our Complete Collocation(TM) solution
satisfies our customers' needs to house their diverse Internet,
telecommunications and data storage equipment in a single location.
- OPEN NETWORK ACCESS. We have developed relationships with several
carriers to provide our customers maximum flexibility in choosing among
multiple bandwidth providers. As a result, our customers are able to
avoid a single point of network failure and can reduce their network
costs.
- VALUE-ADDED SERVICES. We provide a comprehensive suite of value-added
services to meet our customers' evolving needs. In addition to
traditional collocation services, we provide our customers with network
design and integration, Internet and telecommunications network
interconnection, access and transport services, data backup and equipment
monitoring.
- OPERATIONS CENTER. Our network operations center enables our customers
to rely on us as a single source to monitor, troubleshoot and support
their networks and equipment. We provide these services twenty-four hours
a day, seven days a week.
- ANCHOR CUSTOMERS. We plan to license a significant portion of the space
in each of our facilities to our anchor customers. Anchor customers are
typically larger customers who themselves provide services that we
believe our target customers will utilize.
OUR STRATEGY
Our goal is to be a world-class provider of collocation facilities and
operational services for businesses in the Internet, telecommunications, and
data storage industries. To achieve our goal, we have developed a business
strategy that defines collocation as a full-service offering, rather than just
providing a physical location for customer equipment. Our strategy includes the
following elements:
- Create, implement and support tailored solutions to address our
customers' critical operational requirements;
- Develop strong carrier relationships to ensure that our facilities are
serviced by multiple carriers;
- Capitalize on our common carrier status and interconnection rights to
allow our customers to easily access networks and to significantly reduce
their time to market;.
- Pursue long-term contracts with customers, which provide us with a stable
stream of revenues and allows us to better manage our future
infrastructure and bandwidth requirements;
- Continue to utilize and improve our standardized facility design to
provide our customers with uniform services from facility to facility,
reduce our operating costs and enable us to rapidly deploy new
facilities;
- Up-sell our existing customer base by continually identifying, developing
and implementing higher value services; and
- Promote proprietary brands to strengthen our position within our target
markets and continue to build customer confidence in our service
offerings.
2
<PAGE> 5
OUR CORPORATE HISTORY
We began our operations in November 1998 under the name of CO Space
Services, LLC. We subsequently reorganized our company under the name CO Space,
Inc. and were incorporated in Delaware on April 12, 1999. We opened our first
facility in Somerville, Massachusetts in August 1999. The address of our
principal executive offices is 200 Wheeler Road, Burlington, Massachusetts
01803, and our telephone number is (617) 788-0900. Our website is
www.cospace.com. The information on our website is not part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered....................................... shares
Common stock to be outstanding after this offering......... shares
Use of proceeds............................................ We intend to use the net proceeds of this
offering to construct and equip our
facilities, for working capital, and other
general corporate purposes.
Proposed Nasdaq National Market System Symbol.............. COSP
</TABLE>
The number of shares of common stock that will be outstanding after this
offering is based on the 4,965,000 shares outstanding as of March 31, 2000,
plus:
- shares of common stock to be sold by us in this offering; and
- shares of common stock to be issued at the completion of this
offering upon the conversion of all of our outstanding redeemable
convertible preferred stock.
The shares of common stock to be outstanding after this offering exclude:
- shares of common stock issuable pursuant to the over-allotment
option;
- 670,846 shares of common stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $0.40 per share, as of
March 31, 2000;
- 15,000 shares of common stock and 21,000 shares of redeemable convertible
preferred stock issuable upon the exercise of warrants at an exercise
price of $1.50 per share and $1.00 per share, respectively;
- 2,864,154 shares of common stock reserved for future issuance under our
stock incentive plan;
- 1,000,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
- 100,000 shares of common stock issued in connection with our acquisition
of the personnel and a portion of the assets and liabilities of KennTech,
a consulting firm with which we formerly contracted for the selection,
design and construction program management of our OpenCenters(TM).
3
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following summary consolidated financial data together
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes, all
of which appear elsewhere in this prospectus. The pro forma net loss per share
is computed based upon the weighted of average number of common shares
outstanding and the conversion of all outstanding redeemable convertible
preferred stock into an equivalent number of shares of common stock.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10, 1998
(DATE OF INCEPTION) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1998 1999
------------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ 258
OPERATING EXPENSES:
Costs of revenues......................................... -- 2,439
Selling and marketing..................................... -- 488
General and administrative................................ 85 2,970
Depreciation and amortization............................. -- 267
Amortization of stock-based compensation.................. -- 89
--------- ---------
Loss from operations.............................. (85) (5,995)
Interest income, net........................................ -- 38
--------- ---------
Net loss.................................................... (85) (5,957)
Accretion of preferred stock redemption premium and issuance
costs..................................................... -- (331)
--------- ---------
Net loss attributable to common stockholders................ $ (85) $ (6,288)
========= =========
Net loss per share attributable to common stockholders...... $ (0.03) $ (2.10)
========= =========
Weighted average common shares.............................. 3,000,000 3,000,000
========= =========
Pro forma net loss per share:
Basic and diluted........................................... $ (0.74)
=========
Pro forma weighted average shares of common stock
outstanding:
Basic and diluted........................................... 8,039,630
=========
</TABLE>
The pro forma as adjusted balance sheet data reflects:
- The conversion of 22,322,502 shares of series A and B redeemable
convertible preferred stock into an identical number of shares of common
stock; and
- The issuance by us of shares of common stock in this offering
at an assumed initial public offering price of $ , after deducting
the underwriting discount and our estimated offering expenses of
approximately $ .
4
<PAGE> 7
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, PRO FORMA
1999 AS ADJUSTED
------------------- ------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 17,564
Property and equipment, net................................. 12,304 12,304
Total assets................................................ 30,415
Total debt, including capital leases........................ 2,247 2,247
Redeemable convertible preferred stock...................... 31,384 --
Stockholders' equity (deficit).............................. (6,275)
</TABLE>
As used in the table below, EBITDA consists of net loss excluding interest
income, net, income taxes, depreciation and amortization and amortization of
stock-based compensation. We expect that depreciation and amortization will
increase considerably as we add additional facilities. We believe that because
EBITDA is a measure of financial performance, it is useful to investors and
analysts as an indication of a company's ability to fund its operations and to
service or incur debt. However, EBITDA is not a measure calculated under
generally accepted accounting principles and may not be comparable to similarly
titled amounts reported by other companies. We do not expect to generate
positive EBITDA in the near term.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
--------------
(IN THOUSANDS)
<S> <C>
OTHER OPERATING DATA:
Capital expenditures........................................ $ 12,571
EBITDA...................................................... (5,639)
Net cash used in operating activities....................... (3,087)
Net cash used in investing activities....................... (12,055)
Net cash provided by financing activities................... 32,706
</TABLE>
5
<PAGE> 8
RISK FACTORS
You should carefully consider the following risk factors before you decide
to buy our common stock. You should also consider the other information in this
prospectus. Our business, financial condition or results of operation could be
harmed by any of the following risks. The trading price of our common stock
could decline due to any of the following risks, and you might lose all or part
of your investment.
WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT TIME AND YOUR BASIS FOR EVALUATING US
IS LIMITED.
We began operations in November 1998. Because of our limited operating
history, you have limited operating and financial data about our collocation
business on which to base an evaluation of our performance and an investment in
our common stock. We expect to continually reevaluate our business and rollout
plan in light of evolving competitive and market conditions. As a result, we may
alter our rollout plan and reallocate funds, or eliminate segments of our plan
entirely, if there are:
- changes or inaccuracies in our market data and research, projections or
assumptions;
- unexpected results of operations or strategies in our target markets;
- regulatory, technological, and competitive developments, including
additional market developments and new opportunities; or
- changes in, or discoveries of, specific market conditions or factors
favoring expedited development in other markets.
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES.
For the year ended December 31, 1999, we incurred a net loss of
approximately $6.0 million. As of December 31, 1999, we had an accumulated
deficit of approximately $6.0 million. We have not achieved profitability, and
we will continue to incur net losses until we can produce sufficient revenues to
cover our costs, which is not expected to occur in the near term and may never
occur. Even if we do achieve profitability, we may be unable to sustain or
increase our profitability in the future because we expect to incur significant
and increasing costs to construct and expand our collocation sites and to
increase our management, sales and technical support personnel.
WE EXPECT TO CONTINUE TO HAVE NEGATIVE OPERATING CASH FLOW, WHICH WILL REQUIRE
US TO SEEK ADDITIONAL FINANCING, WHICH COULD BE DIFFICULT TO OBTAIN.
We expect to continue to experience significant negative operating cash
flows for the foreseeable future because we intend to continue adding new
OpenCenters(TM), acquiring equipment and hiring personnel. We also plan to
increase expenditures for our sales and marketing efforts and customer support.
We expect that we will use available cash and the net proceeds of this offering
to pay for these expenditures through the second quarter of 2001. Thereafter, we
will need to raise additional capital to meet our cash requirements. We may not
be able to find additional financing on favorable terms or at all.
WE ARE REQUIRED TO MAKE SUBSTANTIAL FUTURE MINIMUM LEASE PAYMENTS UNDER OUR
EXISTING LEASES, AND ANY FAILURE TO MAKE THESE PAYMENTS WILL HARM OUR BUSINESS.
We generally lease our facilities under noncancelable operating leases. As
of March 31, 2000, our future minimum payments under these leases were
approximately $135.7 million, including $4.8 million in 2000, $6.7 million in
2001 and $6.8 million in 2002. If we are unable to license sufficient amounts of
space to our customers, we may not be able to generate sufficient revenues to
meet our future obligations under these leases. Any failure to make these
payments will harm our business, financial condition and results of operations.
6
<PAGE> 9
BECAUSE THE MARKET FOR OUR OUTSOURCED COLLOCATION FACILITIES AND OPERATIONAL
SERVICES IS NEW AND ITS VIABILITY IS UNCERTAIN, OUR SERVICE OFFERINGS MAY NOT BE
ACCEPTED, AND WE MAY NOT BE PROFITABLE.
The market for outsourced collocation facilities and operations services
has only recently begun to develop as a core business and may not grow or be
sustainable. Potential customers may choose not to outsource their collocation
needs to a third-party provider due to concerns about security, reliability or
other matters or they may choose other alternatives to outsourced collocation.
In addition, if the Internet, telecommunications and data storage markets fail
to develop or develop more slowly than expected, or if our service offerings do
not achieve widespread market acceptance, our business, results of operations
and financial condition will be adversely affected. Our future growth, if any,
will be dependent upon:
- the availability of suitable space for construction of our facilities;
- competition for customers;
- demand for our technical services;
- the continued growth in the Internet, telecommunications and data storage
markets;
- federal communications laws and our regulatory status as a licensed
common carrier; and
- our ability to maintain or increase pricing terms.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AGAINST NEW ENTRANTS AND ESTABLISHED
COMPANIES, MANY OF WHICH HAVE GREATER RESOURCES THAN WE DO.
Our success depends upon our ability to substantially differentiate our
service offerings from existing and future offerings of our competition. We may
compare unfavorably with some of our competitors with regard to, among other
things, brand recognition, existing relationships with potential customers and
capital availability. Consequently, we may not be able to compete effectively in
our target markets. Moreover, our strategy depends largely upon the rapid
deployment of our facilities and operational services. If we are unable to
establish our OpenCenters(TM) or increase our offerings in the markets in which
we currently operate, other companies may gain competitive advantages in markets
we are targeting or in our existing markets. We expect significant competition
from several types of competitors, including:
- traditional collocation providers, such as incumbent local telephone
companies and competitive local telephone companies;
- telco hotels, which are buildings in which real estate entities lease
space for telecommunications purposes; and
- value-added collocation providers, which provide services beyond physical
space.
Our competition includes companies such as AboveNet, AT&T, Colo.com,
Equinix, Inc., Exodus Communications, GlobalCenter, Globix, GTE Internetworking,
IBM, Level 3 Communications, MCI WorldCom, Qwest, Switch and Data Facilities
Corp. and incumbent local telephone companies, such as Bell Atlantic and SBC.
Many of our competitors and potential competitors have longer operating
histories and significantly greater financial, technical and marketing resources
than we do. In particular, other telecommunications carriers and collocation
companies have extensive customer bases and customer relationships, including
relationships with many of our potential customers. They may also have greater
access to the components necessary to our business, including fiber optic cable.
These companies may also have significantly greater customer support and
professional services capabilities than we do. Because of their greater
financial resources, some of these companies have the ability to adopt
aggressive pricing policies and may be better able to compete in a price
competitive market. These companies may also be able to bundle their services or
incorporate collocation solutions and other services in a manner that is more
attractive to potential customers than our services. New competitors or
alliances among competitors may emerge and rapidly
7
<PAGE> 10
acquire significant market share. Our competitors also may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements than we can.
Our business model contains many assumptions that may be invalidated by our
competitors, such as our ability to successfully sell add-on services to our
existing customers and the absence of competing service offerings for some of
our solutions. Competitors may reduce demand for or render some of our offerings
obsolete. In addition, we believe that the market in which we compete is likely
to face consolidation, which could increase price and service competition and
harm our business, financial condition and results of operations.
THE LOSS OF ANY SIGNIFICANT CUSTOMER WOULD CAUSE OUR REVENUES TO DECLINE.
The loss of any of our significant customers would cause our revenues to
decline and, thus, have a material adverse effect on our business, financial
condition and results of operations. We opened our first facility in August
1999, and to date we have only entered into license agreements for space at our
facilities with a limited number of customers. Substantially all of our fiscal
1999 revenues were derived from a single customer. In addition, two of our
anchor customers have the right to terminate their contracts with us in the
event we no longer offer open access to multiple networks or in the event that a
competitor of these anchor customers acquires us. It is likely that we will
enter into similar contracts with other anchor customers in the future. Unless
and until we diversify and expand our customer base, our future success will
significantly depend upon a limited number of customers.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ATTRACT OR RETAIN A SUFFICIENT
NUMBER OF QUALIFIED PERSONNEL.
Based on our planned expansion, we will require a significant increase in
the number of our employees. As of March 31, 2000, we had 72 employees. We
anticipate that by December 31, 2000 we will need more than 200 employees to
achieve our expected growth, and we expect to add a significant number of
employees thereafter. Our future success, therefore, will depend, in large part,
on attracting and retaining additional qualified management, sales and technical
personnel. Given the current low unemployment rate and the fact that the
Internet, telecommunications and data storage industries have a high level of
employee mobility and aggressive recruiting of skilled personnel, we may have
significant difficulty finding, hiring and retaining qualified personnel. These
factors increase the cost of hiring. Our inability to hire qualified personnel
on a timely and cost-effective basis could harm our existing business and our
ability to expand our operations.
WE MAY NOT BE ABLE TO EXPAND THE NUMBER OF OUR OPENCENTERS(TM), WHICH COULD HARM
OUR RESULTS OF OPERATIONS.
The opening of additional OpenCenters(TM) is a key element of our business
strategy. To execute our growth plan, we must:
- identify suitable space for construction of our facilities;
- negotiate leases on acceptable terms;
- design, construct and open each OpenCenter(TM);
- obtain necessary regulatory approvals from local, state and federal
regulators where required;
- hire, train, motivate and retain qualified personnel; and
- attract and retain customers.
Each of these factors involves risks and uncertainties beyond our control
that could delay the opening of an OpenCenter(TM). In addition, we have limited
experience in building collocation sites and in building multiple collocation
sites concurrently. As a result, we may not be able to replicate any success we
have had to date at any of our future OpenCenters(TM). We also depend on third
parties for the timely construction and design of our OpenCenters(TM). The
unavailability of these services or the failure of these
8
<PAGE> 11
services to be performed on a timely basis or within budget could have a
material adverse effect on our business, financial condition and results of
operations.
OUR GROWTH COULD BE LIMITED BY THE CAPACITY OF OUR INTERNAL RESOURCES.
Our planned expansion will place a significant strain on our limited
financial, administrative, operational and management resources. Our existing
operating and financial control systems, infrastructure and other resources may
not be sufficient to adequately manage the opening of the planned number of
OpenCenters(TM) in a cost-effective and timely manner. Therefore, our
opportunities for revenue growth could be limited by the capacity of our
internal resources rather than by the absence of market demand.
Additionally, new OpenCenters(TM), if completed, will result in substantial
incremental operating expenses, including expenses associated with hiring,
training, retaining and managing new employees, purchasing new equipment,
obtaining necessary regulatory approvals, implementing new systems and leasing
additional real estate. If we do not generate sufficient revenues to cover these
expenses, our operations will be significantly harmed.
OUR BUSINESS WILL BE HARMED IF OUR INFORMATION SUPPORT SYSTEMS ARE NOT FURTHER
DEVELOPED.
Sophisticated information processing systems, including billing, are vital
to our growth and our ability to achieve operating efficiencies. A failure of
these systems could substantially impair our ability to provide services, send
invoices and monitor our operations. Among the systems we have identified as
being presently inadequate to meet the increased demands of our anticipated
growth are work-flow and customer priority management, human resources, sales
tracking, customer support and fixed asset management. There may be other
systems we have not identified that are in need of improvement. We estimate that
modifying or replacing these systems will cost approximately $4.0 million in
fiscal year 2000. Our plans for the development and implementation of these
systems rely largely upon acquiring services offered by third-party vendors and
integrating those products and services into our systems. We may be unable to
implement these systems on a timely basis or at all, and these systems may not
perform as expected. We may also be unable to maintain and upgrade our
operational support systems as necessary.
WE DEPEND ON LARGER CUSTOMERS TO ATTRACT OTHER COLLOCATION CUSTOMERS TO OUR
OPENCENTERS(TM).
Our business plan depends on our ability to attract and retain larger
customers, which we refer to as anchor customers, to our OpenCenters(TM). Our
ability to attract these anchor customers will depend on a variety of factors,
including the presence of multiple telecommunications carriers, our operating
reliability and security and our value-added services. If we fail to attract and
retain anchor customers, we will have difficulty in attracting individual
collocation customers, which would harm our business.
WE MUST RETAIN AND EXPAND OUR CUSTOMER BASE AND INCREASE THE SERVICES USED BY
EACH CUSTOMER IN ORDER TO MEET OUR FINANCIAL GOALS.
Our future revenues will depend on our ability to retain and expand our
customer base as we open additional collocation facilities. Our ability to
attract customers to our OpenCenters(TM) will depend on a variety of factors,
including the willingness of businesses to outsource their network operations,
the availability of multiple telecommunications carriers, the presence of anchor
customers in an OpenCenter(TM), our operating reliability and security, and our
value-added services. In addition, the Internet, telecommunications and data
storage industries are intensely competitive and, therefore, some of our
customers will face competitive pressures and may not ultimately be successful.
If these customers fail, they will not continue to use our OpenCenters(TM),
which would adversely affect our business, financial condition and results of
operations.
Our success also depends on our ability to successfully introduce new
value-added services to our customers and up-sell our service offerings to
existing customers in order to increase our revenue per customer. Although we
intend to develop and market new value-added services, such as network security
and data storage, we do not know if these or other services will be accepted by
the marketplace, or if
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<PAGE> 12
customers will purchase multiple services. We also may not be able to implement
these offerings in the anticipated timeframe or to offer some of our services in
certain areas without requisite regulatory approval. Our inability to increase
the services used by each customer would adversely affect our business,
financial condition and results of operations.
WE MAY NOT BE ABLE TO OBTAIN REAL ESTATE LEASES ON ACCEPTABLE TERMS, WHICH WOULD
ADVERSELY IMPACT OUR ABILITY TO GROW OUR BUSINESS.
In order to meet our expansion goals, we will need to enter into a
substantial number of leases for OpenCenters(TM) in new markets. Real estate
that conforms to our selection criteria is often located in the central business
district of a city. This type of space may be scarce or in great demand in our
target markets, many of which are experiencing substantial economic growth and
shortages of prime real estate. Even if we are able to locate suitable sites in
these potential markets, these sites may be difficult for us to lease on
acceptable terms. If we are unable to obtain leases for new sites on acceptable
terms, we will not be able to achieve our growth plans.
BECAUSE WE DEPEND ON THIRD PARTIES TO PROVIDE ESSENTIAL SERVICES AND EQUIPMENT
TO OUR OPENCENTERS(TM), ANY FAILURE OR DELAY IN PROVIDING SUCH SERVICES AND
EQUIPMENT WILL HARM OUR BUSINESS.
The presence of diverse telecommunications carriers' networks at our
collocation facilities is critical to our ability to attract new customers. In
most cases, we do not directly provide telecommunications services, but rather
facilitate our customers' ability to receive such services. We, therefore, must
rely on third parties to provide these services. These third-party carriers may
not be willing to offer their services within our OpenCenters(TM) or may charge
prohibitively high rates for doing so. In addition, the construction required to
connect multiple carriers' services to our collocation facilities is complex and
involves factors outside our control, including the granting of easements and
permits, the imposition of moratoriums and the availability of construction
resources. Any delay or failure in providing services and network connectivity
will harm our business.
We also depend on third parties to provide other critical components of our
services, such as state-of-the-art networking equipment and reliable,
high-capacity power. Some of these components may be available only from limited
sources. We do not carry significant inventories of components and have no
guaranteed supply arrangements with vendors. We are also dependent upon our
suppliers to provide products and services that comply with evolving Internet
and telecommunications standards, and that operate together with other products
or components that we use. Our solution is also highly dependent upon continuous
power being supplied to us by our third-party utility providers. Although we
have redundant power sources, such as back-up diesel generators and battery
backups, we cannot assure you that we will be able to provide sufficient
continuous power when we need it. If the equipment or power that we need is
unavailable or not delivered on a timely basis, our business will be harmed.
A FAILURE OF OUR INFRASTRUCTURE COULD LEAD TO SIGNIFICANT COSTS AND SERVICE
DISRUPTIONS, WHICH COULD REDUCE OUR REVENUES AND HARM OUR BUSINESS.
We rely on the capacity, scalability, reliability and security of our
infrastructure to deliver our services in a manner that our customers may access
easily without disruption to their businesses. To meet customer requirements we
must protect our infrastructure against damage caused by any of the following:
- human error;
- physical or electronic security breaches;
- fire, earthquake, flood and other natural disasters;
- power loss; and
- sabotage and vandalism.
We have taken measures to minimize the potential effects of these events,
including assembling teams of skilled technicians, limiting access to our
facilities and equipment, establishing stringent construction criteria,
providing backup power sources and hiring uniformed security personnel. However,
damage to, or
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<PAGE> 13
the failure of, our infrastructure could result in service interruptions or
significant damage to our customers' equipment. Any of these events would damage
our business within our target markets.
BECAUSE OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE INTERNET,
TELECOMMUNICATIONS AND DATA STORAGE INDUSTRIES, A SLOWING OF THEIR GROWTH COULD
HARM OUR BUSINESS.
Our success will depend in large part on the continued growth of the
Internet, telecommunications and data storage industries. The increased use of
the Internet for retrieving, sharing and transferring information has only
recently begun to develop. Recent attacks on major websites have drawn much
media attention and may slow Internet growth. If the Internet, as a commercial
or business medium, fails to develop or develops more slowly than expected, our
business, results of operations and financial condition could be materially
adversely affected.
In addition to the Internet, we rely on customers continuing to require
telecommunications network and data storage services. The continued demand and
acceptance of these services will be critical to the success of our business.
Any decreased use of these forms of network access could harm our business,
financial condition and results of operations.
WE MAY NOT BE ABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING
INDUSTRY STANDARDS, WHICH MAY ADVERSELY IMPACT THE SUCCESS OF OUR BUSINESS.
Our future success will depend, in part, on our ability to address the
increasingly sophisticated and varied needs of our current and prospective
customers and to respond to technological advances and emerging industry
standards and practices. Future advances in technology may not be beneficial to,
or compatible with, our business. In addition, we may not be able to incorporate
such advances on a cost-effective or timely basis into our business, and such
advances may render our services obsolete.
Technological advances may also have the effect of encouraging some of our
current or future customers to rely on in-house personnel and equipment to
furnish the solutions that we currently provide. In addition, keeping pace with
technological advances in our industry may require substantial lead time and
capital expenditures. Although we currently intend to support emerging
standards, we may be unable to maintain a competitive position in the market,
which would negatively affect our business, financial condition and results of
operations.
WE ARE SUBJECT TO REGULATION AND CERTIFICATION REQUIREMENTS, WHICH COULD MAKE IT
MORE DIFFICULT FOR US TO OPERATE OUR BUSINESS.
Some telecommunications services that we offer, and intend to offer in the
future, are, or may become, subject to regulation and certification requirements
at the federal, state or local level. To date, we have received regulatory
approvals in Massachusetts, New Jersey, New York and Texas, and have been
certified to provide some forms of regulated telecommunications services within
those jurisdictions. We intend to file applications for such authority in the
near future in California, Georgia, Illinois, Virginia and Colorado. The law
regarding regulation of telecommunications services as part of our service
offerings is unclear in some jurisdictions.
Moreover, we are actively pursuing additional certifications in the other
areas in which we propose to operate. We do not know if we will be allowed to
register in particular jurisdictions, or if our applications will be accepted,
or if they would be granted without onerous terms. The application process could
be lengthy and time consuming, requiring substantial resources and management
time. If we suffer significant delays in obtaining requisite regulatory
approvals, we may be unable to provide our services in our proposed markets,
which could have an adverse effect on our intended rollout of services.
