<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COLO.COM
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 4813 94-3272783
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
COLO.COM
2000 SIERRA POINT PARKWAY, SUITE 601
BRISBANE, CALIFORNIA 94005
(650) 292-2656
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES M. SKIBO
CHIEF EXECUTIVE OFFICER
COLO.COM
2000 SIERRA POINT PARKWAY, SUITE 601
BRISBANE, CALIFORNIA 94005
(650) 292-2656
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
MARIO M. ROSATI, ESQ.
MICHAEL S. DORF, ESQ.
ALEXANDER D. PHILLIPS, ESQ.
JUDY G. HAMEL, ESQ.
MARK A. METCALF, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CA 94304
(650) 493-9300
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(1) PRICE(1) REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------------------
13 7/8% Senior Notes due 2010, Series
B................................... $300,000,000 100% $300,000,000.00 $79,200.00
---------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(f) under the Securities Act of 1933.
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, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. We may not exchange these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This preliminary prospectus is not an offer to sell or exchange these
securities and it is not soliciting an offer to buy or exchange these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 9, 2000.
[colo.com logo]
Exchange Offer For $300,000,000 of 13 7/8% Senior Notes Due 2010.
Terms of Exchange Offer
EXCHANGE OFFER
We will exchange new notes that are registered under the Securities Act for
old notes that were sold on March 10, 2000.
All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
We will receive no proceeds from the exchange offer.
EXCHANGE OFFER EXPIRATION
, 2000 at 5:00 p.m., New York City time.
OLD NOTES
On March 10, 2000, we issued and sold $300.0 million of 13 7/8% Senior
Notes due 2010.
If you tender your old notes in the exchange offer, interest will cease to
accrue before your new notes are issued. If you do not tender in the exchange
offer, your old notes will continue to be subject to the same terms and
restrictions except that we will not be required to register your old notes
under the Securities Act.
COLO.COM
2000 Sierra Point Parkway, Suite 601, Brisbane, California 94005, (650)
292-2656.
NEW NOTES
Identical to the old notes except that the new notes will be registered
under the Securities Act.
- Maturity: March 15, 2010.
- Change of Control: You can require us to purchase your notes at 101% of
the principal amount.
- Interest: Paid every six months on March 15 and September 15, starting
September 15, 2000.
- Redemption by COLO.COM: Anytime on or after March 15, 2005, except that
redemptions for a portion of the notes may be made at any time prior to
March 15, 2003 with the cash proceeds of specified capital stock sales.
- Ranking: The new notes will be general unsecured obligations, ranking:
- equally with all our senior unsecured indebtedness;
- senior to all our subordinated indebtedness; and
- junior to all our secured indebtedness and liabilities of our
subsidiaries.
Investment in the notes to be issued in the exchange offer involves risks.
See the risk factors section beginning on page 8.
This prospectus and the accompanying letter of transmittal are first being
mailed to holders of outstanding notes on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the notes or determined that this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2000.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 8
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 21
Trademarks.................................................. 21
Capitalization.............................................. 22
Selected Consolidated Financial Data........................ 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business.................................................... 34
Management.................................................. 46
Related Party Transactions.................................. 53
Principal Stockholders...................................... 55
Description of Other Indebtedness........................... 58
The Exchange Offer.......................................... 59
Description of the Notes.................................... 69
Material United States Federal Income Tax Considerations.... 108
Plan of Distribution........................................ 113
Legal Matters............................................... 113
Experts..................................................... 114
Available Information....................................... 114
Index to Consolidated Financial Statements and Schedule..... F-1
</TABLE>
Until , 2000 (90 days after the date of this prospectus), all
dealers that buy, sell or trade these securities, whether or not participating
in this exchange offer, may be required to deliver a prospectus. This is in
addition to dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors described under the heading "Risk Factors" and elsewhere in this
prospectus.
COLO.COM
We are rapidly deploying an international platform of colocation
facilities, called Neutral Optical Hubs, in which our customers can install
equipment, connect to a choice of network providers and connect with our other
customers. We believe our Neutral Optical Hubs will be best-in-class facilities
that will offer a broad choice of network providers and the most flexible
technology protocols. Our carrier neutral facilities enable our target customers
to use any of the network providers available at our facilities to deliver high
quality, broadband services and applications to their end users. We are not a
communications carrier, and because our facilities are carrier neutral, our
customers will be able to connect their communications equipment located in our
facilities to any of the carriers that are connected to our facilities. As of
May 31, 2000, we had signed contracts with 53 customers to locate equipment in
one or more Neutral Optical Hubs, including:
- Internet-based businesses, such as Campsix, Inc., RateXchange Corporation
and ShockWave.com, Inc.
- Application service providers, such as Evolve Software, Inc. and
Musicbank, Incorporated;
- Internet service providers, such as InterNAP Network Services
Corporation, Madge Networks, N.V., The Masterlink Group, Inc. and SAVVIS
Communications Corporation;
- Competitive local phone companies, such as Mpower Communications Corp.,
Telseon Inc. and 2nd Century Communications Inc.; and
- Other voice and data communications companies, such as NeuMedia Inc.
The deregulation of the telecommunications industry and the significant
growth in Internet users and bandwidth intensive applications has increased the
demand for the existing communications infrastructure. This demand has strained
the performance of the infrastructure, leading to problems with latency, data
loss and security. These and other problems are impacting the ability of our
target customers to effectively use the Internet for new services such as
voice-over-Internet protocol and some applications that use streaming and
broadcast capabilities. Content distribution companies and advanced switch
providers have been able to improve existing bottlenecks and network congestion
through technology, but depend on others to provide facilities and interconnect
networks.
Internet-based businesses, application service providers, Internet service
providers, competitive local phone companies and other voice and data
communications companies, which are our target customers, are increasingly
turning to colocation options as the need to be close to their end users and the
cost of building in-house facilities increases. These target customers have
traditionally had limited colocation choices in carrier operated facilities,
carrier hotels or web-hosting facilities. International Data Corporation
predicts that the U.S. market for Internet hosting, which consists of shared
server hosting, several categories of dedicated server hosting and related
services, will grow from an estimated $3.7 billion in 2000 to $18.9 billion in
2003. Within this market, IDC predicts that the market for colocation services
will be one of the
1
<PAGE> 5
fastest growing segments, growing from an estimated $710 million in 2000 to $4.2
billion in 2003.
We believe that our carrier neutral colocation solution addresses the
limitations of the traditional alternatives. Our customers will be able to
purchase a variety of colocation, cross connection and technical support
services in all facilities across our broad geographic presence. We believe our
solution provides the foundation for building networks that enable customers to
locate equipment close to end users, thereby enhancing performance and enabling
them to provide more competitive service offerings. Our Neutral Optical Hubs
will offer a number of compelling advantages to our customers, including:
- International platform and rapid time to market;
- Network and service neutrality;
- Cost savings;
- Best-in-class facilities; and
- Superior customer service
To achieve our goal of becoming the premier, international, single-source
supplier for carrier-neutral colocation facilities to our targeted customer
base, our strategy is to:
- Be first-to-market with broad geographic presence;
- Maintain neutrality;
- Strategically deploy multiple Neutral Optical Hubs in certain geographic
regions;
- Enter into strategic and commercial relationships to extend sales reach;
- Expand our service offerings and enable marketplace exchanges; and
- Build the COLO.COM brand.
We intend to have at least 40 Neutral Optical Hubs generating revenue or
ready for carriers and customers to install their equipment by the end of 2000.
As of May 31, 2000, we had signed leases for 46 facilities in the United States
and Europe totaling more than 1.1 million square feet, of which 11 facilities in
the U.S. were ready for carriers and customers to install their equipment. We
believe our Neutral Optical Hubs will become the preferred platform for
companies that want to enhance service for their end users, will facilitate
business-to-business commerce among our customers and will enable the
convergence of Internet and telecommunication services.
------------------------
We were incorporated in California under the name Colomotion, Inc. in April
1997 and changed our name to COLO.COM in July 1999. Our principal executive
office is located at 2000 Sierra Point Parkway, Brisbane, California 94005, and
our telephone number is (650) 292-2656. Our corporate website is www.colo.com.
The information contained on our website is not incorporated by reference into
this prospectus.
2
<PAGE> 6
THE EXCHANGE OFFER
SECURITIES OFFERED......... $300.0 million aggregate principal amount of
13 7/8% Senior Notes due 2010, Series B. The terms
of the new notes and the old notes are identical
except for transfer restrictions and registration
rights relating to the old notes that will not be
applicable to the new notes. The old notes and the
new notes are collectively referred to as the
notes.
ISSUANCE OF OLD NOTES...... $300.0 million aggregate principal amount of
13 7/8% Senior Notes due 2010, Series A were issued
on March 10, 2000 to Goldman, Sachs & Co., Bear,
Stearns & Co. Inc., Chase Securities Inc., Deutsche
Bank Securities Inc., Warburg Dillon Read, LLC and
Jefferies & Company, Inc., which placed the old
notes with qualified institutional buyers.
THE EXCHANGE OFFER......... We are offering to exchange $1,000 principal amount
of new notes for each $1,000 principal amount of
old notes. Old notes may only be exchanged in
$1,000 principal amount increments. There are
$300.0 million aggregate principal amount of old
notes outstanding.
CONDITIONS TO THE EXCHANGE
OFFER.................... The exchange offer is not conditioned upon any
minimum principal amount of old notes being
tendered for exchange. However, the exchange offer
is subject to customary conditions, which may be
waived by us. See "The Exchange Offer -- Conditions
to the Exchange Offer."
PROCEDURES FOR TENDERING... If you want to tender your old notes in the
exchange offer, you must complete and sign the
letter of transmittal according to the instructions
contained in this prospectus and the letter of
transmittal. You must then mail, fax or hand
deliver the letter of transmittal, together with
any other required documents, to the exchange
agent, either with the old notes to be tendered or
in compliance with the specified procedures for
guaranteed delivery of old notes. You should allow
sufficient time to ensure timely delivery. Some
brokers, dealers, commercial banks, trust companies
and other nominees may also effect tenders by book-
entry transfer. If you own old notes registered in
the name of a broker, dealer, commercial bank,
trust company or other nominee, you are urged to
contract that person promptly if you wish to tender
old notes in the exchange offer. Letters of
transmittal and certificates representing the old
notes should not be sent to COLO.COM. These
documents should be sent only to the exchange
agent. Questions regarding how to tender and
requests for information should also be directed to
the exchange agent.
If you hold old notes through The Depositary Trust
Company and wish to accept the exchange offer, you
must do so pursuant to the book-entry transfer
facility's procedures for book-entry transfer (or
other applicable procedures), all in accordance
with this prospectus and the letter of transmittal.
3
<PAGE> 7
See "The Exchange Offer Procedures for Tendering
Old Notes."
EXPIRATION DATE;
WITHDRAWAL............... The exchange offer will expire on the earlier of
5:00 p.m. New York City time, on ,
2000 or the date when all old notes have been
tendered, or a later date and time to which it may
be extended. However, it may not be extended beyond
, 2000. We will accept for exchange
any and all old notes that are validly tendered in
the exchange offer prior to 5:00 p.m., New York
City time, on the expiration date. The tender of
old notes may be withdrawn at any time prior to the
expiration date. Any old note not accepted for
exchange for any reason will be returned without
expense to the tendering holder as promptly as
practicable after the expiration or termination of
the exchange offer. The new notes issued in the
exchange offer will be delivered promptly following
the expiration date. See "The Exchange
Offer -- Terms of the Exchange Offer; Period for
Tendering Old Notes" and "-- Withdrawals of
Tenders."
GUARANTEED DELIVERY
PROCEDURES............... If you wish to tender your old notes and (1) your
old notes are not immediately available or (2) you
cannot deliver your old notes together with the
letter of transmittal to the exchange agent prior
to the expiration date, you may tender your old
notes according to the guaranteed delivery
procedures contained in the letter of transmittal.
See "The Exchange Offer -- Procedures for Tendering
Old Notes -- Guaranteed Delivery Procedures."
TAX CONSIDERATIONS......... For U.S. federal income tax purposes, the exchange
of old notes for new notes should not be considered
a sale or exchange or otherwise a taxable event to
the holders of notes. See "Material United States
Federal Income Tax Considerations."
USE OF PROCEEDS............ We will receive no proceeds from the exchange
offer.
APPRAISAL RIGHTS........... Holders of old notes will not have dissenters'
rights or appraisal rights in connection with the
exchange offer.
EXCHANGE AGENT............. State Street Bank & Trust Company of California,
National Association is serving as exchange agent
in connection with the exchange offer for the
notes.
RESALES OF NEW NOTES....... Based on an interpretation by the Securities and
Exchange Commission set forth in no-action letters
issued to third parties, we believe that you may
resell or otherwise transfer new notes issued in
the exchange offer in exchange for old notes
without restrictions under the federal securities
laws.
4
<PAGE> 8
However, there are exceptions to this general
statement. You may not freely transfer the new
notes if:
- you are an affiliate of COLO.COM;
- you did not acquire the new notes in the ordinary
course of your business;
- you have engaged in, intend to engage in, or have
an arrangement or understanding with any person
to participate in the distribution of the new
notes; or
- you are a broker-dealer who acquired the old
notes directly from us.
Any holder subject to any of the exceptions above
and each participating broker-dealer that receives
new notes for its own account in the exchange offer
in exchange for old notes that were acquired as a
result of market making, must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with the resale
of the new notes.
CONSEQUENCES OF NOT
EXCHANGING THE OLD
NOTES.................... If you do not tender your old notes or your old
notes are not properly tendered, the existing
transfer restrictions will continue to apply. The
old notes are currently eligible for sale pursuant
to Rule 144A through the PORTAL Market. Because we
anticipate that most holders will elect to exchange
old notes for new notes due to the absence of
restrictions on the resale of new notes under the
Securities Act in most cases, we anticipate that
the liquidity of the market for any old notes
remaining after the consummation of the exchange
offer will be substantially limited. See "Risk
Factors -- There could be negative consequences to
you if you do not exchange your old notes for new
notes" and "The Exchange Offer -- Consequences of
Failure to Exchange Old Notes."
5
<PAGE> 9
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the new notes and the old notes are identical in all respects,
except that the terms of the new notes do not include the transfer restrictions
and registration rights relating to the old notes. The old notes and the new
notes are referred to collectively as the notes.
The new notes will bear interest from the most recent date to which
interest has been paid on the old notes. Accordingly, registered holders of new
notes on the relevant record date for the first interest payment date following
the completion of the exchange offer will receive interest accruing from the
most recent date on which interest has been paid. Old notes accepted for
exchange will cease to accrue interest from and after the date of completion of
the exchange offer. Holders of old notes whose old notes are accepted for
exchange will not receive any payment in respect of interest on the old notes
otherwise payable on any interest payment date that occurs on or after
completion of the exchange offer.
NOTES OFFERED.............. $300.0 million aggregate principal amount of
13 7/8% Senior Notes due 2010, Series B.
MATURITY................... March 15, 2010
INTEREST................... The notes will bear interest at the rate of
13 7/8%. We will pay interest on the notes in cash,
semiannually in arrears, on each March 15 and
September 15, commencing September 15, 2000.
ESCROW PROCEEDS............ We have used a portion of the proceeds from the
sale of the old notes to purchase U.S. government
securities which were placed in an escrow account.
The scheduled interest and principal payments on
the U.S. government securities placed in the escrow
account will be sufficient to pay the first four
scheduled interest payments on the notes. The notes
are secured by a lien on the securities in the
escrow account.
RANKING.................... The notes are unsecured (except as described in
"-- Escrow Proceeds" above) senior obligations and:
- rank equal in right of payment with all of our
existing and future unsecured senior debt;
- are effectively subordinated to any of our
secured debt to the extent of the value of the
assets which secure such debt; and
- are effectively subordinated to the existing and
future debt and other liabilities (including
trade payables) of our subsidiaries or any future
subsidiaries.
As of March 31, 2000, we had:
- no unsecured debt that would have ranked equally
with the notes in right of payment;
- $3.4 million of secured debt that would have
effectively ranked senior to the notes to the
extent of the value of the assets securing such
debt; and
6
<PAGE> 10
- no debt or other liabilities (including trade
payables) of our subsidiaries that would have
effectively ranked senior to the notes.
SINKING FUND............... None.
OPTIONAL REDEMPTION........ We may redeem all or a portion of the notes at any
time on or after March 15, 2005, at the redemption
prices set forth in this prospectus under the
caption "Description of the Notes -- Optional
Redemption", plus accrued interest, if any, to the
date of redemption. In addition, before March 15,
2003, we may redeem up to 35% of the aggregate
principal amount of the old notes with the proceeds
from certain sales of our capital stock.
MANDATORY OFFER TO
REPURCHASE............... If we experience specific kinds of changes of
control, we must offer to repurchase the notes at a
redemption price equal to 101% of the aggregate
principal amount of the notes repurchased, plus
accrued interest, if any, to the date of
repurchase. See "Description of the
Notes -- Repurchase at the Option of Holders Upon a
Change of Control."
BASIC COVENANTS OF THE
INDENTURE................ We have issued the notes under an indenture. The
indenture, among other things, restricts our
ability and the ability of our subsidiaries and any
future subsidiaries to:
- incur debt and issue certain types of preferred
stock;
- pay dividends or repurchase stock;
- repay subordinated debt;
- make certain investments;
- create restrictions on the ability of our
subsidiaries to make certain payments to us;
- enter into transactions with stockholders and
affiliates;
- create liens;
- engage in sale-leaseback transactions;
- issue capital stock of our subsidiaries;
- transfer or sell assets; and
- consolidate, merge or sell all or substantially
all of our assets.
These covenants are subject to important
exceptions, including the right to incur an
unlimited amount of purchase money debt. For more
details, see "Description of the
Notes -- Covenants."
For details of the notes, see the section "Description of the Notes" later
in this prospectus.
7
<PAGE> 11
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before tendering your old notes in the
exchange offer. Risks and uncertainties, in addition to those we describe below,
that are not presently known to us or that we believe are immaterial may also
impair our business operations. These risks could, if they occur, harm our
business and our operating results.
THERE COULD BE NEGATIVE CONSEQUENCES TO YOU IF YOU DO NOT EXCHANGE YOUR OLD
NOTES FOR NEW NOTES.
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Because we anticipate that
most holders will elect to exchange their old notes for new notes due to the
absence of most restrictions on the resale of new notes, we anticipate that the
liquidity of the market for any old notes remaining outstanding after the
exchange offer may be substantially limited. Following the consummation of the
exchange offer, holders who did not tender their old notes generally will not
have any further registration rights under the registration rights agreement,
and these old notes will continue to be subject to restrictions on transfer. The
old notes are currently eligible for sale under Rule 144A through the PORTAL
Market.
As a result of making the exchange offer, we will have fulfilled our
obligations under the registration rights agreement. Holders who do not tender
their old notes generally will not have any further registration rights or
rights to receive the liquidated damages specified in the registration rights
agreement for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
- to COLO.COM or one of its subsidiaries;
- to a qualified institutional buyer;
- to an institutional accredited investor;
- to a party outside the United States under Regulation S under the
Securities Act;
- under an exemption from registration provided by Rule 144 under the
Securities Act; or
- under an effective registration statement.
WE ARE A NEW COMPANY AND FACE ALL OF THE RISKS OF A START-UP COMPANY IN A NEW
AND RAPIDLY EVOLVING MARKET.
We will encounter challenges and difficulties frequently experienced by
early-stage companies in new and rapidly evolving markets, including
- a lack of operating experience;
- increasing net losses and negative cash flows;
- lack of sufficient customers;
- insufficient revenue or cash flow to be self sustaining;
- high capital expenditures;
- an unproven business model; and
- difficulties in managing rapid growth.
We can not assure you that we will ever be successful.
8
<PAGE> 12
WE MAY NOT SUCCEED BECAUSE OF OUR LIMITED EXPERIENCE.
Because we are a new company, we have limited experience in designing,
building and operating Neutral Optical Hubs. As of May 31, 2000, eight of our
Neutral Optical Hubs were generating revenue, including our first facility
located in San Francisco (Mission Street) that we intend to close. Our buildout
plan requires that we identify, lease and construct multiple facilities at the
same time. We intend to have at least 40 Neutral Optical Hubs generating revenue
or ready for carriers and customers to install their equipment in metropolitan
areas by the end of 2000. This business plan is based on our assumption that it
will take approximately ten months from the date that we enter into a lease
until the date a new Neutral Optical Hub begins generating revenue. Although we
have successfully met this time frame for all of our facilities (excluding our
first facility located in San Francisco (Mission Street)) which were generating
revenue as of May 31, 2000, we have previously experienced and may continue to
experience unforeseen delays and expenses in connection with our facility
buildout program. In addition, we have not yet demonstrated that we are able to
manage the buildout of multiple facilities at the same time. Accordingly, we
cannot assure you that we will successfully complete the implementation of our
buildout plan within our proposed time frame. In addition, our lack of
experience could result in increased operating and capital costs and delays in
our expansion strategy. Our lack of operating experience could also result in
service interruptions for our customers. In addition, our long-term business
strategy calls for us to eventually offer higher margin value-added services to
our customers. However, we do not currently provide such services, and have no
experience in developing, implementing and marketing such services. Accordingly,
we can not assure you that we will be successful at providing these additional
services, or that they will not result in additional losses. We may not
successfully address any or all of the risks posed by our lack of experience,
and our failure to do so would seriously harm our business and operating
results.
WE MUST BUILD OUT NEW FACILITIES VERY RAPIDLY IN ORDER TO MAKE PAYMENTS ON THE
NOTES AND TO EXECUTE OUR BUSINESS PLAN.
We have had very low revenues and significant losses to date, and we must
build out new facilities very rapidly in order to generate sufficient revenues
to be able to make payments on the notes. In addition, we must build out new
facilities very rapidly in order to execute our business strategy, which is
based upon gaining a first-to-market advantage in the new market for neutral
colocation facilities. To accomplish this goal, we intend to have at least 40
Neutral Optical Hubs generating revenue or ready for carriers and customers to
install their equipment in metropolitan areas by the end of 2000 and intend to
open numerous facilities in subsequent years. Among other things, our aggressive
buildout strategy will require us to rapidly:
- locate and secure suitable sites for our Neutral Optical Hubs;
- acquire and install equipment for each of our facilities, including heat,
ventilation and air-conditioning systems, electrical power supply and
backup systems, fire detection and suppression systems, equipment
monitoring and 24 x 7 security systems;
- hire technical personnel for each of our facilities; and
- connect a variety of network providers to each of our facilities.
We have very limited experience doing this. In addition, our existing and
prospective customers expect us to provide broad geographic coverage in the near
future. As a result, delays in successfully completing our buildout strategy
could impair important relationships, damage our reputation and have a material
adverse effect on our results of operations.
9
<PAGE> 13
WE HAVE INCURRED LOSSES SINCE INCEPTION AND WE EXPECT FUTURE LOSSES.
We have generally experienced increasing quarterly operating losses and
negative cash flows since inception. As of March 31, 2000, we had cumulative net
losses of $22.4 million and cumulative cash used in operating activities of
$14.0 million. We expect that our net losses and negative cash flows will
increase significantly for the foreseeable future. We cannot assure you that we
will be able to achieve operating income or positive cash flows in the future.
If we cannot, we would not be able to meet our working capital requirements or
make interest and principal payments on our debt, including the notes.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS WHICH WE MAY NOT BE ABLE TO OBTAIN.
To complete the implementation of our intended buildout plan within our
proposed time frame and to fund our anticipated operating losses, we will need
to raise funds through additional private or public equity or debt financings.
We currently anticipate that our available cash resources will be sufficient to
meet our anticipated operating losses, interest expense and capital expenditure
requirements through at least the completion of our facilities that are
currently under construction. We do not currently have the cash resources to
complete all of the facilities for which we have leased sites or to complete our
intended 40 facility buildout plan for fiscal year 2000. However, we do not
intend to begin construction of facilities that we do not then have sufficient
resources to complete. We anticipate that we may incur a substantial amount of
additional debt under a credit facility that we may enter into during 2000.
Financing may not be available to us at the time we need it, or if it is
available, it may only be available on terms that are unfavorable to us. If we
cannot raise sufficient additional funds on acceptable terms we may need to
delay or abandon some or all of our development and expansion plans or otherwise
forego market opportunities, and we may incur additional losses if we need to
terminate any leases or abandon or delay the completion of any facilities under
construction. Equity financing would dilute the ownership interest of our
current stockholders. Debt financing would increase our interest expense.
The anticipated timing and amount of our capital requirements is
forward-looking and therefore inherently uncertain. It may take longer than we
anticipate to build out our Neutral Optical Hubs. We also do not know how long
our sales cycle will be, but it is likely to be lengthy. Once a particular
facility is generating revenue, we expect that it will take an extended period
of time before it will have enough business to provide sufficient revenue to
cover its expenses. Growth in the number of our facilities is likely to increase
the amount and duration of losses and our financing needs. Our future capital
requirements may therefore vary significantly from what we currently project and
may be affected by unforeseen delays and expenses and a lengthier than
anticipated sales cycle. If we encounter any of these problems or if we have
underestimated our working capital, operating losses or capital expenditure
requirements, we may require significantly more financing than we currently
anticipate.
OUR MARKET IS NEW AND WE DO NOT KNOW IF THERE IS SUFFICIENT DEMAND FOR OUR
SERVICES.
Because the market for neutral colocation facilities is just developing, we
do not know whether there will be sufficient demand for our services. Although a
number of emerging companies are developing similar businesses, we are not aware
of any company that has successfully executed a business plan like ours. We will
make large capital expenditures and incur substantial losses before we have much
information about the actual level of demand for our services. If there is not
as much demand as we expect, our revenues may be insufficient to cover our costs
and expenses, we may not be able to make payments on the notes and the value of
our common stock could be significantly decreased.
10
<PAGE> 14
WE EXPECT COMPETITION TO BE INTENSE.
The market for colocation services is expanding. The main barriers to entry
are access to capital, the time needed to assemble a management team and build
out facilities, and the ability to secure a first-to-market advantage. We have
targeted the developing neutral colocation segment of the broader market for
colocation services. Although there are a number of companies developing
businesses similar to ours, in most metropolitan areas there are currently a
limited number of providers of neutral colocation facilities operating. We
expect other companies to enter this market segment if there is sufficient
demand for neutral colocation services.
A substantial portion of the costs and expenses of a neutral colocation
facility are fixed. Once a facility is built and staffed, the marginal cost of
providing colocation space to a customer is relatively low. Therefore, if there
is more than one neutral colocation facility in a metropolitan area, there may
be price competition. If there is significant excess capacity in a metropolitan
area, this could lead to increased price competition and lower margins.
If we are unable to rapidly roll out our Neutral Optical Hubs, we may lose
our first-to-market advantage and other companies may be able to attract the
same customers that we are targeting. Once a potential customer is located in a
competitor's facility, it will be extremely difficult to convince that potential
customer to relocate to our Neutral Optical Hubs because moving out of an
existing facility could result in service interruptions and significant costs to
reconfigure network connections.
In addition to competing with other neutral colocation providers, we will
compete with traditional colocation providers, including local phone companies,
long distance phone companies, Internet service providers and web hosting
facilities. Most of these competitors have greater resources, more customers,
longer operating histories, greater brand recognition and more established
relationships than we have. We believe our neutrality provides us with an
advantage over these competitors. However, these competitors could offer
colocation on neutral terms, and may start doing so in the metropolitan areas
where we establish operations. If this occurs, we could face increased price
competition.
The Telecommunications Act requires incumbent local exchange carriers to
provide non-discriminatory colocation to telecommunications carriers that wish
to interconnect with the incumbent local exchange carrier's networks or obtain
access to incumbent local exchange carrier-provided unbundled network elements.
In 1996, the Federal Communications Commission adopted initial rules to
implement this provision and, in 1999, adopted additional rules that should
significantly lower the cost and increase the attractiveness of incumbent local
exchange carrier-provided colocation facilities. Consequently, colocation
offered by incumbent local exchange carriers may become more competitive with
our service offerings.
Telephone and Internet companies with which we compete will be able to
provide our target customers with additional benefits, including bundled
communication services, and may do so at reduced prices or in a manner that is
more attractive to our potential customers than obtaining space in our Neutral
Optical Hubs. If these competitors were to provide communication services at
reduced prices together with colocation space, it may lower the total price of
these services in a fashion that we cannot match.
Our competitors include:
- carriers, such as AT&T, Level 3 Communications, MCI WorldCom, Qwest
Communications International, Inc. and Sprint, which offer colocation as
a byproduct of offering access to their networks;
- web-hosting facilities offered by Digital Island, Inc. and Exodus
Communications, Inc.;
11
<PAGE> 15
- network access points, such as Neutral Nap, PAIX, and Equinix, Inc.;
- carrier hotels, such as One Wilshire in Los Angeles, the Westin Building
in Seattle and 60 Hudson in New York, which offer physical space for
lease, incumbent local exchange carriers; and
- other domestic and international companies offering central office-like
facilities, such as Switch and Data Facilities Co., CO Space, Inc.,
InFlow, Inc., Telehouse International Corporation of America and
TelePlace in the U.S., CityReach International, DigiPlex S.A., Global
Reach, IX Europe, iaxis, InterXion Netherlands BV and Redbus Interhouse
in Europe, and iAsiaWorks, Inc. in Asia.
Several of our competitors are our customers or our potential customers.
WE MUST MANAGE OUR GROWTH AND EXPANSION EFFECTIVELY.
We are experiencing, and expect to continue to experience, rapid growth
with respect to the buildout of our Neutral Optical Hubs, expansion of our
customer base and increasing the number of our employees. This growth has
placed, and we expect it will continue to place a significant strain on our
financial, management, operational and other systems and resources, and we
cannot assure you that our systems, resources, procedures and controls will be
adequate to support further expansion of our operations. Any failure to manage
growth effectively could seriously harm our business and operating results. To
succeed, we will need to:
- maintain close coordination among our executive, technical, accounting,
finance, marketing, sales, real estate, construction and operations
organizations;
- improve our operating, administrative, financial and accounting
procedures and controls; and
- implement sophisticated management information systems, including
construction management, billing, budget, sales administration and
tracking, human resources and customer support systems, and systems that
enable us to monitor our operations.
We introduced a new management team and replaced substantially all of our
accounting and finance staff in 1999. In connection with the audit of our
financial statements for the period from our inception (April 2, 1997) to
December 31, 1997 and the year ended December 31, 1998, our independent
accountants reported on certain material weaknesses in the system of internal
accounting and financial controls maintained by our former management, which
included deficiencies in the maintenance of supporting documentation and
approvals for disbursements, processes for authorizing significant contracts and
reconciliation of general ledger accounts, and also reported certain
unauthorized stock transactions. During 1999, in addition to hiring new
accounting and financial personnel, our new management team implemented a number
of internal accounting polices and procedures to strengthen our system of
internal controls. We believe that these new policies and procedures have
resolved all of the material weaknesses reported in connection with our 1998
audit. We can not assure you that we will not experience any deficiencies in our
system of internal controls in the future. For example, despite our strengthened
internal control policies and procedures, we discovered an undocumented
transaction involving an option for the purchase of 5,000 shares of our common
stock in mid-1999.
12
<PAGE> 16
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A SHORT OPERATING HISTORY.
We were founded under prior management in April 1997 and opened our first
facility in San Francisco (Mission Street) in January 1998. As of May 31, 2000,
this facility was one of eight of our Neutral Optical Hubs generating revenue.
Our new management has decided to close this facility because it does not meet
our technical best-in-class criteria. Our operating history through December 31,
1999 consists of less than two years of operations of a single facility which
has relatively few customers and which is scheduled to be closed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further description of the costs associated with the closure
of this facility. As a result, you have limited financial and operating data
about our company upon which to evaluate our business operations and our
prospects. Furthermore, the business of providing neutral colocation facilities
is a new industry. Although a number of emerging companies are developing
similar businesses, we are not aware of any company that has successfully
executed a business plan like ours. Accordingly, neither we nor you have the
benefit of a comparable historical business model in order to analyze our
business plan and prospects.
WE HAVE A NEW MANAGEMENT TEAM, AND WE DEPEND ON OUR ABILITY TO ATTRACT AND
RETAIN KEY PERSONNEL.
Nearly all of our management team joined us in 1999 and 2000. Although our
management team has significant business experience, the members of the team
have worked together for only a brief period of time. Our ability to effectively
execute our business strategy depends in large part on our new management team's
ability to operate effectively together. If our executives are unable to do so,
our business and results of operations may be materially and adversely affected.
Our success also depends in significant part upon the continued services of
our key technical, sales and senior management personnel. If we lose one or more
of our key employees, we may not be able to find a replacement and our business
and operating results could be adversely affected. In particular, our
performance depends upon the continued service of Charles M. Skibo, our chairman
and chief executive officer. Mr. Skibo joined us in January 1999 and has been
instrumental in designing and leading the execution of our business strategy.
The loss of Mr. Skibo's services would have a material and adverse effect on our
business.
Although most of our senior management personnel are in place, we will need
to hire additional key personnel in positions related to our strategy of rapid
expansion, including mid-level headquarters staff and qualified technical
personnel at each of our Neutral Optical Hubs. We estimate that we will need to
hire at least 300 additional employees in executive, technical, accounting,
finance, marketing, sales, customer service, real estate, construction
management and operational positions by the end of 2000. As of May 31, 2000, we
had 234 employees, compared to 11 employees at December 31, 1998. Our future
success will depend upon our ability to identify, hire, integrate and retain and
train these new employees. In addition, due to generally tight labor markets,
our industry, in particular, suffers from a lack of available qualified
personnel. We may not be successful in attracting, assimilating or retaining
qualified personnel.
OUR SUBSTANTIAL AMOUNT OF DEBT COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER OUR OUTSTANDING
INDEBTEDNESS, INCLUDING THE NOTES.
We have a substantial amount of debt, with an approximate total
indebtedness of $303.4 million as of March 31, 2000. In addition, we anticipate
that we may incur a substantial
13
<PAGE> 17
amount of additional debt under a credit facility that we may enter into during
2000. This substantial level of debt could have important consequences to you.
For example, it could:
- make it more difficult for us to satisfy our obligations with respect to
our outstanding debt, including the notes;
- increase our vulnerability to general adverse economic and industry
conditions or difficulties that our business may experience;
- require us to dedicate a substantial portion of our cash flow from
operations, if any, to payments on our debt, thereby reducing the
availability of funds for working capital, operating losses, capital
expenditures and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate or in taking advantage of
significant business opportunities that may arise;
- place us at a competitive disadvantage compared to our competitors that
have less debt or leverage; and
- limit our ability to engage in certain business activities, including,
among other things, our ability to borrow additional funds or make
certain investments due to the financial and restrictive covenants in our
debt.
Any of the above factors could have a material adverse effect on our
business, financial condition and results of operations.
We and our subsidiaries and any future subsidiaries may incur substantial
amounts of additional debt in the future, including an unlimited amount of
purchase money debt and up to $200.0 million of debt under credit facilities,
which may be secured. The terms of the indenture governing our senior notes
limit, but do not prohibit, us or our subsidiaries and any future subsidiaries
from doing so. If we or our subsidiaries and any future subsidiaries incur more
debt, the related risks described above could intensify, and it could be more
difficult for us to satisfy our obligations under our senior notes. See
"Capitalization," "Selected Consolidated Financial Data," "Description of Other
Indebtedness," and "Description of the Notes."
SERVICE AND OTHER INTERRUPTIONS COULD LEAD TO SIGNIFICANT COSTS AND DISRUPTIONS
WHICH COULD REDUCE OUR REVENUE AND HARM OUR BUSINESS REPUTATION AND FINANCIAL
RESULTS.
Service interruptions are a very serious concern for our prospective
customers and a service interruption or breach of security could be very costly
to us and very damaging to our reputation. Our facilities and customers'
equipment are vulnerable to damage from human error, physical or electronic
security breaches, power loss, other facility failures, fire, earthquake, water
damage, sabotage, vandalism and similar events. In addition, our customers would
be adversely affected by the failure of carriers to provide network access to
our facilities as a result of any of these events. Moreover, we are using an
internally developed, standard facility design and are installing substantially
the same equipment at each of our facilities. Any latent flaws in our design or
equipment would affect most or all of our facilities. Although we have designed
our facilities to exacting standards, any of these events or other unanticipated
problems at one or more of our facilities could interrupt our customers' ability
to provide their services from our facilities. This could damage our reputation,
make it difficult to attract new customers and cause our existing customers to
seek to terminate their contracts with us.
We face the risk that too many customers may want to enter our facilities
at the same time. Our business plan calls for a substantial percentage of
available facility space to be occupied within the first year after a facility
is operational. However, only a limited number of
14
<PAGE> 18
customers will be physically able to install equipment in a facility at the same
time. Thus, we may be unable to accommodate our customers' needs as quickly as
they would like. This could result in damage to our reputation and a reduction
in the amount of, or delay in receiving, revenue from the affected customers.
WE DEPEND ON THIRD PARTIES, INCLUDING NETWORK OWNERS WITH WHOM WE COMPETE, TO
PROVIDE NETWORK CONNECTIONS TO OUR NEUTRAL OPTICAL HUBS.
We are not a communications carrier, and therefore, we rely on third
parties to provide our customers with access to voice, data and Internet
networks. We need to secure relationships with third party network providers to
offer our customers a choice of cost-effective access to networks from our
Neutral Optical Hubs. Our facilities will not be attractive to our customers
without these connections. We intend to rely primarily on revenue opportunities
from our existing and prospective customers to encourage carriers to incur the
expenses required to connect from their points of presence to our Neutral
Optical Hubs. Carriers will likely evaluate the revenue opportunity of a Neutral
Optical Hub based on their estimates of demand. Many of these carriers have
their own colocation facilities and may therefore be reluctant to provide
network services at our Neutral Optical Hubs. As a result, carriers may elect
not to connect their services to our Neutral Optical Hubs. If numerous carriers
do not connect to our Neutral Optical Hubs, our business may fail.
In order to attract carriers to connect to our facilities, we plan to place
circuit orders with multiple carriers prior to completing construction of each
facility. These orders will generally require us to pay an installation fee and
a minimum monthly charge for periods anticipated to be approximately one to
three years. We expect that as customers connect to these carriers, these
circuits and the related monthly charges will be assigned to these customers and
thereby reduce our obligations to the carriers. However, we cannot assure you
that we will be successful in assigning these commitments to our customers or
that we will not be required to make substantial payments to carriers before we
begin generating revenues from our customers. In addition, we may need to
provide additional incentives to attract carriers to connect to our facilities.
We believe that once the first carriers connect to any given facility, other
carriers will be more likely to do so. In the event that we experience delays in
installing customers in our facilities, or those customers do not want services
from the carriers which we have brought into a facility, we may be required to
make substantial payments to these carriers. As of May 31, 2000, we had placed
orders with multiple carriers to connect to 24 of our facilities, with aggregate
monthly service charges of approximately $550,000. In addition, 11 of our
facilities either had carriers installed or connections on order without monthly
service charges.
The construction required to connect multiple carriers to our Neutral
Optical Hubs is complex and involves factors outside of our control, including
the availability of local building permits, regulatory processes and the
availability of the carrier's construction resources and vendor equipment.
Therefore, there may be delays in obtaining access.
OUR ABILITY TO FILL OUR NEUTRAL OPTICAL HUBS IS LIMITED BY THE AVAILABILITY OF
ELECTRICAL POWER.
The availability of an adequate supply of electrical power and the
infrastructure to deliver that power is critical to our ability to attract new
customers and achieve our projected results. We rely on third parties to provide
electrical power to our Neutral Optical Hubs, and cannot be sure that these
parties will provide adequate electrical power to our Neutral Optical Hubs or
that we will have the necessary infrastructure to deliver adequate electrical
power to our users. Even if the utility company provides adequate power to the
building, we still must rely on the landlord to provide adequate electrical
power to our Neutral Optical Hub. If the amount of electrical
15
<PAGE> 19
power delivered to our facilities is inadequate to support our customer
requirements or does not occur in a timely manner, our operating results and
cash flow may be materially and adversely affected. In addition, the amount of
space required to house generators and batteries limits the amount of sellable
space that we have in each of our Neutral Optical Hubs and restricts our ability
to expand the facilities. Our electrical power specifications are based upon the
expected mix of customers and the expected mix of their equipment. Technological
change could also increase the power requirements of customer equipment. As a
result, a different mix of customers or equipment or different specifications of
our customers equipment than what we expect could cause us to run out of
available power before a facility is fully filled thus reducing our anticipated
revenue stream or requiring us to incur additional costs to increase the amount
of available power and potentially reducing the amount of saleable space.
