<PAGE>
As filed with the Securities and Exchange Commission on August 31, 2000.
Registration No. 333-30684
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 3 to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
INFLOW, INC.
(Exact name of registrant as specified in its charter)
Delaware 4813 84-1439489
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation or
organization)
---------------
938 Bannock Street
Denver, CO 80204
Telephone: (303) 942-2800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Arthur H. Zeile
Chief Executive Officer
InFlow, Inc.
938 Bannock Street
Denver, CO 80204
Telephone: (303) 942-2800
Facsimile: (303) 942-2801
(Name, address, including zip code, and telephone number, including area code
of agent for service)
---------------
Copies to:
Richard R. Plumridge, Esq.
Jeff T. Harris, Esq. William F. Schwitter, Esq.
Brobeck, Phleger & Harrison LLP Jeffrey J. Pellegrino, Esq.
Paul, Hastings, Janofsky & Walker LLP
370 Interlocken Boulevard, Suite 500 399 Park Avenue
Broomfield, CO 80021 New York, NY 10022-4697
(303) 410-2000 (212) 318-6000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+The information in this prospectus is not complete and may be changed. +
+Although we are permitted by US Federal Securities law to offer these +
+securities using this prospectus, we may not sell them or accept your offer +
+to buy them until the documentation filed with the SEC relating to these +
+securities has been declared effective by the SEC. This prospectus is not an +
+offer to sell these securities or our solicitation of your offer to buy these +
+securities in any jurisdiction where that would not be permitted or legal. +
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS
, 2000
[LOGO OF INFLOW, INC.]
7,000,000 Shares of Common Stock
--------------------------------------------------------------------------------
This is our initial public offering and no public market currently exists for
our shares. We anticipate that the initial public offering price for our shares
will be between $14.00 and $16.00 per share.
We have applied to have our common stock quoted on The Nasdaq National Market
under the symbol "INFL."
The underwriters expect to deliver the shares of common stock to purchasers on
, 2000.
See "Risk Factors" beginning on page 8 to read about risks that you should
consider before purchasing any shares of our common stock.
------------------------------------------------
<TABLE>
<CAPTION>
Per Share Total
-------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees: $ $
Proceeds to InFlow, Inc.: $ $
-------------------------------------------
</TABLE>
To the extent that the underwriters sell more than 7,000,000 shares of our
common stock, the underwriters have the option to purchase an additional
1,050,000 shares of common stock from us at the initial public offering price
less the underwriting discount.
--------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
First Union Securities, Inc.
DLJdirect Inc.
<PAGE>
Front Inside Cover Gatefold
---------------------------
Page 1
[MAP OF INFLOW'S OPERATIONAL AND UNDER DEVELOPMENT SITES]
Page 2
[PICTURE OF DATA NETWORK EXCHANGE]
Page 3
[PICTURE OF DATA NETWORK EXCHANGE]
<PAGE>
The information in this prospectus is not complete and may be changed.
Although we are permitted by US Federal Securities law to offer these
securities using this prospectus, we may not sell them or accept your offer to
buy them until the documentation filed with the SEC relating to these
securities has been declared effective by the SEC. This prospectus is not an
offer to sell these securities or our solicitation of your offer to buy these
securities in any jurisdiction where that would not be permitted or legal.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 8
Forward-Looking Statements.......... 23
Trademarks.......................... 23
Use of Proceeds..................... 23
Dividend Policy..................... 23
Capitalization...................... 24
Dilution............................ 25
Selected Financial and Other Data... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business......................... 39
Management....................... 60
Related-Party Transactions....... 69
Principal Stockholders........... 73
Description of Capital Stock..... 76
Shares Eligible for Future Sale.. 79
Underwriting..................... 81
Legal Matters.................... 85
Experts.......................... 85
Where You Can Find Additional
Information..................... 85
Index to Financial Statements.... F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and the financial statements and the notes to the financial
statements, before deciding to invest in our common stock.
InFlow, Inc.
Overview
We provide colocation facilities, comprised of customized physical space and
network connections for our customers' computer equipment, along with value-
added services for their e-business and data communications applications. Our
highly secure data network exchange facilities, or DNXs, connect to multiple
communications carriers and power sources in order to minimize potential
downtime and maximize performance for our customers. We focus on providing
standard-setting quality of service to small and medium-sized businesses with
complex networking needs, an underserved market segment we believe is in need
of reliable, high-performance outsourced solutions that enable them to quickly
expand. As of June 30, 2000, we provided services to 189 customers.
We opened our first state-of-the-art DNX in Denver in July 1998. Today we
operate DNXs in 11 geographically dispersed markets across the United States as
more fully summarized in the table below.
<TABLE>
<CAPTION>
Approximate Total
Square Feet Month First
U.S. Markets Under Lease Entered Market
<S> <C> <C>
Denver 103,300 July, 1998
Minneapolis 15,900 October, 1999
Raleigh-Durham 14,400 November, 1999
San Diego 20,200 January, 2000
Austin 62,000 April, 2000
Atlanta 35,200 May, 2000
Irvine 35,100 June, 2000
Pittsburgh 24,000 June, 2000
Phoenix 39,100 July, 2000
Dallas 60,200 August, 2000
St. Louis 37,000 August, 2000
-----------------------------------------------------------------------------------
Total 446,400
</TABLE>
------------------------------------------------------------
We expect to have 15 DNXs in operation by the end of 2000 and a total of 25
DNXs by the end of 2001. Our customers benefit from the close proximity of our
DNXs to their businesses and we benefit from frequent interaction with them.
1
<PAGE>
We provide highly customized solutions through a broad range of network
connections, including high-speed Internet access and private-line services,
which offer more secure, higher-performing connections. We also offer our
customers a suite of value-added services, including the following:
<TABLE>
<CAPTION>
Value-Added
Service Solution Technology Provider
<S> <C> <C>
MonitorFlow(TM) Equipment and Application Monitoring Freshwater SiteScope
SecureFlow(TM) Managed Firewall Service for Checkpoint Firewall I
perimeter security
EvenFlow(TM) Distribution of Internet Traffic Alteon Web Systems
Among Multiple Servers
StorageFlow(TM) Managed Storage Services Managed Storage International,
CreekPath Systems
InFlowNet(TM) Direction of Internet Traffic AT&T, UUNET, Sprint, GTE
Across Muliple Internet Providers
---------------------------------------------------------------------------------------
</TABLE>
Our outsourced solutions are designed to enable our customers to quickly
establish and rapidly expand their on-line businesses, allowing them to better
focus on their core competencies and accelerate their time to market. In
addition to the performance advantages we offer, our customers also benefit
from economies of scale through the sharing of infrastructure and personnel
costs among multiple users.
We have also developed a proprietary software program, FlowTrack(TM), which
is composed of modules designed to integrate and automate our business
processes. Together with our standardized set of processes for selecting,
constructing and staffing new sites, FlowTrack(TM) allows us to rapidly and
efficiently expand and replicate our business across a broad network of DNXs.
Our objective is to be the leading provider of sophisticated services to
small and medium-sized businesses for the management of their complex e-
business and data communications applications. To achieve this objective, we
intend to:
. Rapidly expand into our target markets;
. Leverage our FlowTrack(TM) software and automated deployment processes;
. Continue to emphasize customer service;
. Enhance and cross-sell our suite of services; and
. Expand sales channels and increase brand awareness.
Our principal executive offices are located at 938 Bannock Street, Denver,
Colorado 80204. Our telephone number at that location is (303) 942-2800.
Our Web site is located at www.inflow.com. Information contained on our Web
site does not constitute part of this prospectus.
2
<PAGE>
You should rely only on the information contained in this prospectus or to
which we have referred you. We have not authorized anyone to provide you with
information that is different from that contained in this prospectus. This
prospectus may only be used where it is legal to sell these securities. The
information contained in this prospectus is only accurate as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of our common stock.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Stock offered by Inflow............................ 7,000,000 shares of voting
common stock
Common stock to be outstanding after the offering.. 65,542,101 shares
Use of proceeds.................................... We estimate that the net
proceeds to us from this
offering will be
approximately $95.7
million, or up to $110.3
million if the
underwriters exercise
their over-allotment
option. We will use the
net proceeds as follows:
. approximately $63.0
million to fund the
capital costs of
constructing DNX
facilities expected to
average approximately
$7.0 million per
facility; and
. the remainder for other
general corporate
purposes, including
working capital, product
development and
research, potential
acquisitions and
strategic investments,
and launching our
services
internationally,
including in Canada and
Europe.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............. "INFL"
</TABLE>
The number of shares of common stock to be outstanding after the offering is
based on the number of shares outstanding as of August 15, 2000. This total
includes 3,907,832 shares of our existing common stock held by First Union
Capital Partners, Inc. which will be converted into shares of our non-voting
common stock and which do not have voting rights but are convertible into and
otherwise identical to our common stock. The number of shares of common stock,
both voting and non-voting, calculated as of August 15, 2000 excludes:
. 7,646,665 shares reserved for issuance under our 2000 stock incentive
plan, of which 3,804,403 shares were subject to outstanding options at a
weighted average exercise price of $2.80 per share as of August 15, 2000;
and
. 750,000 shares reserved for issuance under our 2000 employee stock
purchase plan.
See "Description of Capital Stock--Common Stock" and "Management--2000 Stock
Incentive Plan" and "--2000 Employee Stock Purchase Plan."
Unless otherwise indicated, all share information contained in this
prospectus:
. Gives effect to the conversion of all outstanding shares of preferred
stock, other than that held by First Union Capital Partners, Inc. and
First Union Capital Partners, LLC, into 36,202,399 shares of voting
common stock upon the closing of this offering;
. Gives effect to the conversion of all outstanding shares of preferred
stock held by First Union Capital Partners, Inc. and First Union Capital
Partners, LLC into 12,373,058 shares of common stock, including 3,907,832
shares of non-voting common stock to be held by First Union Capital
Partners, Inc. upon the closing of this offering;
4
<PAGE>
. Assumes no exercise of the underwriters' over-allotment option; and
. Reflects an approximate 2.73-for-1 split of our common stock to be
effected prior to the closing of this offering.
5
<PAGE>
Summary Financial and Other Data
You should read the following summary financial and other data along with
the sections entitled "Use of Proceeds," "Selected Financial and Other Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and notes and other financial and
operating data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from Inception
(September 26, 1997) to Six Months Ended
December 31, Years Ended December 31, June 30,
----------------------- ------------------------- -------------------------
1997 1998 1999 1999 2000
----------------------- ------------------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue.................. $ -- $ 45,032 $ 1,998,164 $ 486,470 $ 4,704,609
Costs of data network
exchange facilities:
Direct.................. -- 118,848 2,681,591 541,291 7,695,190
Indirect................ -- 173,846 866,254 139,796 3,223,322
--------- ---------- ------------- ---------- -------------
Gross profit (loss) from
data network exchange
facilities.............. -- (247,662) (1,549,681) (194,617) (6,213,903)
Total operating
expenses............... 72,193 469,248 3,871,931 525,345 18,205,946
--------- ---------- ------------- ---------- -------------
Loss from operations..... (72,193) (716,910) (5,421,612) (719,962) (24,419,849)
Other income
(expense)............ (9,314) (77,933) 691,987 56,597 1,578,617
--------- ---------- ------------- ---------- -------------
Net loss................. (81,507) (794,843) (4,729,625) (663,365) (22,841,232)
Accretion of convertible
preferred stock......... -- -- (696,897) -- (455,693)
Deemed dividend related
to beneficial conversion
feature of Series B and
Series C preferred
stock................... -- -- (5,655,173) -- (116,372,200)
--------- ---------- ------------- ---------- -------------
Net loss available to
common stockholders..... $ (81,507) $ (794,843) $ (11,081,695) $ (663,365) $(139,669,125)
========= ========== ============= ========== =============
Net loss per common share
(basic and diluted)
(1)..................... $ (.01) $ (0.10) $ (1.35) $ (0.08) $ (16.27)
Weighted average common
shares
(basic and diluted) (1).. 8,179,929 8,179,929 8,180,040 8,179,929 8,582,491
Pro forma net loss per
common share (basic and
diluted) (1)(2)......... $ (.59) $ (3.70)
Pro forma weighted
average common shares
(basic and diluted)
(1)(2).................. 17,496,175 37,598,295
Other Financial Data:
Cash flow provided by
(used in):
Operating activities.... $ (43,868) $ (552,126) $ (4,443) $ (731,608) $ (1,689,573)
Investing activities.... (18,592) (819,413) (68,916,746) (9,590,971) (95,995,063)
Financing activities.... 603,000 854,604 69,862,642 10,298,943 117,987,573
Capital expenditures..... 18,592 819,413 12,005,820 (544,939) 46,897,357
Other Data:
Customers at end of
period.................. -- 12 63 28 189
Operational DNXs......... -- 1 3 1 9
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
-----------------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(3)
------------ ------------ --------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 21,267,995 $60,117,995 $155,767,995
Short-term investments.............. 102,500,024 102,500,024 102,500,024
Working capital..................... 109,690,757 148,540,757 244,190,757
Total assets........................ 192,338,301 231,188,301 326,838,301
Long-term liabilities, including
current maturities................. 2,976,679 2,976,679 2,976,679
Mandatorily redeemable convertible
preferred stock.................... 311,535,941 -- --
Total stockholders' equity
(deficit).......................... (143,277,404) 207,108,537 302,758,537
</TABLE>
6
<PAGE>
--------
(1) See note 1 of notes to financial statements for a description of the
computation of basic, diluted and pro forma net loss per share and the
number of shares used to compute basic, diluted and pro forma net loss per
share.
(2) Pro Forma balance sheet data reflects the sale of 1,902,440 shares of
Series C convertible preferred stock in August at a price of $20.50 per
share, and the net proceeds therefrom and the subsequent conversion of our
convertible preferred stock to common stock and non-voting common stock,
which will occur automatically upon the closing of this offering. Upon the
effective date of the anticipated 2.73 for 1 common stock split, the
preferred stock conversion ratio is expected to be 1 preferred share for
approximately 2.73 shares of common stock.
(3) Pro Forma As Adjusted balance sheet data reflects the sale of 1,902,440
shares of Series C convertible preferred stock in August at a price of
$20.50 per share, and the net proceeds therefrom and the subsequent
conversion of our outstanding preferred stock to common stock and non-
voting common stock, which will occur automatically upon the closing of
this offering, the sale of the 7,000,000 shares of common stock in this
offering and the receipt of the net proceeds from this offering, after
deducting underwriting fees and estimated offering expenses. Upon the
effective date of the anticipated 2.73 for 1 common stock split, the
preferred stock conversion ratio is expected to be 1 preferred share for
approximately 2.73 shares of common stock.
7
<PAGE>
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider the following information about these risks, together
with the other information contained in this prospectus, before you decide to
buy our common stock.
Risks Related To Our Business
We are an early-stage company which makes evaluating our business difficult.
We were founded in 1997 and our first DNX was opened in Denver in July 1998.
Our first dollar of revenue from this DNX was not recognized until September
1998. Since that date, we have opened 11 additional DNXs. Our financial
statements for the year ended December 31, 1999 primarily reflect the results
of a single DNX, our initial Denver location, the operations of which may not
be indicative of the results we will achieve at other locations or of the
future results at our initial Denver DNX. Our limited operating history and
lack of meaningful historical financial or operating data make evaluating our
planned business operations difficult. Additionally, evaluating whether our
plan to build additional DNXs, which will require significant capital
expenditures and management resources, will be successful is difficult because
the revenue and income potential of our business and market is unproven. Many
of the revenue and pricing assumptions in our plan may not conform with future
results. Moreover, we are an early stage company and our business plan may not
address key risks or be implemented on a timely basis. We may not successfully
address any or all of these challenges and our failure to do so would adversely
affect our business, operations and the market price of our stock.
We have incurred losses since our inception and expect our losses to continue.
We have incurred net losses in each quarterly and annual period since our
inception. As of June 30, 2000, our cumulative net losses were approximately
$149.3 million. We expect to incur significant losses in the future. In
addition, as we expand operations, our losses may increase as we:
. increase the number and size of our DNX centers;
. increase our sales and marketing activities, including expanding our
direct sales force; and
. enlarge our customer support and product development activities.
As a result, we must significantly increase our revenues to become
profitable. Even if we are able to achieve profitability, we may not be able to
sustain profitability during any future periods.
Our quarterly operating results may fluctuate, which may make it difficult to
forecast our future performance and may result in volatility in our stock
price.
We expect that our revenue growth, and our cost structure, will be
unpredictable as we continue to implement our business plan. This
unpredictability will likely result in significant fluctuations in our
quarterly results. If our operating results are below market expectations, the
price of our stock will likely decline.
In addition, a large portion of our expenses is fixed in the short-term,
particularly with respect to communications, depreciation, real estate and
interest expenses, and therefore our results of operations are particularly
sensitive to fluctuations in revenue. The timing of customer installations and
discounts, as well as the fluctuations in bandwidth used by customers and our
overall capacity utilization, will also affect our revenues. Because of this,
period-to-period comparisons of our
8
<PAGE>
operating results may not necessarily be meaningful and may not be an
indication of our future performance. Additionally, fluctuations in our results
of operations could cause us to fail to meet the expectations of securities
analysts or investors, which could negatively affect the market price of our
common stock.
To implement our business plan we will require additional capital in the future
and may not be able to secure adequate funds on terms acceptable to us.
To complete the implementation of our intended rollout 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,
which may not be available on acceptable terms or at all. We currently
anticipate that our available cash resources combined with the net proceeds
from this offering will be sufficient to meet our anticipated operating and
capital needs for the next 18 months, although we could be incorrect in this
assumption. If we cannot raise sufficient additional funds to fund our rollout,
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.
Our newer DNXs are larger than our first DNX, which may make it difficult for
us to forecast future expenses.
Our first DNX, located in Denver, Colorado, is significantly smaller than
our recently completed DNXs in Austin, Atlanta, Dallas, Denver, Irvine,
Minneapolis, Phoenix, Pittsburgh, Raleigh-Durham, San Diego and St. Louis, and
at most one-fourth the size of those DNXs which we are developing for
deployment during the rest of 2000. This increase in DNX size adds uncertainty
to our ability to accurately forecast ongoing costs of running our business.
Our lack of experience operating larger facilities could adversely affect our
business, operations and the market price of our stock if we do not
successfully address the complications associated with operating larger DNXs.
If we fail to expand the number of our DNXs or to properly manage our
expansion, our revenues will not grow and we may not be profitable.
The timely expansion, completion and opening of additional DNXs is a key
element of our business strategy. To execute our growth plan, we must:
. Identify appropriate locations;
. Negotiate leases on acceptable terms;
. Design each DNX;
. Obtain permits and the timely approvals of local regulatory authorities;
. Manage the timing and magnitude of capital expenditures;
. Depend upon contractors to construct our additional DNXs in a timely
manner while controlling costs;
. Obtain and install the necessary equipment on a timely basis; and
. Hire, train, motivate and retain qualified employees to assist in our
expansion, as well as to staff our DNXs.
9
<PAGE>
All of these factors involve risks and uncertainties beyond our control and
problems in any other areas could delay the opening of a DNX. Consequently,
opening a new DNX requires significant management time and attention.
Accordingly, you should be aware that we have limited experience in building
DNXs, particularly in building multiple DNXs concurrently, and may not be able
to replicate any success we have had to date in any of our future DNXs. Our
planned expansion will place a significant strain on our limited financial,
administrative, operational and management resources. Our existing operating
and financial control systems, infrastructure and other resources may not be
sufficient to adequately manage the opening of the planned number of DNXs in a
cost-effective and timely manner. Consequently, it may be difficult for us to
meet our growth plan while controlling costs.
Additional DNXs, if completed, will result in substantial new operating
expenses, including expenses associated with hiring, training, retaining and
managing new employees, purchasing new equipment, implementing new systems,
leasing additional real estate and incurring additional depreciation expense.
If we do not implement adequate management and financial controls, reporting
systems and procedures to operate multiple DNXs in geographically diverse
locations, our operations could be significantly harmed.
Many of our customers are start-up companies and may not remain in business.
We anticipate that a number of our customers will be start-up companies.
Many start-up companies do not succeed and are therefore compelled to
discontinue business. In addition, the Internet and communications industries
are intensely competitive, increasing the risk of failure for our customers. A
higher than anticipated failure rate of our customers would result in higher
than expected customer turn-over and unexpectedly reduce our future revenue.
Furthermore, we would have to spend additional amounts on marketing and sales
to replace those customers who are no longer in business, which could
negatively affect our business, operations and the market price of our stock.
Our rollout plan is preliminary and we may need to alter our plan and
reallocate funds.
Our DNX rollout plan is preliminary and has been developed from our current
market data and research, projections and assumptions. We expect to continually
reevaluate our business and rollout plan in light of evolving competitive and
market conditions and the availability of suitable sites, financing and
customer demand. As a result, we may alter our DNX expansion and reallocate
funds, or eliminate segments of our plan entirely based on future events,
including:
. changes or inaccuracies in our market data and research, projections or
assumptions;
. unexpected results of operations or strategies in our target markets;
. regulatory, technological, and competitive developments, including
additional market developments and new opportunities; or
. changes in, or discoveries of, specific market conditions or factors
favoring expedited development in other markets.
We face risks associated with international operations that could harm our
business.
We intend to construct DNXs outside of the United States and we will commit
significant resources to our international operations and sales and marketing
activities. Our management has limited experience conducting business outside
of the United States and we may not be aware of all
10
<PAGE>
the factors that affect our business in foreign jurisdictions. We will be
subject to a number of risks associated with international business activities
that may increase our costs, lengthen our sales cycles, require significant
management attention or subject our business to unexpected difficulties,
including:
. increased costs and expenses related to the leasing of foreign centers;
. difficulty or increased costs of constructing DNXs in foreign countries;
. difficulty in staffing and managing foreign operations;
. increased expenses associated with marketing services in foreign
countries;
. lack of demand for our services outside the U.S.;
. business practices that favor local competition and protectionist laws;
. difficulties associated with enforcing agreements through foreign legal
systems;
. general economic and political conditions in international markets;
. potentially adverse tax consequences, including complications and
restrictions on the repatriation of earnings;
. currency exchange rate fluctuations;
. unusual or burdensome regulatory requirements or unexpected changes to
those requirements;
. tariffs, export controls and other trade barriers; and
. longer accounts receivable payment cycles and difficulties in collecting
accounts receivable.
To the extent that our operations are incompatible with, or not economically
viable within, any given foreign market, we may not be able to locate a DNX in
that particular foreign jurisdiction.
We may make acquisitions and investments which pose integration and other
risks.
We may seek to acquire or invest in other colocation providers, additional
colocation facilities from other companies, or technologies from strategic
partners or other entities to add to our value-added services. As a result of
these acquisitions or investments, we may:
. pay too much;
. be required to incur significant expenditures to retrofit an acquired
facility to bring it up to our standards;
. choose the wrong strategic partner or a technology which does not gain
market acceptance;
. have difficulty assimilating customers, technology and personnel from
acquired businesses; and
. create goodwill that would reduce our earnings, if any, as it is
amortized.
In addition, we might issue common stock or incur significant indebtedness
in connection with any such acquisition or investment, which would dilute the
ownership interests of our current stockholders.
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If we are unable to obtain real estate leases on acceptable terms, our business
will suffer.
In order to meet our expansion goals, we will need to enter into a
substantial number of leases in new markets. Our site selection template
specifies the size, location and other technical specifications we consider
optimal for our DNXs. Real estate that conforms to our template is often
located in high quality buildings in the central business district of a city.
This type of space may be scarce or in great demand in our target markets, many
of which are experiencing substantial economic growth and shortages of prime
real estate. Any increase to the size of our future DNX template may magnify
the difficulty of locating satisfactory sites. Even if we are able to locate
satisfactory sites in these potential markets, these sites may be difficult for
us to lease on acceptable terms. If we are unable to obtain leases for new
sites on acceptable terms, we will not be able to achieve our growth plans.
Our dependence on third parties for telecommunications services increases the
risk that we will not be able to timely or cost-effectively meet our customer
needs.
The presence of connections from multiple communications carriers' networks
to our DNXs is critical to our ability to attract new customers. For most of
the services we provide, we are not a communications carrier, and therefore
rely on third parties to provide us with telecommunications circuits which we
then resell to our customers. In offering certain services, we may be deemed a
communications carrier, by reselling those services, but we are still dependent
on underlying third-party carrier services and facilities. Any of these
carriers may decide not to offer their services to us for competitive or other
reasons or may increase the cost of their services.