Authorization as a telecommunications carrier also subjects us to on-going
governmental regulation at the state and federal levels and any changes to those
regulations or the adoption of future regulations, may make it more difficult
for us to operate and subject us to increased costs. Many of our competitors may
not be subject to similar regulation and, therefore, may have an additional
competitive advantage. As a
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<PAGE> 14
regulated entity, we may be required to pay a portion of revenues derived from
the provision of telecommunications services to the Universal Services Fund.
OUR FAILURE TO NEGOTIATE AND ENTER INTO INTERCONNECTION AGREEMENTS WITH
INCUMBENT LOCAL TELEPHONE COMPANIES COULD HARM OUR ABILITY TO CONDUCT BUSINESS.
We seek to enter into interconnection agreements with incumbent local
telephone companies in each region of the country in which we operate. Under
federal law, incumbent local telephone companies have an obligation to negotiate
with us in good faith to enter into new interconnection agreements or to allow
us to opt into other competitive carrier interconnection agreements. If no
agreement can be reached, either side may petition the applicable state
telecommunications regulator to arbitrate remaining disagreements. Any delay in
obtaining interconnection agreements in markets in which we seek to expand would
delay our entry into these markets and could have a material adverse effect on
our business and prospects. In addition, our interconnection agreements
generally have terms of two to three years, and we cannot assure you that new
agreements will be negotiated or that existing agreements will be extended on
terms favorable to us or at all. Interconnection agreements must be approved by
state regulators and are also subject to oversight by the Federal Communications
Commission and the courts. These governmental authorities may modify the terms
or prices of our interconnection agreements in ways that could adversely affect
our ability to deliver service and our business and results of operations.
GOVERNMENT REGULATION OF THE INTERNET MAY IMPEDE OUR GROWTH AND INCREASE OUR
OPERATING COSTS.
There is currently only a limited body of law and regulation directly
applicable to use of the Internet. However, due to the increasing use of the
Internet, it is possible that new laws and regulations may be adopted at the
international, federal, state and local levels with respect to the Internet and
that existing laws and regulations may become applicable to the Internet. The
adoption of future laws or regulations, or the application of existing laws and
regulations, might decrease the growth of the Internet, decrease demand for our
services, impose taxes or other costly regulatory or technical requirements on
us, or otherwise increase our cost of doing business.
THE LOSS OF OUR KEY MANAGEMENT PERSONNEL WOULD SIGNIFICANTLY DISRUPT OUR
BUSINESS.
Our future success depends upon the continued services of our executive
officers and other key technology, sales, marketing and support personnel, who
have critical industry experience and relationships that we rely on in
implementing our business plan. Many of our officers or key employees are not
bound by employment agreements for any specific term. The loss of the services
of our officers or any of our other key employees could seriously interrupt our
business. In addition, because the demand for employees in our market is
intense, we may not be able to successfully locate, hire, and retain
replacements or other key management personnel on a timely and cost-effective
basis.
OUR NEW MANAGEMENT TEAM MUST PROVE THAT IT CAN WORK TOGETHER EFFECTIVELY.
We have recently hired nearly all of our senior management team, including
our chief executive officer, chief financial officer and chief operating
officer. As a result, our management team has worked together for only a brief
period of time. Our ability to effectively execute our strategies will depend in
part upon our ability to integrate our current and future managers into our
operations. If our executives are unable to operate together effectively, our
business, financial condition and results of operations will be materially
adversely affected.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH COULD
RESULT IN INCREASED COSTS TO US.
We have not sought patent protection on any of our services or processes.
We rely upon a combination of trademark law, trade secret protections, copyright
law, confidentiality agreements and other contractual arrangements with our
employees, consultants and third parties to establish and protect our
proprietary rights. The steps we have taken to protect our intellectual property
rights will likely provide less
12
<PAGE> 15
protection than the level given by patents and may prove to be inadequate.
Notwithstanding our efforts, third parties may still infringe or misappropriate
our proprietary rights. Moreover, effective trademark, copyright and trade
secret protection may not be available in every country in which we eventually
operate to the same extent available in the United States. We may be unable to
detect the unauthorized use of our intellectual property or take appropriate
steps to enforce our intellectual property rights. Defending our intellectual
property rights could also result in the expenditure of significant financial
and managerial resources, which could adversely affect our business, financial
condition and results of operations.
Although we enter into proprietary information and invention assignment
agreements with our employees and consultants and control access to and
distribution of our proprietary information, unauthorized parties, including
departing employees, consultants, strategic partners and others, may attempt to
copy or otherwise obtain and use our technology. Monitoring unauthorized use of
our technology is very difficult, and we may be unable to prevent
misappropriation of our technology.
WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS BY THIRD PARTIES, WHICH MAY RESULT IN
LOSS OF REVENUES.
Third parties may in the future assert trademark, copyright, patent and
other intellectual property rights claims or initiate litigation against us or
our suppliers or customers with respect to existing or future services. Although
we believe that our operations do not infringe on the intellectual property
rights of others, other parties may assert claims against us that we have
misappropriated a trade secret or infringed a patent, copyright, trademark or
other proprietary right belonging to them. Any infringement or related claims,
even if not meritorious, could be costly and time consuming to litigate, may
distract management from other tasks of operating our business, may result in
the loss of significant rights and may adversely affect our ability to operate
our business.
BECAUSE OUR SERVICES UTILIZE COMPLEX TECHNOLOGIES AND ARE DEPLOYED IN COMPLEX
ENVIRONMENTS, PROBLEMS MAY ARISE THAT COULD SERIOUSLY HARM OUR BUSINESS.
Due to the sophisticated nature of our infrastructure and the amount and
complexity of the technologies we and our customers employ, there may be errors
or defects in our infrastructure and technologies that may adversely affect the
provision of our services. If we are unable to efficiently fix errors or other
problems that may be identified, we could experience:
- loss of revenues and market share;
- loss of customers and credibility;
- inability 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 have a material adverse effect on
our business, financial condition and results of operations.
AS AN INTERNET ACCESS PROVIDER, WE MAY INCUR LIABILITY FOR INFORMATION
DISSEMINATED THROUGH OUR NETWORK.
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against us based on the nature and content of the materials disseminated through
our systems. The imposition upon us of liability for information carried on or
disseminated through our systems could require us to implement measures to
reduce our exposure to such liability, which may require us to expend
substantial resources, or to discontinue some of our service offerings. Any
costs that are incurred as a result of such measures or any imposition of
liability could harm our business.
WE MAY BE SUBJECT TO ENVIRONMENTAL RISKS INHERENT IN THE ON-SITE STORAGE OF
DIESEL FUEL AND BATTERIES.
Our OpenCenters(TM) contain tanks for the storage of diesel fuel and
significant quantities of lead acid batteries to provide back-up power
generation and uninterrupted operation of our customers' equipment.
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<PAGE> 16
We maintain an environmental compliance program that includes the implementation
of required technical and operational procedures designed to minimize the
potential for leaks and spills, maintenance of records and manufacturer's
recommended preventative maintenance. However, we cannot assure you that these
systems will at all times remain free from leaks or that the use of these
systems will not result in spills. Any leak or spill, depending on such factors
as the material involved, quantity and environmental setting, could result in
interruptions to our operations and expenditures that could have a material
adverse effect on our business, financial condition and results of operations.
OUR EXISTING STOCKHOLDERS WILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER VOTE,
AND THEIR INTERESTS MAY CONFLICT WITH YOURS.
Upon completion of this offering, our management and principal stockholders
will control approximately % of our outstanding common stock. If all
of these stockholders were to vote together as a group, they would have the
ability to exert significant influence over our board of directors and its
policies. For instance, these stockholders would be able to control the outcome
of all stockholder votes, including votes concerning director elections, charter
and bylaw amendments and possible mergers, corporate control contests and other
significant corporate transactions. Their interests may conflict with your
interests. In addition, this concentration of stock ownership could have the
effect of preventing or delaying a change of control or otherwise discouraging a
potential acquirer from attempting to obtain control of us. As a result, the
market price of our common stock could decline.
PROVISIONS OF DELAWARE LAW AND OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
MAY MAKE A TAKEOVER MORE DIFFICULT.
Provisions in the Delaware corporate law, our certificate of incorporation
and our bylaws may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt that is opposed by our
management and board of directors. Public stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. In
addition, upon the completion of this offering, we will have a staggered board
of directors, which will make it difficult for stockholders to change the
composition of the board of directors. These anti-takeover provisions could
substantially impede the ability of public stockholders to change our management
and board of directors, which may reduce the market price of our common stock.
Prior to the completion of this offering, we intend to adopt a stockholder
rights plan. This plan will entitle our stockholders to rights to acquire
additional shares of our common stock when a third party acquires 15% of our
common stock or commences or announces its intent to commence a tender offer for
at least 15% of our common stock. This plan could delay, deter or prevent a
change of control.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK.
Before this offering, there has been no public market for our common stock.
Although we have applied to have our common stock quoted on the Nasdaq National
Market, an active trading market for our shares may not develop or be sustained
following this offering. Purchasers in this offering may not be able to resell
their shares at prices equal to or greater than the initial public offering
price. The initial public offering price was determined through negotiations
between us and the underwriters and may not be indicative of the market price
for these shares following this offering.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE.
The stock market has, from time to time, experienced extreme price and
volume fluctuations. Many factors may cause the market price for our common
stock to decline, perhaps substantially, following this offering, including:
- failure to meet our growth strategy;
- the demand for our common stock;
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<PAGE> 17
- downward revisions in securities analysts' estimates or changes in
general market conditions;
- technological innovations by competitors or in competing technologies;
and
- investor perception of our industry or our prospects.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price per share will be substantially higher
than the net tangible book value per share immediately after the offering. If
you purchase common stock in this offering, you will incur dilution of
$ per share from the price per share you paid based on pro forma as
adjusted net tangible book value at , 1999. We also have
- --------- outstanding stock options to purchase our common stock as of
, 2000 with exercise prices significantly below the initial public
offering price of the common stock. To the extent these options are exercised,
there will be further dilution.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
Substantial sales of our common stock in the public market following this
offering, or the perception by the market that such sales could occur, could
lower our stock price or make it difficult for us to raise additional equity
capital in the future. After this offering, we will have shares of
common stock outstanding. Of these shares, the shares sold in this
offering, or shares if the underwriters' over-allotment is exercised
in full, will be freely tradeable. Substantially all of the remaining
shares will be subject to 180-day lock-up agreements. Of these shares, up to
shares may be available for sale in the public market 180 days after
the date of this prospectus, subject to compliance with Rule 144 under the
Securities Act of 1933, and the balance will be available for sale at various
times thereafter, also subject to compliance with Rule 144. In addition, after
this offering, we intend to register shares of common stock for
issuance under our stock incentive plan and 1,000,000 shares of common stock
under our employee stock purchase plan. As of April 5, 2000, options to purchase
shares of common stock were issued and outstanding, of which options
to purchase shares have vested. Additionally, up to 15,000 common
shares and 21,000 preferred shares are issuable upon the exercise of warrants
that were issued to RTE Holdings, LLC, and one of our lenders, respectively,
pursuant to warrant agreements. We cannot predict if future sales or issuances
of our common stock, or the availability of our common stock for sale, will harm
the market price for our common stock or our ability to raise capital by
offering equity securities.
After this offering, the holders of approximately million shares
of our common stock, including shares issuable upon the exercise of outstanding
warrants, will have rights, subject to some conditions, to require us to file
registration statements covering their shares, or to include their shares in
registration statements that we may file for ourselves or other stockholders. By
exercising their registration rights and selling a large number of shares, these
holders could cause the price of our common stock to decline. Furthermore, if we
were to include in a company-initiated registration statement shares held by
those holders pursuant to the exercise of their registration rights, those sales
could impair our ability to raise needed capital by depressing the price at
which we could sell our common stock.
WE WILL HAVE BROAD DISCRETION AS TO THE USE OF THE PROCEEDS FROM THIS OFFERING.
Our board of directors and our management will have broad discretion over
the use of the net proceeds of this offering. Investors will be relying on the
judgment of our board of directors and our management regarding the application
of the proceeds of this offering.
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FORWARD-LOOKING STATEMENTS
Some of the information under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business," and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risk and
uncertainties, there are important factors, including the factors discussed
under "Risk Factors," that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of our common stock in this
offering will be approximately $ , based on an assumed initial
public offering price of $ per share, after deducting the estimated
underwriting discount and our estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $ . We expect to use the majority of our net
proceeds to construct and equip our facilities. The remaining net proceeds will
be used for working capital and other general corporate purposes.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies and services. However, we currently have
no agreements or commitments with respect to any such transaction.
We will invest the net proceeds in government securities and other
short-term, investment-grade securities pending use.
DIVIDEND POLICY
To date, we have never declared or paid any cash dividends on shares of our
common stock. We currently intend to retain our earnings for future growth and
development of our business and, therefore, do not anticipate paying cash
dividends in the foreseeable future.
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CAPITALIZATION
You should read this table in conjunction with the sections entitled
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" and our
consolidated financial statements and the related notes included elsewhere in
this prospectus.
The following capitalization table sets forth as of December 31, 1999:
- Our actual capitalization; and
- Our pro forma as adjusted capitalization after giving effect to the
conversion upon the completion of this offering of 22,322,502 shares of
redeemable convertible preferred stock into common stock and the receipt
of the estimated proceeds of $ from this offering, assuming an
initial public offering price of $ per share after deducting the
underwriting discount and estimated offering expenses of $ .
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
PRO FORMA AS
ACTUAL ADJUSTED
------- ------------
(IN THOUSANDS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS:.................................. $17,564 $
------- -------
LIABILITIES:
Capital lease obligations, including current portion of
$185...................................................... 418 418
Notes payable, including current portion of $458............ 1,829 1,829
------- -------
Total notes payable and capital lease obligations........... 2,247 2,247
------- -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Series A redeemable convertible preferred stock, $0.01 par
value, 4,343,500 shares authorized, 4,322,500 issued and
outstanding, at December 31, 1999; none issued and
outstanding pro forma as adjusted......................... 4,470 --
Series B redeemable convertible preferred stock, $0.01 par
value; 18,666,669 shares authorized, 18,000,002 issued and
outstanding, at December 31, 1999; none issued and
outstanding, pro forma as adjusted........................ 26,914 --
------- -------
Total redeemable convertible preferred stock...... 31,384 --
------- -------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value; 28,125,169 shares authorized,
3,000,000 shares issued and outstanding, actual;
shares issued and outstanding, pro forma as adjusted...... 30
Additional paid-in-capital.................................. 501
Deferred stock-based compensation........................... (764) (764)
Accumulated deficit......................................... (6,042) (6,042)
------- -------
Total stockholders' equity (deficit).............. (6,275)
------- -------
Total capitalization.............................. $27,356 $
======= =======
</TABLE>
The capitalization table excludes:
- shares of common stock to be issued pursuant to the over-allotment
option;
- 670,846 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $0.40 per share, as
of March 31, 2000;
- 3,864,154 shares of common stock reserved for future issuance under our
stock incentive plan and employee stock purchase plan, as of March 31,
2000;
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<PAGE> 21
- up to 15,000 shares of common stock and 21,000 shares of redeemable
convertible preferred stock issuable upon the exercise of warrants at an
exercise price of $1.50 per share and $1.00 per share, respectively; and
- The issuance of 100,000 shares of common stock issued in connection with
our acquisition of the personnel and a portion of the assets and
liabilities of KennTech, a consulting firm with which we formerly
contracted for the selection, design and construction program management
of our OpenCenters(TM).
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DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $24.8
million, or $0.98 per share of outstanding common stock, after giving effect to
the conversion upon completion of this offering of all redeemable convertible
preferred stock into common stock. The pro forma net tangible book value per
share represents our total tangible assets less total liabilities, divided by
25,322,502 shares of common stock outstanding on a pro forma basis before this
offering. Dilution per share represents the difference between the amount per
share paid by investors in this offering and the pro forma net tangible book
value per share after this offering. After giving effect to this offering, the
pro forma as adjusted net tangible book value at December 31, 1999 would have
been $ , or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of
$ per share to new investors purchasing shares at the initial public
offering price. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $ 0.98
Increase per share attributable to new investors..........
Pro forma net tangible book value per share after this
offering...............................................
Dilution per share to new investors......................... $
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 1999, the difference between existing stockholders and new
investors with respect to the number of shares of common stock purchased, the
total consideration paid and the average price per share paid. Existing,
stockholder data is computed assuring conversion of all outstanding redeemable
convertible preferred stock as of December 31, 1999. These amounts do not
include estimated underwriting discounts and commissions and offering expenses
payable by us. The table assumes that the initial public offering price will be
$ .
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 25,322,502 % $31,915,000 --% $1.26
New investors......................... % $ % $
---------- --- ----------- ---
Total................................. 100% 100%
========== === =========== ===
</TABLE>
The above table assumes no exercise of stock options or warrants. As of
December 31, 1999, there were options outstanding to purchase 1,144,546 shares
of common stock at a weighted average exercise price of $0.40 per share and
outstanding warrants to purchase 15,000 shares of common stock and 21,000 shares
of preferred stock at an exercise price of $1.50 and 1.00 per share,
respectively. To the extent outstanding options and warrants are exercised,
there will be further dilution to new investors. In addition, we may agree to
issue additional warrants to acquire common stock to property owners in
conjunction with our site acquisition efforts, and we may issue equity
securities to pay for acquisitions.
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<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the period from
November 10, 1998 (date of inception) to December 31, 1998 and the year ended
December 31, 1999 have been derived from our audited consolidated financial
statements. You should read the following selected consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the related
notes, all of which appear elsewhere in this prospectus. The pro forma net loss
per share is computed based upon the weighted average number of common shares
outstanding and conversion of all outstanding redeemable convertible preferred
stock into an equivalent number of shares of common stock.
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10, 1998 YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1998 1999
----------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ 258
Operating expenses:
Costs of revenues......................................... -- 2,439
Selling and marketing..................................... -- 488
General and administrative................................ 85 2,970
Depreciation and amortization............................. -- 267
Amortization of stock-based compensation.................. -- 89
---------- ----------
Loss from operations................................... (85) (5,995)
Interest income, net........................................ -- 38
---------- ----------
Net loss.................................................... (85) (5,957)
Accretion of preferred stock redemption premium and issuance
costs..................................................... -- (331)
---------- ----------
Net loss attributable to common stockholders................ $ (85) $ (6,288)
========== ==========
Net loss per share attributable to common stockholders...... $ (0.03) $ (2.10)
========== ==========
Weighted average common shares.............................. 3,000,000 3,000,000
========== ==========
Pro forma net loss per share:
Basic and diluted (unaudited)............................... $ (0.74)
==========
Pro forma weighted average number of common shares
outstanding:
Basic and diluted (unaudited)............................... 8,039,630
==========
</TABLE>
The pro forma, as adjusted balance sheet data reflects:
- the conversion of 22,322,502 shares of series A and B redeemable
convertible preferred stock into an identical number of shares of common
stock; and
- the issuance by us of shares of common stock in this offering
at an initial public offering price of $ , after deducting the
underwriting discount and estimated offering expenses of approximately
$ .
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<PAGE> 24
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, PRO FORMA
1999 AS ADJUSTED
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $17,564
Property and equipment, net................................. 12,304 12,304
Total assets................................................ 30,415
Total debt, including capital leases........................ 2,247 2,247
Redeemable convertible preferred stock...................... 31,384 --
Stockholders' equity (deficit).............................. (6,275)
</TABLE>
EBITDA consists of net loss excluding interest income, net, income taxes,
depreciation and amortization and amortization of stock-based compensation. We
expect that depreciation and amortization will increase considerably as we add
additional facilities. We believe that because EBITDA is a measure of financial
performance, it is useful to investors and analysts as an indication of a
company's ability to fund its operations and to service or incur debt. However,
EBITDA is not a measure calculated under generally accepted accounting
principles and may not be comparable to similarly titled amounts reported by
other companies. We do not expect to generate positive EBITDA in the near term.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
(IN
THOUSANDS)
<S> <C>
OTHER OPERATING DATA:
Capital expenditures........................................ $ 12,571
EBITDA...................................................... (5,639)
Net cash used in operating activities....................... (3,087)
Net cash used in investing activities....................... (12,055)
Net cash provided by financing activities................... 32,706
</TABLE>
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<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our principal activities through August 1999 included securing space for
and constructing our facilities, obtaining licenses to operate as a
telecommunications carrier, marketing our space and services to customers,
raising funds and hiring personnel to support our growth. Beginning in August
1999 we started generating revenues from operations at our Somerville facility.
We have experienced operating losses and generated negative EBITDA since our
inception, and we expect to continue to generate operating losses and negative
EBITDA for the foreseeable future as we develop new facilities, obtain licenses
as a telecommunications carrier, market our space and services to customers,
expand our personnel and build our internal information systems. We have a
limited operating history and therefore, prospective investors have limited
operating and financial information upon which to evaluate our performance.
As of March 31, 2000, we had entered into leases for nine sites, four of
which are operational and one of which is under construction. We intend to have
approximately eight facilities operational by the end of 2000. As a result of
this build-out strategy, we will significantly increase our costs of revenues,
general and administrative expenses and depreciation and amortization expenses.
On average, we expect a new domestic facility of 40,000 square feet to cost
approximately $14.3 million to construct and equip. We believe it takes three
months on average to complete construction of a facility. In many cases we are
able to accept customers and begin generating revenues before a facility is
fully completed.
DESCRIPTION OF OPERATIONS
Revenues
We derive revenues from license fees, sales of our various value-added
services and installation fees. License fees refer to the fees for the space
utilized by our customers. Value-added service offerings include technical
operations expertise, network services, network design and integration, Internet
and telecommunications interconnection, access and transport services, data
backup and equipment monitoring. Contracts for these services are paid monthly
and terms can vary by customer and offering. Installation fees are one-time
charges to customers for the initial set-up of their equipment, which are
amortized over the life of the applicable customer contract. We license a
significant amount of a facility's licensable square footage to anchor
customers. Contracts for anchor customers generally range from three to ten
years and are typically paid on a monthly basis, although a significant portion
of these payments may be made in advance. Contracts for other customers range
from one to three years and are paid on a monthly basis.
Our ability to generate revenues will be affected by:
- the availability of suitable space for construction of our facilities;
- competition for customers;
- demand for our technical services;
- the continued growth in the Internet, telecommunications and data storage
markets;
- federal communications laws and our regulatory status as a licensed
common carrier; and
- our ability to maintain or increase pricing terms.
Costs of revenues
The costs of revenues include occupancy, communication and network
infrastructure expenses, salaries and benefits for operations and engineering
personnel and for facility maintenance and repair expenses.
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<PAGE> 26
Occupancy expenses primarily reflect the leasing of space and related
utility, security and cleaning expenses.
Communication and network infrastructure expenses primarily reflect the
costs associated with obtaining communication services from various
telecommunications carriers and Internet connectivity providers.
Operations and engineering expenses relate primarily to personnel and
related costs to operate and monitor each of our facilities and provide
technical and installation services to our customers. Network operations center
expenses primarily include personnel and related costs to monitor network
capacity and activity twenty-four hours a day, seven days a week.
Selling and marketing
Selling and marketing expenses include sales and marketing employee
salaries, benefits and commissions, as well as other marketing, development,
advertising and promotional expenses.
General and administrative
General and administrative expenses primarily include personnel and related
costs associated with our corporate administration, business development, legal,
finance, human resource and management information system functions.
Depreciation and amortization
Depreciation and amortization expense primarily include the depreciation of
facility construction costs, leasehold improvements and network and facility
equipment.
Amortization of stock-based compensation expense
Amortization of stock-based compensation reflects non-cash charges recorded
for stock-based compensation.
RESULTS OF OPERATIONS
RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999
We had no facilities open as of January 1, 1999. We began accepting
customers and generating revenues at our Somerville, Massachusetts facility in
August 1999. In addition, we generated revenues from three other facilities that
began accepting customers in the fourth quarter of 1999.
Revenues
Revenues for the year ended December 31, 1999 were $258,000, substantially
all of which were generated from a single customer, StorageNetworks, Inc. These
revenues relate principally to license fees.
Costs of revenues
The costs of revenues for the year ended December 31, 1999 were $2.4
million and reflect the operation of our Somerville, Massachusetts facility and
three other facilities for the last four months of the year.
Selling and marketing
Selling and marketing expenses for the year ended December 31, 1999 were
$488,000 and the majority of these expenses were incurred in the second half of
the year when our first facility became operational.
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<PAGE> 27
General and administrative
General and administrative expenses for the year ended December 31, 1999
were $3.0 million and primarily reflect personnel and related recruiting and
relocation expenses, as well as legal expenses associated with the establishment
and development of our business.
Depreciation and amortization
Depreciation and amortization expense for the year ended December 31, 1999
was $267,000 and primarily reflects four months of in-use improvements and
equipment at our four operating facilities.
Amortization of stock-based compensation expense
Amortization of stock-based compensation expense for the year ended
December 31, 1999 was $89,000. From January 1, 2000 through April 5, 2000, we
granted options to purchase 115,800 shares of common stock at a weighted average
exercise price of $0.40 and options to purchase 303,250 shares of common stock
at a weighted average exercise price of $2.30.