OUR REVENUES FROM EACH NEUTRAL OPTICAL HUB WILL BE AFFECTED BY A MIX OF
CUSTOMERS WITH LARGE AND SMALL DEMANDS FOR SPACE.
Customers will have specific requirements for the configuration of their
space which we may inaccurately predict. We build our sites anticipating roughly
an equal mix of custom fit cage space that is designed to meet the
specifications of our customers with demands for larger space and pre-configured
cabinet and cage space that is designed for customers with demands for small and
medium sized space. If we fail to meet our anticipated customer mix, we may
incur significant costs to retrofit our facilities. We expect our large
customers to purchase large amounts of cage space and outfit it to meet their
own specifications. Our preconfigured cage space is available in 10' x 12', 10'
x 10' and 8' x 7' sizes, and our cabinets are designed to fit standard size
Internet (19-inch) and telecommunications (23-inch) mounts. We expect that some
significant larger customers will drive early revenue and occupancy within each
of our facilities and help us attract smaller customers. If we fail to attract
enough large customers, we may not be able to increase our revenues quickly
enough and may fail to establish ourselves as a credible service provider. We
also expect that we will be able to fill our custom cage space much more quickly
than our pre-configured cabinet and cage space. On the other hand, if we sell
more than the expected amount of our space to large customers, we will have less
space available to sell, on a potentially higher margin basis, to smaller
customers. As a result, if we are unable to achieve a desirable mix of large and
small customers, our financial results may be adversely affected.
WE MAY CONTINUE TO HAVE CUSTOMER CONCENTRATION.
To date, we have relied upon a very small number of customers for most of
our revenue. We expect that we will continue to rely upon a limited number of
customers for a high percentage of our revenue on a per-facility basis and may
also continue to have customer concentration company-wide. As a result of this
concentration of our customer base, a loss of or decrease in business from one
or more of our customers in any single facility could have a material and
adverse effect on that facility, and a loss of or decrease in business from one
or more of our significant customers that have entered into contracts covering
multiple facilities could have a material and adverse effect on our business,
prospects, financial condition and results of operations. In addition, since
customers entering into contracts covering multiple facilities will have a
significant impact on our revenue, they may force us into concessions that will
reduce our profit margins.
WE MAY HAVE DIFFICULTY COLLECTING PAYMENTS FROM SOME OF OUR CUSTOMERS.
We anticipate that a number of our customers will be start-up companies.
There is a risk that these companies will experience difficulty paying their
bills, including money owed to us for our services. Although we believe that the
difficulties and service interruptions associated with
16
<PAGE> 20
relocating communications equipment may lead these customers to give greater
priority to paying for our services, we might not be able to collect all of the
money owed to us by some of these customers. We intend to remove customers that
do not pay us in a timely manner. However, we may have difficulty collecting
from or removing these customers.
WE MUST RESPOND TO EVOLVING INDUSTRY STANDARDS.
The demand for our Neutral Optical Hubs will be affected by evolving
industry standards and changes in customer demands. Our success will partially
depend on our ability to address the increasingly sophisticated and varied needs
of our existing and prospective customers. Future advances in technology may not
be beneficial to, or compatible with, our business, and we may not be able to
incorporate advances on a cost-effective and timely basis. For example, although
we have taken steps to incorporate wireless communications capabilities into our
facilities, the further development of this technology could lead to a reduced
need for our other products and services. If customer requirements for
electrical power increase and we are unable to meet this demand it will have a
material and adverse impact on our business. If evolving industry standards
result in substantial changes in the standard size specifications of our
customers' equipment, and thereby result in the need for different dimensions of
cage or cabinet space, we may need to incur additional costs to retrofit our
facilities and our financial results may be adversely impacted.
WE MUST LOCATE AND SECURE SUITABLE SITES.
We need sites that meet specific infrastructure requirements such as access
to multiple communication carriers, a significant supply of electrical power,
high ceilings, and the capability for heavy floor loading. In many markets, the
supply of facilities with these characteristics is very limited and is in very
high demand. In addition, the completion of lease transactions requires timely
and successful negotiations with landlords. Our ability to secure leases rapidly
can be affected by poor landlord responses. If we are not able to locate and
secure suitable sites for our Neutral Optical Hubs in the markets that we intend
to enter, we will not be able to complete the implementation of our buildout
plan within our proposed time frame, and our business and results of operations
may be adversely affected.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS THAT COULD HARM OUR
BUSINESS.
A component of our strategy is to expand into international markets,
including Europe and Asia-Pacific. International expansion is important to our
customers who want a colocation provider with broad geographic coverage. Because
our management has limited experience in conducting business outside the U.S.
and may not know particular factors that affect our business in foreign
countries, we will be subject to greater risks there. In addition, we anticipate
that market and regulatory acceptance of the services provided by our Neutral
Optical Hubs will be slower outside the U.S. As a result, we could suffer
material harm to our business, including increased costs, longer sales cycles
and diversion of management's attention, if we experience difficulty in dealing
with some of the risks inherent in conducting our business internationally. Some
of these risks include:
- increased leasing costs and expenses;
- difficulty or increased costs of constructing Neutral Optical Hubs;
- longer construction times and sales cycles;
- difficulty of securing relationships with third party network owners;
- business practices and protectionist laws that favor local competition;
- changes in regulatory requirements, tariffs and other trade barriers;
17
<PAGE> 21
- challenges in staffing and managing foreign operations, including
differences in employment laws and practices;
- difficulties associated with enforcing agreements through foreign legal
systems; and
- fluctuations in currency exchange rates and imposition of currency
exchange controls.
In addition, in order to develop or expand our international operations, we
may acquire complementary businesses or enter into joint ventures or outsourcing
agreements with third parties. Thus, we may depend on third parties to be
successful in our international operations.
WE MAY MAKE ACQUISITIONS, WHICH POSE INTEGRATION AND OTHER RISKS.
We may seek to acquire other colocation providers or additional colocation
facilities from other companies. As a result of these acquisitions, we may:
- pay too much;
- be required to incur significant expenditures to retrofit the acquired
facility to bring it up to our standards;
- have difficulty assimilating customers, technology and personnel from
acquired businesses;
- create goodwill that would reduce our earnings, if any, as it is
amortized; and
- have to make write-offs of acquired assets.
We may also acquire colocation facilities or operators of colocation
facilities in foreign countries to expand our international operations. These
acquisitions would also pose the risks discussed above under "We face risks
associated with international operations that could harm our business." In
addition, we might issue common stock to pay for some or all of the purchase
price for acquired businesses. That would dilute the ownership interests of our
current stockholders. Currently, we have no present understandings, commitments
or agreements with respect to any such acquisitions.
LEGISLATION AND GOVERNMENT REGULATION COULD ADVERSELY IMPACT OUR BUSINESS PLAN
AND OUR OPERATING RESULTS.
Changes in the regulatory environment could affect our operating results by
increasing competition, decreasing revenue, increasing costs or impairing our
ability to offer services. The provision of basic telecommunications services is
subject to significant regulation at the federal and state level. The Federal
Communications Commission regulates telecommunications carriers that provide
interstate and international common carrier services. State public utilities
commissions exercise jurisdiction over intrastate basic telecommunications
services but do not regulate most enhanced services, which involve more than the
pure transmission of customer provided information. Many of our customers,
competitors and vendors, especially incumbent local exchange carriers, are
subject to federal and state regulations. These regulations change from time to
time in ways that are difficult for us to predict. Although we believe the
services we provide today are not subject to any regulation by the Federal
Communications Commission or the state public utilities commissions, changes in
regulation or new legislation may increase the regulation of our current
services. In addition, our intended expansion into international markets could
subject us to regulatory requirements of foreign jurisdictions.
18
<PAGE> 22
WE MAY BE SUBJECT TO ENVIRONMENTAL RISKS INHERENT IN THE ON-SITE STORAGE OF
DIESEL FUEL AND BATTERIES.
Our Neutral Optical Hubs 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. 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.
YOU MAY FIND IT DIFFICULT TO SELL YOUR NOTES.
The old notes are eligible for trading in the PORTAL Market. There is no
existing trading market for the new notes and we cannot be sure that any market
for the new notes will develop, that the holders of the new notes will be able
to sell their notes or that the prices at which any sales that are made will be
favorable. If a market for the notes were to develop, the notes could trade at
prices that may be higher or lower than the exchange tender price of the old
notes. Prevailing market prices from time to time will depend on many factors,
including then existing interest rates, our operating results and cash flow and
the market for similar securities.
In addition, the liquidity of, and trading markets for, the new notes may
be adversely affected by declines in the market for high-yield securities
generally. A decline may aversely affect liquidity and trading markets
independent of our financial performance or prospects.
OUR SIGNIFICANT STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE
DECISIONS THAT ARE IN THE BEST INTERESTS OF HOLDERS OF THE NOTES OR OF OUR
STOCKHOLDERS.
As of May 31, 2000, our officers, directors and principal stockholders
(greater than 5% stockholders) together controlled approximately 58.0% of our
outstanding common stock. As a result, these stockholders, if they act together,
are able to exert a significant degree of influence over our management and
affairs and over matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control of COLO.COM, even when such a change may be in the best
interests of all stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US DUE TO ANTI-TAKEOVER
PROVISIONS.
Provisions of our amended and restated articles of incorporation require
approval by holders of a majority of our preferred stock prior to a merger,
reorganization, sale of control or any transaction in which more than 50% of our
voting power is disposed of, or the sale of all or substantially all of our
assets. These provisions could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to holders of the notes or our
stockholders.
In addition, at some point following the exchange offer, we intend to
change our state of incorporation from California to Delaware. In the course of
this reincorporation, we expect to adopt provisions in our certificate of
incorporation and bylaws that would create shares of undesignated preferred
stock, create a classified board of directors, eliminate the right of
stockholders to call a special meeting of stockholders, require stockholders to
comply with advance notice requirements before raising a matter at a meeting of
stockholders and eliminate
19
<PAGE> 23
the ability of stockholders to take action by written consent. As a Delaware
corporation, we would also be subject to the Delaware anti-takeover statute
contained in Section 203 of the Delaware General Corporation Law. Any of these
provisions, or others that we may adopt, could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to holders of
the notes or our stockholders.
THE NOTES ARE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT AND ALL OF THE
LIABILITIES OF OUR SUBSIDIARIES.
The notes are general unsecured senior obligations and rank equally in
right of payment with all our existing and future senior indebtedness. The notes
are effectively subordinated to our secured debt to the extent of the value of
the assets securing that debt. We anticipate that all of the obligations under
any credit facility that we may enter into in the future will be secured. In a
bankruptcy, liquidation or reorganization of our company, our assets securing
other indebtedness will be available to pay obligations on the notes only after
all indebtedness secured by these assets has been paid in full, at which point
there may not be sufficient proceeds remaining to pay amounts due on the notes
then outstanding. The notes are also effectively subordinated to all
liabilities, including trade payables and lease obligations, of our subsidiaries
or any future subsidiaries. Any right we may have to receive assets of our
subsidiaries or future subsidiaries upon liquidation or reorganization will be
effectively subordinated to the claims of that subsidiary's creditors, including
trade creditors. As of March 31, 2000, we had approximately $3.4 million of
outstanding secured debt and our subsidiaries had no outstanding debt. The
indenture governing the notes contains limitations on our ability and the
ability of our subsidiaries to incur additional debt. However, these limitations
are subject to a number of exceptions, and we and our subsidiaries or any future
subsidiaries may incur significant additional debt in the future, including debt
to which the holders of the notes would be effectively subordinated.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue."
In addition, these forward-looking statements include statements regarding
the following:
- our business strategy;
- our future operations;
- our financial position and estimated revenues;
- our expected cost and timing of leasing, constructing and equipping each
new facility; and
- our prospects, plans and objectives of management.
These statements are only predictions.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus or to conform these statements to actual results.
20
<PAGE> 24
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes offered
in the exchange offer. In consideration for issuing the new notes, we will
receive in exchange old notes in like principal amount, the terms of which are
identical in all respects to the new notes except for transfer restrictions and
registration rights. The old notes surrendered in exchange for new notes will be
retired and canceled and cannot be reissued. Accordingly, issuance of the new
notes will not result in any increase in our indebtedness.
The net proceeds from the sale of the old notes, after deducting the
underwriting discounts and offering expenses, was approximately $290.3 million.
We used a portion of the proceeds to purchase U.S. government securities which
were placed in an escrow account and pledged for the benefit of the holders of
the notes to secure our first four scheduled interest payments on the notes. We
expect to use the remaining net proceeds to fund capital expenditures in the
leasing and buildout of colocation facilities in the U.S. and internationally,
to provide working capital, including expenses associated with sales and
marketing activities, to fund operating losses, for general corporate purposes
and potentially to fund acquisitions. The amounts that we will actually expend
will vary significantly depending on a number of factors, including revenue
growth, if any, capital expenditures, the amount of cash generated by our
operations, any additional financing that we may obtain and the use of proceeds
of any such financing and other factors, many of which are beyond our control.
Additionally, if we determine that it would be in our best interests, we may
modify the number, selection and timing of entry into various geographic markets
that we may enter. Accordingly, we retain broad discretion in the allocation of
the net proceeds from the sale of the old notes. Although we may use a portion
of the net proceeds to pursue acquisitions of businesses complementary to ours
or additional colocation facilities from other companies, there are no present
understandings, commitments or agreements with respect to any such acquisitions.
Pending use of the net proceeds as outlined above, we will invest these funds in
short-term, interest bearing, investment-grade securities to the extent
permitted by the covenants governing our outstanding senior notes and our
existing debt and any statistical asset tests imposed by the Investment Company
Act of 1940.
TRADEMARKS
We own applications for federal registration and claim rights in the
service marks COLO.COM(SM), Neutral Optical Hub(SM) and NOH(SM). This prospectus
also refers to service marks, trade names and trademarks of other companies.
21
<PAGE> 25
CAPITALIZATION
The following unaudited table sets forth the actual cash, investments and
capitalization of COLO.COM at March 31, 2000.
Please read this table in conjunction with our consolidated financial
statements, the notes to those statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included later in
this prospectus.
<TABLE>
<CAPTION>
MARCH 31,
2000
--------------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE
DATA)
<S> <C>
Cash and cash equivalents................................... $381,010
Restricted cash and cash equivalents........................ 3,765
========
Restricted investments...................................... 77,729
========
Current portion of notes payable, net of discount(1)........ 478
========
Long term obligations, net of current portion:
Notes payable, net of discount(1)......................... 1,287
13 7/8% senior notes due 2010, net of discount(1)......... 216,468
--------
Total long-term debt...................................... 217,755
Stockholder's equity:
Series A preferred stock, no par value; 5,250,000 shares
authorized; 4,261,730 shares issued and outstanding.... 2,079
Series B preferred stock, no par value; 24,500,000 shares
authorized; 24,500,000 shares issued and outstanding... 12,219
Series C preferred stock, no par value; 21,000,000 shares
authorized; 20,408,164 shares issued and
outstanding(2)......................................... 194,056
Common stock, no par value; 81,000,000 shares authorized;
13,557,555 shares issued and outstanding(3)............ 26,003
Warrants(4)................................................. 88,460
Deferred compensation....................................... (19,698)
Notes receivable from stockholders.......................... (1,377)
Accumulated deficit......................................... (22,410)
--------
Total stockholders' equity............................. 279,332
--------
Total capitalization................................... $497,087
========
</TABLE>
-------------------------
(1) The unamortized portion of the estimated fair value of warrants issued in
connection with financing transactions is recorded as a discount to the
related note payable. The actual amount payable on these notes as of March
31, 2000 is $303.4 million.
(2) Excludes 601,655 shares of Series C preferred stock issuable upon the
exercise of currently exercisable warrants outstanding as of March 31, 2000
with a weighted average per share exercise price of $8.35 and per share
exercise prices ranging from $6.44 to $10.00.
(3) Excludes:
- 2,860,550 shares of common stock reserved for issuance upon exercise of
outstanding vested and unvested options as of March 31, 2000 with a
weighted average per share exercise price of $2.22 and per share exercise
prices ranging from $0.05 to $5.00;
22
<PAGE> 26
- 530,000 shares of common stock issuable upon the exercise of currently
exercisable warrants outstanding as of March 31, 2000 with a per share
exercise price of $0.05; and
- 5,991,540 shares of common stock reserved for issuance upon exercise of
the warrants sold in our senior notes offering in March 2000, with a per
share exercise price of $0.01. These warrants will become exercisable
upon the earlier of (a) March 10, 2001 or (b) 180 days following the
closing of our initial public offering.
(4) Reflects the value assigned to warrants issued in connection with our senior
notes offering and other financing transactions. The value assigned to the
warrants was calculated using the Black-Scholes pricing model (see Notes 6
and 8 to Consolidated Financial Statements).
23
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and the notes to those
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included later in this prospectus. The following selected
consolidated financial data for the period from our inception (April 2, 1997) to
December 31, 1997 and for the years ended December 31, 1998 and 1999 has been
derived from our audited consolidated financial statements included in the back
of this prospectus. The statements of operations data for the three months ended
March 31, 1999 and 2000 and the balance sheet data as of March 31, 2000 are
derived from our unaudited financial statements included in the back of this
prospectus. In management's opinion, the unaudited financial statements include
all adjustments, consisting of only normal recurring adjustments, which we
consider necessary for a fair presentation of our financial position and results
of operations as of this date and for these periods. The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the entire year.
In the following table, "EBITDA" consists of net loss excluding net
interest, income taxes, depreciation and amortization, and deferred
compensation. We have included EBITDA because we believe it is a widely used
financial indicator of a company's ability to service debt, fund capital
expenditures and expand its business. However, EBITDA is not calculated in the
same way by all companies and is neither a measurement required by, nor
represents cash flow from operations as defined by, generally accepted
accounting principles. We have presented EBITDA to enhance your understanding of
our operating results. You should not construe it as an alternative to net loss,
as an indicator of operating performance or as an alternative to cash flow as a
measure of liquidity. EBITDA in the following table is calculated differently
than in the covenants under the indenture governing the notes. With respect to
the caption entitled "Deficiency of earnings available to cover fixed charges,"
earnings available to cover fixed charges consists of net loss before provision
for taxes plus fixed charges, and fixed charges consist of interest and
amortization of debt discount and expense (including amounts capitalized) and
one-third of rental expense, which is the portion of rental expense we believe
to be representative of interest.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
INCEPTION DECEMBER 31, MARCH 31,
(APRIL 2) TO ------------------ ------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue..................................... $ 31 $ 190 $ 218 $ 55 $ 192
Operating costs and expenses:
Cost of revenue........................... 92 342 762 164 3,521
Selling, general and administrative......... 14 1,388 6,526 409 5,464
Deferred compensation....................... -- -- 1,248 -- 2,258
Depreciation and amortization............... 2 10 139 50 561
Loss on lease and leasehold improvements.. -- -- 921 610 --
------ ------- -------- ------- --------
Total operating costs and expenses...... 108 1,740 9,596 1,233 11,804
------ ------- -------- ------- --------
Loss from operations........................ (77) (1,550) (9,378) (1,178) (11,612)
Interest income............................. -- 7 491 2 2,659
Interest expense(1)......................... (1) (10) -- -- (2,939)
------ ------- -------- ------- --------
Net loss.................................... $ (78) $(1,553) $ (8,887) $(1,176) $(11,892)
====== ======= ======== ======= ========
Basic and diluted net loss per share........ $(0.03) $ (0.28) $ (1.86) $ (0.26) $ (1.49)
====== ======= ======== ======= ========
Shares used in computing basic and diluted
net loss per share........................ 2,612 5,554 4,771 4,461 7,985
====== ======= ======== ======= ========
</TABLE>
24
<PAGE> 28
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
INCEPTION DECEMBER 31, MARCH 31,
(APRIL 2) TO ------------------ ------------------
DECEMBER 31, 1997 1998 1999 1999 2000
----------------- ------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA...................................... $ (75) $(1,540) $ (7,991) $(1,128) $ (8,793)
Depreciation and amortization............... 2 10 139 50 561
Capital expenditures........................ 71 436 12,430 73 35,734
Net cash used in operating activities....... (66) (1,280) (7,739) (485) (4,932)
Net cash used in investing activities....... (71) (436) (11,994) (73) (97,489)
Net cash provided by financing activities... 172 1,819 218,007 515 285,019
Deficiency of earnings available to cover
fixed charges............................. (78) (1,553) (9,900) (1,171) (12,717)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $138 $198,412 $381,010
Property and equipment, net................................. 495 13,195 49,033
Restricted cash and cash equivalents(2)..................... -- 2,162 3,765
Restricted investments(3)................................... -- -- 77,729
Total assets................................................ 888 215,742 525,108
Current portion of notes payable, net of discount(4)........ -- 1,464 478
Non-current liabilities, net of discount on long term notes
payable(4)................................................ -- 1,918 219,041
Total stockholders' equity.................................. 476 202,688 279,332
</TABLE>
-------------------------
(1) Excludes interest of $930,000 in 1999 and $591,000 in the three months ended
March 31, 2000, which has been capitalized as a component of construction in
progress, in accordance with generally accepted accounting principles.
(2) Reflects funds set aside as collateral for letters of credit issued under
building lease agreements.
(3) Reflects investments set aside as collateral for the first four interest
payments relating to our senior notes.
(4) The unamortized portion of the estimated fair value of warrants issued in
connection with financing transactions is recorded as a discount to the
related note payable. The actual amount payable on these obligations at
March 31, 2000 is $303.4 million.
25
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those statements included
later in this prospectus. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below and elsewhere in this prospectus, particularly
in "Risk Factors."
OVERVIEW
We are creating an international platform of colocation facilities, which
we refer to as Neutral Optical Hubs, in which our customers can install
equipment, connect to a choice of network providers and connect with our other
customers to deliver high quality, broadband services and applications to their
end users. We offer our customers best-in-class facilities, which provide
environmentally and physically secure centers to deploy their equipment, the
opportunity to interconnect with outside carriers and with our other customers,
and technical assistance and consulting services. Our colocation, cross
connection and service products will scale with our customers' needs both within
facilities and across our international solution. We are not a communications
carrier, and because our facilities are carrier neutral, our customers will be
able to connect their communications equipment located in our facilities to any
of the carriers that are connected to our facilities.
Since our inception in April 1997, our principal activities have included
developing our business plan, raising capital, hiring management and other key
personnel, developing our site selection criteria and our standard facility
design, locating and securing sites, designing and constructing our Neutral
Optical Hubs, and sales and marketing activities. We have generally experienced
increasing quarterly operating losses and negative cash flows since inception,
and we expect that our net losses and negative cash flows will increase
significantly for the foreseeable future.
As of May 31, 2000, we had entered into leases for 46 sites in the United
States and Europe, of which 15 facilities were under construction and 11
facilities were ready for carriers and customers to install their equipment, of
which seven facilities were generating revenue (excluding our first facility
located in San Francisco (Mission Street)). We intend to have at least 40
Neutral Optical Hubs generating revenue or ready for carriers and customers to
install their equipment in metropolitan areas by the end of 2000. As a result of
this buildout strategy, we will significantly increase our cost of revenue and
selling, general and administrative expenses.
On average, we expect a new domestic facility of 25,000 square feet to cost
approximately $10 million to construct and equip. Our business plan assumes that
it will take approximately ten months from the date that we enter into a lease
until the date a new Neutral Optical Hub begins generating revenue. Although we
have successfully met this time frame for all of our facilities (excluding our
first facility located in San Francisco (Mission Street)) which were generating
revenue as of May 31, 2000, we have previously experienced and may continue to
experience unforeseen delays and expenses in connection with our facility
buildout program. In addition, we have not yet demonstrated that we are able to
manage the buildout of multiple facilities at the same time. We also do not know
how long our sales cycle will be, but it is likely to be lengthy. Once a
particular facility is generating revenue, we expect that it will take an
extended period of time before it will have enough business to provide
sufficient revenue to cover its expenses. We expect that it will cost more and
take longer to construct, equip and begin generating revenue in international
locations. In order to attract carriers to connect to our
26
<PAGE> 30
facilities we plan to place circuit orders with approximately three carriers
prior to completing construction of a facility. These orders will generally
require us to pay an installation fee and a minimum monthly charge for periods
anticipated to be approximately one to three years. As of May 31, 2000, we had
placed orders with multiple carriers to connect to 24 of our facilities, with
aggregate monthly service charges of approximately $550,000. These charges
become payable as carriers complete their connections to each facility. We
expect that as customers connect to these carriers, these circuits and the
related monthly charges will be assigned to these customers and thereby reduce
our obligations to the carriers. However, we cannot assure you that we will be
successful in assigning these commitments to our customers or that we will not
be required to make substantial payments to carriers before we begin generating
revenues from our customers. In addition, we may need to provide additional
incentives to attract carriers to connect to our facilities. If we accelerate
our expansion plans or develop additional facilities, this will likely increase
the amount and duration of losses and our financing needs. In addition to the 24
facilities with carrier service orders to be charged, 11 facilities either had
carriers installed or connections on order without monthly service charges.
In early 1999, our new management team determined that our first facility
located in San Francisco (Mission Street) and the adjoining expansion site did
not meet our technical criteria and decided to close it. As a result, we
recognized a charge of $921,000 in 1999 for the writedown of the leasehold
improvements related to this facility, the termination of the lease on the
adjacent expansion site and forfeiture of a security deposit and prepaid rent.
We have offered to move customers from this facility to either of our new
facilities in San Francisco (Townsend Street) or Emeryville, California in the
first half of 2000. We have made arrangements with all of the customers at our
San Francisco (Mission Street) facility to relocate to other facilities. We
accounted for the writedown of leasehold improvements and cancellation of the
lease in 1999, but may be required to incur additional expenses in 2000 for
costs related to this facility closure and in connection with relocating
customers.
FACTORS AFFECTING FUTURE OPERATIONS
REVENUE. We enter into contracts with our customers that typically have
terms between one and ten years with varying renewal periods. Our revenue
consists primarily of:
- monthly fees for colocation services;
- monthly fees for cross connecting our customers to communication carriers
and other customers;
- fees for technical support services; and
- fees for installation services.
Our revenue will increase as we open additional Neutral Optical Hubs. Over
time, we intend to build upon our present service offerings by providing
additional value-added services and eventually enabling customers to buy, sell
and exchange services within each facility. Revenue for services other than
installation is recognized as services are provided. Advance payments received
from customers are deferred and recognized as revenue on a straight-line basis
over the period in which service is provided.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. As of January 1,
2000, we began to recognize installation revenue over the life of the customer
contract. The cost associated with customer installation and other services is
expensed as incurred. There is no material impact on prior years' statements.
27
<PAGE> 31
COST OF REVENUE. Cost of revenue has historically consisted primarily of
site-related employee salaries and benefits, rental payments on our Neutral
Optical Hubs, payments for equipment, connectivity charges and other
site-related operating expenses. We expect our cost of revenue to increase both
in dollar amounts and as a percentage of revenue for the foreseeable future as a
result of our buildout strategy.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of headquarters-related employee
salaries and benefits, consulting fees, travel costs, sales commissions, rental
payments and other occupancy costs at our headquarters location. We expect our
selling, general and administrative expenses to increase both in dollar amounts
and as a percentage of revenue for the foreseeable future as we build the
infrastructure necessary to support our anticipated growth. However, we expect
these expenses to eventually decline as a percentage of our revenue as we roll
out additional Neutral Optical Hubs.
DEFERRED COMPENSATION. In connection with the grant of certain stock
options at various dates in 1999 and 2000, we recorded deferred compensation
under stockholders' equity, representing the difference between the estimated
fair value for accounting purposes of our stock on the dates of grant and the
exercise prices. We are amortizing this deferred compensation amount over the
vesting period of the underlying options or upon the lapsing of the restrictions
on the applicable shares. We recorded a stock-based compensation expense
resulting from the amortization of this deferred compensation amount in 1999 and
the first quarter of 2000, and will recognize additional stock-based
compensation expense in future periods as we amortize the $19.7 million deferred
compensation remaining in stockholders' equity at March 31, 2000. All deferred
compensation relates to selling, general and administrative expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
consists of depreciation of capitalized construction costs, leasehold
improvements, site equipment, furniture, fixtures and computer and office
equipment and amortization of other assets. Capitalized costs include
construction, cabling and on-site construction management costs as well as rent,
utilities, direct costs and interest accrued during the construction phase.
Depreciation of these costs begins once construction is complete and the
facility is ready for carriers and customers to install their equipment.
INTEREST INCOME. Interest income has been generated primarily from the
unspent proceeds of our common and preferred stock offerings, our senior notes
and funds received from various financing arrangements.
INTEREST EXPENSE. Interest expense includes interest paid in cash as well
as the amortization of the value of warrants issued in connection with our debt
facilities and the amortization of deferred financing costs incurred in
conjunction with our senior notes offering. We amortize the value of these
warrants over the commitment period of the credit facility or the period in
which the debt is outstanding. In accordance with generally accepted accounting
principles, certain interest expense incurred during construction of our
facilities is capitalized as a component of construction in progress.
INCOME TAXES. We have operated at a net loss since inception and as a
result we do not have a provision for income taxes. Deferred tax assets
resulting from net operating losses and other temporary differences have been
fully reserved.
28
<PAGE> 32
RESULTS OF OPERATIONS
QUARTERS ENDED MARCH 31, 1999 AND 2000
REVENUE. Our revenue increased 249% from $55,000 in the three months ended
March 31, 1999 to $192,000 in the three months ended March 31, 2000. The
increase in revenue resulted primarily from one customer at one of our Neutral
Optical Hubs. The majority of this revenue is related to monthly fees for
colocation services.
COST OF REVENUE. Our cost of revenue increased 2,047% from $164,000 in the
three months ended March 31, 1999 to $3.5 million in the three months ended
March 31, 2000. This increase was primarily the result of increased headcount
and site expenses, consisting of rent, utilities and other related costs at our
Neutral Optical Hubs as well as a one-time non cash charge of $2.3 million for
warrants issued to NEXTLINK.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased 1,236% from $409,000 in the three months ended
March 31, 1999 to $5.5 million in the three months ended March 31, 2000. The
increase was primarily due to an increase in headcount and related costs. We
hired additional personnel in anticipation of future growth and increased the
number of employees who perform headquarters-based functions. Our headcount
increased from 11 at March 31, 1999 to 161 at March 31, 2000. Our occupancy and
rental costs increased as a result of the expansion of our corporate office to
accommodate our larger headcount.
DEFERRED COMPENSATION. Amortization of deferred compensation increased from
$0 in the three months ended March 31, 1999 to $2.3 million in the three months
ended March 31, 2000. The increase was due to the increase in deferred
compensation in connection with the grant of stock options subsequent to March
31, 1999. All deferred compensation relates to selling, general and
administrative expenses.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expenses
have increased 1,022% from $50,000 in the three months ended March 31, 1999 to
$561,000 in the three months ended March 31, 2000. The increase was the result
of the commencement of depreciation at three additional Neutral Optical Hubs in
the first quarter of 2000. The increase is also due to additional computer
equipment and office furniture at our expanded corporate office.
LOSS ON LEASE AND LEASEHOLD IMPROVEMENTS. Our costs associated with the
loss on lease and leasehold improvements decreased from $610,000 in the three
months ended March 31, 1999 to $0 in the three months ended March 31, 2000. In
early 1999, our new management team determined that our first facility located
in San Francisco (Mission Street) and the adjacent expansion site did not meet
our technical criteria and decided to close it. As a result, we recognized a
charge of $610,000 in the three months ended March 31, 1999.
INTEREST INCOME. Our interest income increased 132,850% from $2,000 in the
three months ended March 31, 1999 to $2.7 million in the three months ended
March 31, 2000. This increase was due to interest earnings on the net proceeds
of our Series C preferred stock offering in December 1999 and our senior notes
offering in March 2000.
INTEREST EXPENSE. Our interest expense increased from $0 in the three
months ended March 31, 1999 to $2.9 million in the three months ended March 31,
2000. The increase was due to accrued interest on the $300 million of senior
notes issued in March 2000 and our other financing vehicles. An additional
$591,000 of interest is capitalized and included as construction in progress in
the first quarter of 2000.
29
<PAGE> 33
YEARS ENDED DECEMBER 31, 1998 AND 1999
REVENUE. Our revenue increased 15% from $190,000 in 1998 to $218,000 in
1999. This increase came from additional customers at our San Francisco (Mission
Street) facility as well as increased technical support services provided to
customers.
COST OF REVENUE. Our cost of revenue increased 123% from $342,000 in 1998
to $762,000 in 1999. This increase was primarily the result of increased
headcount at our new Neutral Optical Hubs and variable costs related to the
increased headcount.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased 370% from $1.4 million in 1998 to $6.5 million
in 1999. This increase was primarily the result of increased salaries and
related expenses. We hired additional personnel in anticipation of future growth
and increased the number of employees who perform headquarters-based functions
from nine at December 31, 1998 to 64 at December 31, 1999. Our occupancy and
rental costs increased as a result of the expansion of our corporate office to
accommodate our larger headcount. Additionally, consulting costs increased as we
developed our site selection criteria and standardized facility design, located
and secured sites and evaluated our compensation structure.
DEFERRED COMPENSATION. Amortization of deferred compensation increased from
$0 in 1998 to $1.2 million in 1999. The increase was due to the increase in
deferred compensation in connection with the grant of stock options in 1999. All
deferred compensation relates to selling, general and administrative expenses.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expense
increased 1,290% from $10,000 in 1998 to $139,000 in 1999. This increase was
primarily the result of depreciation on computer and office furniture and
equipment at our expanded corporate office and depreciation associated with
leasehold improvements at our existing San Francisco (Mission Street) facility.
LOSS ON LEASE AND LEASEHOLD IMPROVEMENTS. Our costs associated with the
loss on lease and leasehold improvements increased from $0 in 1998 to $921,000
in 1999. In early 1999, our new management team determined that our first
facility located in San Francisco (Mission Street) and the adjacent expansion
site did not meet our technical criteria and decided to close it. As a result,
we recognized a charge of $921,000 in 1999, which consisted of $449,000 in the
writedown of the leasehold improvements related to this facility and $472,000
for the termination of the lease on the expansion site and related legal costs,
and forfeiture of a security deposit and prepaid rent.
INTEREST INCOME. Our interest income increased 6,914% from $7,000 in 1998
to $491,000 in 1999. This change was primarily the result of interest earnings
on the unspent proceeds of our Series B preferred stock offering in April 1999
and Series C preferred stock offering in December 1999.
INTEREST EXPENSE. Our interest expense decreased from $10,000 in 1998 to $0
in 1999. This change is primarily the result of capitalizing interest costs
incurred during the construction of various Neutral Optical Hubs in 1999.
FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997 AND FOR THE
YEAR ENDED DECEMBER 31, 1998
REVENUE. Our revenue increased 513% from $31,000 in 1997 to $190,000 in
1998. This increase was due to the fact that our first facility opened in
January 1998, and we recognized minimal revenue from consulting services prior
to the opening of this facility.
30
<PAGE> 34
COST OF REVENUE. Our cost of revenue increased 272% from $92,000 in 1997 to
$342,000 in 1998. This increase was primarily the result of increased salaries
and consulting costs in connection with the increased headcount concurrent with
opening our first facility in January 1998. Rent and other costs have also
increased as a result of opening of our first facility in January 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses increased 9,814% from $14,000 in 1997 to $1.4 million in
1998. This increase was primarily the result of increased salaries and related
expenses, higher marketing costs associated with our initial marketing efforts
and consulting expenses incurred to support our growing business. In
anticipation of future growth, we increased the number of employees who perform
headquarters-based functions from two at December 31, 1997 to nine at December
31, 1998. Our travel and occupancy costs also increased as a result of the
increase in personnel.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expense
increased 400% from $2,000 in 1997 to $10,000 in 1998. This increase was
primarily the result of the expansion of our corporate office as well as the
purchase of computer equipment necessary to support our business, as well as the
depreciation of leasehold improvements related to our San Francisco (Mission
Street) facility.
INTEREST INCOME. Our interest income increased from $0 in 1997 to $7,000 in
1998. This change was primarily the result of interest earnings on the unspent
proceeds of our sale of common stock and short-term borrowings during 1998.
INTEREST EXPENSE. Our interest expense increased 900% from $1,000 in 1997
to $10,000 in 1998. This change is primarily the result of additional interest
expense on short-term borrowings in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our business primarily from approximately
$498.3 million of net proceeds from the sale of our preferred stock to venture
capital firms and other individual, institutional and strategic investors and
issuance of our senior notes. In 1998 and 1999, we received approximately $2.0
million in net proceeds from the sale of our Series A preferred stock. In April
1999, we received $12.2 million in net proceeds from the sale of our Series B
preferred stock. In December 1999, we received $193.6 million in net proceeds
from the sale of our Series C preferred stock. In March 2000, we received $290.3
million of net proceeds from the issuance of our senior notes.
Our capital expenditures were approximately $71,000 in 1997, $436,000 in
1998, $12.4 million in 1999 and $35.7 million in the three months ended March
31, 2000. These expenditures were incurred primarily to build out our colocation
facilities and corporate office. Our capital expenditures will be substantially
higher in future periods in connection with the construction of Neutral Optical
Hubs in the U.S. and internationally. As of March 31, 2000, we had committed
capital expenditures of approximately $52.7 million relating to the build out of
our Neutral Optical Hubs. For fiscal year 2000, we plan to make total capital
expenditures estimated in excess of $400 million, primarily to build out 40
Neutral Optical Hubs, to expand our headquarters and to install and upgrade our
information systems. We will need to raise additional funds in fiscal year 2000
to complete this capital expenditure program. If we are unable to raise these
additional funds, we will have to build out fewer Neutral Optical Hubs. We will
also need to fund our net losses, which we expect will increase substantially.
As of March 31, 2000, we are obligated to make minimum base payments on
non-cancelable leases for 36 Neutral Optical Hub sites and our corporate office
of $9.7 million in the
31
<PAGE> 35
last nine months of 2000, $17.3 million in 2001, $18.2 million in 2002, $18.7
million in 2003, $18.4 million in 2004 and $122.5 million in subsequent years.
Our lease obligations will increase substantially in future periods as we enter
into additional leases. In order to attract a carrier to connect to one of our
facilities, we plan to place circuit orders with approximately three carriers
prior to completing construction of that facility. These orders will generally
require us to pay an installation fee and a minimum monthly charge for periods
anticipated to be approximately one to three years. In the event that we
experience delays in installing customers in our facilities, we may be required
to make substantial payments to these carriers. As of May 31, 2000, we had
placed orders with multiple carriers to connect to 24 facilities with monthly
service charges of approximately $550,000. This monthly cost is subject to
decrease as customers move into the Neutral Optical Hubs and assume these
obligations.
Net cash used in operating activities was $66,000 in 1997, $1.3 million in
1998, $7.7 million in 1999 and $4.9 million in the three months ended March 31,
2000. Net cash used in operating activities in each of these periods was
primarily due to our net losses and increases in deposits, prepaid and other
current assets, offset in part by depreciation and increases in accounts
payable, accrued expenses, deferred compensation and the loss on lease and
leasehold improvements.
Net cash used in investing activities was $71,000 in 1997, $436,000 in
1998, $12.0 million in 1999 and $97.5 million in the three months ended March
31, 2000. Net cash used in investing activities in each of these periods was
primarily used to fund capital expenditures. In 1999 and the three months ended
March 31, 2000, we also set aside funds as collateral for letters of credit
issued under building lease agreements. In March 2000, we set aside
approximately $77.7 million of funds as collateral for the first four interest
payments of the senior notes under the terms of that offering.
Net cash provided by financing activities was $172,000 in 1997, $1.8
million in 1998, $218.0 million in 1999 and $285.0 million in the three months
ended March 31, 2000. In 1997, this amount consisted primarily of $119,000 in
net proceeds from our issuance of notes payable and $53,000 from our sale of
common stock. In 1998, this amount included primarily $2.0 million in net
proceeds from our issuance of Series A preferred stock, offset in part by
$160,000 from our repayment of notes payable and $30,000 from our repurchase of
common stock. Net cash provided by financing activities in 1999 consisted
primarily of $12.2 million in net proceeds from our Series B preferred stock
financing, $193.6 million in net proceeds from our Series C preferred stock
financing, $6.1 million in net borrowings under our loan facilities and
revolving line of credit and $205,000 from our sale of common stock. Net cash
provided by financing activities in the three months ended March 31, 2000
consisted primarily of $290.3 million in net proceeds from our senior notes
offering, less preferred stock issuance costs of $5.9 million, which were paid
during the three months ended March 31, 2000.