To provide Internet and network connectivity, we rely on various local,
national and international telecommunications companies such as ICG, AT&T Local
Services and Qwest to provide the local connections from our DNXs to points of
presence of other national and international Internet companies, such as
Intermedia/Digex, GTE, AT&T, UUNet and Cable & Wireless. The construction
required to provide the local connections to our DNXs is complex and involves
factors outside our control, including regulatory processes and the
availability of construction resources. If we are unable to establish the
necessary bandwidth connectivity to our DNXs, if the connections are materially
delayed, or if the bandwidth provided to us is subject to capacity bottlenecks
and other reliability problems or is at increased costs, our business,
operations and the market price of our stock will be negatively affected. There
are a limited number of local providers in each of our markets and we cannot
control any delays or deficiencies associated with this provisioning function.
Additionally, any national or international carrier may refuse to provide us
with services which our customers need or may provide connectivity which has
reliability problems or is at increased costs. Any failure by us to procure the
connections necessary to serve our customers or any increased costs of such
connections may harm our business, operations and the market price of our
stock.
Our dependence on third parties for components and services used in our DNXs
increases the risk that our operations could be interrupted.
We depend on third parties to timely provide critical components of our
reliability solution, such as state-of-the-art equipment and continuous power.
Some of the communications and networking equipment may be available only from
limited sources. We do not carry significant inventories of components and have
no guaranteed supply arrangements with vendors. We are also dependent upon our
suppliers providing products or components that must comply with evolving
Internet and
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communications standards or that inter-operate with other products or
components we use. Our performance and reliability are also highly dependent
upon continuous power being supplied by our third party providers. Although
continuous power availability is critical to our business, we have no control
or assurance that we will be supplied with adequate power. If the equipment or
power that we need are unavailable or are not delivered on a timely basis, our
business will be harmed.
We are also dependent upon third parties for the timely construction and
design of our DNXs. The unavailability of these services or the failure of
these services to be timely performed in a professional manner will negatively
affect our business, operations and the market price of our stock.
Our failure to hold required authorizations and to be registered with, or
certified by, applicable regulatory authorities could result in potential
penalties or other adverse consequences.
Certain network related services that we offer, and intend to offer in the
future, including private-line services, which offer more secure, higher
performing connections, are, or may be, subject to regulation and certification
requirements at the state level. To date, except for our Application for
Authority to Provide Telephone Services in the State of Minnesota: Niche
Services, Local Resale Services which we recently filed in the State of
Minnesota and our Application for a Certificate of Public Convenience and
Necessity to Offer Long Distance Telecommunications Service by a Reseller in
the State of North Carolina, with respect to the provision of certain specified
services, we have not been certified to provide any form of regulated
telecommunications services within any jurisdiction. It is possible that we
have provided certain network related services without the requisite regulatory
approval or certification in a limited number of jurisdictions. Our failure to
have held any required authorizations and to have been registered or certified
previously could expose us to risks, including substantial fines, third-party
lawsuits and potential inability to continue our operations. For example, we
have received notice from the State of North Carolina requiring us to pay a
fine for operating without a certificate. Although we are presently disputing
the requirement of such certification, we cannot predict how the State of North
Carolina will rule or the related cost of compliance. Likewise, the Arizona
Corporation Commission has decided that some of InFlow's services are subject
to regulation by such Commission, which may subject us to penalties or other
consequences due to our having commenced operations prior to submitting an
application for certification.
We may encounter difficulties if we are required to apply for, and obtain,
necessary authorizations in other states in which we expect to operate.
As certain of our current and planned network related services are, or may
be subject to regulation and certification requirements at the state level, we
may be required to apply for and obtain authorizations in states where we plan
to offer our services. The application and registration process could be
lengthy and time-consuming, requiring substantial resources and management
time.
Any past failure to have held required authorizations and to have been
registered with, or certified by, applicable regulatory authorities could
expose us to the risk that such regulators could refuse to grant our
applications to provide such services due to prior non-compliance. We do not
know if we will be allowed to register in particular jurisdictions or if our
applications will be accepted. We also do not know whether our applications
would be granted without onerous terms, or at all.
Delays in obtaining or failure to obtain regulatory approvals could negatively
affect our intended rollout of services.
If we are required in particular states to apply for and obtain
authorizations to provide certain of our services, we could incur delays in the
approval process. Any significant delays in obtaining any
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requisite regulatory approvals could result in our being unable to provide
those services during the period in which we have not been certified or
authorized to provide those services. In addition, we may be unable to obtain
required regulatory authorizations in some states, in which case we would be
unable to provide certain services in those states.
Regulation as a carrier will subject us to ongoing regulation at the state and
federal levels and could result in increased costs and other competitive
disadvantages.
If we become authorized as a carrier in a particular state or at the federal
level, we will be subject to the regulatory directives of the applicable
regulatory authorities. Such regulation could subject us to increased costs as
a result of having to comply with these requirements, such as reporting
obligations and the payment of various regulatory fees and surcharges. We may
not be able to pass these costs along to our customers. Compliance with
regulatory requirements, including, but not limited to, regulation of the rates
and terms and conditions of our services, may make it more difficult for us to
operate.
It is possible that many of our competitors may not be subject to the type
of telecommunications regulation to which we may become subject. Some
regulators may seek, among other things, to regulate our charges and terms of
service. If our competitors are not similarly regulated, they may have an
additional competitive advantage in the event we become regulated.
Changes in current or future regulations, or legislative or judicial
initiatives related to the telecommunications industry, could negatively affect
our business.
The enactment of new legislation or regulatory requirements or changes in
the interpretation of existing legislation and/or changes in regulatory
requirements could negatively affect us. Unlike some of our competitors,
including the incumbent local exchange carriers, such as Qwest (formerly U S
West), Verizon (formerly Bell Atlantic and GTE), SBC (including Southwestern
Bell and Pacific Bell), and BellSouth, we are not subject to some of the
burdensome regulations imposed by federal and state regulation. For example, we
do not have to allow competitors to access portions of our network, such as
transmission lines and equipment used to connect calls, we do not have to file
FCC tariffs for our access services, and our rates are not currently subject to
stringent regulation by the FCC or state public utility commissions. Our
ability to compete may largely depend upon a continued favorable, pro-
competitive regulatory environment, and could be negatively affected by new
regulations or legislation affording greater flexibility and regulatory relief
to certain of our competitors. For example, the FCC is reviewing whether
incumbent local exchange carriers may provide certain data services free from
burdensome regulation through a separate affiliate. In addition, Verizon and
SBC (including Ameritech) agreed, as conditions to approval of their respective
mergers, to provide "advanced services", including many data services, through
a separate affiliate subject to reduced regulation. Legislation also has been
introduced in Congress that would grant the regional Bell operating companies,
such as Verizon (formerly Bell Atlantic and GTE), SBC (including Southwestern
Bell and Pacific Bell), and BellSouth, permission to provide "interLATA" (non-
local access and transport area) data services, a line of business that
currently is prohibited to them. The ability of incumbent local exchange
carriers, including the regional Bell operating companies, to provide data
services on a broader basis could have a negative effect on our business.
If we were to lose any of our top customers, we would lose a substantial
portion of our revenue.
A relatively small number of customers account for a large percentage of our
total revenues and we expect some degree of concentration will continue for the
foreseeable future. For the year ending December 31, 1999, our top five
customers accounted for approximately 46% of our revenue,
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including Verio, a potential competitor, which alone accounted for
approximately 14% of our revenue during this period. No other customer
individually represented more than 10% of revenue for the year ended December
31, 1999. For the six-month period ending June 30, 2000, our top five customers
accounted for approximately 32% of our revenue, with only one customer,
MessageMedia, Inc., accounting for more than 10% of our revenue. For the six-
month period ended June 30, 2000, MessageMedia and Verio accounted for
approximately 12% and 5%, respectively, of our revenue. Our initial contract
with Verio expired on August 31, 2000, but has been amended such that a
significant portion of this contract is now on a month-to-month basis. Our
business will be seriously harmed if we do not generate as much revenue as we
expect from our significant customers or experience a loss of any significant
customer.
Any of our key employees could terminate his or her employment at will.
Our success 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 Arthur H. Zeile, our
President and Chief Executive Officer, and Joel C. Daly, our Vice President,
Chief Operating Officer and Secretary. Mr. Zeile and Mr. Daly have been with us
since our founding and have been instrumental in designing and leading the
execution of our business strategy. The loss of Mr. Zeile's or Mr. Daly's
services would have a material and adverse effect on our business. Although we
maintain $2.5 million "key person" life insurance policies on the lives of each
of Arthur H. Zeile and Joel C. Daly, we believe this amount would not
sufficiently compensate us for the loss of either of their services.
We do not have employment agreements with any of our officers or employees.
Any of our officers or employees can terminate his or her employment with us at
any time. The loss of the services of one or more of our key personnel could
seriously interrupt our business, and because the demand for employees in the
communications and network management services market is intense, we may not be
able to successfully locate, hire, assimilate and retain replacements or other
key management personnel on a timely and cost-effective basis.
It may be difficult for us to hire and retain highly qualified personnel,
particularly as we open additional DNXs in highly competitive markets.
To achieve our growth goals, we will need to hire a substantial number of
people in each new market where we open a DNX. New hires at each DNX will
include a local general manager as well as sales and marketing personnel. The
success of a DNX will depend largely upon the efforts of the people we hire for
those positions. The demand for employees in the communications and network
management services market is intense. Moreover, many of our DNXs are in highly
competitive geographic labor markets. If we are unable to locate, hire and
retain qualified personnel in these markets on a timely and cost-effective
basis, we will face delays in our planned expansion and our financial results
may fail to meet our growth expectations.
If we are unable to compete successfully against new entrants and established
companies with greater resources, our business will suffer.
We believe that new competitors will enter our market. Our success is
dependent upon our ability to substantially differentiate our solutions from
existing and future offerings of our competition. We believe that we may
compare unfavorably with some of our competitors with regard
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to, among other things, brand recognition, existing relationships with
potential customers, available pricing discounts, capital availability,
strategic relationships and existing contracts. We may not be able to compete
effectively in our target markets. Moreover, our strategy depends largely upon
the rapid deployment of our solutions. If we are slowed in our rollout of our
DNXs or value-added services, other companies may gain competitive advantages
in markets we are targeting. We expect significant competition from several
areas, including:
. Web hosting and colocation companies;
. National and regional Internet service providers;
. Internet performance enhancers, including companies focusing on moving
information closer to the user to make it more readily and speedily
accessible for caching;
. Global, regional and local communications companies; and
. Global technology companies.
Our competition may operate in one or more of these arenas and include
companies such as AboveNet Communications, Akamai, AT&T Corp., Digital Island,
Exodus Communications, Equinix, Frontier GlobalCenter, Globix, GTE Corporation,
InterNAP, Level 3 Communications, MCI WorldCom, PSINet, Qwest, Sprint, Verio
and the regional Bell operating companies, such as Verizon (formerly Bell
Atlantic and GTE), SBC (including Southwestern Bell and Pacific Bell), and
BellSouth, most of which have well-established brands.
A key element of our strategy is to increase awareness of the Inflow brand.
If we fail in our efforts to build our brand awareness, we may not be able to
effectively compete and our strategic and financial objectives might not be
met. We have attracted our existing customers primarily through a small sales
force, the visibility of our founders, Arthur H. Zeile and Joel C. Daly, in the
Denver entrepreneurial community, and our reputation in the Denver marketplace.
Our founders do not have this reputation and visibility in the markets into
which we are expanding.
Some of our competitors and potential competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than we do. In particular, other communications carriers and several
Web hosting and colocation companies have extensive customer bases and customer
relationships, including relationships with many of our potential customers.
These companies also have significantly greater customer support and
professional services capabilities than we do and, in many cases may also own
their own networks and thereby incur lower operating expenses. Because of their
greater financial resources, some of these companies have the ability to adopt
aggressive pricing policies and may be better able to compete in a price
competitive market.
Our competitors may also be able to bundle their products or incorporate
colocation and other services in a manner that is more attractive to our
potential customers than using our solutions. New competitors or alliances
among competitors may emerge and rapidly acquire significant market shares. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can. Our revenue model contains
many assumptions which may be invalidated by our competitors, such as demand
and market acceptance for our services, our ability to successfully introduce
new products each year, the absence of competing products for certain of our
solutions and our ability to cross-sell multiple services to each customer.
Competitive products may reduce demand for or render certain of our offerings
obsolete. In addition, we believe that the market in which we compete is likely
to face consolidation in the future, which could have the effect of increasing
price and service competition and would negatively affect our business,
operations and the market price of our stock.
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Federal regulations may make the colocation services offered by some of our
competitors more attractive than our own.
Incumbent local exchange carriers, such as Qwest (formerly U S West),
Verizon (formerly Bell Atlantic and GTE), SBC (including Southwestern Bell and
Pacific Bell), and BellSouth, are subject to federal regulations that require
them to offer colocation to other local telephone companies and long distance
carriers on an efficient, nondiscriminatory basis. Some of those rules recently
were vacated by the decision of the Court of Appeals for the D.C. Circuit.
However, the rules that remain in effect are likely to enhance the
attractiveness of the incumbent local exchange carriers colocation offerings
and may make them more competitive with our own. On remand, the FCC recently
asked for comments on various proposals to amend and possibly expand its
colocation rules, which would further enhance the attractiveness of incumbent
local exchange carriers' colocation offerings and thus pose an even greater
competitive risk to us.
A system failure could cause significant delays and interruptions of service to
our customers, which could reduce our revenue and harm our reputation.
Our business depends on our ability to avoid system failures and provide our
customers with fast, efficient and highly reliable network solutions. Our
operations are subject to failure resulting from numerous factors, including
human error, physical or electronic security breaches, network software flaws,
fire, earthquake, flood or other natural disasters, power loss and sabotage or
vandalism. Additionally, if our communications providers fail to provide the
communications capacity that we require, that failure could also result in
interruptions in our services, which could damage our reputation. Our customer
contracts currently provide service level guarantees, including those related
to circuit performance, such as service up-time and time to restore a circuit
once a problem is encountered. This guarantee provides a billing credit to
customers if a performance parameter is not met and we may be required to
provide significant credits. If we encounter significant system downtime, we
may incur substantial harm to our reputation and obligations that our liability
insurance may not adequately cover, which could negatively affect our business,
operations and the market price of our stock.
We must retain and expand our customer base and increase the services used by
each customer in order to meet our financial goals.
Our future revenues will depend on our ability to retain and expand our
customer base as we open additional DNXs. Our ability to attract customers to
our DNXs will depend on a variety of factors, including the willingness of
businesses to outsource their network operations, the availability of multiple
communications carriers to provide connections, our operating reliability and
security, our ability to effectively market and cross-sell our services and our
ability to increase the bandwidth capacity we offer to customers as they grow.
We typically begin building a DNX before we have agreements with customers to
use that DNX. If we open a new DNX and cannot attract customers, we will not be
able to cover costs associated with that DNX and we will not be profitable.
Our success is also dependent upon our ability to successfully introduce new
products to our customers and cross-sell our product offerings to customers in
order to increase our revenue per customer. Although we intend to develop new
services and market these services to customers, we do not know if these or
other services will be accepted by the marketplace or if customers will
purchase
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multiple products or services. We also may not be able to offer some of our
services in certain jurisdictions without requisite regulatory approval.
Breaches of our network security could damage our reputation and cause us to
lose customers.
Unauthorized access, computer viruses and accidental or intentional actions
may cause delays or interruptions in our services. Confidential information,
such as credit card and bank account numbers, may be stored in our customers'
computer systems, and breach of the security protecting such confidential
information could result in liability to us and the loss of existing customers
and/or the deterrence of potential customers. Our security measures could be
circumvented. The costs required to eliminate computer viruses and alleviate
other security problems could be prohibitively expensive and the efforts to
address such problems could result in interruptions, delays or cessation of
service to our customers, which could negatively affect our business,
operations and the market price of our stock.
If we are unable to adequately protect our proprietary rights, our business
will suffer.
We have not sought patent protection on any of our products, services or
processes. We rely upon a combination of trademark and copyright law, trade
secret protections, and confidentiality agreements and other contractual
arrangements with our employees, consultants and third parties to establish and
protect our proprietary rights. The steps we have taken to protect our
intellectual property rights will likely provide less protection than the level
given by patents and may prove to be inadequate and third parties may still
infringe or misappropriate our proprietary rights. Moreover, effective
trademark, copyright and trade secret protection may not be available in every
country in which we eventually operate to the same extent available in the
United States. Defending our intellectual property rights could also result in
the expenditure of significant financial and managerial resources, which could
negatively affect our business, operations and the market price of our stock.
Unauthorized parties, including departing employees, business partners and
others, may attempt to copy or otherwise obtain and use our products and
technology. Monitoring unauthorized use of our products and technology is very
difficult, and we may be unable to prevent misappropriation of our products and
technology.
If we become subject to infringement claims by third parties, we may be forced
to divert significant resources away from the operation of our business.
Third parties may in the future assert copyright, trademark, patent and
other intellectual property rights claims or initiate litigation against us or
our suppliers or customers with respect to existing or future products and
services. Other parties may assert claims against us that we have
misappropriated a trade secret or infringed a patent, copyright, trademark or
other proprietary right belonging to them. Any infringement or related claims,
even if not meritorious, could be costly and time consuming to litigate, may
distract management from other tasks of operating the business and may result
in the loss of significant rights and the loss of our ability to operate our
business.
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Risks Related To Our Industry
Because the market for colocation and network management services is new and
its viability is uncertain, our services may not be accepted and we may not be
profitable.
The market for colocation and network management services has only recently
begun to develop and is evolving rapidly. Our future growth, if any, will be
dependent on:
. The growth of applications that depend on the absence of delays or down
time;
. The willingness of enterprises to colocate and outsource network access
for their critical applications; and
. Our ability to successfully and cost-effectively market our services to a
sufficiently large number of customers.
The market for our services may not fully develop. If this market fails to
develop, develops more slowly than expected or if our services do not achieve
widespread market acceptance, our business, operations and market price of our
stock would be adversely affected.
Because the demand for our services depends on continued growth in the use of
the Internet and other forms of network access, a slowing of this growth could
harm the development of the demand for our services.
Our success will depend in large part on the continued growth of e-business
applications, including the underlying growth of the Internet. The increased
use of the Internet for retrieving, sharing and transferring information among
businesses, consumers, suppliers and partners has only recently begun to
develop. Our success will depend in large part on continued growth in the use
of the Internet, which in turn will depend on a variety of factors including
security, reliability, cost, ease of access, quality of service and necessary
increases in bandwidth availability. The recent attacks on major Web sites have
drawn much media attention and may threaten to slow Internet growth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, our business, results of operations and financial
condition could be materially adversely affected. The recent growth in the use
of the Internet has caused frequent periods of performance degradation,
requiring the upgrade of circuits, communications links and other components
forming the infrastructure of the Internet by Internet service providers and
other organizations with links to the Internet. Any perceived degradation in
the performance of the Internet as a whole could undermine the benefits of our
services. Potentially increased performance provided by our services is
ultimately limited by and reliant upon the speed and reliability of the
networks operated by third parties. Consequently, the emergence and growth of
the market for our services is dependent on improvements being made to the
entire Internet infrastructure to alleviate overloading and congestion.
In addition to the Internet, we are dependent on customers continuing to
require non-Internet forms of network access that may provide more flexibility,
security, capacity or speed. The continued demand and acceptance of these
alternative forms of network access will be critical to the success of our
business. Any decreased use of these forms of network access or degradation in
the reliability, security or speed of these forms of network access could harm
our business, operations and market price of our stock.
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If the government modifies or increases its regulation of the Internet, the
provision of our services could become more costly and the use of the Internet
may decline.
There is currently only a limited body of law and regulation directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet and that existing laws and
regulations may become applicable to the Internet. Federal, state and foreign
legislatures have proposed or are currently considering a number of laws and
regulations relating to the Internet. The adoption of any future laws or
regulations, or the application of existing laws and regulations, might
decrease the growth of the Internet, decrease demand for our services, impose
taxes or other costly regulatory or technical requirements on us, or otherwise
increase the cost of doing business. In addition, because our services are
currently available in multiple states and we plan to expand our operations
internationally, such jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each state or foreign country where
we operate, which could increase our operating costs and negatively affect our
business, operations and the market price of our stock.
If we do not respond to rapid technological change and evolving industry
standards, we will lose customers.
Our future success will depend, in part, on our ability to offer services
that address the increasingly sophisticated and varied needs of our current and
prospective customers and to respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. Internet
operations and e-business applications are complex and are characterized by
rapidly changing and unproven technology, evolving industry standards, changes
in customer needs, emerging competition and frequent new service introductions.
Future advances in technology may not be beneficial to, or compatible with, our
business. In addition, we may not be able to incorporate such advances on a
cost-effective or timely basis into our business or such advances, including
alternate delivery systems like cable or satellite, may make our services
unnecessary or less cost-effective than using the new technology. Technological
advances may have the effect of encouraging certain of our current or future
customers to rely on in-house personnel and equipment to furnish the outsourced
solutions that we currently provide. Keeping pace with technological advances
in our industry may require substantial lead time and capital expenditures. We
may not be able to conform to these new standards in a timely fashion and we
may be unable to maintain a competitive position in the market, which could
negatively affect our business, operations and the market price of our stock.
We may be held liable for information disseminated over our network.
The law relating to the liability of online services companies and Internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against us under both United States and foreign law for defamation, negligence,
copyright or trademark infringement or other theories based on the nature and
content of the materials disseminated through our networks. Legislation has
been enacted or proposed that imposes liability for, prohibits or limits the
transmission over the Internet of certain types of information, including
obscene materials and pornography. The imposition upon us of liability for
information carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to such liability, which may require
us to expend substantial resources, or to discontinue certain service
offerings. Our general liability insurance may not adequately compensate us, if
at all, or may not cover us if we are held liable for information carried on or
disseminated through our networks, which would negatively affect our business,
operations and market price of our stock.
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If our systems encounter year 2000 compliance problems, our business could be
harmed.
We have tested our key computer systems and, to date, we have not
encountered any material Year 2000 related disruptions or failures of our
systems or services, nor have we been notified of any disruption or failures in
the systems of any of our third parties with whom we deal. There is an ongoing
risk that Year 2000 related problems could still occur, which could harm our
business.
Risks Related To This Offering
Substantial future sales of our common stock in the public market may depress
our stock price.
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for our common stock. The number
of shares of common stock available for sale in the public market will be
limited by lock-up agreements under which certain holders of our outstanding
shares of common stock will agree not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this offering without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. However, holders of such restricted shares who have not been
officers or directors of us on or since the date of this prospectus may offer,
sell or otherwise dispose of 25% of their shares on the earlier of 90 days
after the date of this offering or on the second trading day after the first
public release of our quarterly results if the last recorded sale price on The
Nasdaq National Market for 20 of the 30 trading days ending on such date is at
least twice the price per share in the initial public offering. These
stockholders may also offer, sell or otherwise dispose of an additional 25% of
their shares 135 days after the date of this offering if the price per share of
common stock has achieved the same target level. Additionally, DLJ may, in its
sole discretion and at any time without notice, release all or any portion of
the shares subject to lock-up agreements. In addition to the adverse effect a
price decline could have on holders of common stock, that decline would likely
impede our ability to raise capital through the issuance of additional shares
of common stock or other equity securities.
Our current stockholders hold a substantial number of shares, which, subject
to the lock-up agreements described above, they will be able to sell in the
public market in the near future. All of the 7,000,000 shares sold in this
offering will be eligible for sale. The remaining 58,542,101 shares, based on
the number of shares outstanding as of August 15, 2000, will be restricted
securities as defined in Rule 144 of the Securities Act of 1933, as amended. Of
such restricted shares, approximately 36,178,276 will be eligible for sale upon
the expirations of or their release from the lock-up agreements described above
subject, in some cases, to volume restrictions. The remainder of these shares
will become eligible for sale at various times thereafter. In addition,
1,592,775 shares will be eligible for sale at various times after the date of
this prospectus under Rule 701. In addition, the holders of 48,578,539
restricted shares of our stock are entitled to certain rights with respect to
registration of such shares for resale in the public market. Sales of a
substantial number of shares of our common stock after this offering could
cause our stock price to fall. As of August 15, 2000, options to purchase
3,804,403 shares of our common stock were outstanding under our 1997 stock
option/stock issuance plan, all of which will be outstanding under our 2000
stock incentive plan upon its adoption. The exercise or transfer of these
options or underlying shares may also cause our stock price to fall.
21
<PAGE>
Our executive officers, directors and entities affiliated with them will
continue to have substantial control over us after the offering.
Our executive officers, directors and entities affiliated with them, if
acting together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other business combination transactions. These
stockholders will beneficially own, in the aggregate, approximately 53.53% of
our common stock following the completion of this offering. The interests of
these stockholders may differ from the interests of other stockholders.