Interest income, net
Interest income, net, for the year ended December 31, 1999 was $38,000 and
primarily reflects interest earned on the $26.7 million of cash and cash
equivalents received in November and December 1999 from the sale of our series B
preferred stock.
RESULTS FOR THE PERIOD FROM NOVEMBER 10, 1998 (DATE OF INCEPTION) TO DECEMBER
31, 1998
For the period from November 10, 1998 (date of inception) to December 31,
1998, we incurred $85,000 of general and administrative expenses related to the
initial development, organization and planning of our business.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our business primarily from
approximately $31.1 million of net proceeds from the sale of our preferred
stock, including approximately $26.7 million in net proceeds from the sale of
our series B preferred stock in November and December 1999.
We had no capital expenditures in 1998. Our capital expenditures and
equipment acquired under capital leases in 1999 totaled approximately $12.6
million and were made primarily to construct and equip our operating facilities.
We expect that our capital expenditures will be substantially higher in future
periods as we build and equip new facilities both in the U.S. and abroad. We
will also require financing to fund our operating losses, which we expect will
increase substantially as we continue to grow our business.
As of March 31, 2000, we were obligated to make minimum lease payments
under noncancelable operating leases of $4.8 million in 2000, $6.7 million in
2001, $6.8 million in 2002, $6.9 million in 2003, $7.0 million in 2004 and
$103.5 million in the aggregate in subsequent years. As of December 31, 1999, we
were also obligated to make future minimum lease payments under capital leases
of approximately $473,000. Our lease obligations will increase substantially in
future periods as we enter into leases covering additional collocation
facilities. To ensure that we have multiple telecommunications carriers serving
our facilities, we generally place orders with up to three carriers prior to
completing facility construction. These orders generally require us to pay
installation fees and minimum monthly charges for periods ranging from one to
three years. As of March 31, 2000, we had placed orders with five
telecommunications carriers to connect our facilities with 22 circuits and who
charged a monthly service charge of approximately $3,500 per circuit. Also, as
of March 31, 2000, we had placed orders for the purchase of equipment to be
installed in our facilities totaling approximately $1.0 million.
We have a bank loan agreement, which is collateralized by the underlying
equipment it was used to purchase, for $2.0 million. This loan bears interest at
a weighted average rate of 12.6%. The loan is payable in monthly installments
ending in April of 2003.
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Cash flow used in operations totaled $3.1 million for the year ended
December 31, 1999. The operation of four facilities and the addition of
personnel to support our operations with minimal corresponding revenue increased
our cash outflow.
Cash flow used in investing activities totaled $12.1 million relating to
the construction of four facilities in 1999.
Cash flow provided by financing activities of $32.7 million reflects the
issuance of series A and B preferred stock and net borrowings in the form of
notes payable and capital leases. The proceeds from these issuances have been
and will continue to be used to fund our operating and investing activities.
From January 1, 2000 through March 10, 2000, we issued 666,667 shares of series
B preferred stock at $1.50 per share for total proceeds of $1.0 million.
We intend to use the proceeds of this offering primarily to fund the
construction and operation of our facilities, to purchase related equipment and
for working capital and other general corporate purposes. We may also use a
portion of the net proceeds to acquire or invest in complementary businesses,
technologies or services.
We estimate that our current cash resources and the net proceeds from this
offering will be sufficient to fund our operations and the build-out of new
facilities and continue development of operations support systems through the
end of the second quarter of 2001. If we are unable to complete this offering,
we intend to scale back and delay our planned network and operational
infrastructure expansion.
We expect to continue to grow our business and to build additional
facilities in order to significantly expand our geographic reach. Accordingly,
we expect that we will need to arrange for additional sources of capital through
the issuance of debt or equity or bank borrowings. We have no commitments for
any such additional financing, and we cannot be sure that we will be able to
obtain any such additional financing at the times required and on terms and
conditions acceptable to us. In such event, our growth could slow and operations
could be adversely affected.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of many factors, including but not
limited to:
- our ability to secure space that meets our criteria;
- our ability to meet construction requirements;
- our ability to obtain favorable prices for purchases of equipment; and
- demand for our services.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not use derivative financial instruments. We generally place our cash
and cash equivalents in investment grade securities, primarily U.S. government
obligations with contractual maturities of less than 90 days. We do not expect
any material loss from our cash and cash equivalents and, therefore, believe our
potential interest rate risk is not material. We operate primarily in the U.S.,
and all sales have been made in U.S. dollars. Accordingly, there has not been
any exposure to foreign currency rate fluctuations.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, certain
computer programs that have time-sensitive software may recognize a date ending
in "00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations.
We have not to date experienced any material problems as a result of the
year 2000 issue. Costs to ensure that our systems and networks are year 2000
compliant have not been, and are not expected to be,
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<PAGE> 29
material. We do, however, continue to monitor our systems for year 2000
compliance, including substantial testing of the compatibility of all new
systems that we introduce into our existing infrastructure.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. We will adopt SFAS No. 133 in 2001, in
accordance with SFAS No. 137, which deferred the effective date of SFAS No. 133.
The adoption of this standard in 2001 is not expected to have a material impact
on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the Staff's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in our second quarter of 2000, in
accordance with SAB 101A which deferred the effective date by one quarter. We
have evaluated the application of SAB 101 and determined that it will have no
impact on reported revenues and net loss.
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<PAGE> 30
BUSINESS
OVERVIEW
We offer a Complete Collocation(TM) solution to our Internet,
telecommunications and data storage customers that combines high-quality
collocation facilities with a comprehensive suite of value-added services. Our
OpenCenter(TM) collocation facilities provide a fully conditioned environment
with high levels of security, reliable, high-capacity power supply and
multi-stage fire detection and suppression systems in which our customers can
locate their telecommunications, computer, network, data storage and other
related equipment. Our value-added services encompass network design and
integration, Internet and telecommunications network interconnection, access and
transport services, data backup and equipment monitoring. The combination of our
facilities and services enables our customers to outsource the location and
operations of their equipment and we believe cost-effectively deepen their own
service offerings, expand their geographic reach and shorten their time to
market.
We differentiate ourselves from our competition by designing flexible
facilities that can accommodate a wide variety of Internet, telecommunications
and data storage equipment and by offering what we believe to be the broadest
array of services available. In addition, unlike many of our competitors, we are
a licensed common carrier, enabling us to enter into interconnection agreements
with local and long-distance telephone companies. This accelerates our
customers' access to multiple carrier networks and expands their network service
options.
We opened our first OpenCenter(TM) in Somerville, Massachusetts in August
1999. As of March 31, 2000, we had entered into leases for nine sites, four of
which are operational and one of which is under construction. We intend to have
approximately eight facilities operational by the end of 2000. Beyond 2000, our
strategy is to aggressively expand our presence by opening additional facilities
targeting key communications centers in the U.S. and abroad. Our current
customers include Broadwing, InterNAP Network Services Corporation, SAVVIS
Communications Corporation, StorageNetworks, Inc. and White Pine Software, Inc.
MARKET OPPORTUNITY
The market for operations of the Internet, telecommunications and data
storage industries is expected to grow dramatically. Forrester Research predicts
that the U.S. market for web hosting will grow from an estimated $3.5 billion in
2000 to $14.7 billion in 2003. Forrester Research also predicts that, within
this broader market, the submarket for web hosting collocation services will
grow from an estimated $1.6 billion in 2000 to $4.4 billion in 2003.
International Data Corporation predicts that the U.S. market for
telecommunications services will grow from an estimated $193 billion in 1997 to
$252 billion in 2002. In addition, IDC also predicts that the worldwide data
storage market will grow from $29 billion in 1999 to $46 billion in 2003. We are
not aware of any reliable forecasts relating to the growth in the submarkets for
collocation of telecommunications services or data storage, but we expect the
growth in these submarkets to be significant.
The demand driving the growth in the Internet, telecommunications and data
storage industries is also driving our target customers to be able to access
these markets efficiently and cost-effectively. Historically, our target
customers have accessed these markets by either building their own facilities or
collocating their equipment in carrier-operated facilities. Building their own
facility, however, can take substantial time because it requires a team of
individuals to identify an appropriate site, negotiate a lease, negotiate
contracts with equipment vendors, manage construction, integrate network
operations centers, implement a disaster recovery plan and staff the facility.
This alternative and type of facility is therefore time, resource and capital
intensive.
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<PAGE> 31
In today's environment there are three choices available to those companies
that do not wish to build their own facilities:
- TRADITIONAL COLLOCATION FACILITIES, such as those owned and operated by
incumbent local telephone companies and competitive local telephone
companies, have historically provided limited support and flexibility. We
believe that these facilities cannot support the increased demand and
flexibility required by the customers we target because they provide
limited equipment operations and value-added services to the customer. In
addition, because such facilities are carrier-operated, customers within
these facilities often have no choice but to use that carrier's network.
- TELCO HOTELS are buildings in which real estate entities lease space for
telecommunications purposes. Telco hotels specialize in providing
unimproved operating space and, therefore, service providers who utilize
telco hotels typically incur large capital expenditures in conjunction
with the buildout and improvement of their lease space. In addition,
telco hotels do not provide operations and value-added services to the
customer.
- VALUE-ADDED COLLOCATION FACILITIES, including those offered by Colo.com,
Equinix and GlobalCenter, provide services beyond physical space, such as
facility monitoring and operations support, but we believe lack the
combination of high-quality facilities, support for a range of
applications, open network access, and comprehensive operations and
value-added services.
OUR SOLUTION
Our Complete Collocation(TM) solution is designed to address the individual
operational requirements of our customers. It combines the quality of
traditional incumbent local telephone company facilities with what we believe is
the broadest range of value-added services available in an equipment-flexible,
open-network-access environment. The key elements of our Complete
Collocation(TM) solution include:
- STATE-OF-THE-ART FACILITIES. Our OpenCenters(TM) are designed and
constructed to exceed the highest standards of telecommunications
carriers. These facilities provide our customers with a fully conditioned
environment with high-levels of security; a reliable, high-capacity power
supply; multi-stage fire detection and suppression systems; and
comprehensive systems monitoring.
- CUSTOMER EQUIPMENT FLEXIBILITY. Our Complete Collocation(TM) solution
satisfies our customers' needs to house their diverse Internet,
telecommunications and data storage equipment in a single location. Our
OpenCenter(TM) architecture enables our customers to implement
applications across the different infrastructure requirements of the
Internet, telecommunications and data storage industries.
- OPEN NETWORK ACCESS. Our OpenCenters(TM) provide our customers with
access to multiple network providers offering connectivity to different
types of networks. This open access promotes choice, reliability and cost
efficiency for our customers. We have developed critical, nonexclusive
relationships with established metropolitan area and long-haul carriers
to provide maximum choice for our customers. As a result of having
multiple communication carrier alternatives, our customers are able to
avoid the threat of a single point of network failure and can
significantly reduce their network costs.
- VALUE-ADDED SERVICES. We provide a comprehensive suite of value-added
services to meet our customers' evolving needs. In addition to
traditional collocation services, we provide our customers with network
design and integration, Internet and telecommunications network
interconnection, access and transport services, data backup and equipment
monitoring. By standardizing these services and offering them to multiple
customers from a single location we reduce our customers' costs.
- OPERATIONS CENTER. Our network operations center enables our customers
to rely on us as a single source to monitor, troubleshoot and support
their networks and equipment. Our center provides 24x7 real-time
monitoring of circuit connectivity, network performance and equipment
status. This
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<PAGE> 32
monitoring is seamlessly linked to trouble ticketing, customer service
and technical support to provide continuous operations for our customers.
- ANCHOR CUSTOMERS. We plan to license a significant portion of the space
in each of our facilities to our anchor customers. Anchor customers are
typically larger customers who themselves provide services that we
believe our target customers will utilize, such as network and
infrastructure components that enhance our overall service offerings and
attract other customers to our facilities.
STRATEGY
Our goal is to be a world-class provider of collocation facilities and
operations services for businesses in the Internet, telecommunications, and data
storage industries. To achieve our goal, we have developed a business strategy
that defines collocation as a full-service offering, rather than just providing
a physical location for customer equipment. Our focus is on the development and
implementation of high-quality facilities and the provision of increasingly high
value-added services to our customers.
Our strategy includes the following elements:
- PRIORITIZE CUSTOMER CARE. We are fully committed to providing a
single-source solution that addresses our customers' critical operations
requirements, allowing them to concentrate on growing their businesses.
In consultation with our customers, our sales and marketing teams develop
solutions tailored to each customer's specific requirements. To support
these solutions, we have assembled a multi-disciplined team of
technicians to provide end-to-end customer care, twenty-four hours a day,
seven days a week.
- DEVELOP STRONG CARRIER RELATIONSHIPS. Our operations group works to
ensure that our facilities are served by the incumbent local telephone
company, at least two competitive local telephone companies and at least
one provider of fiber optic cable not carrying a signal, or dark fiber.
Service from multiple carriers permits our customers to achieve a high
level of network reliability and provides them with the ability to
quickly and easily increase their bandwidth capacity.
- CAPITALIZE ON CARRIER STATUS AND INTERCONNECTION RIGHTS. We have, or are
obtaining, certification as a common carrier in each state in which we
operate to enhance customer choice by providing access to the broadest
number of networks. As a result of our common carrier status, we are able
to enter into interconnection agreements with the local telephone company
in each region of the country in which we operate. The combination of our
common carrier status and multiple interconnection agreements allows us
to economically build our own metropolitan area access networks, which in
turn allows our customers to easily access multiple local and long-haul
networks. This access can significantly reduce our customers' time to
market and their network costs.
- PURSUE LONG-TERM CONTRACTS WITH CUSTOMERS. We seek to enter into
long-term license agreements with anchor customers in each of our
facilities. These license agreements provide us with a stable stream of
revenue and allows us to better manage our future physical infrastructure
and bandwidth requirements. We expect that a portion of these contracts
will be paid for up-front, creating an additional source of capital to
fund our business plan.
- STANDARDIZE FACILITY DESIGN. Using a rigorous product development
methodology, we have created a modular and replicable design for our
OpenCenters(TM), which greatly reduces the time it takes us to construct
and open a new facility. Our standardized design provides our customers
with uniform services from facility to facility, reduces our operating
costs and enables us to deploy upgrades rapidly across all of our
facilities and significantly speeds our time to market. To further our
strategy to standardize facility design, we recently acquired the
personnel and a portion of the assets and liabilities of Kennedy and
Rossi Technology Builders, or KennTech, a consulting firm with which we
formerly contracted for the selection, design and construction program
management of our OpenCenters(TM).
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<PAGE> 33
- UP-SELL EXISTING CUSTOMER BASE. We continually seek to identify, develop
and implement higher-value services, and sell these as add-on services to
our existing customers. We see a progression in the value of our service
offerings, beginning with the leasing of the space itself, and moving to
facility operation, on-site technical support, operating system
configuration and applications support. This allows us to strengthen
relations with our customers and progressively assume additional aspects
of their operations.
- PROMOTE PROPRIETARY BRANDS. We are seeking to establish a nationally
recognized family of brands to strengthen our position within our target
markets and to continue to build customer confidence in our service
offerings. We promote several brand names, including CO Space(TM), our
primary brand, CO FlexSpace(TM), CO Connect(TM), and CO Services(TM). We
strive to associate our brands with quality, flexibility and ease of use,
and promote our brands through a variety of media, including collateral
material, advertising, public relations and our website.
CUSTOMERS
In response to the rapidly expanding Internet, telecommunications and data
storage markets, we have designed our service offerings to meet the individual
space, connectivity and operations needs of a variety of customers within each
market:
- Internet -- Internet service providers; web hosting providers; e-commerce
companies; digital subscriber line, or DSL, providers; enterprise
hosting; and application service providers;
- Telecommunications -- competitive and incumbent local telephone
companies; interexchange carriers; enhanced service providers; and
international providers; and
- Data Storage -- primary data storage; backup data storage; and enterprise
data storage.
For each of our facilities, we target one or more anchor customers who we
expect will license a significant portion of the space within the facility,
while we license the remainder of the available space to customers with space
requirements as small as one 2'x2' rack cabinet.
We enter into license agreements with our customers that provide them with
secure space for the installation, maintenance and operation of their equipment,
various value-added services, 24x7 access to their equipment and reliable,
high-capacity power supply. Our smaller customers typically license space for
one to three years, while our anchor customers typically license space for a
period of up to 10 years, with renewal options in some cases.
Our customers include, among others, the following service providers:
- BROADWING, a nationwide provider of voice, data, wireless and Internet
services;
- INTERNAP NETWORK SERVICES CORPORATION, a leading provider of fast,
reliable and centrally managed Internet connectivity services targeted at
businesses seeking to maximize the performance of mission-critical
Internet-based applications;
- SAVVIS COMMUNICATIONS CORPORATION, a provider of high-quality, global
data networking and Internet-related services;
- STORAGENETWORKS, INC., a provider of data storage services serving
emerging e-commerce companies and established enterprises; and
- WHITE PINE SOFTWARE, INC., a provider of software solutions that
facilitate worldwide video and audio communication and data collaboration
across the Internet.
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We provide value to our customers through a combination of the following
elements:
- Diligent focus on customer care;
- High-quality facilities that support all types of communications
equipment and provide open network access, increased choice of network
providers and easy access to unbundled network elements from the
incumbent local telephone company;
- A range of services that includes technical operations services, a
network operations center and value-added services, such as data backup;
and
- Depth of coverage in geographic markets served.
We enable our anchor customers, such as Broadwing and InterNAP, to focus on
their core services by providing collocation solutions for them and their
customers and by offering a comprehensive suite of operations services. We
enable customers with smaller space requirements to benefit from our
high-quality facilities, and choice of network providers, as well as affording
them access to the combined solutions that we develop with our anchor customers.
OUR SERVICE OFFERINGS
Our service offerings fall into three broad categories: CO FlexSpace(TM),
our facility space offering; CO Connect(TM), our connectivity offerings; and CO
Services(TM), our monitoring, operations and value-added services. The following
table describes our current service offerings, as well as those under
development, and the customer benefits of these service offerings:
<TABLE>
<CAPTION>
SERVICE SUMMARY CUSTOMER BENEFITS
<S> <C> <C>
CO FLEXSPACE(TM)
CO FlexSpace Cabinet Core space offering includes Low initial cost; low operating
CO FlexSpace Cage various size cabinets, cages and costs; rapid deployment; access to
CO FlexSpace Private private rooms. multiple networks; support for a
Room broad range of equipment.
CO FlexSpace Custom Space constructed to customer Customer branded and configured.
specifications.
CO FlexSpace Office Office space and conference Provides a presence for customer
facilities. personnel in proximity to
equipment.
CO CONNECT(TM)
CO Connect Internet 10 Provides high-bandwidth access to High-bandwidth Internet access;
CO Connect Internet 100 the Internet for businesses such immediate installation;
as web hosters, Internet service reliability; elimination of
providers, or ISPs, and expenses for dedicated connection
application service providers, or and the capital and operations
ASPs. expense of deploying equipment to
connect to an ISP.
CO Connect Provides for connection of Connection to carrier(s) of
Cross-Connects telecommunications circuits customer's choice and services
entering an OpenCenter(TM) to a offered by providers in an
customer's space (cabinet, cage or OpenCenter(TM).
private room).
Transport Services Provides high-speed connectivity Rapid deployment; increased
from our OpenCenter(TM) to other choice; one-stop shopping;
locations (telco hotels, competitive pricing.
interexchange carriers, or IXCs,
and ISPs) within a metropolitan
area.
</TABLE>
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<TABLE>
<CAPTION>
SERVICE SUMMARY CUSTOMER BENEFITS
<S> <C> <C>
CO SERVICES(TM)
Data Backup Stores contents of customer's Capital/labor savings for
servers to tape on a regular customer; protection in the event
basis to protect against disk or of hardware failure.
server failure.
Equipment Monitoring Monitors customer's equipment for Minimizes unplanned downtime due
outages and signs of performance to undetected faults; decreased
degradation using our network deployment cost.
operations center, and reports
problems to customer.
Network Equipment Monitors customer's network Minimizes unplanned downtime due
Monitoring elements for outages and signs of to undetected faults; decreased
performance degradation using our deployment cost.
network operations center, and
reports problems to customer.
Circuit Monitoring Monitors customer's circuits for Minimizes unplanned downtime due
outages and signs of performance to undetected faults; decreased
degradation using our network deployment cost.
operations center, and reports
problems to customer.
Direct Current Power Electric power, backed up by Minimizes capital expenditures;
batteries and generator, for decreased overall cost.
telecommunications equipment.
Remote Hands At direction of customer, 24x7 staff without dedicated
observes and reports on equipment staffing expenses.
status, and performs tasks to
restart failed equipment.
Troubleshooting Diagnoses and seeks to repair 24x7 staff without dedicated
problems with communication staffing expenses.
and/or server equipment and
network infrastructure.
Data Storage(1) Provides for storage of Reliability; rapid deployment.
customer's data.
Network Security(1) Provides capabilities that help a Reduced operational expenditures
customer secure their for customer; improved security
communications and/or server capabilities.
infrastructure.
Caching(1) Improves network performance by Rapid deployment; one-stop
locating web content close to shopping.
users.
</TABLE>
- ---------------
(1) These services are expected to be available in 2001.
CUSTOMER SERVICE
Our goal is to provide superior customer service. To that end, we have
implemented comprehensive customer service procedures including:
- CONTINUOUS CUSTOMER INTERACTION. We maintain close relationships with
our customers to assure that they are receiving the highest level of
service possible. Our on-site technicians initiate dialogues with our
customers' local technicians to receive feedback on our service and to
solicit recommendations on how we may provide even better service.
- DEDICATED PROJECT TEAMS. We strive to make the design, installation and
integration process as simple as possible for our customers. Each
customer has its own dedicated project manager who is
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responsible for the successful coordination of all of these elements.
This project manager works with team members from our sales, engineering
and provisioning teams to provide a single point of contact for the
customer for all aspects of implementation and turn-up of service.
- WEB-BASED SUPPORT. We are currently developing a secure customer service
section of our website that will provide information to our customers and
enable them to conveniently order new services over the Internet. We are
also developing a web-based interface that will allow our customers to
view trouble ticket information and status.
SALES AND MARKETING
Direct Sales Force
We market our services and solutions primarily through our direct sales
force, which as of March 31, 2000 consisted of 15 full-time, trained sales
professionals responsible for developing new customers as well as selling
additional services to our existing customers. Our sales force is organized by
market segment based on customer characteristics and identifies potential
customers through direct contact, attendance at trade shows and our website. To
achieve our planned growth, we intend to increase the size of our sales force to
a total of approximately 50 professionals by the end of 2000 and to open
additional sales offices as we enter new geographic markets.
Our national account sales organization targets the approximately 200 top
companies in the communications industry. We seek to build anchor customer
relationships with these customers to produce detailed collocation solutions
customized to their specifications. Our major account sales organization
primarily targets medium-sized companies within the metropolitan area served by
our facilities. We consult with these customers to determine their needs and
create tailored solutions for their specific application.
Indirect Sales Channels
We are developing indirect sales channels for our service offerings by
targeting vendors, contractors and suppliers to the Internet, telecommunications
and data storage industries that have relationships with prospective customers
requiring a collocation solution. For example, we entered into a joint marketing
agreement with one of our anchor customers under which it receives an ongoing
referral fee. We continue to market these opportunities to other anchor
customers and communications carriers.
Marketing
Our marketing includes the following strategies:
- BRANDING. To build brand recognition, we actively promote several
tradenames and product brand names, including: CO Space(TM) -- our
primary brand; OpenCenter(TM) -- our centrally-located, high-quality
facilities; CO Space (location) -- our individual OpenCenters(TM) named
after recognizable geographic areas, such as CO Space Boston or CO Space
Metro New York; and CO FlexSpace(TM), CO Connect(TM), and CO
Services(TM) -- our high-level service offerings.
- SERVICES MARKETING. Our services marketing strategy is to develop and
market services that add value to our target customers. We commit
substantial resources to continuously analyze customer needs and
regularly update our services to reflect changes in technology.
- MARKETING COMMUNICATIONS. Our marketing communications strategy is to
promote our brands and communicate our capabilities through a variety of
media, including print advertising in trade publications, public
relations activities, exhibits at telecommunications, Internet and
technology-related trade shows, direct mail campaigns and speaking
engagements.
REAL ESTATE SELECTION AND FACILITY ARCHITECTURE
To successfully implement our business strategies, we must identify
suitable real estate for the location of our facilities. Typically, our
collocation facilities are centrally located within major metropolitan
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<PAGE> 37
areas, often in the central business district. Our experienced team of real
estate professionals is responsible for identifying suitable locations in
existing markets and in new markets in which we wish to expand. To further
support this effort, we recently acquired the personnel and a portion of the
assets and liabilities of KennTech, a consulting firm with which we formerly
contracted for the selection, design and construction program management of our
OpenCenters(TM).
Real Estate Selection
We carefully select buildings in our markets based on a specific set of
criteria. To qualify as a site for one of our facilities, a building must have
the following key attributes:
- Easy access to communications networks, including proximity to an
advanced, high-speed local network, or metropolitan fiber optic network,
and proximity to the incumbent telephone company switching center, or
tandem central office;
- Access to high levels of reliable electric power; and
- Meet a broad range of architectural requirements, including steel frame,
weather-tight construction and high floor-load capacity.