We have an equipment and tenant improvement financing agreement with
MMC/GATX Partnership and other lenders. This agreement provides financing of up
to $17.0 million for construction costs and the purchase of equipment at our Los
Angeles and Vienna, Virginia, facilities. Amounts may be borrowed under this
agreement through December 31, 2001, subject to certain conditions. The interest
rate is set at the applicable U.S. treasury note yield to maturity plus 3.93%.
The principal and interest on each advance is payable in 42 equal monthly
installments commencing on the first day of the month immediately following the
advance date, plus a final payment of 10% of the original advance. This
agreement is secured by all tangible and intangible assets relating to the
specific facilities funded by the lender. As of March 31, 2000, we had
outstanding borrowings of $1.2 million under this facility, and $15.7 million
was available for future borrowing, subject to certain conditions.
We have an equipment and tenant improvement financing agreement with
Comdisco, Inc. This agreement provides financing of up to $7.0 million for
construction costs and the purchase of equipment at our Chicago and Emeryville,
California facilities. Amounts may be borrowed
32
<PAGE> 36
under this agreement through August 31, 2000, subject to certain conditions. The
credit line bears interest at 8.25%. The principal and interest on each advance
is payable in 42 equal monthly installments commencing on the first day of the
month immediately following the advance date, plus a final payment of 15% of the
original advance. This agreement is secured by all tangible and intangible
assets relating to the specific facilities funded by the lender. As of March 31,
2000, we had outstanding borrowings of $2.2 million under this facility, and
$4.6 million was available for future borrowing, subject to certain conditions.
We currently anticipate that our available cash resources will be
sufficient to meet our anticipated operating losses, interest expense and
capital expenditure requirements through at least the completion of our
facilities that are currently under construction. We do not currently have the
cash resources to complete all of the facilities for which we have leased sites
or to complete our intended 40 facility buildout plan for fiscal year 2000. We
are able to control the deployment of our facilities and do not intend to begin
construction on a facility unless we have the capital available to complete
construction. We will need to raise additional funds in order to complete our
intended buildout plan within our proposed time frame and to fund our
anticipated operating losses, to develop new or enhance existing services or
applications, or to respond to competitive pressures. We anticipate that we may
incur a substantial amount of additional debt under a credit facility that we
may enter into during 2000. If we cannot raise sufficient additional funds on
acceptable terms, we may need to delay or abandon some or all of our development
and expansion plans or otherwise forego market opportunities, and we may incur
additional losses if we need to terminate any leases or abandon or delay the
completion of any facilities under construction. See "Risk Factors -- We will
need significant additional funds, which we may not be able to obtain."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio. We do not use derivative financial instruments in
our investment portfolio. We place our investments with high quality issuing
institutions in the U.S. and, by policy, limit the amount of risk by investing
primarily in demand deposits and government securities. We do not have a
significant amount of floating rate debt, and do not believe that an increase or
decrease in interest rates would significantly increase or decrease our interest
expense on debt obligations. We do not currently have any significant foreign
operations and thus are not currently materially exposed to foreign currency
fluctuations.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on the
capitalization of the costs incurred for computer software developed or obtained
for internal use. We adopted the new standard in 1999, although the impact on
our 1999 financial statements was not significant.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted.
Adoption of this statement in fiscal 1999 did not have a material impact on our
consolidated financial statements; we have historically expensed all of our
startup costs as incurred.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Subsequently, in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivatives and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133," which amended SFAS No. 133. We do not currently engage in derivative
activity and do not expect the adoption of this standard to have a material
effect on our results of operations, financial position or cash flows.
33
<PAGE> 37
BUSINESS
We are creating an international platform of colocation facilities, which
we refer to as Neutral Optical Hubs, in which our customers can install
equipment, connect to a choice of network providers and connect with our other
customers to deliver high quality, broadband services and applications to their
end users. We believe our Neutral Optical Hubs will be best-in-class facilities
that will offer a broad choice of network providers and the most flexible
technology protocols that allow our target customers to deliver high quality,
broadband services and applications to their end users. We are not a
communications carrier, and because our facilities are carrier neutral, our
customers will be able to connect their communications equipment located in our
facilities to any of the carriers that are connected to our facilities. As of
May 31, 2000, we had signed contracts with 53 customers to locate equipment in
one or more Neutral Optical Hubs. Our customers currently include:
- Internet-based businesses, such as Campsix, Inc., RateXchange Corporation
and ShockWave.com, Inc.;
- Application service providers, such as Evolve Software, Inc. and
Musicbank, Incorporated;
- Internet service providers, such as InterNAP Network Services
Corporation; Madge Networks, N.V., The Masterlink Group, Inc. and SAVVIS
Communications Corporation;
- Competitive local phone companies, such as Mpower Communications Corp.,
Telseon Inc. and 2nd Century Communications Inc.; and
- Other voice and data communications companies, such as NeuMedia Inc.
We intend to have at least 40 Neutral Optical Hubs generating revenue or
ready for carriers and customers to install their equipment in metropolitan
areas by the end of 2000, including multiple facilities in certain geographic
regions. With this broad footprint and proximity to our customers' end users, we
believe our Neutral Optical Hubs will become the preferred platform for
companies that want to optimize service for their end users and will facilitate
business-to-business commerce among our customers. As of May 31, 2000, we had
signed leases for 46 facilities in the United States and Europe totaling more
than 1.1 million square feet, of which we had 11 facilities in the U.S. ready
for carriers and customers to install their equipment.
MARKET OPPORTUNITY
The deregulation of the telecommunications industry and the significant
growth in Internet users and bandwidth intensive applications has increased the
demand for and strained the performance of the existing communications
infrastructure. According to International Data Corporation, the number of
Internet users worldwide is expected to grow from 160 million at the end of 1998
to 500 million at the end of 2003. This rapid growth has resulted in performance
problems across the Internet, including problems with latency, data loss and
security. These and other problems are impacting the ability of our target
customers to effectively use the Internet for new services such as
voice-over-Internet protocol and some applications that use streaming and
broadcast capabilities. Content distribution companies and advanced switch
providers have been able to improve existing bottlenecks and network congestion
through technology, but depend on others to provide facilities and interconnect
networks.
Internet-based businesses, application service providers, Internet service
providers, competitive local phone companies and other voice and data
communications companies all face challenges to effectively provide high-quality
services due to the inadequacies of the present infrastructure. Internet-based
businesses and application service providers need reliable,
34
<PAGE> 38
high-performance delivery of their products and services. This need is growing
as bandwidth intensive applications increase, end-users become more
sophisticated and performance expectations increase. Internet service providers
require sophisticated user connections and peering arrangements in order to
deliver their services to the broadest array of customers by the most efficient
means of transport. Competitive local phone companies need broadly distributed
local access to successfully deliver their services and are still dependent on
the incumbent local phone companies for access. Other voice and data
communications companies need to stay competitive in a market with many emerging
providers and technologies. While attempting to keep pace with new technology
and deliver quality services, each of these businesses rely on an infrastructure
that is not designed for current demands.
In order to enhance performance, businesses require a systems architecture
and platform that is distributed close to their end users. Our target customers
have traditionally had the limited choices of building their own facilities or
colocating their equipment in carrier operated facilities, carrier hotels or
web-hosting facilities. Building a facility can take a substantial amount of
time, capital and expertise that would be better focused on the core business.
In an attempt to improve their service performance and focus on their core
competencies, many Internet-based businesses, application service providers,
Internet service providers, competitive local phone companies and network
providers have turned to colocation, which enables them to outsource key
components of their operations.
The current options available for colocation services all have limitations
that restrict our target customers from providing the necessary service
offerings that their customers demand. The following are the current colocation
alternatives:
CARRIERS. Historically, carrier colocation facilities have provided limited
support of customers' equipment, limited or no flexibility in carrier choice,
and limited availability of space, resulting in dependence on a specific carrier
and higher costs. For example, local phone companies' central offices provide
interconnection to only their networks and do not provide the scalability
essential to our target customers.
CARRIER HOTELS. These facilities may offer flexibility in choice of carrier
and interconnection among tenants, but typically provide limited support and
coordination of network services. In addition, they are typically single site
facilities which do not provide our customers a solution for widespread network
deployment.
WEB-HOSTING FACILITIES. These facilities typically create dependence on the
services and the network provided by the facility operator. In addition, these
facilities do not typically accommodate customers in the telecommunications
industry. In some instances, these operators may require customers to use their
services exclusively, which may result in higher prices and limited flexibility
in network deployment for our target customers.
IDC predicts that the U.S. market for Internet hosting, consisting of
shared server hosting, several categories of dedicated server hosting, including
the colocation market in which we compete, and related services, will grow from
an estimated $3.7 billion in 2000 to $18.9 billion in 2003. Within this market,
IDC predicts that the market for colocation services, will be one of the fastest
growing segments growing from an estimated $710 million in 2000 to $4.2 billion
in 2003. However, all of these estimates include charges for bandwidth, which we
do not provide. Although we are not aware of any similar forecast for growth in
the overall telecommunications services provider market or in the market for
colocation of telecommunications equipment, we expect the growth of these
markets to be significant.
35
<PAGE> 39
THE COLO.COM SOLUTION
We believe that our neutral colocation solution addresses the limitations
of the traditional alternatives. We will provide customers with cabinet,
pre-configured and custom cage space for their equipment, connections to a
choice of carriers and technical services and support in all facilities across
our broad geographic presence. Our solution is carrier neutral, cost-effective,
flexible and scalable, and our facilities will be widely deployed and staffed
with trained Internet and telecommunications technicians. We believe our
solution provides the foundation for building networks that enable customers to
locate equipment close to end users, thereby enhancing performance and enabling
them to provide more competitive service offerings to their end users. Our
Neutral Optical Hubs will offer a number of compelling advantages to our
customers, including:
INTERNATIONAL PLATFORM AND RAPID TIME TO MARKET. We believe that the
ability to rapidly deploy equipment close to their end users is a critical
success factor for our customers. We intend to have at least 40 Neutral Optical
Hubs generating revenue or ready for carriers and customers to install their
equipment by the end of 2000, including multiple locations in certain
metropolitan areas. With such a broad footprint and proximity to our customers'
end users, we offer to our customers the ability to accelerate the deployment
and expansion of their services. By using our Neutral Optical Hubs, we enable
our customers to better focus on their core competencies.
NETWORK AND SERVICE NEUTRALITY. Our Neutral Optical Hub solution is
designed to offer our customers choices in network and service providers to
enable them to meet current and future market needs and technology demands. Each
Neutral Optical Hub will have multiple carrier and connectivity options to
provide a solution that meets each customer's network objectives. We will offer
connectivity choice and flexibility from longhaul to local, Internet protocol to
wireless and dark fiber to gigabit ethernet. We also offer our customers choice
in managed services and network integration, both through our own services and
those developed through strategic relationships with third party service
providers.
COST SAVINGS. Because our facilities are neutral and will have a diverse
population of carriers and service providers, we expect that our customers will
be able to obtain competitive pricing and benefit from the aggregated purchasing
power of colocating with many other high bandwidth users. In addition, we expect
that our professional service offerings will help our customers manage their
equipment in our facilities and reduce their overhead expenses.
BEST-IN-CLASS FACILITIES. We believe that our Neutral Optical Hubs will be
superior or equal to other colocation alternatives. We have designed our
facilities to offer our customers technologically advanced, redundant systems
intended to provide uninterruptible electrical power availability, temperature
and humidity control, fire detection and suppression systems and security
systems. Our facilities are engineered to conform to a high set of standards
that define a rigid and extensive set of performance, quality, environmental and
safety requirements.
SUPERIOR CUSTOMER SERVICE. Substantially all of our facilities have
technicians, who are trained in Internet and telecommunications networks and
equipment, available on site 24 hours a day, seven days a week. Our technicians
are available to assist our customers in diagnosing and repairing customers'
network equipment problems and installing customer equipment. We also may offer
customers access to experienced network technicians to help configure and test
networks as well as for more technically complex tasks. Each of our Neutral
Optical Hubs has an operations control center that monitors all aspects of the
facility through a comprehensive facility management system.
36
<PAGE> 40
OUR STRATEGY
To achieve our goal of becoming the premier, international, single-source
supplier of carrier neutral colocation facilities to our targeted customer base,
our strategy is to:
BE FIRST-TO-MARKET WITH BROAD GEOGRAPHIC PRESENCE. Our strategy is to be
first-to-market with a broad geographic presence to provide a Neutral Optical
Hub solution to Internet-based businesses, application service providers,
Internet service providers, competitive local exchange phone companies and other
voice and data communications companies. We intend to quickly build Neutral
Optical Hubs in metropolitan areas across North America and eventually Europe
and Asia to become the first provider of carrier neutral colocation facilities
with a broad domestic and international presence.
MAINTAIN NEUTRALITY. We are not a communications carrier. We believe that
by operating carrier neutral facilities, we will be able to offer our target
customers the opportunity to select among many network providers and to
negotiate terms with the providers of their choice. We also believe that by
remaining neutral, we will be more likely to attract multiple carriers to
connect to our facilities. In addition, we intend to continue to offer our
customers choice in managed services and network integration through services
developed through strategic relationships with third party service providers.
STRATEGICALLY DEPLOY MULTIPLE NEUTRAL OPTICAL HUBS IN CERTAIN GEOGRAPHIC
REGIONS. We believe that by deploying multiple Neutral Optical Hubs in one
geographic region, we will provide the foundation for networks that enable
customers to locate equipment in closer proximity to end users, thereby
enhancing performance and enabling them to provide more competitive service
offerings. We also believe this strategy will enable us to establish a market
presence more quickly and provide benefits from being on different power grids
and with better access to local telecom facilities.
ENTER INTO STRATEGIC AND COMMERCIAL RELATIONSHIPS TO EXTEND OUR SALES
REACH. We intend to enter into strategic and commercial relationships with
companies such as communications service providers, who may attract additional
customers, and communications equipment companies, who may both locate equipment
in our sites and resell our space. We believe that such relationships are
valuable because they could accelerate our revenue growth, support our Neutral
Optical Hub branding process, decrease our cost of sales, extend our sales reach
and contribute to further network provider diversity within our facilities.
EXPAND OUR SERVICE OFFERINGS AND ENABLE MARKETPLACE EXCHANGES. Over time,
we intend to expand upon our current service offerings by providing additional
value-added services, either through internal development, acquisitions or
partnerships. These future service offerings may include developing switching
capabilities among customers, more efficient distribution of content from
peering points to end users, and an expanded scope of technical services for
network consulting and support. Some of these additional service offerings may
eventually enable our customers to efficiently buy, sell and exchange services
with other customers within the same facility, thereby making our Neutral
Optical Hubs more attractive as commerce centers for growth and interconnection
of voice and data networks. In addition, because our Neutral Optical Hubs will
house both Internet and telecommunications network equipment, we may eventually
provide our customers with a platform on which Internet and telecommunications
customers may connect to each other to provide integrated voice, data and
Internet services, facilitating future applications.
BUILD THE COLO.COM BRAND. We intend to build recognition of the COLO.COM
brand through our best-in-class facility design, direct and indirect channel
sales, and an aggressive communications strategy including public relations
campaigns, industry trade show participation, channel marketing programs and
targeted advertising programs. In particular, we have designed
37
<PAGE> 41
our Neutral Optical Hubs to provide a standardized layout, color scheme and
overall recognizable look and feel.
SERVICE OFFERINGS
We offer our customers best-in-class colocation facilities, which provide
environmentally and physically secure centers to deploy their equipment, the
opportunity to interconnect with outside carriers and with our other customers,
and technical assistance and consulting services. The colocation, cross
connection and service and support offerings can grow with our customers' needs.
Our current offerings and their benefits include:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
OFFERINGS DESCRIPTION CUSTOMER BENEFIT
<S> <C> <C>
----------------------------------------------------------------------------------------------
COLOCATION
- Cabinets (designed to - Customer controlled, secure - Security
fit standard Internet or equipment areas in multiple
telecom size equipment) size offerings - Flexibility of size
- Cages (available in
preconfigured sizes or
custom sizes)
----------------------------------------------------------------------------------------------
CROSS CONNECTIONS
- DS-1 - Connects customers to - Choice of carriers and
carriers and other customers negotiated terms
- DS-3
- Demuxed DS-3
- Single-mode fiber
- Multi-mode fiber
- 10/100 ethernet
----------------------------------------------------------------------------------------------
SERVICE AND SUPPORT
- Long-term contracts - 24 x 7 on-site technical - No necessity to hire staff
support to support equipment located
- Hourly service at our Neutral Optical
- Technical support services, Hubs
including status reporting,
cross connection testing, - Fast response to customers'
and smart hands equipment and network
problems
- Installation of colocation
equipment and cross
connections
- Comprehensive tracking of
service requests
- Conference facilities
----------------------------------------------------------------------------------------------
</TABLE>
Our pre-packaged service options vary based on the number of hours of
technical support requested. In the future, we plan to build upon our present
offerings by providing additional value-added services, either directly or
through partnerships. These future service offerings may include developing
switching capabilities among customers, more efficient distribution of content
from peering points to end users, web-enabled remote monitoring of customer
equipment, and an expanded scope of technical services for network consulting
and support.
OPERATIONS CONTROL CENTERS AND FACILITIES MONITORING
Each Neutral Optical Hub has an operations control center that monitors all
aspects of the facility through a comprehensive facility management system. This
system collects data on
38
<PAGE> 42
more than 200 variables per location and provides real time monitoring of all
aspects of facility health, including customer power utilization, power trend
analysis and power-based alarming. We are currently developing a web extension
of this architecture to provide a common set of customer-viewable facility
metrics, power utilization reports, power trend reports, and to allow both
distributed and centralized monitoring of our facilities. We believe that this
management flexibility will allow individual Neutral Optical Hubs to be
self-supporting, supported from a "sister site," or supported from our corporate
headquarters in Brisbane, California.
CUSTOMER SERVICE
We believe that customer satisfaction is a critical component to growing
our business. We have designed a comprehensive customer service program that
focuses on the customer deployment process and post-deployment requests through
our 24 x 7 customer service center.
Customer deployment phase: We assign a dedicated account specialist to each
customer/account to ensure that the processing of each customer order and
installation is handled expeditiously. Account specialists will be highly versed
in their assigned accounts and will be personally responsible to support the
customer.
Customer post-deployment: Once the installation process is complete,
customers can make service requests through our customer service center
(1-877-FYI-COLO). Based on the nature of the call, a customer service
representative will expedite a service request ticket to one of our 24 x 7
on-site support staff.
On-site support services: Our Internet and telecommunications network and
equipment trained technicians are available at all times to assist our customers
in diagnosing and repairing network equipment problems and installing equipment.
We also may offer customers access to experienced network technicians to help
configure and test networks as well as for more technically complex tasks.
CUSTOMERS
Our target customers are Internet-based businesses, application service
providers, Internet service providers, competitive local phone companies and
other voice and data communications companies. Our customers include:
INTERNET BASED BUSINESSES
- Campsix, Inc., a business-to-business Internet incubator.
- RateXchange Corporation, a centralized, online marketplace that brings
buyers and sellers of telecom capacity together.
- Shockwave.com, Inc., the provider of Shockwave Player, a Web standard for
entertaining, engaging and rich media playback.
APPLICATION SERVICE PROVIDERS
- Evolve Software, Inc., a provider of solutions that automate the service
chain.
- Musicbank, Incorporated, a streaming music service for major record
labels, music retailers, artists and the general public.
39
<PAGE> 43
INTERNET SERVICE PROVIDERS
- InterNAP Network Services Corporation, a provider of Internet
connectivity services targeted at businesses seeking to maximize the
performance of Internet-based applications.
- Madge Networks N.V., a networking and Internet services provider,
specializing in managed networks, Web and application hosting, enterprise
local area networking products and video networking.
- The Masterlink Group, Inc., an Internet services company, providing
professional website development and design services, website hosting,
e-commerce development tools, Internet access, and database integration
services.
- SAVVIS Communications Corporation, a global internetworking solutions
provider offering high-quality, high-speed Internet and networking
services to corporate users, web centric companies and local/regional
Internet service providers. Together with its parent company, Bridge
Information Systems, a provider of financial news and information, SAVVIS
provides bundled content, security and managed data networking services.
COMPETITIVE LOCAL PHONE COMPANIES
- Mpower Communications Corp. (formerly MGC Communications, Inc.), a
provider of facilities based integrated communication services including
Internet, voice over DSL, local phone service, custom calling features
and long distance services to small and medium size businesses.
- Telseon Inc. (formerly Cmetric), a provider of gigabit bandwidth
fiber-based data services to enterprises, Internet service providers, and
network provider partners by exploiting ethernet and fiber optics
technology.
- 2nd Century Communications Inc., a provider of advanced computing
applications integrated with voice and data communications over a unified
network to small and medium-sized businesses.
NETWORK PROVIDERS
- NeuMedia Inc., a provider of fiber optic network services.
In the three months ended March 31, 2000, our three largest customers were
Mpower, IXNet, Inc. and Megawatts, from whom we received approximately 61%, 18%
and 5% of our revenue, respectively. In 1999, our three largest customers were
IXNet, Megawats and KIVEX, from whom we received approximately 56%, 23% and 11%
of our revenue, respectively. In 1998, our three largest customers were MediaOne
Group, Inc., Megawats and IXNet from whom we received approximately 34%, 31% and
11% of our revenue, respectively.
SALES AND MARKETING
DIRECT SALES FORCE. We have a direct sales force to market our Neutral
Optical Hub solution to our target customers. We are organizing our sales force
along both account-specific and geographic lines. We have six sales regions in
the U.S. and intend to establish two additional international sales regions.
Each region will have a sales director, sales representatives and sales
engineers who handle the technical issues that may arise in our sales process.
At May 31, 2000, we employed 62 people in our sales and sales engineering
divisions, and we intend to continue to grow our sales force rapidly.
40
<PAGE> 44
INDIRECT SALES CHANNELS. We are also building and exploring additional
distribution channels, including indirect sales channels for our product
offerings by strategically targeting partners that have relationships with
prospective customers requiring a colocation solution. For example, we currently
have an agreement with Nortel for an option on space in our Neutral Optical Hubs
for use by Nortel's customers to place equipment purchased from Nortel. This
provides us with an indirect sales channel and allows Nortel to deploy its
switches more quickly. Other channel relationships include InterNAP, Band-X,
Avcom, Cat Technologies and Extreme Networks.
MARKETING. Our marketing efforts are focused on building a world-wide brand
through actively communicating a value proposition that establishes COLO.COM as
the premier provider of a widely distributed infrastructure where customers can
locate their equipment close to end users and partners and quickly and easily
deploy applications and services for their customers. We believe that brand
recognition is critical in developing market leadership. We intend to build our
services into a world class brand through a recognizable standard look and feel
of our Neutral Optical Hubs and an aggressive communications strategy including
public relation campaigns, trade show participation, channel marketing programs
and targeted advertising.
STRATEGIC AND COMMERCIAL RELATIONSHIPS
We have entered into strategic relationships with NEXTLINK, Nortel, and
MasTec and Skanska, each of whom also made equity investments in COLO.COM, and a
commercial relationship with InterNAP.
NEXTLINK. NEXTLINK has an option to locate its equipment in 20 of our
Neutral Optical Hubs and to provide connectivity in the form of both fiber and
wireless connections to our customers in these facilities. NEXTLINK also
received a warrant to purchase our Series C preferred stock, which became
exercisable in the first quarter of 2000 based on NEXTLINK initiating the
process of connecting its network to ten of our Neutral Optical Hubs. NEXTLINK
purchased approximately $5 million of our Series C preferred stock.
NORTEL. Nortel has an option on space in our Neutral Optical Hubs for use
by its customers who want to buy Nortel equipment and need a place to locate it.
This provides us with an indirect sales channel and allows Nortel to deploy its
switches more quickly. Nortel purchased approximately $5 million of our Series C
preferred stock and we have agreed to acquire $5 million of equipment from
Nortel before December 31, 2001.
MASTEC AND SKANSKA. MasTec and Skanska have agreed to build 22 of our
Neutral Optical Hubs in North America. In addition, MasTec and Skanska each
purchased approximately $2.5 million of our Series C preferred stock in December
1999.
INTERNAP. We have also entered into a commercial relationship with InterNAP
that gives it reseller rights with respect to its space in our San Francisco
(Townsend Street) facility for the purpose of selling value-added services to
its customers. InterNAP has also designated COLO.COM as a preferred colocation
provider.
FACILITY BUILDOUT
SITE SELECTION AND LEASING. We have engaged two large commercial real
estate brokers, Cushman & Wakefield in the U.S. and Canada, and Jones Lang
LaSalle in Europe, to identify and evaluate potential targeted sites for our
facilities. To ensure consistent quality and uniform facilities, we have
developed an exacting set of standards for the features of the spaces that we
lease and a 60-point site selection checklist. One of our most important
criteria is proximity to network facilities. Using these standards, our real
estate staff evaluates each potential site,
41
<PAGE> 45
ranks them and then makes its selection. Detailed proposal requirements and our
own lease form with sample lease amendments allow us to expedite the leasing
process.
FACILITY DESIGN. We have designed a comprehensive facility model based on a
rigorous set of standardized engineering specifications that will be applied to
each facility we build. We design our facilities to provide exacting
environmental controls and physical security as well as fully redundant,
technologically advanced electrical power, air conditioning and fire suppression
systems. We believe that our design specifications will lead to high quality
facilities that we can construct rapidly.
FACILITY CONSTRUCTION. We have teamed with leading project management and
construction firms to build our facilities in accordance with our construction
criteria. These firms include MasTec North America, Inc. of Miami, Florida and
Sordoni Skanska Construction Company of Parsippany, New Jersey; DPR Construction
of Redwood City, California; and Total Site Solutions of Beltsville, Maryland
for facilities in the United States and Jones Lang LaSalle for facilities in
Europe. Each of these firms has expertise in architecture, engineering, and the
permitting process as well as the skills to manage local contractors.
CUSTOMER INSTALLATION AND CONNECTIVITY. Once we have completed construction
of a Neutral Optical Hub, some time is required for customers and carriers to
stage, configure and install their equipment, and for customers to connect to
the carriers. Systems testing and further staff training also occurs during this
time. At the end of this period, we expect that the facility will begin
generating revenue.
On average, we expect a new domestic facility of 25,000 square feet to take
approximately ten months from entering into a lease to generating revenue and
cost approximately $10 million to construct and equip. On average, we expect a
new international facility of 50,000 square feet to take approximately twelve
months from entering into a lease to generating revenue and cost approximately
$25 million to construct and equip.
COMPETITION
The market for colocation services is expanding. The main barriers to entry
are access to capital, the time needed to assemble a management team and build
out facilities, and the ability to secure a first-to-market advantage. We have
targeted the developing neutral colocation segment of the broader market for
colocation services. Although there are a number of companies developing
businesses similar to ours, in most metropolitan areas there are currently a
limited number of providers of neutral colocation facilities operating. We
expect other companies to enter this market segment if there is sufficient
demand for neutral colocation services.
In addition to competing with other neutral colocation providers, we will
compete with traditional colocation providers, including local phone companies,
long distance phone companies, Internet service providers and web-hosting
facilities. Most of these competitors have greater resources, more customers,
longer operating histories, greater brand recognition and more established
relationships than we have. We believe our neutrality provides us with an
advantage over these competitors. However, these competitors could offer
colocation on neutral terms, and may start doing so in the metropolitan areas
where we establish operations. If this occurs, we could face increased price
competition.
The Telecommunications Act requires incumbent local exchange carriers to
provide non-discriminatory colocation to telecommunications carriers that wish
to interconnect with the incumbent local exchange carrier's networks or obtain
access to incumbent local exchange carrier-provided unbundled network elements.
In 1996, the Federal Communications Commission adopted initial rules to
implement this provision and, in 1999, adopted additional
42
<PAGE> 46
rules that should significantly lower the cost and increase the attractiveness
of incumbent local exchange carrier-provided colocation facilities.
Consequently, colocation offered by incumbent local exchange carriers may become
more competitive with our service offerings.
There are a number of companies offering colocation facilities. Many of
these competitors could also be our customers. These companies can be
categorized as follows:
CARRIER OPERATED FACILITIES. Carrier operated facilities are generally
operated by the traditional local exchange carriers, long distance providers and
some new local phone companies. For example, carriers such as AT&T, Global
Center, Level 3 Communications, MCI WorldCom, Qwest Communications
International, and Sprint, as a byproduct of offering access to their networks,
offer colocation space. By becoming an occupant of a carrier-operated facility,
customers are typically limited to purchasing services from that carrier. As a
result, customers may be required to pay high prices and might receive poor
service, as colocation is ancillary to the carriers' primary business.
WEB-HOSTING FACILITIES. Web-hosting facilities such as Digital Island,
Exodus Communications and Globix may require their Internet-based customers to
use their services exclusively which may result in higher pricing and limited
network deployment flexibility.
NETWORK ACCESS POINTS. Other network access facilities, such as Neutral
Nap, PAIX, and Equinix, tend to be Internet exchange centric and can face
difficulties in bringing the right mix of customers and carrier-diversity into
their sites, affecting connectivity and time-to-market.
OTHER CENTRAL OFFICE-LIKE FACILITIES. Several other companies are offering
central office-like facilities. There are a number of domestic and international
companies, including Switch and Data Facilities, CO Space, InFlow, Telehouse and
TelePlace in the U.S., City Reach, DigiPlex, Global Reach, IX Europe, iaxis,
InterXion and Redbus Interhouse in Europe, and iAsiaWorks in Asia.
CARRIER HOTELS. Carrier hotels such as the Westin Building in Seattle, One
Wilshire in Los Angeles and 60 Hudson in New York City, are buildings that tend
to be operated by real estate companies or individuals that expect to lease
physical space to telecommunications companies for colocation purposes.
Once a customer is located in a facility, it will be difficult to convince
that customer to relocate to another colocation facility, because moving out of
an existing facility could result in service interruptions and significant costs
to reconfigure network connections. One of the key components of our business
strategy is to be first-to-market with broad geographic presence, which we
believe will provide us with a competitive advantage over later market entrants.
GOVERNMENT REGULATION
We believe that, because we do not provide transmission, switching, or
multiplexing services or facilities, we are not currently subject to regulation
by the Federal Communications Commission or state authorities that regulate
telecommunications. Telecommunications regulation frequently changes, however,
and, particularly at the state level, the line between regulated and
non-regulated activities is not always clear. Accordingly, it is possible that a
regulatory authority would seek to regulate some of our existing activities. In
addition, some new services or products offered by us may be subject to
regulation by state public utility commissions, the FCC, or both.
43
<PAGE> 47
FACILITIES
Our executive offices are located in approximately 36,000 square feet of
office space in Brisbane, California under leases expiring in 2004 and 2005. As
of May 31, 2000, we had entered into leases for 46 Neutral Optical Hubs in the
following metropolitan areas and specific locations, which cover the approximate
gross square footage noted below and expire in the indicated years:
<TABLE>
<CAPTION>
SQUARE FEET LEASE
METROPOLITAN AREA LOCATION LEASED EXPIRATION
----------------- -------- ----------- ----------
<S> <C> <C> <C>
Austin...................... Austin, TX 15,986 2010
Boston...................... Medford, MA 38,416 2010
Chicago..................... Chicago, IL -- Wells St.* 6,800 2009
Oak Brook, IL* 16,780 2009
Chicago, IL -- Cermak Rd. 33,300 2015
Charlotte................... Charlotte, NC 30,324 2010
Cincinnati.................. Cincinnati, OH 22,840 2010
Cleveland................... Cleveland, OH 27,776 2012
Dallas...................... Dallas, TX* 27,370 2010
Ft. Worth, TX* 19,031 2011
Denver...................... Englewood, CO 27,485 2010
Detroit..................... Detroit, MI 28,342 2010
Jacksonville................ Jacksonville, FL 25,910 2010
Kansas City................. Lee's Summit, MO 25,000 2010
Las Vegas................... Las Vegas, NV* 28,560 2010
Los Angeles................. Los Angeles, CA* 34,710 2009
Irvine, CA 23,709 2010
Louisville.................. Louisville, KY 28,000 2010
Madrid...................... Madrid, Spain 37,700 2015
Memphis..................... Cordova, TN 27,298 2010
Miami....................... Miami, FL 26,216 2010
Milwaukee................... Milwaukee, WI* 5,200 2010
Minneapolis................. Minneapolis, MN 38,367 2012
Munich...................... Munich, Germany 111,000 2010
Norfolk..................... Chesapeake, VA 23,424 2010
New York City............... New York, NY -- Hudson St. 33,286 2015
New York, NY -- Broad St. 32,614 2010
Orlando..................... Orlando, FL 27,992 2010
Phoenix..................... Phoenix, AZ 32,000 2010
Pittsburgh.................. Pittsburgh, PA 26,220 2010
Portland.................... Beaverton, OR 23,101 2010
Portland, OR 23,441 2011
Richmond.................... Richmond, VA 33,471 2010
Salt Lake City.............. West Valley, UT 33,947 2010
San Antonio................. San Antonio, TX 34,898 2010
San Diego................... San Diego, CA 22,068 2010
San Francisco............... Emeryville, CA* 14,657 2009
San Francisco, CA -- Townsend St.* 20,576 2010
Santa Clara, CA 25,000 2015
San Ramon, CA 18,677 2010
Seattle..................... Seattle, WA* 19,138 2010
Bothell, WA 66,568 2015
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
SQUARE FEET LEASE
METROPOLITAN AREA LOCATION LEASED EXPIRATION
----------------- -------- ----------- ----------
<S> <C> <C> <C>
St. Louis................... St. Louis, MO -- Walnut St. 9,358 2010
St. Louis, MO -- Tucker Blvd. 28,024 2010
Washington, DC.............. Vienna, VA* 23,715 2009
Sterling, VA 26,534 2010
</TABLE>
-------------------------
* Generating revenue or ready for carriers and customers to install their
equipment as of May 31, 2000.
We anticipate that our target center in the United States will be
approximately 25,000 square feet, subject to space and power availability, and
that approximately 50% of the square footage in each of our facilities will be
available for our customers' use. Most of our facilities have ten year lease
terms, with options for additional lease periods. We are actively negotiating
and seeking leases in many additional locations as part of our planned
deployment in the U.S., Canada and Europe.
EMPLOYEES
As of May 31, 2000, we had 234 full-time employees. None of our employees
is represented by a labor union, and we consider employee relations to be good.
We believe that our future success will depend in part on our continued ability
to attract, hire and retain qualified personnel. The competition for such
personnel is intense, and we cannot assure you that we will be able to identify,
attract and retain such personnel in the future. See "Risk Factors -- We have a
new management team, and we depend on our ability to attract and retain key
personnel."
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
45
<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of May 31, 2000 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles M. Skibo.................. 61 Chief Executive Officer and Chairman of the Board
Wayne A. Olson.................... 55 Senior Vice President, Operations and Administration
H.S. Kullar....................... 47 Senior Vice President, Marketing
Stephen I. Robertson.............. 39 Chief Financial Officer
James M. Smith.................... 31 Chief Technology Officer
David H. Stanley.................. 53 General Counsel and Secretary
Robert E. Lamb, Jr. .............. 32 Vice President, Business Development
John F. Mevi III.................. 42 Vice President, Sales
James H. Strachan................. 26 Vice President, Product Development and Planning
Christopher E. Clouser(2)......... 48 Director
Young Soo Ha(1)................... 37 Director
John W. Jarve(2).................. 44 Director
Richard P. Nespola(1)............. 55 Director
Arthur Patterson(2)............... 56 Director
Kirby G. Pickle, Jr.(1)........... 43 Director
</TABLE>
-------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
CHARLES M. SKIBO has served as our Chairman of the Board and Chief
Executive Officer since January 1999. Since February 1996, Mr. Skibo has also
served as Chairman and Chief Executive Officer of Allied Telecommunications, a
communications company. Since February 1990, Mr. Skibo has served as Chairman
and Chief Executive Officer of Strategic Enterprises and Communications, Inc., a
venture capital firm. From 1985 to 1987, Mr. Skibo was President and CEO of U.S.
Sprint and its predecessor company, U.S. Telecom. Mr. Skibo is also a director
of iBasis, Inc., a public international Internet telephony services provider;
the Chairman of Angstrom, Inc., a privately held telecommunications company; and
a director of NexCen, a privately held software company.
WAYNE A. OLSON has served as our Senior Vice President of Operations and
Administration since March 1999. From July 1993 to March 1999, Mr. Olson was
President and Chief Executive Officer of the St. Andrews Group, Ltd., a
consulting firm specializing in human systems and organizational services.
H.S. KULLAR has served as our Senior Vice President of Marketing since
September 1999. From February 1999 to September 1999, Mr. Kullar was an
independent consultant. From April 1998 to February 1999, Mr. Kullar served as
Vice President of Product Marketing with Fabrik Communications, a provider of
service-based enterprise email solutions. From May 1997 to April 1998, Mr.
Kullar was Senior Director of Business Development for ICG/Netcom, an Internet
services corporation; Senior Director of Strategic and Product Marketing from
October 1996 to May 1997; and Director of Market Programs and Development for
Business Services from April 1996 to October 1996. From March 1994 to April
1996, Mr. Kullar served as General Manager of AFAX, a messaging services
company.
STEPHEN I. ROBERTSON has served as our Chief Financial Officer since March
2000. From July 1998 to March 2000, Mr. Robertson served as Chief Financial
Officer of InsWeb Corporation, an online insurance marketplace. From November
1997 to July 1998,
46
<PAGE> 50
Mr. Robertson was a Senior Vice President of Lehman Brothers, an investment
banking firm. From September 1986 to October 1997, Mr. Robertson held various
investment banking positions with Salomon Brothers, Smith Barney, and Alex.
Brown.
JAMES M. SMITH has served as our Chief Technology Officer since July 1999.
From April 1999 to June 1999, he was our Director of Operations. From November
1997 to April 1999, Mr. Smith served as Sales Manager with Verio, an Internet
service provider. Prior to joining Verio, Mr. Smith founded ATMnet, an Internet
service provider, where he served as Sales Manager from February 1996 to
November 1997. From August 1994 to January 1996, Mr. Smith attended Oregon State
University.
DAVID H. STANLEY has served as our General Counsel and Secretary since
October 1999. From October 1997 to September 1999, Mr. Stanley served as General
Counsel and Member of Executive Staff for Avant! Corporation, a software
company. From July 1988 to October 1997, Mr. Stanley served as Vice President,
Legal and Corporate Services, General Counsel and Secretary with Informix
Corporation, a software company.
ROBERT E. LAMB, JR. co-founded COLO.COM in 1997 and has served as our Vice
President of Business Development since February 1999. From November 1998 to
February 1999, Mr. Lamb served as our President, and from October 1997 to
November 1998, as our Vice President of Marketing. From March 1997 to October
1997, Mr. Lamb served as Senior Account Manager at Neural Applications
Corporation, a software company. From July 1995 to March 1997, Mr. Lamb served
as Regional Sales Director for Ethos Corporation, a web portal development
company. From January 1995 to June 1995, Mr. Lamb was an institutional equities
salesperson with Genesis Merchant Group Securities, a brokerage firm.
JOHN F. MEVI III has served as our Vice President of Sales since May 1999.
From March 1998 to May 1999, Mr. Mevi served as Director of Sales with Sentient
Networks, a multi-protocol switch manufacturer. Prior to joining Sentient, Mr.
Mevi founded ATMnet, an Internet service provider, where he served as Vice
President of Sales and Marketing from November 1995 to November 1997. From
September 1994 to December 1995, Mr. Mevi was a Senior Account Executive at
Teleport Communications Group, a communications company.
JAMES H. STRACHAN has served as our Vice President of Product Development
and Planning since March 1999. Mr. Strachan served as our Director of Product
Development from December 1998 to March 1999, our Vice President of Sales from
June 1998 to November 1998 and our Business Development Manager from February
1998 to June 1998. From September 1996 to February 1998, Mr. Strachan served in
various sales positions at MCI Communications, a telecommunications company.
From 1992 to 1996, Mr. Strachan attended California State University at San Luis
Obispo, California, and received his B.S. in Finance, Real Estate and Marketing.
CHRISTOPHER E. CLOUSER has served as one of our directors since January
2000. Since May 2000, Mr. Clouser has served as President of CRP Sports and
Chief Executive Officer of the Minnesota Twins Baseball Club. From July 1999 to
May 2000, Mr. Clouser served as President and Chief Executive Officer and a
director of Preview Travel, Inc. From March 1991 to June 1999, Mr. Clouser
served as Senior Vice President of Northwest Airlines. Mr. Clouser is also a
director of Pepsi Americas, Inc.