Our stock price may be particularly volatile and could decline substantially
because of the industry in which we compete.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies have been extremely volatile, and have experienced fluctuations that
have often been unrelated to or disproportionate to the operating performance
of these companies. These broad market fluctuations could adversely affect the
market price of our common stock. In addition, as an early stage company, small
delays in implementation of our DNX rollout plan, customer bookings,
installations or revenues could result in material variations in our quarterly
results and quarter-to-quarter growth in the foreseeable future. This could
result in greater volatility in our stock price. These fluctuations could lead
also to costly class action litigation which could significantly harm our
business and operating results.
We may spend the net proceeds of this offering in ways with which you do not
agree.
We intend to use approximately $63.0 million of the net proceeds of this
offering to fund the capital costs of constructing DNX facilities, and the
remaining proceeds for general corporate purposes, including working capital,
product development and research, potential acquisitions and strategic
investments, and launching our services internationally, including in Canada
and Europe. Our management will have broad discretion to spend a significant
portion of the net proceeds from this offering in ways with which investors may
not agree. The failure of our management to apply these funds effectively would
result in unfavorable returns, which could cause the price of our stock to
decline.
We have anti-takeover provisions that may make it difficult for a third party
to acquire us.
Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
might be beneficial to our stockholders. See "Description of Capital Stock--
Anti-Takeover Effects of Various Provisions of Delaware Law and Our Certificate
of Incorporation and Bylaws" for a discussion of these anti-takeover
provisions.
Investors in this offering will suffer immediate and substantial dilution.
The initial public offering price of our common stock will be substantially
higher than the book value per share of our outstanding common stock
immediately after the offering. Accordingly, if you purchase common stock in
the offering, you will incur immediate dilution of approximately $10.41 in the
book value per share of our common stock from the price you pay for our common
stock. See "Dilution."
22
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future business or financial performance. In some
cases, you can identify forward-looking statements by terminology--for
instance, may, will, should, would, could, expect, plan, anticipate, believe,
estimate, predict, potential or continue, the negative of these terms, or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the risk
factors section. These factors may cause our actual results to differ
materially from any forward-looking statement. 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.
TRADEMARKS
We have received trademark and service mark registration for the mark
"Inflow." We have applied for protection for the marks "InflowNet(TM)",
"MonitorFlow(TM)" and "SecureFlow(TM)." Other trademarks and service marks
appearing in this prospectus are the property of their respective holders.
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of 7,000,000
shares of common stock in this offering of $95.7 million, assuming an initial
public offering price of $15.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses. If the
underwriters exercise their over-allotment option in full, we estimate that our
net proceeds will be $110.3 million.
We intend to use the net proceeds of this offering as follows:
. approximately $63.0 million to fund the capital costs of constructing
DNX facilities, expected to average approximately $7.0 million per
facility; and
. the remainder for general corporate purposes, including working capital,
product development and research, potential acquisitions and strategic
investments, and launching our services internationally, including in
Canada and Europe.
We presently do not have any specific plans for the proceeds to be used for
general corporate purposes, including working capital and product development
and research. Portions of the net proceeds of this offering may be used to fund
potential acquisitions and strategic investments, and launching our
international expansion. We have no current agreements or commitments for
acquisitions or strategic investments. Pending any such uses, we may invest the
net proceeds in interest bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain any future earnings for the operation,
development and proposed expansion of our business. Accordingly, we do not
anticipate declaring or paying any cash dividends in the foreseeable future. In
addition, any future financing arrangements may contain limitations on our
ability to declare and pay cash dividends.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 and
gives effect to the sale of 5,707,317 shares of Series C convertible preferred
stock at a price of $20.50 per share through June 30, 2000 and the net proceeds
therefrom. The pro forma information gives effect to the sale of an additional
1,902,440 shares of Series C convertible preferred stock at a price of $20.50
in August 2000 and the subsequent conversion of all of our outstanding
preferred stock as of August 15, 2000, including the conversion of 1,433,202
shares held by First Union Capital Partners, Inc. into 3,907,832 shares of non-
voting common stock. The pro forma as adjusted information reflects, in
addition to the pro forma adjustments, the issuance and sale of the 7,000,000
shares of common stock offered by us in this offering at the assumed initial
public offering price of $15.00 per share.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and accompanying notes and other financial data included elsewhere
in this prospectus. Additionally, Inflow intends to effect an approximate 2.73
for 1 split of its common stock prior to the consummation of this offering
which will result in a conversion ratio of 1 preferred share for approximately
2.73 shares of common stock. All references in this table to common shares,
common share prices, and per share amounts have been adjusted for all periods
presented to reflect this stock split.
<TABLE>
<CAPTION>
As of June 30, 2000
-------------------------------------------
Pro Forma as
Actual Pro Forma Adjusted
------------- ------------- -------------
<S> <C> <C> <C>
Long-term liabilities............. $ 2,976,679 $ 2,976,679 $ 2,976,679
Mandatorily redeemable convertible
preferred stock at redemption
value, $0.001 par value:
Series A mandatorily redeemable
convertible preferred stock;
3,310,000 shares authorized;
3,309,953 shares issued and
outstanding actual; none
authorized, issued and
outstanding pro forma and pro
forma as adjusted (1)
(unaudited)..................... 12,256,021 -- --
Series B mandatorily redeemable
convertible preferred stock;
7,000,000 shares authorized;
6,896,552 shares issued and
outstanding actual; none
authorized, issued and
outstanding pro forma and pro
forma as adjusted (1)
(unaudited)..................... 65,984,415 -- --
Series C mandatorily redeemable
convertible preferred stock:
7,318,000 shares authorized;
5,707,317 shares issued and
outstanding actual; none
authorized, issued and
outstanding pro forma and pro
forma as adjusted (1)
(unaudited)..................... 233,295,505 -- --
------------- ------------- -------------
Total mandatorily redeemable
convertible preferred stock.... 311,535,941 -- --
------------- ------------- -------------
Stockholders' equity (deficit):
Common stock, voting, $0.001 par
value; 115,533,317 shares
authorized actual and
150,000,000 shares authorized
pro forma and pro forma as
adjusted; 9,966,644 shares
issued and outstanding actual;
54,634,269 shares issued and
outstanding on a pro forma
basis (unaudited); 61,634,269
shares issued and outstanding
on a pro forma as adjusted
basis (1)(2) (unaudited)........ 9,966 54,634 61,634
Common stock, non-voting, $0.001
par value; 0 shares authorized
actual and 5,000,000 authorized
pro forma and pro forma as
adjusted, 0 shares issued and
outstanding actual, 3,907,832
shares issued and outstanding
on a pro forma and on a pro
forma as adjusted basis (1)(3)
(unaudited)..................... -- 3,908 3,908
Additional paid-in capital....... 35,423,019 385,760,384 481,403,384
Deferred compensation............ (29,001,103) (29,001,103) (29,001,103)
Stock subscriptions receivable
and other....................... (409,647) (409,647) (409,647)
Accumulated deficit.............. (149,299,639) (149,299,639) (149,299,639)
------------- ------------- -------------
Total stockholders' equity
(deficit)...................... (143,277,404) 207,108,537 302,758,537
------------- ------------- -------------
Total capitalization........... $ 171,235,216 $ 210,085,216 $ 305,735,216
============= ============= =============
</TABLE>
--------
(1) Upon the effective date of the anticipated common stock split, the
preferred stock conversion ratio is expected to be 1 preferred share for
approximately 2.73 shares of common stock.
(2) Excludes 3,299,702 shares of common stock issuable upon the exercise of
outstanding options as of June 30, 2000.
(3) 5,000,000 shares of non-voting common stock will be authorized by the
stockholders prior to the closing of this offering but, for purposes of
the pro forma and pro forma as adjusted information in this table, are
assumed to have been authorized as of June 30, 2000.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was approximately
$205.5 million, or $3.51 per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the number of shares of common stock
outstanding as of June 30, 2000 on a pro forma basis including the sale of
1,902,440 shares of Series C convertible preferred stock at a price of $20.50
per share and the net proceeds therefrom and the subsequent conversion of all
of our preferred stock into shares of common stock and non-voting common stock.
Dilution in net tangible book value per share represents the difference between
the assumed initial public offering price and the net tangible book value per
share of common stock immediately after the completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us at an assumed initial public offering price of $15.00 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net tangible book
value as of June 30, 2000 would have been $301.1 million or $4.59 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value to our existing stockholders of $1.08 per share of common stock and
an immediate dilution to purchasers in this offering of $10.41 per share of
common stock.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of common stock... $15.00
Pro forma net tangible book value per share of common stock at
June 30, 2000.................................................... $3.51
Increase in pro forma net tangible book value per share of common
stock attributable to this offering after giving effect to
conversion of our preferred stock................................ 1.08
-----
Pro forma net tangible book value per share of common stock after
this offering and after giving effect to conversion of our
preferred stock.................................................. 4.59
------
Dilution per share of common stock to new investors............... $10.41
======
</TABLE>
The following table summarizes, on a pro forma basis, as of June 30, 2000,
including the issuance of 1,902,440 shares of Series C convertible preferred
stock for gross proceeds of approximately $39,000,000 during the third quarter
of 2000, the differences between the number of shares of common stock purchased
from us, the aggregate cash consideration paid to us and the average price per
share paid by existing stockholders and new investors purchasing shares of
common stock in this offering. The calculation below is based on an assumed
initial public offering price of $15.00 per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us:
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price
------------------ -------------------- Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 58,542,101 89.3% $228,729,644 68.5% $ 3.91
New investors................... 7,000,000 10.7 105,000,000 31.5 15.00
---------- ----- ------------ ----- ------
Total........................... 65,542,101 100.0% 333,729,644 100.0% $ 5.09
========== ===== ============ ===== ======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of June 30, 2000. As of June 30, 2000, there were options
outstanding to purchase a total of
25
<PAGE>
3,299,702 shares with a weighted average exercise price of $2.56 per share. To
the extent that any of these options are exercised, there will be further
dilution to new investors.
Additionally, Inflow intends to effect an approximate 2.73 for 1 split of
its common stock prior to the consummation of this offering which will result
in a conversion ratio of 1 preferred share for approximately 2.73 shares of
common stock. All references in the foregoing discussion and tables to common
shares, common share prices, per share amounts and preferred stock conversion
ratios have been adjusted for all periods presented to reflect this stock
split.
26
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following selected financial data is qualified by reference to, and
should be read in conjunction with, our financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus. The statement of
operations data presented below for the period from September 26, 1997
(inception) through December 31, 1997 and for each of the years ended December
31, 1998 and 1999 and the selected balance sheet data at December 31, 1997,
1998 and 1999 is derived from our financial statements that have been audited
by PricewaterhouseCoopers LLP, independent accountants, included elsewhere in
this prospectus. The selected statement of operations data for the six months
ended June 30, 1999 and 2000 and the balance sheet data at June 30, 2000 are
derived from our unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include, in the opinion of our
management, all adjustments, consisting only of normal recurring adjustments,
that we consider necessary for a fair presentation of our financial position
and results of operations for these periods. The financial data for the six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000 or any other future
period. Additionally, Inflow intends to effect an approximate 2.73 for 1 split
of its common stock prior to the consummation of this offering. All references
in this table to common shares, common share prices, and per share amounts have
been adjusted for all periods presented to reflect this stock split.
<TABLE>
<CAPTION>
Years Ended Six Months Ended
Period from Inception December 31, June 30,
(September 26, 1997) to ------------------------ -------------------------
December 31, 1997 1998 1999 1999 2000
----------------------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ 45,032 $ 1,998,164 $ 486,470 $ 4,704,609
Costs of data network
exchange facilities:
Direct................. -- 118,848 2,681,591 541,291 7,695,190
Indirect............... -- 173,846 866,254 139,796 3,223,322
---------- ---------- ------------ ---------- -------------
Gross profit (loss) from
data network exchange
facilities............. -- (247,662) (1,549,681) (194,617) (6,213,903)
Total operating
expenses............ 72,193 469,248 3,871,931 525,345 18,205,946
---------- ---------- ------------ ---------- -------------
Loss from operations.... (72,193) (716,910) (5,421,612) (719,962) (24,419,849)
Other income (expense).. (9,314) (77,933) 691,987 56,597 1,578,617
---------- ---------- ------------ ---------- -------------
Net loss................ (81,507) (794,843) (4,729,625) (663,365) (22,841,232)
Accretion of convertible
preferred stock........ -- -- (696,897) -- (455,693)
Deemed dividend related
to beneficial
conversion feature of
Series B and Series C
preferred stock........ -- -- (5,655,173) -- (116,372,200)
---------- ---------- ------------ ---------- -------------
Net loss available to
common stockholders.... $ (81,507) $ (794,843) $(11,081,695) $ (663,365) $(139,669,125)
========== ========== ============ ========== =============
Net loss per common
share (basic and
diluted) (1)........... $ (.01) $ (.10) $ (1.35) $ (0.08) $ (16.27)
Weighted average common
shares (basic and
diluted) (1)........... 8,179,929 8,179,929 8,180,040 8,179,929 8,582,491
Pro forma net loss per
common share (basic and
diluted) (1)(2)........ $ (.59) $ (3.70)
Pro forma weighted
average common shares
(basic and diluted)
(1)(2)................. 17,496,175 37,598,295
Other Financial Data:
Cash flow provided by
(used in):
Operating activities... $ (43,868) $ (552,126) $ (4,443) $ (731,608) $ (1,689,573)
Investing activities... (18,592) (819,413) (68,916,746) (9,590,971) (95,995,063)
Financing activities... 603,000 854,604 69,862,642 10,298,943 117,987,573
Capital expenditures.... 18,592 819,413 12,005,820 (544,939) 46,897,357
Other Data:
Customers at end of
period................. -- 12 63 28 189
Operational DNXs........ -- 1 1 9
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------- As of
1997 1998 1999 June 30, 2000
-------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents... $540,540 $ 23,605 $ 965,058 $ 21,267,995
Short-term investments...... -- -- 56,387,515 102,500,024
Working capital............. (96,750) (1,226,804) 54,715,399 109,690,757
Total assets................ 558,783 832,142 72,882,292 192,338,301
Long-term liabilities,
including current
maturities................. 600,000 1,596,595 1,440,624 2,976,679
Mandatorily redeemable
convertible preferred
stock...................... -- -- 77,793,139 311,535,941
Total stockholders'
deficit.................... (78,507) (873,350) (11,453,573) (143,277,404)
</TABLE>
--------
(1) See note 1 of notes to financial statements for a description of the
computation of basic, diluted and pro forma net loss per share and the
number of shares used to compute basic, diluted and pro forma net loss per
share.
(2) Pro Forma data reflects the conversion of our convertible preferred stock
to common stock and non-voting common stock, which will occur
automatically upon the closing of this offering and, upon the effective
date of the anticipated common stock split, the preferred stock conversion
ratio is expected to be 1 preferred share for approximately 2.73 shares of
common stock.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and the
notes to those statements included elsewhere in this prospectus.
Overview
We provide colocation facilities, comprised of customized physical space and
network connections for our customers' computer equipment, along with value-
added services for their e-business and data communications applications. We
provide these solutions through our secure DNXs, which are connected to
multiple providers communications. We were incorporated in September 1997 and
opened Denver 1, our first DNX, in July 1998 and our first dollar of revenue
was realized in September 1998.
Our customers demand high-performance, reliable network connections to
maximize the performance of their applications for their partners and
customers. We provide customized solutions by providing a broad range of
network connections including Internet hosting and more secure, higher
performing private-line services. In addition, we offer our customers value-
added services, including equipment status monitoring, security management,
data backup and multi-provider Internet connections.
Our activities in 1999 consisted primarily of:
. Operating our first Denver DNX;
. Locating space and constructing our DNXs in Denver, Minneapolis, Raleigh-
Durham and San Diego;
. Developing and further refining our template for designing and building
future DNXs;
. Raising private equity to fund the deployment of additional DNXs;
. Developing our first three value-added service offerings--InflowNet(TM),
SecureFlow(TM) and MonitorFlow(TM);
. Introducing and continuing development of FlowTrack(TM), our proprietary
software application that allows us to rapidly and efficiently expand by
automating our business processes; and
. Further developing technical resources and our sales and management
teams.
29
<PAGE>
The following table provides an overview of our DNX deployment as of August
31, 2000.
<TABLE>
<CAPTION>
Operational First Dollar of
DNX Location Date Revenue Realized
<S> <C> <C> <C>
Denver 1 Lincoln Street, Denver, CO August 1998 September 1998
Minneapolis Eleventh Avenue South, Minneapolis, MN October 1999 November 1999
Raleigh-
Durham South Miami Blvd., Durham, NC November 1999 December 1999
Denver 2 Bannock Street, Denver, CO January 2000 February 2000
San Diego Scranton Road, San Diego, CA January 2000 March 2000
Austin Interstate Highway 35 North, Austin, TX April 2000 April 2000
Atlanta West Peachtree Street, Atlanta, GA May 2000 June 2000
Irvine Cartwright Road, Irvine, CA June 2000 June 2000
Pittsburgh Liberty Avenue, Pittsburgh, PA June 2000 June 2000
Phoenix East Van Buren Avenue, Phoenix, AZ July 2000 July 2000
Dallas Stemmons Freeway, Dallas, TX August 2000 August 2000
St. Louis North Tucker Blvd., St. Louis, MO August 2000 September 2000 (1)
---------------------------------------------------------------------------------------
</TABLE>
--------
(1) Anticipated date based on executed contracts.
We have formed several wholly-owned subsidiaries through which we may
conduct certain of our operations in the jurisdictions in which we have or are
planning on constructing a DNX, and may form additional subsidiaries as we
expand our geographic footprint.
We currently operate DNXs in 11 geographically dispersed markets across the
United States. We expect to have 15 DNXs in operation by the end of 2000 and a
total of 25 DNXs by the end of 2001. Each new DNX is expected to be constructed
to our current template of approximately 30,000 to 35,000 gross leased square
feet, of which approximately 20,000 square feet will be dedicated to raised-
floor hosting facilities, although we have constructed some of our newest DNXs
with a greater amount of raised floor space by duplicating this aspect of our
current template. Each DNX is expected to be fully-staffed at its initial
opening date, in advance of receiving any revenue and we expect to incur both
personnel-related costs in this pre-opening period as well as costs for power,
telecommunications services and other administrative costs. Over the first 24
months of development, we expect to invest approximately $11.0 million to fund
the capital expenditures and initial operating losses of each additional DNX,
of which we expect, as a general matter, that approximately two-thirds will be
expended prior to receiving any revenue.
We have a limited operating history and we have not reported an operating
profit for any year since our incorporation. We expect to incur net losses for
the foreseeable future.
Certain telecommunications services that we offer, and intend to offer in
the future, are or may be subject to regulation and certification requirements
at the federal and/or state level. The required application and registration
process could be lengthy and time-consuming, and any regulations to which we
may become subject may be burdensome and increase our operating costs. In
addition, our failure to have been registered as a telecommunications carrier
could expose us to substantial fines, lawsuits and the potential inability to
continue our operations.
We rely on multiple local, national, and international telecommunication
companies to provide us with telecommunications circuits, which we resell to
our customers. Any of these carriers may decide not to offer their services to
us for competitive or other reasons or may increase the cost of their services.
Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do and may
be able to adopt aggressive pricing policies and may be better able to compete
in a price competitive market.
30
<PAGE>
Description of Financial Components
Revenue. Revenue consists of monthly fees for colocation, network
connectivity, systems management and value-added services. Customer contracts
for the lease of cabinet space, network connectivity and our value-added
services are renewable and range from one to three years in duration with
payments due on a monthly basis. Although we do not charge our customers for
initial consulting required in the design and implementation of complex network
solutions, we do realize revenue from charges related to initial network
capacity provisioning, equipment installation and other one-time set-up fees.
Monthly recurring service revenue is recorded in the month the services are
rendered. Fees related to installation services are recorded as deferred
revenue and recognized on a straight-line basis over the term of the customer
service contracts. The incremental direct costs incurred related to the
origination of customer contracts are capitalized and recognized on a straight-
line basis over the same term.
Costs of DNXs. Direct costs of DNXs consist primarily of the incremental
costs of installation services, costs for private-line and Internet
connectivity, net rent expense, utilities and maintenance, operations personnel
salaries and benefits, and depreciation and amortization related to our DNXs.
Indirect DNX costs consist primarily of costs related to sales, marketing and
administrative personnel working in DNXs. We expect direct and indirect costs
of DNXs to increase significantly as we execute our strategy of rapidly
developing additional DNXs, due to costs related to construction and
maintenance, network provisioning, and hiring and training new DNX employees.
Sales and Marketing, General and Administrative and Product Development
Expenses. Sales and marketing expenses consist primarily of salaries and
benefits of our Denver headquarters' sales and marketing personnel, advertising
costs for national and regional campaigns and costs for national marketing and
collateral materials. General and administrative expenses include costs related
to our finance and accounting, legal, human resources, construction and
business development functions as well as costs associated with our central
network operations center located at our headquarters. Product development
expenses consist primarily of salaries and benefits of our employees devoted to
software and product development at our headquarters. We expect to add a
significant number of people centrally in sales and marketing, general and
administrative and product development functions as well as dramatically
increase our advertising and marketing efforts as we build out our DNXs.
Stock Compensation Expense. Stock compensation expense substantially
reflects the difference between the deemed fair market value of our common
stock for accounting purposes and the exercise price of the options as of the
date of grant. Deferred compensation is reflected as a reduction of
stockholders' equity and is generally being amortized as a charge to operations
over the 48-month vesting period of the options. This amortization is generally
recorded in an accelerated manner consistent with Financial Accounting
Standards Board ("FASB") Interpretation No. 28.
We do not intend to issue stock options below fair market value subsequent
to the effective date of this offering. We recorded deferred compensation
expense of approximately $9,480,700 and $27,134,800 for the difference between
the exercise price of the stock options and deemed fair market value of our
common stock at the date of grant for all stock options granted to employees in
1999 and the first six months of 2000 respectively. This deferred compensation
will be amortized to expense over the vesting period of the options, generally
four years, using an accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28. The unamortized deferred stock
compensation for the above stock options as of June 30, 2000 will be amortized
to stock compensation expense as follows: $9,383,459 (2000); $10,945,856
(2001); $5,792,975 (2002); $2,586,968 (2003); and $291,845 (2004).
31
<PAGE>
Beneficial Conversion Feature Related to Preferred Stock. In September 1999,
we agreed to sell shares of our $0.001 par value Series B preferred stock at
$8.70 per share. In October and November 1999, we closed this round of
financing and issued a total of 6,896,552 shares of Series B preferred stock at
$8.70 per share and received proceeds, net of issuance costs, totaling
$59,931,035. The difference between the offering price and the deemed fair
value of the Series B preferred stock resulted in a beneficial conversion
feature in the amount of approximately $5,655,173 which was calculated in
accordance with Emerging Issues Task Force No. 98-5.
In May and June 2000, we issued a total of 5,707,317 shares of $0.001 par
value Series C preferred stock at $20.50 per share and received proceeds, net
of issuance costs, totaling approximately $116,916,000. The difference between
the offering price and the deemed fair value of the Series C preferred stock
resulted in a beneficial conversion feature in the amount of approximately
$116,372,200 which was calculated in accordance with Emerging Issues Task Force
No. 98-5.
In August 2000, we issued an additional 1,902,440 shares of Series C
preferred stock at $20.50 per share. Based on currently available information,
we expect to record an additional beneficial conversion feature in the amount
of approximately $38,800,000.
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios. The beneficial conversion feature is
reflected as a deemed dividend in the statement of operations.
Construction-in-progress. At December 31, 1999, we had approximately $3.3
million in construction-in-progress at DNXs included in property and equipment.
These assets were placed into service during the first quarter of 2000 and will
incur approximately $355,000 of depreciation expense during 2000.
Comparison of Six Months Ended June 30, 2000 and 1999
During the six-months ended June 30, 2000 we opened DNXs in Denver (second
location), San Diego, Austin, Atlanta, Irvine and Pittsburgh. These DNX
facilities generated approximately 30% of total revenue for the six-month
period ended June 30, 2000. Pre-opening direct and indirect costs of DNXs were
incurred for Denver 3, St. Louis, Nashville, and Dublin, Ireland during the
six-month period ended June 30, 2000.
Revenue. Revenues increased from $486,470 for the six-month period ended
June 30, 1999 to $4,704,609 for the six-month period ended June 30, 2000. This
increase of approximately $4.2 million was primarily due to increased sales at
our Denver 1 DNX and the opening of eight additional DNXs, resulting in a total
of nine operational DNXs at June 30, 2000, as compared to one DNX at June 30,
1999.
The number of our customers increased from 28 at June 30, 1999 to 189 at
June 30, 2000. The increase in the number of customers was due to the opening
of eight DNXs since June 30, 1999 in addition to our expanded sales and
marketing efforts. Our revenue per customer increased as we sold new value-
added services to our existing customers as well as because our customers
contracted for more cabinet space and network connectivity as their own
applications expanded. At June 30, 2000 approximately 73% of our customers
purchased value-added services from us, compared to 14% as of June 30, 1999.