Once we have identified real estate that meets our criteria, our design
team will tailor our standardized design for that facility. Once a site is
selected, our sales team then begins targeting potential anchor customers for
the facility. Our architects and engineers will then begin the process of
obtaining the proper local permits for construction while our project team
consults with our anchor customers to determine their needs within the facility.
After all the necessary approvals are obtained, a facility can be constructed
and operational in approximately ninety days. In many cases we are able to
accept customers and begin generating revenues before a facility is fully
completed.
The following table sets forth the details of the facilities currently
operational, under construction or under lease for development:
<TABLE>
<CAPTION>
GROSS LEASE ACTUAL OR
SQUARE FEET TERM LICENSABLE ANTICIPATED
LOCATION UNDER LEASE (YEARS) SQUARE FEET OPENING DATE
- -------- ----------- ------- ----------- ----------------
<S> <C> <C> <C> <C>
Somerville, MA.................. 35,589 20(2) 23,000 August 1999
Waltham, MA..................... 10,300 15 7,000 February 2000
Houston, TX..................... 27,548 15(3) 11,900 April 2000
Jersey City, NJ................. 8,782 10(3) 4,200 May 2000
Atlanta, GA..................... 110,797 20(4) 50,000 May 2000
New York, NY.................... 34,578 15(3) 15,200 September 2000
Loudoun County, VA(1)........... 58,080 20(2) 42,120 Q4 2000
Chicago, IL..................... 36,000 20(5) 20,100 Q4 2000
Denver, CO...................... 41,037 15(5) 27,000 Q1 2001
Brea, CA........................ 21,432(6) 15 16,800(6) Q2 2001
Richardson, TX(1)............... 19,207 15(2) 12,415 Q2 2001
</TABLE>
- ---------------
(1) The lease for this property is currently under negotiation. We expect that
this lease will be entered into shortly.
(2) We have the option to renew this lease for four additional terms of five
years each.
(3) We have the option to renew this lease for two additional terms of five
years each.
(4) We have the option to renew this lease for one additional term of five
years.
(5) We have the option to renew this lease for three additional terms of five
years each.
(6) We will be leasing an additional 10,338 square feet with an additional 7,300
licensable square feet in July 2000 when the current tenant vacates this
property.
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<PAGE> 38
Facility Architecture
We have designed our OpenCenters(TM) to support the diverse equipment needs
of our Internet, telecommunications and data storage customers. Each
OpenCenter(TM) is constructed to meet the Telcordia (formerly Bellcore) Network
Engineered Building Standards specification, which serves as the standard for
all incumbent telephone central office facilities. We have supplemented this
standard to accommodate the specialized needs of the Internet,
telecommunications and data storage industries, including higher availability
and reliability of AC and DC, power, raised floors in selected areas and
interconnection infrastructure supporting data network services. These features
enable us to properly house and operate virtually any type of equipment.
We equip our OpenCenters(TM) with the following critical systems, all of
which are linked to our direct digital control system, which allows us to
monitor all aspects of performance and quickly identify problems:
CONDITIONED AC AND DC POWER. Our customers require high-availability power
to ensure continuous operation of their equipment. AC power systems typically
supply power to the Internet and data networking equipment in our facilities,
while DC power systems are designed to supply power to the telecommunications
equipment in our facilities. Accordingly, we implement highly redundant AC and
DC power systems at all of our facilities.
Our primary power source is from the local utility company. We seek
facilities that have access to at least two sources of utility power for added
reliability. In the event of a total disruption of utility power, our facilities
are equipped with diesel generators that automatically switch from utility power
to generator power within 20 seconds. We also maintain battery backup to provide
power during the interval between the failure of utility power and the
activation of generator power.
FIRE DETECTION AND SUPPRESSION SYSTEMS. We use state-of-the-art fire
detection and suppression systems. Our facilities are equipped with
high-sensitivity aspirating smoke detection systems that provide early warning
in order to allow the widest window of opportunity to detect and control the
spread of a fire even before visible smoke or flames appear.
ENVIRONMENTAL CONTROL. Our environmental control system contains integral
refrigeration circuits, steam generating humidification, and instruments and
equipment designed to maintain optimal temperature and humidity.
SECURITY. We implement strict security policies and procedures at all of
our facilities. All sites undergo security surveys and regular security audits,
which include multi-level risk assessments that start at the perimeter of the
building and extend to our physical space within the building. Our procedures
and equipment include access control devices, managed electronic badging
systems, escorted access to the equipment floor, intelligent digital closed
circuit television systems and uniformed security forces twenty-four hours a
day, seven days a week.
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<PAGE> 39
COMPETITION
Our competition comes from the following sources:
- Traditional Collocation Providers -- Traditional collocation providers
include incumbent local telephone companies, such as Bell Atlantic and
companies offering competitive local telephone services, such as AT&T
Local Service, Level 3 Communications and MCI WorldCom. Because the main
business objective of these companies is to sell capacity on their
networks, they provide space for collocation to those companies that
purchase network capacity. Equipment operations services and value-added
services are typically limited.
- Telco Hotels -- Telco hotels are buildings that have, over time,
attracted a concentration of telecommunications carriers' equipment.
Carriers are generally attracted to these buildings because of their
proximity to metropolitan area fiber optic cable connections. Landlords
of telco hotels provide raw space, and carriers are generally responsible
for building out the space to meet their requirements and for the
purchase and installation of critical elements such as environmental and
backup systems. Many telco hotels do not have the space available for
ancillary equipment or the electrical capacity and redundancy to support
communications equipment. Furthermore, equipment and network monitoring,
operations services and technical expertise are not typically available
to tenants of telco hotels.
- Value-Added Collocation Providers -- The market for value-added
collocation services is relatively new and rapidly evolving. Value-added
collocation providers are developing solutions that go beyond the
provision of physical space to include technical operations services, and
facility monitoring services, as well as a range of value-added services,
such as web hosting, data storage and backup, and network security
services. Providers of value-added collocation services vary in the types
of services offered, approach to service implementation, and types of
customers served. In addition, some of these providers sell network
capacity on their branded networks. These providers include AboveNet,
Colo.com, Equinix, Exodus Communications, GlobalCenter, Globix, GTE
Internetworking, IBM, Inflow, Qwest and Switch and Data Facilities Corp.
All of these competitors have strengths in some of the following areas;
however, we are committed to consistently gaining strength across all of these
areas, which we believe will provide us with a competitive advantage:
- Customer care that focuses on the specific needs of customers and on
improving the customer experience throughout their license term;
- High-quality facilities that exceed the standards of incumbent telephone
company central office facilities;
- Open network access to promote choice, reduce costs and increase
reliability of equipment components;
- Licensed common carrier status and interconnection rights to provide
rapid access to unbundled network elements from the incumbent local
telephone companies and to enable metropolitan area transport to increase
network choices available to customers;
- Platform flexibility to support the requirements of Internet,
telecommunications, and data storage customers, which enables customers
to develop services that span the range of these three industries;
- A network operations center to quickly identify and resolve problems with
network connectivity and equipment, thereby increasing reliability and
decreasing downtime;
- Enhanced value-added services, such as data backup, that provide value to
customers by enabling them to operate more efficiently and reliably; and
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- Depth of market coverage with multiple facilities in each market to
benefit customers that utilize technology that has distance limitations
and that requires multiple sites in the same metropolitan area.
Despite our strategy, we may not be successful in differentiating ourselves
or achieving widespread market acceptance of our solutions. As a result, we may
not be able to compete successfully against current and future competitors. See
"Risk Factors -- We may not be able to compete successfully against new entrants
and established companies, many of which have greater resources than we do."
REGULATION
Some of the services we provide, and will provide in the future, are
subject to regulation at the federal, state and local levels. Often regulations
do not specifically address the exact nature of our operations, and the
application of these regulations are subject to interpretation. Regulators may
successfully assert that additional regulations apply to our operations or that
regulations that previously applied no longer apply. Regulators may also
challenge our characterization of certain services as subject to regulation and
tariffing. Some of the regulations that apply to us are subject to ongoing
administrative proceedings, litigation and legislation. The outcome of these
various proceedings, as well as any regulatory initiatives, cannot be predicted.
Future regulatory changes may have a material adverse affect on our business.
FEDERAL REGULATION
The services we intend to offer consist of both communications and
non-communications services. To the extent that communications services, such as
interconnection and resale of telecommunications transmission services, are
offered, such services could trigger the following alternative types of
regulatory requirements:
- PRIVATE CARRIER SERVICES. These typically entail the offering of
telecommunications, but are provided to a limited class of users on the
basis of individually negotiated terms and conditions that are not
considered telecommunications services under the Telecommunications Act
of 1996. If our services are treated as private carriage, they are
generally unregulated by the Federal Communications Commission, but would
be subject to universal service payments.
- TELECOMMUNICATIONS SERVICES OR COMMON CARRIAGE. These include entities
offering telecommunications services for a fee directly to the public or
to classes of users so as to be effectively available directly to the
public, regardless of the facilities used. If our services are treated as
telecommunications services by the FCC, federal regulatory requirements
may be applicable to those services.
Common Carrier Regulation
For some of our service offerings, we may be operating as a
telecommunications carrier, subject to the basic common carrier obligations of
just and reasonable rates and non-discrimination. However, as a competitive
local telephone company, we will be treated as "non-dominant." As such, we will
not need authorization to provide domestic services and will be subject to only
minimal federal oversight. Moreover, as an authorized common carrier, the
Telecommunications Act requires incumbent local telephone companies to permit
interconnection to their networks and establishes their obligations with respect
to the following services, among others:
Interconnection. Requires incumbent local telephone companies and
competitive local telephone companies to permit competitive carriers to
interconnect with their facilities either directly or indirectly. Requires
all incumbent local telephone companies to permit interconnection at any
technically feasible points within their networks, on nondiscriminatory
terms, at prices based on cost, which may include a reasonable profit.
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<PAGE> 41
Resale. Requires incumbent local telephone companies and competitive local
telephone companies to permit resale of their telecommunications services
without unreasonable restrictions or conditions. In addition, incumbent
local carriers are generally required to offer wholesale versions of retail
services to other telecommunications carriers for resale at discounted
rates, based on the costs avoided by the incumbent local telephone company
in the wholesale offering.
Reciprocal Compensation. Requires local exchange carriers to complete local
calls originated by competing carriers under reciprocal arrangements at
prices based on a reasonable approximation of incremental cost or through
mutual exchange of traffic without explicit payment. The FCC recently
determined that dial-up calls placed to internet service providers are
interstate in nature, not local, and initiated a proceeding to determine
appropriate carrier-to-carrier compensation. This order was overturned on
March 24, 2000 by the U.S. Court of Appeals for the D.C. Circuit and
remanded to the FCC for further consideration.
Unbundled Access. Requires all incumbent local telephone companies
generally to provide nondiscriminatory access to unbundled network elements
including network facilities, equipment, features, functions, and
capabilities, at technically feasible points within their networks, on
nondiscriminatory terms and at prices based on cost, which may include a
reasonable profit. The FCC has established a list of network elements that
incumbent local exchange carriers must make available to competitive
carriers. While the Supreme Court has upheld the FCC's jurisdiction to
implement the local competition provisions of the Telecommunications Act,
the specifics of the list of network elements continue to be the subject of
litigation. Incumbents have also challenged the FCC's pricing rules, which
are favorable to competitive carriers such as ourselves. We cannot predict
the ultimate disposition of these matters.
Incumbent local telephone companies are also required to negotiate in good
faith with carriers requesting any or all of the above arrangements. If the
negotiating carriers cannot reach agreement within a prescribed time, either
carrier may request binding arbitration of the disputed issues by the state
regulatory commission. Where an agreement has not been reached, incumbent local
telephone companies generally remain subject to interconnection obligations
established by the FCC and state telecommunications regulatory commissions. The
states approve both arbitrated and negotiated interconnection agreements and
establish rates for resold services and unbundled network elements, subject to
the guidelines established in FCC regulations.
At present, we have interconnection agreements in place with Bell
Atlantic-Massachusetts, Bell Atlantic-New Jersey, Bell Atlantic-New York, and
SBC-Texas. We have also filed tariffs in Massachusetts and New York. We intend
to obtain state certification and interconnection agreements in other markets,
as we expand our operations. We also intend to obtain authorization from the FCC
and plan to file a federal tariff.
Interconnection agreements provide us with the right to collocate
interconnection and transport equipment within incumbent local telephone
companies' central offices, except where there exists demonstrable space
limitations or other technical impediments, to obtain access to unbundled
network elements, and to provide local transport services, at rates generally
lower than tariffed offerings available to non-regulated entities. We also
anticipate that we will resell some telecommunications services to customers
that we would not be able to but-for our status as a regulated carrier.
Other Federal Communications Requirements
General Obligations of All Telecommunications Carriers. To the extent that
some of our offerings are treated as telecommunications services, we would be
subject to a number of general regulations at the federal level that apply to
all telecommunications carriers, including the obligation not to charge
unreasonable rates or engage in unreasonable practices, the obligation to not
unreasonably discriminate in our service offerings, the need to tariff our
telecommunications services, the potential obligation to allow resale of our
services in certain circumstances, the obligation to pay annual regulatory fees
and to comply with FCC equal employment policies. Third parties may file
complaints against us at the FCC for
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<PAGE> 42
violations of the Communications Act. Certain statistical reporting requirements
may also apply. The FCC also requires common carriers to obtain an authorization
to construct and operate telecommunications facilities. In addition, FCC rules
require that telecommunications carriers contribute to universal service support
mechanisms, the Telecommunications Relay Service fund, the number portability
fund, and the North American Number Plan Administrator fund.
Universal Service. We will be required to contribute a percentage of
revenues derived from our provision of some interstate telecommunications
services to the federal Universal Services Fund. The universal service program
provides support to carriers serving low-income customers and customers who live
in areas where the cost of providing telecommunications services is high. In
addition, the FCC established new subsidies for telecommunications and certain
information services provided to qualifying schools and libraries and for
services provided to rural health care providers. Our contribution to the
federal support funds would be calculated based on a percentage of our gross
end-user interstate telecommunications revenues. We believe that we will not be
liable to contribute any material amount to these programs during 2000. With
respect to subsequent years, however, we are currently unable to quantify the
amount of any contributions that we will be required to make or the effect that
these required contributions will have on our financial condition. Numerous FCC
orders revising these funds are subject to petitions for reconsideration and
further petitions for appeal. The outcome of these proceedings or their effect
cannot be predicted.
CALEA. To the extent that we provide facilities-based services, we might
incur significant expenses to assure that our networks comply with the
requirements of the Communications Assistance for Law Enforcement Act, or CALEA.
Under CALEA, common carriers are required to assist law enforcement officials by
providing call content and call identifying information pursuant to a valid
electronic surveillance warrant, and reserve a sufficient number of circuits for
use by law enforcement officials in executing court authorized electronic
surveillance.
Tariff and Pricing Requirements
We intend to file tariffs with the FCC stating the rates, terms and
conditions for our interstate services. Our tariffs are generally not subject to
prior review by the FCC, and can be amended on one day's notice. By making
services available pursuant to tariffs, we are able to take advantage of the
"filed tariff doctrine" when dealing with individual clients, while at the same
time not restraining our flexibility to offer diverse bundles of services to
other clients with more comprehensive needs.
The FCC issued an order eliminating this tariff-filing requirement, but it
has been stayed by the U.S. Court of Appeals for the D.C. Circuit, pending
review. If the stay is lifted and the FCC order becomes effective, competitive
telecommunications carriers such as ourselves will no longer be able to rely on
the filing of tariffs with the FCC as a means of providing notice to customers
of prices, terms and conditions on which they offer their interstate services.
Tariffs allow a carrier, among other things, to limit its liability to its
customers, including in connection with service interruptions. If tariffs are
eliminated, we may become subject to liability risks that we would have been
able to limit through tariff filings.
Collocation Services
Among other services and applications, we provide collocation services to
companies in the telecommunications, Internet and data storage markets. Although
the FCC generally does not establish prices, mandate terms, or regulate certain
other aspects of collocation services of non-dominant carriers, other services
that we may offer may be subject to federal telecommunications regulation.
Moreover, collocation services offered in conjunction with or ancillary to
telecommunications transmission and interconnection services may also be subject
to federal regulations. To the extent allowed by law, we intend to file a
federal tariff for our various collocation services. In addition to offering
collocation and related services at our own facilities, we intend to offer our
customers access to collocation facilities at incumbent carrier central offices
and transport between those facilities and our own collocation facilities.
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On March 18, 1999, the FCC adopted measures designed to facilitate the
ability of telecommunications carriers to collocate certain equipment at the
incumbent local telephone companies' facilities for the purposes of
interconnection and access to their network elements. The FCC adopted rules to
strengthen collocation requirements and reduce the costs and delays of
collocating equipment at incumbent carrier central offices. On March 17, 2000,
the D.C. Circuit decided an appeal challenging certain aspects of the FCC's
collocation regulations and vacated those portions of the rules that permitted
competitive local telephone companies to collocate equipment that contained
functions in addition to those necessary for interconnection or access to
unbundled network elements. The Court, while upholding the FCC's authority to
require cageless collocation, also rejected the FCC's effort to leave the choice
of space within the central office to the competitive local telephone company.
The Court remanded to the FCC the issue of what equipment is necessary for
interconnection or access to unbundled elements. We are currently reviewing the
potential impact of this ruling. At this time, we do not believe that it will
have a major impact on our business.
Transport Services
Our transport services, which we will provide pursuant to interconnection
and other agreements, provide companies in the Internet, telecommunications and
data storage markets with access to the networks of local telephone companies,
long distance providers and others. To the extent that our telecommunications
services are interstate, the FCC has jurisdiction over these services, but we
are subject to far less regulation than incumbent carriers. To the extent our
services are deemed intrastate, they are subject to regulation by state
regulatory agencies.
In September 1999, the FCC ruled that dark fiber is one of the unbundled
network elements that incumbent local telephone companies must lease to
telecommunications carriers. Dark fiber is fiber that is not yet powered or
"lit" with the electronics necessary to transmit communications through it.
Access to the incumbent local telephone company's dark fiber will help us
attract and cost-effectively serve customers. The FCC's decision concerning
unbundled network elements has been appealed, however, and the outcome is
uncertain.
STATE REGULATION
State regulatory agencies have regulatory jurisdiction when our facilities
and services are used to provide intrastate toll and local services. To provide
intrastate services, we generally must obtain a certificate of public
convenience and necessity from the state regulatory agency and comply with state
requirements for telecommunications utilities, including state tariffing
requirements. We have obtained such certificates to provide local exchange and
intrastate toll service in Massachusetts, New Jersey, New York and Texas; we
intend to file applications for such authority in the near future in California,
Georgia, Illinois, Virginia and Colorado. There can be no assurance that such
state authorizations will be granted.
Currently, the states do not generally establish prices, mandate terms or
regulate some other aspects of collocation and related services of competitive
carriers. Other services that we offer may likely be subject to state
telecommunications regulation. Moreover, collocation services offered in
conjunction with or ancillary to telecommunications transmission and
interconnection service may also be subject to state regulation. Practices
differ state by state as to the regulation and tariffing of various collocation
services that we offer or intend to offer. To the extent permitted by law, we
intend to file state tariffs for our various arrangements of collocation and
related services. Our pricing flexibility for our services, however, may be
limited by regulation in some jurisdictions. We cannot assure you that these
requirements, and the associated pricing methodologies where applicable, will
not reduce the demand for our service offerings.
To the extent that any of our offerings are treated as telecommunications
services, we will be subject to a number of general requirements, similar to
those imposed by federal regulation, including the prohibition against charging
unreasonable rates or engaging in unreasonable practices; the obligation to not
unreasonably discriminate in our service offerings; the need to tariff our
telecommunications services; and the potential obligation to allow resale of
certain services. We might also be obligated to comply with
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certain statistical reporting requirements and pay certain fees. We will also be
required to contribute to the state's Universal Service Fund, which, like the
federal program, is used to subsidize the cost of service in high cost areas.
Our contribution to the state's Universal Service Fund will be based on
percentage of intrastate revenues. These obligations are enforceable by the
appropriate state regulatory agency, and third parties may file complaints
against us with state regulators for violating state laws and regulations.
LOCAL REGULATION
Our telecommunications offerings are generally not subject to local
regulation. In the event that we were to construct our transport facilities in
public rights-of-way, we may be subject to local regulations concerning use of
public rights-of-way. Such regulations vary on a city-by-city, county-by-county
basis. Section 253(a) of the Communications Act, however, specifically limits
the power of local authorities to adopt any "legal requirement" that
"prohibit[s] or ha[s] the effect of prohibiting the ability of any entity to
provide any interstate or intrastate telecommunications service."
INTERNET SERVICES
The Internet and data services that we provide as an Internet service
provider generally are not subject to federal, state, or local regulation.
Congress and some state legislatures have considered imposing taxes and other
burdens on Internet service providers and regulating content provided over the
Internet. Additionally, we may be affected by statutes, regulations and court
cases relating to the liability of Internet service providers and other on-line
service providers for information carried on or through their services or
equipment, including in the areas of copyright, indecency/obscenity, defamation,
child privacy and fraud. Future regulation may have a negative impact on our
ability to offer Internet services at competitive and profitable rates.
INTELLECTUAL PROPERTY
We regard our service offerings and technology, including our facility
design and construction, as proprietary and attempt to protect them with
copyrights, trademarks, trade secret laws, restrictions on disclosure and other
methods. We also generally enter into confidentiality or license agreements with
our employees and consultants, and generally control access to and distribution
of our documentation and other proprietary information. We cannot be certain
that the steps we have taken to protect our intellectual property rights will be
adequate or that third parties will not infringe or misappropriate our
proprietary rights. Moreover, effective trademark, copyright and trade secret
protection may not be available in every country in which we may eventually
operate to the same extent available in the United States. We may be unable to
detect the unauthorized use of our intellectual property or take appropriate
steps to enforce our intellectual property rights. Defending our intellectual
property rights could also result in the expenditure of significant financial
and managerial resources, which could harm our financial results. 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 an industry and technology leadership position than the various
available legal protections.
EMPLOYEES
As of March 31, 2000, we had 72 full-time employees. We are not party to
any collective bargaining agreements, have never experienced any material labor
disruptions and are unaware of any current efforts or plans to organize our
employees. We consider our relationship with our employees to be good.
FACILITIES
Our offices are headquartered in a facility consisting of approximately
22,000 square feet in Burlington, Massachusetts, under subleases that expire in
2003.
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We currently operate OpenCenters(TM) in Somerville, Massachusetts; Waltham,
Massachusetts; Jersey City, New Jersey; and Houston, Texas. We intend to have
eight facilities operational by the end of 2000. For a description of our
OpenCenters(TM) see, "Real Estate Selection and Facility Architecture."
LEGAL PROCEEDINGS
We may from time to time be involved in legal proceedings in the ordinary
course of our business. We are not currently involved in any pending legal
proceedings that are expected to have a material adverse effect on our business.
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<PAGE> 46
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
Our executive officers, key employees and directors, their position and
their ages as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William A. Jandovitz............................ 54 Chief Executive Officer and Director
G. Gabriel Cole................................. 35 President and Director
Donato A. DeNovellis............................ 55 Chief Financial Officer
Elizabeth H. Houlihan........................... 54 Chief Operating Officer
Nicholas F. Kourtis............................. 38 General Counsel and Secretary
Steven A. Gunderson............................. 40 Vice President of Sales
Catherine A. Davies............................. 29 Vice President and Treasurer
Linda M. Cole................................... 34 Vice President
William P. Egan................................. 54 Director
John C. Halsted................................. 35 Director
Robert McKenzie................................. 55 Director
Thomas H. Nolan, Jr. ........................... 42 Director
James Hynes..................................... 52 Director
</TABLE>
William A. Jandovitz has served as our Chief Executive Officer and a
director since February 2000. From 1997 to 1998, Mr. Jandovitz served as a Vice
President of Fidelity Ventures, where he led the evaluation and selection of
telecommunications and technology investment opportunities, including analyses
of several voice and data competitive local exchange carriers, Internet service
providers and software companies. From 1970 to 1997, Mr. Jandovitz held various
management positions for NYNEX, a telecommunications provider, including serving
as Senior Vice President and Chief Operating Officer of NYNEX Information
Resources Company. During his tenure at NYNEX, Mr. Jandovitz also served as Vice
President, Long Distance Carrier Marketing and Sales, where he was responsible
for the marketing and sales of NYNEX products and services to the long distance
carrier market. Mr. Jandovitz received a BA degree from St. Francis College and
an MBA from Bernard Baruch College of the City University of New York.
G. Gabriel Cole is a co-founder of CO Space and has served as our President
and a director since 1998. From November 1998 to February 2000, he also served
as our Chief Executive Officer. Mr. Cole co-founded and, from 1993 to 1998,
served as the President of RTE Group, Inc., a consulting firm serving the
telecommunications and real estate industries. From 1995 to 1996, Mr. Cole
served as a consultant to Atlantic-ACM, a business strategy consulting firm
concentrating in the telecommunications and multi-media industries. Prior to
that, Mr. Cole spent ten years as a consulting engineer specializing in failure
analysis. Mr. Cole received an SB degree and an SM degree from the Massachusetts
Institute of Technology. Mr. Cole is married to Linda M. Cole.