YOUNG SOO ("PERRY") HA has served as one of our directors since September
1998. From December 1998 to January 1999, Mr. Ha served as our Interim Chief
Executive Officer. Since September 1997, Mr. Ha has been a general partner of
Athena Technology Ventures, a venture capital firm. From June 1994 to September
1997, he was head of the North American Center of Excellence for the Product
Development and Technology Management Practice at Gemini Consulting, a
consulting company.
47
<PAGE> 51
JOHN W. JARVE has served as one of our directors since April 1999. Since
1985, Mr. Jarve has been employed by Menlo Ventures, a venture capital firm
focused on the software, communications, healthcare and Internet sectors, where
he currently serves as a general partner and managing director. Mr. Jarve is
also a director of Digital Insight Corporation and iBasis, Inc.
RICHARD P. NESPOLA has served as one of our directors since January 2000.
Since January 1990, Mr. Nespola has served as President, Chief Executive Officer
and a director of The Management Network Group, Inc., a consulting firm.
ARTHUR PATTERSON has served as one of our directors since April 1999. Since
1983, Mr. Patterson has been a partner of Accel Partners, a venture capital
firm. Mr. Patterson is also a director of Actuate Corporation, Weblink Wireless,
Inc., Portal Software, Inc. and Viasoft, Inc.
KIRBY G. ("BUDDY") PICKLE, JR. has served as one of our directors since
January 2000. Since February 1997, Mr. Pickle has served as President and Chief
Operating Officer of Teligent, Inc., a telecommunications company. From 1991 to
January 1997, Mr. Pickle served as Executive Vice President of MFS
Communications Co., a telecommunications company.
BOARD OF DIRECTORS
Our bylaws authorize a range of from four to seven directors, currently set
at seven. Either our board or our stockholders have the power to amend this
provision of our bylaws to set the exact number of directors within this range.
We currently have seven directors and no vacancies.
BOARD COMMITTEES
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Mr. Nespola, Mr. Ha and Mr. Pickle.
The audit committee has a written charter and selects our independent auditors,
reviews the scope of audit and other services by our independent auditors,
reviews the accounting principles and auditing practices and procedures to be
used for our financial statements and reviews the results of our accounting
audits.
The compensation committee consists of Mr. Clouser, Mr. Patterson and Mr.
Jarve. The compensation committee makes recommendations to the board of
directors regarding our stock plans and the compensation of officers.
DIRECTOR COMPENSATION
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. Pursuant to the terms of our
stock plan, our board has the discretion to grant options to current and new
non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently, or has been
at any time since our formation, one of our officers or employees. No
interlocking relationships exist between our board of directors, compensation
committee or officers and the board of directors, compensation committee or
officers of any other company, nor has an interlocking relationship existed in
the past.
48
<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned during
1999 by the two individuals who served as our Chief Executive Officers during
1999 and our four other most highly compensated executive officers, whom we
collectively refer to as our named executive officers, for services rendered in
all capacities to COLO.COM.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------- ----------------------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS SALARY BONUS COMPENSATION OPTIONS COMPENSATION(5)
---------------------------- -------- ------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Charles Skibo(1)................... $206,250 $75,000 -- 4,210,000 --
Chairman of the Board and Chief
Executive Officer
Young Soo Ha(2).................... -- -- -- -- --
Wayne Olson(3)..................... 118,750 50,000 -- 551,143 --
Senior Vice President, Operations
and Administration
Robert Lamb, Jr. .................. 117,500 40,000 -- 40,000 $6,346
Vice President, Business
Development
James Strachan..................... 107,500 45,000 -- 100,000 6,827
Vice President, Product
Development and Planning
Richard Palomba(4)................. 144,250 -- -- 50,000 --
Vice President, Real Estate
Acquisition and Development
</TABLE>
-------------------------
(1) Mr. Skibo began his employment with us on January 25, 1999.
(2) Mr. Ha served as our Interim Chief Executive Officer from December 1998 to
January 1999, for which he received no compensation.
(3) Mr. Olson began his employment with us on March 15, 1999.
(4) Mr. Palomba was compensated pursuant to a consulting agreement with
Corporate Planning & Property Consulting, Inc., of which Mr. Palomba is a
principal. In March 2000, Mr. Palomba became a part-time consultant and no
longer serves as a vice president.
(5) All other compensation consists of payments for accrued but unused vacation
time.
49
<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information relating to stock options
granted during 1999 to our named executive officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION FOR
OPTIONS GRANTED GRANTED TO OR BASE OPTION TERM(3)
GRANTED EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME (#)(1) FISCAL YEAR SHARE DATE(2) 5% 10%
---- --------------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles 1,270,000 13.05% $0.05 1/28/2009 $39,935 $101,203
Skibo(4)........
2,940,000 30.20 0.05 4/12/2009 92,448 234,280
Young Soo Ha...... -- -- -- -- -- --
Wayne Olson....... 551,143 5.67 0.05 6/08/2009 17,331 43,919
Robert Lamb, 40,000 0.41 0.05 6/08/2009 1,258 3,187
Jr. ............
James Strachan.... 40,000 0.41 0.05 6/08/2009 1,258 3,187
60,000 0.62 0.50 11/24/2009 18,867 47,812
Richard Palomba... 50,000 0.51 0.05 6/08/2009 1,572 3,984
</TABLE>
-------------------------
(1) These options are incentive stock options that were granted at fair market
value and vest over a 4-year period so long as the optionee is employed by
us, except for the options granted to Mr. Skibo which vest over a 3-year
period.
(2) Each of the options has a ten-year term, subject to earlier termination in
the event of the optionee's earlier cessation of service with us.
(3) The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent our estimate or projection of the future price of our common
stock. Actual gains, if any, on stock option exercises are dependent on the
future performance of the common stock, overall market conditions and the
option holder's continued employment through the vesting period. Unless the
market price of the common stock appreciates over the option term, no value
will be realized from the option grants made to the Named Executive
Officers.
(4) Under the terms of Mr. Skibo's employment agreement, all of the shares
subject to this option will accelerate and become fully vested in the event
that either Mr. Skibo's employment with the Company is terminated without
cause or there is a material breach by the Company of his employment
agreement. See "-- Employment Arrangements."
50
<PAGE> 54
AGGREGATE OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information for our named executive officers
in 1999 relating to option exercises in 1999 and the number and value of
securities underlying exercisable and unexercisable options held at December 31,
1999. All options were granted under our 1998 Incentive Stock Option Plan. These
options are immediately exercisable in full at the date of grant, but shares
purchased on exercise of unvested options are subject to a repurchase right in
our favor that entitles us to repurchase unvested shares at their original
exercise price upon termination of the employee's services with us. Except as
indicated in the footnotes below, the repurchase rights generally lapse on these
shares as to 25% of the shares on the first anniversary of the grant date, and
the balance ratably per month over the next three years.
<TABLE>
<CAPTION>
NUMBER SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE DECEMBER 31, 1999 DECEMBER 31, 1999(2)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles Skibo(3)... 4,210,000 $8,209,500 -- -- -- --
Young Soo Ha....... -- -- -- -- -- --
Wayne Olson........ 551,143 1,074,729 -- -- -- --
Robert Lamb,
Jr. ............. 40,000 78,000 -- -- -- --
James Strachan..... 190,000 370,500 60,000 -- $90,000 --
Richard Palomba.... 50,000 97,500 -- -- -- --
</TABLE>
-------------------------
(1) Based on the fair market value of our common stock at an assumed price of
$2.00 per share, less the exercise price payable for such shares.
(2) Based on the fair market value of our common stock at December 31, 1999
estimated by our board of directors to be $2.00 per share less the exercise
price payable for such shares.
(3) Our right of repurchase lapses over a three-year period with respect to 60%
of the underlying shares at the first anniversary of the grant date, 20% on
the second anniversary and 20% on the third anniversary of the grant date
except in the event of termination without cause, our right of repurchase
lapses immediately.
COMPENSATION PLANS
1998 INCENTIVE STOCK OPTION PLAN
Our 1998 Incentive Stock Option Plan was adopted by our board of directors
in January 1998 and approved by our stockholders in February 1998. The maximum
number of shares that may be issued under the 1998 Incentive Stock Option Plan
is 14,047,839 shares of our common stock. As of May 31, 2000, options to
purchase 3,208,250 shares of our common stock were outstanding under this plan.
The 1998 Incentive Stock Option Plan provides for the grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, referred to as the Code, to our employees, and for the grant of
nonstatutory stock options and stock purchase rights to our employees, directors
and consultants. In the event of our merger with or into another corporation or
a sale of substantially all of our assets, the successor corporation will assume
or substitute each option or stock purchase right. If the outstanding options or
stock purchase rights are not assumed or substituted, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase right as to all of the shares subject to the option or
stock purchase right, including shares which would not otherwise be exercisable,
for a period of 15 days from the date of the notice. The option or stock
purchase right will terminate upon the expiration of the 15-day period.
51
<PAGE> 55
401(k) PLAN
In 1999, our board of directors adopted a Retirement Savings and Investment
Plan covering our full-time employees located in the U.S. This plan is intended
to qualify under Section 401(k) of the Internal Revenue Code of 1986, as
amended, so that contributions to this plan by employees, and the investment
earnings thereon, are not taxable to employees until withdrawn. Pursuant to this
plan, employees may elect to reduce their current compensation by up to the
lesser of 15% of their annual compensation or the statutorily prescribed annual
limit, and to have the amount of such reduction contributed to this plan. We do
not currently make additional matching contributions on behalf of plan
participants.
EMPLOYMENT ARRANGEMENTS
Charles M. Skibo. Mr. Skibo entered into an employment agreement with us on
January 25, 1999. This agreement is for an initial term of three years,
terminating on January 24, 2002, and renewable for one-year periods. Under the
agreement, we agreed to pay Mr. Skibo an annual salary of $225,000 for his first
year of employment, $250,000 for his second year of employment, and $300,000 for
his third year of employment.
Upon completion of an initial public offering during the term of agreement,
Mr. Skibo's annual salary will immediately increase to $360,000. Mr. Skibo is
also eligible to receive target bonuses of up to $75,000 in the first year of
employment, 60% of his base salary in the second year of employment and 85% of
his base salary in the third year of employment.
In connection with his employment, Mr. Skibo was granted options to
purchase 4,210,000 shares of our common stock. These options were exercised for
shares of restricted stock which vest over a three year period, with 60% of the
shares vesting at the end of one year of employment, 20% vesting at the end of
two years of employment, and 20% vesting at the end of three years of
employment. If Mr. Skibo is terminated without cause, he will be entitled to
receive continued payment of his base salary for the remainder of the term of
the agreement and the vesting of his restricted stock shall accelerate and
become fully vested.
Stephen I. Robertson. Mr. Robertson began working as our Chief Financial
Officer in March 2000. Under the terms of the offer, Mr. Robertson was granted
an option to purchase 560,000 shares of our common stock to vest over four
years. If we complete a secondary funding event after our initial public
offering prior to the end of Mr. Robertson's first year of employment, 70,000 of
the shares will vest at the close of that transaction.
If we terminate Mr. Robertson's employment without cause, Mr. Robertson
will continue to receive his salary and his options will continue to vest for
twelve months following the termination date. In the event that we experience a
change in control and Mr. Robertson is terminated without cause or is
constructively terminated, his option will continue to vest for two years after
the termination date.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our amended and restated articles of incorporation provide for the
limitation of liability of our directors and for the indemnification of our
directors and officers to the fullest extent permissible under California law.
However, at some point following the exchange offer, we intend to change our
state of incorporation from California to Delaware.
Our bylaws provide for the indemnification of our officers, directors and
third parties acting on our behalf if these people acted in good faith and in a
manner they reasonably believed to be in and not opposed to our best interest,
and, with respect to any criminal action or proceeding, the indemnified person
had no reason to believe his conduct was unlawful.
52
<PAGE> 56
RELATED PARTY TRANSACTIONS
PREFERRED STOCK FINANCINGS
From June 1998 through April 1999, we issued to various investors a total
of 4,261,730 shares of Series A preferred stock at a purchase price of $0.50 per
share. In April 1999, we issued to various investors a total of 24,500,000
shares of Series B preferred stock at a purchase price of $0.50 per share. In
December 1999, we issued to various investors a total of 20,408,164 shares of
Series C Preferred stock at a purchase price of $9.80 per share.
Investors in, and beneficial owners of, our preferred stock include, among
others, the following directors and holders of more than 5% of our outstanding
stock:
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------
PREFERRED STOCKHOLDER SERIES A SERIES B SERIES C
--------------------- --------- ---------- ---------
<S> <C> <C> <C>
HOLDERS OF MORE THAN 5%:
Accel Partners Entities...................... -- 10,000,000 816,327
Athena Venture Fund, L.P. ................... 2,500,000 2,500,000 510,204
InvestCorp International Inc. ............... -- -- 3,571,428
Menlo Ventures Entities...................... -- 10,000,000 1,836,735
Meritech Capital Partners Entities........... -- -- 4,081,633
DIRECTORS:
Young Soo Ha(1).............................. 2,500,000 2,500,000 510,204
John Jarve(2)................................ -- 10,000,000 1,836,735
Arthur Patterson(3).......................... -- 10,000,000 816,327
</TABLE>
-------------------------
(1) Consists of shares held by Athena Venture Fund, L.P. Mr. Ha is a general
partner of Athena Venture Fund, L.P. and disclaims beneficial ownership of
these shares except to the extent of his proportionate partnership interest
therein.
(2) Consists of shares held by Menlo Ventures entities. Mr. Jarve is a general
partner of the Menlo Ventures entities and disclaims beneficial ownership of
these shares except to the extent of his proportionate partnership interest
therein.
(3) Consists of shares held by Accel Partners entities. Mr. Patterson is a
general partner of the Accel Partners entities and disclaims beneficial
ownership of these shares except to the extent of his proportionate
partnership interest therein.
Holders of our preferred stock are entitled to registration rights with
respect to the shares of common stock issuable upon conversion of the preferred
stock. See "Description of Capital Stock -- Registration Rights."
LOANS TO OFFICERS
We have implemented a program under which our directors, executive officers
and a number of other key employees are permitted to exercise their outstanding
options as to both vested and unvested shares, with unvested shares being
subject to a right of repurchase at cost in favor of COLO.COM in the event of
termination of employment prior to vesting of the shares. Under this program,
the participants paid the exercise price for their outstanding options pursuant
to full recourse promissory notes. The notes bear interest at a rate of
approximately 6.2% per annum and are due and payable on the earlier of
termination of the participant's
53
<PAGE> 57
employment with us, or on various dates beginning in November 2003. The
principal balance as of March 31, 2000 of each note payable by a director or
executive officer is set forth below:
<TABLE>
<CAPTION>
NOTE
DIRECTOR OR EXECUTIVE OFFICER AMOUNT
----------------------------- ----------
<S> <C>
H.S. Kullar................................................. $ 200,000
David H. Stanley............................................ 200,000
Charles M. Skibo............................................ 84,200
James M. Smith.............................................. 82,000
Wayne A. Olson.............................................. 27,557
John F. Mevi III............................................ 20,000
Robert E. Lamb, Jr. ........................................ 10,000
James H. Strachan........................................... 8,500
</TABLE>
The aggregate principal balance as of March 31, 2000 of notes payable by
all directors, officers and employees was approximately $1.4 million.
CONSULTING AGREEMENT
In March 1999, we entered into a consulting agreement with Corporate
Planning & Property Consulting, Inc. Mr. Palomba is a Principal of Corporate
Planning & Property Consulting, Inc. Under this agreement, Mr. Palomba served as
our Vice President, Real Estate Acquisition and Development. In March 2000, Mr.
Palomba became a part-time consultant and no longer serves as a vice president.
OTHER TRANSACTIONS
In December 1998, we repurchased 600,000 shares of common stock for a total
of $60,000 from our former Chief Executive Officer, Peter Berns, in connection
with his resignation from employment with us.
Mario M. Rosati, one of our directors from June 1998 to April 1999, is also
a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation, which
has served as our outside corporate counsel since January 1998. Mr. Rosati holds
12,000 shares of common stock and WS Investment Company 98B holds 108,000
shares. WS Investment Company 98B is a holding company of Wilson Sonsini
Goodrich & Rosati.
The spouse of Robert E. Lamb, Jr., our Vice President, Business
Development, is the owner of Visual Resources, Inc. Through May 31, 2000, we had
purchased approximately $72,000 of business materials and printing supplies from
Visual Resources.
We believe that all transactions between us and our officers, directors,
principal stockholders and other affiliates have been, and it is our intention
that they will be, on terms no less favorable to us than could be obtained from
unaffiliated third parties.
54
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock (on an as-converted basis), as of May 31, 2000, by
the following individuals or groups:
- each person, or group of affiliated persons, whom we know beneficially
owns more than 5% of our outstanding stock;
- each of our named executive officers;
- each of our directors; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder on this table
is c/o COLO.COM, 2000 Sierra Point Parkway, Suite 601, Brisbane, California
94005-1819. Except as otherwise noted, and subject to applicable community
property laws, to the best of our knowledge, the persons named in this table
have sole voting and investing power for all of the shares of common stock held
by them.
This table lists percentage ownership based on 62,881,699 shares of common
stock outstanding (assuming the conversion of all preferred stock) as of May 31,
2000. Options to purchase shares of our common stock that are exercisable within
60 days of May 31, 2000 are deemed to be beneficially owned by the persons
holding these options for the purpose of computing percentage ownership of that
person, but are not treated as outstanding for the purpose of computing any
other person's ownership percentage. Shares underlying options that are deemed
beneficially owned are included in the number of shares listed in the column
labeled "Number." In addition, a portion of the shares held by all of our
executive officers listed below are subject to repurchase by us at the original
purchase prices under the terms of restricted stock purchase agreements. Under
these agreements, these officers exercised unvested options and gave us a right
to repurchase these shares, which lapses over time.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------
PERCENT OF SHARES
BENEFICIAL OWNER NUMBER OUTSTANDING
---------------- ---------- -----------------
<S> <C> <C>
5% STOCKHOLDERS:
Accel Partners Entities(1)................................ 10,816,327 17.2%
428 University Ave
Palo Alto, CA 94301
Athena Venture Fund, L.P.(2).............................. 5,510,204 8.8
310 University Ave., Suite 202
Palo Alto, CA 94301
InvestCorp International Inc.(3).......................... 3,571,428 5.7
280 Park Avenue, 37th Floor
New York, NY 10017
Menlo Ventures Entities(4)................................ 11,836,735 18.8
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Meritech Capital Partners Entities(5)..................... 4,081,633 6.5
90 Middlefield Road, Suite 201
Menlo Park, CA 94025
</TABLE>
55
<PAGE> 59
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------
PERCENT OF SHARES
BENEFICIAL OWNER NUMBER OUTSTANDING
---------------- ---------- -----------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Charles M. Skibo(6)....................................... 4,210,000 6.7%
Wayne A. Olson............................................ 551,143 *
Robert E. Lamb, Jr. ...................................... 1,366,550 2.2
Richard J. Palomba(7)..................................... 210,000 *
James H. Strachan(8)...................................... 270,000 *
Christopher E. Clouser(9)................................. 150,000 *
Young S. Ha(10)........................................... 5,643,141 9.0
John W. Jarve(11)......................................... 11,836,735 18.8
Richard P. Nespola(12).................................... 150,000 *
Arthur Patterson(13)...................................... 10,816,327 17.2
Kirby G. Pickle, Jr.(14).................................. 150,000 *
All directors and executive officers as a group
(15 persons)(15)....................................... 37,107,896 58.0%
</TABLE>
-------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 8,140,000 shares of Series B preferred stock and 664,490 shares of
Series C preferred stock held by Accel VI L.P., 1,040,000 shares of Series
B preferred stock and 84,898 shares of Series C preferred stock held by
Accel Internet Fund II L.P., 690,000 shares of Series B preferred stock and
56,327 shares of Series C preferred stock held by Accel Investors '98 L.P.
and 130,000 shares of Series B preferred stock and 10,612 shares of Series
C preferred stock held by Accel Keiretsu VI L.P.
(2) Consists of 2,500,000 shares of Series A preferred stock, 2,500,000 shares
of Series B preferred stock and 510,204 shares of Series C preferred stock.
(3) Consists of 3,571,428 shares of Series C preferred stock held by Colo.com
Equity Limited, a holding company of InvestCorp International Inc.
(4) Includes 9,596,929 shares of Series B preferred stock and 783,423 shares of
Series C preferred stock held by Menlo Ventures VII, L.P., 403,071 shares
of Series B preferred stock and 32,904 shares of Series C preferred stock
held by Menlo Entrepreneurs Fund VII, L.P., 971,817 shares of Series C
preferred stock held by Menlo Ventures VIII, L.P., 38,484 shares of Series
C preferred stock held by Menlo Entrepreneurs Fund VIII, L.P., and 10,107
shares of Series C preferred stock held by MMEF VIII, L.P.
(5) Includes 4,016,327 shares of Series C preferred stock held by Meritech
Capital Partners, L.P. and 65,306 shares of Series C preferred stock held
by Meritech Capital Affiliates, L.P.
(6) All of these shares are held by the Skibo Family Limited Partnership, of
which Mr. Skibo is a general partner.
(7) Includes 40,000 shares of Series A preferred stock held by Mr. Palomba's
daughter, Gina K. Palomba UGMA, and 120,000 shares of Series A preferred
stock held jointly by Mr. Palomba and Beverly Palomba.
(8) Includes 60,000 shares that are subject to unvested options which are
immediately exercisable into restricted stock.
(9) Includes 150,000 shares that are subject to unvested options which are
immediately exercisable into restricted stock.
(10) Includes 5,510,204 shares of preferred stock held by Athena Venture Fund,
L.P. Mr. Ha, one of our directors, is a general partner of this entity and
disclaims beneficial ownership
56
<PAGE> 60
of these shares, except to the extent of his proportionate partnership
interest therein. Also includes 132,937 shares held by the Ha Family Trust
of 1997.
(11) Includes 10,380,352 shares of preferred stock held by Menlo Ventures VII,
L.P., 435,975 shares of preferred stock held by Menlo Entrepreneurs Fund
VII, L.P., 971,817 shares of preferred stock held by Menlo Ventures VIII,
L.P., 38,484 shares of preferred stock held by Menlo Entrepreneurs Fund
VIII, L.P., and 10,107 shares of preferred stock held by MMEF VIII, L.P.
Mr. Jarve, one of our directors, is a managing director of MV Management
VII, LLC, the general partner of Menlo Ventures VII, L.P. and Menlo
Entrepreneurs Fund VII, L.P., and MV Management VIII, LLC, the general
partner of Menlo Ventures VIII, L.P., Menlo Entrepreneurs Fund VIII, L.P.
and MMEF VIII, L.P. and disclaims beneficial ownership of these shares,
except to the extent of his proportionate partnership interest therein.
(12) Includes 150,000 shares that are subject to unvested options which are
immediately exercisable into restricted stock.
(13) Includes 8,804,490 shares of preferred stock held by Accel VI L.P.,
1,124,898 shares of preferred stock held by Accel Internet Fund II L.P.,
746,327 shares of preferred stock held by Accel Investors '98 L.P. and
140,612 shares of preferred stock held by Accel Keiretsu VI L.P. Mr.
Patterson, one of our directors, is a general partner of each of these
entities and disclaims beneficial ownership of these shares, except to the
extent of his proportionate partnership interest therein.
(14) Includes 150,000 shares that are subject to unvested options which are
immediately exercisable into restricted stock.
(15) Includes 1,070,000 shares that are subject to unvested options which are
immediately exercisable into restricted stock.
57
<PAGE> 61
DESCRIPTION OF OTHER INDEBTEDNESS
COMDISCO LOAN FACILITY
In October 1999, we entered into a $7.0 million loan facility with
Comdisco, Inc. Under this facility, which we can draw down through August 31,
2000, Comdisco provides financing for construction costs and equipment for our
facilities in Chicago, Illinois and Emeryville, California. This agreement is
secured by all tangible and intangible assets relating to the specific
facilities funded by the lender. Individual loans bear interest at a rate of
8.25% per annum and will be repaid in 42 equal monthly installments plus a final
payment equal to 15% of the original advance. As of March 31, 2000, we had
outstanding borrowings of $2.2 million under this facility.
In connection with this facility, we issued to Comdisco a warrant to
purchase 73,976 shares of our Series C preferred stock at an exercise price of
$7.57 per share.
The facility restricts our ability to merge or consolidate with another
entity. It also restricts our ability to pay dividends or purchase stock.
MMC/GATX LOAN FACILITY
In November 1999, we entered into a $17.0 million loan facility with
MMC/GATX Partnership and other lenders. Under this facility, which we can draw
down through December 31, 2001, MMC provides financing for construction costs
and equipment for our facilities in Los Angeles, California and Vienna,
Virginia. This agreement is secured by all tangible and intangible assets
relating to the specific facilities funded by the lender. Individual loans bear
interest at a rate equal to the sum of the applicable U.S. Treasury note yield
to maturity plus 3.93% per annum and will be repaid in 42 equal monthly
installments plus a final payment equal to 10% of the original advance. As of
March 31, 2000, we had outstanding borrowings of $1.2 million under this
facility.
In connection with this facility, we issued to MMC and others warrants to
purchase 227,697 shares of our Series C preferred stock at an exercise price of
$6.44 per share.
The facility restricts our ability to merge or consolidate with another
entity. It also restricts our ability to pay dividends or purchase stock.
58
<PAGE> 62
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
The old notes were sold by us on March 10, 2000 to Goldman, Sachs & Co.,
Bear, Stearns & Co. Inc., Chase Securities Inc., Deutsche Bank Securities Inc.,
Warburg Dillon Read LLC and Jefferies & Company, Inc. (the "Purchasers")
pursuant to a purchase agreement dated March 3, 2000 between us and the
Purchasers. As set forth in this prospectus and in the accompanying letters of
transmittal, we will accept for exchange any and all old notes that are properly
tendered on or prior to the expiration date and not withdrawn as permitted
below. The term "expiration date" means 5:00 p.m., New York City time, on
, 2000; provided, however, that if we extend the period of time for
which the exchange offer is open, the term "expiration date" means the latest
time and date to which the exchange offer is extended.
As of the date of this prospectus, $300.0 million aggregate principal
amount of the old notes is outstanding. This prospectus, together with the
letters of transmittal, is first being sent on or about the date set forth on
the cover page to all holders of old notes at the addresses set forth in the
security register maintained by the trustee or other applicable registrar. Our
obligation to accept old notes for exchange is subject to conditions as set
forth under "-- Conditions to the Exchange Offer" below.
We expressly reserve the right, at any time or from time to time, to extend
the period of time during which the exchange offer is open, and thereby delay
acceptance for exchange of any old notes, by mailing written notice of an
extension to the holders of old notes as described below. During any extension,
all old notes previously tendered will remain subject to the exchange offer and
may be accepted for exchange by us. Any old notes not accepted for exchange for
any reason will be returned without expense to the tendering holder as promptly
as practicable after the expiration or termination of the exchange offer.
Old notes tendered in the exchange offer must be $1,000 in principal amount
or any integral multiple of $1,000.
We will mail written notice of any extension, amendment, non-acceptance or
termination to the holders of the old notes as promptly as practicable. This
notice will be mailed to the holders of record of the old notes no later than
9:00 a.m., New York City time, on the next business day after the previously
scheduled expiration date of other event giving rise to the notice requirement.
REGISTRATION COVENANT; EXCHANGE OFFER
Under our registration rights agreement with the Purchasers, we have agreed
to file with the Commission the exchange offer registration statement on the
appropriate form under the Securities Act with respect to the new notes. Upon
the effectiveness of the exchange offer registration statement, we will offer to
the holders of the old notes who are able to make required representations the
opportunity to exchange their old notes for new notes. Alternatively, we will
file with the Commission a shelf registration statement to cover resales of
transfer restricted securities (as defined below) by the holders of old notes
who satisfy specific conditions relating to the provision of information in
connection with the shelf registration statement if:
- we are not permitted to consummate the exchange offer because it is not
permitted by applicable law or Commission policy; or
59
<PAGE> 63
- any holder of old notes notifies us prior to the 20th day following
consummation of the exchange offer that:
- it is prohibited by law or Commission policy from participating in the
exchange offer;
- it may not resell the old notes acquired by it in the exchange offer
to the public without delivering a prospectus and the prospectus
contained in the exchange offer registration statement is not
appropriate or available for resales; or
- it is a broker-dealer and owns old notes acquired directly from us or
one of our affiliates.
We will use our best efforts to cause the applicable registration statement
to be declared effective as promptly as possible by the Commission.
"Transfer restricted securities" means each old note until the earliest of:
- the date on which the old note has been exchanged by a person other than
a broker-dealer for a new note in the exchange offer;
- following the exchange by a broker-dealer in the exchange offer of an old
note for a new note, the date on which the new note is sold to a
purchaser who received from the broker-dealer, on or prior to the date of
the sale, a copy of the prospectus contained in the exchange offer
registration statement;
- the date on which the old note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
- the date on which the old note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreement provides that:
- we will file an exchange offer registration statement with the Commission
on or prior to 90 days after March 10, 2000, which is the date of the
original issuance of the old notes;
- we will use our best efforts to have the exchange offer registration
statement declared effective by the Commission on or prior to 180 days
after March 10, 2000;
- unless the exchange offer would not be permitted by applicable law or
Commission policy , we will commence the exchange offer and use our best
efforts to issue, on or prior to 30 business days after the date on which
the exchange offer registration statement was declared effective by the
Commission, new notes in exchange for all old notes tendered in the
exchange offer; and
- if obligated to file the shelf registration statement, we will use our
best efforts to file the shelf registration statement with the Commission
on or prior to 60 days after the filing obligations arises, but in no
event less than 90 days after March 10, 2000, and to cause the shelf
registration to be declared effective by the Commission on or prior to
150 days after this obligation arises, but in no event less than 180 days
after March 10, 2000.
If a registration default (as defined below) occurs, we will pay liquidated
damages to each holder of transfer restricted securities, with respect to the
first 90-day period immediately following the occurrence of the first
registration default in and amount equal to 0.25%. The amount of the liquidated
damages will increase to 0.50% for the second 90-day period, 0.75% for the third
90-day period and 1.00% for the remainder of that period. On each interest
payment date we will pay all accrued liquidated damages to the holders of the
old notes by wire
60
<PAGE> 64
transfer of immediately available funds or by federal funds check and to holders
of certificated securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no accounts have been
specified. Following the cure of all registration defaults, accrual of
liquidated damages will cease.
A "registration default" means the occurrence of one of the following
events:
- we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for the
filing;
- any of the registration statements is not declared effective by the
Commission on or prior to the date specified for the effectiveness;
- we fail to completed the exchange offer within 30 business days of the
date of effectiveness of the exchange offer registration statement; or
- the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales (except in specified circumstances) of
transfer restricted securities during the period specified in the
registration rights agreement.
This summary of the provisions of the registration rights agreement is not
complete and is subject to, and is qualified by reference to, all provisions of
the registration rights agreement. A copy of this agreement is filed as an
exhibit to the registration statement of which this prospectus is a part.
INTEREST ON NEW NOTES
Each new note will bear interest from the most recent date to which
interest has been paid or duly provided for on the old note surrendered in
exchange for a new note, or, if no interest has been paid or duly provided for
on the old note, from March 10, 2000, the date of issuance of the old note.
Holders of the old notes whose old notes are accepted for exchange will not
receive accrued interest on the old notes for any period from and after the last
interest payment date to which interest has been paid or duly provided for on
the old notes prior to the original issue date of the new notes, or, if no
interest has been paid or duly provided for, will not receive any accrued
interest on the old notes. These holders will be deemed to have waived the right
to receive any interest on the old notes accrued from and after that interest
payment date, or, if no interest has been paid or fully provided for, from and
after March 10, 2000. Interest on the notes is payable semi-annually in arrears
on each March 15 and September 15.
PROCEDURES FOR TENDERING OLD NOTES
To tender in the exchange offer, a holder must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, have the
signatures guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal or a facsimile, together with the
old notes and any other required documents, to the exchange agent. The exchange
agent must receive these documents at the address set forth below prior to 5:00
p.m., New York City time on the expiration date. Delivery of the old notes may
be made by book-entry transfer in accordance with the procedures described
below. Confirmation of book-entry transfers must be received by the exchange
agent prior to the expiration date.
By executing a letter of transmittal, each holder will make to use the
representations set forth below in the fourth paragraph under the heading
"-- Resale of New Notes."
61
<PAGE> 65
The tender by a holder and the acceptance by us will constitute an
agreement between the holder and us in accordance with the terms subject to the
conditions set forth in this prospectus and in the letter of transmittal.
The method of delivery of old notes and the letter of transmittal and all
other required documents to the exchange agent is at the election and risk of
the holder. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure delivery to the exchange agent before the expiration date. No
letter of transmittal or notes should be sent to us. Holders may request their
brokers, dealers, commercial banks, trust companies or nominees to effect the
above transactions for them.
Any beneficial owner whose old notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct the
registered holder to tender on the beneficial owner's behalf.
Signatures on a letter of transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an eligible institution (as defined below)
unless the old notes tendered:
- are signed by the registered holder, unless the holder has completed the
box entitled "special exchange instructions" or "special delivery
instructions" on the applicable letter of transmittal; or
- are tendered for the account of an eligible institution.
In the event that signatures on a letter of transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, the guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "eligible institution").
If a letter of transmittal is signed by a person other than the registered
holder of any old notes listed on the letter of transmittal, the old notes must
be endorsed or accompanied by a properly completed bond power, signed by the
registered holder as the registered holder's name appears on the old notes, with
the signature guaranteed by an eligible institution.
If a letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or other acting in a fiduciary or representative capacity, the
persons should so indicate when signing. Unless waived by us, evidenced
satisfactory to us of their authority to so act must be submitted with the
letter of transmittal.
All questions as to the validity, form, eligibility, including time or
receipt, acceptance of tendered old notes and withdrawal of tendered old notes
will be determined by us in our sole discretion. This determination will be
final and binding. We reserve the absolute right to reject any and all old notes
that are not properly tendered or any old notes our acceptance of which would,
in the opinion of our counsel, be unlawful. We also reserve the right to waive
any defects, irregularities or conditions of tender as to particular old notes.
Our interpretation of the terms and conditions of the exchange offer, including
the instructions in the letters of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of old notes must be cured within the time period we determine. Although we
intend to notify holders of defects or irregularities with respect to tenders of
old notes, none of COLO.COM, the exchange agent or any other person will incur
any liability for failure to give this notification. Tenders of old notes will
not be deemed to have been made until
62
<PAGE> 66
defects or irregularities have been cured or waived. Any old notes received by
the exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the exchange
agent to the tendering holders, unless otherwise provided in the letter of
transmittal, as soon as practicable following the expiration date.
BOOK-ENTRY DELIVERY PROCEDURES
Promptly after the date of this prospectus, the exchange agent for the old
notes will establish accounts with respect to the old notes at DTC (DTC is
referred to as the "book-entry transfer facility") for purposes of the exchange
offer. Any financial institution that is a participant in the book-entry
transfer facility's systems may make book-entry delivery of the old notes by
causing the book-entry transfer facility to transfer old notes into the exchange
agent's account at the book-entry transfer facility in accordance with the
book-entry transfer facility's procedures for transfers. Timely book-entry
delivery of old notes pursuant to the exchange offer, however, requires receipt
of a book-entry confirmation prior to the expiration date. In addition, to
receive new notes for tendered old notes, the letter of transmittal, or a
mutually signed facsimile, together with any required signature guarantees and
any other required documents, or an agent's message in connection with a
book-entry transfer, must, in any case, be delivered or transmitted to and
received by the exchange agent at its address set forth under "-- Exchange
Agent" below prior to the expiration date. Alternatively, the guaranteed
delivery procedures described below must be complied with. Tender will not be
considered made until the documents are received by the exchange agent. Delivery
of documents to any of the book-entry transfer facilities does not constitute
delivery to the exchange agent.
TENDER OF OLD NOTES HELD THROUGH BOOK-ENTRY TRANSFER FACILITY
The exchange agent and the book-entry transfer facility have confirmed that
the exchange offer is eligible for the book-entry transfer facility's Automated
Tender Offer Program, or ATOP. Accordingly, participants in the book-entry
transfer facility's ATOP may, in lieu of physically completing and signing the
letter of transmittal and delivering it to the exchange agent, electronically
transmit their acceptance of the exchange offer by causing the book-entry
transfer facility to transfer old notes to the exchange agent in accordance with
the book-entry transfer facility's ATOP procedures for transfer. The book-entry
transfer facility will then send an agent's message to the exchange agent.
The term "agent's message" means a message transmitted by a book-entry
transfer facility, received by exchange agent and forming party of the
book-entry confirmation, which states that:
- the book-entry transfer facility has received an expressed
acknowledgement from a participant in its ATOP that is tendering old
notes which are the subject of the book-entry conformation;
- the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, the participant has received and agrees to be bound
by the notice of guaranteed delivery; and
- we may enforce the agreement against the participant.
63
<PAGE> 67
GUARANTEED DELIVERY PROCEDURE
Holders who wish to tender their old notes and (1) whose old notes are not
immediately available, (2) who cannot deliver their old notes, the letter of
transmittal or any other required documents to the exchange agent or (3) who
cannot complete the procedures for book-entry transfer, prior to the expiration
date, may effect a tender if:
- the tender is made through an eligible institution;
- prior to the expiration date, the agent receives from the eligible
institution a properly completed and duly executed notice of guaranteed
delivery by facsimile transmission, mail or hand delivery;
- setting forth the name and address of the holder;
- setting forth the certificate number(s) of the old notes and the
principal amount of old notes tendered, stating that the tender is being
made; and
- guaranteeing that, within three New York Stock Exchange trading days
after the expiration date, the letter of transmittal or facsimile
together with the certificate(s) representing the old notes or a
book-entry confirmation of the old notes into the exchange agent's
account at the book-entry transfer facility and any other documents
required by the letter of transmittal, will be deposited by the eligible
institution with the exchange agent; and
- a properly completed and executed letter of transmittal for facsimile, as
well as the certificate(s) representing all tendered old notes in proper
form for transfer or a book-entry confirmation transfer of the old notes
into the exchange agent's account at the book-entry transfer facility and
all other documents required by the letter of transmittal, are received
by the exchange agent within New York Stock Exchange trading days after
the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their old notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided in this prospectus, tenders of old notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
expiration date.
To withdraw a tender of old notes in the exchange offer, a written or
facsimile transmission notice of withdrawal must be received by the exchange
agent at the address set forth below prior to 5:00 p.m., New York City time, on
the expiration date. Any notice of withdrawal must:
- specify the name of the person having deposited the old notes to be
withdrawn (the "depositor");
- identify the old notes to be withdrawn, including the certificates
number(s) and principal amount of the old notes, or, in the case of old
notes transferred by book-entry transfer, the name and number of the
account at the book-entry transfer facility to be credited;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the old notes were tendered, including
any required signature guarantees, or be accompanied by documents of
transfer sufficient to have the trustee or other applicable registrar
register transfer of the old notes into the name of the person
withdrawing the tender; and
64
<PAGE> 68
- specify the name in which any of the old notes are to be registered, if
different from that of the depositor.
All questions as to the validity, form and eligibility, including time or
receipt, of the notices will be determined by us. Our determination will be
final and binding on all parties. Any old notes so withdrawn will be deemed not
to have been validly tendered for purposes of the exchange offer and no new
notes will be issued in exchange unless the old notes so withdrawn are validly
retendered. Any old notes which have been tendered but which are not accepted
for exchange will be returned to their holder without cost to the holder as soon
as practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn old notes may be retendered by following one
of the procedures described above under "-- Procedures for Tendering Old Notes"
at any time prior to the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other terms of the exchange offer, we will not be
required to accept for exchange, or exchange new notes for, any old notes, and
may terminate the exchange offer before the acceptance of the old notes if, in
our sole judgment, the exchange offer would violate any law, statute, rule or
regulation or an interpretation thereof of the Staff of the Commission. If we
determine in our sole discretion that this condition is not satisfied, we may:
- refuse to accept any old notes and return all tendered old notes to the
tendering holders;
- extend the exchange offer and retain all old notes tendered prior to the
expiration date, subject, however, to the rights of holders to withdraw
the old notes (see "-- Withdrawals of Tender"); or
- waive the unsatisfied conditions with respect to the exchange offer and
accept all validly tendered old notes which have not been withdrawn. If
the waiver constitutes a material change to the exchange offer, we will
promptly disclose the waiver by means of a prospectus supplement that
will be distributed to the registered holders, and we will extend the
exchange offer for a period of five to ten business days, depending upon
the significance of the waiver and the manner of disclosure to the
registered holders, if the exchange offer would otherwise expire during
that five to ten business-day period.