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We must effectively compete in our target markets to gain new customers and
revenue. Competition may have a negative effect on our business and financial
condition if it reduces our ability to attract new customers or cause us to
reduce the prices we charge our customers for our services.
Direct Costs of DNXs. Our direct costs of DNXs increased to $7,695,190 for
the six-month period ended June 30, 2000 from $541,291 for the six-month period
ended June 30, 1999. Approximately $2.2 million of this increase resulted from
hiring additional customer service technicians in order to support our growing
customer base. In addition, our network and power costs increased approximately
$1.6 million and $160,000 respectively for the six-month period ended June 30,
2000 compared to the six-month period ended June 30, 1999 primarily from an
increase in the number of customers and the resultant increase in network
bandwidth and power use. Depreciation expense and rent expense increased
approximately $911,000 and $1.9 million respectively for the six-month period
ended June 30, 2000 compared to the six-month period ended June 30, 1999
primarily from opening eight additional DNXs since June 30, 1999.
Indirect Costs of DNXs. Our indirect costs of DNXs increased to $3,223,322
for the six-month period ended June 30, 2000 from $139,796 for the six-month
period ended June 30, 1999 due primarily to incurring additional personnel-
related costs in sales, management and administration at our DNXs.
Sales and Marketing. Sales and marketing costs increased to $3,304,618 for
the six-month period ended June 30, 2000 from $89,172 for the six-month period
ended June 30, 1999. Approximately $1.3 million of this increase was due to
hiring sales support personnel in our corporate offices. In addition, from June
30, 1999 to June 30, 2000 we promoted brand awareness and established a
corporate marketing department by hiring ten marketing employees. Marketing
salaries and other marketing activities including market research, public
relations, trade shows, and advertising increased by approximately $1.9 million
for the six month period ended June 30, 2000 compared to the six-month period
ended June 30, 1999.
General and Administrative. General and administrative expenses increased to
$6,593,343 for the six-month period ended June 30, 2000 from $307,004 for the
six-month period ended June 30, 1999 as we hired more personnel to support our
growth.
Product Development. Product development costs increased to $1,269,049 for
the six-month period ended June 30, 2000 from $87,264 for the six-month period
ended June 30, 1999. This growth is attributable to increased personnel costs
related to the continued development of FlowTrack(TM), MonitorFlow(TM),
SecureFlow(TM) and InflowNet(TM), as well as the development of new and
enhanced services such as EvenFlow(TM)and StorageFlow(TM).
Stock Compensation. Stock compensation expense increased to $7,038,936 for
the six-month period ended June 30, 2000 from $41,905 for the six-month period
ended June 30, 1999. Unamortized deferred stock compensation at June 30, 1999
and June 30, 2000 was $455,747 and $29,001,103, respectively.
Other Income. Other income was $56,597 for the six-month period ended June
30, 1999 compared with $1,578,617 for the six-month period ended June 30, 2000.
The change was due to increased interest income earned on capital raised in our
equity financings.
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Comparison of Fiscal Years Ended December 31, 1999 and 1998
The Denver 1 DNX was opened in July 1998 and our first dollar of revenue was
realized in September 1998. Our Minneapolis and Raleigh-Durham DNXs were opened
in October and November 1999, respectively; however, we generated limited
revenue from those DNXs in 1999. Pre-opening direct and indirect costs of DNXs
were incurred for Denver 2, Minneapolis, Raleigh-Durham and San Diego during
1999.
Revenue. Our revenue increased to $1,998,164 in 1999 from $45,032 in 1998.
This growth in revenue resulted primarily from an increase in the number of
customers to 63 at the end of 1999 from 12 at the end of 1998, as well as
increases in revenue per customer from our first Denver DNX.
The number of our customers increased due to our expanded sales and
marketing efforts. Our revenue per customer increased as we sold new value-
added services to our existing customers as well as because our customers
contracted for more cabinet space and network connectivity as their own
applications expanded. At December 31, 1999, approximately 51% of our customers
purchased value-added services from us, compared to 8% as of December 31, 1998.
Direct Costs of DNXs. Our direct costs of DNXs increased to $2,681,591 in
1999 from $118,848 in 1998. Approximately $716,000 of this increase resulted
from hiring 31 additional operations technicians during 1999 to support our
growing customer base. In addition our network and power costs increased
approximately $599,000 and $179,000 respectively from 1998 to 1999 primarily
from an increase in the number of customers and the resultant increase in
network bandwidth and power use.
Indirect Costs of DNXs. Our indirect costs of DNXs increased to $866,254 in
1999 from $173,846 in 1998 due principally to incurring additional personnel-
related costs in sales, management and administration at our DNXs.
Sales and Marketing. Sales and marketing costs increased to $653,186 in 1999
from none in 1998. Approximately $216,000 of this increase is from our attempt
to create a national sales support infrastructure during 1999 by hiring 11
additional corporate sales people. In addition, during 1999 in an attempt to
promote brand awareness we established a corporate marketing department by
hiring five marketing employees. We spent approximately $437,000 on marketing
salaries and other marketing activities including market research, public
relations, trade shows, and advertising.
General and Administrative. General and administrative expenses increased to
$1,937,254 in 1999 from $298,985 in 1998 as we hired more personnel to support
our growth.
Product Development. Product and development costs increased to $706,008 in
1999 from $170,263 in 1998. This growth is attributable to increased personnel
costs related to development of FlowTrack(TM), MonitorFlow(TM), SecureFlow(TM)
and InflowNet(TM).
Stock Compensation. During 1999, we recorded aggregate deferred stock
compensation of $9,480,706. We recorded amortization of this deferred
compensation of $575,483 in 1999. Prior to 1999, we did not record any deferred
compensation.
Other Income (expense). Other income (expense) was ($77,933) in 1998 as
compared with $691,987 in 1999. The change was due to interest income earned on
capital raised in our equity financings.
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Comparison of Fiscal Year Ended December 31, 1998 and Period from Inception
(September 26, 1997) through December 31, 1997
We did not generate any revenue during 1997. During this time, we were
primarily refining our business plan, developing the design of our first DNX,
and gathering requirements to start writing a proprietary operating software,
which evolved into FlowTrack(TM). Our costs and expenses consisted primarily of
salaries, travel and legal fees related to start-up activities and capital
expenditures related to personal computers and peripheral equipment.
Revenue. Our revenue increased to $45,032 in 1998 from none in 1997. This
revenue growth is attributable to signing our first customer and commencing
operations in the third quarter of 1998.
Cost of DNXs. Our direct and indirect costs of DNXs increased to $292,694 in
1998 from none in 1997 as we opened our first DNX in Denver and incurred costs
related to facility rent, network connectivity and customer service personnel.
Sales and Marketing, General and Administrative Product Development and
Stock Compensation. Our operating expenses increased from $72,193 in 1997 to
$469,248 in 1998 due principally to hiring of additional sales, marketing,
technical and administrative personnel.
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Quarterly Results of Operations
The following table sets forth certain statement of operations data on a
quarterly basis for the three months ended March 31, 1999, June 30, 1999,
September 30, 1999, December 31, 1999, March 31, 2000 and June 30, 2000. This
information has been derived from our unaudited quarterly financial statements.
In our opinion, this quarterly information has been prepared on a basis
consistent with the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments which are necessary for a fair
presentation of the financial information for the quarters presented. This
information should be read in conjunction with the financial statements and
notes thereto included elsewhere in this prospectus. The results of operations
for any one quarter are not necessarily indicative of the results of operations
for any future period:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
March 31, June 30, September 30, December March 31, June 30,
1999 1999 1999 31, 1999 2000 2000
--------- --------- ------------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ 126,396 $ 360,074 $ 596,571 $ 915,123 $ 1,608,231 $ 3,096,378
Costs of DNXs:
Direct................. 215,287 326,004 681,105 1,459,195 2,529,713 5,165,477
Indirect............... 48,530 91,266 241,238 485,220 1,047,789 2,175,533
--------- --------- ----------- ----------- ----------- ------------
Gross profit (loss)
from DNXs............ (137,421) (57,196) (325,772) (1,029,292) (1,969,271) (4,244,632)
Other operating
expenses:
Sales and marketing.... 15,534 73,638 221,272 342,742 935,634 2,368,984
General and
administrative........ 93,418 213,586 441,310 1,188,940 2,666,333 3,927,010
Product development.... 13,302 73,962 244,472 374,272 588,186 680,863
Stock compensation..... 3,768 38,137 169,958 363,620 2,761,546 4,277,390
--------- --------- ----------- ----------- ----------- ------------
Total operating
expenses............... 126,022 399,323 1,077,012 2,269,574 6,951,699 11,254,247
Loss from operations.... (263,443) (456,519) (1,402,784) (3,298,866) (8,920,970) (15,498,879)
Other income (expense).. (35,148) 91,745 109,613 525,777 837,178 741,439
--------- --------- ----------- ----------- ----------- ------------
Net loss................ $(298,591) $(364,774) $(1,293,171) $(2,773,089) $(8,083,792) $(14,757,440)
========= ========= =========== =========== =========== ============
</TABLE>
Revenue increased 261% during the quarter ended March 31, 1999, 185% during
the quarter ended June 30, 1999, 66% during the quarter ended September 30,
1999, 53% during the quarter ended December 31, 1999, 76% during the quarter
ended March 31, 2000 and 93% during the quarter ended June 30, 2000, as the
number of customers and revenue per customer increased. Direct and indirect
costs of DNXs increased in each quarter due to the increase in the number of
customers. Overhead expenses and deferred stock compensation expenses increased
quarter over quarter primarily due to the addition of personnel as our business
increased.
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods from inception. These cash usages have been funded by sales of stock.
Those sales amounted to $3,000, $0 and $70,210,002 in 1997, 1998 and 1999,
respectively. In April 1999, we sold our Series A convertible preferred stock
to First Union Capital Partners, Inc., our co-founders Joel C. Daly and Arthur
H. Zeile and certain other private investors for aggregate proceeds to us of
approximately $10.2 million.
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During the fourth quarter of 1999, we sold our Series B convertible preferred
stock to Meritage Investment Partners, First Union Capital Partners, Inc.,
J.P. Morgan Investment Corporation, General Electric Capital Corporation and
Stolberg, Meehan and Scano II, L.P. for aggregate proceeds to us of
approximately $60.0 million. In the second and third quarters of 2000, we sold
our Series C convertible preferred stock to certain of our existing preferred
stockholders, as well as to Spire Capital Partners, L.P., Citizens Capital,
Inc., G.C. Investments, LLC, Castellini Management Company Limited
Partnership, DLJ Merchant Banking Funding III, Inc. and entities affiliated
with DLJ Merchant Banking Funding III, Inc., PNC Venture Corp., Hexagon
Investments LLC, Grandhaven LLC, BancBoston Capital, Inc., Cornerstone Equity
Investors IV, LP, Private Equity Portfolio Fund II, LLC, BMO Nesbitt Burns
Capital (U.S.), Inc. and Carlyle High Yield Partners, L.P., for aggregate
proceeds to us of approximately $156.0 million.
Net cash used in operating activities in 1997, 1998 and 1999 was $43,868,
$552,126 and $4,443, respectively. Net cash used for operating activities in
each of these periods was primarily the result of operating losses and changes
in working capital.
Net cash used in operating activities for the six-month period ended June
30, 2000 was $1,689,573. Net cash used in operating activities was primarily
the result of a $22,841,233 net loss offset by the amortization of $7,038,936
of deferred stock compensation, a $13,785,527 increase in accounts payable and
other changes in working capital.
Net cash used for investing activities in 1997, 1998 and 1999 was $18,592,
$819,413 and $68.9 million, respectively. Net cash used for investing
activities in each of 1998 and 1997 was primarily the result of capital
expenditures for DNXs, as well as leasehold improvements, furniture and
fixtures and computers and other equipment. Net cash used in 1999 for
investing activities also includes $56.4 million of purchases of short-term
investments.
Net cash used in investing activities for the six-month period ended June
30, 2000 was $95,995,063. Net cash used for investing activities was primarily
the result of $46,895,267 of capital expenditures for DNXs, the purchase of
$46,376,663 of short-term investments, and a $2,714,518 increase in restricted
cash. Although we have plans to invest significantly in property and
equipment, we have no material commitments for such items at this time. We
enter into non-cancelable operating lease agreements for our corporate offices
and DNXs. Future annual minimum lease payments, net of deferred rent, as of
June 30, 2000 totaled approximately $98,546,000.
We anticipate that we will have significant cash requirements for several
years as we build additional DNXs, increase our employee base to support DNX
operations, develop additional value-added services and expand our marketing
efforts. In addition, we expect to invest significantly in the purchase of
property and equipment.
We currently operate DNXs in 11 geographically dispersed markets across the
United States. We expect to have 15 DNXs in operation by the end of 2000 and a
total of 25 DNXs by the end of 2001. The capital costs of constructing DNX
facilities are expected to average approximately $7.0 million per facility. In
order to facilitate this build out, our capital requirements are approximately
$28.0 million for the last six months 2000, and an additional $70.0 million
for 2001.
We expect to receive net proceeds from this offering of approximately $95.7
million, or up to $110.3 million if the underwriters exercise their over-
allotment option. We intend to use the net proceeds of this offering as
follows: approximately $63.0 million to fund the capital costs of constructing
DNX facilities and the remainder for general corporate purposes, including
working
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capital, product development and research, potential acquisitions and strategic
investments, and launching our services internationally, including in Canada
and Europe. Based on our DNX development plan, we believe the net proceeds of
this offering, together with cash on hand, will be sufficient to fund our
anticipated operating and capital needs for the next 18 months. After that
time, we will require significant additional funds to support our operations
and fund the expansion of our business. We intend to raise these additional
funds by either borrowing or by selling more equity; however we may not be
successful in such efforts. Moreover, due to our limited operating history, the
nature of our industry and the possibility that we will encounter delays or
cost overruns in building our planned new DNXs, our future capital needs are
difficult to predict, and we may need additional capital before this time. We
may not be able to obtain additional funding in amounts or on terms acceptable
to us. Our inability to raise additional funds could impede our growth, may
force us to scale back or cease our operations or may negatively affect our
financial condition or the market price of our stock.
As of June 30, 2000 our commitments under non-cancelable operating lease
agreements in 2000, 2001, 2002, 2003, 2004 and thereafter are $4,471,124,
$9,000,129, $9,289,563, $9,530,583, $9,749,920 and $56,504,814, respectively.
Subsequent to June 30, 2000, we entered into additional operating leases with
future minimum lease payments aggregating $8,154,000 over the next ten years.
Year 2000 Compliance
To date, we have experienced no material complications to our operations due
to Year 2000 issues nor do we expect to experience any material adverse effects
on our business, financial condition or results of operations internally or
from any of our vendors or service providers as a result of Year 2000 problems.
Recent Accounting Pronouncements
In December 1999 the SEC issued staff accounting bulletin No. 101, "Revenue
Recognition in Financial Statements" as amended. Staff accounting bulletin 101
provides specific guidance, among other things, as to the recognition of
revenue related to up-front non-refundable fees and services charges received
in connection with a contractual arrangement. We have applied the provisions of
staff accounting bulletin 101 for the year ended December 31, 1999. The
adoption of staff accounting bulletin 101 did not have a material impact on our
financial condition or results of operations.
Qualitative and Quantitative Disclosures about Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high-quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of our cash
equivalents, we believe that we are not subject to any material market risk
exposure.
We do not have any foreign currency hedging or other derivative financial
instruments.
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BUSINESS
Overview
We are a rapidly growing provider of colocation facilities, comprised of
customized physical space and network connections for our customers' computer
equipment, along with value-added services for their e-business and data
communications applications. We provide reliable outsourced solutions to small
and medium-sized businesses with sophisticated networking needs through our
secure data network exchange facilities, which are connected to multiple
communications carriers. We opened our first state-of-the-art DNX in Denver in
July 1998 and today we have opened DNXs in Austin, Atlanta, Dallas, Denver,
Irvine, Minneapolis, Phoenix, Pittsburgh, Raleigh-Durham, San Diego and St.
Louis. We expect to have a total of 15 DNXs in operation by the end of 2000 and
intend to build another 10 by the end of 2001. Our customers benefit from the
close proximity of our DNXs to their businesses and we benefit from frequent
interaction with them. As of June 30, 2000, we provided services to 189
customers.
Our customers are in need of high-performance, reliable network connections
to maximize the performance of the applications they provide for their business
partners and customers. Using a consultative sales approach, which involves our
sales engineers and network designers, we tailor solutions for our customers
using a broad range of network connections. We optimize our customers'
applications by providing high-speed Internet access and private line services,
which offer more secure, higher-performing connections, using different types
of connections depending on the customers' transmission rate and data carrying
capacity, or bandwidth, needs. We offer our customers a suite of value-added
services including MonitorFlow(TM) for equipment and application monitoring,
SecureFlow(TM) for security management commonly referred to as a firewall,
EvenFlow(TM) for distributing Internet traffic among multiple servers,
StorageFlow(TM), for data-backup and InflowNet(TM) for the directing Internet
traffic across the networks of several providers. We have also developed a
proprietary software program, FlowTrack(TM), which is composed of modules
designed to integrate and automate our business processes. Together with our
standardized set of processes for selecting, constructing and staffing new
sites, FlowTrack(TM) allows us to rapidly and efficiently expand and replicate
our business across a broad network of DNXs.
We believe that our solutions provide our customers not only a significant
performance advantage but also a compelling cost and time-to-market advantage.
Our customers benefit from economies of scale through the sharing of
infrastructure and personnel costs among multiple users. Our outsourced
solutions enable our customers to quickly establish and rapidly expand their e-
business applications, allowing them to better focus on their core
competencies. Our customers include Akamai, Email Knowledge, At Home (aka
Excite@Home), Factual Data Corp., High Speed Access Corp., MapQuest.com,
MessageMedia Inc., Northpoint Communications, Inc., Sandbox.com, Inc. and
SciQuest.com.
Market Opportunity
We believe that a significant opportunity exists to provide colocation
services, management of complex network connections and value-added services to
small and medium-sized companies focused on e-business, due in large part to
the following trends:
Growth of Internet Use for Business. Since the early 1990's, the Internet
has experienced tremendous growth and its use as a medium for communications
and commerce is increasing.
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According to Forrester, the number of U.S. enterprises online is expected to
grow from 1.8 million in 1998 to approximately 4.3 million in 2003.
We believe that businesses are increasingly using the Internet for a variety
of reasons, including:
. Engaging in e-commerce, both business-to-business and business-to-
consumer;
. Communicating and conducting business more efficiently with customers,
suppliers and employees; and
. Delivering application services to businesses on a usage-based model,
such as the application service provider model.
The greatest area of online growth is in the area of small to medium-sized
companies. According to International Data Corporation, Web-related
expenditures by small businesses in the United States are expected to grow from
$9.6 billion in 1999 to over $32 billion by 2003. In addition, Forrester
estimates that the business-to-business e-commerce market is expected to grow
dramatically, from $43 billion in 1998 to $1.3 trillion in 2003, a compound
annual growth rate of 98%.
Increasing Network Complexity. Businesses are seeking to improve
efficiencies by capitalizing on lower network costs and new technologies and
are requiring greater connectivity to their customers, business partners and
employees in geographically dispersed locations. At the same time, many
businesses have been unable to capitalize on the Internet. Growth of Internet
usage and lack of Internet infrastructure development have led to quality and
reliability problems in the delivery of Internet-related services, particularly
at the increasingly congested points of direct connection to the Internet,
known as network access points. In addition, communications infrastructures are
becoming increasingly complex and difficult to manage as businesses create and
deploy data networking solutions to meet their growing needs. Small and medium-
sized businesses, in particular, are finding that designing, implementing and
managing their network infrastructures is an inefficient use of their
resources.
Network management has been made even more difficult by the ongoing shortage
of information technology professionals. According to the Information
Technology Association of America, there were over 345,000 open information
technology positions at the end of 1998 in the United States, which represents
approximately 10% of the total number of current core information technology
employees. According to a report released by the Department of Commerce in
1998, companies were already reporting severe difficulties in filling these
positions.
We believe that small and medium-sized businesses are particularly hard hit
by the scarcity of information technology professionals and have a difficult
time attracting and retaining these individuals. At best, the loss of a key
information technology professional at a small or medium-sized business can
result in a difficult search for a replacement. At worst, this could mean the
loss of all knowledge regarding a business' customized network infrastructure.
Growth in Outsourcing. An increasing number of businesses, especially small
and medium-sized e-businesses, are outsourcing significant aspects of their
complex, time-sensitive information technology needs due to the:
. High cost and complexity of establishing and maintaining a Web presence;
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. Challenge of maintaining state-of-the-art technology and back-up systems
to support their e-business applications; and
. Difficulty in attracting and retaining qualified information technology
talent.
As businesses become increasingly comfortable outsourcing their critical
applications and equipment, the market for hosting and colocation services is
expected to grow rapidly. Forrester estimates that revenues from Internet-
related hosting and colocation services will grow from approximately $875
million in 1998 to approximately $14.7 billion in 2003, a compound annual
growth rate of 76%. Within this market, Forrester predicts that the market for
customized and colocation hosting services, segments on which we largely focus,
will grow from approximately $427 million in 1998 to approximately $7.6 billion
in 2003, a compound annual growth rate of 80%. The market for colocation
services is relatively new and rapidly evolving and neither we nor this market
may achieve or maintain this level of growth or acceptance. See "Risk Factors--
Risks Related to Our Industry."
Need for Comprehensive Advanced e-Business Application Solutions. A variety
of companies offer products and services that attempt to address the
infrastructure needs of e-businesses. However, we believe that the solutions
offered by these companies fail to meet the requirements of small and medium-
sized e-businesses for their complex, time-sensitive applications. Most
providers of colocation facilities merely provide connectivity and fail to
offer the value-added services necessary to support emerging e-businesses.
Additionally, many of these companies offer only Internet connectivity and do
not provide complex data networking and private-line solutions that are needed
by growing business-to-business enterprises. Many of these companies provide
these services in large facilities centrally located near the major network
access points, far from their customers. This has created a significant
opportunity for a complete outsourced solution for connecting, monitoring and
servicing e-business applications of small and medium-sized businesses.
Our Solution
We provide our customers with a comprehensive range of high-performance
services for their advanced e-business and data communications applications.
Through our state-of-the-art DNXs, we provide network connectivity with
multiple communications providers, value-added services and a secure
environment for our customers' application hardware. Our outsourcing solution
offers meaningful performance, cost and time-to-market benefits to our
customers. Specifically, we provide our customers with the following key
advantages:
Reliable Facilities and Multiple Carrier Connections. As more complex, time-
critical information and applications migrate onto the Internet and other data
networks, our customers are increasingly demanding not only more data carrying
capacity, or bandwidth, but more reliable bandwidth. Our DNXs have been
engineered and constructed to eliminate any single point of system failure,
which reduces the possibility of application downtime for our customers. For
instance, our DNXs offer back-up power, fire suppression, environmental
controls and security systems. Because communications networks may fail, our
DNXs also offer access to multiple carriers, thereby providing back-up high-
speed network connections. We choose these carriers based on their performance,
network architecture, ability to avoid congested network access points and
available bandwidth.
Complex Network Connectivity. Many businesses require more secure, higher-
performance private-line connectivity solutions than basic Internet
connections. We design, provision and maintain
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complex network connections tailored to each customer's needs. We provide
customized solutions by using different types of connections designed to
optimize each connection's price and performance characteristics. Private-line
connections also allow for enhanced security by using a dedicated channel over
which no other data may travel. We believe that this tailored approach to
network connections is integral to serving the emerging e-business community.
Value-Added Services. We offer services that improve the reliability and
performance of our customers' e-business applications. Our InflowNet(TM)
service provides back-up Internet connectivity by dynamically allocating data
among multiple Internet pathways. Other branded services include SecureFlow(TM)
for security management, commonly known as a firewall, EvenFlow(TM) for
distributing Internet traffic among multiple servers, MonitorFlow(TM) for
equipment and application status monitoring and StorageFlow(TM) for data-
backup. We develop these services in-house, often based on products from key
technology providers. These services, in the aggregate, are designed to provide
a high degree of reliability, protection of our customers' applications in the
event of a system failure and ongoing security.
Geographic Proximity. We target an underserved customer base in geographic
markets with a significant number of e-businesses. We believe that building
facilities in a large number of cities versus concentrating on a few locations
provides a number of psychological and practical benefits to our customers and
distinguishes us from other colocation providers. Our geographic proximity to
our customers allows customer technicians to easily access their equipment for
maintenance, upgrades and changes, as well as better manage potential
emergencies. Because most fast growing e-businesses frequently change their
hardware and software configurations to take advantage of new and improved
technologies, having their equipment readily accessible is critical. This
regular contact with our customers enables us to sell tailored value-added
services and enhance our service offerings through better identification of
customer needs. Moreover, the geographic dispersion of our DNXs allows our
customers' data traffic to avoid the congested network access points, thereby
increasing the performance and reliability of their data transmissions.