Donato A. DeNovellis has served as our Chief Financial Officer since March
2000. From 1993 to 1999, Mr. DeNovellis served as the Executive Vice President,
Finance and Administration and Chief Financial Officer of Ekco Group, Inc., a
publicly-traded manufacturer and marketer of branded housewares and pet
products, where he was responsible for corporate and business unit strategy,
capital management and all financial functions, as well as company-wide
information technology, telecommunications, employee benefits and risk
management. From 1980 to 1992, Mr. DeNovellis held various management positions
for Xerox Corporation, most recently serving as its Executive Vice President and
Chief Administrative Officer of Crum and Forster, Inc., Xerox Corporation's
property-casualty insurance subsidiary. At Crum and Forster, Mr. DeNovellis
directed the company's restructuring and its accounting, internal audit, legal,
management information systems, human resources, public relations, and
environmental claims. Mr. DeNovellis previously served as Senior Vice President,
Finance of Xerox Financial Services Inc.,
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<PAGE> 47
where he oversaw all division finance functions. Mr. DeNovellis received a BS
degree from Drexel University.
Elizabeth H. Houlihan has served as our Chief Operating Officer since March
2000. Previously Ms. Houlihan was owner and President of E. H. Houlihan &
Associates, an executive search and consulting services firm. From 1972 to 1997,
Ms. Houlihan held numerous executive and managerial positions at Nynex
Corporation, most recently serving as its Vice President, Enterprise Markets,
where she led the effort to create a subsidiary to market Nynex's
telecommunications products to customers with large global networks. She was the
Vice President -- General Manager for Construction, Engineering, Network
Services, Operations and Business Office Operations for the New England area.
Ms. Houlihan also was Branch Manager -- Sales, New England, handling some of
Nynex's most complex business customers. Ms. Houlihan received a BSE from Salem
State College and attended PMD 56 at Harvard Business School.
Nicholas F. Kourtis has served as our General Counsel and Secretary since
January 2000. From 1997 to 2000, Mr. Kourtis practiced law at the firm of
Goulston & Storrs, P.C. From 1988 to 1997, Mr. Kourtis practiced law at the firm
of Rich, May, Bilodeau & Flaherty, P.C. Mr. Kourtis practiced corporate and
commercial law, with a particular emphasis on business organizations and
planning, corporate finance, joint venture and acquisitions, representing
clients in the telecommunications, public utility, high technology and
manufacturing industries. Mr. Kourtis received a BA degree from the University
of Massachusetts Amherst and a JD degree from Harvard Law School.
Steven A. Gunderson has served as our Vice President of Sales since October
1999. From 1995 to 1999, Mr. Gunderson served as Sales Vice President, Eastern
Region, of IXC Communications, a communications company providing voice and data
services to wholesale and retail customers. From 1993 to 1995, Mr. Gunderson
served as Director of Wholesale Sales for Frontier Communications, a
communications provider. Prior to 1995, Mr. Gunderson held various positions in
the telecommunications industry, including Carrier Sales Executive for WILTEL as
well as several account management positions at MCI Communications. Mr.
Gunderson received a BBA in Marketing from Texas A&M University.
Catherine A. Davies is a co-founder of CO Space and has served as our Vice
President and Treasurer since 1998. Ms. Davies co-founded RTE Group, Inc., a
consulting firm serving the telecommunications and real estate industries where
from 1996 to 1998, she was responsible for daily operations, project management,
marketing and administration. Prior to 1996, Ms. Davies was a research analyst
in the telecommunications industry, specializing in consumer and business needs
and market positioning for telecommunications providers. Ms. Davies received a
BA degree from Roger Williams University and a MA degree from the University of
Massachusetts. Ms. Davies is a sister of Linda M. Cole.
Linda M. Cole is a co-founder of CO Space and has served as a Vice
President since 1998. From 1998 to February 2000, Ms. Cole served as our
Director of Regulatory Compliance. Ms. Cole now serves as one of our staff
attorneys focused on business development issues. Ms. Cole co-founded RTE Group,
Inc., a consulting firm serving the telecommunications and real estate
industries, where she was responsible for project management and administration,
served as General Counsel from 1996 to 1998, and developed and directed its
realty services business. Ms. Cole received a BA degree from Wellesley College
and a JD degree from Harvard Law School. Ms. Cole is married to G. Gabriel Cole
and is a sister of Catherine A. Davies.
William P. Egan has served as a director since 1999. Mr. Egan is a founding
partner of Burr, Egan, Deleage & Co. and Alta Communications, an affiliated
firm. For over twenty years, Mr. Egan has invested in a wide variety of
companies in the information technology, life sciences and communications
industries. He is a past President and Chairman of the National Venture Capital
Association. Mr. Egan received a BA degree from Fairfield University and an MBA
from the University of Pennsylvania. Mr. Egan serves as a director of Cephalon,
Inc. and Cypress Communications, Inc.
John C. Halsted has served as a director since 1999. Mr. Halsted serves as
Chief Investment Officer of Beacon Ventures, Inc. From 1993 to 1997, Mr. Halsted
was Vice President at Harvard Private Capital
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<PAGE> 48
Group. From 1991 to 1993, Mr. Halsted was an Associate with Simmons & Company,
an investment banking firm in Houston, Texas. Mr. Halsted received a BA degree
in Economics from the University of California at Berkeley and an MBA from the
Harvard Business School. Mr. Halsted serves as a director of Cypress
Communications, Inc.
Robert McKenzie has served as a director since 1999. As an independent
director, he has helped to found and build Crown Castle International Corp.,
Cordillera Communications Corporation (formerly Centennial Communications
Corp.), VeloCom, Inc. and TeleMedia Resources, all telecom industry businesses.
In 1990, Mr. McKenzie was founder and President of OneComm which consolidated 20
companies over four years to implement a digital mobile communication network
that is now part of Nextel. He has held management positions with Northern
Telecom, Memorex and Kodak. He received his BS degree from the University of
Colorado. Mr. McKenzie serves as a director of Crown Castle International Corp.
and Cordillera Communications Corporation.
Thomas H. Nolan, Jr. has served as a director since 1999. Mr. Nolan is a
Managing Director of AEW Capital Management, where he directs the investment
activities of the AEW Partners series of funds. Mr. Nolan has been employed by
AEW Capital Management and its predecessor firm since 1984. Mr. Nolan received a
BBA from the University of Massachusetts. Mr. Nolan serves as a director of
Bedford Property Investors, Inc.
James Hynes has served as a director since 1999. From 1989 through 1999,
Mr. Hynes served as Group Managing Director at Fidelity Ventures, where he
focused in the area of telecommunications and technology. Mr. Hynes directed the
establishment in Europe of COLT Telecommunications in 1992 and was the first
chief executive officer of that company, moving to the role of Chairman at the
time of its initial public offering in 1996. Also in the area of local and
long-haul telecommunications services, he directed the establishment of MetroRED
Telecom in South America and Mexico in 1996, as well as KVH Telecom in Tokyo in
late 1998. He has been active in the systems and telecommunications industries
for approximately 30 years. Mr. Hynes holds a BA from Iona College, where he is
currently a member of the Board of Trustees, and a MBA from Adelphi University.
BOARD COMPOSITION
As part of the sale of our series B preferred stock, all of our then
existing stockholders entered into a stockholders agreement which provides for
the nomination of and voting for a total of nine directors, as follows:
- one representative designated by the Beacon investors -- this
representative currently is Mr. Halsted;
- one representative designated by the AEW investors -- this representative
currently is Mr. Nolan;
- one representative designated by the Alta investors -- this
representative currently is Mr. Egan;
- two representatives designated collectively by a majority in interest of
the Beacon investors, AEW investors and the Alta investors -- these
directorships are currently vacant;
- one representative designated by a majority in interest of Mr. Cole and
Mses. Cole and Davies, as long as they collectively own at least 10% of
our capital stock -- this representative is Mr. Cole;
- two outside directors designated by a majority of the board of
directors -- these representatives are Mesrs. McKenzie and Hynes; and
- one representative who is our Chief Executive Officer -- this
representative is Mr. Jandovitz.
The stockholder agreement requires each stockholder, other than a lender
who holds a warrant, to vote or cause to be voted all securities over which they
have voting control and to take all other necessary or desirable actions within
their control to effect the preceding election of directors. The provision of
the stockholders agreement regarding the nomination and election of directors
automatically terminates upon the closing of this offering.
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<PAGE> 49
Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term.
Messrs. , and will serve as Class I
directors whose terms will expire at the annual meeting of stockholders held in
2001. Messrs. , and will serve as
Class II directors whose terms will expire at the annual meeting of stockholders
held in 2002. Messrs. , and will serve as Class
III directors whose terms will expire at the annual meeting of stockholders held
in 2003.
COMMITTEES OF THE BOARD OF DIRECTORS
Our bylaws provide that our board of directors may designate one or more
board committees. We currently have an audit committee and a compensation
committee. The members of these committees will be reconstituted as of this
offering.
Audit Committee. The audit committee is responsible for recommending to
the board of directors the engagement of our outside auditors and reviewing our
accounting controls and the results and scope of audits and other services
provided by our auditors. The members of the audit committee are Messrs.
McKenzie and Nolan.
Compensation Committee. The compensation committee is responsible for
reviewing and approving the amount and type of consideration to be paid to our
senior management. The members of the compensation committee are Messrs. Egan,
Halsted and Cole.
Other Committees. The board of directors may establish, from time to time,
other committees to facilitate the management of our business.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our board of directors and senior management were
directly involved in setting compensation for our executives.
DIRECTOR COMPENSATION
Directors who are employees receive no additional compensation for their
services as directors. We plan to compensate non-employee directors as follows:
$1,000 for each meeting attended in person and $500 for each meeting attended by
telephone. Non-employee directors are also eligible to participate in our 1999
stock incentive plan at the discretion of the full board of directors.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued in
the year ended December 31, 1999 to our Chief Executive Officer. None of our
other executive officers had aggregate compensation in excess of $100,000 during
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION COMPENSATION LONG-TERM
--------------------- ------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING
AWARDS OPTIONS
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) # $
- --------------------------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C>
G. Gabriel Cole(1).............................. $126,000 $-- 105,000(2) $--(2)
President
</TABLE>
- ---------------
(1) Mr. Cole served as our Chief Executive Officer from November 10, 1998 to
January 31, 2000.
(2) On December 27, 1999, we granted Mr. Cole options to purchase 105,000 shares
of common stock at an exercise price of $0.40 per share. On March 7, 2000,
we canceled these options and replaced them
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<PAGE> 50
with a grant of restricted common stock, whereby Mr. Cole purchased 105,000
shares of restricted common stock for $0.40 per share, which was determined
to be the fair market value of the common stock as of the grant date. The
aggregate purchase price of $42,000 was paid for by Mr. Cole with a
promissory note in the amount of $40,950 and the remainder in cash. The
restrictions on the shares lapse as follows: 25% on the first anniversary of
November 11, 1999 and 6.25% per quarter thereafter.
OPTION GRANTS IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The options granted to Mr. Cole during the year ended December 31, 1999,
were canceled in March 2000 and replaced with a grant of restricted stock as
described above.
STOCK PLANS
1999 Stock Incentive Plan
Our 1999 stock incentive plan was adopted by our board of directors on June
28, 1999 and was subsequently approved by our stockholders on August 2, 1999.
The plan was later amended and approved as of December 27, 1999, January 11,
2000 and March 30, 2000. The 1999 plan permits us to make grants of:
- incentive stock options;
- non-qualified stock options;
- restricted stock;
- bonus stock;
- deferred stock; and
- performance shares.
Under the 1999 plan, the aggregate number of shares available for grants of
awards is 5,500,000 shares of common stock, subject to adjustment in the event
of a stock split, stock dividend or other change in capitalization. As of April
5, 2000, there were options to purchase a total of 3,049,596 shares of common
stock granted under the 1999 plan, of which options to purchase 1,965,000 shares
were canceled and then replaced with grants of restricted shares of common stock
on March 7, 2000. As of April 5, 2000, there were options to purchase a total of
1,001,596 shares of common stock outstanding, of which options to purchase
229,846 shares had vested.
Administration. The 1999 plan provides for administration by either the
board of directors or a compensation committee, which consists of non-employee
directors. The committee has full power to select, from among the individuals
eligible for awards, the participants to whom awards will be granted, to make
any combination of awards to participants, and to determine the specific terms
and conditions of each award, subject to the provisions of the 1999 plan. The
1999 plan also provides that the board of directors may delegate to an officer
who is a member of the board the authority to grant awards to certain employees
subject to guidelines established by the board or the committee.
Eligibility. All officers, employees, directors and key persons, including
consultants and advisors, are eligible to participate in the 1999 stock
incentive plan, subject to the discretion of the committee. From and after the
date awards made under the 1999 plan become subject to Section 162(m) of the
Internal Revenue Code, no more than 1,000,000 shares of stock (subject to
adjustment for stock splits, stock dividends and other changes in
capitalization) may be granted to any one individual participant during any one
calendar year period.
Option Terms. The committee has authority to determine the terms of grants
under the 1999 plan. However, incentive stock options must have an exercise
price that is not less than 100% of the fair market value of the shares of
common stock on the date of the option grant.
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<PAGE> 51
Acceleration Upon a Merger, Sale or Change of Control of the Company. Upon
the occurrence of any of the following events, except for a merger,
consolidation or sale of all or substantially all of the assets of CO Space
where the committee does not elect to provide for the substitution of options,
pursuant to which the optionee's employment with CO Space or the surviving
entity is terminated prior to the sixth month anniversary of the date of the
consummation of the event either by the optionee for good reason or by CO Space
or the surviving entity for reasons other than misconduct, all outstanding
options held by such optionee granted pursuant to the 1999 plan shall become
fully exercisable or fully vested and nonforfeitable, unless otherwise provided
in the option agreement:
- a merger, consolidation or sale of all or substantially all of our
assets;
- a transaction or a series of transactions whereby any person, with
certain persons excepted, acquires the beneficial ownership of at least
50% of the combined voting power of the then outstanding securities of CO
Space; and
- the liquidation or dissolution of CO Space.
Upon the occurrence of any of the above events, the restricted stock held
by executives and directors shall become fully vested and non-forfeitable. In
the event of these transactions, the committee shall provide for appropriate
substitutions or adjustments of non-vested shares of restricted stock.
Alternatively, the committee may provide for all non-vested shares to become
fully vested and non-forfeitable subject to the consummation of these
transactions.
In the event of certain transactions, such as a merger, consolidation or
sale of all or substantially all of the assets of CO Space, the committee in its
discretion may provide for appropriate substitutions or adjustments of
outstanding stock options. Alternatively, the committee may (1) provide for all
options to be exercisable in full, subject to the consummation of such
transaction or (2) provide that outstanding stock options will terminate and the
holder will receive a cash payment exchange for all vested options.
Amendments and Termination. The board of directors may at any time amend
or discontinue the 1999 plan and the committee may at any time amend or cancel
any outstanding award for the purpose of satisfying changes in law or for any
other lawful purpose, but no such action shall adversely affect the rights under
any outstanding awards without the holder's consent. To the extent required by
the Internal Revenue Code to ensure that options granted under the 1999 plan
qualify as incentive stock options, plan amendments shall be subject to approval
by our stockholders.
Employee Stock Purchase Plan
Our employee stock purchase plan was adopted by our board of directors in
March 2000 and we expect that it will be subsequently approved by our
stockholders. Up to 1,000,000 shares of common stock may be issued under the
purchase plan. The purchase plan is administered by the compensation committee
of the board of directors.
The first offering under the purchase plan will begin on the effective date
of this offering and end on October 31, 2000. Subsequent offerings will commence
on each November 1, February 1, May 1 and August 1 thereafter and will have a
duration of three months. Generally, all employees who are customarily employed
for more than 20 hours per week as of the first day of the applicable offering
period will be eligible to participate in the purchase plan. An employee who
owns or is deemed to own shares of stock representing in excess of 5% of the
combined voting power of all classes of our stock will not be able to
participate in the purchase plan.
During each offering, an employee may purchase shares under the purchase
plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares that may
be purchased by any participating employee during any quarterly offering period
is limited to the number of whole shares which is equal to $6,250 divided by the
closing price per share on the first day of the applicable offering period.
Unless the employee has previously withdrawn from the offering, his or her
accumulated payroll deductions will be used to purchase common stock on the last
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<PAGE> 52
business day of the period at a price equal to 85% of the fair market value of
the common stock on the first or last day of the offering period, whichever is
lower. For purposes of the initial offering period, the fair market value of
common stock on the first day of the offering period shall be the offering price
to the public. Under applicable tax rules, an employee may purchase no more than
$25,000 worth of common stock in any calendar year. No common stock has been
issued to date under the purchase plan.
401(k) PLAN
We have established a savings plan for our employees which is designed to
be qualified under Section 401(k) of the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deductions within statutory and plan limits.
EMPLOYMENT AGREEMENTS
On February 1, 2000, we entered into an employment agreement with William
A. Jandovitz, our Chief Executive Officer. Under the terms of the agreement, Mr.
Jandovitz receives an annual base salary of $250,000 and is eligible to receive
a quarterly bonus of $31,250. Mr. Jandovitz also received an option to purchase
845,000 of our common shares which vests over a four year period. This option
was subsequently canceled and replaced with a grant of 1,000,000 restricted
shares of our common stock with similar vesting terms. Mr. Jandovitz's
employment may be terminated either by Mr. Jandovitz or by us at any time. If
Mr. Jandovitz's employment is terminated by us for any reason or by Mr.
Jandovitz for good cause prior to February 1, 2001, Mr. Jandovitz will receive
his base salary for a period of six months. If Mr. Jandovitz's employment is
terminated after February 1, 2001, Mr. Jandovitz will receive his base salary
for a period of one year. In the event that Mr. Jandovitz's employment is
terminated, Mr. Jandovitz is not entitled to receive any unpaid bonuses.
On March 11, 2000, we entered into an employment agreement with Donoto A.
DeNovellis, our Chief Financial Officer. On March 20, 2000, we entered into an
employment agreement with Elizabeth H. Houlihan, our Chief Operating Officer.
Under the terms of their agreements, both Mr. DeNovellis and Ms. Houlihan
receive an annual base salary of $190,000 and are eligible to receive a
quarterly bonus of $20,000. All the terms of both employment agreements are
substantially similar to those of the agreement we have with Mr. Jandovitz.
On May 12, 1999, we entered into an employment agreement with G. Gabriel
Cole, our President and one of our founders. On November 12, 1999, we amended
the agreement, revising Mr. Cole's compensation and extending the term of the
agreement through May 12, 2002. Under the terms of the amended agreement, Mr.
Cole receives an annual base salary of $200,000 and is eligible to receive a
quarterly bonus of $25,000 effective as of January 1, 2000. Mr. Cole is also
eligible to participate in any other bonus or profit sharing programs that we
offer to our other senior executives. The amended agreement also provides that
Mr. Cole's employment may be terminated either by Mr. Cole or by us at any time.
If Mr. Cole's employment is terminated by us without cause or is terminated by
Mr. Cole for good reason, Mr. Cole is entitled to receive both his base salary
and any bonuses to which he would be entitled until the end of the term of the
amended agreement.
On May 12, 1999, we entered into employment agreements with Catherine A.
Davies, one of our founders and our Vice President and Treasurer, and Linda M.
Cole, one of our founders and staff attorneys. Under those agreements, Ms.
Davies receives an annual base salary of $125,000 and Ms. Cole received an
annual base salary of $50,000. The term of Ms. Davies agreement is for one year
and the term of Ms. Cole's agreement was for six months. All other provisions of
both agreements are substantially similar to the employment agreement we have
with Mr. Cole. We have not entered into another employment agreement with Ms.
Cole subsequent to the expiration of her original agreement.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of April 5, 2000. The percentage of beneficial ownership
is based on 28,220,015 shares of our common stock outstanding as of such date,
after giving effect to the conversion of all of our outstanding shares of
redeemable convertible preferred stock into common stock and the exercise of a
warrant immediately prior to the closing of this offering and on a pro forma as
adjusted basis to reflect the sale of the common stock offered hereby, by:
- each stockholder who is known by us to beneficially own 5% or more of the
common stock;
- each of our directors;
- each of the executive officers named in "Management" above; and
- all of our executive officers and directors as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by such stockholder.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission. Accordingly, a
beneficial owner of a security includes any person who, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise has
or shares the power to vote such security or the power to dispose of such
security. The amounts set forth below as beneficially owned include shares
owned, if any, by spouses and relatives living in the same home as to which
beneficial ownership may be disclaimed. The amounts set forth below as
beneficially owned include shares of common stock which such persons had the
right to acquire within 60 days of April 5, 2000, pursuant to the exercise of
any stock option or other right.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT BENEFICIALLY
OWNED OWNED
------------------- -----------------------
BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) NUMBER OFFERING OFFERING(2)
--------------------------- ------------------- -------- -----------
<S> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
William Jandovitz.................................... 1,000,000(3) 3.5%
G. Gabriel Cole...................................... 3,120,000(4) 11.1
Donato A. DeNovellis................................. 175,000(5) *
Elizabeth H. Houlihan................................ 175,000(5) *
Nicholas F. Kourtis.................................. 150,000(6) *
Steven A. Gunderson.................................. 250,000(7) *
Catherine A. Davies.................................. 3,055,000(8) 10.8
Linda M. Cole........................................ 3,120,000(9) 11.1
William P. Egan...................................... 5,333,334(10) 18.9
John C. Halsted...................................... 5,445,834(11) 19.3
James Hynes.......................................... 135,000(12) *
Robert McKenzie...................................... 110,000(13) *
Thomas H. Nolan, Jr. ................................ 5,333,334(14) 18.9
OTHER BENEFICIAL OWNERS
AEW Partners III, L.P. .............................. 5,333,334(14) 18.9
Alta Communications, Inc. ........................... 5,333,334(10) 18.9
Beacon Capital Partners, Inc. ....................... 5,395,834(11) 19.1
The Centennial Funds................................. 2,090,000(15) 7.4
Latona COS Investment LLC............................ 2,000,000 7.1
Norwest Venture Partners VII, L.P. .................. 2,090,000 7.4
</TABLE>
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<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENT BENEFICIALLY
OWNED OWNED
------------------- -----------------------
BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) NUMBER OFFERING OFFERING(2)
--------------------------- ------------------- -------- -----------
<S> <C> <C> <C>
RTE Holdings, LLC.................................... 2,565,000(16) 9.1
All directors and executive officers as a group (13
persons)........................................... 21,227,502 75.2
</TABLE>
- ---------------
* Represents less than 1% of the outstanding shares of common stock.
(1) The address of Alta Communications, Inc. and Mr. Egan is One Post Office
Square, Suite 3800, Boston, MA 02109. The address of Beacon Capital
Partners, Inc. and Mr. Halsted is One Federal Street, 26th Floor, Boston, MA
02110. The address of AEW Capital Partners, Inc. and Mr. Nolan is 225
Franklin Street, Boston, MA 02110. The address of Latona COS Investment LLC
is 1 Liberty Lane, Hampton, NH 03842. The address of Norwest Venture
Partners VII, L.P. is 40 William Street, Suite 305, Wellesley, MA 02181. The
address of the Centennial Funds is 1428 Fifteenth Street, Denver, CO 80202.
The address of all other listed stockholders is c/o CO Space, Inc., 200
Wheeler Road, Burlington, MA 01803.
(2) Assumes the underwriters do not elect to exercise their over-allotment
option.
(3) Represents 1,000,000 shares of restricted common stock, none of which are
vested.
(4) Includes 2,550,000 shares of common stock held by RTE Holdings, LLC, of
which Mr. Cole is a Member and Manager, a warrant to purchase 15,000 shares
of common stock held by RTE Holdings, LLC, 105,000 shares of restricted
common stock, none of which are vested, 200,000 shares held by the G.
Gabriel Cole 2000 Irrevocable Trust, dated as of April 3, 2000, 150,000
shares held by the Linda M. Cole 2000 Irrevocable Trust, dated as of April
3, 2000 and 100,000 shares held by the Davies Family 2000 Trust, dated as of
April 3, 2000. Mr. Cole disclaims beneficial ownership of the shares held by
RTE Holdings, LLC, the Linda M. Cole 2000 Irrevocable Trust and the Davies
Family 2000 Trust, except to the extent of his pecuniary interests therein.
(5) Represents 175,000 shares of restricted common stock, none of which are
vested.
(6) Represents 150,000 shares of restricted common stock, none of which are
vested.
(7) Represents 250,000 shares of restricted common stock, none of which are
vested.
(8) Includes 2,550,000 shares of common stock held by RTE Holdings, LLC, of
which Ms. Davies is a Member and Manager, a warrant to purchase 15,000
shares of common stock held by RTE Holdings, LLC, 40,000 shares of
restricted common stock, none of which are vested, 100,000 shares held by
the Davies Family 2000 Trust dated as of April 3, 2000. 2,000,000 shares
held by the G. Gabriel Cole 2000 Irrevocable Trust, dated as of April 3,
2000 and 150,000 shares held by the Linda M. Cole 2000 Irrevocable Trust,
dated as of April 3, 2000. Ms. Davies disclaims beneficial ownership of the
shares held by RTE Holdings, LLC, the Davies Family 2000 Trust the G.