EXCHANGE AGENT
State Street Bank & Trust Company of California, National Association has
been appointed as the exchange agent for the exchange offer of the old notes.
All executed letters of transmittal should be directed to the exchange agent at
the address set forth below. Questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for notices of guaranteed delivery should be directed to the exchange
agent, addressed as follows:
If to the State Street Bank & Trust Company of California, National
Association:
By mail or by hand:
State Street Bank & Trust Company of California, National Association,
Exchange Agent
633 West 5th Street, 12th Floor
Los Angeles, CA 90071
Attn: Corporate Trust Division
By Facsimile:
(213) 362-7357
Confirm Facsimile by Telephone:
(213) 362-7369
65
<PAGE> 69
Delivery of a letter of transmittal to an address other than that for the
exchange agent as set forth above or transmission of instructions via facsimile
other than as set forth above does not constitute a valid delivery of a letter
of transmittal.
FEES AND EXPENSES
We will not make any payment to brokers, dealers or other soliciting
acceptances of the exchange offer.
TRANSFER TAXES
Holders who tender their old notes for exchange generally will not be
obligated to pay any transfer tax in connection with the exchange. However,
holders who instruct us to register new notes in the name of a person other than
the registered tendering holders, or request that old notes not tendered or not
accepted in the exchange offer be returned to a person other than the registered
tendering holder, will be responsible for the payment of any applicable transfer
tax.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes.
This is the aggregate principal amount of the old notes, as reflected in our
accounting records on the date of exchange. Accordingly, no gain or loss for
accounting purposes will be recognized in connection with the exchange offer.
The expenses of the exchange offer will be amortized over the term of the new
notes.
APPRAISAL RIGHTS
Holders of old notes will not have dissenters' rights or appraisal rights
in connection with the exchange offer.
RESALE OF NEW NOTES
The new notes are being offered to satisfy our obligations contained in the
registration rights agreement. We are making the exchange offer in reliance on
the position of the Staff of the Commission as set forth in the Exxon Capital
No-Action Letter, the Morgan Stanley No-Action Letter, the Shearman & Sterling
No-Action Letter, and other interpretive letters addressed to third parties in
other transactions. However, we have not sought our own interpretive letter
addressing these matters and there can be no assurance that the Staff would make
a similar determination with respect to the exchange offer as it has in those
interpretive letters to third parties. Based on these interpretations by the
Staff, and subject to the two immediately following sentences, we believe that
new notes issued pursuant to this exchange offer in exchange for old notes may
be offered for resale, resold and otherwise transferred by holders, other than a
holder who is a broker-dealer, without further compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that:
- the new notes are acquired in the ordinary course of the holder's
business; and
- the holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution within the meaning of
the Securities Act of the new notes.
However, any holder who:
- is an "affiliate" of us, within the meaning of Rule 405 under the
Securities Act;
- does not acquire new notes in the ordinary course of its business;
66
<PAGE> 70
- intends to participate in the exchange offer for the purpose of
distributing new notes; or
- is a broker-dealer who purchased old notes directly from us, will not be
able to rely on the interpretations of the Staff set forth in the
above-mentioned interpretive letters; will not be permitted or entitled
to tender old notes in the exchange offer; and must comply with the
registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of old notes unless the
sale is made pursuant to an exemption from those requirements.
In addition, as described below, if any broker-dealer holds old notes
acquired for its own account as a result of market-making or other trading
activities and exchanges the old notes for new notes (a "participating
broker-dealer"), the participating broker-dealer may be deemed to be a statutory
"underwriter" within the meaning of the Securities Act and must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales of new notes. See "Plan of Distribution."
Each holder who wishes to exchange old notes for new notes in the exchange
offer will be required to represent that:
- it is not an affiliate of us;
- any new notes to be received by it are being acquired in the ordinary
course of its business; and
- it has no arrangement or understanding with any person to participate in
a distribution, within the meaning of the Securities Act, of new notes.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must:
- acknowledge that it acquired the old notes for its own account as a
result of market-making activities or other trading activities, and not
directly from us, and
- must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of new notes.
The letters of transmittal state that by so acknowledging and by delivering
a prospectus, a participating broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the Staff in the interpretive letters referred to above, we
believe that participating broker-dealers may fulfill their prospectus delivery
requirements with respect to the new notes received upon exchange of old notes
with a prospectus meeting the requirements of the Securities Act, which may be
the prospectus prepared for an exchange offer so long as it contains a
description of the plan of distribution with respect to the resale of new notes.
Accordingly, this prospectus, as it may be amended or supplemented from time to
time, may be used by a participating broker-dealer during the period referred to
below in connection with the resales of new notes received in exchange for old
notes where the old notes were acquired by the participating broker-dealer for
its own account as a result of market-making or other trading activities.
Subject to provisions set forth in the registration rights agreement, we
shall use our best efforts to:
- keep the exchange offer registration statement continuously effective,
supplemented and amended to the extent necessary to ensure that it is
available for sales of new notes by participating broker-dealers; and
- ensure that the exchange offer registration statement conforms with the
requirements of the Securities Act and the policies, rules and
regulations of the Commission as announced from time to time, for a
period ending upon the earlier of 180 days after the
67
<PAGE> 71
exchange offer has been completed or at the time the participating
broker-dealers no longer own any transfer restricted securities. See
"Plan of Distribution."
Any participating broker-dealer who is an affiliate of us may not rely on
the interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Each participating broker-dealer who surrenders old notes pursuant to the
exchange offer will be deemed to have agreed, by execution of a letter of
transmittal, that, upon receipt of notice from us of the occurrence of any event
or the discovery of any fact which makes any statement contained or incorporated
by reference in this prospectus untrue in any material respect or which causes
this prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference herein, in light of the
circumstances under which they were made, not misleading or of the occurrence of
other events specified in the registration rights agreement, the participating
broker-dealer will suspend the sale of new notes pursuant to this prospectus
until we have amended or supplemented this prospectus to correct the
misstatement or omission and have furnished copies of the amended or
supplemented prospectus to the participating broker-dealer or we have given
notice that the sale of the new notes may be resumed, as the case may be.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Any old notes tendered and exchanged in the exchange offer will reduce the
aggregate principal amount of old notes outstanding. Following the consummation
of the exchange offer, holders who did not tender their old notes generally will
not have any further registration rights under the registration rights
agreement, and these old notes will continue to be subject to restrictions on
transfer. Accordingly, the liquidity of the market for the old notes could be
adversely affected. The old notes are currently eligible for sale under Rule
144A through the PORTAL Market. Because we anticipate that most holders will
elect to exchange their old notes for new notes due to the absence of most
restrictions on the resale of new notes, anticipate that the liquidity of the
market for any old notes remaining outstanding after the exchange offer may be
substantially limited.
As a result of the making of the exchange offer, we will have fulfilled our
obligations under the registration rights agreement, and holders who do not
tender their old notes generally will not have any further registration rights
or rights to receive liquidated damages specified in the registration rights
agreement for our failure to register the new notes.
The old notes that are not exchanged for new notes will remain restricted
securities. Accordingly, the old notes may be resold only:
- to COLO.COM or one of its subsidiaries;
- to a qualified institutional buyer;
- to an institutional accredited investor;
- to a party outside the United States under Regulation S under the
Securities Act;
- under an exemption from registration provided by Rule 144 under the
Securities Act; or
- under an effective registration statement.
68
<PAGE> 72
DESCRIPTION OF THE NOTES
The old notes were and the new notes will be issued under an Indenture,
dated March 10, 2000 (the "Indenture"), among COLO.COM, as issuer, and State
Street Bank and Trust Company of California, N.A., as trustee (the "Trustee").
The term "notes" refers to the old notes and the new notes. The terms of the
notes include those stated in the Indenture and those made part of the Indenture
by reference to the Trust Indenture Act of 1939. The following is a summary of
the material provisions of the Indenture but does not restate the Indenture in
its entirety. You can find the definitions of certain capitalized terms used in
the following summary under the subheading "-- Definitions." We urge you to read
the Indenture because it, and not this description, defines your rights as
Holders of the notes. A copy of the Indenture is available upon request from
COLO.COM. For purposes of this "Description of the Notes", the term "COLO.COM"
means COLO.COM and its successors under the Indenture, in each case excluding
its subsidiaries.
GENERAL
The notes are unsecured (except to the extent described under "-- Security"
below) unsubordinated obligations of COLO.COM. The notes will mature on March
15, 2010. Subject to the covenants described below under "-- Covenants" and
applicable law, COLO.COM may issue up to $100.0 million aggregate principal
amount of additional notes ("Additional Notes") under the Indenture. The notes
and any Additional Notes subsequently issued will be treated as a single class
for all purposes under the Indenture.
Each note initially bears interest at 13 7/8% per annum from March 10, 2000
or from the most recent Interest Payment Date to which interest has been paid.
Interest on the notes will be payable semiannually on March 15 and September 15
of each year, commencing September 15, 2000. Interest will be paid to Holders of
record at the close of business on the March 1 or September 1 immediately
preceding the Interest Payment Date. Interest is computed on the basis of a
360-day year of twelve 30-day months on a U.S. corporate bond basis.
The notes may be exchanged or transferred at the office or agency of
COLO.COM in the Borough of Manhattan, the City of New York. Initially, the
corporate trust office of the Trustee at State Street Bank and Trust Company of
California, N.A., will serve as such office. If any Holder of at least $1.0
million of principal amount of notes gives COLO.COM wire transfer instructions,
COLO.COM will make all principal, premium and interest payments on such Holder's
notes in accordance with those instructions. Otherwise, COLO.COM will make
payments of principal, premium and interest on the notes at the office or agency
of the paying agent which will initially be the Trustee, unless COLO.COM elects
to make interest payments by check mailed to the Holders at their addresses set
forth in the register of Holders.
The notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and integral multiples of $1,000.
See "-- Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of notes, but COLO.COM may require payment
of a sum sufficient to cover any transfer tax or other similar governmental
charge payable in connection therewith, subject to certain exceptions.
OPTIONAL REDEMPTION
COLO.COM may redeem the notes, in whole or in part, at any time on or after
March 15, 2005 at the following Redemption Prices (expressed as percentages of
principal amount), plus
69
<PAGE> 73
accrued interest to the applicable Redemption Date, if redeemed during the
12-month period commencing March 15 of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2005.................................................... 106.938%
2006.................................................... 104.625%
2007.................................................... 102.313%
2008 and thereafter..................................... 100.000%
</TABLE>
In addition, at any time prior to March 15, 2003, COLO.COM may redeem up to
35% of the principal amount of the notes with the Net Cash Proceeds of one or
more sales of Capital Stock (other than Disqualified Stock) of COLO.COM at a
Redemption Price (expressed as a percentage of principal amount) of 113.875%,
plus accrued interest to the Redemption Date; provided that at least 65% of the
aggregate principal amount of notes originally issued on the Closing Date
remains outstanding after each such redemption and notice of any such redemption
is mailed within 60 days of each such sale of Capital Stock.
COLO.COM will give not less than 30 days' nor more than 60 days' notice of
any redemption. If less than all of the notes are to be redeemed, selection of
the notes for redemption will be made by the Trustee:
- in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed, or,
- if the notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate.
However, no note of $1,000 in principal amount or less shall be redeemed in
part. If any note is to be redeemed in part only, the notice of redemption
relating to such note will state the portion of the principal amount to be
redeemed. A new note in principal amount equal to the unredeemed portion will be
issued upon cancellation of the original note.
RANKING
The notes are unsecured (except to the extent described under "-- Security"
below) unsubordinated obligations of COLO.COM and are equal in right of payment
with all existing and future unsubordinated indebtedness of COLO.COM and senior
in right of payment to all existing and future subordinated indebtedness of
COLO.COM. The notes are effectively subordinated to (a) any secured indebtedness
of COLO.COM to the extent of the value of the assets which secure such
indebtedness and (b) any indebtedness and other liabilities (including trade
payables) of COLO.COM's Subsidiaries.
As of March 31, 2000, COLO.COM had $3.4 million of consolidated
indebtedness outstanding (other than the notes), all of which was secured
indebtedness which would have effectively ranked senior to the notes to the
extent of the value of the assets securing such indebtedness. COLO.COM's
Subsidiaries did not have any indebtedness or other material liabilities and
COLO.COM did not have any subordinated indebtedness outstanding.
70
<PAGE> 74
SINKING FUND
There will be no sinking fund payments for the notes.
SECURITY
On the Closing Date, COLO.COM purchased and pledged to the Trustee for the
benefit of the Holders of the notes the Pledged Securities. The amount of the
Pledged Securities purchased will be sufficient upon receipt of scheduled
interest and principal payments of such securities to provide for payment in
full of the first four scheduled interest payments due on the notes. COLO.COM
used approximately $77.5 million of the net proceeds from the offering of the
old notes to acquire the Pledged Securities. The Pledged Securities were pledged
by COLO.COM to the Trustee for the benefit of the Holders of the notes and are
held by the Trustee in the Pledge Account. Immediately prior to an Interest
Payment Date on the notes, COLO.COM may either deposit with the Trustee from
funds otherwise available to COLO.COM cash sufficient to pay the interest
scheduled to be paid on such date or COLO.COM may direct the Trustee to release
from the Pledge Account proceeds sufficient to pay interest then due on the
notes. In the event that COLO.COM exercises the former option, COLO.COM may
thereafter direct the Trustee to release to COLO.COM proceeds or Pledged
Securities from the Pledge Account in like amount. A failure by COLO.COM to pay
interest on the notes within three business days after the first four scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture.
The notes are secured in part by a first priority security interest in the
Pledged Securities and in the Pledge Account. Accordingly, the Pledged
Securities and the Pledge Account also secure repayment of the principal amount
of the notes to the extent of the security. Once COLO.COM makes the first four
scheduled interest payments on the notes, all of the remaining Pledged
Securities and any other amounts in the Pledge Account will be released from the
Pledge Account and thereafter the notes will be unsecured.
COVENANTS
OVERVIEW
In the Indenture, COLO.COM agreed to covenants that limit its and its
Restricted Subsidiaries' ability, among other things, to:
- incur additional debt;
- pay dividends, acquire shares of capital stock, make payments on
subordinated debt or make investments;
- place limitations on distributions from Restricted Subsidiaries;
- issue or sell capital stock of Restricted Subsidiaries;
- issue guarantees;
- sell assets;
- enter into transactions with shareholders and affiliates;
- create liens; and
- effect mergers and consolidations.
In addition, if a Change of Control occurs, each Holder of notes will have
the right to require COLO.COM to repurchase all or a part of the Holder's notes
at a price equal to 101% of their principal amount, plus any accrued interest to
the date of repurchase.
71
<PAGE> 75
LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
(a) COLO.COM will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, Incur any Indebtedness (other than the
notes, the notes issued in the Exchange Offer and other Indebtedness existing on
the Closing Date) and COLO.COM will not issue or Incur any Disqualified Stock
and will not permit any of its Restricted Subsidiaries to issue or Incur any
shares of Preferred Stock; provided, however, that COLO.COM may Incur
Indebtedness or issue or Incur shares of Disqualified Stock and its Restricted
Subsidiaries may Incur Acquired Indebtedness or Acquired Preferred Stock if,
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Consolidated Leverage Ratio would be
greater than zero and less than 6:1.
Notwithstanding the foregoing, COLO.COM and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following:
(1) Indebtedness of COLO.COM or any Restricted Subsidiary Incurred
under one or more Credit Facilities outstanding at any time in an aggregate
principal amount (together with refinancings thereof) not to exceed $200.0
million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant;
(2) Indebtedness owed:
(A) to COLO.COM evidenced by an unsubordinated promissory note or
(B) to any Restricted Subsidiary; provided that
(x) any event which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to COLO.COM or another
Restricted Subsidiary) shall be deemed, in each case, to
constitute an Incurrence of such Indebtedness not permitted by
this clause(2)(B) and
(y) if COLO.COM is the obligor on such Indebtedness, such
Indebtedness must be unsecured and expressly subordinated in right
of payment to the notes;
(3) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness of COLO.COM
or any of its Restricted Subsidiaries (other than Indebtedness Incurred
under clause (1), (2), (5), (6), (8) or (10) of the second paragraph of
part (a) of this covenant) and any refinancings thereof in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); provided that
(A) Indebtedness the proceeds of which are used to refinance or
refund the notes or Indebtedness that is pari passu with, or
subordinated in right of payment to, the notes shall only be permitted
under this clause (3) if
(x) in case the notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the notes, such
new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is outstanding,
is expressly made pari passu with, or subordinate in right of
payment to, the remaining notes, or
(y) in case the Indebtedness to be refinanced is
subordinated in right of payment to the notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or
remains outstanding, is expressly made subordinate in right of
payment to the
72
<PAGE> 76
notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the notes,
(B) such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not have a final maturity
prior to the final maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least
equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded, and
(C) if COLO.COM is the obligor on the Indebtedness to be
refinanced or refunded, such new Indebtedness shall not be Incurred by
a Restricted Subsidiary;
(4) Indebtedness of COLO.COM to the extent the net proceeds thereof are
promptly
(A) used to purchase notes tendered in an Offer to Purchase made
as a result of a Change in Control or
(B) deposited to defease the notes as described under
"Defeasance";
(5) Guarantees of the notes, if any, and Guarantees of Indebtedness of
COLO.COM by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant; and
(6) Indebtedness,
(A) in respect of performance, surety or appeal bonds or security
deposits provided in the ordinary course of business,
(B) under Currency Agreements, Commodity Agreements and Interest
Rate Agreements; provided that such agreements,
(i) are entered into for the primary purpose of protecting
COLO.COM or any of its Restricted Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates
and
(ii) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of
fees, indemnities and compensation payable thereunder, and
(C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees
or letters of credit, surety bonds or performance bonds securing any
obligations of COLO.COM or any of its Restricted Subsidiaries pursuant
to such agreements, in any case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary (other
than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the
purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by COLO.COM or any
Restricted Subsidiary in connection with such disposition;
(7) Incurrence by COLO.COM or any Restricted Subsidiary of Purchase
Money Indebtedness
(A) pursuant to the terms of any Purchase Money Indebtedness
facility existing and as in effect on the Closing Date or
73
<PAGE> 77
(B) to constitute not more than 75% of the cost, including
shipping, installation and importation costs and sales, use and similar
taxes (collectively "Costs") payable upon acquisition of the subject
property (determined in accordance with GAAP in good faith by the Board
of Directors of COLO.COM), to COLO.COM or any such Restricted
Subsidiary, as applicable, of the property so purchased, developed,
acquired, constructed, improved or leased;
provided, that with respect to any Purchase Money Indebtedness
incurred under clause (B) above, at least 25% of the Costs payable upon
acquisition of the subject property shall be funded from Newly Raised
Capital; provided, further, that any assets acquired by a Restricted
Subsidiary pursuant to this clause (7) are acquired for use in the
ordinary course of business of such Restricted Subsidiary.
(8) Indebtedness of COLO.COM not to exceed, at any time outstanding,
two times the Net Cash Proceeds received by COLO.COM after the Closing Date
from the issuance and sale of its Capital Stock (other than Disqualified
Stock) to a Person that is not a Subsidiary of COLO.COM, to the extent that
the Net Cash Proceeds have not been used pursuant to clause (C)(ii) of part
(a) or clause (3), (4) or (6) of part (b) of the "Limitation on Restricted
Payments" covenant to make a Restricted Payment; provided that such
Indebtedness does not have a final maturity date prior to the final
maturity date of the notes and has an Average Life longer than the Average
Life of the notes;
(9) Indebtedness Incurred for the purpose of paying interest on
outstanding Indebtedness in the form of additional Indebtedness with the
same terms, and Disqualified Stock or Preferred Stock Issued for the
purpose of paying dividends on Disqualified Stock or Preferred Stock in the
form of additional shares of the same class of Disqualified Stock or
Preferred Stock, as the case may be; and
(10) Indebtedness of COLO.COM or any Restricted Subsidiary (in addition
to Indebtedness permitted under clauses (1) through (9) above) in an
aggregate principal amount outstanding at any time (together with
refinancings thereof) not to exceed $25.0 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant.
(b) Notwithstanding any other provision of this "Limitation on Incurrence
of Indebtedness and Issuance of Preferred Stock" covenant, the maximum amount of
Indebtedness that may be Incurred pursuant to this "Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant will not be deemed to be
exceeded, with respect to any outstanding Indebtedness due solely to the result
of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant,
(1) Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and
(2) any Liens granted pursuant to the equal and ratable provisions
referred to in the "Limitation on Liens" covenant shall not be treated as
Indebtedness.
For purposes of determining compliance with this "Limitation on Incurrence
of Indebtedness and Issuance of Preferred Stock" covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the types of
Indebtedness described above, including under the first part (a) of this
covenant, COLO.COM, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness.
74
<PAGE> 78
LIMITATION ON RESTRICTED PAYMENTS
(a) COLO.COM will not, and will not permit any of its Restricted
Subsidiaries to,
(1) declare or pay any dividend or make any distribution on or with
respect to its Capital Stock (other than (x) dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified
Stock) or in options, warrants or other rights to acquire shares of such
Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons
other than COLO.COM or any of its Restricted Subsidiaries,
(2) purchase, call for redemption or redeem, retire or otherwise
acquire for value any shares of Capital Stock of COLO.COM or any Restricted
Subsidiary of COLO.COM (including options, warrants or other rights to
acquire such shares of Capital Stock) held by any Person other than
COLO.COM or any of its Restricted Subsidiaries,
(3) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of COLO.COM that is subordinated in
right of payment to the notes or
(4) make any Investment, other than a Permitted Investment, in any
Person,
(such payments or any other actions described in clauses (1) through (4) above
being collectively "Restricted Payments") if, at the time of, and after giving
effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be
continuing,
(B) COLO.COM could not Incur at least $1.00 of Indebtedness under
clause (i) of the first paragraph of part (a) of the "Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, or
(C) the aggregate amount of all Restricted Payments made after the
Closing Date shall exceed the sum of
(i) the amount of COLO.COM's cumulative Consolidated EBITDA less
150% of Consolidated Interest Expense, during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter
immediately following the Closing Date and ending on the last day of
the last fiscal quarter preceding the Transaction Date for which
reports have been filed with the SEC or provided to the Trustee
pursuant to the "SEC Reports and Reports to Holders" covenant, plus
(ii) the aggregate Net Cash Proceeds received by COLO.COM after
the Closing Date from the issuance and sale permitted by the Indenture
of its Capital Stock (other than Disqualified Stock) to a Person who is
not a Subsidiary of COLO.COM, including an issuance or sale permitted
by the Indenture of Indebtedness or Disqualified Stock of COLO.COM for
cash subsequent to the Closing Date upon the conversion of such
Indebtedness or Disqualified Stock into, or upon the exchange of such
Indebtedness or Disqualified Stock for, Capital Stock (other than
Disqualified Stock) of COLO.COM, or from the issuance to a Person who
is not a Subsidiary of COLO.COM of any options, warrants or other
rights to acquire Capital Stock of COLO.COM (in each case, exclusive of
any Disqualified Stock or any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be
redeemed, prior to the final maturity of the notes), in each case
except to the extent such Net Cash Proceeds are used to Incur
Indebtedness pursuant to clause (8) of the second paragraph of part (a)
of the "Limitation on Incurrence of Indebtedness and Issuance
75
<PAGE> 79
of Preferred Stock" covenant, which is outstanding on the Transaction
Date or used to make a Restricted Payment pursuant to clause (6) of
paragraph (b) of this "Limitation on Restricted Payments" covenant,
plus
(iii) an amount equal to the net reduction in Investments (other
than reductions in Permitted Investments) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to COLO.COM or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale to
any Person who is not a Subsidiary of COLO.COM of any such Investment
(except, in each case, to the extent any such payment or proceeds are
included in the calculation of Consolidated EBITDA), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investments").
(b) The foregoing provision shall not be violated by reason of:
(1) the payment of any dividend or redemption of any Capital Stock
within 60 days after the related date of declaration or call for redemption
if, at said date of declaration or call for redemption, such payment or
redemption would comply with the preceding paragraph (a);
(2) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of
payment to the notes, including premium, if any, and accrued interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (3)
of the second paragraph of part (a) of the "Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant;
(3) the repurchase, redemption or other acquisition of Capital Stock of
COLO.COM (or options, warrants or other rights to acquire such Capital
Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Disqualified
Stock) of COLO.COM (or options, warrants or other rights to acquire such
Capital Stock); provided that such options, warrants or other rights are
not redeemable prior to the Stated Maturity of the notes;
(4) the making of any principal payment or the repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness which
is subordinated in right of payment to the notes in exchange for, or in
connection with the conversion of such Indebtedness for, or out of the
proceeds of, a substantially concurrent offering of, shares of the Capital
Stock (other than Disqualified Stock) of COLO.COM (or options, warrants or
other rights to acquire such Capital Stock); provided that such options,
warrants or other rights are not redeemable prior to the Stated Maturity of
the notes;
(5) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of COLO.COM;
(6) Investments acquired in exchange for, or out of the proceeds of an
offering (that occurred within six months at the time of any such
Investment) of, Capital Stock (other than Disqualified Stock) of COLO.COM,
to the extent that such proceeds have not been used to make Restricted
Payment pursuant to clause (3) or (4) of this paragraph (b) or clause
(C)(ii) of paragraph (a) of this "Limitation on Restricted Payments"
covenant or to Incur Indebtedness pursuant to clause (8) of the second
paragraph of part (a) of the "Limitation on the Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant;
76
<PAGE> 80
(7) (i) the redemption, repurchase, retirement or other acquisition of
any Capital Stock of COLO.COM (or options, warrants or other rights to
acquire such Capital Stock) from an employee or former employee of COLO.COM
or any of its Subsidiaries (or from such person's estate, heirs or
representatives) in connection with such employee's death, disability or
termination of employment, provided that the aggregate amount expended
pursuant to this clause (7)(i) does not exceed $5.0 million; or
(ii) the redemption, repurchase, retirement or other acquisition of any
unvested shares of any Capital Stock of COLO.COM (or any unvested options,
warrants or other rights to acquire such Capital Stock) from an employee or
former employee of COLO.COM or any of its Subsidiaries (or from such
person's estate, heirs or representatives) in connection with such
employee's death, disability or termination of employment, at a price per
share of Capital Stock not to exceed the price per share at which the
shares of Capital Stock (or options, warrants or other rights to acquire
such Capital Stock) were issued or granted to such employee;
(8) the payment of dividends on shares of Disqualified Stock of
COLO.COM or shares of Preferred Stock of COLO.COM's Restricted Subsidiaries
issued or Incurred in accordance with the "Limitation of Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant;
(9) the making of any payment on or with respect to, or repurchase,
redemption, defeasance or acquisition or retirement for value, of
Convertible notes in connection with (i) an optional redemption of
Convertible notes pursuant to the terms thereof if at the time COLO.COM
sends a notice of redemption to the holders of such Convertible notes, the
Closing Price of the Capital Stock into which such Convertible notes are
convertible is greater than the conversion price, or (ii) the honoring by
COLO.COM of any conversion request by a holder of Convertible notes
(including the payment by COLO.COM of any cash in lieu of issuing
fractional shares) in accordance with the terms of Convertible notes;
(10) the repurchase of Capital Stock or any options, warrants or other
rights to acquire Capital Stock of COLO.COM that may be deemed to occur
upon the cash-less exercise thereof or the payment by COLO.COM of any cash
in lieu of issuing fractional shares of Capital Stock pursuant to the terms
of any such options, warrants or other rights;
(11) other Restricted Payments in an aggregate amount not to exceed
$20.0 million;
provided that, except in the case of clauses (1) and (3), no Default or Event of
Default shall have occurred and be continuing or occur as a consequence of the
actions or payments set forth therein.
(c) Each Restricted Payment permitted pursuant to the preceding part (b)
(other than the Restricted Payment referred to in clause (2) or (10) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (3) or (4) thereof and an Investment acquired in exchange for Capital
Stock referred to in clause (6) thereof), and the Net Cash Proceeds from any
issuance of Capital Stock referred to in clauses (3), (4) and (6), shall be
included in calculating whether the conditions of clause (C) of part (a) of this
"Limitation on Restricted Payments" covenant have been met with respect to any
subsequent Restricted Payments.
For purposes of determining compliance with this "Limitation on Restricted
Payments" covenant:
(i) the amount of all Restricted Payments (other than cash) shall be
the fair market value on the date of the Restricted Payment of the asset(s)
or securities proposed to be
77
<PAGE> 81
transferred or issued by COLO.COM (or such Restricted Subsidiary, as the
case may be) pursuant to the Restricted Payment;
(ii) the fair market value of any asset(s) or securities that are
required to be valued by this covenant shall be determined in good faith by
the Board of Directors; provided that such determination shall be supported
by the opinion or appraisal of an accounting, appraisal or investment
banking firm of national standing if such fair market value would in the
good faith determination of the Board of Directors exceed $10 million;
(iii) in the event that a Restricted Payment meets the criteria of more
than one of the types of Restricted Payments described in the above
clauses, including part (a) of this "Limitation on Restricted Payments"
covenant, COLO.COM, in its sole discretion, may order and classify, and
from time to time may reclassify, such Restricted Payment if it would have
been permitted at the time such Restricted Payment was made and at the time
of such reclassification; and
(iv) The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the fair market value of such Investment on the date
made, less the return of capital, repayment of loans, return on capital and
release of Guarantees, in each case of or to the Company and its Restricted
Subsidiaries with respect to such Investment (up to the amount of such
Investment on the date made).
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
(a) COLO.COM will not, and will not permit any Restricted Subsidiary to
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by
COLO.COM or any other Restricted Subsidiary,
(2) pay any Indebtedness owed to COLO.COM or any other Restricted
Subsidiary,
(3) make loans or advances to COLO.COM or any other Restricted
Subsidiary or
(4) transfer any of its property or assets to COLO.COM or any other
Restricted Subsidiary.
(b) The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances
and restrictions in any such extensions, refinancings, renewals or
replacements taken as a whole are no less favorable in any material respect
to the Holders of the notes than those encumbrances or restrictions that
are then in effect and that are being extended, refinanced, renewed or
replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or assets of
such Person acquired by COLO.COM or any Restricted Subsidiary, existing at
the time of such acquisition and not incurred in contemplation thereof,
which encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
78
<PAGE> 82
(iv) in the case of clause (4) of part (a) of this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries"
covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue
of any transfer of, agreement to transfer, option or right with respect to,
or Lien on, any property or assets of COLO.COM or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (C) arising or agreed to in
the ordinary course of business, not relating to any Indebtedness, and that
do not, individually or in the aggregate, detract from the value of
property or assets of COLO.COM or any Restricted Subsidiary in any manner
material to COLO.COM or any Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary;
(vi) contained in the terms of any Indebtedness or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in any Indebtedness or agreement,
(B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the notes than is customary in
comparable financings (as determined by COLO.COM in good faith) and
(C) COLO.COM determines that any such encumbrance or restriction
will not materially affect COLO.COM's ability to make principal or
interest payments on the notes; or
(vii) contained in the terms of any Indebtedness of any Restricted
Subsidiary of COLO.COM that is a Foreign Subsidiary or any agreement
pursuant to which such Indebtedness was issued if:
(A) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the notes than is customary in
comparable financings (as determined by COLO.COM in good faith) and
(B) COLO.COM determines that any such encumbrance or restriction
will not materially affect COLO.COM'S ability to make principal or
interest payments on the notes; or
(viii) restrictions or encumbrances imposed at the request of joint
venture partners, provided that such joint venture is engaged in a
Permitted Business.
Nothing contained in this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant shall prevent COLO.COM or any of its
Restricted Subsidiaries from (1) creating, incurring, assuming or suffering to
exist any Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of COLO.COM or
any of its Restricted Subsidiaries that secure Indebtedness of COLO.COM or any
of its Restricted Subsidiaries.
79
<PAGE> 83
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
COLO.COM will not sell, and will not permit any Restricted Subsidiary to
issue or sell, any shares of Capital Stock of a Restricted Subsidiary (including
options, warrants or other rights to purchase shares of such Capital Stock)
except:
(1) to COLO.COM or a Restricted Subsidiary of COLO.COM;
(2) issuances of director's qualifying shares or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law; or
(3) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in such Person remaining after giving effect to such
issuance or sale would have been permitted to be made under the "Limitation
on Restricted Payments" covenant if made on the date of such issuance or
sale;
(4) sales or issuances of Common Stock (including options, warrants or
other rights to purchase shares of such Common Stock) of a Restricted
Subsidiary by COLO.COM or a Restricted Subsidiary, provided that such sale
complies with the "Limitation on Asset Sales" covenant; or
(5) Issuances of Preferred Stock made in accordance with the
"Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
COLO.COM will not permit any Restricted Subsidiary to Guarantee any
Indebtedness of COLO.COM which is equal in right of payment with or subordinate
in right of payment to the notes ("Guaranteed Indebtedness"), unless:
(1) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the Indenture providing for a Guarantee (a "Note
Guarantee") of payment of the notes by such Restricted Subsidiary and
(2) such Restricted Subsidiary waives, and will not in any manner
whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against
COLO.COM or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Note Guarantee;
provided that this paragraph shall not be applicable to (i) any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary or (ii) any Guarantee of Indebtedness of
COLO.COM which Indebtedness would have been permitted to be Incurred by a
Restricted Subsidiary pursuant to the "Limitation on Incurrence of Indebtedness
and Issuance of Preferred Stock" covenant.
If the Guaranteed Indebtedness is
(A) equal in right of payment with the notes, then the Guarantee of
such Guaranteed Indebtedness shall be equal in right of payment with, or
subordinated to, the Note Guarantee or
(B) subordinated to the notes, then the Guarantee of such Guaranteed
Indebtedness shall be subordinated to the Note Guarantee at least to the
extent that the Guaranteed Indebtedness is subordinated to the notes.
80
<PAGE> 84
Notwithstanding the foregoing, any Note Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(1) any sale, exchange or transfer, to any Person not an Affiliate of
COLO.COM, of all of COLO.COM's and each Restricted Subsidiary's Capital
Stock in, or all or substantially all the assets of, such Restricted
Subsidiary (which sale, exchange or transfer is not prohibited by the
Indenture);
(2) the release or discharge of the Guarantee which resulted in the
creation of such Note Guarantee, except a discharge or release by or as a
result of payment under such Guarantee; or
(3) upon the designation of such Restricted Subsidiary as an
Unrestricted Subsidiary in accordance with the terms of the Indenture.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
COLO.COM will not, and will not permit any Restricted Subsidiary to, enter
into, renew or extend any transaction (including, without limitation, the
purchase, sale, lease or exchange of property or assets, or the rendering of any
service) with, or for the benefit of, any Affiliate of COLO.COM or any
Restricted Subsidiary, except upon fair and reasonable terms no less favorable
to COLO.COM or such Restricted Subsidiary than could be obtained, at the time of
such transaction or, if such transaction is pursuant to a written agreement, at
the time of the execution of the agreement providing therefor, in a comparable
arm's-length transaction with a Person that is not such an Affiliate.
The foregoing limitation does not limit, and shall not apply to:
(1) transactions (A) approved by a majority of the disinterested
members of the Board of Directors or (B) for which COLO.COM or a Restricted
Subsidiary delivers to the Trustee a written opinion of a nationally
recognized investment banking, accounting, valuation or appraisal firm
stating that the transaction is fair to COLO.COM or such Restricted
Subsidiary from a financial point of view;
(2) any transaction solely between COLO.COM and any of its Restricted
Subsidiaries or solely among Restricted Subsidiaries;
(3) the payment of reasonable and customary regular fees to officers
and directors of COLO.COM and indemnification arrangements entered into by
COLO.COM in the ordinary course of business and consistent with past
practices of COLO.COM;
(4) any payments or other transactions pursuant to any tax-sharing
agreement between COLO.COM and any other Person with which COLO.COM files a
consolidated tax return or with which COLO.COM is part of a consolidated
group for tax purposes;
(5) any sale of shares of Capital Stock (other than Disqualified
Stock) of COLO.COM; or
(6) any Permitted Investments or any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant.
Notwithstanding the foregoing, any transaction or series of related transactions
covered by the first paragraph of this "Limitation on Transactions with
Shareholders and Affiliates" covenant and not covered by clauses (2) through (6)
of this paragraph, (a) the aggregate amount of which exceeds $5 million in
value, must be approved or determined to be fair in the manner provided for in
clause (1)(A) or (B) above and (b) the aggregate amount of which exceeds
81
<PAGE> 85
$10 million in value, must be determined to be fair in the manner provided for
in clause (1)(B) above.
LIMITATION ON LIENS
COLO.COM will not, and will not permit any Restricted Subsidiary to,
create, Incur, assume or suffer to exist any Lien securing Indebtedness on any
of its assets or properties of any character, or any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, without making effective provision
for all of the notes and all other amounts due under the Indenture to be
directly secured equally and ratably with (or, if the obligation or liability to
be secured by such Lien is subordinated in right of payment to the notes, prior
to) the obligation or liability secured by such Lien.
The foregoing limitation does not apply to:
(1) Liens existing on the Closing Date;
(2) Liens granted on or after the Closing Date on any assets or
Capital Stock of COLO.COM or its Restricted Subsidiaries created in favor
of the Holders of the notes, the Exchange notes or any Additional notes;
(3) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to COLO.COM or another Restricted
Subsidiary to secure Indebtedness owing to COLO.COM or such other
Restricted Subsidiary or the Guarantee of any such Indebtedness;
(4) Liens securing Indebtedness, which is permitted to be Incurred
under clause (3) of the second paragraph of part (a) of the "Limitation on
Incurrence of Indebtedness and Issuance of Preferred Stock" covenant, which
is Incurred to refinance secured Indebtedness; provided that such Liens do
not extend to or cover any property or assets of COLO.COM or any Restricted
Subsidiary other than the property or assets securing the Indebtedness
being refinanced;
(5) Liens securing Indebtedness Incurred under clause (1) of the
second paragraph of part (a) of the "Limitation on Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant; provided that such
Liens only cover property or assets of the obligor, co-obligor or guarantor
of such Indebtedness;
(6) Liens on cash set aside at the time of the Incurrence of any
Indebtedness, or government securities or Temporary Cash Investments
purchased with such cash, in either case, to the extent that such cash,
government securities or Temporary Cash Investments pre-fund the payment of
interest on such Indebtedness and are held in a collateral or escrow
account or similar arrangement to be applied to pay such interest when due;
(7) Liens arising under the Existing Vendor Finance Agreements as in
effect on the Closing Date;
(8) Liens on the assets or property of any Restricted Subsidiary of
COLO.COM that is a Foreign Subsidiary securing Indebtedness which is
permitted to be Incurred by such Restricted Subsidiary under the Indenture;
(9) Liens securing Indebtedness not to exceed at any one time
outstanding in the aggregate $1.0 million; or
(10) Permitted Liens.
82
<PAGE> 86
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
COLO.COM will not, and will not permit any Restricted Subsidiary to, enter
into any sale-leaseback transaction involving any of its assets or properties
whether now owned or hereafter acquired, whereby COLO.COM or a Restricted
Subsidiary sells or transfers such assets or properties and then or thereafter
leases such assets or properties or any part thereof or any other assets or
properties which COLO.COM or such Restricted Subsidiary, as the case may be,
intends to use for substantially the same purpose or purposes as the assets or
properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if:
(1) the lease is for a period, including renewal rights, of not in
excess of three years;
(2) the lease secures or relates to industrial revenue or pollution
control bonds;
(3) the transaction is solely between COLO.COM and any Restricted
Subsidiary or solely between Restricted Subsidiaries; or
(4) such sale-leaseback transaction complies with the "Limitation on
Asset Sales" covenant.