Accelerated Time-to-Market and Efficient Expansion. Because we believe that
speed to market and the ability to rapidly grow are critical to our customers,
particularly e-businesses, we offer an outsourced solution that provides
accelerated deployment and expansion of their applications. Building an in-
house data center is an expensive, complicated and time-consuming process. In
contrast, we guarantee that we will be ready to implement our customers'
applications within 30 days from the signing of a contract. Our robust
proprietary database, FlowTrack(TM), facilitates DNX and network capacity
planning that allows us to rapidly fulfill our customers' orders for additional
space and connectivity, typically within days of their request. Our outsourced
solution enables our customers to quickly establish and rapidly expand their e-
business applications, allowing them to better focus on their core
competencies.
Our Strategy
Our objective is to be the leading provider of sophisticated services to
small and medium-sized businesses for the management of their complex e-
business and data communications applications. To achieve this objective, we
intend to:
Rapidly Expand Into Our Target Markets. We believe significant opportunities
exist to provide complex networking solutions to small and medium-sized e-
businesses. To establish a leadership position in providing these solutions, we
believe we have to expand quickly into multiple markets. We intend to increase
the number of our DNXs from 12 today to 25 DNXs by the end of 2001. We
42
<PAGE>
are focused primarily on domestic expansion but intend to initiate business in
Europe and in Canada during mid-2001 and to continue to evaluate further
international opportunities. In addition, our expansion into metropolitan areas
that have previously been underserved by our competitors is designed to enable
us to be the first mover in many of these markets, an important advantage given
the low customer turnover rate in our industry.
Leverage Our Infrastructure. We have developed an infrastructure and
proprietary software systems to help us rapidly and efficiently expand into
multiple markets. We have built a team and set of automated processes to
accelerate the design, construction, staffing and marketing of future DNXs. Our
deployment team consists of 14 full-time professionals who manage outside
consultants and the key elements of the data center construction process. We
have developed a robust proprietary software system, FlowTrack(TM), which
integrates and automates our business processes and allows us to effectively
manage rapid deployment across a broad network of DNXs. In addition, we hire a
general manager for a DNX up to six months in advance of DNX activation along
with up to seven sales professionals and nine network engineers and operations
technicians to launch each DNX. Automating our deployment processes, where
possible, allows us to more quickly expand into new markets.
Continue to Emphasize Customer Service. We believe that delivering complete
customer satisfaction is vital to growing our business. We target customers who
are underserved by existing colocation providers or who have a small
information technology staff in need of outside expertise and consultation. Our
emphasis on customer service and support has resulted in a strong, loyal base
of customers and provides us many benefits, including potentially shortened
sales cycles, greater incremental sales opportunities to our existing customers
and new and improved services resulting from customer feedback. We intend to
remain focused on providing the highest level of satisfaction to our customers
by continuing to hire superior sales, technical and customer support personnel
and maintaining our intensive training programs.
Enhance and Cross-Sell Our Suite of Services. We intend to continue to
develop new and enhanced services that we believe will be attractive to
potential and existing customers and currently employ 20 full-time engineers
and technicians devoted to this development effort. Our sales force is trained
to effectively communicate the benefits of these new services and is motivated
to sell them as they become available to new or existing customers. For
example, we introduced InflowNet(TM) in September 1999. Of our 42 customers as
of September 30, 1999, 43% currently purchase InflowNet(TM). Additionally, 90%
of the new customers contracted since September 30, 1999 have purchased
InflowNet(TM). New services currently under development include SecureFlow(TM)
VPN, a solution to manage an Internet-based virtual private network for our
customers, which will permit our customers to temporarily access private
networks from a public connection. We are also currently developing further
enhancements to EvenFlow(TM) to provide the capability of distributing Internet
traffic over servers located in multiple DNXs, and our managed data storage
services. In addition, our geographically dispersed footprint may provide us
with significant advantages in providing future services such as caching, which
focuses on moving information closer to the user in order to make it more
readily and speedily accessible.
Expand Sales Channels and Increase Brand Awareness. We intend to
significantly grow our direct sales organization to expand coverage and
penetration of small and medium-sized businesses as we build out our DNXs. We
believe that we can further accelerate customer growth by using indirect sales
channels such as relationships with Internet service providers, distributors,
companies
43
<PAGE>
that package standard products with software solutions and those which
integrate and maintain network systems or computing operations. We believe that
building our brand awareness is important to attracting and expanding our
customer base. In addition to the branding achieved by our various sales
channels, we intend to increase our brand recognition through a variety of
marketing and promotional techniques, including traditional advertising,
hosting on-site conferences and seminars, attending trade shows, establishing
and maintaining close relationships with recognized industry analysts and
entering into co-marketing and co-branding agreements with strategic partners
and customers.
During August, 2000, we introduced our channel sales program, InFlow UpTime
Alliance. To date, this program includes approximately 15 participants,
including local system integrators, value-added equipment resellers and web-
design firms.We believe that we can further accelerate customer growth through
this channel sales program. Members of the InFlow UpTime Alliance are
compensated based on a percentage of monthly recurring revenue for the
customers which they refer.
Our Services
Our services are designed to provide high-performance, reliability and
expertise to our customers. Our services are generally covered by service level
agreements which specify exacting performance levels associated with
availability and service repair time. We believe that our service level
agreements and customer support are among the best in our industry. Our
services are delivered from our geographically dispersed, state-of-the-art DNXs
and fall within the following general categories, each of which is designed to
enhance the performance, reliability and security of our customers' mission-
critical applications:
<TABLE>
<CAPTION>
Category Services
<C> <S>
Equipment Colocation . Network design
. Secure equipment colocation
. Back-up power
------------------------------------------------------------------------------------
Network Access and Connectivity . Local network connectivity
. National network connectivity
------------------------------------------------------------------------------------
Valued-Added Services . Multi-provider Internet connectivity
. Monitoring, managed firewalls and load balancing
------------------------------------------------------------------------------------
</TABLE>
For the year ended December 31, 1999, revenue from equipment colocation,
network access and connectivity, and value added services accounted for 51%,
32%, and 17% of total revenue, respectively. We derive revenue from both
installation charges and monthly recurring service fees. For the year ended
December 31, 1999, installation revenue represented 7.9% of our total revenue
during this period. For the six months ended June 30, 2000, revenue from
equipment colocation, network access and connectivity, and value added services
accounted for 48%, 17%, and 35% of total revenue, respectively. For the six
months ended June 30, 2000, installation revenue represented 9% of our total
revenue during this period.
Equipment Colocation
Our DNXs are designed to provide our customers with a protected environment
for their data communications equipment. For instance, our DNXs offer back-up
power and fire suppression systems, high levels of physical security and
sophisticated environmental controls. We began offering colocation services in
September of 1998.
44
<PAGE>
Our colocation services include space rental and power supply. We charge an
installation fee for each of these services, as well as monthly fees based on
space and power usage. Additionally, we provide customers initial consulting
and design assistance at no additional charge to help them optimize their
complex communications solutions. We offer our customers a variety of choices
for these services as follows:
<TABLE>
<CAPTION>
Service Description
<C> <S>
Network Design . Custom engineered solutions
. Network installation, configuration and
testing
. Documentation of network operations and
trouble shooting procedures
-------------------------------------------------------------------------------
Secure Equipment Colocation . Dedicated, lockable cabinet space rental--19
or 23 inches wide, 7 feet high and 31 or 36
inches deep
. Dedicated, lockable cage or suite space
. Raised-floor environment for easy, controlled
access to power and network connections
. 24x7 on-site technical support
. Controlled temperature and humidity
. Guaranteed 30 day installation
-------------------------------------------------------------------------------
Back-up Power . Surge-protected power
. Multiple utility feeds from separate grids,
uninterruptible power supplies and backup
diesel-powered generators
. Multiple A/C and D/C power distribution
offerings
. Guaranteed 30 day installation and 100%
uptime
-------------------------------------------------------------------------------
</TABLE>
Network Access and Connectivity
We provide access and connectivity to multiple carriers, including major
Internet pathways such as UUNet, GTE and AT&T. We have executed national master
service agreements with certain providers to help ensure that we have available
capacity to meet our customers' growing demand. We also utilize Internet
pathways with providers such as Verio and Cable & Wireless on a selective basis
where we believe there is a measurable performance benefit to doing so. Through
local connections with incumbent local exchange carriers, such as Qwest
(formerly U S West), Verizon (formerly Bell Atlantic and GTE), SBC (including
Southwestern Bell and Pacific Bell), BellSouth, and competitive telephone
companies, such as Time Warner Telecommunications and AT&T Local, Sprint, MCI
WorldCom and ICG, we can deliver customized services directly to a customer's
cabinet. We purchase various types of communication circuits in bulk quantities
and offer access to them to our customers. Because of our carrier neutrality,
we can further enhance the reliability of our customer's applications by
providing customized solutions to route traffic to alternative networks in the
event of a failure of any single network. Additionally, we select the network
connections which offer our customers the most appropriate performance and
security characteristics for their business.
By ordering carrier circuits and maintaining our own circuit connection
equipment, we take responsibility for the link from the customers' equipment to
the carrier's network. We connect our DNXs to these networks through multiple
pathways. We guarantee the performance of our own network connections. Because
we do not own the necessary pathways, we have contracts with several third
party service providers, such as Qwest, AT&T Local, MCI WorldCom and ICG. Terms
of our agreements with these service providers generally commit us to purchase
fixed amounts of bandwidth and may include the ability to increase bandwidth as
necessary. These agreements are generally non-cancelable by either us or the
third party and include service fees based on rates negotiated on a contract-
by-contract basis.
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<PAGE>
Our network access and connectivity services include ongoing 24 hours a day,
seven days a week, or 24x7, monitoring of network performance. We began
offering network access and connectivity services in September of 1998. We
receive both initial setup fees and recurring monthly revenue for these
services. Our customers enjoy a variety of resold network connectivity and
service guarantees as follows:
<TABLE>
<CAPTION>
Description
<C> <S>
Network Connectivity . Multiple types of private-line connections
. Internet
. Remote access modem lines
. Guaranteed 30 day installation
. Guaranteed 4 hour maximum time to repair
. Match carrier service level agreements for
availability
-------------------------------------------------------------------
</TABLE>
Value-Added Services
We believe that our customers seek value-added services to enhance the
reliability and performance of their applications. We employ 20 full-time
engineers and technicians devoted to the evaluation, development and deployment
of new value-added services. In addition, we enter into agreements with key
technology providers to develop our value-added services. We intend to continue
to develop new and enhanced services which we believe will be attractive to
potential and existing customers.
Multi-Provider Internet Access: InflowNet(TM) is an innovative Internet
access solution which provides direct Internet access to the networks of
multiple major Internet providers. We have executed master service agreements
with certain providers to help ensure that we have available capacity to meet
our customers' growing demand and utilize a variety of Internet providers. Many
providers offer limited back-up options within their own network, but if
individual networks fail, so does a customer's application. By managing for our
customers Border Gateway Protocol v 4.0, an advanced Internet routing protocol,
InflowNet(TM) provides reliability by re-routing traffic to another network
should any individual Internet providers' network fail. In addition, we choose
providers based on end-user reach, performance, architecture, ability to avoid
congested network access points and available bandwidth, providing a very
reliable, high-performance solution which we believe is appealing to e-
businesses. We introduced InflowNet(TM) in September of 1999.
<TABLE>
<CAPTION>
Branded
Service Description
<S> <C>
InflowNet(TM) . Multi-provider Internet access solution
. Fixed (known as dedicated) or dynamic (known as
burstable) bandwidth capacity
. Expandable with increased demand
. Two connections to the local area network known as
the Ethernet
. Guaranteed 100% uptime
. On-line bandwidth reports
. Guaranteed 30 day installation
----------------------------------------------------------------------
</TABLE>
46
<PAGE>
Advanced Monitoring Applications: Our managed monitoring applications are
designed to enhance the reliability and security of our customers' e-business
applications. We began offering monitoring applications during the fourth
quarter of 1998. These value-added services are based on applications developed
in-house or by third-party software vendors. We receive both initial setup fees
and recurring monthly revenue for these services. We currently offer our
customers the following branded services on a 24x7 basis:
<TABLE>
<CAPTION>
Branded Service Description
<S> <C>
MonitorFlow(TM) . Equipment status monitoring on several levels
. Based on FreshWater, Inc.'s SiteScope and in-house
developed software
. Various levels of service from equipment level
monitoring to application transaction testing
. Available end-user impact monitoring to help our
customers identify problems before their users do
. Advance troubleshooting plan ensures speedy
resolution upon identification of a problem
. Monthly customer reports provide statistics and
tracking information to help evaluate performance
trends and help in growth planning
---------------------------------------------------------------------------
. Review and consultation on customer-developed
SecureFlow(TM) security policy
. Based on Checkpoint Firewall-1 technology
. Perimeter-based managed firewall, a type of security
feature, system tailored to individual security
policy
. Guaranteed 30 day installation
. Optional 100% uptime service level
---------------------------------------------------------------------------
EvenFlow(TM) . Managed load balancing service
. Based on Alteon Web switches
. Provides increased server availability in high-
demand periods
---------------------------------------------------------------------------
StorageFlow(TM) . Managed data storage
. Data backup
. Based on Managed Storage International and CreekPath
Systems software
---------------------------------------------------------------------------
</TABLE>
Efficiently Replicable Technology Platform
FlowTrack(TM) is a robust proprietary software program developed in-house
that integrates and automates our business processes. This program allows us to
quickly implement network and equipment provisioning through electronic work
orders issued to technicians in each DNX. FlowTrack(TM) is a critical component
to our 30 day up and running guarantee because it allows us to rapidly and
efficiently expand our business across a broad network of fully-functional
DNXs. Additionally, using FlowView(TM), our customers can access FlowTrack(TM)
through the Internet and receive real-time status updates regarding their
specific work orders and Internet usage statistics.
FlowTrack(TM) gives our sales force online access to the latest Inflow
service and pricing information, enabling them to provide service proposals to
new and existing customers on a real-time basis. Using FlowTrack(TM), our sales
force can instantly review pricing information, analyze profit margins and
network and space capacity factors. This on-the-spot analysis allows our sales
force to respond quickly and accurately to customer inquiries.
47
<PAGE>
FlowTrack(TM) is composed of the following three modules, each of which
focuses on a different aspect of customer management:
. Asset Management. This module records the configuration of customer
applications, including equipment, communication circuits, cabling and
power. Each record is given a unique identifier to allow us to better
manage and monitor customer applications. Using this module, we are able
to track network and space capacity and identify and plan for impending
shortages.
. Network Operations. This module records monitoring alarms and suggests
operational procedures, maintenance and/or work orders to remedy the
problems identified by the alarms. Also, as trouble spots are identified
and subsequently resolved, they are added to our database, which allows
us to more efficiently manage future problems for our customers and
develop troubleshooting policies and maintenance activities. In
addition, this module contains built-in intelligence relating to
managing multiple networks and equipment.
. Customer Account and Billing Management. The functions necessary to
efficiently administer a customer account, including customer contact
information, service requirements and service level agreements, are
automated using this module. All billing information is contained in
this module, which generates bills on a monthly basis, including monthly
charges for recurring services as well for non-recurring charges based
on work orders generated in the network operations module.
FlowTrack(TM) v2.0, released in August, 2000, is a Web-based application
accessible to our customers and employees. FlowTrack(TM) v2.0 is based on the
NT platform and takes advantage of new technologies to allow for efficient
expansion of our business and support for a larger number of DNXs and users.
FlowTrack(TM) v2.0 further integrates with other external systems used in
delivering our value-added services, managing sales leads and contacts,
accounting and financial systems and human resources. We believe that this
integration will more fully automate additional aspects of our business and
provide us a competitive advantage by offering our customers the benefits of
full functionality with these best-in-class systems.
FlowTrack(TM) is designed to enable us to quickly and effectively integrate
new applications and services such as load balancing and data storage and
backup into our offerings. We believe that FlowTrack(TM) will also allow us to
efficiently integrate the delivery of software applications to end-users
remotely using the Internet, as more businesses seek to take advantage of the
emerging application service provider model. Application service providers
combine software, hardware and networking technologies to provide applications
to customers for a fixed monthly per-user fee. As more of these applications
become available, FlowTrack(TM) will enable us to take advantage of these new
service offerings.
Our DNXs
Our DNXs were originally designed with approximately 5,000 to 12,000 square
feet of dedicated raised-floor hosting capacity and 10,000 to 20,000 gross
square feet. During 1999, we increased the planned size of our future DNXs to
approximately 30,000 to 40,000 gross square feet, of which approximately 20,000
square feet is dedicated to raised-floor hosting facilities. Depending on our
perceived market opportunity, we will occasionally lease larger facilities and
construct additional raised-floor area on a modular basis to our 20,000 square
foot template. We believe that raised floor facilities of approximately 20,000
square feet are the optimal size due to the following reasons:
. More Rapid Deployment. By limiting the size of a facility to
approximately 35,000 gross square feet, it is typically easier to locate
satisfactory sites. We generally lease properties in
48
<PAGE>
central business districts, which tend to have higher concentrations of
carriers and fiber. This size facility also uses primarily off-the-shelf
power and heating, ventilation and air conditioning, or HVAC, components,
which are more readily available than the custom-built equipment required
in larger facilities. This significantly speeds the site selection and
deployment process. Our construction time is also reduced compared to that
of larger facilities.
. Lower Construction Costs. We have designed our facilities to maximize
the efficiency of data center construction. For example, the size of our
DNXs enables us to maximize the use of standardized power and HVAC
components. Data centers with over 20,000 square feet of raised floor
space typically require special-order components, which are more costly
because of their limited production and the special architectures
required to interconnect them.
. Reduced Site Selection Risk. We believe that building raised floor
facilities of approximately 20,000 square feet significantly reduces the
risks of site selection when compared to larger data centers. Although
we project that our present DNX size will sustain our customers' space
needs for approximately three years after opening, we have the
technology and expertise to add data centers in the same city and
interconnect them. We implemented this "virtual data center" solution in
Denver and found that some customers prefer to locate their equipment in
two separate data centers in the same city to further enhance the
reliability of their critical network architecture. Combined with our
FlowTrack(TM) asset management module which tracks network and space
capacity, we believe that we will be able to anticipate our customers'
needs and efficiently add virtual data centers to multiple markets.
We believe this size of facility will allow us to establish first-mover
advantages in several new markets. We outsource a portion of the site
selection, design and build-out process of our additional DNXs to real estate
agents specializing in communications properties and to law firms able to
negotiate our leases based on a master template. We believe that outsourcing
these functions allows for even more rapid and efficient deployment of our
additional DNXs.
Site Selection
We target attractive markets that offer high concentrations of underserved
e-business customers and minimal competition. Due to the low customer turnover
rate in our industry, we feel it is important to establish a first-mover
advantage in our target markets and believe we can leverage our experience in
quickly constructing data centers, hiring and training employees and deploying
our proprietary operating system in order to achieve this objective. In
evaluating potential new markets, we generally concentrate on significant
metropolitan statistical areas in the United States outside the top five. We
internally rank these markets in order of priority based on a number of
economic, competitive and demographic factors including presence and
concentration of venture capital-backed companies and number of Internet
domain name registrations. Additionally, we may consider expansion
opportunities in metropolitan statistical areas in which we already have a
DNX, such as in Denver, and we also expect to continue to further explore
opportunities for international expansion.
We believe that our geographic diversity allows us to not only be closer to
our customers, but also provides our customers with greater reliability due to
our avoidance of the limited number of primary network access points, which
are becoming increasingly congested and where data packets are often lost in
the transfer process.
49
<PAGE>
Design and Build-out Process
We have launched 12 DNXs over a short period of time and have built a team
and set of processes to accelerate the design, construction, staffing and
marketing of future DNXs. Our internal deployment team consists of 14 full-time
professionals who manage outside consultants and construction personnel
responsible for completing discrete elements of DNX construction. Based on
experience, use of standardized construction processes and our proprietary
design templates and systems architecture, we expect to activate a DNX within
five to six months of selecting a host city. The following chart illustrates
the timing involved in the deployment of a DNX:
[CHART]
Site Design/Build. The key elements of the DNX deployment process include
site selection, lease negotiation, design, construction and commissioning. To
accelerate deployment of our DNXs, our template is designed such that many of
these elements occur concurrently and may be outsourced where appropriate. We
employ multiple specialized real-estate firms to locate suitable properties in
target cities based on a specified set of criteria. We retain multiple outside
legal counsel specializing in real estate to negotiate leases based on a
standard lease template. We retain outside firms to design DNXs using our
proprietary blueprint that specifies each subsystem and component. Construction
firms are hired regionally to speed local regulatory compliance and selected
based on data center build experience. We have a standard configuration for our
network switching area and network operations center architecture that is
installed shortly thereafter. Upon completion, each data center subsystem is
tested by an independent data center design firm and the network and service
architecture is tested by our internal engineering team.
Team Development. We generally hire a general manager up to six months in
advance of expected DNX activation. During this time the general manager is
trained in our systems and processes and works in several DNXs at varying
stages of development. The general manager is primarily responsible for hiring
the initial DNX team and is supported by our Denver-based human resources
department. For instance, we generally hold an Inflow career fair approximately
8-12 weeks prior to expected activation date of a new DNX where upper
management, human resources, national sales and engineering personnel hold over
100 interviews. We hire up to five sales professionals and ten network
engineers and operations technicians before commissioning each DNX. Additional
team members are added as customers contract for services.
50
<PAGE>
Marketing Program. Our marketing team develops prospect lists during the
construction period to support pre-sales activities and advertises in local
publications to promote awareness of our services. Special events are held for
prospective customers both before and after data center activation.
Roll-out Schedule
We currently have 21 DNXs in various stages of development and have selected
several additional markets in which we are seeking appropriate DNX locations.
The following table summarizes the location, size and status of our network of
21 DNXs open or currently under development.
<TABLE>
<CAPTION>
Gross Square Raised Floor Operational Lease
DNX Feet(1) Space(2) Date(3) Expiration
<S> <C> <C> <C> <C>
Denver 1 8,400 5,200 7/98 2/08
Minneapolis 15,900 8,300 10/99 8/09
Raleigh-Durham 14,400 7,500 11/99 9/09
Denver 2 9,900 7,400 1/00 1/10
San Diego 20,200 11,700 1/00 12/09
Austin 62,000 40,000 4/00 12/09
Atlanta 35,200 20,000 5/00 6/10
Irvine 35,100 20,000 6/00 1/10
Pittsburgh 24,000 17,000 6/00 3/10
Phoenix 39,100 20,000 7/00 9/10
Dallas 60,200 33,800 8/00 8/10
St. Louis 37,000 22,200 8/00 8/10
Denver 3 85,000 44,100 9/00 9/10
Nashville 22,700 12,300 10/00 10/10
Portland 41,600 24,200 11/00 12/10
Philadelphia 39,600 20,200 1/01 7/10
Sacramento 18,900 11,200 2/01 9/10
Seattle 40,500 49,900 4/01 6/10
Dublin, Ireland 27,700 24,600 4/01 8/10
Miami (4) 54,300 20,000 5/01 1/11
Toronto, Canada (4) 34,800 20,000 6/01 10/10
------------------------------------------------------------------------------
</TABLE>
--------
(1) Approximate gross square footage under lease by us, including raised floor,
administrative, sales, marketing, conference, dedicated customer, Network
Operations Center and storage space.
(2) Approximate raised floor square footage allocated to, or reserved for,
equipment colocation including customer cabinets and our equipment.
(3) Actual or, in the case of DNXs not operational by August 31, 2000, the
expected date of operation. We generally expect to begin receiving revenue
within 60 days of a DNX's operational date.
(4) Leases in Miami and Toronoto have been executed by InFlow and we
anticipate, but cannot be assured, that such leases will be executed by the
applicable landlords.
Infrastructure Specifications
Each DNX includes the following features designed to offer maximum
performance, security and reliability:
. Uninterruptible Power Supply System. In order to provide uninterruptible
power supplies to our customers' equipment, we connect to multiple power
grids when available, feed power through uninterruptible power supplies,
and provide stand-by diesel generators. Connecting to
51
<PAGE>
multiple power grids through separate power feeds ensures that no single-
grid power loss will cause us to lose our primary power source. In the
event of a temporary loss of power from the power grids, our
uninterruptible power supply systems have enough capacity to supply a
minimum of 120 minutes of power to a DNX. Our on-site diesel generator
system is automatically brought on line within seven seconds of a power
failure and can supply power to both AC and DC systems for a minimum of 24
hours before the on-site fuel tanks must be refilled.