Gabriel Cole 2000 Irrevocable Trust and the Linda M. Cole 2000 Irrevocable
Trust, except to the extent of her pecuniary interests therein.
(9) Includes 2,550,000 shares of common stock held by RTE Holdings, LLC, of
which Ms. Cole is Member and Manager, a warrant to purchase 15,000 shares of
common stock held by RTE Holdings, LLC, 105,000 shares of restricted stock
held by Mr. Cole, none of which are vested, 150,000 shares held by the Linda
M. Cole 2000 Irrevocable Trust, dated as of April 3, 2000, 200,000 shares
held by the G. Gabriel Cole 2000 Irrevocable Trust, dated as of April 3,
2000 and 100,000 shares held by the Davies Family 2000 Trust, dated as of
April 3, 2000. Ms. Cole disclaims beneficial ownership of the shares held by
RTE Holdings, LLC, the G. Gabriel Cole 2000 Irrevocable Trust and the Davies
Family 2000 Trust except to the extent of her pecuniary interests therein.
(10) Represents shares of common stock beneficially owned by investment funds
affiliated with Alta Communications, Inc., of which Mr. Egan is indirectly
a general partner or manager, including 1,951,972 shares of common stock
beneficially owned by Alta Communications VI, L.P., 3,332,929
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<PAGE> 55
shares of common stock beneficially owned by Alta Communications VII, L.P.,
and 44,433 shares of common stock owned by Alta Comm S By S, LLC. Mr. Egan
disclaims beneficial ownership of the shares of common stock held by these
funds, except to the extent of his pecuniary interest in such funds.
(11) Represents shares of common stock beneficially owned by investment funds
affiliated with Beacon Capital Partners, Inc., of which Mr. Halsted is an
executive officer, including 4,800,001 shares of common stock beneficially
owned by Secured Space Facilities, LLC, 533,333 shares of common stock
beneficially owned by Shared Communications Spaces, LLC, and 112,500 shares
of common stock owned by Mr. Halsted. Mr. Halsted disclaims beneficial
ownership of the shares of common stock held by these funds, except to the
extent of his pecuniary interests in such funds.
(12) Represents 35,000 shares of restricted common stock 7,000 of which are
vested and 100,000 shares of common stock owned by Mr. Hynes.
(13) Represents 35,000 shares of restricted common stock 12,250 of which are
vested and 75,000 shares of common stock owned by Mr. McKenzie.
(14) Represents shares of common stock beneficially owned by AEW Partners III,
L.P., an investment fund affiliated with AEW Capital Management, L.P., of
which Mr. Nolan is a Managing Director. Mr. Nolan disclaims beneficial
ownership of the shares of common stock held by these funds, except to the
extent of his pecuniary interest in such funds.
(15) Represents shares of common stock beneficially owned by investment funds
affiliated with Centennial Funds, including 2,000,000 shares of common
stock beneficially owned by Centennial Fund VI, L.P., 40,000 shares of
common stock in beneficially owned by Centennial Holdings I, LLC, and
50,000 shares of common stock beneficially owned by Centennial
Entrepreneurs Fund VI, L.P.
(16) Includes 15,000 shares of common stock issuable upon exercise of a warrant
held by RTE Holdings, LLC.
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<PAGE> 56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We were formed as CO Space, Inc. under the laws of Delaware on April 12,
1999. Our three predecessor companies, CO Space Services, LLC, CO Space Boston,
LLC, and CO Space San Diego, LLC, were formed as limited liability companies
under the laws of Delaware on November 10, 1998, the sole member of each being
CO Space, LLC (subsequently renamed RTE Holdings, LLC). We completed a
reorganization on April 12, 1999 in which the operations and assets of CO Space
Services, LLC, CO Space Boston, LLC, and CO Space San Diego, LLC, were merged
into CO Space, Inc. In connection with this reorganization, we issued a total of
3,000 shares of our common stock, representing all of our outstanding capital
stock, to RTE Holdings, LLC (formerly CO Space, LLC). Mr. Cole and Mses. Cole
and Davies are the only members of RTE Holdings, LLC.
During 1999, RTE Group, Inc. advanced us $209,341 which we used to fund our
start-up operating costs. Mr. Cole and Mses. Cole and Davies own all of the
outstanding stock of RTE Group, Inc. We repaid this advance in full on May 12,
1999.
On May 5, 1999, our stockholders and board of directors approved a
1,000-for-1 stock split that was effected through a stock dividend. The stock
split increased the number of common shares owned by RTE Holdings, LLC to
3,000,000 shares.
On May 12, 1999, we issued an aggregate of 4,180,000 shares of series A
preferred stock to Centennial Fund VI, L.P., Centennial Holdings I, LLC,
Centennial Entrepreneurs Fund VI, L.P. and Norwest Venture Partners for $1 per
share. On June 7, 1999, we issued 12,500 shares of our series A preferred stock
to John Halsted for $1 per share. On August 15, 1999, we issued 75,000 shares of
our series A preferred stock to Mr. McKenzie for $1 per share.
On October 28, 1999 we issued a warrant to RTE Holdings, LLC to purchase up
to 15,000 shares of our common stock with an exercise price of $1.50.
On November 12, 1999, we issued an aggregate of 18,000,002 shares of series
B preferred stock to investors, including Secured Space Facilities, LLC (an
affiliate of Beacon Capital Partners), Alta Communications, AEW Partners III,
L.P., Latona COS Investment LLC and Messrs. Halsted, Nolan, and Egan for $1.50
per share.
On January 28, 2000, we issued 4,800,001 shares of our series B-1
non-voting preferred stock and 533,333 shares of our series B-2 preferred stock
to Secured Space Facilities, LLC in exchange for the cancellation of the
5,333,334 shares of our series B preferred stock previously issued to Secured
Space Facilities, LLC. The 533,333 shares of our series B-2 preferred stock were
subsequently transferred by Secured Space Facilities, LLC to Beacon Capital
Partners, L.P., which then transferred the shares to Shared Communications, LLC.
Certain of our directors are affiliated with certain of our principal
stockholders. Mr. Egan is a general partner of Alta Communications. Mr. Halsted
is an executive officer of Beacon Capital Partners. Mr. Nolan is a Managing
Director of AEW Capital Management, L.P.
On October 28, 1999, we issued a promissory note to RTE Holdings, LLC for
an aggregate amount of $225,000 bearing an annualized interest rate of 18%.
According to the terms of the note, the outstanding amount was to be repaid upon
the first to occur of the following events: (1) the closing of an equity
financing of our company in an amount of at least $10 million or (2) November
30, 1999. As a part of our series B financing that took place on November 12,
1999, we repaid this obligation to RTE Holdings, LLC and the promissory note was
canceled.
On February 4, 1999, one of our subsidiaries entered into a real estate
lease with a subsidiary of AEW Partners III which is affiliated with one of our
investors, AEW Partners III, L.P. The lease is for 24,589 square feet at 70
Inner Belt Road, Somerville, Massachusetts for a twenty year period with four
successive extension terms of five years each. The lease was subsequently
amended to provide for an additional 11,000 square feet for a term of twenty
years. We agreed to pay total lease payments of
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<PAGE> 57
$8,845,470 over the twenty-year term for the entire Somerville facility, ranging
from $293,123 in the first year of the lease to $602,424 in the final year.
On March 7, 2000, the board authorized the issuance of restricted stock
under the 1999 plan to Messrs. Jandovitz, Cole, DeNovellis, Kourtis and
Gunderson, and Mses. Houlihan and Davies. The executives and directors paid cash
for the par value of the restricted stock and paid the balance of the fair
market value of the restricted stock with secured full recourse promissory
notes. These notes bear interest at a rate of 6.80% and are due on the fifth
anniversary of the date of the note subject to acceleration in the event of
certain circumstances. Each promissory note is secured by the restricted stock
purchased by the promissory note. As of March 7, 2000, we had extended loans
totaling approximately $390,000, $40,950, $68,250, $58,500, $97,500, $68,250 and
$15,600 to each of the individuals listed above, respectively.
On March 10, 2000, we issued 50,000 shares of our series B preferred stock
to Mr. Egan for $1.50 per share and 100,000 shares of our series B preferred
stock to Mr. Hynes for $1.50 per share.
RTE Group, Inc., doing business as RTE Realty, provides real estate
brokerage services to us and our subsidiaries for which it receives commissions.
Mr. Cole and Mses. Cole and Davies are the directors of RTE Group. RTE Group is
a wholly-owned subsidiary of RTE Holdings, LLC of which Mr. Cole and Mses. Cole
and Davies are the only members. RTE Group earned approximately $344,000 in
commissions related to brokered transactions in which we or our subsidiaries
were involved for the year ended December 31, 1999.
We are currently in negotiation with affiliates of Beacon Capital Partners,
Inc., one of our investors, to lease real estate located in Loudoun County,
Virginia and Richardson, Texas. We expect to lease 58,080 square feet for a
twenty year period with four successive terms of five years each in Loudoun
County, Virginia. We expect to lease 19,207 square feet for a fifteen year
period with four successive terms of five years each in Richardson, Texas. We
expect that these leases will be entered into shortly.
We believe that each of the transactions described above was entered into
on terms no less favorable to CO Space than could be obtained with
non-affiliated parties.
SECOND AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
As part of the sale of our series B preferred stock, all of our then
existing stockholders entered into an amended and restated stockholders
agreement. This agreement provides for, among other things, the nomination of
and voting for a total of nine directors of CO Space, as described under
"Management -- Board Composition."
The stockholders agreement generally restricts the transfer of any shares
of common or preferred stock held by the parties thereto by granting certain
parties rights of first offer and participation rights in connection with any
proposed transfer by any other party. In addition, the stockholders agreement
generally provides that the parties thereto will have the right of first refusal
and participation rights in any subsequent offering of equity securities or
securities convertible into equity securities, subject to exceptions such as a
registered public offering. The provisions of the stockholders agreement
regarding nomination, voting and transferability of shares automatically
terminate upon the closing of this offering.
At any time after the effective date of this offering, specified
stockholders may require us to register all or any portion of their shares by
filing one registration statement utilizing a Form S-1 and multiple registration
statements utilizing a Form S-3. The parties will also be entitled to unlimited
piggyback registration rights in connection with any registration by us of
securities for our own account or the account of other stockholders. The
registration rights available under the stockholders agreement generally will
terminate when all shares owned by the parties to the agreement may be
immediately sold under Rule 144 and our stock is listed on a national securities
market or traded in the Nasdaq Stock Market.
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DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock. To
fully understand the actual terms of the capital stock you should refer to our
amended and restated certificate of incorporation and amended and restated
bylaws, which will go into effect prior to the completion of this offering. The
following summary gives effect to the conversion of all outstanding shares of
preferred stock upon completion of this offering. The summary does not give
effect to the exercise of outstanding options or warrants to purchase common
stock.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
As of March 31, 2000 there were 4,065,000 shares of common stock, 4,322,500
shares of series A preferred stock, 13,333,335 shares of series B preferred
stock, 4,800,001 shares of series B-1 non-voting preferred stock and 533,333
shares of series B-2 preferred stock issued and outstanding. At and subject to
the closing of this offering, all of the outstanding shares of preferred stock
will be automatically converted into shares of common stock.
Following this offering, our authorized capital stock will consist of
shares of common stock, of which will be issued
and outstanding; and shares of undesignated preferred stock
authorized and issuable in one or more series designated by our board of
directors, of which no shares will be issued and outstanding and
shares of series Z junior participating cumulative preferred stock, as discussed
in more detail under "-- Stockholder Rights Plan."
COMMON STOCK
Voting Rights. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority or in the case of election of directors, by a
plurality, of the votes entitled to be cast at a meeting at which a quorum is
present, voting together as a single class, subject to any voting rights granted
to holders of any then outstanding preferred stock. Except as otherwise provided
by law and our certificate of incorporation, amendments to our certificate of
incorporation must be approved by a majority of the voting power of the common
stock.
Dividends. Holders of common stock will share ratably in any dividends
declared by our board of directors, subject to the preferential rights of any
preferred stock then outstanding. Dividends consisting of shares of common stock
may be paid to holders of shares of common stock.
Other Rights. In the event of any merger or consolidation of CO Space with
or into another company, as a result of which shares of common stock are
converted into or exchangeable for shares of stock, other securities or
property, including cash, all holders of common stock will be entitled to
receive the same kind and amount, on a per share of a common stock basis, of
such shares of stock and other securities and property, including cash. On
liquidation, dissolution or winding up of CO Space, all holders of our common
stock are entitled to share ratably in any assets available for distribution to
holders of shares of our common stock. No shares of common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock.
PREFERRED STOCK
Our amended and restated certificate of incorporation will provide that
shares of preferred stock may be issued from time to time in one or more series.
Our board of directors is authorized to issue shares of preferred stock in one
or more series, to establish the number of shares in each series and to fix the
designation, powers, preferences and rights of each such series and the
qualifications, limitations or restrictions thereof, in each case, if any, as
are permitted by Delaware law and as the board of directors may determine by
adoption of any amendment of our certificate of incorporation, without any
further vote or action by our stockholders. Because our board of directors has
the power to establish the preferences and rights of each class or series of
preferred stock, it may afford the stockholders of any series or class of
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preferred stock preferences, powers and rights, voting or otherwise, senior to
the rights of holders of shares of our common stock. We have no present plans to
issue any shares of preferred stock. The issuance of shares of preferred stock
could have the effect of delaying, deferring or preventing a change in control
of CO Space.
WARRANTS
As of March 31, 2000, we had outstanding warrants to purchase an aggregate
of 36,000 shares of our common stock and preferred stock. The weighted average
exercise price of the warrants is $1.21 per share. These warrants consist of:
- a warrant issued to RTE Holdings, LLC to purchase up to 15,000 shares of
common stock at an exercise price of $1.50 per share. The warrant expires
on October 4, 2004.
- a warrant issued to a lender to purchase up to 21,000 shares of series A
preferred stock at an exercise price of $1.00 per share. This warrant
will become exercisable for shares of our common stock upon completion of
this offering. The warrant expires on July 29, 2006.
Any warrant may be exercised by applying the value of a portion of the
warrant, which is equal to the number of shares issuable under the warrant being
exercised multiplied by the fair market value of the security receivable upon
exercise of the warrant, less the per share exercise price, in lieu of paying
the per share exercise price in cash.
INDEMNIFICATION MATTERS
We plan to enter into indemnification agreements with each of our directors
and certain of our executive officers. The form of indemnification agreement
provides that we will indemnify our directors and certain executive officers for
expenses incurred because of their status as such, to the fullest extent
permitted by Delaware law, our certificate of incorporation and our bylaws.
Our amended and restated certificate of incorporation will contain a
provision permitted by Delaware law that generally eliminates the personal
liability of directors for monetary damages for breaches of their fiduciary
duty, including breaches involving negligence or gross negligence in business
combinations, unless the director has breached his or her duty of loyalty,
failed to act in good faith, engaged in intentional misconduct or a knowing
violation of law, paid a dividend or approved a stock repurchase in violation of
the Delaware General Corporation Law or obtained an improper personal benefit.
This provision does not alter a director's liability under the federal
securities laws and does not affect the availability of equitable remedies, such
as an injunction or rescission, for breach of fiduciary duty. Our amended and
restated bylaws will provide that directors and officers shall be, and in the
discretion of our board of directors, non-officer employees may be, indemnified
by CO Space to the fullest extent authorized by Delaware law, as it now exists
or may in the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of CO Space. Our amended
and restated bylaws will also provide for the advancement of expenses to
directors and, in the discretion of our board of directors, officers and
non-officer employees. In addition, our amended and restated bylaws will provide
that the right of directors and officers to indemnification shall be a contract
right and shall not be exclusive of any other right now possessed or hereafter
acquired under any bylaw, agreement, vote of stockholders or otherwise. We will
also have directors' and officers' insurance against certain liabilities and we
believe that the indemnification agreements, together with the limitation of
liability and indemnification provisions of our amended and restated certificate
of incorporation and amended and restated bylaws and directors' and officers'
insurance, will assist us in attracting and retaining qualified individuals to
serve as directors and officers of CO Space.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling CO Space as
described above, we have 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. At present, there is no
pending material
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litigation or proceeding involving any director, officer, employee or agent of
CO Space in which indemnification will be required or permitted.
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE
OF INCORPORATION AND BYLAWS
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws described below, as well as the ability of our board
of directors to issue shares of preferred stock and to set its voting rights,
preferences and other terms, may be deemed to have an anti-takeover effect and
may discourage takeover attempts not first approved by our board of directors,
including takeovers which particular stockholders may deem to be in their best
interests. These provisions also could have the effect of discouraging open
market purchases of our common stock because they may be considered
disadvantageous by a stockholder who desires subsequent to such purchases to
participate in a business combination transaction with CO Space or elect a new
director to our board.
Staggered Board of Directors. Our board of directors will be divided into
three classes serving staggered three-year terms, with one-third of the board
being elected each year. Our staggered board, together with certain other
provisions of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships or increase the size of the
board, may prevent a stockholder from removing, or delay the removal of,
incumbent directors and simultaneously gaining control of the board of directors
by filling vacancies created by such removal with its own nominees.
Director Vacancies and Removal. Our amended and restated certificate of
incorporation will provide that vacancies in our board of directors shall be
filled only by the affirmative vote of a majority of the remaining directors.
Our amended and restated certificate of incorporation will provide that
directors may be removed from office only with cause and only by the affirmative
vote of holders of at least 75% of the shares then entitled to vote in an
election of directors.
No Stockholder Action by Written Consent. Our amended and restated
certificate of incorporation will provide that any action required or permitted
to be taken by our stockholders at an annual or special meeting of stockholders
must be effected at a duly called meeting and may not be taken or effected by a
written consent of stockholders.
Special Meetings of Stockholders. Our amended and restated certificate of
incorporation and amended and restated bylaws will provide that a special
meeting of stockholders may be called only by our board of directors. Our
amended and restated bylaws will provide that only those matters included in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law.
Advance Notice of Director Nominations and Stockholder Proposals. Our
amended and restated bylaws will include advance notice and informational
requirements and time limitations on any director nomination or any new proposal
which a stockholder wishes to make at an annual meeting of stockholders. For the
first annual meeting following the completion of this offering, a stockholder's
notice of a director nomination or proposal will be timely if delivered to the
secretary of CO Space at our principal executive offices not later than the
close of business on the later of the 75th day prior to the scheduled date of
such annual meeting or the 10th day following the day on which public
announcement of the date of such annual meeting is made by CO Space.
Amendment of the Certificate of Incorporation. As required by Delaware
law, any amendment to our certificate of incorporation must first be approved by
a majority of our board of directors and, if required by law, thereafter
approved by a majority of the outstanding shares entitled to vote with respect
to such amendment, except that any amendment to the provisions relating to
stockholder action by written consent, directors, limitation of liability and
the amendment of our certificate of incorporation must be approved by not less
than 75% of the outstanding shares entitled to vote with respect to such
amendment.
Amendment of Bylaws. Our amended and restated certificate of incorporation
and amended and restated bylaws will provide that our bylaws may be amended or
repealed by our board of directors or by
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the stockholders. Such action by the board of directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the affirmative vote of at least 75% of the shares present
in person or represented by proxy at an annual meeting of stockholders or a
special meeting called for such purpose unless our board of directors recommends
that the stockholders approve such amendment or repeal at such meeting, in which
case such amendment or repeal only requires the affirmative vote of a majority
of the shares present in person or represented by proxy at the meeting.
STOCKHOLDER RIGHTS PLAN
We intend to adopt a stockholder rights plan to help ensure that our
stockholders receive fair and equal treatment in the event of any proposed
acquisition of CO Space. The rights plan may delay, deter or prevent a change of
control of CO Space and, therefore, could adversely affect your ability to
realize a premium over the then prevailing market price for our common stock in
connection with such a transaction.
Upon adoption of the rights plan, our board of directors will declare a
dividend of one "right" for each share of our common stock outstanding as of the
closing of this offering. Under certain circumstances described below, each
right will entitle its holder to purchase from us shares of our series Z junior
participating cumulative preferred stock, par value $0.001 per share.
Initially, the rights will not be exercisable and will be attached to,
trade with and be inseparable from the shares of common stock. Until the rights
become exercisable, they will be evidenced only by the certificates or
book-entry credits that represent shares of common stock. If a person or group
acquires ownership of 15% or more of the outstanding common stock or makes a
tender offer that could result in that person or group owning 15% or more of the
outstanding common stock, then the rights will separate from the common stock
and become their own separately tradable security. Thereafter, the rights will
be evidenced by book-entry credits or by rights certificates that we will mail
to all eligible holders of common stock. At this point, each right also will
become exercisable to acquire one one-thousandth of a share of the junior
preferred stock at a cash exercise price that will be substantially higher than
the market price of one share or our common stock, and accordingly, the right
will be "out-of-the-money." The exercise price initially has been established as
$ per right. Each one one-thousandth of a share of junior preferred stock
will give the stockholder approximately the same dividend, voting and
liquidation rights as would one share of common stock and therefore is expected
to approximate the market price of one share of our common stock. Prior to
exercise, the right does not give its holder any dividend, voting or liquidation
rights. Any rights held by the person or group who acquired ownership of 15% or
more of the outstanding common stock or who made a tender offer that could
result in that person or group owning 15% or more of the outstanding common
stock will be void and may not be exercised.
If a person or group acquires 15% or more of the outstanding common stock,
all holders of rights except that person or group may, upon the payment of the
exercise price, purchase a number of one one-thousandths of a share of the
junior preferred stock having a market value of two times the exercise price of
the right, based on the market price of one one-thousandth of a share of junior
preferred stock prior to such acquisition. In other words, each holder of a
right will be permitted to acquire shares of the junior preferred stock at a 50%
discount to the market price of such stock. Thus, at this point the rights will
be "in-the-money."
If our company is later acquired in a merger or similar transaction after a
person or group acquires ownership of 15% or more of the outstanding common
stock, holders of rights (other than that person or group, whose rights will be
void) may, upon the payment of the exercise price, purchase shares of the
acquiring corporation with a market value of two times the exercise price of the
right, based on the market price of the acquiring corporation's stock prior to
such merger or similar transaction. In other words, each holder of a right is
permitted to acquire shares of the acquiring company's common stock at a 50%
discount to the market price of such stock.
The rights plan and the rights will expire on the tenth anniversary of the
closing of the offering, unless the rights are earlier exercised, redeemed or
exchanged. Our board of directors may redeem the rights for
59
<PAGE> 62
$.01 per right only until the earlier of the time at which any person or group
acquires ownership of 15% or more of the outstanding common stock or the
expiration of the rights plan. If our board of directors redeems any rights, it
must redeem all of the rights. The redemption price will be adjusted if we have
a stock split of or stock dividends on our common stock. After a person or group
acquires ownership of 15% or more of the outstanding common stock, but before
that person or group owns 50% or more of our outstanding common stock, our board
of directors may, at its option, extinguish the rights by exchanging all or any
part of the then outstanding exercisable rights for shares of common stock at an
exchange ratio specified in the rights plan, other than rights held by that
person or group, which are void.
Generally, prior to a person or group acquiring 15% or more of the
outstanding common stock or making a tender or exchange offer that could result
in such person or group owning 15% or more of the outstanding common stock, our
board of directors may amend the rights plan without the consent of the holders
of the rights, including an amendment to reduce the ownership limitation from
15% to not less than 10%. After such time, our board of directors may not amend
the rights plan in a way that adversely affects holders of the rights.
In the event that our board of directors approves a transaction that it has
determined is in the best interests of our stockholders but that otherwise would
cause the rights to separate from the common stock and become exercisable, the
board may, in connection with such approval, redeem the rights. Once the rights
are redeemed, the transaction can proceed without causing the rights to separate
from the common stock and become exercisable. The rights plan could make it more
difficult for a third party to acquire, and could discourage a third party from
acquiring or seeking to acquire, CO Space or a large block of our common stock.
STATUTORY BUSINESS COMBINATION PROVISION
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three years,
owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our bylaws contains any such exclusion.
60
<PAGE> 63
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "COSP."
NO PREEMPTIVE RIGHTS
No holder of any class of our stock has any preemptive right to subscribe
for or purchase any kind or class of our securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be EquiServe
Trust Company, N.A.
61
<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market price
of our common stock. The market price of our common stock could drop due to the
sale of a large number of shares of our common stock or the perception that such
sales could occur. These factors could also make it more difficult to raise
funds through future offerings of common stock.
After this offering, shares of common stock will be
outstanding. Of these shares, the shares sold in this offering
will be freely tradeable without restriction under the Securities Act, except
that any shares held by our "affiliates" as defined in Rule 144 under the
Securities Act may be sold only in compliance with the limitations described
below. The remaining shares of common stock are "restricted
securities" within the meaning of Rule 144 under the Securities Act. The
restricted securities generally may not be sold unless they are registered under
the Securities Act or are sold pursuant to an exemption from registration, such
as the exemption provided by Rule 144 under the Securities Act.