LIMITATION ON ASSET SALES
COLO.COM will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless:
(1) the consideration received by COLO.COM or such Restricted
Subsidiary at the time of such Asset Sale is at least equal to the fair
market value (as determined in good faith by the Board of Directors
(including as to the value of all noncash consideration) and, if determined
to be in excess of $5.0 million, as set forth in an Officer's Certificate
delivered to the Trustee) of the assets sold or otherwise disposed of (or
of the Capital Stock issued, sold or otherwise disposed of);
(2) at least 75% of the consideration received consists of:
(A) cash or Temporary Cash Investments,
(B) the assumption, payment or extinguishment of Indebtedness or
other liabilities, in each case not subordinated in right of payment to
the notes, of COLO.COM or any Restricted Subsidiary (in each case, other
than Indebtedness owed to COLO.COM or any Restricted Subsidiary),
provided that COLO.COM or such Restricted Subsidiary is irrevocably and
unconditionally released from all liability under such Indebtedness or
other liabilities, or
(C) Replacement Assets; and
(3) (I) the Net Cash Proceeds received by COLO.COM (or such Restricted
Subsidiary, as the case may be) from such Asset Sale are applied within 365
days following the receipt of such Net Cash Proceeds, to the extent
COLO.COM (or such Restricted Subsidiary, as the case may be) elects:
(A) apply an amount equal to such excess Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of COLO.COM or
Indebtedness of any other Restricted Subsidiary, in each case owing to a
Person other than COLO.COM or any of its Restricted Subsidiaries, or
83
<PAGE> 87
(B) invest an equal amount, or the amount not so applied pursuant
to clause (A) (or enter into a definitive agreement committing to so
invest within 365 days after the date of such agreement), in Replacement
Assets, or
(II) apply such Net Cash Proceeds, to the extent not applied pursuant
to clause (3)(I), as provided in the following paragraphs of this
"Limitation on Asset Sales" covenant.
The amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 365-day period as set forth in clause
(3)(I) of the preceding sentence and not applied as so required by the end of
such period shall constitute "Excess Proceeds".
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, COLO.COM must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders of the notes (and if required
by the terms of any Indebtedness that is equal in right of payment with the
notes ("Pari Passu Indebtedness"), from the holders of such Pari Passu
Indebtedness) on a pro rata basis an aggregate principal amount of notes (and
Pari Passu Indebtedness) equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of their principal amount, plus, in each case,
accrued interest (if any) to the Payment Date. To the extent that any Excess
Proceeds remain after consummation of an Asset Sale Offer, COLO.COM may use such
Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If
the aggregate principal amount of notes and Pari Passu Indebtedness tendered
into such Asset Sale Offer surrendered by holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the notes and Pari Passu Indebtedness
to be purchased on a pro rata basis in proportion to the respective principal
amounts (or accreted values in the case of Indebtedness issued with an original
issue discount) of the notes and such other Indebtedness. Upon completion of
such Asst Sale Offer, the amount of Excess Proceeds shall be reset at zero for
purposes of the first sentence of this paragraph.
BUSINESS ACTIVITIES
COLO.COM will not, and will not permit any of its Restricted Subsidiaries
to engage, to more than a de minimus extent, in any business other than a
Permitted Business.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
COLO.COM must commence, within 60 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all notes then outstanding, at
a purchase price equal to 101% of their principal amount, plus accrued interest
(if any) to the Payment Date; provided that COLO.COM shall not be obligated to
repurchase notes pursuant to a Change of Control Offer in the event that it has
exercised its rights to redeem all of the notes pursuant to the Indenture.
There can be no assurance that COLO.COM will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of notes) required by the foregoing covenant or any
similar covenant that in other securities of COLO.COM which might be outstanding
at the time.
The above covenant requiring COLO.COM to repurchase the notes will, unless
consents are obtained, require COLO.COM to repay all indebtedness then
outstanding which by its terms would prohibit such note repurchase, either prior
to or concurrently with such note repurchase.
84
<PAGE> 88
SEC REPORTS AND REPORTS TO HOLDERS
At all times from and after the date of the commencement of the exchange
offer, whether or not COLO.COM is then required to file reports with the SEC,
COLO.COM shall file with the SEC all such reports and other information as it
would be required to file with the SEC by Section 13(a) or 15(d) under the
Securities Exchange Act of 1934 if it were subject thereto. COLO.COM shall
supply to the Trustee and to each Holder of notes or shall supply to the Trustee
for forwarding to each such Holder, without cost to such Holder, copies of such
reports and other information.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture:
(a) default in the payment of principal of (or premium, if any, on)
any note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) default in the payment of interest on any note when the same
becomes due and payable, and such default continues for a period of 30
days; provided that a failure to make any of the first four scheduled
interest payments on the notes within three business days after an interest
payment date will constitute an Event of Default with no grace or cure
period;
(c) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of COLO.COM or the failure by COLO.COM to
make or consummate an Offer to Purchase in accordance with the "Limitation
on Asset Sales" or "Repurchase of notes upon a Change of Control" covenant;
(d) COLO.COM or any Restricted Subsidiary defaults in the performance
of or breaches any other covenant or agreement in the Indenture or under
the notes (other than a default specified in clause (a), (b) or (c) above)
and such default or breach continues for a period of 45 consecutive days
after written notice by the Trustee or the Holders of 25% or more in
aggregate principal amount of the notes;
(e) the default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced any
Indebtedness of COLO.COM or any of its Significant Subsidiaries (or the
payment of which is Guaranteed by COLO.COM or any of its Significant
Subsidiaries) whether such Indebtedness or Guarantee now exists or is
created after the Closing Date, and either such Indebtedness is already due
and payable or such default results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the amount of
any such Indebtedness, together with the amount of any other such
Indebtedness the maturity of which has been so accelerated or which is
already due and payable, aggregates $10 million or more;
(f) one or more judgments, orders or decrees for the payment of money
in excess of $10 million, individually or in the aggregate (net of
applicable insurance coverage which is acknowledged in writing by the
insurer), shall be entered against COLO.COM or any of its Significant
Subsidiaries or any of their respective properties and shall not be
discharged and there shall have been a period of 60 days or more during
which a stay of enforcement of such judgment or order, by reason of pending
appeal or otherwise, shall not be in effect;
85
<PAGE> 89
(g) a court having jurisdiction in the premises enters a decree or
order for:
(i) relief in respect of COLO.COM or any Significant Subsidiary in
an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect,
(ii) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of COLO.COM or any Significant
Subsidiary or for all or substantially all of the property and assets of
COLO.COM or any Significant Subsidiary or
(iii) the winding up or liquidation of the affairs of COLO.COM or
any Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 45 consecutive days;
(h) COLO.COM or any Significant Subsidiary (A) commences a voluntary
case under any applicable bankruptcy, insolvency or other similar law now
or hereafter in effect, or consents to the entry of an order for relief in
an involuntary case under any such law, (B) consents to the appointment of
or taking possession by a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of COLO.COM or any Significant
Subsidiary or for all or substantially all of the property and assets of
COLO.COM or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or
(i) the Pledge Agreement shall cease to be in full force and effect or
enforceable in accordance with its terms, other than in accordance with its
terms.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to COLO.COM or any Significant
Subsidiary) occurs and is continuing under the Indenture, the Trustee or the
Holders of at least 25% in aggregate principal amount of the notes, then
outstanding, by written notice to COLO.COM (and to the Trustee if such notice is
given by the Holders), may, and the Trustee at the request of such Holders
shall, declare the principal of, premium, if any, and accrued interest on the
notes to be immediately due and payable. Upon a declaration of acceleration,
such principal of, premium, if any, and accrued interest shall be immediately
due and payable. In the event of a declaration of acceleration because an Event
of Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (e) shall
be remedied or cured by COLO.COM or the relevant Restricted Subsidiary or waived
by the holders of the relevant Indebtedness within 60 days after the declaration
of acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to COLO.COM or any Significant Subsidiary,
the principal of, premium, if any, and accrued interest on the notes then
outstanding shall automatically become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Holders of at least a majority in principal amount of the outstanding
notes by written notice to COLO.COM and to the Trustee, may waive all past
defaults and rescind and annul a declaration of acceleration and its
consequences if (x) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and interest on the notes that have become
due solely by such declaration of acceleration, have been cured or waived and
(y) the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. For information as to the waiver of defaults, see
"-- Modification and Waiver".
The Holders of at least a majority in aggregate principal amount of the
outstanding notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee
86
<PAGE> 90
may refuse to follow any direction that conflicts with law or the Indenture,
that may involve the Trustee in personal liability, or that the Trustee
determines in good faith may be unduly prejudicial to the rights of Holders of
notes not joining in the giving of such direction and may take any other action
it deems proper that is not inconsistent with any such direction received from
Holders of notes. A Holder may not pursue any remedy with respect to the
Indenture or the notes unless:
(1) the Holder gives the Trustee written notice of a continuing Event
of Default;
(2) the Holders of at least 25% in aggregate principal amount of
outstanding notes make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer the Trustee indemnity satisfactory to
the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding notes do not give the Trustee a
direction that is inconsistent with the request.
However, such limitations do not apply to the right of any Holder of a note
to receive payment of the principal of, premium, if any, or interest on, such
note or to bring suit for the enforcement of any such payment, on or after the
due date expressed in the notes, which right shall not be impaired or affected
without the consent of the Holder.
Officers of COLO.COM must certify, on or before a date not more than 90
days after the end of each fiscal year, that a review has been conducted of the
activities of COLO.COM and its Restricted Subsidiaries and COLO.COM's and its
Restricted Subsidiaries' performance under the Indenture and that COLO.COM has
fulfilled all obligations thereunder, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default and the nature
and status thereof. COLO.COM will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
COLO.COM will not consolidate with, merge with or into, or sell, assign,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into it unless:
(1) it shall be the continuing Person, or the Person (if other than
it) formed by such consolidation or into which it is merged or that
acquired or leased such property and assets of (the "Surviving Person")
shall be a corporation organized and validly existing under the laws of the
United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee,
all of COLO.COM's obligations under the Indenture and the notes;
(2) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a pro forma basis to such transaction;
(3) immediately after giving effect to such transaction on a pro forma
basis COLO.COM, or the Surviving Person, as the case may be, could Incur at
least $1.00 of Indebtedness under the first paragraph of part (a) of the
"Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock"
covenant; provided that this clause (3) shall
87
<PAGE> 91
not apply to a consolidation, merger or sale of all (but not less than all)
of the assets of COLO.COM if all Liens and Indebtedness of COLO.COM or the
Surviving Person, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would have been permitted
(and all such Liens and Indebtedness, other than Liens and Indebtedness of
COLO.COM and its Restricted Subsidiaries outstanding immediately prior to
the transaction, shall be deemed to have been Incurred) for all purposes of
the Indenture; and
(4) it delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (3)) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and
that all conditions precedent provided for herein relating to such
transaction have been complied with; and
(5) each Subsidiary Guarantor, if any, unless such Subsidiary
Guarantor is the Person with which COLO.COM has entered into a transaction
under this "Consolidation, Merger and Sale of Assets" section, shall have
by amendment to its Note Guarantee confirmed that its Note Guarantee shall
apply to the obligations of COLO.COM or the Surviving Person in accordance
with the notes and the Indenture;
provided, however, that clause (3) above does not apply if, in the good faith
determination of the Board of Directors of COLO.COM, whose determination shall
be evidenced by a Board Resolution, the principal purpose of such transaction is
to change the state of incorporation of COLO.COM.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that COLO.COM will be
deemed to have paid and will be discharged from any and all obligations in
respect of the notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
notes (except for, among other matters, certain obligations to register the
transfer or exchange of the notes, to replace stolen, lost or mutilated notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things:
(A) COLO.COM has deposited with the Trustee, in trust, money and/or
U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the notes,
(B) COLO.COM has delivered to the Trustee (1) either (x) an Opinion of
Counsel to the effect that Holders will not recognize income, gain or loss
for federal income tax purposes as a result of COLO.COM's exercise of its
option under this "Defeasance" provision and will be subject to federal
income tax on the same amount and in the same manner and at the same times
as would have been the case if such deposit, defeasance and discharge had
not occurred, which Opinion of Counsel must be based upon (and accompanied
by a copy of) a ruling of the Internal Revenue Service to the same effect
unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the
same effect as the aforementioned Opinion of Counsel and (2) an Opinion of
Counsel to the effect that the creation of the defeasance trust does not
violate the Investment Company Act of 1940 and after the passage of 123
days following the deposit, the trust fund will not be subject to the
effect of Section 547 of the United States Bankruptcy Code or Section 15 of
the New York Debtor and Creditor Law,
88
<PAGE> 92
(C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or
lapse of time or both would become an Event of Default, shall have occurred
and be continuing on the date of such deposit or during the period ending
on the 123rd day after the date of such deposit, and such deposit shall not
result in a breach or violation of, or constitute a default under, any
other agreement or instrument to which COLO.COM or any of its Subsidiaries
is a party or by which COLO.COM or any of its Subsidiaries is bound and
(D) if at such time the notes are listed on a national securities
exchange, COLO.COM has delivered to the Trustee an Opinion of Counsel to
the effect that the notes will not be delisted as a result of such deposit,
defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further will provide that the provisions of the Indenture will no
longer be in effect with respect to clause (3) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants", clause
(c) under "Events of Default" with respect to such clause (3) under
"Consolidation, Merger and Sale of Assets", clause (d) under "Events of Default"
with respect to such other covenants and clauses (e) and (f) under "Events of
Default" shall be deemed not to be Events of Default upon, among other things,
the deposit with the Trustee, in trust, of money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the notes, the satisfaction of the provisions described in
clauses (B)(2), (C) and (D) of the preceding paragraph and the delivery by
COLO.COM to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
Defeasance and Certain Other Events of Default. In the event COLO.COM
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the notes as described in the immediately
preceding paragraph and the notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the notes at the time of the
acceleration resulting from such Event of Default. However, COLO.COM will remain
liable for such payments and any Subsidiary Guarantor's Note Guarantee with
respect to such payments will remain in effect.
MODIFICATION AND WAIVER
The Indenture may be amended, without the consent of any Holder, to:
(1) cure any ambiguity, defect or inconsistency in the Indenture;
(2) comply with the provisions described under "Consolidation, Merger
and Sale of Assets" or "Limitation on Issuances of Guarantees by Restricted
Subsidiaries";
(3) comply with any requirements of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act;
(4) evidence and provide for the acceptance of appointment by a
successor Trustee; or
89
<PAGE> 93
(5) make any change that, in the good faith opinion of the Board of
Directors, does not materially and adversely affect the rights of any
Holder.
Modifications and amendments of the Indenture may be made by COLO.COM and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any note,
(2) reduce the principal amount of, or premium, if any, or interest on,
any note,
(3) change the optional redemption dates or optional redemption prices
of the notes from that stated under the caption "Optional Redemption",
(4) change the place or currency of payment of principal of, or
premium, if any, or interest on, any note,
(5) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any note,
(6) waive a default in the payment of principal of, premium, if any, or
interest on the notes, or
(7) release any Subsidiary Guarantor from its Note Guarantee, except as
provided in the Indenture, or
(8) reduce the percentage or aggregate principal amount of outstanding
notes the consent of whose Holders is necessary for waiver of compliance
with certain provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
No recourse for the payment of the principal of, premium, if any, or
interest on any of the notes or for any claim based thereon or otherwise in
respect thereof, and no recourse under or upon any obligation, covenant or
agreement of COLO.COM in the Indenture, or in any of the notes or because of the
creation of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, officer, director, employee or controlling person of
COLO.COM or of any successor Person thereof. Each Holder, by accepting the
notes, waives and releases all such liability. The waiver and release are part
of the consideration for the issuance of the notes. Such waiver may not be
effective to waive liabilities under the federal securities laws.
CONCERNING THE TRUSTEE
Except during the continuance of a Default, the Trustee will not be liable,
except for the performance of such duties as are specifically set forth in the
Indenture. If an Event of Default has occurred and is continuing, the Trustee
will use the same degree of care and skill in its exercise of the rights and
powers vested in it under the Indenture as a prudent person would exercise under
the circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of COLO.COM, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The
90
<PAGE> 94
Trustee is permitted to engage in other transactions; provided, however, that if
it acquires any material conflicting interest, it must eliminate such conflict
or resign.
DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used in this "Description of the Notes" for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" or "ACQUIRED PREFERRED STOCK" means with respect to
any specified Person, Indebtedness or Preferred Stock of any other Person
existing at the time such other Person is merged with or into or becomes a
Restricted Subsidiary of such specified Person or assumed in connection with an
Asset Acquisition by such specified Person; provided that such Indebtedness or
Preferred Stock is not incurred in connection with, or in contemplation of, such
other Person merging with or into or becoming a Subsidiary of such specified
Person; provided that such Indebtedness or Preferred Stock of such other Person
which is redeemed, defeased, retired or otherwise repaid at the time of or
immediately upon consummation of the transactions by which such Person becomes a
Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness or Acquired Preferred Stock.
"ADJUSTED CONSOLIDATED NET INCOME" means, for any period, the aggregate net
income (or loss) of COLO.COM and its Restricted Subsidiaries for such period, on
a consolidated basis, determined in conformity with GAAP; provided that the
following items shall be excluded in computing Adjusted Consolidated Net Income
(without duplication):
(1) the net income (or loss) of any Person that is not a Restricted
Subsidiary, except (x) with respect to net income, to the extent of the
amount of dividends or other distributions actually paid to COLO.COM or any
of its Restricted Subsidiaries by such Person during such period and (y)
with respect to net losses, to the extent of the amount of Investments made
by COLO.COM or any Restricted Subsidiary in such Person during such period;
(2) the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with
COLO.COM or any of its Restricted Subsidiaries or all or substantially all
of the property and assets of such Person are acquired by COLO.COM or any
of its Restricted Subsidiaries;
(3) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary;
(4) any gains or losses (on an after-tax basis) attributable to sales
of assets outside the ordinary course of business of COLO.COM and its
Restricted Subsidiaries;
(5) solely for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of paragraph (a) of the
"Limitation on Restricted Payments" covenant, any amount paid or accrued as
dividends on Preferred Stock of COLO.COM owned by Persons other than
COLO.COM and any of its Restricted Subsidiaries; and
(6) all extraordinary gains and, solely for purposes of calculating the
Consolidated Leverage Ratio, extraordinary losses.
91
<PAGE> 95
"AFFILIATE" means, as applied to any specified Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as applied to any Person,
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise; provided that
beneficial ownership of less than 10% or more of the Voting Stock of a Person
shall be deemed not to be control.
"ASSET ACQUISITION" means (1) an Investment by COLO.COM or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with
COLO.COM or any of its Restricted Subsidiaries; provided that such Person is
engaged in a Permitted Business or (2) an acquisition by COLO.COM or any of its
Restricted Subsidiaries of the property and assets of any Person other than
COLO.COM or any of its Restricted Subsidiaries that constitute substantially all
of a division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to a Permitted Business.
"ASSET DISPOSITION" means the sale or other disposition by COLO.COM or any
of its Restricted Subsidiaries (other than to COLO.COM or another Restricted
Subsidiary) of (1) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (2) all or substantially all of the assets that
constitute a division or line of business of COLO.COM or any of its Restricted
Subsidiaries.
"ASSET SALE" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by COLO.COM or any of its Restricted
Subsidiaries to any Person other than COLO.COM or any of its Restricted
Subsidiaries of:
(1) all or any of the Capital Stock of any Subsidiary,
(2) all or substantially all of the property and assets of an operating
unit or business of COLO.COM or any of its Restricted Subsidiaries, or
(3) any other property and assets (other than the Capital Stock or
other Investment in an Unrestricted Subsidiary) of COLO.COM or any of its
Restricted Subsidiaries outside the ordinary course of business of COLO.COM
or such Restricted Subsidiary and,
in each case, that is not governed by the provisions of the Indenture applicable
to mergers, consolidations and sales of assets of COLO.COM; provided that "Asset
Sale" shall not include:
(a) sales or other dispositions of inventory, receivables and related
assets and other current assets,
(b) sales, transfers or other dispositions constituting the making or
liquidating of a Permitted Investment or Restricted Payment permitted to be
made under the "Limitation on Restricted Payments" covenant,
(c) sales, transfers or other dispositions of assets with a fair market
value not in excess of $1.0 million in any transaction or series of related
transactions,
(d) any sale, transfer, assignment or other disposition of any property
or equipment that has become damaged, worn out, obsolete or otherwise
unsuitable for use in connection with the business of COLO.COM or its
Restricted Subsidiaries,
(e) sales, transfers, assignments or other dispositions constituting
the granting of Liens otherwise permitted by the Indenture,
92
<PAGE> 96
(f) sales, transfers or assignments of all or substantially all of the
assets of COLO.COM or mergers or consolidations in compliance with the
"Consolidation, Merger and Sale of Assets" covenant,
(g) sales, transfers or other dispositions in the ordinary course of
business of such Person, or
(h) the licensing by COLO.COM or any Restricted Subsidiary of
intellectual property.
"AVERAGE LIFE" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (1) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (2) the sum of all such principal payments.
"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock; provided that the term "Capital Stock" shall not
include any Indebtedness Convertible into Capital Stock of such Person.
"CAPITALIZED LEASE" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"CAPITALIZED LEASE OBLIGATIONS" means the capitalized portion of a
Capitalized Lease in accordance with GAAP.
"CHANGE OF CONTROL" means such time as:
(1) (a) prior to the occurrence of a Public Market, a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act), other than an Existing Stockholder, becomes the ultimate "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting Stock
representing a greater percentage of the total voting power of the Voting
Stock of COLO.COM, on a fully diluted basis, than is held by the Existing
Stockholders on such date and
(b) on or after the occurrence of a Public Market, a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act), other than an Existing Stockholder, becomes the ultimate "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 50%
of the total voting power of the Voting Stock of COLO.COM on a fully
diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of COLO.COM, on a fully diluted
basis, than is held by the Existing Stockholders on such date; or
(2) individuals who on the Closing Date constitute the Board of
Directors (together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by
COLO.COM's stockholders was approved by a vote of at least a majority of
the members of the Board of Directors then in office who either were
members of the Board of Directors on the Closing Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board of Directors then in
office for a period of two years.
"CLOSING DATE" means the date on which the old notes were originally issued
under the Indenture, March 10, 2000.
93
<PAGE> 97
"CLOSING PRICE" on any Trading Day with respect to the per share price of
any shares of Capital Stock means the last reported sale price regular way or,
in case no such sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the New York Stock
Exchange, or, if such shares of Capital Stock are not listed or admitted to
trading on such exchange, on the principal national securities exchange on which
such shares are listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the Nasdaq Stock Market, or if
such shares are not listed or admitted to trading on any national securities
exchange or quoted on the Nasdaq Stock Market, the average of the closing bid
and asked prices in the over-the-counter market as furnished by any New York
Stock Exchange member firm of national standing that is selected from time to
time by COLO.COM for that purpose.
"COMMODITY AGREEMENT" means any forward contract, commodity swap agreement,
commodity option agreement or other similar agreement or arrangement.
"CONSOLIDATED EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income:
(1) Consolidated Interest Expense,
(2) income taxes,
(3) depreciation expense,
(4) amortization expense and
(5) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual
or reserve is, or is required by GAAP to be, made), less all non-cash items
increasing Adjusted Consolidated Net Income, all as determined on a
consolidated basis for COLO.COM and its Restricted Subsidiaries in
conformity with GAAP;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by COLO.COM or
any of its Restricted Subsidiaries.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by COLO.COM or any of its Restricted
Subsidiaries), one-third of the rental expense of all operating leases of
COLO.COM and its Restricted Subsidiaries and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by COLO.COM and its Restricted Subsidiaries during
such period; excluding, however,
(1) any amount of such interest of any Restricted Subsidiary if the net
income of such Restricted Subsidiary is excluded in the calculation of
Adjusted Consolidated Net Income pursuant to clause (3) of the definition
thereof (but only in the same proportion
94
<PAGE> 98
as the net income of such Restricted Subsidiary is excluded from the
calculation of Adjusted Consolidated Net Income pursuant to clause (3) of
the definition thereof) and
(2) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Units, all as determined on
a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"CONSOLIDATED LEVERAGE RATIO" means, with respect to COLO.COM on any
Transaction Date, the ratio of:
(1) the aggregate amount of Indebtedness of COLO.COM and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date
to
(2) four times Consolidated EBITDA for the most recently ended fiscal
quarter for which financial statements of COLO.COM have been filed with the
SEC or provided to the Trustee pursuant to the "SEC Reports and Reports to
Holders" covenant.
Notwithstanding the definition of Adjusted Consolidated Net Income, for the
purposes of calculating the "Consolidated EBITDA" for any fiscal quarter for
purposes of this definition,
(i) any Subsidiary of COLO.COM that is a Restricted Subsidiary on the
Transaction Date shall be deemed to have been a Restricted Subsidiary at
all times during such fiscal quarter and
(ii) any Subsidiary of COLO.COM that is not a Restricted Subsidiary on
the Transaction Date shall be deemed not to have been a Restricted
Subsidiary at any time during such fiscal quarter.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated EBITDA" shall be calculated after giving effect on a
pro forma basis for the applicable fiscal quarter to, without duplication:
(A) the Incurrence or repayment of any Indebtedness to be Incurred or
repaid on the Transaction Date;
(B) Asset Dispositions and Asset Acquisitions (including giving pro
forma effect to the application of proceeds of any Asset Disposition) that
occur from the beginning of the most recently ended fiscal quarter, for
which financial statements of COLO.COM have been filed with the SEC or
provided to the Trustee pursuant to the "SEC Reports and Reports to
Holders" covenant, through the Transaction Date (the "REFERENCE PERIOD"),
as if they had occurred and such proceeds had been applied on the first day
of such Reference Period; and
(C) asset dispositions and asset acquisitions (including giving pro
forma effect to the application of proceeds of any asset disposition) that
have been made by any Person that has become a Restricted Subsidiary or has
been merged with or into COLO.COM or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or
Asset Acquisitions had such transactions occurred when such Person was a
Restricted Subsidiary as if such asset dispositions or asset acquisitions
were Asset Dispositions or Asset Acquisitions that occurred on the first
day of such Reference Period;
provided that to the extent that clause (B) or (C) of this sentence requires
that pro forma effect be given to an Asset Acquisition or Asset Disposition,
such pro forma calculation shall be based upon the full fiscal quarter
immediately preceding the Transaction Date of the Person, or division
95
<PAGE> 99
or line of business of the Person, that is acquired or disposed of for which
financial information is available.
"CONVERTIBLE NOTES" means notes that are convertible into Capital Stock of
COLO.COM at the option of the holders thereof.
"CREDIT FACILITY" means any credit facilities, any receivables facilities
or programs, or one or more other term loan and/or revolving credit or
commercial paper facilities (including any letter of credit subfacilities)
entered into with commercial banks or other financial institutions or
institutional investors, or any replacement, extension, renewal, refinancing or
refunding thereof.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"DEFAULT" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"DISQUALIFIED STOCK" means any class or series of Capital Stock of any
Person that by its terms or otherwise is
(1) required to be redeemed prior to the Stated Maturity of the notes,
(2) redeemable at the option of the holder of such class or series of
Capital Stock at any time prior to the Stated Maturity of the notes or
(3) convertible into or exchangeable for Capital Stock referred to in
clause (1) or (2) above or Indebtedness having a scheduled maturity prior
to the Stated Maturity of the notes;
provided that any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof (i) the right to require such
Person to repurchase or redeem such Capital Stock upon the occurrence of an
"asset sale" or "change of control" occurring prior to the Stated Maturity of
the notes shall not constitute Disqualified Stock if the "asset sale" or "change
of control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the
"Limitation on Asset Sales" and "Repurchase of notes upon a Change of Control"
covenants and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to
COLO.COM's repurchase of such notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales" and "Repurchase of notes upon a Change of
Control" covenants, or (ii) the right to require such Person to repurchase in
any other event, if such repurchase right is expressly contingent on the payment
in full of the notes.
"EXISTING STOCKHOLDERS" means Accel Partners, Athena Venture Fund L.P.,
Investcorp International, Menlo Ventures and Meritech Capital Partners, and, in
each case, affiliated funds.
"EXISTING VENDOR FINANCE AGREEMENTS" means, collectively, (i) the equipment
and tenant improvement financing agreement with Meier Mitchell & Company
providing up to $17 million of credit and (ii) the equipment and tenant
improvement financing agreement with Comdisco, Inc. providing up to $17 million
of credit, each of which is secured by all of the tangible and intangible assets
relating to assets financed by the lender under the applicable agreement.
"FAIR MARKET VALUE" means the price that would reasonably be expected to be
paid in an arm's-length transaction between an informed and willing seller under
no compulsion to sell and an informed and willing buyer under no compulsion to
buy, as determined in good faith by the Board of Directors, whose determination
shall be conclusive if evidenced by a Board Resolution.
96
<PAGE> 100
"FOREIGN SUBSIDIARY" mean any Subsidiary of COLO.COM that is organized
under the laws of any jurisdiction, other than under the laws of the United
States or any state, territory or political subdivision thereof, and its primary
business and operation do not include any of the U.S.-based business and
operations conducted by COLO.COM and its Restricted Subsidiaries.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (1) the amortization of any expenses incurred in
connection with the offering of the notes and (2) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"GOVERNMENT SECURITIES" means direct obligations of, obligations fully
guaranteed by, or participations in pools consisting solely of obligations of or
obligations guaranteed by, the United States of America for the payment of which
guarantee or obligations the full faith and credit of the United States of
America is pledged and which are not callable or redeemable at the option of the
issuer thereof.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (1) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (2) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"INCUR" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise, directly or indirectly, become liable for or
with respect to, or become responsible for, the payment of, contingently or
otherwise, such Indebtedness, including an "Incurrence" of Acquired
Indebtedness; provided that neither the accrual of interest nor the accretion of
original issue discount shall be considered an Incurrence of Indebtedness.
"INDEBTEDNESS" means, with respect to any Person at any date of
determination (without duplication):
(1) all indebtedness of such Person for borrowed money;
(2) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments;
(3) all obligations of such Person in respect of letters of credit or
other similar instruments (including reimbursement obligations with respect
thereto, but excluding obligations with respect to letters of credit
(including trade letters of credit) securing
97
<PAGE> 101
obligations (other than obligations described in (1) or (2) above or (5),
(6) or (7) below) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for
reimbursement);
(4) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
except Trade Payables;
(5) all Capitalized Lease Obligations;
(6) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
provided that the amount of such Indebtedness shall be the lesser of
(A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness;
(7) all Indebtedness of other Persons Guaranteed by such Person to the
extent such Indebtedness is Guaranteed by such Person;
(8) to the extent not otherwise included in this definition,
obligations under Commodity Agreements, Currency Agreements and Interest
Rate Agreements (other than Commodity Agreements, Currency Agreements and
Interest Rate Agreements designed solely to protect COLO.COM or its
Restricted Subsidiaries against fluctuations in commodity prices, foreign
currency exchange rates or interest rates and that do not increase the
Indebtedness of the obligor outstanding at any time other than as a result
of fluctuations in commodity prices, foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder); and
(9) Disqualified Stock of such Person and Preferred Stock of such
Person's Restricted Subsidiaries.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and,
with respect to contingent obligations, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, provided that
(A) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP,
(B) money borrowed and set aside at the time of the Incurrence of any
Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such money
is held to secure the payment of such interest and
(C) Indebtedness shall not include (v) any liability for federal,
state, local or other taxes, (w) performance, surety or appeal bonds
provided in the ordinary course of business, (x) agreements providing for
indemnification, adjustment of purchase price or similar obligations, or
Guarantees or letters of credit, surety bonds or performance bonds securing
any obligations of COLO.COM or any of its Restricted Subsidiaries pursuant
to such agreements, in any case Incurred in connection with the disposition
of any business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the
98
<PAGE> 102
purpose of financing such acquisition), so long as the principal amount
does not exceed the gross proceeds actually received by COLO.COM or any
Restricted Subsidiary in connection with such disposition, (y) liabilities
incurred in connection with leases properly classified as operating leases
in accordance with GAAP or (z) accrued expenses.
"INTEREST RATE AGREEMENT" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"INVESTMENT" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers or suppliers in the
ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable, prepaid expenses or deposits on the balance sheet of
COLO.COM or its Restricted Subsidiaries and endorsements for collection or
deposit arising in the ordinary course of business) or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, bonds, notes, debentures or other similar
instruments issued by, such Person and shall include:
(1) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and
(2) the retention of the Capital Stock (or any other Investment) by
COLO.COM or any of its Restricted Subsidiaries, of (or in) any Person that
has ceased to be a Restricted Subsidiary, including, without limitation or
by reason of any transaction permitted by clause (3) of the "Limitation on
the Issuance and Sale of Capital Stock of Restricted Subsidiaries"
covenant.
For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation
on Restricted Payments" covenant,
(a) the amount of or a reduction in an Investment shall be equal to the
fair market value thereof at the time such Investment is made or reduced
and
(b) in the event COLO.COM or a Restricted Subsidiary makes an
Investment by transferring assets to any Person and as part of such
transaction receives Net Cash Proceeds, the amount of such Investment shall
be the fair market value of the assets less the amount of Net Cash Proceeds
so received.
"LIEN" means any mortgage, pledge, security interest, encumbrance, lien or
fixed or floating charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof or any agreement to give any security interest); provided, however, that
the term "Lien" shall not include any lease, properly classified as an operating
lease in accordance with GAAP.
"MOODY'S" means Moody's Investors Service, Inc. and its successors.
"NET CASH PROCEEDS" means:
(a) with respect to any Asset Sale, the proceeds of such Asset Sale in
the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or
cash equivalents and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of
(1) brokerage commissions and other fees and expenses (including
fees and expenses of counsel and investment bankers) related to such
Asset Sale;
99
<PAGE> 103
(2) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of COLO.COM and its
Restricted Subsidiaries, taken as a whole;
(3) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (x) is secured
by a Lien on the property or assets sold or (y) is required to be paid
as a result of such sale and
(4) appropriate amounts to be provided by COLO.COM or any
Restricted Subsidiary as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in
conformity with GAAP and
(b) (i) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the
extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, and (ii) with respect to any Indebtedness that is converted
into, or exchanged for, Capital Stock (other than Disqualified Stock), the
proceeds of such issuance or sale of Indebtedness in the form of cash or
cash equivalents and proceeds from the conversion of other property
received when converted to cash or cash equivalents, in each case with
respect to clauses (i) and (ii), net of attorney's fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such
issuance or sale and net of taxes paid or payable as a result thereof.
"NEWLY RAISED CAPITAL" means funds raised by COLO.COM or its Restricted
Subsidiaries after the Closing Date.
"NOTE GUARANTEE" means any Guarantee of the obligations of COLO.COM under
the Indenture and the notes by any Subsidiary Guarantor.
"OFFER TO PURCHASE" means an offer to purchase notes by COLO.COM from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(1) the covenant pursuant to which the offer is being made and that all
notes validly tendered will be accepted for payment on a pro rata basis;
(2) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "PAYMENT DATE");
(3) that any note not tendered will continue to accrue interest
pursuant to its terms;
(4) that, unless COLO.COM defaults in the payment of the purchase
price, any note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date;
(5) that Holders electing to have a note purchased pursuant to the
Offer to Purchase will be required to surrender the note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
100
<PAGE> 104
(6) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such notes purchased; and
(7) that Holders whose notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased portion of
the notes surrendered; provided that each note purchased and each new note
issued shall be in a principal amount of $1,000 or integral multiples of
$1,000.
On the Payment Date, COLO.COM shall
(a) accept for payment on a pro rata basis notes or portions thereof
tendered pursuant to an Offer to Purchase;
(b) deposit with the Paying Agent money sufficient to pay the purchase
price of all notes or portions thereof so accepted; and
(c) deliver, or cause to be delivered, to the Trustee all notes or
portions thereof so accepted together with an Officers' Certificate
specifying the notes or portions thereof accepted for payment by COLO.COM.
The Paying Agent shall promptly mail to the Holders of notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new note equal in principal amount to
any unpurchased portion of the note surrendered; provided that each note
purchased and each new note issued shall be in a principal amount of $1,000 or
integral multiples of $1,000. COLO.COM will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. COLO.COM will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that COLO.COM is required to repurchase notes pursuant to an Offer
to Purchase.
"PERMITTED BUSINESS" means
(1) the business of designing, constructing, owning, operating and
leasing colocation facilities for telecommunications, data communications
and Internet-based businesses and businesses reasonably related,
complementary or incidental thereto;
(2) server and other based hosting;
(3) the management of computer systems, data networks, or
telecommunications systems;
(4) providing direct connections, switched interconnections and
related services to third parties as well as related operations and
businesses;
(5) technology services, equipment staging, or software services for
Internet Protocol or successor protocol based networks; and
(6) other businesses reasonably related, ancillary, supplemental or
incidental to any of the foregoing or reasonable extensions thereof.
"PERMITTED INVESTMENT" means:
(1) an Investment in COLO.COM or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or
101
<PAGE> 105
consolidated with or into or transfer or convey all or substantially all
its assets to, COLO.COM or a Restricted Subsidiary; provided that such
Person's primary business is related, ancillary or complementary to a
Permitted Business;
(2) Temporary Cash Investments;
(3) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP, or loans or guarantees to officers, directors and
employees approved by the Board of Directors of COLO.COM or any committee
thereof, in connection with the relocation of such persons;
(4) stock, obligations or securities received in satisfaction of
judgments;
(5) an Investment in an Unrestricted Subsidiary consisting solely of
an Investment in another Unrestricted Subsidiary;
(6) Commodity Agreements, Interest Rate Agreements and Currency
Agreements designed solely to protect COLO.COM or its Restricted
Subsidiaries against fluctuations in commodity prices, interest rates or
foreign currency exchange rates;
(7) any Investment received (a) in satisfaction of judgments or (b) as
payment on a claim made in connection with any bankruptcy, liquidation,
receivership or other insolvency proceeding;
(8) Investments in (a) prepaid expenses and negotiable instruments
held for collection, (b) Investments obtained in exchange or settlement of
accounts receivable for which COLO.COM or any Restricted Subsidiary has
determined that the collection is questionable and (c) lease, utility and
worker compensation, performance and other similar deposits arising in the
ordinary course of business;
(9) Strategic Investments provided that the aggregate amount of
Investments made pursuant to this clause (9) shall not exceed the greater
of $20.0 million and 2 1/2% of COLO.COM's Total Common Equity, at any one
time outstanding;
(10) Investments, to the extent the consideration therefore is the
licensing or disclosure of intellectual property or know-how; and
(11) other Investments not to exceed $5.0 million at any one time
outstanding.
"PERMITTED LIENS" means:
(1) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment
of borrowed money);
(2) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Closing Date; provided that
(a) such Lien is created solely for the purpose of securing
Indebtedness Incurred pursuant to clause (7) of the second paragraph of
part (a) of the "Limitation on Incurrence of Indebtedness and Issuance
of Preferred Stock" covenant, and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property,
102
<PAGE> 106
(b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost, and
(c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets or attachments,
accessions or proceeds thereof, and any improvements on such item;
(3) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(4) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(5) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes a
Restricted Subsidiary of COLO.COM or is merged with or into or consolidated
with COLO.COM or any Restricted Subsidiary of COLO.COM; provided that such
Liens are not Incurred in contemplation of such acquisition, merger or
consolidation and do not extend to or cover any property or assets of
COLO.COM or any Restricted Subsidiary other than those of the Person
acquired by, merged into or consolidated with COLO.COM or any Restricted
Subsidiary;
(6) Liens in favor of COLO.COM or any Restricted Subsidiary;
(7) Liens on property existing at the time of acquisition thereof by
the Company or any Restricted Subsidiary of the Company; provided that such
Liens are not incurred in contemplation of such acquisition and do not
extend to any asset other than the assets acquired;
(8) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof or any cash
collateral;
(9) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Commodity Agreements, Interest Rate Agreements
and Currency Agreements designed solely to protect COLO.COM or any of its
Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
(10) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
COLO.COM or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of COLO.COM and its
Restricted Subsidiaries prior to the Closing Date;
(11) Liens on shares of Capital Stock of any Unrestricted Subsidiary
to secure Indebtedness of such Unrestricted Subsidiary;
(12) Liens on, or sales of, accounts receivable; and
(13) licenses.
"PLEDGE ACCOUNT" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities to
be purchased by COLO.COM with a portion of the net proceeds from the sale of the
notes.
"PLEDGE AGREEMENT" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by COLO.COM in favor of the Trustee,
governing the disbursement of
103
<PAGE> 107
funds from the Pledge Account, as such agreement may be amended, restated,
supplemented or otherwise modified from time to time.
"PLEDGED SECURITIES" means the Government Securities to be purchased by
COLO.COM and held in the Pledge Account in accordance with the Pledge Agreement.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering of
Common Stock of COLO.COM pursuant to an effective registration statement under
the Securities Act.
A "PUBLIC MARKET" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of COLO.COM has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144 or
Rule 701 under the Securities Act.