To further reduce potential interruptions, we use an "interlocking
horseshoe" design in laying our power and network cables so that they
never overlap in our DNXs. We believe this sub-floor routing of network
and power cabling minimizes the potential for data network interference
and expedites the fault location process. For security purposes, the
mechanical and power system feeds are on the perimeter of the raised floor
area and feed either AC or DC power cabling located under the raised
floor. No one may access power cables and customer power connections
without the assistance of one of our employees.
. Advanced Security System. Customer access to each DNX is limited to a
single reception area staffed by one of our employees who logs each
entrance into the DNX. Access is further restricted by a card-access
system located at the main entrance of the DNX and the entrance to the
raised-floor space. All areas of the DNX are under continuous
surveillance in the network operations center through a closed-circuit TV
system. We maintain a rolling library of surveillance camera video tapes
for 30 days.
. Dual Fire Suppression System. We generally employ a fire suppression
system based on dry-pipe water supplies to prevent accidental leakage,
coupled with a VESDA early warning system and gas fire suppression
system. These systems are designed to avoid any water being introduced
into the raised floor area.
. High Capacity HVAC System. Our HVAC systems ensure that our DNXs operate
at a consistent temperature and humidity level. The temperature in our
DNXs will average between 65 and 75 degrees and that relative humidity
will average between 45 and 55 percent at all times.
. Other DNX Features. In addition to the features described above, each
DNX includes a self-contained local network operations center staffed
24x7 by our trained technicians, reserved testing and office space for
our customers, and space for our local administrative, sales and
marketing functions.
We monitor all power, HVAC and fire-suppression systems on a 24x7 basis
using an automated application under the supervision of our local operations
staff. Component level failures are detected and trigger alarms at the local
network operations center, allowing our trained personnel to quickly respond
and ensure our systems are operational.
Sales and Marketing
We primarily market our services and solutions through our direct sales
force which is organized by geographic region and whose compensation is
largely commission-driven. This sales force will be supplemented by our
national sales team which is organized by customer segment. We are currently
establishing other distribution channels and expect to continue reviewing
possible arrangements with outside parties. However, we expect that
substantially all of our revenues through the end of 2000 will be generated by
direct sales.
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<PAGE>
Direct Sales. Our direct sales force currently consists of 82 full-time,
trained sales professionals responsible for developing new clients as well as
new opportunities with existing clients. All sales professionals complete a
comprehensive three-month training program. We have expanded our direct sales
force from two to 82 individuals in the past year. We intend to continue to add
to our direct sales force in parallel with our DNX build-out.
Each DNX is typically staffed with one sales manager, up to six sales
representatives and at least one sales engineer. Our sales engineers, most of
whom hold degrees in network engineering, assist our sales representatives in
the design and implementation of our customized offerings. Additionally, we
have three regional sales managers, each of whom is located in one of the DNXs
in their region and oversee the sales efforts of several local DNX sales
personnel.
Prior to opening a DNX, we focus on hiring and training salespeople and on
conducting market analysis. We typically have each DNX fully-staffed at least
30 days prior to activation in order to commence the sales cycle in advance of
opening the DNX. Our typical direct sales cycle is approximately three months
and includes the following efforts:
. Prospecting, qualifying and opportunity identification, especially for
top regionally-recognized e-businesses to serve as anchors for DNXs;
. Networking and cold-calling prospective customers and introducing them
to our local DNXs and personnel;
. Conferring with a prospective customer to select service terms and using
FlowTrack(TM) to generate real-time price quotes and cost analysis;
. Consulting on final network design and determining specific services for
immediate or future implementation; and
. Signing a contract, typically one to three years in duration, for
initial services.
We believe the structure of our direct sales efforts allows us to easily
identify the needs of prospective and existing customers, devote significant
attention to customer satisfaction and quickly offer new services to existing
customers.
Indirect Sales Channel. We expect to complement our direct sales efforts
with a series of partnerships and alliances, which we call our lead agent
program. Our lead agents are expected to include internet service providers,
equipment vendors and resellers who have relationships with our target customer
base. We are currently in discussions with candidates from each of these
industries to become lead agents and expect to compensate our lead agents on a
non-recurring success fee basis. We believe lead agents will function as an
extension of our direct sales force and provide a significant source of leads
and referrals.
Marketing. To support our sales efforts and to actively establish and
promote our brand awareness, we plan to further expand our comprehensive
marketing programs. We currently employ 11 people in a variety of marketing
activities, including preparing marketing research, service planning and
collateral marketing materials, managing press coverage and other public
relations, attending trade shows, seminars and conferences, hosting on-site
events and maintaining and updating our Web site and brochure materials. During
August, 2000, we introduced our channel sales program, Inflow Uptime Alliance.
To date, this program includes approximately 15 participants, including local
system integrators, value-added equipment resellers and web-design firms. We
believe that we can further accelerate customer growth through this channel
sales program. Members of the Inflow Uptime Alliance are compensated based on a
percentage of monthly recurring revenue for customers which they refer.
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Customers
We provide a combination of colocation, network connectivity and value-added
services to 189 customers, including Akamai, Email Knowledge, At Home (aka
Excite@Home), Factual Data Corp., High Speed Access Corp., MapQuest.com,
MessageMedia Inc., Northpoint Communications, Inc., Sandbox.com, Inc. and
SciQuest.com, each of which currently generates recurring monthly revenues in
excess of $10,000. Our customers are typically small to medium-sized e-
businesses that are growing rapidly and require complex communication
architectures and services. Our customers include business-to-business
application providers, network providers and business-to-consumers enterprises.
We believe that the emerging business-to-business market increases our market
opportunity because these customers require more complex network architectures
and greater information technology staff attention than network providers and
business-to-consumer businesses. Our typical customer requires continuous
uptime for their applications, multiple types of data circuits and has a
limited information technology staff. Although our focus is on small to medium-
sized businesses, we provide services to many nationally recognized entities as
well. Currently, 73% of our customers are business-to-business and 15% of our
customers are business-to-consumer.
A relatively small number of customers account for a large percentage of our
total revenues and we expect some degree of concentration will continue for the
foreseeable future. For the year ended December 31, 1999, our top five
customers accounted for approximately 46% of our revenue, including Verio, a
potential competitor, which alone accounted for approximately 14% of our
revenue during this period. No other customer individually represented more
than 10% of revenue for the year ended December 31, 1999. Our customer base
continues to be somewhat concentrated in that for the six months ended June 30,
2000, our top five customers accounted for approximately 32% of our revenue,
with only one customer, MessageMedia, Inc., accounting for more than 10% of our
revenue. For the six-month period ended June 30, 2000, MessageMedia and Verio
accounted for approximately 12% and 5%, respectively, of our revenue. We expect
some degree of customer concentration will continue for the foreseeable future.
Our customer contracts are fairly standard and include provisions relating to
warranties, confidentiality obligations, indemnification, term and termination.
Customer Support
We believe the key to long-term success is providing best-of-class customer
service and support. We also believe that e-business companies will demand
increasing performance guarantees for their applications as a means of ensuring
better service to their own customers. We believe that our service level
agreements and customer support are among the best in our industry. Our
services are generally covered by service level agreements, which specify
exacting performance levels associated with availability and service repair
time. For example, we guarantee that:
. We will be ready to implement a customer's application within 30 days of
signing a contract;
. Power will always be on; and
. Purchasers of our InflowNet(TM) Internet access solution will have 100%
uptime.
To ensure that we meet our service level agreements each of our sites is
managed by an extensively-trained and experienced general manager. Our general
managers go through up to six months of hands-on, comprehensive training before
they are assigned a site to manage. Typically, we expect a general manager to
oversee a dedicated staff of approximately 30 trained technical and operations
personnel who provide customer support 24x7. Staff members are empowered to
make on-the-spot decisions, enabling them to address our customers' concerns
immediately without referring the customer to another staff member.
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Each DNX contains a stand-alone network operations center and the necessary
systems to install, test, monitor and repair customer network connections and
value-added services on-the-spot. Customers interact with a local account team
consisting of technical operations personnel, sales engineers and sales
representatives. All operations personnel receive multiple levels of training
to gain detailed knowledge of our DNX's physical, network and systems
infrastructure as well as the configuration of our value-added services. By
graduating from various internal and external training programs, operations
personnel attain different certifications and become technical experts which we
believe makes them highly qualified to provide excellent customer service.
We also have constructed a central network operations center, located at our
Denver, Colorado corporate headquarters, to provide advanced troubleshooting
support to each remote site. Currently, we employ 24 of our most experienced
network, information technology and software engineers for this additional
layer of support. Our central network operations center staff can also serve as
a backup for a DNX if necessary. Central operations personnel are primarily
responsible for designing and implementing technical training for the
individual site operations teams.
In addition, FlowTrack(TM) provides automated service delivery to the
customer. Specifically, FlowTrack(TM) allows us to track leads, develop service
proposals and quotes, initiate work orders for network connections and value-
added services, issue trouble reports for failure conditions and generate clear
and concise bills. This automation allows for more efficient customer support
activities.
Competition
Our market is highly competitive and rapidly growing. We also believe that
competition will likely increase in the future. We believe that we may compare
unfavorably with some of our competitors with regard to, among other things,
brand recognition, existing relationships with potential customers, available
pricing discounts, capital availability, strategic relationships and existing
contracts. We expect significant competition from several areas, including
information technology and Internet outsourcing firms; national and regional
Internet service providers; and global, regional and local communications
companies. Currently, our solutions compete with the services offered by many
companies, including AboveNet Communications, Akamai, AT&T Corp., Digital
Island, Exodus Communications, Equinix, Frontier GlobalCenter, Globix, GTE
Corporation, InterNAP, Level 3 Communications, MCI WorldCom, PSINet, Qwest,
Sprint, Verio and the regional Bell operating companies, such as Verizon
(formerly Bell Atlantic and GTE), SBC (including Southwestern Bell and Pacific
Bell), and BellSouth.
We believe that the principal competitive factors in our market are the
ability to locate the right expansion sites in new markets and achieve first-
mover advantages in most markets, upgrade our service offerings to meet the
changing needs of our customers, establish credibility and brand recognition in
our markets, and successfully hire qualified personnel in the face of
increasing competition for their services.
Although several larger companies have entered or will enter our market, we
believe we are positioned to compete favorably because:
. We intend to remain carrier-neutral, providing our customers with the
choices they desire, more reliable solutions, competitive pricing and
greater access to new technology;
. Our focus on multiple markets as opposed to concentrating on a few
cities gives us geographic proximity to our customers, increased
reliability through avoidance of network access point bottlenecks and,
we believe, first-mover advantages in many of these markets; and
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. We provide complex network connectivity solutions, not only Internet
connectivity, giving our customers the flexibility and solutions we
believe they need.
We generally focus on underserved customers with complex application needs.
Despite our strategy, we may not be successful in differentiating ourselves or
achieving widespread market acceptance of our solutions. Our expansion plans
are aggressive and if we are unable to complete our DNXs in a timely manner,
other companies may enter those markets before us, thereby putting us at a
competitive disadvantage. We may not be able to compete successfully against
current and future competitors. Some of our competitors and potential
competitors have longer operating histories and significantly greater financial
marketing and other resources than we do. These companies may also have more
extensive customer bases and in some circumstances, own their networks and
thereby may be able to achieve lower operating costs. Our competitors may be
better able to compete in a price competitive market, bundle their products and
services in a more competitive manner or form alliances or otherwise respond to
changing technologies and customer needs. In addition, some competitors, such
as incumbent local exchange carriers, such as Qwest (formerly U S West),
Verizon (formerly Bell Atlantic and GTE), SBC (including Southwestern Bell and
Pacific Bell), and BellSouth, are subject to federal regulations that require
them to offer colocation to other local telephone companies and long distance
carriers on an efficient, nondiscriminatory basis. These rules may enhance the
attractiveness of the incumbent local exchange carriers' colocation offerings
because they may be forced to offer more cost-effective or more attractive
service offerings.
Intellectual Property and Proprietary Rights
To protect our intellectual property, we rely on a combination of trademark
and copyright law, trade secret protections and confidentiality agreements and
other contractual arrangements with our employees, consultants and third
parties. For example, "Inflow" is our trademark and is registered in the United
States. We cannot be certain that the steps we have taken to protect our
intellectual property rights will be adequate or that third parties will not
infringe or misappropriate our proprietary rights. Moreover, effective
trademark, copyright and trade secret protection may not be available in every
country in which we may eventually operate to the same extent available in the
United States. We may be unable to detect the unauthorized use of our
intellectual property or take appropriate steps to enforce our intellectual
property rights. Defending our intellectual property rights could also result
in the expenditure of significant financial and managerial resources, which
could harm our financial results.
We enter into proprietary information and invention assignment agreements
with our employees and consultants and control access to and distribution of
our proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties, including departing employees, business partners
and others, may attempt to copy or otherwise obtain and use our services and
technology. Monitoring unauthorized use of our technology is very difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology. In addition, the laws in foreign countries
may not protect our proprietary rights as fully as in the United States.
Third parties may in the future assert copyright, trademark, patent and
other intellectual property rights claims or initiate litigation against us or
our suppliers or customers with respect to existing or future services.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert claims against
us that we have misappropriated a trade secret or infringed a patent,
copyright, trademark or other proprietary right belonging to them. Any
infringement or related claims, even if not meritorious, could be costly and
time consuming to litigate, may distract management from other tasks of
operating the business and may result in the
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loss of significant rights and the loss of our ability to operate our business.
See "Risk Factors--If we are unable to adequately protect our proprietary
rights, our business will suffer" and "--If we become subject to infringement
claims by third parties, we may be forced to divert significant resources away
from the operation of our business."
Government Regulation
Regulation of Our Telecommunications Services. Some of our services may be
subject to regulation by federal and state telecommunications regulators. For
example, the Federal Communications Commission, or FCC, and many states
regulate the provision of transmission services to third parties, even when we
do not own the transmission facilities used to provide those services. In
addition, although some of the services may not be regulated now, federal or
state regulators may expand current regulations to include additional services
we offer. The nature and extent to which our communications services are
regulated affects the scope of our services, our profitability and the degree
to which other companies can successfully compete with us.
The FCC regulates the provision of interstate telecommunications services,
including interstate long distance services and physically intrastate services
that are used to originate and terminate interstate long distance
communications. The FCC also regulates many of the terms and conditions under
which incumbent local exchange carriers must permit competition by competitive
local exchange carriers. We are not an incumbent local exchange carrier, but
may be considered or become a competitive local exchange carrier in some
states. In addition, in many instances the FCC and the state public utilities
commissions share jurisdiction over facilities that are used to provide both
interstate and intrastate communications services.
Federal Telecommunications Regulation. The FCC has authority to regulate
interstate telecommunications services. The FCC has not definitively determined
the boundaries of the telecommunications service category, and therefore the
exact scope of services subject to the FCC's jurisdiction remains unclear.
Under current FCC requirements, we do not need either prior authorization or a
tariff to offer interstate access services. It is possible, however, that a
prior authorization or a tariffing requirement could be imposed in the future.
To the extent we provide telecommunications services, we must, among other
things:
. contribute to certain funds, including the Universal Service Fund, the
Telecommunications Relay Service Fund, and a fund intended to recover
the costs of administering the use of telephone numbers;
. provide telecommunications services at just, reasonable, and
nondiscriminatory rates;
. interconnect directly or indirectly with the facilities and equipment of
other telecommunications carriers;
. be subject to complaints in court or at the FCC for failure to comply
with the Communications Act or the FCC's rules;
. install network features, functions, or capabilities that comply with
guidelines and standards governing accessibility by individuals with
disabilities and interconnectivity with other networks;
. comply with certain network design requirements in order to assist law
enforcement personnel; and
. comply with statutory and regulatory requirements regarding unauthorized
changes in a customer's pre-subscribed carrier.
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These requirements will increase our costs of doing business.
In addition, to the extent we are considered a local exchange carrier, that
is, to the extent we provide local telephone service or interstate access
services, we must comply with certain duties set out in the Communications Act,
including:
. not to prohibit or unreasonably restrict resale of our
telecommunications services;
. to provide number portability;
. to provide dialing parity;
. to afford access to poles, ducts, conduits, and right-of-way to
competing providers of telecommunications services; and
. to establish reciprocal compensation arrangements for the transport and
termination of telecommunications.
These requirements will increase our costs of doing business and may limit
the manner in which we provide some of our services.
The Communications Act and the FCC's rules impose additional requirements on
incumbent local exchange carriers, such as Qwest (formerly U S West), Verizon
(formerly Bell Atlantic and GTE), SBC (including Southwestern Bell and Pacific
Bell), and BellSouth. We are not considered an incumbent local exchange
carrier. However, the requirements imposed on incumbent local exchange carriers
affect the ability of those entities to compete and therefore may indirectly
affect us. For example, the FCC has granted incumbent local exchange carriers
considerable pricing flexibility and is likely to further relax regulation of
the incumbent local exchange carriers' rates in the near future. Consequently,
the incumbent local exchange carriers may be able to compete aggressively on
price against certain of our services. In addition, the Communications Act and
the FCC's rules require the incumbent local exchange carriers to offer
colocation on an efficient, nondiscriminatory basis. Those requirements may
enhance the attractiveness of the incumbent local exchange carriers' colocation
services to our target customers and therefore render the incumbent local
exchange carriers more potent competitors. The FCC's rules recently were
vacated in part by the D.C. Circuit, but the remaining rules still are likely
to have this effect. On remand, the FCC has initiated a proceeding to amend and
possibly expand its rules.
State Telecommunications Regulation. State public utilities commissions have
jurisdiction over the provision of intrastate communications services. Some of
our communications services may be classified as intrastate and therefore may
be subject to extensive state regulation. The nature of such regulation varies
from state to state, but in some states it may be more extensive than the
regulations imposed by the FCC.
Intrastate regulatory requirements are changing rapidly and will continue to
change. The inability to obtain state approvals to initiate or expand our
services could have a material adverse effect on our business and results of
operations.
While we believe that the law regarding regulation of these and similar
types of services is unclear in certain jurisdictions in which we currently
operate or intend to operate, and we continue to evaluate our status with
counsel, it is possible that we have provided certain telecommunications
services without the requisite regulatory approval or certification in a
limited number of jurisdictions.
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We may also be required to obtain and to apply for similar authorizations in
other states in which we expect to operate in the future. Our failure to have
held any required authorizations and to have been registered or certified
previously could expose us to risks, including substantial fines, third-party
lawsuits and potential inability to continue our operations. See "Risk
Factors--Our failure to hold required authorizations and to be registered with,
or certified by, applicable regulatory authorities could result in potential
penalties or other adverse consequences," "--We may encounter difficulties if
we are required to apply for, and obtain, necessary authorizations in other
states in which we expect to operate," "--Delays in obtaining or failure to
obtain regulatory approvals could negatively affect our intended rollout of
services," "--Regulation as a carrier will subject us to ongoing regulation at
the state and federal levels and could result in increased costs and other
competitive disadvantages," and "--Change in current or future regulations, or
legislative or judicial initiatives related to the telecommunications industry
could negatively affect our business."
Regulation of the Internet. There is currently only a small body of laws and
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
possible that a number of laws and regulations may be adopted at the federal,
state and local levels with respect to the Internet, covering issues such as
user privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase the cost of doing business. In
addition, applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. See "Risk
Factors--If the government modifies or increases its regulation of the
Internet, the provision of our services could become more costly and the use of
the Internet may decline."
Employees
We had 363 full-time employees as of June 30, 2000, of which we had 11 in
marketing, 82 in sales, 130 in operations, 29 in engineering, information
technology and product development, 23 in software development, eight in
business process automation, 14 in expansion and 66 in management and
administration. Our employees are not represented by any collective bargaining
organization and we consider our relations with our employees to be good.
Competition for qualified personnel in our industry is intense. We believe that
we will need to continue to attract, hire and retain qualified personnel to be
successful in the future.
Facilities
Our principal executive offices are located in Denver, Colorado. In addition
to our headquarters, we have leases for our DNXs in the following cities:
Atlanta; Austin; Dallas; Denver (three locations); Dublin, Ireland; Irvine;
Miami; Minneapolis; Nashville; Philadelphia; Phoenix; Pittsburgh; Portland;
Raleigh-Durham; Sacramento; San Diego; Seattle; St. Louis; and Toronto, Canada.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table provides information about our executive officers and
directors:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Arthur H. Zeile......... 36 President, Chief Executive Officer and Chairman of the Board of
Directors
Joel C. Daly............ 31 Vice President, Chief Operating Officer, Secretary and Director
James W. McHose, III.... 36 Vice President, Chief Financial Officer and Treasurer
Dr. Yousif Asfour....... 37 Vice President and Chief Technical Officer
Bruce E. Cunningham..... 31 Vice President, Business Development
Robert J. Gedrose....... 41 Vice President, Sales
Nancy B. Printz......... 33 Vice President, General Counsel and Assistant Secretary
Donald F. Detampel, 45 Director
Jr.....................
Andrew J. Armstrong, 44 Director
Jr.....................
Stephen O. James........ 56 Director
Scott B. Perper......... 44 Director
G. Jackson Tankersley, 51 Director
Jr.....................
</TABLE>
Arthur H. Zeile co-founded Inflow and has served as our President, Chief
Executive Officer and director since our inception in September 1997 and the
Chairman of our board of directors since April 1999. From July 1994 to May
1997, he was Vice President of Sales and Marketing for LINK-VTC, a
videoconferencing services company. From 1992 to 1994, he was a Software
Program Manager for The Automation Group, an organization providing client-
server database applications. Mr. Zeile also served as an Executive Officer for
the U.S. Air Force Satellite Communications Program Office, supporting the 150-
man Milstar Satellite program. Mr. Zeile received his master's degree in public
policy from Harvard University and his bachelor of science degree in
astronautical engineering from the U.S. Air Force Academy.
Joel C. Daly co-founded Inflow and has served as our Vice President, Chief
Operating Officer, Secretary and director since our inception in September
1997. From 1993 to May 1997, he was Vice President of Operations for LINK-VTC.
From 1990 to 1993, he was Chief of Scheduling and Cost Estimator for the
Milstar Satellite program in the U.S. Air Force. Mr. Daly received his master's
degree in business administration from Loyola Marymount University and his
bachelor of science degree in management from the U.S. Air Force Academy.
James W. McHose, III has served as our Vice President, Chief Financial
Officer and Treasurer since September 1999, full-time since January 1, 2000.
From July 1996 to September 1999, he was Vice President of Finance for
FrontierVision Partners, LP, a cable television company. From 1987 to July
1996, he was a Senior Manager in the Information, Communications and
Entertainment practice of KPMG Peat Marwick, LLP, a certified public accounting
firm. Mr. McHose received his bachelor of science degree in accounting from
Southern Illinois University.
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Dr. Yousif Asfour has served as our Vice President and Chief Technology
Officer since January 2000. From August 1999 to December 1999 he served as our
Director, Software Development. From January 1999 to August 1999, he was a
Systems Architect with Sapient. From 1996 to 1999, he was Director of Software
and Systems Development with Smart Route Systems. From 1994 to 1996, he was a
Senior Consultant with Symmetrix. Dr. Asfour received his Ph.D. in cognitive
and neural systems from Boston University and his master of science and
bachelor of science degrees in electrical engineering from the Northeastern
University.
Bruce E. Cunningham has served as our Vice President, Business Development
since January 2000. From September 1996 to January 2000, he was an associate
with Brobeck, Phleger & Harrison LLP. Prior to that time, Mr. Cunningham
attended the University of Virginia School of Law, where he received his juris
doctor degree. Mr. Cunningham received his bachelor of arts degree in economics
from Trinity University.
Robert J. Gedrose has served as our Vice President, Sales since July 1998.
From July 1997 to July 1998, he was the Executive Vice President of
Commonwealth Telephone Enterprises, a competitive telephone company. From
February 1994 to April 1997, he was a Vice President and General Manager for
MFS Communications, a competitive telephone company. Mr. Gedrose received his
bachelor of science degree in economics from Williamette University.
Nancy B. Printz has served as our Vice President and General Counsel since
January 2000 and our Assistant Secretary since July 1999. From May 1999 to
December 1999, she served as our Chief Legal Officer. From September 1995 to
April 1999, she was an attorney with Steiner, Darling, Hutchinson & Wilson LLP
where she served as both an associate and as of counsel. From September 1992 to
August 1995, she was an attorney in the corporate department of Davis, Graham &
Stubbs. Ms. Printz received her bachelor of arts degree in political science
from Emory University and her juris doctor degree from Yale Law School.