In connection with this offering, existing officers, directors and
stockholders who will own a total of shares of common stock after
this offering, have entered into lock-up agreements pursuant to which they have
agreed not to offer or sell any shares of common stock for a period of 180 days
after the date of this prospectus without the prior written consent of Bear,
Stearns & Co. Inc., on behalf of the underwriters. Bear, Stearns & Co. Inc. may,
however, in its sole discretion, at any time and without notice, waive any of
the terms of these lock-up agreements. Following the lock-up period, these
shares will not be eligible for sale in the public market without registration
under the Securities Act, unless such sale meets the conditions and restrictions
of Rule 144 as described below or another exemption from registration under the
Securities Act.
Beginning 180 days after the date of this prospectus, or earlier with the
prior written consent of Bear, Stearns & Co. Inc., shares and
shares issuable upon exercise of outstanding vested options will
be eligible for sale in the public market subject to Rule 144 and Rule 701 of
the Securities Act.
In general, under Rule 144 as currently in effect, any person or persons
whose shares are required to be aggregated, including an affiliate of ours, who
has beneficially owned shares for a period of at least one year is entitled to
sell, within any three-month period, commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of:
- 1% of the then-outstanding shares of common stock, which is expected to
be approximately shares upon the completion of this
offering; or
- the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of such
sale on Form 144 is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about us during the 90 days immediately preceding a sale. In addition, a person
who is not an affiliate of ours during the 90 days preceding a sale and who has
beneficially owed the shares proposed to be sold for at least two years would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. The foregoing summary of Rule
144 is not intended to be a complete description.
In general, in reliance upon Rule 144 but without compliance with certain
restrictions, including the holding period requirements, contained in Rule 144,
Rule 701 permits resales of shares issued pursuant to certain compensatory
benefits plans and contracts commencing 90 days after we become subject to the
reporting requirements of the Exchange Act.
62
<PAGE> 65
Prior to the expiration of the lock-up agreements, we intend to register on
a registration statement on Form S-8:
- a total of up to shares of common stock reserved for
future issuance pursuant to the 1999 stock incentive plan; and
- a total of 1,000,000 shares of common stock reserved for future issuance
pursuant to the employee stock purchase plan.
The Form S-8 will permit the resale in the public market of shares so
registered by non-affiliates without restriction under the Securities Act.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus, we will not sell or offer to sell or otherwise dispose of any
shares of common stock without the prior written consent of Bear, Stearns & Co.
Inc., except that we may issue, and grant options to purchase, shares of common
stock under employee benefit plans in effect as of the date of this prospectus.
Upon completion of this offering and subject to the 180-day lock-up period
described above, the holders of approximately shares of our
common stock, including the shares to be issued upon conversion of all of our
outstanding convertible preferred stock, are entitled to request that we
register their shares under the Securities Act or to have their shares included
in a future registration statement which we may file. After these shares are
registered, they will become freely tradeable without restriction under the
Securities Act.
63
<PAGE> 66
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
dated , 2000, each of the underwriters named below, through their
representatives Bear, Stearns & Co. Inc., J.P. Morgan & Co., Thomas Weisel
Partners LLC and Wasserstein Perella Securities, Inc., has severally agreed to
purchase from us the aggregate number of shares of common stock set forth
opposite its name below at the public offering price less the underwriting
discount set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
J.P. Morgan & Co. ..........................................
Thomas Weisel Partners LLC..................................
Wasserstein Perella Securities, Inc. .......................
-------
Total.............................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters thereunder are subject to approval of legal matters by their
counsel and to various other conditions. Under the underwriting agreement, the
underwriters are obligated to purchase and pay for all of the shares of common
stock, other than those covered by the over-allotment option described below, if
they purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the offering price set forth on the cover page of this prospectus
and some of the shares to dealers at this price less a concession not in excess
of $ per share. The underwriters may allow, and the dealers may re-
allow, concessions not in excess of $ per share on sales to other
dealers. After the initial offering of the shares to the public, the
underwriters may change the offering price, concessions and other selling terms.
The underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
We have granted the underwriters an option exercisable for 30 days from the
date of the underwriting agreement to purchase up to additional
shares, at the offering price less the underwriting discount. The underwriters
may exercise this option solely to cover over-allotments, if any, made in
connection with this offering. To the extent the underwriters exercise this
option in whole or in part then each of the underwriters will become obligated,
subject to conditions, to purchase a number of additional shares approximately
proportionate to each underwriter's initial purchase commitment set forth in the
table above.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Our directors, executive officers and stockholders, who collectively hold a
total of shares of common stock, have agreed, subject to limited
exceptions, not to sell, offer to sell or otherwise dispose of any shares of
common stock or securities convertible into or exercisable or exchangeable for
our common stock, for a period of 180 days after the date of this prospectus
without the prior written consent of Bear, Stearns & Co. Inc., on behalf of the
underwriters.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not offer, sell or otherwise dispose of any shares of
common stock except for the shares offered in this offering and shares offered
in connection with employee benefit plans in effect prior to completion of the
offering, without the consent of Bear, Stearns & Co. Inc., on behalf of the
underwriters.
64
<PAGE> 67
Prior to the offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the common stock will
be determined by us and the representatives of the underwriters. Among the
factors to be considered in these negotiations will be:
- our results of operations in recent periods;
- estimates of our business potential;
- an assessment of our management;
- prevailing market conditions; and
- the prices of similar securities of generally comparable companies.
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol "COSP." We cannot assure you, however,
that an active or orderly trading market will develop for the common stock or
that our common stock will trade in the public markets subsequent to the
offering at or above the initial offering price.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock during and after the offering. Specifically, the underwriters may
over-allot or otherwise create a short position in the common stock for their
own account by selling more shares of common stock than we have actually sold to
them. The underwriters may elect to cover any short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common stock by bidding for or purchasing shares of
common stock in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if shares of common stock previously distributed
in the offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market and these transactions may be discontinued at any time. The imposition of
a penalty bid may also affect the price of the common stock to the extent that
it discourages resales. No representation is made as to the magnitude or effect
of these activities.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of common stock for employees, directors and other
persons associated with us who expressed an interest in purchasing these shares
of common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase reserved shares. Any reserved shares not purchased by these persons
will be offered by the underwriters to the general public on the same terms as
the other shares offered in this offering.
The underwriters may, from time to time, engage in transactions with, and
perform services for, us in the ordinary course of their businesses.
The following table shows the underwriting discount to be paid to the
underwriters in connection with this offering. These amounts are shown assuming
no exercise and full exercise of the underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total....................................................... $ $
</TABLE>
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) payable by us are expected
to be approximately $ .
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-manager on 153 filed
public offerings of equity securities, of which 109 have been completed, and has
acted as a syndicate member in an additional 80 public offerings of equity
securities.
65
<PAGE> 68
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.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for CO Space by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. Certain
legal matters related to the sale of the common stock offered hereby will be
passed upon for the underwriters by Latham & Watkins, Washington, D.C. As of the
date of this prospectus, attorneys at Goodwin, Procter & Hoar LLP and an
investment partnership composed of current and former attorneys at Goodwin,
Procter & Hoar LLP beneficially owned an aggregate of 18,844 shares of our
series B preferred stock.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1999 and
for the period from November 10, 1998 (date of inception) through December 31,
1998 and for the year ended December 31, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, as stated in their report herein, and are given on the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
stock we are offering by this prospectus. This prospectus does not include all
of the information contained in the registration statement. You should refer to
the registration statement and its exhibits for additional information. Whenever
we make reference in this prospectus to any of our contracts, agreements or
other documents, the references are not necessarily complete, and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract, agreement or other document. When we complete this offering, we
will also be required to file annual, quarterly and special reports, proxy
statements and other information with the SEC. We intend to furnish to our
stockholders annual reports containing audited financial statements for each
fiscal year.
You can read our SEC filings, including the registration statement, over
the Internet at the SEC's website at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at 450
Fifth Street, NW, Washington, DC 20549; 7 World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities. Our
SEC filings are also available at the office of the Nasdaq National Market. For
further information on obtaining copies of our public filings at the Nasdaq
National Market, you should call (212) 656-5060.
66
<PAGE> 69
CO SPACE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the period
November 10, 1998 (date of inception) to December 31, 1998
and for the year ended December 31, 1999.................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the period November 10, 1998 (date of inception) to
December 31, 1998 and for the year ended December 31,
1999...................................................... F-5
Consolidated Statements of Cash Flows for the period
November 10, 1998 (date of inception) to December 31, 1998
and for the year ended December 31, 1999.................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CO Space, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of CO Space, Inc. and Subsidiaries at December 31, 1998 and 1999, and the
results of their operations and their cash flows for the period November 10,
1998 (date of inception) to December 31, 1998 and for the year ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
April 5, 2000
F-2
<PAGE> 71
CO SPACE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
--------------- ------------
1998 1999 1999
---- ------- ------------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. -- $17,564 $17,564
Accounts receivable....................................... -- 75 75
Prepaid expenses.......................................... -- 134 134
---- ------- -------
Total current assets................................. -- 17,773 17,773
---- ------- -------
Property and equipment, net................................. -- 12,304 12,304
Other assets................................................ -- 338 338
---- ------- -------
Total assets......................................... $ -- $30,415 $30,415
==== ======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ -- $ 2,462 $ 2,462
Due to related party...................................... 85 -- --
Accrued expenses.......................................... -- 597 597
Current portion of notes payable.......................... -- 458 458
Current portion of capital lease obligations.............. -- 185 185
---- ------- -------
Total current liabilities............................ -- 3,702 3,702
---- ------- -------
Notes payable............................................... -- 1,371 1,371
Capital lease obligations, net of current portion........... -- 233 233
---- ------- -------
Long term liabilities............................. -- 1,604 1,604
---- ------- -------
Total liabilities.................................... 85 5,306 5,306
---- ------- -------
Commitments and contingencies
Redeemable convertible preferred stock:
Series A Redeemable Convertible Preferred Stock, $0.01 par
value; 4,343,500 shares authorized; 4,322,500 issued
and outstanding at December 31, 1999 (liquidation
preference of $4,322,500 at December 31, 1999); none
issued and outstanding, on a pro forma basis........... -- 4,470 --
Series B Redeemable Convertible Preferred Stock, $0.01 par
value; 18,666,669 shares authorized; 18,000,002 issued
and outstanding at December 31, 1999 (liquidation
preference of $27,360,003 at December 31, 1999); none
issued and outstanding, on a pro forma basis........... -- 26,914 --
Stockholders' equity (deficit):
Common stock, $0.01 par value; 28,125,169 shares
authorized; 3,000,000 issued and outstanding at
December 31, 1999; 25,322,502 issued and outstanding,
pro forma.............................................. -- 30 253
Additional paid-in capital................................ -- 501 31,662
Deferred compensation..................................... -- (764) (764)
Accumulated deficit....................................... (85) (6,042) (6,042)
---- ------- -------
Total stockholders' equity (deficit)................. (85) (6,275) 25,109
---- ------- -------
Total liabilities and redeemable convertible
preferred stock and stockholders' equity
(deficit)......................................... $ -- $30,415 $30,415
==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 72
CO SPACE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 10,
1998 (DATE OF
INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------- ------------
<S> <C> <C>
Revenues $ -- $ 258
Operating expenses:
Costs of revenues......................................... -- 2,439
Selling and marketing..................................... -- 488
General and administrative................................ 85 2,970
Depreciation and amortization............................. -- 267
Amortization of stock-based compensation.................. -- 89
---------- ----------
Loss from operations................................... (85) (5,995)
---------- ----------
Interest income, net........................................ -- 38
---------- ----------
Net loss............................................... (85) (5,957)
Accretion of preferred stock redemption premium and issuance
costs..................................................... -- (331)
---------- ----------
Net loss attributable to common stockholders................ $ (85) $ (6,288)
========== ==========
Net loss per share attributable to common stockholders
Basic and diluted......................................... $ (0.03) $ (2.10)
========== ==========
Weighted average common shares.............................. 3,000,000 3,000,000
========== ==========
Pro forma net loss per share
Basic and diluted (unaudited) (Notes 2 and 11)............ $ (0.74)
==========
Pro forma weighted average number of common shares
outstanding
Basic and diluted (unaudited) (Notes 2 and 11)............ 8,039,630
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 73
CO SPACE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM NOVEMBER 10, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDER'S
------------------- ADDITIONAL DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT PAID-IN CAPITAL COMPENSATION DEFICIT (DEFICIT)
--------- ------ --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Loss..................... $ (85) $ (85)
------- -------
Balance at December 31,
1998....................... (85) (85)
Issuance of common stock for
contribution of predecessor
entities in April 1999,
adjusted for 1,000-for-1
common stock split on May
12, 1999................... 3,000,000 $30 $(30) --
Issuance of Series A
Redeemable Convertible
Preferred Stock warrant.... 8 8
Accretion of preferred stock
redemption premium and
issuance costs............. (331) (331)
Issuance of Common Stock
warrant.................... 1 1
Deferred stock-based
compensation............... 853 $(853) --
Amortization of deferred
stock-based compensation... 89 89
Net Loss..................... $(5,957) (5,957)
--------- --- ---- ----- ------- -------
Balance at December 31,
1999....................... 3,000,000 $30 $501 $(764) $(6,042) $(6,275)
========= === ==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 74
CO SPACE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
NOVEMBER 10,
1998 (DATE OF
INCEPTION) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(85) $ (5,957)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. -- 267
Amortization of stock-based compensation.................. -- 89
Interest expense recorded for warrants issued............. -- 2
Changes in assets and liabilities:
Increase in accounts receivable........................ -- (75)
Increase in prepaid expenses........................... -- (134)
Increase in other assets............................... -- (338)
Increase in accounts payable........................... -- 2,462
Increase in accrued expenses........................... -- 597
---- --------
Net cash used in operating activities.................. (85) (3,087)
---- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... -- (12,055)
---- --------
Net cash used in investing activities.................. -- (12,055)
---- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................... -- 1,998
Principal payments on capital lease obligations........... -- (259)
Borrowings from related party............................. 85 376
Repayment to related party................................ -- (461)
Proceeds from issuance of redeemable convertible preferred
stock, net of issuance costs of $270................... -- 31,052
---- --------
Net cash provided by financing activities.............. 85 32,706
---- --------
Net increase in cash and cash equivalents................... 17,564
Cash and cash equivalents, beginning of period.............. -- --
---- --------
Cash and cash equivalents, end of period.................... $ -- $ 17,564
==== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 92
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of property and equipment under capital
leases................................................. $ 516
Issuance of common stock for contribution of predecessor
entities............................................... $ --
Accretion of preferred stock, redemption premium and
issuance costs......................................... $ 331
</TABLE>
The accompanying notes are an integral part of these financial statement.
F-6
<PAGE> 75
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF THE BUSINESS
CO Space, Inc. and subsidiaries (the "Company") provides critical
operations collocation space and services to customers in the Internet,
telecommunications and data storage businesses.
The Company began operations in November 1998 under the name of CO Space
Services, LLC. The Company was reorganized and CO Space, Inc. was incorporated
on April 12, 1999, at which time 3,000,000 common shares were issued in exchange
for a contribution of the business assets of CO Space Services, LLC; CO Space
Boston, LLC; and CO Space San Diego, LLC, all of which were commonly controlled
entities, accordingly, the contribution of the business assets was accounted for
at historical cost (see Note 6).
The Company operates its business in one reportable segment.
The Company's plans contemplate significant funding requirements. In the
event the Company is unable to raise additional capital the Company intends to
scale back and delay its anticipated network and operational infrastructure
expansion.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates
and could impact future results of operations and cash flows.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at date of acquisition to be cash equivalents. Cash and
cash equivalents consisted of cash deposited with banks and money market funds
of $3 and $17,561, respectively, at December 31, 1999.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable and other accrued
expenses approximate their fair values due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar terms,
the carrying value of notes payable and capital lease obligations approximates
fair value.
Concentration of Credit Risk and Significant Customer
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable. To
minimize risk, ongoing credit evaluations of customers' financial condition are
performed, although collateral generally is not required. At December 31, 1999,
one
F-7
<PAGE> 76
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
customer accounted for 100% of accounts receivable. For the year ended December
31, 1999 one customer accounted for 99% of total revenues.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Equipment held under
capital leases and leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the related asset. Upon retirement or
sale, the cost of assets disposed of and the related accumulated depreciation
are removed from the accounts and any resulting gain or loss is credited or
charged to operations. Repairs and maintenance costs are expensed as incurred.
Accounting for Stock-Based Compensation
Employee and director stock awards under the Company's compensation plans
are accounted for in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. The Company provides the disclosure requirements of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), and related interpretations. Stock-based awards to
non-employees are accounted for under the provisions of SFAS No. 123.
Revenue Recognition
Revenues consist of fees from the licensing of collocation facilities,
provision of technical services, and installation fees. Fee revenues are
generally recognized as the services are provided. Installation fees and related
expenses are recognized over the customer contract period. To date such
installation revenues and expenses have not been material.
Advertising Costs
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $6 and $33 for the period November 10, 1998 (date of
inception) to December 31, 1998 and the year ended December 31, 1999,
respectively.
Redeemable Convertible Preferred Stock
The carrying value of redeemable convertible preferred stock is increased
by periodic accretions so that the carrying amount will equal the redemption
amount at the redemption date. These increases are effected through charges
against additional paid in capital and are presented on the statements of
operations as an increase to net loss to compute net loss attributable to common
stockholders.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse. Valuation allowances are provided if, based upon the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
Net Loss Per Common Share
Basic net loss per common share is based upon the weighted average number
of common shares outstanding during each period (see Note 6). Diluted net loss
per common share gives effect to all dilutive potential common shares
outstanding during the period. The computation of diluted net loss per common
share does not assume the issuance of potential common shares that have an
anti-dilutive effect.
F-8
<PAGE> 77
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Net Loss per Common Share (Unaudited)
The pro forma net loss per common share is computed based upon the weighted
average number of common shares and common equivalent shares (using the treasury
stock method) outstanding (see Note 11). Common equivalent shares are not
included in the per share calculations where the effect of their inclusion would
be anti-dilutive. In the computation of pro forma net loss per share, accretion
of preferred stock to the mandatory redemption amount is not included as an
increase to net loss. Also, the pro forma net loss per common share gives effect
to the mandatory conversion of all outstanding redeemable convertible preferred
stock into shares of common stock as if the conversion had occurred upon
issuance of the preferred stock.
Pro Forma Balance Sheet (Unaudited)
Upon the closing of the Company's initial public offering and pursuant to
the contractual agreements with the preferred stockholders, all the outstanding
shares of the Company's series A and B redeemable convertible preferred stock
will be converted into common stock. The unaudited pro forma presentation of the
balance sheet has been prepared assuming the conversion of the outstanding
preferred stock into common stock as of December 31, 1999 pursuant to the
initial public offering of the Company's common stock contemplated in this
prospectus.
Comprehensive Income
For the period from November 10, 1998 (date of inception) to December 31,
1998 and the year ended December 31, 1999, there were no differences between net
loss and comprehensive loss.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, ("SFAS"), No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including some derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The Company will adopt SFAS No. 133 in
2001, in accordance with SFAS No. 137, which deferred the effective date of SFAS
No. 133. The adoption of this standard in 2001 is not expected to have a
material impact on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the Staff's view in applying generally
accepted accounting principles to selected revenue recognition issues. The
application of the guidance in SAB No. 101 will be required in the Company's
second quarter of 2000, in accordance with SAB No. 101A which deferred the
effective date by one quarter. The Company has evaluated the application of SAB
No. 101 and determined that it will have no impact on reported revenues and net
loss.
F-9
<PAGE> 78
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ------------------
USEFUL LIFE YEARS 1998 1999
-------------------------- ------- -------
<S> <C> <C> <C>
Office equipment and furniture................ 3-5 $ -- $ 420
Leasehold improvements........................ Lesser of lease term or 20 -- 9,317
Operating equipment........................... 5 -- 2,834
------- -------
-- 12,571
Less -- accumulated depreciation and
amortization................................ -- (267)
------- -------
$ -- $12,304
======= =======
</TABLE>
At December 31, 1999, property and equipment under capital leases consist
of office equipment and operating equipment with a cost basis of $516.
Amortization of property and equipment under capital leases totaled $99 for
the year ended December 31, 1999, respectively.
4. NOTES PAYABLE
During July 1999, the Company entered into a loan agreement (collateralized
by the underlying equipment) with a bank for $1,998 at a weighted average
interest rate of 12.6% to finance equipment purchases. The loan is payable in
equal monthly installments of $55 through February 2003, and payments of $118
and $52 in March and April of 2003, respectively.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 1999, the Company authorized 23,010,169 shares of preferred stock
and designated 4,343,500 shares as Series A redeemable convertible preferred
stock (the "Series A Preferred Stock"). In May 1999, the Company issued
4,322,500 of Series A Preferred Stock at $1.00 per share resulting in proceeds
of $4,323. In November 1999, 18,666,669 shares were designated as Series B
redeemable convertible preferred stock (the "Series B Preferred Stock"). In
November and December 1999, the Company issued a total of 18,000,002 shares of
Series B Preferred Stock at $1.50 per share resulting in net proceeds to the
Company of $26,730 after issuance costs.
The Series A and Series B Preferred Stock have the following
characteristics:
Voting
The holders of the Series A and B Preferred Stock are entitled to
vote, together with the holders of common stock, on all matters submitted
to stockholders for a vote. Each preferred stockholder is entitled to the
number of votes equal to the number of shares of common stock into which
each preferred share is convertible at the time of such vote.
Dividends
The holders of the Series A and B Preferred Stock are entitled to
receive, when and as declared by the Board of Directors and out of funds
legally available, noncumulative dividends only if such dividends are
contemporaneously declared on each series of preferred stock and the common
stock.
F-10
<PAGE> 79
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the
affairs of the Company, the holders of the then outstanding Series B
Preferred Stock have a preference equal to the greater of (X) the sum of
(i) its issue price plus 8% compounded interest, (ii) any accrued and
unpaid dividends, and (iii) an additional amount, if any, that Series B
preferred stockholders would have been entitled to in such liquidation on
an as if converted basis after payment of preferences to the Series A
preferred stockholders and other stockholders, if any, with a preference in
liquidation over the common stock or (Y) the amount the Series B preferred
stockholders would have been entitled to on an as if converted basis,
including all declared but unpaid dividends thereon immediately prior to
such liquidation; provided, however, if the calculation of (X) exceeds
$3.00 per Series B preferred share, the Series B preferred stockholders
shall be entitled to the greater of $3.00 or the amount calculated pursuant
to (Y). Remaining proceeds, if any, are distributed first to the Series A
preferred stockholders in an amount equal to the greater of the sum of
(A)(i) its issue price and (ii) declared and unpaid dividends or (B) the
amount the Series A preferred stockholders would have been entitled to on
an as if converted basis, and then to common stockholders, if any.
Conversion
Each share of Series A and B Preferred Stock is convertible at the
option of the holder into one share of common stock. Each share of
outstanding preferred stock is automatically converted into one share of
common stock upon the affirmative vote of two-thirds of the holders of that
series, or upon the closing of a public offering resulting in gross
proceeds of at least $50 million at an offering price of at least $6.00 per
share. The number of conversion shares is subject to adjustment if common
stock is sold under defined circumstances for less than $1.00 for Series A
and $1.50 for Series B, respectively. If a preferred stockholder does not
exercise preemptive rights in an equity financing of at least $1 million,
such shares are converted into a new series of preferred stock with
substantially the same rights, but with no further anti-dilution
protection.
Redemption
The preferred stock is mandatorily redeemable in March (Series B) and
May (Series A) 2005, 2006 and 2007 at 33 1/3%, 50% and 100%, respectively,
of the then outstanding shares. The redemption price for each series is, at
the election of the holder, the sum of (i) its issue price, (ii) 8%
compound interest and (ii) accrued and unpaid dividends; or the fair market
value of the common stock.
If the Company does not have sufficient funds available to redeem all
shares of preferred stock to be redeemed at the Redemption Date, then the
Company shall redeem such shares ratably to the extent possible and shall
redeem the remaining shares as soon as sufficient funds are available.
6. COMMON STOCK
On May 11, 1999, the Company authorized a 1,000-for-1 stock split, effected
through a stock dividend increasing the outstanding shares to 3,000,000. All
share data, except par value per share, has been retroactively adjusted for all
periods presented to reflect this stock split.
The Company issued 3,000,000 shares of common stock, $0.01 par value, on
April 12, 1999 to RTE Holdings, LLC in exchange for business assets contributed
by RTE Holdings, LLC (see Note 1). The 3,000,000 shares issued have been
presented as if they had been issued prior to April 12, 1999, representing RTE
Holdings, LLC's ownership interests in the three contributed entities since
their inception on November 10, 1998.
F-11
<PAGE> 80
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under certain conditions, the Company has the option to repurchase certain
shares issued to RTE Holdings, LLC at a price of $1.00 per share. As of December
31, 1999, 1,035,416 shares of the 3,000,000 shares issued to RTE Holdings, LLC
is subject to this option. The right to repurchase the shares terminates in even
quarterly increments through May 11, 2001.
As of December 31, 1999, 25,125,169 shares of common stock were reserved
for issuance under option plans, warrant agreements and conversion of the
preferred stock.