"PURCHASE MONEY INDEBTEDNESS" means indebtedness (including Acquired
Indebtedness, Capital Lease Obligations, mortgage financings and purchase money
obligations) Incurred for the purpose of financing all or any part of the cost
of the engineering, construction, installation, importation, acquisition, lease,
development or improvement of any assets used by COLO.COM or any Restricted
Subsidiary in a Permitted Business, including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or restated from
time to time. COLO.COM in its sole discretion shall determine whether any item
of Indebtedness or portion thereof meeting the foregoing criteria shall be
classified as Purchase Money Indebtedness for the purposes of the covenant
"Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock."
"REPLACEMENT ASSETS" means, on any date, property or assets (other than
current assets) of a nature or type or that are used in a business (or an
Investment in a company having property or assets of a nature or type, or
engaged in a business) that is a Permitted Business.
"RESTRICTED SUBSIDIARY" means any Subsidiary of COLO.COM other than an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, and its successors.
"SIGNIFICANT SUBSIDIARY" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (1) for the most
recent fiscal year of COLO.COM, accounted for more than 10% of the consolidated
revenues of COLO.COM and its Restricted Subsidiaries or (2) as of the end of
such fiscal year, was the owner of more than 10% of the consolidated assets of
COLO.COM and its Restricted Subsidiaries, all as set forth on the most recently
available consolidated financial statements of COLO.COM for such fiscal year.
"STATED MATURITY" means, (1) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (2) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"STRATEGIC INVESTMENT" means any Investment in any Person (other than an
Unrestricted Subsidiary) whose primary business is a Permitted Business, and
such Investment is determined by the Board of Directors of COLO.COM to promote
or significantly benefit the businesses of COLO.COM and its Restricted
Subsidiaries as of the date of such Investment.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is
104
<PAGE> 108
owned, directly or indirectly, by such Person and one or more other Subsidiaries
of such Person.
"SUBSIDIARY GUARANTOR" means any Restricted Subsidiary which provides a
Note Guarantee of COLO.COM's obligations under the Indenture and the notes.
"TEMPORARY CASH INVESTMENT" means any of the following:
(1) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United
States of America or any agency thereof, in each case maturing within one
year;
(2) time deposit accounts, certificates of deposit and money market
deposits maturing (with respect to all such items outstanding at any given
time) within an average of 180 days of the date of acquisition thereof
(provided that each such item matures within 18 months of the date of
acquisition thereof) issued by a bank or trust company which is organized
under the laws of the United States of America, any state thereof or any
foreign country recognized by the United States of America, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $100 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any money
market fund sponsored by a registered broker dealer or mutual fund
distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank or trust company meeting the qualifications described in
clause (2) above;
(4) commercial paper, maturing not more than one year after the date
of acquisition, issued by a corporation (other than an Affiliate of
COLO.COM) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's or "A-1" (or
higher) according to S&P;
(5) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or Moody's; and
(6) any mutual fund that has at least 95% of its assets continuously
invested in investments of the types described in clauses (1) through (5)
above.
"TOTAL COMMON EQUITY" of any Person means, as of any date of determination
the product of (i) the aggregate number of outstanding primary shares of Common
Stock of such Person on such day (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average Closing Price of such Common Stock
over the 20 consecutive Trading Days immediately preceding such day. If no such
Closing Price exists with respect to shares of any such class, the value of such
shares for purposes of Clause (ii) of the preceding sentence shall be determined
by the Board of Directors of COLO.COM in good faith and evidenced by a
resolution of the Board of Directors filed with the Trustee.
"TRADE PAYABLES" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such
105
<PAGE> 109
Person or any of its Subsidiaries arising in the ordinary course of business in
connection with the acquisition of goods or services.
"TRADING DAY" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"TRANSACTION DATE" means, with respect to the Incurrence of any
Indebtedness or Issuance or Incurrence of Preferred Stock, the date such
Indebtedness is to be Incurred or such Preferred Stock is to be Issued or
Incurred and, with respect to any Restricted Payment, the date such Restricted
Payment is to be made.
"UNRESTRICTED SUBSIDIARY" means
(1) any Subsidiary of COLO.COM that at the time of determination shall
be designated an Unrestricted Subsidiary by the Board of Directors in the
manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Restricted Subsidiary (including
any newly acquired or newly formed Subsidiary of COLO.COM) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, COLO.COM or any Restricted Subsidiary; provided
that
(A) any Guarantee by COLO.COM or any Restricted Subsidiary of any
Indebtedness of the Subsidiary being so designated shall be deemed an
"Incurrence" of such Indebtedness and an "Investment" by COLO.COM or such
Restricted Subsidiary (or both, if applicable) at the time of such
designation;
(B) either (I) the Subsidiary to be so designated has total assets of
$1,000 or less or (II) if such Subsidiary has assets greater than $1,000,
such designation would be permitted under the "Limitation on Restricted
Payments" covenant; and
(C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted under the
"Limitation on Incurrence of Indebtedness and Issuance of Preferred Stock"
and "Limitation on Restricted Payments" covenants.
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that
(a) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such designation and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately after such designation would, if Incurred at such
time, have been permitted to be Incurred (and shall be deemed to have been
Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"U.S. GOVERNMENT OBLIGATIONS" means securities that are
(1) direct obligations of the United States of America for the payment
of which its full faith and credit is pledged or
106
<PAGE> 110
(2) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America the payment of
which is unconditionally guaranteed as a full faith and credit obligation
by the United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof at any time prior to the
Stated Maturity of the notes, and shall also include a depository receipt
issued by a bank or trust company as custodian with respect to any such
U.S. Government Obligation or a specific payment of interest on or
principal of any such U.S. Government Obligation held by such custodian for
the account of the holder of a depository receipt; provided that (except as
required by law) such custodian is not authorized to make any deduction
from the amount payable to the holder of such depository receipt from any
amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt.
"VOTING STOCK" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"WHOLLY OWNED" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
107
<PAGE> 111
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of material U.S. federal income
considerations relevant to holders of the notes including material U.S. federal
income tax consequences of the exchange of old notes for new notes pursuant to
the exchange offer. This discussion is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change, possibly with retroactive effect, or different interpretations. There
can be no assurance that the IRS will not challenge one or more of the tax
consequences described herein, and we have not obtained, nor do we intend to
obtain, a ruling from the IRS with respect to the U.S. federal income tax, state
tax, local tax, foreign tax or other tax consequences of acquiring or holding
notes. This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular holder in light of the
holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable to
all categories of investors, some of which, such as dealers in securities,
banks, insurance companies, tax-exempt (employment, charitable or other)
organizations, and persons holding notes as part of a hedging or conversion
transaction or straddle or persons deemed to sell notes under the constructive
sale provisions of the Code, may be subject to special rules. The discussion
also does not discuss any aspect of state, local or foreign law, or U.S. federal
estate and gift tax law. This discussion is limited to purchasers of notes who
hold the notes as "capital assets" within the meaning of Section 1221 of the
Code.
All purchasers of the notes are advised to consult their own tax advisors
regarding the federal, state, local and foreign tax consequences of the
purchase, ownership and disposition of the notes.
U.S. HOLDERS
As used herein, the term "U.S. Holder" means the beneficial owner of a note
that for United States federal income tax purposes is:
- a citizen or resident (as defined in Section 7701(b) of the Code) of the
United States;
- a corporation, partnership or other entity formed under the laws of the
United States or any political subdivision thereof;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in Section
7701(a)(30) of the Code.
A "Non-U.S. Holder" is any holder other than a U.S. Holder.
INTEREST
Stated interest on the notes will generally be includable in a U.S.
Holder's gross income and taxable as ordinary income for U.S. federal income tax
purposes at the time it is paid or accrued in accordance with the U.S. Holder's
regular method of accounting.
108
<PAGE> 112
SALE, EXCHANGE OR REDEMPTION
Each U.S. Holder generally will recognize capital gain or loss upon the
sale, exchange, redemption or other disposition of the notes measured by the
difference, if any, between:
- the amount of cash and the fair market value of any property received,
except to the extent that such cash or other property is attributable to
the payment of accrued interest not previously included in income, which
amount will be taxable as ordinary income; and
- such holder's adjusted tax basis in the notes.
Capital gain recognized by an individual U.S. Holder generally will be
subject to a maximum United States federal income tax rate of:
- 39.6% if the U.S. Holder held the asset for not more than 12 months
before the disposition; or
- 20% if the U.S. Holder held the asset for more than 12 months before the
disposition.
A holder's initial tax basis in a note will be the amount paid therefor.
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind or extent from
the old notes and because the exchange will occur by operation of the terms of
the old notes. A U.S. Holder's adjusted tax basis in the new notes should be the
same as such Holder's adjusted tax basis in the old notes. A U.S. Holder's
holding period for the new notes received pursuant to the exchange offer should
include its holding period for the old notes surrendered therefor.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A U.S. Holder of notes may be subject to "backup withholding" at a rate of
31% with respect to "reportable payments," including interest payments, and,
under various circumstances, principal payments on the notes and proceeds from
the sale, exchange or redemption of the notes. These backup withholding rules
apply if the U.S. Holder, among other things:
- fails to furnish a social security number or other taxpayer
identification number ("TIN") certified under penalties of perjury within
a reasonable time after the request therefor;
- furnishes a TIN as to which the IRS provides notification that it is an
incorrect TIN;
- fails to report properly interest; or
- under various circumstances, fails to provide a certified statement,
signed under penalties of perjury, that the TIN furnished is correct and
that such U.S. Holder is not subject to backup withholding.
A U.S. Holder who does not provide us with its correct TIN also may be
subject to penalties imposed by the IRS. Any amount withheld from a payment to a
U.S. Holder under the backup withholding rules is creditable against the U.S.
Holder's federal income tax liability, provided that the required information is
furnished to the IRS. Backup withholding will not apply, however, with respect
to payments made to certain holders, including corporations and tax-exempt
organizations, provided their exemptions from backup withholding are properly
established.
109
<PAGE> 113
We will report to the U.S. Holders of notes and to the IRS the amount of
any "reportable payments" for each calendar year and the amount of tax withheld,
if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a Non-U.S. Holder. Non-U.S. Holders should consult
their own tax advisors concerning the state, local, foreign and other tax
consequences of the purchase, ownership and disposition of the notes.
For purposes of U.S. federal income tax on interest discussed below, a
Non-U.S. Holder (as defined above) includes a non-resident fiduciary of an
estate or trust. For purposes of the following discussion, interest and gain on
the sale, exchange or other disposition of a note will be considered to be "U.S.
trade or business income" if such income or gain is:
- effectively connected with the conduct of a trade or business within the
U.S. of such Non-U.S. Holder; or
- in the case of certain residents of certain countries which have an
income tax treaty in force with the U.S., attributable to a permanent
establishment or, in the case of an individual, a fixed base, in the
United States as such terms are defined in the applicable treaty.
STATED INTEREST
Generally any interest paid to a Non-U.S. Holder of a note that is not U.S.
trade or business income will not be subject to U.S. federal income tax if the
interest qualifies as "portfolio interest." Generally interest on the notes will
qualify as portfolio interest if:
- the Non-U.S. Holder does not actually or constructively own 10% or more
of the total combined voting power of all classes of our stock entitled
to vote and is not a "controlled foreign corporation" with respect to
which we are a "related person" within the meaning of the appropriate
provisions of the Code;
- the Non-U.S. Holder, under penalty of perjury, certifies in general that
the Non-U.S. Holder is not a U.S. person and such certificate provides
the Non-U.S. Holder's name and address;
- the Non-U.S. Holder is not a bank receiving interest on an extension of
credit made pursuant to a loan agreement made in the ordinary course of
its trade or business; and
- the notes are in registered form.
The gross amount of payments of interest to a Non-U.S. Holder that do not
qualify for the portfolio interest exemption and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate such tax.
Interest payments that are considered as U.S. trade or business income will be
taxed at regular U.S. income tax rates rather than the 30% gross rate. In the
case of a Non-U.S. Holder that is a corporation, such U.S. trade or business
income may also be subject to the branch profits tax (which is generally imposed
on a foreign corporation on the actual or deemed repatriation from the United
States of earnings and profits attributable to U.S. trade or business income) at
a 30% rate unless a U.S. income tax treaty applies to reduce or eliminate such
tax. To claim the benefit of a tax treaty or to claim exemption from withholding
because the income is U.S. trade or business income, the Non-U.S. Holder must
provide a properly
110
<PAGE> 114
executed IRS Form 1001 or IRS Form 4224 (or such successor forms as the IRS
designates), as applicable, prior to the payment of interest. Under recently
issued U.S. Treasury Regulations that will generally be effective on and after
January 1, 2001 (the "Withholding Regulations"), the required Forms 1001 and
4224 will be replaced by a new Form W-8. Under the Withholding Regulations, a
Non-U.S. Holder may under certain circumstances be required to obtain a U.S.
taxpayer identification number and make certain certifications to us. Special
procedures are provided in the Withholding Regulations for payments through
qualified intermediaries. Investors should consult their tax advisors regarding
the effect, if any, of the Withholding Regulations.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a note generally will not be subject to U.S. federal income tax,
unless:
- such gain is U.S. trade or business income; or
- the Non-U.S. Holder is subject to tax pursuant to the provisions of U.S.
tax law applicable to certain U.S. expatriates, including certain former
citizens or residents of the United States.
The exchange of the old notes for the new notes pursuant to the exchange
offer should not be treated as an "exchange" for federal income tax purposes
because the new notes should not differ materially in either kind or extent from
the old notes and because the exchange will occur by operation of the terms of
the old notes. A Non-U.S. Holder's adjusted tax basis in the new notes should be
the same as such Holder's adjusted tax basis in the old notes. A Non-U.S.
Holder's holding period for the new notes received pursuant to the exchange
offer should include its holding period for the old notes surrendered therefor.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the IRS and to each Non-U.S. Holder any interest
that is subject to withholding, or that is exempt from U.S. withholding tax
pursuant to a tax treaty, or interest that is exempt from U.S. tax under the
portfolio interest exception or because it is U.S. trade or business income.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides. We may have to report to the IRS
payments of principal.
Generally, information reporting and backup withholding of United States
federal income tax at a rate of 31% may apply to payments made by us or our
agents to Non-U.S. Holders if the payee fails to make the appropriate
certification that the holder is a non-U.S. person or if we or our paying agent
have actual knowledge that the payee is a United States person.
The payment of the proceeds from the disposition of notes to or through a
United States office of a United States or foreign broker will be subject to
information reporting and backup withholding unless the owner provides
certification as to its Non-U.S. Holder status under penalty of perjury or
otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The proceeds of the disposition by
a Non-U.S. Holder of the notes to or through a foreign office of a broker will
generally not be subject to backup withholding. However, if such broker is a
U.S. person, a controlled foreign corporation for United States tax purposes, or
a foreign person 50% or more of whose gross income from all sources for certain
periods is effectively connected with a United States trade or business, or,
111
<PAGE> 115
in addition, for periods after December 31, 2000, a foreign partnership that at
any time during its tax year either is engaged in the conduct of a trade or
business in the United States or has as partners one or more United States
persons that, in the aggregate hold more than 50% of the income or capital
interest in the partnership, such payments will be subject to information
reporting, but not backup withholding, unless such broker has documentary
evidence in its records that the holder is a Non-U.S. holder and certain other
conditions are met or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures for claiming such refund or credit are followed.
The preceding discussion of material United States federal income tax
consequences is for general information only and is not tax advice. Accordingly,
each investor should consult its own tax advisers as to particular U.S. federal,
state, local, foreign and other tax consequences to it of purchasing, holding
and disposing of our notes, including the applicability and effect of any state,
local or foreign tax laws, and of any proposed changes in applicable laws.
112
<PAGE> 116
PLAN OF DISTRIBUTION
We will receive no proceeds in connection with the exchange offer.
Each broker-dealer that receives new notes for its own account in
connection with the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of new notes. This prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of new notes received in exchange for old notes where
the old notes were acquired as a result of market-making activities or other
trading activities. We have agreed that for a period ending upon the earlier of
(1) 180 days after the exchange offer has been completed and (2) the date on
which broker-dealers no longer own any Transfer restricted securities, we will
make available and provide promptly upon reasonable request this prospectus as
amended or supplemented, in a form meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale.
New notes received by broker-dealers for their own account in the exchange
offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of these methods of resale, at market
prices prevailing at the time of resale, at prices related to prevailing market
prices or negotiated prices. Any resale may be made directly to purchasers or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any broker-dealer and/or the purchasers of any
new notes. Any broker-dealer that resells new notes that were received by it for
its own account in the exchange offer and any broker or dealer that participates
in a distribution of new notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any such resale of new notes
and any commissions or concessions received by these persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. We have agreed to
indemnify broker-dealers against various liabilities, including liabilities
under the Securities Act.
For a period of 180 days after the consummation of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests such documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer, including the expenses of one counsel for the holders of the new
notes, other than the commissions or concessions of any broker-dealers and will
indemnify the holders of the new notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act. We note,
however, that, in the opinion of the SEC, indemnification against liabilities
arising under federal securities laws is against public policy and may be
unenforceable.
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California, will pass upon the validity of the new notes offered by this
prospectus. As of the date of this prospectus, an investment partnership
composed of current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati and certain members of and persons associated with
Wilson Sonsini Goodrich & Rosati, beneficially owned an aggregate of 123,132
shares of our common stock.
113
<PAGE> 117
EXPERTS
The consolidated financial statements of COLO.COM and subsidiaries as of
December 31, 1998 and 1999 and for the period from inception (April 2, 1997) to
December 31, 1997 and for the years ended December 31, 1998 and 1999 included in
this prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-4. This prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of COLO.COM, such references are
not necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement, including exhibits and schedule
filed therewith, at the Securities and Exchange Commission's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Securities and Exchange
Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You may also obtain copies of such materials from the Public
References Section of the Securities and Exchange Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding
registrants, such as COLO.COM, that file electronically with the Securities and
Exchange Commission.
114
<PAGE> 118
COLO.COM AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 119
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
COLO.COM:
We have audited the accompanying consolidated balance sheets of COLO.COM (a
California corporation) and Subsidiary as of December 31, 1998 and 1999, and the
related statements of operations, changes in stockholders' equity (deficit), and
cash flows for the period from inception (April 2, 1997) to December 31, 1997,
and for the years ended December 31, 1998 and 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of COLO.COM and
Subsidiary as of December 31, 1998 and 1999, and the results of their operations
and their cash flows for the period from inception (April 2, 1997) to December
31, 1997, and for the years ended December 31, 1998 and 1999, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
San Francisco, California,
January 24, 2000
F-2
<PAGE> 120
COLO.COM AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999, AND MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------- -----------
1998 1999 2000
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 138 $198,412 $381,010
Accounts receivable, net of allowance for doubtful
accounts of $5, $25, and $135 (unaudited) at December
31, 1998 and 1999, and March 31, 2000, respectively..... 42 28 521
Prepaids and other current assets......................... 177 704 2,182
------- -------- --------
Total current assets.................................... 357 199,144 383,713
PROPERTY AND EQUIPMENT, net................................. 495 13,195 49,033
RESTRICTED CASH AND CASH EQUIVALENTS........................ -- 2,162 3,765
RESTRICTED INVESTMENTS...................................... -- -- 77,729
DEPOSITS AND OTHER NONCURRENT ASSETS........................ 36 1,241 10,868
------- -------- --------
Total assets............................................ $ 888 $215,742 $525,108
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 263 $ 8,911 $ 21,434
Accrued liabilities....................................... 149 761 4,823
Current portion of notes payable, net of discount......... -- 1,464 478
------- -------- --------
Total current liabilities............................... 412 11,136 26,735
------- -------- --------
NONCURRENT LIABILITIES:
Long-term notes payable, net of discount.................. -- 1,876 217,755
Other noncurrent liabilities.............................. -- 42 1,286
------- -------- --------
Total noncurrent liabilities............................ -- 1,918 219,041
------- -------- --------
Total liabilities....................................... 412 13,054 245,776
------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY:
Series A preferred stock, no par value:
Authorized shares -- 5,250,000
Issued and outstanding shares -- 4,255,730 at December 31,
1998, and 4,261,730 at both December 31, 1999, and March
31, 2000................................................ 2,078 2,079 2,079
Series B preferred stock, no par value:
Authorized shares -- 24,500,000
Issued and outstanding shares -- 0 at December 31, 1998,
and 24,500,000 at both December 31, 1999, and March 31,
2000.................................................... -- 12,219 12,219
Series C preferred stock, no par value:
Authorized shares -- 21,000,000
Issued and outstanding shares -- 0 at December 31, 1998
and 20,408,164 at both December 31, 1999, and March 31,
2000.................................................... -- 194,056 194,056
Common stock, no par value:
Authorized shares -- 81,000,000
Issued and outstanding shares -- 4,233,888, 13,321,793 and
13,557,555 (unaudited) at December 31, 1998 and 1999,
and March 31, 2000 respectively......................... 37 12,826 26,003
Warrants.................................................. -- 2,434 88,460
Deferred compensation..................................... -- (9,306) (19,698)
Notes receivable from stockholders........................ (8) (1,102) (1,377)
Accumulated deficit....................................... (1,631) (10,518) (22,410)
------- -------- --------
Total stockholders' equity.............................. 476 202,688 279,332
------- -------- --------
Total liabilities and stockholders' equity.............. $ 888 $215,742 $525,108
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 121
COLO.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997,
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED ENDED
PERIOD FROM INCEPTION DECEMBER 31, MARCH 31,
(APRIL 2, 1997) TO ----------------- ------------------
DECEMBER 31, 1997 1998 1999 1999 2000
--------------------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE......................................... $ 31 $ 190 $ 218 $ 55 $ 192
------ ------- ------- ------- --------
OPERATING COSTS AND EXPENSES:
Cost of revenue............................... 92 342 762 164 3,521
Selling, general, and administrative.......... 14 1,388 6,526 409 5,464
Deferred compensation......................... -- -- 1,248 -- 2,258
Depreciation and amortization................. 2 10 139 50 561
Loss on lease and leasehold improvements...... -- -- 921 610 --
------ ------- ------- ------- --------
Total operating costs and expenses.......... 108 1,740 9,596 1,233 11,804
------ ------- ------- ------- --------
Loss from operations........................ (77) (1,550) (9,378) (1,178) (11,612)
INTEREST INCOME................................. -- 7 491 2 2,659
INTEREST EXPENSE................................ (1) (10) -- -- (2,939)
------ ------- ------- ------- --------
Net loss........................................ $ (78) $(1,553) $(8,887) $(1,176) $(11,892)
====== ======= ======= ======= ========
PER SHARE INFORMATION:
Net loss per common share: basic and
diluted..................................... $(0.03) $ (0.28) $ (1.86) $ (0.26) $ (1.49)
====== ======= ======= ======= ========
Common shares used in computing per share
amounts: basic and diluted.................... 2,612 5,554 4,771 4,461 7,985
====== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 122
COLO.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997,
FOR THE YEARS ENDED DECEMBER 31, 1998, AND 1999, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C COMMON STOCK
------------------ -------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
--------- ------ ---------- ------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 2, 1997..... -- $ -- -- $ -- -- $ -- -- $ -- $ --
Issuance of common stock
for cash and services... -- -- -- -- -- -- 5,050,000 53 --
Net loss for period....... -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- ---------- -------- ---------- ------- -------
BALANCE, DECEMBER 31,
1997...................... -- -- -- -- -- -- 5,050,000 53 --
Issuance of Series A
preferred stock for cash
and services, net of
issuance costs.......... 4,255,730 2,078 -- -- -- -- -- -- --
Issuance of common stock
in exchange for
stockholder notes and
cash.................... -- -- -- -- -- -- 3,755,000 188 --
Repurchase of common
stock................... -- -- -- -- -- -- (4,571,112) (204) --
Net loss for year......... -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- ---------- -------- ---------- ------- -------
BALANCE, DECEMBER 31,
1998...................... 4,255,730 2,078 -- -- -- -- 4,233,888 37 --
Issuance of Series A
preferred stock for
cash, net of issuance
costs................... 6,000 1 -- -- -- -- -- -- --
Issuance of Series B
preferred stock for
cash, net of issuance
costs................... -- -- 24,500,000 12,219 -- -- -- -- --
Issuance of Series C
preferred stock for cash
and debt repayment, net
of issuance costs....... -- -- -- -- 20,408,164 194,056 -- -- --
Issuance of common stock
for cash and services... -- -- -- -- -- -- 284,366 999 --
Value assigned to issued
warrants................ -- -- -- -- -- -- -- -- 2,434
Exercise of employee stock
options for stockholder
notes and cash.......... -- -- -- -- -- -- 9,785,368 1,285 --
<CAPTION>
NOTES
RECEIVABLE ACCUMU-
DEFERRED FROM LATED EQUITY
COMPENSATION STOCKHOLDERS DEFICIT (DEFICIT)
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
BALANCE, APRIL 2, 1997..... $ -- $ -- $ -- $ --
Issuance of common stock
for cash and services... -- -- -- 53
Net loss for period....... -- -- (78) (78)
-------- ------ -------- --------
BALANCE, DECEMBER 31,
1997...................... -- -- (78) (25)
Issuance of Series A
preferred stock for cash
and services, net of
issuance costs.......... -- -- -- 2,078
Issuance of common stock
in exchange for
stockholder notes and
cash.................... -- (182) -- 6
Repurchase of common
stock................... -- 174 -- (30)
Net loss for year......... -- -- (1,553) (1,553)
-------- ------ -------- --------
BALANCE, DECEMBER 31,
1998...................... -- (8) (1,631) 476
Issuance of Series A
preferred stock for
cash, net of issuance
costs................... -- -- -- 1
Issuance of Series B
preferred stock for
cash, net of issuance
costs................... -- -- -- 12,219
Issuance of Series C
preferred stock for cash
and debt repayment, net
of issuance costs....... -- -- -- 194,056
Issuance of common stock
for cash and services... -- -- -- 999
Value assigned to issued
warrants................ -- -- -- 2,434
Exercise of employee stock
options for stockholder
notes and cash.......... -- (1,143) -- 142
</TABLE>
F-5
<PAGE> 123
COLO.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997,
FOR THE YEARS ENDED DECEMBER 31, 1998, AND 1999, AND
FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES B SERIES C COMMON STOCK
------------------ -------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT WARRANTS
--------- ------ ---------- ------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Recognition of deferred
compensation............ -- -- -- -- -- -- -- 10,554 --
Deferred compensation..... -- -- -- -- -- -- -- -- --
Repurchase of common
stock................... -- -- -- -- -- -- (981,829) (49) --
Net loss for year......... -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- ---------- -------- ---------- ------- -------
BALANCE, DECEMBER 31,
1999...................... 4,261,730 2,079 24,500,000 12,219 20,408,164 194,056 13,321,793 12,826 2,434
Value assigned to issued
warrants (unaudited).... -- -- -- -- -- -- -- -- 86,176
Warrants exercised
(unaudited)............. -- -- -- -- -- -- 90,345 200 (150)
Exercise of employee stock
options for stockholder
notes and cash
(unaudited)............. -- -- -- -- -- -- 210,000 330 --
Payment of stockholder
note.................... -- -- -- -- -- -- -- -- --
Recognition of deferred
compensation
(unaudited)............. -- -- -- -- -- -- -- 12,650 --
Deferred compensation
(unaudited)............. -- -- -- -- -- -- -- -- --
Repurchase of common stock
(unaudited)............. -- -- -- -- -- -- (64,583) (3) --
Net loss for period
(unaudited)............. -- -- -- -- -- -- -- -- --
--------- ------ ---------- ------- ---------- -------- ---------- ------- -------
BALANCE, MARCH 31, 2000
(unaudited)............... 4,261,730 $2,079 24,500,000 $12,219 20,408,164 $194,056 13,557,555 $26,003 $88,460
========= ====== ========== ======= ========== ======== ========== ======= =======
<CAPTION>
NOTES
RECEIVABLE ACCUMU-
DEFERRED FROM LATED EQUITY
COMPENSATION STOCKHOLDERS DEFICIT (DEFICIT)
------------ ------------ -------- ---------
<S> <C> <C> <C> <C>
Recognition of deferred
compensation............ (10,554) -- -- --
Deferred compensation..... 1,248 -- -- 1,248
Repurchase of common
stock................... -- 49 -- --
Net loss for year......... -- (8,887) (8,887)
-------- ------- -------- --------
BALANCE, DECEMBER 31,
1999...................... (9,306) (1,102) (10,518) 202,688
Value assigned to issued
warrants (unaudited).... -- -- -- 86,176
Warrants exercised
(unaudited)............. -- -- -- 50
Exercise of employee stock
options for stockholder
notes and cash
(unaudited)............. -- (328) -- 2
Payment of stockholder
note.................... -- 53 -- 53
Recognition of deferred
compensation
(unaudited)............. (12,650) -- -- --
Deferred compensation
(unaudited)............. 2,258 -- -- 2,258
Repurchase of common stock
(unaudited)............. -- -- -- (3)
Net loss for period
(unaudited)............. -- -- (11,892) (11,892)
-------- ------- -------- --------
BALANCE, MARCH 31, 2000
(unaudited)............... $(19,698) $(1,377) $(22,410) $279,332
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 124
COLO.COM AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (APRIL 2, 1997) TO DECEMBER 31, 1997,
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999, AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND 2000 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
INCEPTION YEAR ENDED ENDED
(APRIL 2, 1997) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------ ------------------
1997 1998 1999 1999 2000
------------------ ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(78) $(1,553) $ (8,887) $(1,176) $(11,892)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 2 10 139 50 561
Amortization of warrants.............................. -- -- -- -- 338
Loss on disposal of fixed assets...................... -- -- 465 465 --
Deferred compensation................................. -- 1,248 -- 2,258
Cost of revenues relating to warrants................. -- -- -- -- 2,294
Series A preferred stock exchanged for services....... -- 116 -- -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................ (9) (33) 14 3 (494)
Prepaids and other current assets................... -- (177) (527) 178 (1,478)
Deposits and other noncurrent assets................ -- (36) (955) 32 (209)
Accounts payable.................................... 7 256 110 (155) 886
Other noncurrent liabilities........................ -- -- 42 -- 1,170
Accrued liabilities................................. 12 137 612 118 1,634
---- ------- -------- ------- --------
Net cash used in operating activities............. (66) (1,280) (7,739) (485) (4,932)
---- ------- -------- ------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Additions to property and equipment, net................ (71) (436) (12,430) (73) (35,734)
Increase in accounts payable related to construction
activities............................................ -- -- 2,598 -- 17,577
Restricted investments.................................. -- -- -- -- (77,729)
Increase in restricted cash and cash equivalents........ -- -- (2,162) -- (1,603)
---- ------- -------- ------- --------
Net cash used in investing activities............. (71) (436) (11,994) (73) (97,489)
---- ------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable................. 119 41 9,729 497 290,508
Interest payable........................................ -- -- -- -- 2,502
Repayments of notes payable............................. -- (160) (3,643) -- (2,153)
Proceeds from sale of common stock...................... 53 6 205 17 --
Payment of stockholder note............................. -- -- -- -- 53
Warrants and options exercised.......................... -- -- -- -- 52
Proceeds from issuance of Series A preferred stock,
net................................................... -- 1,962 1 1 --
Proceeds from issuance of Series B preferred stock,
net................................................... -- -- 12,219 -- --
Proceeds from issuance of Series C preferred stock,
net................................................... -- -- 199,496 -- --
Preferred stock issuance costs paid..................... -- -- -- -- (5,940)
Repurchase of common stock.............................. -- (30) -- -- (3)
---- ------- -------- ------- --------
Net cash provided by financing activities......... 172 1,819 218,007 515 285,019
---- ------- -------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 35 103 198,274 (43) 182,598
CASH AND CASH EQUIVALENTS:
Beginning of period..................................... -- 35 138 138 198,412
---- ------- -------- ------- --------
End of period........................................... $ 35 $ 138 $198,412 $ 95 $381,010
==== ======= ======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 1 $ 10 $ 63 $ -- $ 106
Notes issued for purchase of common stock............... -- 182 1,143 -- 328
Repurchase of common stock in exchange for stockholder
notes................................................. -- 174 49 -- --
Stock issued for assets and services.................... -- -- 936 -- --
Value assigned to warrants.............................. -- -- 2,434 -- 86,176
Warrants exercised...................................... -- -- -- -- 150
Deferred compensation................................... -- -- 10,554 -- 12,650
Issuance of Series C preferred stock in lieu of debt
repayment............................................. -- -- 500 -- --
Amortization of debt discount included in capitalized
interest.............................................. -- -- 874 -- 591
Accrued preferred stock issuance costs.................. -- -- 5,940 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 125
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
1. NATURE OF BUSINESS:
COLO.COM, formerly Colomotion, Inc., was incorporated on April 2, 1997, in
the state of California. As of March 31, 2000, COLO.COM had two wholly owned
subsidiaries. COLO.COM Limited, was incorporated in the United Kingdom on
November 12, 1999. COLO.COM GmbH was incorporated in Germany on February 9,
2000. The Company, which includes COLO.COM, COLO.COM Limited and COLO.COM GmbH,
is a rapidly growing provider of colocation facilities in which communications
services companies can house their equipment and connect to network providers.
The Company's target customers are Internet-based businesses, application
service providers, Internet service providers, competitive local phone companies
and other voice and data communications companies. The facilities, known as
Neutral Optical Hubs, will offer target customers a capital-efficient means to
rapidly deploy their networks and applications. As of December 31, 1999, the
Company operated one such Neutral Optical Hub in which revenue was generated. As
of March 31, 2000, the Company had four Neutral Optical Hubs in which revenue
was generated. The Company intends to make its facilities available in many
domestic and international locations. The facilities are planned to provide
flexible access to multiple communications carriers, allowing customers the
opportunity to select a network provider. The facilities will also have
technologically advanced systems designed to provide uninterrupted electric
power availability, temperature and humidity control, physical security and
environmental safety, and on-site services provided by a staff of
telecommunication and Internet-trained technicians.
The Company is a start-up company in a new and rapidly evolving market. Its
success, in part, depends on its ability to generate additional financing, grow
its customer base, and manage its relations with the companies that provide
connectivity to its Neutral Optical Hubs. The Company's success also depends on
its ability to effectively manage growth, develop Neutral Optical Hubs
worldwide, penetrate additional international markets, and profitably charge for
its services. Additional risks include actual and potential competition from
larger, existing service providers and carriers as well as new market entrants,
changes in technology, evolving industry standards, development of an effective
strategy to secure market acceptance for the Company's services, and retention
of qualified personnel.
The Company incurred a loss of $8,887,000 and $11,892,000 (unaudited) for
the year ended December 31, 1999, and for the three months ended March 31, 2000,
respectively, and had an accumulated deficit at March 31, 2000, of $22,410,000
(unaudited). The Company expects to make significant capital expenditures and to
continue to incur significant losses in the foreseeable future. Management
believes that the Company will be successful in obtaining adequate sources of
cash to fund its anticipated operating losses, capital expenditures, and
interest expense through the end of 2000 and to follow through with plans for
growth and expansion. There can be no assurance that management will be
successful in carrying out its plans. If the risks listed above cannot be
managed in a timely manner, the Company's operations may be adversely affected.
2. SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements as of March 31, 2000, and for
the three months ended March 31, 1999 and 2000, are unaudited, and certain
information and footnote
F-8
<PAGE> 126
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim financial statements have been included.
The results of operations for the interim periods are not indicative of the
results for the entire fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of COLO.COM and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated in the consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current reporting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
Through December 31, 1999, all revenue has been generated from the
Company's first facility in San Francisco (Mission Street). In the first three
months of 2000, revenue has been generated from four of the Company's Neutral
Optical Hubs. The Company enters into contracts with its customers for services
and use of cabinet and cage space at the Company's Neutral Optical Hubs. These
contracts typically have terms between one and ten years, with varying renewal
periods. The Company's revenue consists primarily of monthly payments for use of
cabinet and cage space in the Company's Neutral Optical Hubs, payments for
customer connections to communications carriers, and payments for installation
and technical support services. Generally, the Company bills the customer at the
beginning of the month for the subsequent month's rent. Any advance collections
are deferred and recognized on a straight-line basis over the period in which
service is provided. Revenue for services other than installation is recognized
as the services are provided.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. As of January 1,
2000, the Company began to recognize installation revenue over the life of a
customer contract. The cost associated with customer installation and other
services is expensed as incurred. There is no material impact on prior years'
statements.
F-9
<PAGE> 127
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
SIGNIFICANT CUSTOMERS
The Company earned approximately 34 percent, 31 percent and 11 percent of
its revenue from sales made to its three largest customers during the year ended
December 31, 1998. The Company earned approximately 56 percent, 23 percent and
11 percent of its revenue from sales made to its three largest customers during
the year ended December 31, 1999. The Company earned approximately 28 percent,
19 percent and 18 percent of its revenues compared to 61 percent, 18 percent and
5 percent of its revenues for sales made to its three largest customers during
the three months ended March 31, 1999 and 2000, respectively (unaudited).
DEFERRED RENT
The Company has certain leases that contain fixed escalations of the
minimum annual lease payments during the original term of the lease. The Company
recognizes occupancy expense on a straight-line basis, recording the difference
between the rental amount charged to expense and the amount payable under the
lease as a deferred rent liability. Amounts are included in other noncurrent
liabilities.
CONCENTRATION OF CREDIT RISK
Financial instruments that may potentially subject the Company to
concentration of credit risk consist principally of cash, short term securities
and accounts receivable. All cash is with financial institutions with strong
credit ratings, which minimizes the risk of loss due to nonpayment. The Company
has not experienced any losses due to credit impairment related to its financial
instruments. The collection of accounts receivable is subject to the credit
worthiness of the Company's customers. The Company has experienced minimal
losses due to the write-off of uncollectible accounts.
INCOME TAXES
Upon incorporation, the Company's common stockholders elected to be taxed
under the subchapter S corporation provisions of the Internal Revenue Code,
whereby stockholders are personally liable for federal income taxes on their
proportionate share of the Company's net income or loss. Effective June 26,
1998, with the issuance of Series A preferred stock, the Company became
ineligible for S corporation status. As of June 26, 1998, the Company had an
accumulated deficit of $567,000 incurred while an S corporation. The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires
the asset and liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying the applicable statutory tax rate to the
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities.
SEGMENT REPORTING
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
annual and interim
F-10
<PAGE> 128
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
reporting standards for operating segments of a company. The statement requires
disclosures of selected segment-related financial information about products,
major customers, and geographic areas. The Company has one reportable segment
because it is not organized by multiple segments for purposes of making
operating decisions or assessing performance. The Company evaluates performance,
makes operating decisions, and allocates resources based on financial data
consistent with the presentation in the accompanying consolidated financial
statements. As of December 31, 1998 and 1999 and March 31, 2000 (unaudited),
substantially all operations and assets were based in the United States.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid investments with an original maturity of three months or less to be cash
equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents represent funds set aside as
collateral for letters of credit issued under building lease agreements. The
balance consists of certificates of deposits with terms of 90 days or less.
RESTRICTED INVESTMENTS
Under the covenants of the offering of the senior notes, the Company is
required to pledge securities equal to the amount of the first four interest
payments. These securities, which consist of United States Treasury bills with
maturities near the date of each interest payment, are held by a Trustee. It is
the Company's intent to hold these investments until maturity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives, or related lease terms, if
shorter, as follows:
<TABLE>
<CAPTION>
CLASSIFICATIONS ESTIMATED USEFUL LIVES
--------------- ----------------------
<S> <C>
Computer and office furniture and
equipment.......................... 3 - 5 years
Site equipment, furniture and
fixtures........................... 5 years
Leasehold improvements............... The lesser of estimated useful lives
or term of lease
</TABLE>
LONG-LIVED ASSETS
The Company's policy is to record long-lived assets at cost, amortizing
their costs over the expected useful life of the related assets. In accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of," assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable.
F-11
<PAGE> 129
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
CONSTRUCTION IN PROGRESS
Construction in progress includes direct expenditures for the construction
of Neutral Optical Hubs and is stated at cost. Capitalized construction costs
include costs incurred under the construction contract, cabling, on-site
construction management and rent, utilities, direct costs and interest during
the construction phase. Once a Neutral Optical Hub has been constructed and is
available for its intended use, capitalized costs are depreciated at an
appropriate rate based on Company policy. Interest incurred during construction
is capitalized in accordance with SFAS No. 34, "Capitalization of Interest
Costs." Total interest capitalized to construction in progress during the year
ended December 31, 1999, and the three months ended March 31, 1999 and 2000, was
$930,000, $0 and $591,000 (unaudited), respectively.