Donald F. Detampel, Jr. has served on our board of directors since February
2000. Mr. Detampel is currently the Chief Executive Officer of OneSecure. From
December 1998 to February 2000, Mr. Detampel served as President of Global
Center Inc., a wholly-owned subsidiary of Global Crossing, Ltd. From March 1998
to November 1998, Mr. Detampel was President of Enhanced Services for Frontier
Corporation. From February 1996 to March 1998, Mr. Detampel served as President
of ConferTech International, and from April 1990 to February 1996, he served as
President of Schneider Communications. Mr. Detampel received his bachelor of
science degrees in mathematics and physics from St. Norbert College.
Andrew J. Armstrong, Jr. has been a director of InFlow since June 2000.
Since October 1999 he has served as a principal of Spire Capital Partners, L.P.
Mr. Armstrong has also served as a principal of Waller-Sutton Management Group
since its formation in early 1997. From 1985 to 1996, Mr. Armstrong was a
principal of Waller Capital Corporation. He also serves as a director of
Lionheart Newspapers, PowerAdz Corporation and The Golf Channel. Mr. Armstrong
received his Bachelor of Arts degree in economics from Duke University.
Stephen O. James has served as a consultant to us since December 1998 and on
our board of directors since March 1999. Since 1995, Mr. James has served as an
independent business consultant for numerous companies, including us. Mr. James
also serves on the board of directors of SCC Communications. He received his
bachelor of arts degree in economics from Denison University.
Scott B. Perper has served on our board of directors since April 1999. Since
February 1995, Mr. Perper has been a Managing Partner of First Union Capital
Partners, Inc., a subsidiary of First Union
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Corporation. Mr. Perper is a Senior Vice President of First Union Corporation
and First Union National Bank of North Carolina. Mr. Perper received his
bachelor of arts degree in government and legal studies from Bowdoin College
and his masters in business administration from the Graduate School for
Business Administration of Harvard University.
G. Jackson Tankersley, Jr. has served on our board of directors since
November 1999. Since September 1998, he has served as Managing Member of
Meritage Investment Partners, LLC, the general partner and sponsor of various
private equity funds. From 1981 to October 1997, Mr. Tankersley was a General
Partner of the Centennial Funds. Mr. Tankersley received his bachelor of arts
degree in economics from Denison University and his masters in business
administration from Dartmouth College, Amos Tuck School of Business.
Board Composition
Upon the closing of this offering our board will consist of seven directors.
In accordance with the terms of our amended certificate of incorporation, the
terms of office of the board of directors will be divided into the following
three classes, serving staggered three-year terms:
. Messrs. Armstrong and Tankersley will serve as our Class I directors,
whose term will expire at the annual meeting of stockholders to be held
in 2001 (or a special meeting held in lieu of the annual meeting);
. Messrs. Perper and Daly will serve as our Class II directors, whose term
will expire at the annual meeting of stockholders to be held in 2002 (or
a special meeting held in lieu of the annual meeting); and
. Messrs. James, Detampel and Zeile will serve as our Class III directors,
whose term will expire at the annual meeting of stockholders to be held
in 2003 (or a special meeting held in lieu of the annual meeting).
As a result, only one class of directors will be elected at each annual
meeting of our stockholders, with the other classes continuing for the
remainder of their respective terms. This classification of our board of
directors may have the effect of delaying or preventing a change in control or
management.
All directors were nominated and elected as directors by the holders of our
common and preferred stock in accordance with provisions of our current
stockholders agreement. These provisions of our stockholders agreement will
terminate upon the completion of this offering. Each of the individuals will
remain as a director until their resignation or until their replacement. Please
see "Related-Party Transactions--Stockholders' Agreement."
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee of our board of directors reviews and monitors our
internal accounting procedures and reviews the results and scope of the annual
audit and other services provided by our independent accountants. The audit
committee also consults with our management and our independent auditors prior
to the presentation of financial statements to stockholders and, as
appropriate, initiates inquiries into aspects of our financial affairs. In
addition, the audit committee is responsible for considering and recommending
the appointment of, and reviewing fee arrangements
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with, our independent auditors. The current members of the audit committee are
Stephen O. James, Donald F. Detampel, Jr. and Scott B. Perper.
The compensation committee of our board of directors reviews and makes
recommendations to the board regarding the compensation and benefits provided
to our key executive officers and directors, including stock compensation and
loans. In addition, the compensation committee reviews policies regarding
compensation arrangements and benefits for all of our employees. As part of the
foregoing, the compensation committee also administers our 2000 stock incentive
plan. The current members of the compensation committee are Arthur H. Zeile, G.
Jackson Tankersley, Jr., Andrew J. Armstrong, Jr. and Scott B. Perper, with one
vacancy remaining on the committee. Mr. Zeile does not participate in the
determination of his own compensation.
Director Compensation
Our directors do not currently receive compensation for attendance at board
meetings or board committee meetings. However, our directors are reimbursed for
all reasonable out-of-pocket expenses incurred in connection with their
attendance at board and board committee meetings. Employee directors are
eligible to participate in our 1997 stock option/stock issuance plan and will
also be eligible to receive equity incentives, in the form of stock option
grants or direct stock issuances, under our 2000 stock incentive plan.
Non-employee board members will receive option grants at periodic intervals
under the automatic option grant program of the 2000 stock incentive plan of
15,000 upon their initial appointment and 5,000 annually thereafter upon each
reelection. They will also be eligible to receive discretionary option grants
under the discretionary option grant program of such plan.
Pursuant to the 1997 stock option/stock issuance plan, in 1999 we granted
Mr. James options to purchase 81,799 shares of our common stock and in January
of 2000 we granted Mr. James options to purchase 40,899 shares of our common
stock. The 81,799 options granted during 1999 have an exercise price of $0.27
and vest in equal monthly installments over 36 months. The 40,899 options
granted in 2000 have an exercise price of $1.46 and vest in equal monthly
installments over 12 months.
In February of 2000, Mr. Detampel was granted options to purchase 40,899
shares of our common stock under the 1997 stock option plan at an exercise
price of $2.93. These options vest in equal monthly installments over 12
months.
Other than Mr. James and Mr. Detampel, none of our directors has been
granted any options to purchase shares of our common stock.
Compensation Committee Interlocks and Insider Participation
In April 1999, we formed our compensation committee, comprised of Arthur H.
Zeile, G. Jackson Tankersley, Jr., Andrew J. Armstrong, Jr. and Scott B.
Perper, with one vacancy remaining on the committee. Mr. Zeile is our President
and Chief Executive Officer. Prior to such date, all compensation decisions
were made by our full board of directors. Following this offering, the
compensation committee will continue to make recommendations to the board
regarding all of our compensation decisions. For more information regarding
transactions entered into between us and the members of our compensation
committee. Please see the section entitled "Related-Party Transactions."
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Executive Compensation
The following table sets forth the approximate cash compensation (including
cash bonuses) paid or awarded by us for the fiscal year ended December 31, 1999
to (i) our Chief Executive Officer and (ii) all of our executive officers whose
salary and bonus for fiscal year 1999 exceeded $100,000. These individuals are
collectively referred to as Named Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual Compensation Securities
-------------------- Underlying All Other
Name and Principal Position Salary ($) Bonus ($) Options Compensation
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Arthur H. Zeile, President
and Chief Executive
Officer.................... $ 44,272 $100,000 -- $300(1)
Joel C. Daly, Vice
President, Chief Operating
Officer and Secretary...... $ 44,274 $100,000 -- $300(1)
Robert J. Gedrose, Vice
President, Sales........... $111,373 $ 10,750 81,799 $700(1)
James W. McHose, III, Chief
Financial Officer and
Treasurer.................. $ 4,500 $242,110(2) 245,397 $135(1)
</TABLE>
--------
(1) Represents our 401(k) match.
(2) Includes 40,000 shares of Series A preferred stock sold to Mr. McHose at
$3.50 per share on October 15, 1999, a discount of $6.02 per share from the
then fair market value of preferred stock.
Option Grants in Fiscal Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percent of Annual Rates of Stock
Number of Total Options Option Value Price Appreciation
Shares Granted to Fair Market Based on For Option Term
Underlying Employees Exercise or Value of Options Midpoint of ($)(2)
Options in Fiscal Base Price on Date of Grant Expiration Our Estimated ---------------------
Name Granted (#)(1) Year (%) ($/sh)(1) ($/sh) Date Range ($) 5% 10%
---- -------------- ------------- ----------- ---------------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arthur H Zeile.. -- -- -- -- -- -- -- --
Joel C. Daly.... -- -- -- -- -- -- -- --
Robert J.
Gedrose........ 81,799 4% $0.27 $1.85 06/01/09 $1,204,899 $1,976,263 $3,160,713
James W. McHose,
III............ 245,397 12% $0.27 $2.37 08/17/09 $3,614,697 $5,928,791 $9,482,140
</TABLE>
--------
(1) These options are incentive stock options that were granted at an exercise
price of $0.27 per share. These incentive stock options are immediately
exercisable and vest over a period of four years from their grant date at a
rate of 25% after one year of service and in equal monthly installments
over the next 36 months of service. All unvested exercised options are
subject to our right of repurchase at the option base price if the holder
terminates their service with us prior to vesting. The potential realizable
value is based on the term of the option at the time of grant, which is ten
years for each of the options set forth in this table. All amounts have
been calculated using the midpoint of our estimated range as the base value
and assumed annual rates of stock price appreciation of 5% and 10%.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the company's estimate or projection of future common stock
prices.
Aggregated Option Exercises in the Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year End (#) at Fiscal Year End ($)(1)
---------------------------- ----------------------------
Name Exercisable(2) Unexercisable Exercisable(2) Unexercisable
---- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Arthur H. Zeile...... -- -- -- --
Joel C. Daly......... -- -- -- --
Robert J. Gedrose.... 245,397(3) -- $3,645,781 --
James W. McHose,
III................. 245,397 -- $3,614,697 --
</TABLE>
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<PAGE>
--------
(1) In the table above, the value of unexercised in-the-money options is based
on the midpoint of our estimated range, minus the per share exercise price
multiplied by the number of shares.
(2) These options are immediately exercisable and vest over a period of four
years from their grant date at a rate of 25% after one year of service and
in equal monthly installments over the next 36 months of service. All
unvested exercised options are subject to our right of repurchase at the
option base price if the holder terminates their service with us prior to
vesting.
(3) Includes 163,598 options granted in 1998 at an exercise price of $.09 per
share.
Option Grants to Executive Officers and Directors in Fiscal Year 2000
<TABLE>
<CAPTION>
Number of
Shares
Underlying Exercise or Midpoint
Options Granted Base Price of Estimated Value of
Name (#) ($/sh) Range ($/sh) Options ($)(1)
---- --------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Bruce E. Cunningham..... 190,865 $1.46 $15.00 $2,584,312
Nancy B. Printz......... 27,266 $1.46 $15.00 $ 369,181
Donald F. Detampel,
Jr..................... 40,899 $2.93 $15.00 $ 493,651
Stephen O. James........ 40,899 $1.46 $15.00 $ 553,772
</TABLE>
--------
(1) In the table above, the value of options is based on the midpoint of our
estimated range, minus the per share exercise price multiplied by the
number of shares.
2000 Stock Incentive Plan
Introduction
The 2000 stock incentive plan is the successor program to our 1997 stock
option/stock issuance plan. The 2000 stock incentive plan will be adopted by
the board of directors and approved by our stockholders prior to the date of
this offering. The 2000 stock incentive plan will be administered by our
compensation committee. All outstanding options under our 1997 stock
option/stock issuance Plan will be transferred to the 2000 stock incentive plan
upon the closing of this offering, and no further option grants will be made
under the predecessor plan. The transferred options will continue to be
governed by their existing terms. Except as otherwise noted, the transferred
options have substantially the same terms as those for grants to be made under
the 2000 stock incentive plan.
Outstanding options under the predecessor plan will be incorporated into the
2000 stock incentive plan upon the date of this offering, and no further option
grants will be made under that plan. The incorporated options will continue to
be governed by their existing terms, unless the compensation committee extends
one or more features of the 2000 stock incentive plan to those options.
However, except as otherwise noted below, the outstanding options under the
predecessor plans contain substantially the same terms and conditions
summarized below for the discretionary option grant program under the 2000
stock incentive plan.
Share Reserve
7,646,665 shares of common stock have been authorized for issuance under the
2000 stock incentive plan. This share reserve consists of the shares estimated
to remain available for issuance under our 1997 stock option/stock issuance
plan, and the shares subject to outstanding options thereunder, plus an
increase to be effected prior to the closing of this offering. The share
reserve will automatically increase on the first trading day in January of each
calendar year, beginning January
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2001, by an amount equal to 3% of the total number of shares of common stock
outstanding on the last trading day in December in the preceding calendar year,
but in no event will this annual increase exceed 1,500,000 shares. In addition,
in no event may one participant in the 2000 stock incentive plan receive option
grants or direct stock issuances for more than 950,000 shares in the aggregate
per calendar year.
Programs
The 2000 stock incentive plan will be divided into five separate programs:
. the discretionary option grant program under which eligible individuals
employed by us may be granted options to purchase shares of common stock
at an exercise price determined by the plan administrator;
. the stock issuance program under which eligible individuals may be issued
shares of common stock directly, through the purchase of these shares at
a price determined by the plan administrator or as a bonus tied to the
performance of services;
. the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to use a portion of their base
salary to acquire special below market stock option grants;
. the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and
. the director fee option grant program under which our non-employee board
members may be given the opportunity to use a portion of any retainer fee
otherwise payable to them in cash for the year to acquire special below
market stock option grants.
Plan Features
The 2000 stock incentive plan will include the following features:
. The exercise price for any options granted under the plan may be paid in
cash or with mature shares of our common stock valued at fair market
value on the exercise date. The option may also be exercised through a
same-day sale program without any cash outlay by the optionee.
. The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine
which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances
are to be made, the number of subject to each such grant or issuance, the
exercise or purchase price for each such grant or issuance (which may be
less than, equal to or greater than the fair market value of the shares),
the status of any granted option as either an incentive stock option or a
non-statutory stock option under the federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the
maximum term for which any granted option is to remain outstanding. The
committee will also select the executive officers and other highly
compensated employees who may participate in the salary investment option
grant program in the event that program is activated for one or more
calendar years. Neither the compensation committee nor the board will
exercise any
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administrative discretion with respect to option grants made under the
salary investment option grant program or under the automatic option grant
program or director fee option grant program for the non-employee board
members.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of
common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
us equal to the fair market value of the vested shares of common stock
subject to the surrendered option less the exercise price payable for
those shares. We may make the payment in cash or in shares of common
stock.
. The exercise price for the options may be paid in cash or in shares of
our common stock valued at fair market value on the exercise date. The
option may also be exercised through a same-day sale program without any
cash outlay by the optionee. In addition, the compensation committee may
allow a participant to pay the option exercise price or direct issue
price (and any associated withholding taxes incurred in connection with
the acquisition of shares) with a full-recourse, interest-bearing
promissory note.
Change in Control
The 2000 stock incentive plan will include change in control provisions that
may result in the accelerated vesting of outstanding option grants and stock
issuances:
. In the event that we are acquired by merger or asset sale or a board-
approved sale of more than 50% of our capital stock, each outstanding
option under the discretionary option grant program that is not assumed
or continued by the successor corporation will immediately become
exercisable for all the option shares, and all unvested shares will
immediately vest, except to the extent our repurchase rights with respect
to those shares are to be assigned to the successor corporation.
. The compensation committee may grant options and issue shares which will
accelerate (i) upon an acquisition even if the options are assumed and
repurchase rights assigned, (ii) in connection with a hostile change in
control (effected through a successful tender offer for more than 50% of
our outstanding voting stock or by proxy contest for the election of
board members) or (iii) upon a termination of the individual's service
following a change in control or hostile take-over.
The board will be able to amend or modify the 2000 stock incentive plan at
any time, subject to any required stockholder approval. The 2000 stock
incentive plan will terminate no later than June 30, 2010.
2000 Employee Stock Purchase Plan
The 2000 employee stock purchase plan will be adopted by the board of
directors and approved by our stockholders prior to the date of this offering.
The plan will become effective immediately upon the execution of the
underwriting agreement for this offering. The plan is designed to allow our
eligible employees to purchase shares of our common stock, at semi-annual
intervals, through their periodic payroll deductions. A total of 750,000 shares
of common stock may be issued under the plan.
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<PAGE>
The plan will have a series of successive offering periods, each with a
maximum duration of 24 months. However, the initial offering period will begin
on the day the underwriting agreement is executed in connection with this
offering and will end on the last business day in April 2002. The next offering
period will begin on the first business day in May 2002, and subsequent
offering periods will be set by our compensation committee.
Individuals who are eligible employees on the start date of any offering
period may enter the plan on the start date or on any subsequent semi-annual
entry date. Individuals who become eligible employees after the start date of
the offering period may join the plan on any subsequent semi-annual entry date
within that period.
A participant may contribute up to 15% of his or her base salary through
payroll deductions and the accumulated payroll deductions will be applied to
the purchase of shares on the participant's behalf on each semiannual purchase
date (the last business day in April and October of each year). The purchase
price per share will be 85% of the lower of the fair market value of our common
stock on the participant's entry date into the offering period or the fair
market value on the semi-annual purchase date. The first purchase date will
occur on the last business day in October 2000. In no event, however, may any
participant purchase more than 1,000 shares, nor may all participants in the
aggregate purchase more than 187,500 shares on any one semi-annual purchase
date. Should the fair market value of the common stock on any semi-annual
purchase date be less than the fair market value on the first day of the
offering period, then the current offering period will automatically end and a
new offering period will begin, based on the lower fair market value.
The board will be able to amend or modify the plan at any time. The plan
will terminate no later than the last business day in June 2010.
401(k) Plan
We have an employee plan that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code. The 401(k) plan allows our
employees to defer up to 15% of their pre-tax earnings, subject to the Internal
Revenue Services annual contribution limit. At our discretion, we may make
matching contributions to the 401(k) plan. As of December 31, 1999, we have
made $22,427 in matching contributions under the 401(k) plan.
Employment Agreements
We do not currently have any employment agreements with any of our
employees.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. This limitation of liability does not
apply to liabilities arising under the federal securities laws. Our bylaws
provide that we shall indemnify each of our directors and officers against
expenses (including attorney's fees), judgments, fines, settlements and other
amounts actually and reasonably incurred in connection with a n proceeding
arising by reason of the fact that such person is or was one of our directors
or officers or serving as director or officer of another corporation,
partnership, joint venture, trust, or other enterprise at our request. We have
also entered into agreements to indemnify directors and certain executive
officers. With respect to the indemnification of directors and officers for
liabilities arising under the Securities Act, the SEC has opined that this
indemnification is against public policy, as expressed in the Securities Act,
and is therefore unenforceable.
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<PAGE>
RELATED-PARTY TRANSACTIONS
Sales of Common Stock
In September 1997, we issued and sold 2,726,643 shares of our common stock
to each of Arthur H. Zeile, our president, chief executive officer and Chairman
of our board of directors and a 5% stockholder, and Joel C. Daly, our chief
operating officer, director and a 5% stockholder, in exchange for $1,000 in the
aggregate from each.
In December 1998, we issued and sold 163,598 shares of our common stock to
Stephen O. James, one of our directors, in exchange for his execution and
delivery of a promissory note secured by the shares and a stock pledge
agreement in the amount of $14,400. In October 1999, we forgave the balance of
the note in payment for consulting services rendered by Mr. James to us.
Convertible Promissory Notes
Between September 1997 and January 1999, Mr. Daly loaned an aggregate of
$610,000 to us, at an interest rate of 8% per year. The loan by Mr. Daly was
paid in full by us when, in April 1999, Mr. Daly converted his promissory notes
into 187,381 shares of our Series A preferred stock.
Between September 1997 and February 1999, Mr. Zeile loaned an aggregate of
$610,000 to us, at an interest rate of 8% per year. The loan by Mr. Zeile was
paid in full by us when, in April 1999, Mr. Zeile converted his promissory
notes into 186,858 shares of our Series A preferred stock.
Sales of Preferred Stock
The Series A, Series B and Series C convertible preferred stock have voting,
liquidation, dividend and redemption rights more favorable than those of our
common stock. Upon the closing of this offering, the outstanding shares of
Series A, Series B and Series C convertible preferred stock will automatically
convert into a total of 48,578,457 shares of common stock, or a per share
conversion ratio of 1 preferred share for approximately 2.73 shares of common
stock in light of the expected stock split of approximately 2.73 for 1 to be
effected prior to the closing of this offering.
Series A
In April 1999, we issued and sold 2,857,143 shares of our Series A preferred
stock to First Union Capital Partners, Inc., a 5% stockholder of Inflow, at a
per-share purchase price of $3.50. One of our directors, Scott B. Perper, is a
managing partner of First Union Capital Partners, Inc.
In April 1999, we issued 187,381 shares of our Series A convertible
preferred stock to Mr. Daly at a per-share price of $3.50. Mr. Daly converted
his existing promissory notes and related accrued interest aggregating $655,833
into 187,381 shares of Series A convertible preferred stock.
In April 1999, we issued 186,858 shares of our Series A convertible
preferred stock to Mr. Zeile at per-share price of $3.50. Mr. Zeile converted
his existing promissory notes and related accrued interest aggregating $654,003
into 186,858 shares of Series A convertible preferred stock.
In October 1999, we issued 40,000 shares of our Series A convertible
preferred stock to James W. McHose, III, our Vice President, Chief Financial
Officer and Treasurer, at below fair market value at a per-share price of
$3.50, a discount of $6.02 per share from the then fair market value of our
preferred stock. In connection with the sale, we loaned an aggregate of $87,500
to Mr. McHose at an
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<PAGE>
interest rate of 6%. The full-recourse promissory note, due on or before
October 15, 2002, was also secured by 25,000 shares of Series A convertible
preferred stock through a stock pledge agreement. We have the right to
repurchase such 25,000 shares of Series A convertible preferred stock from Mr.
McHose at $3.50 per share if he discontinues his employment with us before
October 15, 2002.
Series B
In October 1999, we issued and sold 2,298,851 shares of our Series B
convertible preferred stock to First Union Capital Partners, Inc., at a per-
share price of $8.70. One of our directors, Scott B. Perper, is a managing
partner of First Union Capital Partners, Inc.
In October 1999, we issued and sold 2,298,851 shares of our Series B
convertible preferred stock to Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.,
collectively 5% stockholders of Inflow, at a per-share price of $8.70. One of
our directors, G. Jackson Tankersley, Jr., is a managing member of the general
partner of the Meritage funds.
In October 1999, we issued and sold 1,149,424 shares of our Series B
convertible preferred stock to J.P. Morgan Investment Corporation and Sixty
Wall Street SBIC Fund, collectively 5% stockholders of Inflow, at a per-share
price of $8.70.
For accounting purposes, the difference between the offering price of $8.70
and the deemed fair value of the Series B convertible preferred stock was
calculated as a beneficial conversion feature in the amount of approximately
$5,655,000 and reflected as a deemed dividend in the statement of operations
for the year ended December 31, 1999.
Series C
In May and June 2000, we issued and sold 487,805 shares of our Series C
convertible preferred stock to First Union Capital Partners, Inc., at a per-
share price of $20.50. One of our directors, Scott B. Perper, is a managing
partner of First Union Capital Partners, Inc.
In May and June 2000, we issued and sold 731,709 shares of our Series C
convertible preferred stock to Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.,
collectively 5% stockholders of Inflow, at a per-share price of $20.50. One of
our directors, G. Jackson Tankersley, Jr., is a managing member of the general
partner of the Meritage Funds.
In May and June 2000, we issued and sold 243,903 shares of our Series C
convertible preferred stock to J.P. Morgan Investment Corporation and Sixty
Wall Street SBIC Fund, collectively 5% stockholders of Inflow, at a per-share
price of $20.50.
In June and August 2000, we issued and sold 1,219,513 shares of our Series C
convertible preferred stock to Spire Capital Partners, L.P., a 5% stockholder
of Inflow, at a per-share price of $20.50. One of our directors, Andrew J.
Armstrong, Jr., is a principal of Spire Capital Partners, L.P.
In June 2000, we issued and sold 1,463,414 shares of our Series C
convertible preferred stock to DLJ Merchant Banking Funding III, Inc. and
entities affiliated with DLJ Merchant Banking Funding III, Inc., collectively
5% stockholders of Inflow, at a per-share price of $20.50.
For accounting purposes, the difference between the offering price of $20.50
and the deemed fair value of the Series C convertible preferred stock issued as
of June 30, 2000 was calculated as a beneficial conversion feature in the
amount of approximately $116,372,200 and reflected as a deemed dividend in the
statement of operations for the six months ended June 30, 2000.
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<PAGE>
We expect to record an additional beneficial conversion feature in the
amount of approximately $38,790,800 related to the shares of Series C
convertible preferred stock issued in August 2000.