Each share of common stock is entitled to one vote. The holders of common
stock are also entitled to receive dividends whenever funds are available and
when declared by the Board of Directors, only if such dividends are
contemporaneously declared on each series of preferred stock and common stock.
7. WARRANTS
In connection with the promissory note with a related party described in
Note 12, the Company issued a warrant to purchase 15,000 shares of common stock
at $1.50 per share. The warrant is immediately exercisable and expires in 2005.
The value of the warrant of $1 was recorded as interest expense in 1999.
In connection with the bank loan described in Note 4, the Company issued a
warrant to purchase 21,000 shares of Series A Preferred Stock at an exercise
price of $1.00. The warrant is immediately exercisable and expires in July 2006.
The value of the warrant of $8 is being amortized to interest expense over the
term of the note.
The fair value of all warrant issuances were calculated using the
Black-Sholes option pricing model with the following assumptions: no dividends;
expected life is the contractual term; risk-free interest rates of 6.5%;
volatility of 50%.
8. STOCK OPTION PLAN
In 1999, the Company adopted the 1999 Stock Plan (the "Plan") under which
2,100,000 shares of the Company's common stock were reserved for issuance to
employees, directors, creditors and consultants. Options granted under the Plan
may be incentive stock options or nonqualified stock options. The exercise price
of incentive stock options shall not be less than the fair market value per
share of the Company's common stock on the grant date. Employee options vest 25%
one year after the date of grant and the remainder in twelve equal quarterly
installments thereafter. If an individual owns stock representing more than 10%
of the outstanding shares, the exercise price of each stock option granted shall
be at least 110% of fair market value, as determined by the Board of Directors.
The term of the options is up to 10 years. Stock options granted to date have a
term of 7 years. No stock-based awards were granted prior to 1999.
The following table summarizes the activity of the Company's stock option
plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- --------
<S> <C> <C>
Outstanding -- beginning of period, January 1, 1999......... --
Granted..................................................... 1,144,546 $0.40
---------
Outstanding -- end of period, December 31, 1999............. 1,144,546 0.40
=========
Weighted average fair value for financial reporting purposes
at grant date............................................. $1.35
</TABLE>
F-12
<PAGE> 81
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.40.............................. 1,144,546 7 years $0.40 210,616 $0.40
</TABLE>
During 1999, the Company recorded deferred compensation of $853 which
represents the difference between the exercise price and the fair value of the
underlying common stock for financial reporting purposes of $1.35 per share on
the date of grant. The deferred compensation will be amortized to expense over
the four-year vesting period.
Compensation cost of $89 has been recognized for stock-based compensation
in 1999 for grants to employees below fair value. Compensation cost of $39 has
been recognized for 306,846 options granted to vendors and consultants for the
year ended December 31, 1999. At December 31, 1999, 96,230 of these options were
unvested. Had compensation cost for options issued to employees and directors
been determined based on the fair value at the grant dates, as prescribed by
SFAS No. 123, for awards in 1999, the Company's net loss would have been greater
by $55. Because options vest over several years and additional option grants are
expected to be made in future years, the above pro forma results are not
representative of the pro forma results for future years.
For purposes of pro forma disclosure, the fair value of each option was
estimated on the date of grant using the minimum value method with the following
assumptions for grants in 1999: no dividend yield; risk-free interest rate of
6.5%; and expected lives of four years.
9. INCOME TAXES
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1998 1999
---- -------
<S> <C> <C>
Net operating loss carryforwards............................ $35 $ 2,502
Depreciation and amortization............................... -- (87)
--- -------
Net deferred tax assets..................................... 35 2,415
Deferred tax asset valuation allowance...................... (35) (2,415)
--- -------
$-- $ --
=== =======
</TABLE>
The Company has provided a valuation allowance for the full amount of its
net deferred tax assets since realization of any future benefit from deductible
temporary differences and net operating loss and tax credit carryforwards cannot
be sufficiently assured at December 31, 1999.
At December 31, 1999, the Company has federal net operating loss
carryforwards of approximately $6,161,866 available to reduce future taxable
income which expires in 2019.
Under the provisions of the Internal Revenue Code, certain substantial
changes in the Company's ownership may result in a limitation on the amount of
net operating loss carryforwards and research and development credit
carryforwards which can be used in future years.
F-13
<PAGE> 82
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases its office space and certain equipment under
noncancelable operating leases. Total expense under these operating leases was
approximately $0 and $619 for the period November 1, 1998 (date of inception) to
December 31, 1998 and for the year ended December 31, 1999, respectively.
Certain noncancelable operating leases totaling $62.9 million were in
negotiations at December 31, 1999 and were executed on January 10, 2000. Future
minimum lease payments under capital leases and noncancelable operating leases
at December 31, 1999, and noncancelable operating leases executed on January 10,
2000 are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES OPERATING LEASES
YEAR ENDING AS OF EXECUTED ON CAPITAL
DECEMBER 31, DECEMBER 31, 1999 JANUARY 10, 2000 LEASES
- ------------ ----------------- ----------------- -------
<S> <C> <C> <C>
2000..................................... $ 2,885 $ 1,496 $225
2001..................................... 3,351 2,759 214
2002..................................... 3,369 2,831 34
2003..................................... 3,422 2,905 --
2004..................................... 3,484 2,979 --
Thereafter............................... 44,112 49,968 --
-------- ------- ----
$ 60,623 $62,938 473
======== =======
Less: portion representing interest...... (55)
----
$418
====
</TABLE>
The Company is engaged in certain legal actions arising in the ordinary
course of business. The Company believes that it has adequate legal defenses and
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position and results of operations.
11. NET LOSS PER SHARE:
A reconciliation between basic and diluted net loss per share is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
NOV. 1, 1998
(DATE OF INCEPTION) YEAR ENDED
TO DECEMBER 31, DECEMBER 31,
1999 1999
------------------- ------------
<S> <C> <C>
Historical:
Net loss attributable to common stockholders......... $ (85) $ (6,288)
Weighted average common shares....................... 3,000,000 3,000,000
Net loss per share attributable to common
shareholders -- Basic and diluted................. $ (0.03) $ (2.10)
Pro forma (Unaudited):
Historical net loss.................................. $ (5,957)
Weighted average number of common shares............. 3,000,000
Weighted average assumed number of shares upon
conversion of preferred stock..................... 5,039,630
----------
Total weighted average number of shares used in
computing pro forma net loss per share............ 8,039,630
Basic and diluted pro forma net loss per share....... $ (0.74)
</TABLE>
F-14
<PAGE> 83
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1998 and 1999, options to purchase 0 and 1,144,546
shares of common stock, respectively, and warrants to purchase 0 and 15,000
shares of common stock, respectively, were outstanding, but were not included in
the computation of the diluted net loss per share attributable to common
shareholders and pro forma diluted net loss per common share because the Company
was in a loss position and the inclusion of such shares would be anti-dilutive.
12. RELATED PARTY TRANSACTIONS
During 1999, the Company repaid to its founders approximately $461 of which
$376 was borrowed in 1999, including the promissory note discussed below, and
reimbursed them for approximately $90 of expenses incurred during 1999 on behalf
of the Company.
In October 1999, the Company entered into a promissory note with its common
stockholder for $225. The promissory note was paid in full in November 1999. In
conjunction with the promissory note, the Company issued a warrant for the
purchase of common stock (see Note 7)
As of December 31, 1999, the Company leases approximately 40,000 square
feet of its collocation space in a 280,000 square foot facility owned by a
stockholder.
A real estate broker affiliated with the Company's founders receives
commissions from property owners with whom the Company enters into leases for
its operating facilities. Total commissions received by the broker during 1999
for Company-related transactions were $344.
13. EMPLOYEE BENEFIT PLAN
The Company sponsors a savings plan for its employees which is designed to
be qualified under Section 401(k) by the Internal Revenue Code. Eligible
employees are permitted to contribute to the 401(k) plan through payroll
deductions within statutory and plan limits. The Company did not contribute to
the plan in 1999.
14. SUBSEQUENT EVENTS
On March 30, 2000, the Board of Directors approved the Employee Stock
Purchase Plan. A total of 1,000,000 shares of common stock are available for
issuance under this plan. The first offering under this plan will begin on the
effective date of the Company's initial public offering of its common stock and
will have a duration of six months. Participating employees may purchase stock
under this plan at 85% of the fair market value of the Company's common stock on
the first or last day of the offering period, whichever is lower. No common
stock has been issued to date under this plan.
The Company issued 666,667 shares of Series B Preferred Stock at $1.50 per
share from January 1, 2000 through March 10, 2000 for total proceeds of $1
million.
The Company granted options for the purchase of 1,500,800 shares of common
stock from January 1, 2000 through March 7, 2000 for an exercise price of $0.40
per share.
On March 7, 2000, the Company exchanged 1,965,000 options for the purchase
of common stock at an exercise price of $0.40 per share for an equivalent number
of shares of restricted common stock for a purchase price of $0.40 per share.
The recipients of the restricted stock paid a total of $19,650 in cash and
issued the Company full-recourse notes totaling $766,350.
On April 4, 2000 and April 5, 2000, the Company granted options for the
purchases of 303,250 shares of common stock for an exercise price of $2.30.
F-15
<PAGE> 84
CO SPACE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 11, 2000, the Company amended the 1999 Stock Plan to increase
the aggregate number of shares which may be issued pursuant to the plan to
4,000,000. The Plan was subsequently amended on March 30, 2000 to increase the
aggregate number of shares issuable to 5,500,000.
On April 5, 2000, the Company acquired the personnel and a portion of the
assets and liabilities of KennTech, a consulting firm with which the Company
formerly contracted for the selection, design and construction program
management of collocation facilities, for 100,000 shares of the Company's common
stock and $300 in cash. This acquisition will be recorded as a purchase.
F-16
<PAGE> 85
- ------------------------------------------------------
- ------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither CO Space, Inc. nor any underwriter has authorized anyone to
provide prospective investors with different or additional information. This
prospectus is not an offer to sell nor is it seeking an offer to buy these
securities in any jurisdiction where such offer or sale is not permitted. The
information contained in this prospectus is correct only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or any sale of
these securities.
------------------------------
TABLE OF CONTENTS
------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements.......... 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 20
Selected Consolidated Financial
Data.............................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 23
Business............................ 28
Management.......................... 44
Principal Stockholders.............. 51
Certain Relationships and Related
Transactions...................... 54
Description of Capital Stock........ 56
Shares Eligible for Future Sale..... 62
Underwriting........................ 64
Legal Matters....................... 66
Experts............................. 66
Where You Can Find Additional
Information....................... 66
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------
Until , 2000 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to each dealer's obligation to deliver a prospectus when acting as
an underwriter and with respect to its unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[CO-SPACE INC. LOGO]
SHARES
COMMON STOCK
------------------------
PROSPECTUS
------------------------
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
THOMAS WEISEL PARTNERS LLC
WASSERSTEIN PERELLA
SECURITIES, INC.
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 86
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- -------
<S> <C>
SEC registration fee........................................ $33,000
NASD filing fee............................................. 4,500
Nasdaq National Market listing fee.......................... 1,000
Accounting fees and expenses................................ *
-------
Legal fees and expenses..................................... *
-------
Printing expenses........................................... *
-------
Blue sky qualification fees and expenses.................... 7,500
Transfer Agent's fee........................................ *
-------
Miscellaneous............................................... *
-------
TOTAL.................................................. $
=======
</TABLE>
The amounts set forth above, except for the Securities and Exchange
Commission, NASD and Nasdaq National Market fees, are in each case estimated.
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article VIII of our second amended and restated certificate of incorporation
provides that no director of CO Space be personally liable to CO Space or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to CO
Space or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) in respect of
unlawful dividend payments or stock redemptions or repurchases, or (4) for any
transaction from which the director derived an improper personal benefit. In
addition, our second amended and restated certificate of incorporation provides
that if the Delaware General Corporation Law is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Article V of our amended and restated bylaws provides for indemnification
by CO Space of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of CO Space if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of CO Space, and, with respect to criminal actions or proceedings, if
such person had no reasonable cause to believe his or her conduct was unlawful.
We also intend to enter into indemnification agreements with each of our
directors. These agreements will provide that we indemnify each of our directors
to the fullest extent permitted under law and our bylaws, and provide for the
advancement of expenses to each director. We have also obtained directors' and
officers' insurance against certain liabilities.
II-1
<PAGE> 87
We have also entered into indemnification agreements with each of our
directors and certain of our executive officers. These agreements provide that
we indemnify each of our directors and such officers to the fullest extent
permitted under law and our bylaws, and provide for the advancement of expenses
to each director and each such officer. We have also obtained directors and
officers insurance against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by CO Space during the past two years. Further
included is the consideration, if any, received by CO Space for such shares. We
believe that the transactions described below with respect to option grants to
our employees were exempt from the registration requirements of the Securities
Act by reason of Rule 701 promulgated thereunder.
(1) On April 12, 1999, CO Space issued an aggregate of 3,000 shares of
common stock to CO Space, LLC pursuant to a contribution agreement in
which CO Space, LLC transferred all right, title and interest in,
among other things, a number of Delaware limited liability companies
to CO Space. The sale and issuance of these securities were exempt
from registration under the Securities Act pursuant to Section 4(2)
thereof, on the basis that the transaction did not involve a public
offering. CO Space, LLC subsequently changed its name to RTE Holdings,
LLC.
(2) On May 12, 1999, CO Space issued an aggregate of 4,180,000 shares of
series A preferred stock to Centennial Fund VI, L.P., Centennial
Holdings I, LLC, Centennial Entrepreneurs Fund VI, L.P., and Norwest
Venture Partners VII, L.P. for an aggregate consideration of
$4,180,000. The sale and issuance of these securities were exempt from
registration under the Securities Act pursuant to Section 4(2)
thereof, on the basis that the transaction did not involve a public
offering.
(3) On June 7, 1999, CO Space issued 67,500 shares of series A preferred
stock to Jeffrey Brown, John Halsted, Henry G. Irwig, Justin
Perreault, Robert Perriello and Thomas Ragno for consideration of
$67,500. The sale and issuance of these securities were exempt from
registration under the Securities Act pursuant to Section 4(2)
thereof, on the basis that the transaction did not involve a public
offering.
(4) On July 27, 1999, CO Space issued a warrant to purchase up to 21,000
shares of series A preferred stock to Silicon Valley Bank with an
exercise price of $1.00 per share pursuant to a stock warrant
agreement. The sale and issuance of these securities were exempt from
registration under the Securities Act pursuant to Section 4(2)
thereof, on the basis that the transaction did not involve a public
offering.
(5) On August 15, 1999, CO Space issued 75,000 shares of series A
preferred stock to Robert McKenzie for consideration of $75,000. The
sale and issuance of these securities were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
(6) On October 28, 1999, CO Space issued a warrant to purchase up to
15,000 shares of common stock to RTE Holdings, LLC with an exercise
price of $1.50 per share pursuant to a stock warrant agreement. The
sale and issuance of these securities were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
(7) On November 12, 1999, CO Space issued an aggregate of 18,000,002
shares of series B preferred stock to the Secured Space Facilities,
LLC, Alta Communications VI, L.P., Alta Communications VII, L.P.,
Alta-Comm S By S, LLC, Alta VII Associates, LLC, AEW Partner III,
L.P., and Latona COS Investment LLC for an aggregate consideration of
$27,000,003. The sale and issuance of these securities were exempt
from registration under the
II-2
<PAGE> 88
Securities Act pursuant to Section 4(2) thereof, on the basis that the
transaction did not involve a public offering.
(8) On January 28, 2000, CO Space issued 436,656 shares of series B
preferred stock to Telecom Investors, LLC, Warren L. Harkness, William
A. Morash, David E. Nilson, John F. Kennedy, Diogo Teixeira, AG
Edwards & Sons, Inc. Custodian for Jamie McAndrews IRA and Henry G.
Irwig for consideration of $654,984. The sale and issuance of these
securities were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, on the basis that the transaction
did not involve a public offering.
(9) On January 28, 2000, CO Space issued 4,800,001 shares of series B-1
non-voting preferred stock and 533,333 shares of series B-2 preferred
stock to Secured Space Facilities, LLC in exchange for the
cancellation of the 5,333,334 shares of series B preferred stock owned
by Secured Space Facilities, LLC. The 533,333 shares of series B-2
preferred stock were subsequently transferred by Secured Space
Facilities, LLC to Beacon Capital Partners, L.P., and Beacon Capital
Partners, L.P. subsequently transferred such shares to Shared
Communications Spaces, LLC. Both such transfers took place on January
28, 2000.
(10) On February 15, 2000, CO Space issued 8,333 shares of series B
preferred stock to Glen Bagless for consideration of $12,499.50. The
sale and issuance of these securities were exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
(11) On December 27, 1999, CO Space granted options to purchase an
aggregate of 992,546 shares of common stock to employees, directors,
consultants and vendors with an exercise price of $0.40 per share
pursuant to the 1999 stock incentive plan. The issuance of these
options was exempt from registration under Rule 701 of the Securities
Act of 1933. On March 7, 2000, 580,000 of these options were canceled
and the recipients were granted an identical number of shares of
restricted common stock at $0.40 per share for an aggregate
consideration of $226,200.
(12) On February 8, 2000, CO Space granted options to purchase an aggregate
of 53,500 shares of common stock to employees with an exercise price
of $0.40 per share pursuant to the 1999 stock incentive plan. The
issuance of these options was exempt from registration under Rule 701
of the Securities Act.
(13) On January 11, 2000, CO Space granted options to purchase an aggregate
of 959,700 shares of common stock to employees and directors with an
exercise price of $0.40 per share pursuant to the 1999 stock incentive
plan. The issuance of these options was exempt from registration under
Rule 701 of the Securities Act. On March 7, 2000, 845,000 of these
options were canceled and the recipient was granted an identical
number of shares of restricted common stock at $0.40 per share for an
aggregate consideration of $374,283.
(14) On March 7, 2000, CO Space granted options to purchase an aggregate of
91,000 shares of common stock to employees with an exercise price of
$0.40 per share pursuant to the 1999 stock incentive plan. The
issuance of these options was exempt from registration under Rule 701
of the Securities Act.
(15) On March 7, 2000, CO Space granted 540,000 restricted shares of common
stock to employees and directors at $0.40 per share pursuant to the
1999 stock incentive plan for an aggregate purchase price of $210,600.
The issuance of these options was exempt from registration under Rule
701 of the Securities Act.
(16) On March 10, 2000, CO Space issued 666,667 shares B preferred stock to
investors, including Messrs. Egan and Hynes and attorneys at Goodwin,
Procter & Hoar LLP and an investment partnership composed of current
and former attorneys at Goodwin, Procter & Hoar LLP. The sale and
issuance of those securities were exempt from registration under the
Securities Act
II-3
<PAGE> 89
pursuant to Section 4(2) thereof, on the basis that the transaction
did not involve a public offering.
(17) On April 4, 2000, CO Space issued options to purchase an aggregate of
103,250 shares of common stock to employees with an exercise price of
$2.30 per share pursuant to the 1999 stock incentive plan. The
issuance of these options was exempt from registration under Rule 701
of the Securities Act.
(18) On April 5, 2000, CO Space issued 100,000 shares of common stock to
Kennedy & Rossi Technology Builders, Inc. The sale and issuance of
these securities were exempt from registration under the Securities
Act pursuant to Section 4(2) thereof, on the basis that the
transaction did not involve a public offering.
(19) On April 5, 2000, CO Space granted options to purchase an aggregate of
200,000 shares of common stock to employees with an exercise price of
$2.30 per share pursuant to the 1999 stock incentive plan. The
issuance of these options was exempt from registration under Rule 701
of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* Form of Fifth Amended and Restated Certificate of
Incorporation.
3.3* Form of Sixth Amended and Restated Certificate of
Incorporation.
3.4* Amended and Restated Bylaws.
3.5* Form of Second Amended and Restated Bylaws.
4.1* Specimen certificate for shares of common stock, $.01 par
value per share.
5.1* Opinion of Goodwin, Procter & Hoar LLP as to the legality of
the securities being offered.
10.1* 1999 Stock Incentive Plan.
10.2* Employee Stock Purchase Plan.
10.3* Warrant to purchase common stock issued to RTE Holdings, LLC
issued on October 28, 1999.
10.4* Amendment to Stockholders Agreement, dated January 27, 2000,
among CO Space and the Stockholders named therein.
10.5* Lease Agreement dated April 4, 1999 between CO Space Boston,
LLC and Cathartes/AEW, 70 Inner Belt, LLC.
10.6* Executive Agreement by and between CO Space and G. Gabriel
Cole.
10.7* Amendment to Executive Agreement by and between CO Space and
G. Gabriel Cole dated November, 1999.
10.8* Executive Agreement by and between CO Space and William A.
Jandovitz.
10.9* Executive Agreement by and between CO Space and Donato A.
DeNovellis.
10.10* Executive Agreement by and between CO Space and Elizabeth H.
Houlihan.
10.11* Executive Agreement by and between CO Space and Catherine A.
Davies.
10.12* Executive Agreement by and between CO Space and Linda M.
Cole.
21.1* List of subsidiaries of CO Space, Inc.
23.1* Consent of Goodwin, Procter & Hoar LLP (included in Exhibit
5.1 hereto).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (included on signature pages).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
II-4
<PAGE> 90
(b) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because
the required information is given in the Financial Statements or Notes to those
statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Burlington, on April 5,
2000.
CO SPACE, INC.
By: /s/ DONATO A. DENOVELLIS
------------------------------------
Name: Donato A. DeNovellis
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints each of William A. Jandovitz and G.
Gabriel Cole such person's true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or to any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that any said attorney-in-fact and agent, or any
substitute or substitutes of any of them, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM A. JANDOVITZ Chief Executive Officer and April 5, 2000
- --------------------------------------------------- Director (Principal Executive
William A. Jandovitz Officer)
/s/ G. GABRIEL COLE President and Director April 5, 2000
- ---------------------------------------------------
G. Gabriel Cole
/s/ DONATO A. DENOVELLIS Chief Financial Officer April 5, 2000
- --------------------------------------------------- (Principal Financial and
Donato A. DeNovellis Accounting Officer)
/s/ WILLIAM P. EGAN Director April 5, 2000
- ---------------------------------------------------
William P. Egan
/s/ JOHN C. HALSTED Director April 5, 2000
- ---------------------------------------------------
John C. Halsted
</TABLE>
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<PAGE> 92
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT MCKENZIE Director April 5, 2000
- ---------------------------------------------------
Robert McKenzie
/s/ THOMAS H. NOLAN, JR. Director April 5, 2000
- ---------------------------------------------------
Thomas H. Nolan, Jr.
/s/ JAMES HYNES Director April 5, 2000
- ---------------------------------------------------
James Hynes
</TABLE>
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<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* Form of Fifth Amended and Restated Certificate of
Incorporation.
3.3* Form of Sixth Amended and Restated Certificate of
Incorporation.
3.4* Amended and Restated Bylaws.
3.5* Form of Second Amended and Restated Bylaws.
4.1* Specimen certificate for shares of common stock, $.01 par
value per share.
5.1* Opinion of Goodwin, Procter & Hoar LLP as to the legality of
the securities being offered.
10.1* 1999 Stock Incentive Plan.
10.2* Employee Stock Purchase Plan.
10.3* Warrant to purchase common stock issued to RTE Holdings, LLC
issued on October 28, 1999.
10.4* Amendment to Stockholders Agreement, dated January 27, 2000,
among CO Space and the Stockholders named therein.
10.5* Lease Agreement dated April 4, 1999 between CO Space Boston,
LLC and Cathartes/AEW, 70 Inner Belt, LLC.
10.6* Executive Agreement by and between CO Space and G. Gabriel
Cole.
10.7* Amendment to Executive Agreement by and between CO Space and
G. Gabriel Cole dated November, 1999.
10.8* Executive Agreement by and between CO Space and William A.
Jandovitz.
10.9* Executive Agreement by and between CO Space and Donato A.
DeNovellis.
10.10* Executive Agreement by and between CO Space and Elizabeth H.
Houlihan.
10.11* Executive Agreement by and between CO Space and Catherine A.
Davies.
10.12* Executive Agreement by and between CO Space and Linda M.
Cole.
21.1* List of subsidiaries of CO Space, Inc.
23.1* Consent of Goodwin, Procter & Hoar LLP (included in Exhibit
5.1 hereto).
23.2 Consent of PricewaterhouseCoopers LLP.
24.1 Powers of Attorney (included on signature pages).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated April 5, 2000, relating to the consolidated financial statements of
CO Space, Inc. and Subsidiaries, which appear in such Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 5, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17,564
<SECURITIES> 0
<RECEIVABLES> 75
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 17,773
<PP&E> 12,571
<DEPRECIATION> (267)
<TOTAL-ASSETS> 30,415
<CURRENT-LIABILITIES> 3,702
<BONDS> 0
31,384
0
<COMMON> 30
<OTHER-SE> (6,305)
<TOTAL-LIABILITY-AND-EQUITY> 30,415
<SALES> 0
<TOTAL-REVENUES> 258
<CGS> 0
<TOTAL-COSTS> 2,439
<OTHER-EXPENSES> 3,814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,957)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,288)
<EPS-BASIC> (2.10)
<EPS-DILUTED> (2.10)
</TABLE>