DEFERRED FINANCING COSTS
During March 2000, the Company completed an offering of senior notes that
raised approximately $290 million (unaudited), net of issuance costs. As of
December 31, 1999, and March 31, 2000, costs of $144,000 and $9,680,000
(unaudited), respectively, have been incurred in connection with this offering.
These costs are included in other noncurrent assets in the accompanying
consolidated balance sheets. These costs are being amortized on a straight-line
basis over the life of the notes beginning in March 2000.
NET INCOME (LOSS) PER COMMON SHARE
The Company computes net income (loss) per common share in accordance with
SFAS No. 128, "Earnings Per Share," and SEC Staff Accounting Bulletin No. 98
(SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net
income (loss) per common share (Basic EPS) is computed by dividing net income
(loss) by the weighted average number of common shares outstanding excluding
shares subject to repurchase. Diluted net income (loss) per common share
(Diluted EPS) is computed by dividing net income (loss) by the weighted average
number of common shares and dilutive common share equivalents then outstanding.
Diluted EPS for all periods presented does not include the impact of stock
options, shares subject to repurchase, preferred stock, and warrants, as the
effect of their inclusion would be antidilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
The calculation of pro forma net loss per share assumes that all series of
convertible shares have been converted into common stock as of the original
issuance date.
COST OF REVENUE
Cost of revenue consists primarily of site-related employee salaries and
benefits, rental payments on the Company's Neutral Optical Hubs, payments for
equipment, connectivity charges, utilities, and other direct operating expenses.
F-12
<PAGE> 130
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
DEFERRED COMPENSATION AND STOCK EXCHANGED FOR SERVICES
The Company has elected to follow Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its employee stock options. Under APB 25, when
the exercise price of employee stock options is less than the fair market value
of the underlying stock on the date of grant, compensation expense is recorded
for the difference between fair market value and the exercise price. Expense
associated with stock-based compensation is being amortized over the vesting
period of the individual award consistent with the method described in Financial
Accounting Standards Board (FASB) Interpretation No. 28. No stock compensation
expense was recorded in 1998. The Company has recorded compensation expense of
$1,248,000 and $2,258,000 (unaudited) for the year ended December 31, 1999, and
for the three months ended March 31, 2000, respectively. All deferred
compensation relate to selling, general and administrative expense. The Company
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
The value of warrants, options or stock exchanged for services is expensed
over the period benefited. To calculate the expense, the Company uses either the
market value of the equity instrument or the value of the services, whichever is
more objectively determinable.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which provides
guidance on the capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company adopted the new standard in
1999, although the impact on the 1999 financial statements was not significant.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5 requires that all start-up costs related to new
operations must be expensed as incurred. In addition, all start-up costs that
were capitalized in the past must be written off when SOP 98-5 is adopted.
Adoption of this statement in fiscal 1999 did not have an impact on the
consolidated financial statements; all start-up costs have historically been
expensed as incurred.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards of derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Subsequently, in June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivatives and Hedging Activities -- Deferral of the Effective Date of SFAS No.
133," which amended SFAS No. 133. The Company does not currently have any
derivatives or hedges and does not expect the adoption of this standard to have
a material effect on the Company's results of operations, financial position or
cash flows.
F-13
<PAGE> 131
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31, 1998 and
1999, and March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1998 1999 2000
---- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer and office furniture and equipment....... $ 15 $ 1,487 $ 3,159
Site equipment, furniture, and fixtures........... 24 24 4,275
Leasehold improvements............................ 163 146 6,476
Construction in progress.......................... 305 11,635 35,676
---- ------- -------
507 13,292 49,586
Less: Accumulated depreciation.................... (12) (97) (553)
---- ------- -------
$495 $13,195 $49,033
==== ======= =======
</TABLE>
Depreciation and amortization expense for the period from inception (April
2, 1997) to December 31, 1997, for the years ended December 31, 1998 and 1999,
and for the three months ended March 31, 1999 and 2000, was $2,000, $10,000,
$139,000, $50,000 (unaudited) and $561,000 (unaudited), respectively.
During 1997, the Company implemented SFAS No. 121, which requires an entity
to assess the recoverability of the carrying amount of an asset if certain
events or changes in circumstances occur. During 1999, management determined
that the Company would relocate its San Francisco facility to a new site.
Consequently, the Company determined that the leasehold improvements related to
the current site were impaired and recognized a charge for impairment loss of
$449,000, which is included in loss on lease and leasehold improvements in the
accompanying consolidated statements of operations.
ACQUISITION OF LEASE AND LEASEHOLD IMPROVEMENTS
In September 1999, the Company entered into an agreement to acquire a
colocation facility lease in Chicago and the related equipment and leasehold
improvements, which were under construction. The facility was under construction
and not yet producing revenue. A two-year noncompete agreement with the seller
was also obtained. Further, the Company agreed to utilize an affiliate of the
seller to construct five additional Neutral Optical Hubs and to pay the seller a
fee for future customer referrals. The purchase price was $500,000 plus 100,000
shares of the Company's common stock, with 50,000 issued in September 1999 and
50,000 to be issued in increments in 2000 based upon the seller achieving
certain milestones. If the milestones are not achieved by the seller, any
unissued shares will be issued by the Company on September 1, 2000, for no
additional consideration. A value of $250,000 was assigned to the common stock
issued in September 1999 and the 50,000 shares that will ultimately be issued in
2000. The Company has assigned a value of $500,000 to the leasehold improvements
in process and a $250,000 value to the noncompete covenant and other rights
obtained under the agreement. The $500,000 and $250,000 are included in property
and equipment, net, and deposits and other noncurrent assets, respectively, in
the accompanying consolidated balance sheet.
F-14
<PAGE> 132
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
4. ACCRUED LIABILITIES:
Accrued liabilities consist of the following at December 31, 1998 and 1999,
and March 31, 2000 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------ MARCH 31,
1998 1999 2000
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and payroll related expenses................. $ 20 $622 $ 820
Operating expenses and other......................... 129 139 1,575
Interest payable..................................... -- -- 2,428
---- ---- ------
$149 $761 $4,823
==== ==== ======
</TABLE>
5. INCOME TAXES:
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
The Company's primary temporary differences relate to items expensed for
financial reporting purposes but not currently deductible for income tax
purposes consisting primarily of accrued vacation, capitalized interest,
stock-based compensation expense, deferred rent, and other reserves.
As of December 31, 1999, the Company had a tax net operating loss (NOL)
carryforward of approximately $8,157,000 for both federal and California state
income tax purposes. The federal NOL begins to expire in 2018, and the
California NOL begins to expire in 2005. A significant change in ownership of
the Company may limit the Company's ability to use these NOL carryforwards. SFAS
No. 109 requires that the tax benefit of such net operating loss be recorded as
an asset. At December 31, 1999, the Company had gross deferred tax assets of
approximately $3,432,000 related to the NOL, tax credits, and miscellaneous
temporary differences. The Company has recorded a full valuation allowance of
$3,432,000 at December 31, 1999, due to uncertainties surrounding the
realizability of the deferred tax asset.
6. NOTES PAYABLE:
In March 2000, the Company issued $300,000,000 of Senior Notes and 300,000
warrants to purchase 5,991,540 shares of the Company's Common Stock (the Senior
Notes) at $.01 per share. The Senior Notes mature on March 15, 2010 and bear
interest at 13 7/8% per annum. Interest on the Senior Notes will be payable
semiannually on March 15 and September 15 of each year. Approximately $9,680,000
of costs were incurred in connection with this offering. These deferred
financing costs are included in other non current assets in the accompanying
consolidated balance sheets and are being amortized on a straight-line basis
over the life of the notes beginning in March 2000. The Senior Notes indenture
restricts, among other things, the Company's ability to incur additional debt
and the use of proceeds of such additional debt, pay dividends or make certain
other restricted payments, incur certain liens to secure debt or engage in
certain merger transactions. In the event of a change of control as defined in
the indenture agreement, each note-holder will have the right to require that
the
F-15
<PAGE> 133
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
Company repurchase the notes at a price equal to 101% of the principal amount,
plus accrued and unpaid interest. The covenants of the Senior Notes require the
Company to pledge investments equal to the first four interest payments due by
the Company. These securities are included in restricted investments in the
accompanying consolidated balance sheets. The warrants are exercisable any time
on or after the earliest to occur of (a) 180 days after the closing date of the
Company's initial public offering or (b) the first anniversary of the warrant
issuance date. A value of $83,881,560 was assigned to these warrants.
In October 1999, the Company entered into a loan agreement (the Comdisco
Loan Agreement) with Comdisco, Inc. (Comdisco). The Comdisco Loan Agreement
provides financing for up to $7 million for construction costs and equipment at
the Company's Chicago, Illinois, and Emeryville, California, sites. The
commitment for this financing terminates on August 31, 2000. Individual notes
bear interest at a rate of 8.25 percent per annum and are repayable in 42
monthly installments plus a final payment of 15 percent of the original advance.
The Comdisco Loan Agreement includes a prepayment option available after 12
months with a premium equal to 1 percent of the unpaid principal plus the
present value of the final payment. Comdisco's security interest includes all
tangible and intangible assets relating to the specific facilities funded by the
lender. The agreement contains restrictive covenants including limitations on
future acquisitions or the payment of dividends or stock purchases. As part of
the Comdisco Loan Agreement, the Company granted Comdisco warrants to purchase
73,976 shares of the Company's Series C preferred stock at an exercise price of
$7.57 per share. The warrants are exercisable from the date of grant and expire
10 years after this date. A value of $548,000 was assigned to these warrants. In
November 1999, the Company borrowed $2.4 million under the Comdisco Loan
Agreement. As of December 31, 1999, and March 31, 2000, $2.3 million and $2.2
million (unaudited), respectively, was outstanding. Comdisco is also a holder of
Series C preferred stock.
In November 1999, the Company entered into a loan agreement (the MMC Loan
Agreement) with MMC/GATX Partnership (MMC) and other lenders (Others). The MMC
Loan Agreement provides financing of up to $17 million for eligible construction
costs and equipment at the Company's Los Angeles, California, and Vienna,
Virginia, sites. The commitment for this financing terminates on December 31,
2001. Individual notes bear interest at a per annum rate equal to the sum of the
applicable U.S. Treasury note yield to maturity plus 3.93 percent. These notes
are repayable in 42 equal monthly installments plus a final payment of 10
percent of the original advance. MMC's security interest includes substantially
all tangible and intangible assets relating to the specific facilities funded by
the lenders. The MMC Loan Agreement includes a prepayment option declining from
10 percent to 2 percent of the unpaid principal over the loan period plus the
present value of the final payment. The agreement contains restrictive covenants
including limitations on future acquisitions or the payment of dividends or
stock purchases. As part of the MMC Loan Agreement, the Company granted MMC and
Others warrants to purchase 227,697 shares of the Company's Series C preferred
stock at an exercise price of $6.44 per share. The warrants are exercisable from
the date of grant and expire 10 years after this date. A value of $1.7 million
was assigned to these warrants. In December 1999, the Company borrowed $1.3
million under the MMC Loan Agreement. As of December 31, 1999, and March 31,
2000, $1.3 million and $1.2 million (unaudited), respectively, was outstanding.
In November 1999, the Company entered into a one-year Revolving Line of
Credit Agreement (Revolver) with a bank. The Revolver provides credit of up to
$2 million, including
F-16
<PAGE> 134
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
amounts outstanding under letters of credit. Advances bear interest at a rate
equal to the prime rate plus 1.25 percent per annum. The borrowings are secured
by substantially all personal property of the Company, including accounts
receivable, deposit accounts, inventory, and intellectual property other than
assets pledged to the Company's other lenders. The agreement contains
restrictive covenants including limitations on future acquisitions or the
payment of dividends or stock purchases. Additionally, the agreement contains
covenants requiring certain minimum quarterly consolidated revenue amounts. As
part of the Revolver, the Company entered into a stock purchase agreement giving
the bank the right to purchase 24,845 shares of the Company's common stock at a
price of $2.00 per share. A value of $150,000 was assigned to these stock
purchase rights. In December 1999, the Company borrowed $2 million under the
Revolver. In March 2000, the Revolver was paid in full and cancelled
(unaudited).
The value assigned to the above warrants or options was calculated using
the Black-Scholes pricing model with the following assumptions: a risk-free
weighted average interest rate of 6.0 percent, expected dividend yield of 0
percent, the expected lives of four to seven years from the date of the grant,
and an expected volatility of 70 percent. This amount is accounted for as a
discount on the related note and is being amortized as interest expense ratably
over either the life of the commitment period of the credit facility or the life
of the Senior Notes (10 to 120 months).
In December 1999, the Company entered into a loan agreement (the Lighthouse
Loan Agreement) with Lighthouse Capital Partners (Lighthouse). The Lighthouse
Loan Agreement provides bridge financing of up to $6 million. Notes issued bear
interest at a rate of 10 percent per annum and mature on January 31, 2000. The
agreement contains covenants including limitations on future investments or loan
agreements. As part of the Lighthouse Loan Agreement, the Company entered into a
stock purchase agreement whereby Lighthouse purchased 91,429 shares of the
Company's common stock at a price of $0.50 per share. In December 1999, the
Company borrowed $4 million under the Lighthouse Loan Agreement. This note was
repaid on December 30, 1999, with cash of $3.5 million and the issuance of
51,020 shares of Series C preferred stock at a value $9.80 per share. The
differences between the fair value of the common stock used for accounting
purposes and the purchase price of $0.50 was $686,000 and was accounted for as a
discount on the related note and was fully amortized in 1999 upon the repayment
of the note. Lighthouse is also a holder of Series C preferred stock.
The unamortized portion of the value assigned to warrants issued in
connection with the above notes payable agreements is recorded as a discount to
the related note payable.
F-17
<PAGE> 135
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
As of December 31, 1999 and March 31, 2000 (unaudited), the payments due on
long-term debt for the next five years and thereafter were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
YEAR ENDING 1999 2000
----------- ------------ ----------
<S> <C> <C>
2000........................................... $ 2,829 $ 676
2001........................................... 996 996
2002........................................... 1,103 1,103
2003........................................... 658 658
Thereafter..................................... -- 300,000
------- --------
Total notes payable.......................... 5,586 303,433
Less: Discount related to warrants, net of
amortization................................. (2,246) (85,200)
------- --------
Total notes payable, net of discount......... 3,340 218,233
Less: Current portion of notes payable, net of
discount..................................... (1,464) (478)
------- --------
Long term notes payable, net of discount..... $ 1,876 $217,755
======= ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES:
FACILITY OPERATING LEASES
The Company is committed under long-term operating leases for various
facilities expiring at various dates through 2014 with varying renewal options
and escalating rent clauses. The Company generally pays for real estate taxes,
insurance, and specified maintenance costs under real property leases. The
minimum rental commitments under these lease agreements as of December 31, 1999,
are as follows:
<TABLE>
<CAPTION>
LEASED
YEAR ENDING DECEMBER 31, FACILITIES
------------------------ --------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 6,686
2001........................................................ 7,420
2002........................................................ 7,570
2003........................................................ 7,703
2004........................................................ 7,476
Thereafter.................................................. 47,990
-------
$84,845
=======
</TABLE>
Rent expense, net of amounts capitalized to construction in progress, for
the period from inception (April 2, 1997) to December 31, 1997, and for the
years ended December 31, 1998 and 1999 (excluding the expansion site abandoned
in 1999), and for the three months ended March 31, 1999 and 2000, was
approximately $26,000, $121,000, $338,000, $14,000 (unaudited) and $388,000
(unaudited), respectively. These amounts are included in operating expenses in
the accompanying statements of operations.
F-18
<PAGE> 136
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
PURCHASE COMMITMENTS
The Company has entered into certain capital expenditure commitments
associated with construction of future facilities and equipment purchases. As of
December 31, 1999, and March 31, 2000, purchase commitments were $42 million and
$53 million (unaudited), respectively, excluding the commitments described in
Note 8.
CARRIER COMMITMENTS
To attract carriers to connect to our facilities, the Company plans to
place circuit orders with up to three carriers prior to completing construction
of a facility. These orders generally require the Company to pay an installation
fee and a minimum monthly charge for periods anticipated to be approximately one
to three years. As of March 31, 2000, the Company had placed orders with
multiple carriers to connect to six facilities.
As of March 31, 2000, the Company had the following commitments associated
with these contracts:
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------
(UNAUDITED)
<S> <C>
2000........................................................ $ 910
2001........................................................ 1,468
2002........................................................ 1,407
2003........................................................ 610
------
$4,395
======
</TABLE>
The table above excludes amounts payable under month to month carrier
commitments. As customers connect to carriers, it is anticipated that the
related monthly charges will be assigned to the customers, thereby reducing the
Company's obligation.
ABANDONED LEASES
In 1998, the Company leased its original San Francisco facility and an
adjacent expansion site under operating leases with original expiration dates in
1999 and 2007, respectively.
In the first quarter of 1999, management determined that the original
facility and the expansion site adjacent to the San Francisco facility would not
be used, and thus it was anticipated that the lease would be terminated. On
October 5, 1999, the Company entered into an agreement to terminate its
expansion site lease whereby the Company paid the owner approximately $286,000
and forfeited its security deposit. Additionally, the Company wrote off rent
that was prepaid through August and paid certain legal costs associated with
terminating the lease. For the year ended December 31, 1999, the Company has
recorded a $472,000 provision for loss associated with terminating the lease.
This provision is included in loss on lease and leasehold improvements in the
accompanying consolidated statements of operations.
F-19
<PAGE> 137
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
8. TRANSACTIONS WITH PREFERRED STOCK INVESTORS:
AGREEMENT WITH NEXTLINK
In December 1999, the Company entered into a Definitive Agreement and
Warrant (the NEXTLINK Agreement) with NEXTLINK Communications, Inc. (NEXTLINK).
Among other items, the NEXTLINK Agreement specifies a minimum number of
facilities the Company must open by December 31, 2001, and provides for the
connection of NEXTLINK's network at up to 20 of the Company's Neutral Optical
Hubs within two years. As part of the NEXTLINK Agreement, the Company granted
NEXTLINK a warrant to purchase up to 300,000 shares of the Company's Series C
preferred stock at an exercise price of $10.00 per share. The warrants are
issued in increments of 30,000 for up to 10 facilities. The warrants become
exercisable when specific performance measures in the first quarter of 2000 are
achieved and expire five years from the warrant issuance. As of December 31,
1999, measurement dates had not yet occurred, and no warrants had been earned.
In the first quarter of 2000, NEXTLINK met the performance measures of
initiating connections into 10 facilities and earned the warrants to purchase
300,000 shares of the Company's Series C Preferred stock. The value associated
with these warrants of $2,294,000 was included in cost of revenues in the three
months ended March 31, 2000 (unaudited).
This agreement also provides NEXTLINK with available space provisions at
the Company's Neutral Optical Hubs and grants NEXTLINK certain rental rights.
The terms of the agreement are for five years and provide NEXTLINK with two
five-year renewal options.
The value assigned to the above warrants was calculated using the
Black-Scholes pricing model with the following assumptions: risk free interest
rate of 6.6 percent, no expected dividend yield, expected life of four years
from the grant date, and expected volatility of 70 percent.
AGREEMENT WITH MASTEC AND SKANSKA
In December 1999, the Company entered into a Project Management and
Construction Services Agreement (the Construction Agreement) with Mastec North
America, Inc. (Mastec) and Sordoni Skanska Construction Company (Skanska). The
Construction Agreement provides for the construction of 22 Neutral Optical Hubs
and the related project management at specified prices.
Skanska will perform the construction work, and Mastec will provide project
management services. Management estimates the Company's obligation under this
agreement to be approximately $120 million, depending on the building
specifications. Mastec and Skanska are holders of Series C preferred stock.
AGREEMENT WITH NORTEL
In December 1999, the Company entered into a Strategic Alliance Agreement
with Nortel Networks, Inc. (Nortel). The agreement requires the Company to
purchase Nortel equipment in an amount of no less than $5 million before
December 31, 2001, and gives Nortel the right of first refusal on a percentage
of space in future Neutral Optical Hubs. Contemporaneous with the execution of
the Strategic Alliance Agreement, Nortel purchased Series C preferred stock.
F-20
<PAGE> 138
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
9. STOCKHOLDERS' EQUITY:
The Company's amended and restated articles of incorporation allow for the
issuance of 81,000,000 shares of common stock, 5,250,000 shares of Series A
preferred stock (Series A Stock), 24,500,000 shares of Series B preferred stock
(Series B Stock), and 21,000,000 shares of Series C preferred stock (Series C
Stock).
COMMON STOCK
The holders of common stock are entitled to one vote per share. Subject to
preferences on outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors. In the event of a liquidation, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock.
Certain holders of common stock have entered into repurchase agreements
allowing the Company the exclusive option to repurchase the unreleased shares as
defined in the stock purchase agreement in the event of termination of the
stockholder's employment with the Company. The repurchase option extends for 90
days after termination and grants the right to the Company to repurchase the
shares at the original purchase price per share. The number of shares subject to
repurchase is reduced over a four-year vesting period. The Company has the right
to repurchase 88,889, 35,556 and 22,224 (unaudited) unreleased shares as of
December 31, 1998 and 1999, and March 31, 2000, respectively, at the stock
issuance price if the holders' service with the Company terminates.
For the year ended December 31, 1999, the Company issued 9,785,368 shares
of common stock as a result of the exercise of stock options and repurchased
981,829 shares (see Note 11). The Company has the right to repurchase 7,551,976
unvested shares as of December 31, 1999, at the stock issuance price if the
holders' service with the Company terminates
PREFERRED STOCK
Significant rights and preferences attaching to the Series A Stock are as
follows:
DIVIDENDS -- The holders of Series A Stock are entitled, when and if
declared by the Board of Directors, to receive noncumulative dividends out
of the remaining assets of the Company after payment of liabilities,
payable in preference and priority to any dividend to common stockholders,
at the rate of $0.04 per share per annum. To date, no dividends have been
declared by the Board of Directors.
PREFERENCE IN LIQUIDATION -- In the event of any liquidation, dissolution,
or winding up of the Company, the holders of Series A Stock are entitled to
receive, prior and in preference to any distribution of any assets or
surplus funds to the holders of common stock, an amount equal to $0.50 per
share plus a further amount equal to any dividends declared but unpaid on
such shares.
VOTING RIGHTS -- The holders of Series A Stock are entitled to the number
of votes equal to the number of shares of common stock into which each
share of preferred stock is convertible on the record date for the vote.
F-21
<PAGE> 139
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
CONVERSION -- Each share of Series A Stock is convertible, at the option of
the holder, into the number of fully paid and nonassessable shares of
common stock on a one-for-one basis, subject to certain adjustments. All
preferred stock will convert upon the closing of a public offering of the
Company's common stock in which the public offering price equals or exceeds
$15.00 per share and the aggregate proceeds raised equal or exceed $40
million.
During 1998, the Company issued 231,000 shares of Series A Stock to individuals
at no cost in exchange for services. The value of $116,000 was assigned to the
stock and has been expensed as selling, general, and administrative expenses in
the accompanying statements of operations.
SERIES B PREFERRED STOCK
In April 1999, the Company issued 24,500,000 shares of Series B Stock at
$0.50 per share. The sale of Series B Stock raised $12,219,000, net of issuance
costs. The Series B Stock has essentially the same rights and preferences as the
Series A Stock.
SERIES C PREFERRED STOCK
In December 1999, the Company issued 20,408,164 shares of Series C Stock at
$9.80 per share. The sale of Series C Stock raised $194,056,000, net of issuance
costs.
The Series C Stock has essentially the same rights and preferences as the
Series A Stock, except that (1) dividends are payable at a rate of $0.784 per
share per annum and (2) in the event of any liquidation, dissolution, or winding
up of the Company, the holders of Series C Stock are entitled to receive, prior
and in preference to any distribution of assets or surplus funds to the holders
of Series A Stock, Series B Stock or common stock an amount equal to $9.80 per
share plus a further amount equal to any dividends declared but unpaid on such
shares.
NOTES RECEIVABLE FROM STOCKHOLDERS
The Company has implemented a program under which directors, officers, and
a number of key employees are permitted to exercise their outstanding options as
to both the vested and unvested shares. The Company has the right to repurchase
any unvested shares at the original option price in the event of termination of
employment prior to vesting of all shares. Under this program, the participants
paid the exercise price for their outstanding options through a full-recourse
promissory note. These notes bear interest at a rate of 6.2 percent per annum
and are due and payable on the earlier of termination of employment or on
various dates beginning in November 2003.
As of December 31, 1998 and 1999, and March 31, 2000 (unaudited), there
were one stockholder, fifteen stockholders and seventeen stockholders,
respectively, with loans outstanding. Stockholder loans are classified as a
contra account within stockholders' equity.
10. WARRANTS TO PURCHASE STOCK:
In conjunction with the issuance of Series A Stock in March 1998, the
Company issued warrants to purchase 545,500 shares of the Company's common stock
at an exercise price of
F-22
<PAGE> 140
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
$0.05 per share to certain individuals involved in identifying Series A Stock
investors. The purchase rights under the warrants expire in March 2002 unless
terminated earlier in accordance with the stock warrant purchase agreement.
See Notes 6 and 8 for a description of Series C Stock and common stock
warrants issued to various lenders and a related party, respectively.
Warrants outstanding have the following contractual lives (in years):
<TABLE>
<CAPTION>
MARCH 31, 2000
DECEMBER 31, 1999 (UNAUDITED)
----------------------------------------- ------------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE WARRANTS REMAINING WARRANTS REMAINING
PRICE OUTSTANDING CONTRACTUAL LIFE OUTSTANDING CONTRACTUAL LIFE
-------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Common stock............ $ 0.01 -- -- 5,991,540 10.0
Common stock............ 0.05 545,500 3.2 530,000 3.0
Common stock............ 2.00 24,845 * -- --
Series C Stock.......... 7.57 73,976 9.8 73,976 9.5
Series C Stock.......... 6.44 227,679 9.8 227,679 9.6
Series C Stock.......... 10.00 300,000 5.0 300,000 4.7
--------- ---------
Total................. 1,172,000 7,123,195
========= =========
</TABLE>
-------------------------
* This warrant had no stated expiration date and was exercised during the three
months ended March 31, 2000.
All of the warrants outstanding at December 31, 1999, are exercisable
except the 300,000 Series C Stock warrants related to NEXTLINK (see Note 8). A
holder of any of the warrants described above will not be entitled to any rights
as a stockholder of the Company, including, without limitation, the right to
vote the underlying shares of preferred stock until the holder has exercised the
warrants. All of the warrants outstanding at March 31, 2000 are exercisable
except the 5,991,541 common stock warrants related to the Senior Notes
(unaudited).
11. STOCK OPTION PLAN:
The Company's 1998 Stock Option Plan (the Plan) provides for the grant of
incentive stock options and nonstatutory stock options to employees, directors,
and consultants of the Company. The Plan also allows for the issuance of stock
purchase rights and an option exchange program. As of December 31, 1999 and
March 31, 2000 (unaudited), there were no stock purchase rights outstanding and
no activity in the option exchange program. Stock options granted under the Plan
generally vest over a four-year period, with 25 percent vesting after one year
of the grant date and an additional one forty-eighth of the total number of
shares becoming exercisable on each monthly anniversary thereafter. Options
expire ten years after the grant date. The terms of the Plan allow certain
individuals to exercise their options prior to full vesting. In the event that
an individual's service to the Company terminates before his/her options become
fully vested, the Company has the right to repurchase the unvested shares at the
original option price. The maximum aggregate number of shares authorized for
options under the Plan was 3,490,000 at December 31, 1998 and 14,047,839 at both
December 31, 1999 and March 31, 2000 (unaudited).
F-23
<PAGE> 141
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
The Company accounts for stock options granted to employees and directors
under APB Opinion No. 25. For the year ended December 31, 1998, no compensation
expense was recognized. Stock-based compensation expense of $1,248,000, $0
(unaudited) and $2,258,000 (unaudited) was recognized for the year ended
December 31, 1999, and for the three months ended March 31, 1999 and 2000,
respectively.
Options issued to consultants were valued using the Black-Scholes option
pricing model consistent with SFAS No. 123. Expense is being recognized over the
vesting period of the options.
Had compensation cost for the stock options issued to employees and
directors been determined consistently with SFAS No. 123, the Company's net loss
and basic and diluted loss per share would have been changed to the following
pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
PERIOD FROM INCEPTION DECEMBER 31, MARCH 31,
(APRIL 2, 1997) TO ------------------ ---------------------
DECEMBER 31, 1997 1998 1999 1999 2000
--------------------- ------- ------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss:
As reported......... $ (78) $(1,553) $(8,887) $(1,176) $(11,892)
Pro forma........... (78) (1,554) (9,040) (1,182) (12,343)
Basic and diluted net
loss per common
share:
As reported......... $(0.03) $ (0.28) $ (1.86) (0.26) $ (1.49)
Pro forma........... (0.03) (0.28) (1.89) (0.26) (1.55)
</TABLE>
F-24
<PAGE> 142
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
A summary of the status of the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE
EXERCISE EXERCISE
OPTIONS PRICES PRICE
---------- ------------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1997........ -- $ -- $ --
Granted............................... 2,472,500 0.03 - 0.055 0.05
Exercised............................. -- -- --
Canceled.............................. -- -- --
---------- ------------- -----
Outstanding at December 31, 1998........ 2,472,500 0.03 - 0.055 0.05
Granted............................... 9,735,072 0.05 - 2.00 0.21
Exercised............................. (9,785,368) 0.03 - 1.00 0.13
Canceled.............................. (963,854) 0.05 - 0.50 0.06
---------- ------------- -----
Outstanding at December 31, 1999........ 1,458,350 0.05 - 2.00 0.54
Granted (unaudited)................... 1,629,500 2.00 - 5.00 3.63
Exercised (unaudited)................. (210,000) 0.05 - 2.00 1.57
Canceled (unaudited).................. (17,300) 0.05 - 2.00 1.00
---------- ------------- -----
Outstanding at March 31, 2000
(unaudited)........................... 2,860,550 $0.05 - 2.00 $2.22
========== ============= =====
</TABLE>
The weighted average fair value of options granted as of December 31, 1998
and 1999, and March 31, 2000, is $0.007, $1.190 and $8.42 (unaudited),
respectively.
Of the options outstanding at December 31, 1998 and 1999, and March 31,
2000, 850,000, 250,000 and 250,000 (unaudited), respectively, are vested.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998, 1999 and 2000: risk-free weighted-average
interest rates of between 4.5 and 6.5 percent, expected dividend yield of 0
percent, expected life of between three and four years from the grant date, and
expected volatility of 0 percent in 1998 and 70 percent in 1999 and 2000.
Included in the options exercised above for the year ended December 31, 1999,
was 981,829 of unvested options where the Company repurchased the stock upon the
individuals' leaving the Company.
F-25
<PAGE> 143
COLO.COM AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, AND MARCH 31, 2000 (UNAUDITED)
The options outstanding have the following contractual lives:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999 MARCH 31, 2000
------------------------------------ ------------------------------------ ---------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF REMAINING NUMBER OF REMAINING NUMBER OF REMAINING
OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE CONTRACTUAL
OUTSTANDING PRICE LIFE OUTSTANDING PRICE LIFE OUTSTANDING PRICE LIFE
----------- -------- ----------- ----------- -------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
150,000... 0.030 9.07 -- 0.030 N/A -- 0.030 --
1,472,500.. 0.050 9.76 479,000 0.050 9.58 440,000 0.050 9.33
850,000... 0.055 9.79 250,000 0.055 8.71 250,000 0.055 8.48
--........ 0.500 N/A 478,050 0.500 9.81 456,750 0.500 9.58
--........ 2.000 N/A 251,300 2.000 9.96 827,600 2.000 9.80
--........ 5.000 N/A -- 5.000 886,200 5.000 9.85
--------- --------- ---------
2,472,500.. 1,458,350 2,860,550
========= ========= =========
</TABLE>
12. 401(K) RETIREMENT PLAN:
The Company established a 401(k) retirement plan in May 1999 for which all
full-time employees are eligible after one month of employment. Pursuant to this
plan, employees may elect to reduce their current compensation by up to the
lesser of 15% of their annual compensation or the statutorily prescribed annual
limit, and to have the amount of such reduction contributed to the plan. Company
contributions to the plan are at the discretion of the Board of Directors, begin
to vest upon completion of one year of employment, and become fully vested after
five years of employment. As of both December 31, 1999 and March 31, 2000
(unaudited) the Company has not declared or paid any contributions to the plan.
13. SUBSEQUENT EVENTS:
Subsequent to March 31, 2000, the Company has formed three new
subsidiaries, COLOCOM Iberia, S.A. in Spain, COLO.COM Limited in Canada, and
COLO.COM B.V. in the Netherlands. Each of these subsidiaries are wholly owned by
the Company.
In April 2000, the Company authorized 1,724,439 shares of Series D
preferred stock. No shares have been issued.
F-26
<PAGE> 144
$300,000,000
COLO.COM
EXCHANGE OFFER FOR ALL OUTSTANDING
13 7/8% SENIOR NOTES DUE 2010
<PAGE> 145
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation and our bylaws provide for indemnification of
our directors, officers, employees and other agents to the extent and under the
circumstances permitted by the California Corporations Code.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation
3.2 Bylaws of COLO.COM
*4.1 Purchase Agreement, dated March 3, 2000, by and among
COLO.COM and Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Chase Securities Inc., Deutsche Bank Securities Inc.,
Warburg Dillon Read LLC and Jefferies & Company Inc. (as
representatives of the Purchasers)
4.2 Senior Notes Indenture by COLO.COM as Issuer and State
Street Bank and Trust Company, N.A. as Trustee, dated March
10, 2000
4.3 Registration Rights Agreement dated March 10, 2000 between
COLO.COM and Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Chase Securities Inc., Deutsche Bank Securities Inc.,
Warburg Dillon Read LLC and Jefferies & Company Inc. (as
representatives of the Purchasers)
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Amended and Restated Investors Rights Agreement dated
December 17, 1999
*10.2 1998 Incentive Stock Option Plan and forms of agreements
thereunder
10.3 Office Lease by and between COLO.COM and Hitachi America,
LTD, dated December , 1999
10.4 Office Building Net Lease by and between COLO.COM and
BEP-Emeryville, LP, dated July 16, 1999
10.5 Strategic Alliance Agreement by and between COLO.COM and
Nortel Networks Inc., dated December 23, 1999
10.6 Definitive Agreement by and between COLO.COM and NextLINK
Communications, Inc., dated December 23, 1999
10.7 Employment Agreement by and between COLO.COM and Charles
Skibo, with Addendum, dated January 25, 1999
10.8 Loan and Security Agreement by and between COLO.COM and
Comdisco, Inc., dated October 22, 1999
10.9 Loan and Security Agreement by and among COLO.COM and
MMC/GATX Partnership No. 1, Silicon Valley Bank, Venture
Lending and Leasing II, Inc., Transamerica Business Credit
Corporation and Lighthouse Capital Partners, dated November
9, 1999
</TABLE>
II-1
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.10 Retail Lease between Telehub, Inc. and Mauswerks, Inc.,
dated November 7, 1996 and related assignment by Mauswerks,
Inc. to COLO.COM dated July 8, 1997
*10.11 Office Lease by and between COLO.COM and Sierra Point One
Trust, dated June 8, 2000.
21.1 List of Subsidiaries
23.1 Consent of Arthur Andersen LLP, Independent Auditors
*23.2 Consent of Counsel (included in exhibit 5.1)
24.1 Power of Attorney (included on signature page)
*25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal
*99.2 Form of Notice of Guaranteed Delivery
</TABLE>
-------------------------
* To be filed by amendment
(b) FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 22. UNDERTAKINGS
Insofar as indemnification by COLO.COM for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of COLO.COM, 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. In the event that a
claim for indemnification against such liabilities (other than the payment by
COLO.COM of expenses incurred or paid by a director, officer or controlling
person of COLO.COM in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by COLO.COM
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
We hereby undertake:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement (1) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933, as amended (the "Act"); (2) to reflect in the prospectus any facts
or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the information set
forth in the registration statement; and (3) to include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
II-2
<PAGE> 147
(b) that, for the purpose of determining any liability under the Act,
each such post-effective amendment 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;
(c) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(d) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), COLO.COM undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition the information called for by the other items of
the applicable form; and
(e) that every prospectus (1) that is filed pursuant to paragraph d
immediately preceding, or (2) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Act, each such post-effective amendment 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-3
<PAGE> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
COLO.COM has duly caused this Registration Statement on Form S-4 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Brisbane, State of California, on the 8th day of June, 2000.
COLO.COM
By: /s/ CHARLES M. SKIBO
---------------------------------------
Charles M. Skibo
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Charles M. Skibo and Stephen I. Robertson
and each of them, his attorneys-in-fact, each with the power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same Offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto in all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, 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 he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ CHARLES M. SKIBO Chief Executive Officer and June 8, 2000
--------------------------------------------- Chairman of the Board
Charles M. Skibo (Principal Executive Officer)
/s/ STEPHEN I. ROBERTSON Chief Financial Officer (Principal June 8, 2000
--------------------------------------------- Financial and Accounting Officer)
Stephen I. Robertson
/s/ CHRISTOPHER E. CLOUSER Director June 8, 2000
---------------------------------------------
Christopher E. Clouser
/s/ YOUNG SOO HA Director June 8, 2000
---------------------------------------------
Young Soo Ha
</TABLE>
II-4
<PAGE> 149
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ JOHN W. JARVE Director June 8, 2000
---------------------------------------------
John W. Jarve
/s/ RICHARD P. NESPOLA Director June 8, 2000
---------------------------------------------
Richard P. Nespola
/s/ ARTHUR PATTERSON Director June 8, 2000
---------------------------------------------
Arthur Patterson
/s/ KIRBY G. PICKLE, JR. Director June 8, 2000
---------------------------------------------
Kirby G. Pickle, Jr.
</TABLE>
II-5
<PAGE> 150
EXHIBIT INDEX
<TABLE>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ ------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation
3.2 Bylaws of COLO.COM
*4.1 Purchase Agreement, dated March 3, 2000, by and among
COLO.COM and Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Chase Securities Inc., Deutsche Bank Securities Inc.,
Warburg Dillon Read LLC and Jefferies & Company Inc. (as
representatives of the Purchasers)
4.2 Senior Notes Indenture by COLO.COM as Issuer and State
Street Bank and Trust Company, N.A. as Trustee, dated March
10, 2000
4.3 Registration Rights Agreement dated March 10, 2000 between
COLO.COM and Goldman, Sachs & Co., Bear, Stearns & Co. Inc.,
Chase Securities Inc., Deutsche Bank Securities Inc.,
Warburg Dillon Read LLC and Jefferies & Company Inc. (as
representatives of the Purchasers)
*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 Amended and Restated Investors Rights Agreement dated
December 17, 1999
*10.2 1998 Incentive Stock Option Plan and forms of agreements
thereunder
10.3 Office Lease by and between COLO.COM and Hitachi America,
LTD, dated December , 1999
10.4 Office Building Net Lease by and between COLO.COM and
BEP-Emeryville, LP, dated July 16, 1999
10.5 Strategic Alliance Agreement by and between COLO.COM and
Nortel Networks Inc., dated December 23, 1999
10.6 Definitive Agreement by and between COLO.COM and NextLINK
Communications, Inc., dated December 23, 1999
10.7 Employment Agreement by and between COLO.COM and Charles
Skibo, with Addendum, dated January 25, 1999
10.8 Loan and Security Agreement by and between COLO.COM and
Comdisco, Inc., dated October 22, 1999
10.9 Loan and Security Agreement by and among COLO.COM and
MMC/GATX Partnership No. 1, Silicon Valley Bank, Venture
Lending and Leasing II, Inc., Transamerica Business Credit
Corporation and Lighthouse Capital Partners, dated November
9, 1999
10.10 Retail Lease between Telehub, Inc. and Mauswerks, Inc.,
dated November 7, 1996 and related assignment by Mauswerks,
Inc. to COLO.COM dated July 8, 1997
*10.11 Office Lease by and between COLO.COM and Sierra Point One
Trust, dated June 8, 2000.
21.1 List of Subsidiaries
23.1 Consent of Arthur Andersen LLP, Independent Auditors
*23.2 Consent of Counsel (included in exhibit 5.1)
24.1 Power of Attorney (included on signature page)
*25.1 Statement of Eligibility of Trustee
27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal
*99.2 Form of Notice of Guaranteed Delivery
</TABLE>
-------------------------
* To be filed by amendment