Other Transactions with Directors
On February 3, 2000, Donald F. Detampel, Jr. was granted an option to
purchase 40,899 shares of our common stock at $2.93 per share. This option was
immediately exercised by Mr. Detampel. These shares are subject to our
repurchase right, which began lapsing at a rate of 1/12 per month in February
2000.
OneSecure, a company of which Donald F. Detampel, Jr., one of our directors
is Chief Executive Officer, holds a material interest, entered into a six month
contract dated April 15, 2000 for the provision by the Company of colocation
services to OneSecure for $11,600 per month. We believe that such contract was
made on terms no less favorable to us than could have been otherwise obtained
from an unaffiliated third party.
On May 4, 1999, Mr. James was granted an option to purchase 81,799 shares of
our common stock at $0.27 per share. Mr. James exercised this option on
December 27, 1999 and these shares are subject to a repurchase right which
began lapsing at a rate of 1/36 per month in May 1999. On January 19, 2000, Mr.
James was granted an option to purchase 40,899 shares of our common stock at
$1.46 per share. Mr. James exercised this option on January 21, 2000. These
shares are subject to our repurchase right, which began lapsing at a rate of
1/12 per month in January 2000.
Other Related-Party Transactions
Donaldson, Lufkin & Jenrette Securities Corporation and First Union Capital
Partners, Inc., are participating as underwriters in this offering. We will pay
all of the underwriters participating in this offering commissions and fees for
their services, not to exceed a total amount of 7% of the proceeds of this
offering.
Hammered Design, a company owned by Ivar Zeile, the brother of Mr. Zeile,
provides facility and design consulting services to us. We also purchase
certain office furnishings from Hammered Design. As of December 31, 1999,
aggregate payments to Hammered Design totaled approximately $296,000.
We provide colocation services to Savvis and OnSite, companies in which J.P.
Morgan (one of our principal stockholders) holds a material interest, with
recurring monthly revenue of approximately $74,300 and $12,100, respectively.
We believe that such contracts were made on terms no less favorable to us than
could have been otherwise obtained from an unaffiliated third party.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties, except for the sale of Series A preferred stock to
Mr. McHose. We believe this sale was necessary to attract Mr. McHose to work
with us. We do not currently have plans to adopt a policy that requires all
future transactions between us and our officers, directors and affiliates to be
on terms no less favorable than could be obtained from unaffiliated third
parties.
Investors' Rights Agreement
In connection with the sale of our Series C convertible preferred stock, we
entered into an amended and restated investors' rights agreement with Mr.
Zeile, Mr. Daly and our preferred stockholders. This investors' rights
agreement provides the Series A, B and C stockholders with
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<PAGE>
certain demand and piggyback registration rights. The holders of 25% or more of
the registrable securities are entitled to demand that we register their
registrable securities under the Securities Act on Form S-1 or any similar
long-form registration statement. We are not required to effect more than four
registrations pursuant to these demand registration rights. The holders of the
registrable securities are entitled to demand that we register their
registrable securities under the Securities Act on Form S-3 or any similar
short-form registration statement then available to us. In addition, the
holders of registrable securities are entitled to require us to include their
registrable securities in future registration statements that we may file.
Please see "Description of Capital Stock--Registration Rights."
Stockholders' Agreement
Also in connection with the sale of our Series C convertible preferred
stock, we entered into an amended and restated stockholders' agreement with the
parties to our investors' rights agreement and Mr. James. The stockholders'
agreement provides that the board must consist of seven members designated as
follows:
. the common stockholders have the right to designate two directors, each
of whom shall be one of our executive officers;
. First Union Capital Partners, Inc. has the right to designate one
director so long as it holds at least 1,122,143 shares of Series A
convertible preferred stock, as adjusted (in the event that First Union
holds less than such amount, the holders of Series A convertible
preferred stock, voting as a separate class, shall then designate such
director);
. Meritage Private Equity Fund, L.P. has the right to designate one
director so long as it holds at least 1,149,851 shares of Series B
convertible preferred stock, as adjusted (in the event that Meritage
holds less than such amount, the holders of Series B convertible
preferred stock, voting as a separate class, shall then designate such
director);
. Spire Capital Partners, L.P. has the right to designate one director so
long as it holds at least 536,586 shares of our Series C convertible
preferred stock, as adjusted (in the event that Spire holds less than
such amount, the holders of Series C convertible preferred stock, voting
as a separate class, shall then designate such director); and
. two independent directors must be designated by the holders of the
common stock and approved by the holders of the Series A, Series B and
Series C convertible preferred stock.
The common stockholders have designated Mr. Zeile and Mr. Daly as directors.
First Union has designated Scott B. Perper as a director. Meritage has
designated G. Jackson Tankersley, Jr. as a director. Spire has designated
Andrew J. Armstrong, Jr. as a director. The holders of the common stock, with
the approval of the holders of the Series A, Series B and Series C convertible
preferred stock, have designated Stephen O. James and Donald F. Detampel, Jr.
as directors.
In addition, the agreement restricts the sale or transfer of shares of stock
except in limited instances or in compliance with a co-sale procedure which
permits each other stockholder to participate in the proposed sale, based on
such stockholder's pro-rata stock holdings on an as-converted basis. The
agreement will terminate upon the completion of this offering and the board of
directors designation and co-sale provisions will no longer be applicable.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of August 15, 2000, as adjusted to
reflect the sale of 7,000,000 shares of common stock in this offering, by:
. each person, or group of affiliated persons, known by us to own
beneficially more than 5% of our outstanding common stock;
. each of our directors;
. each of our Named Executive Officers; and
. all of our directors and executive officers as a group.
The following table assumes the conversion of all of our preferred stock
outstanding as of August 15, 2000 into common stock, except for 1,433,203
shares of the preferred stock held by First Union Capital Partners, Inc. which
is assumed to convert into 3,907,832 shares of non-voting common stock. See
"Description of Capital Stock."
Beneficial ownership is determined in accordance with the rules of the SEC
and includes voting and investment power with respect to shares. To our
knowledge, except under applicable community property laws or as otherwise
indicated, the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned. The applicable
percentage of ownership for each stockholder is based on 58,542,101 shares of
common stock, both voting and non-voting, outstanding as of August 15, 2000,
and 65,542,101 shares outstanding after the completion of this offering, in
each case together with applicable options for that stockholder. Shares of
common stock issuable upon exercise of options granted on or before August 15,
2000 are deemed outstanding for the purpose of computing the percentage
ownership of the person holding those options but are not deemed outstanding
for computing the percentage ownership of any other person. Options issued by
us are immediately exercisable and the shares of common stock issuable pursuant
to exercise of such options are subject to repurchase by us at the original
exercise price in the event of termination of that person's relationship with
us. This repurchase right lapses over time.
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<PAGE>
<TABLE>
<CAPTION>
Percentage of
Number of Shares Beneficially
Shares Owned
Beneficially ----------------------
Owned Prior Prior to After
Beneficial Owner to Offering Offering Offering
---------------- ------------ --------- ---------
<S> <C> <C> <C>
Entities affiliated with First Union
Capital Partners, Inc. (1)............. 12,373,061 21.14% 18.88%
Entities affiliated with Meritage
Investment Partners, LLC (2)........... 8,263,255 14.12% 12.61%
Arthur H. Zeile (3)..................... 4,599,459 7.86% 7.02%
Joel C. Daly (4)........................ 4,600,885 7.86% 7.02%
DLJ Merchant Banking Funding III, Inc.
and its affiliated entities (5) ....... 3,990,208 6.82% 6.09%
Entities affiliated with J.P. Morgan
Investment Corporation (6)............. 3,799,104 6.49% 5.80%
Spire Capital Partners, L.P. (7)........ 3,325,176 5.68% 5.07%
Robert J. Gedrose (8)................... 245,397 * *
James W. McHose, III (9)................ 346,282 * *
Andrew J. Armstrong (10)................ 3,325,176 5.68% 5.07%
Scott B. Perper (11).................... 12,829,964 21.92% 19.58%
G. Jackson Tankersley (12).............. 8,263,255 14.12% 12.61%
Stephen O. James (13)................... 286,296 * *
Donald F. Detampel, Jr. (14)............ 40,899 * *
All directors and executive officers as
a group (12 persons) (15).............. 35,084,886 59.93% 53.53%
</TABLE>
--------
* Less than 1% of the outstanding shares of our common stock, both voting
and non-voting.
(1) Stock consists of 11,042,991 shares held directly by First Union Capital
Partners, Inc. and 1,330,070 shares held directly by First Union Capital
Partners, LLC. The address of First Union Capital Partners, Inc. and
First Union Capital Partners, LLC is 301 South College Street,
Charlotte, NC 28288-0732.
(2) Stock consists of 7,286,187 shares held directly by Meritage Private
Equity Fund, L.P., 850,175 shares held directly by Meritage Private
Equity Parallel Fund, L.P. and 126,893 shares held directly by Meritage
Entrepreneurs Fund, L.P. The address of the Meritage funds is 1600
Wynkoop Street, Suite 300, Denver, CO 80202.
(3) Stock consists of 4,517,660 shares held by Mr. Zeile and 81,799 shares
held by the Zeile INFLOW Trust dated December 22, 1999. Mr. Zeile
disclaims beneficial ownership of the shares held by such trust. The
address of Mr. Zeile and the trust is 938 Bannock Street, Denver, CO
80204.
(4) Stock consists of 4,464,553 shares held by Mr. Daly and 136,332 shares
held by the Daly INFLOW Trust dated December 22, 1999. Mr. Daly
disclaims beneficial ownership of the shares held by such trust. The
address of Mr. Daly and the trust is 938 Bannock Street, Denver, CO
80204.
(5) Stock consists of 3,571,237 shares held directly by DLJ Merchant Banking
Funding III, Inc., and 418,971 shares held directly by DLJESC II L.P. The
address of DLJ Merchant Banking Funding III, Inc. and DLJESC II L.P. is 277
Park Avenue, New York, NY 10172.
(6) Stock consists of 3,319,442 shares held directly by J.P. Morgan
Investment Corporation and 479,662 shares held directly by Sixty Wall
Street SBIC Fund, L.P. The address of J.P. Morgan Investment Corporation
and Sixty Wall Street SBIC Fund, L.P. is 101 California Street, 37th
Floor, San Francisco, CA 94111.
(7) The address of Spire Capital Partners, L.P. is 30 Rockefeller Plaza,
Suite 4200, New York, NY 10112.
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<PAGE>
(8) 57,942 of the shares held by Mr. Gedrose are subject to a repurchase right
which lapses at a rate of 1/36 per month. Also includes 81,803 shares
subject to a repurchase right which lapses at a rate of 1/36 per month.
Mr. Gedrose's address is 938 Bannock Street, Denver, CO 80204.
(9) 46,012 of the shares held by Mr. McHose are subject to a repurchase right
which lapses at a rate of 1/36 per month. Also includes 184,048
immediately exercisable options to purchase common stock, which shares,
when exercised, will be subject to a repurchase right which will lapse at
a rate of 25% on August 17, 2000 and 1/36 per month thereafter. Mr.
McHose's address is 938 Bannock Street, Denver, CO 80204.
(10) Stock consists of 3,325,176 shares held directly by Spire Capital
Partners, L.P. Mr. Armstrong is a Principal of Spire Capital Partners,
L.P. and disclaims beneficial ownership of its shares. Mr. Armstrong's
address is 30 Rockefeller Plaza, Suite 4200, New York, NY 10112.
(11) Stock includes 456,903 shares held by Mr. Perper and 11,042,991 shares
held indirectly by First Union Capital Partners, Inc. and 1,330,070
shares held indirectly by First Union Capital Partners, LLC. Mr. Perper
is a Managing Partner of First Union Capital Partners, Inc., a subsidiary
of First Union Corporation, and disclaims beneficial ownership of its
shares. Mr. Perper's address is 301 South College Street, Charlotte, NC
28288-0732.
(12) Stock includes 7,286,187 shares held directly by Meritage Private Equity
Fund, L.P., 850,175 shares held directly by Meritage Private Equity
Parallel Fund, L.P. and 126,893 shares held directly by Meritage
Entrepreneurs Fund, L.P. Mr. Tankersley is a Managing Member of Meritage
Investment Partners, LLC, which is the sole General Partner of each of
these Meritage funds. Mr. Tankersley disclaims beneficial ownership of
the shares held by these Meritage funds. The address of each of Meritage
Investment Partners, LLC, the Meritage funds and Mr. Tankersley is 1600
Wynkoop Street, Suite 300, Denver, CO 80202.
(13) Stock includes 265,848 shares held directly by Mr. James and 6,816 shares
held indirectly by the Amy Cherie James Trust, 6,816 shares held
indirectly by the Kristen Monett Roberts Trust and 6,816 shares held
indirectly by the Michael James Trust. Mr. James disclaims beneficial
ownership of the shares held by these trusts. 81,799 of the shares held
by Mr. James are subject to a repurchase right which began lapsing at a
rate of 1/36 per month in May 1999. In addition, 40,899 of such shares
are subject to a repurchase right which began lapsing at a rate of 1/12
per month in January 2000. Mr. James' address is 915 Spruce Street,
Boulder, CO 80302.
(14) All of the shares held by Mr. Detampel are subject to a repurchase right
which began lapsing at a rate of 1/12 per month in January 2000. Mr.
Detampel's address is 6969 West 90th Ave, Westminster, CO 80021.
(15) See footnotes (3), (4) and (8) through (14) above. Stock includes 467,618
shares subject to options exercisable within 60 days of August 15, 2000.
75
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
The following are general descriptions of the material terms of our common
stock, both voting and non-voting, and preferred stock and the relevant
provisions of our amended and restated certificate of incorporation and amended
and restated bylaws as will be in effect upon the closing of this offering.
Upon closing of this offering, our authorized capital stock will consist of
150,000,000 shares of common stock, par value $0.001 per share, 5,000,000
shares of non-voting common stock, par value $0.001 per share, and 15,000,000
shares of preferred stock, par value $0.001 per share.
Common Stock
As of August 15, 2000, our stock is held by 153 stockholders of record. Upon
the closing of this offering, and after giving effect to the issuance of
7,000,000 shares of common stock in this offering and the contemplated
amendment to our amended and restated certificate of incorporation as more
fully discussed below, there will be 65,542,101 shares of common stock
outstanding, including 3,907,832 shares of non-voting common stock outstanding.
Upon closing of this offering, holders of non-voting common stock do not
have any voting rights, except as required by applicable law. Holders of common
stock are entitled to one vote for each share held on all matters submitted to
a vote of stockholders and do not have cumulative voting rights. Accordingly,
holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of both common stock and non-voting common stock are entitled to
receive ratably those dividends, if any, as may be declared by the board of
directors out of funds legally available therefor, subject to any preferential
dividend rights of any outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of both common stock and non-voting
common stock are entitled to receive ratably our net assets available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding preferred stock. Holders of the common stock and non-voting
common stock have no preemptive, subscription, redemption or conversion rights
except that each share of non-voting common stock is convertible, at any time,
at the option of the holder into one share of common stock, and generally will
convert into one share of common stock upon transfer of the non-voting common
stock from its original holder. The common stock is not convertible into non-
voting common stock. The rights, preferences and privileges of holders of
common stock and non-voting common stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of preferred
stock which we may designate and issue in the future. Upon the closing of this
offering, there will be no shares of preferred stock outstanding.
Preferred Stock
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Upon the closing of this offering, the board of directors
will be authorized, without further stockholder approval, to issue from time to
time up to an aggregate of 15,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences, rights and any
qualifications, limitations or restrictions of the shares of each series
thereof, including the dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, including sinking fund provisions,
redemption price or prices, liquidation preferences and the number of shares
constituting any series or designation of series. We
76
<PAGE>
have no present plans to issue any shares of preferred stock. See "--Anti-
Takeover Effects of Various Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws."
Conversion of Certain Shares of Stock
Prior to the closing of this offering, we will amend our amended and
restated certificate of incorporation to provide for the issuance of non-voting
common stock and allow for any holder of preferred stock to convert its shares
into either common stock or non-voting common stock. We are undertaking this
change in our capital structure to accommodate one of our principal
stockholders, First Union Capital Partners, Inc., who wanted to reduce their
ownership percentage of voting common stock. Upon the closing of this offering,
First Union Capital Partners, Inc. will convert 1,433,202 of its shares of
preferred stock into 3,907,832 shares of non-voting common stock, and the
balance of its preferred stock into shares of voting common stock. We do not
expect that any of our other preferred stockholders will elect to receive
shares of non-voting common stock upon the conversion of their preferred
shares. We do not currently anticipate further issuances of our non-voting
common stock.
Anti-Takeover Effects of Various Provisions of Delaware Law and Our Certificate
of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to some exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction it attained that status with the approval of the board of directors
or unless the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
various exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, 15% or more of
the corporation's voting stock. This statute could prohibit or delay the
accomplishment of mergers or other takeover or change in control attempts with
respect to Inflow and, accordingly, may discourage attempts to acquire us.
In addition, various provisions of our amended and restated certificate of
incorporation and our amended and restated bylaws, which provisions will be in
effect upon the closing of the offering and are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by stockholders.
Board of Directors Vacancies. Our amended and restated certificate of
incorporation authorizes the board of directors to fill vacant directorships
and our amended and restated bylaws allow the board of directors to increase
the size of the board of directors. This may deter a stockholder from removing
incumbent directors and simultaneously gaining control of the board of
directors by filling the vacancies created by this removal with its own
nominees.
Stockholder Action; Special Meeting of Stockholders. Our amended and
restated certificate of incorporation provides that stockholders may not take
action by written consent, but only at duly called annual or special meetings
of stockholders. The bylaws further provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors or a
majority of the board of directors.
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<PAGE>
Advance Notice Requirements for Stockholder Proposals and Directors
Nominations. Our amended and restated bylaws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to or mailed and received at our principal executive offices,
not less than 120 days prior to the first anniversary of the date of our notice
of annual meeting provided with respect to the previous year's annual meeting
of stockholders.
Our amended and restated bylaws also specify certain requirements as to the
form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
Authorized But Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without stockholder
approval, subject to various limitations imposed by The Nasdaq National Market.
These additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital, corporate
acquisitions and employee benefit plans. The existence of authorized but
unissued shares of common stock and preferred stock could make more difficult
or discourage an attempt to obtain control of us by means of a proxy context,
tender offer, merger or otherwise.
Classified Board of Directors. Our board of directors is composed of three
separate classifications. At each annual meeting of stockholders after the
initial classification, the successors to directors whose terms expire will be
elected to serve a term of three years. This classification of directors may
have the effect of delaying or preventing changes in our control. See
"Management--Board Composition."
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
Registration Rights
Upon the closing of this offering, holders of approximately 56,922,101
shares of common stock (or securities convertible into common stock) will be
entitled to certain registration rights with respect to their shares. Of these
shares, 8,343,527 shares of common stock (or securities convertible into common
stock) are entitled only to "piggy-back" registration rights. Holders of
securities with registration rights may require us to register all or part of
their shares at any time following 180 days after this offering. In addition,
these holders may also require us to include their shares in future
registration statements that we file and may require us to register their
shares on Form S-3. Upon registration, these shares will be freely tradable in
the public market without restriction.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Securities
Transfer & Trust Company, Denver, Colorado.
Listing
We have applied to have our shares of common stock approved for listing on
The Nasdaq National Market under the symbol "INFL."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. In addition,
since no shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale described below, sales
of substantial amounts of common stock in the public market after these
restrictions lapse could harm the prevailing market price and our ability to
raise equity capital in the future.
Upon the closing of this offering, we will have outstanding an aggregate of
65,542,101 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act unless such shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act.
The remaining 58,542,101 shares outstanding are "restricted securities"
within the meaning of Rule 144. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of
the contractual restrictions described below and the provisions of Rule 144 and
Rule 701, the shares of common stock outstanding prior to this offering will be
available for sale in the public market 180 days following the closing of this
offering, in accordance with the volume limitations and other conditions of
Rule 144.
Our directors, officers and other stockholders holding, in the aggregate,
approximately 65% of our common stock signed lock-up agreements under which
they agreed not to transfer or dispose of, directly or indirectly, any shares
of our common stock or any securities convertible into or exercisable or
exchangeable for shares of our common stock for 180 days after the date of this
prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation. After the expiration of the lock-up agreements, these
directors, officers and stockholders will be allowed to sell shares of our
common stock in accordance with Rule 144; provided further, holders of such
restricted shares who have not been officers or directors of us on or since the
date of this prospectus may offer, sell or otherwise dispose of 25% of their
shares, that are eligible for sale under Rule 144, on the earlier of 90 days
after the date of this offering or on the second trading day after the first
public release of our quarterly results if the last recorded sale price on The
Nasdaq National Market for 20 of the 30 trading days ending on such date is at
least twice the price per share in the initial public offering. These
stockholders may also offer, sell or otherwise dispose of an additional 25% of
their shares, that are eligible for sale under Rule 144, 135 days after the
date of this offering if the price of the share of common stock has achieved
the same target level. However, Donaldson, Lufkin & Jenrette, may in its sole
discretion, at any time without notice, release all or any portion of the
shares subject to lock-up agreements. Upon expiration of the lock-up agreements
180 days after the date of this prospectus, 36,178,276 shares will become
eligible for sale at various times under Rule 144, of which 31,055,635 shares
are held by affiliates and subject to certain volume restrictions, and
1,592,775 shares will become eligible for sale under Rule 701 (except to the
extent that any shares were sold 90 or 135 days after the date of this
prospectus as described above). In addition, 21,135,313 shares are not subject
to lock-up agreements and will be eligible for sale at various times after the
date of this prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the
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<PAGE>
greater of 1% of the number of shares of common stock then outstanding, which
will equal approximately 445,106 shares immediately after the offering, or the
average weekly trading volume of the common stock on The Nasdaq National Market
during the four calendar weeks preceding the filing of a notice on Form 144
with respect to such sale. Sales under Rule 144 are also subject to various
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
Under Rule 144(k), a person who is not one of our affiliates at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years, including the holding period of any
prior owner other than an affiliate, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock plan or other written agreement is
eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
As of August 15, 2000, we had 3,804,403 outstanding stock options with a
weighted average exercise price of $2.80. As soon as practicable following the
closing of this offering, we intend to file a registration statement under the
Securities Act covering 8,396,665 shares of common stock reserved for issuance
under our 2000 stock incentive plan and 2000 employee stock purchase plan.
Shares issued under these plans will be eligible for sale in the public market
from time to time, subject to vesting provisions, Rule 144 volume limitations
applicable to our affiliates and, in the case of some options, the expiration
of lock-up agreements.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 2000, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Chase Securities Inc.,
First Union Securities, Inc., and DLJdirect Inc. have severally agreed to
purchase the numbers of shares of common stock shown opposite their names
below:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Chase Securities Inc............................................
First Union Securities, Inc.....................................
DLJdirect Inc...................................................
---
Total.......................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations, the listing of
our common stock on The Nasdaq National Market and no occurrence of an event
that would have a material adverse effect on us. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of our shares.
An electronic prospectus will be available on the Web site maintained by
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 1,050,000 additional shares at
the initial public offering price less the underwriting fees. The underwriters
may exercise their option to cover over-allotments of common stock made in
connection with this offering. To the extent that the underwriters exercise
their option, each underwriter will become obligated, subject to conditions, to
purchase a number of additional shares approximately proportionate to that
underwriter's initial purchase commitment.
The underwriters propose to initially offer some of our common stock
directly to the public at the initial public offering price shown on the cover
page of this prospectus and some of the common stock to selling group members
at the initial public offering price less a concession of $ per share. The
underwriters and selling group members may re-allow a concession not in excess
of $ per share on sales to other dealers. After the initial offering of the
common stock to the public, the representatives of the underwriters may change
the public offering price and such concessions. The underwriters do not intend
to confirm sales to any accounts over which they exercise discretionary
authority.
The following table summarizes the underwriting fees we will pay:
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
</TABLE>
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<PAGE>
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 34,004
NASD fee...................................................... 13,380
NASDAQ listing fee............................................ 5,000
Director and officers insurance expenses...................... 100,000
Legal fees and expenses....................................... 600,000
Accounting fees and expenses.................................. 400,000
Printing expenses............................................. 600,000
Blue sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees and expenses................ 10,000
Miscellaneous................................................. 232,616
----------
Total....................................................... $2,000,000
==========
</TABLE>
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
We, our officers and directors and certain stockholders have agreed that for
a period of 180 days from the date of this prospectus, we and they will not,
without the prior written consent of DLJ, do either of the following:
. offer, pledge, sell, contract to sell, sell any portion or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of our common
stock.
However, 25% of the shares of common stock subject to the restrictions
described above (other than shares owned by directors or officers) will be
released from these restrictions if the reported last sale price of the common
stock on The Nasdaq National Market is at least twice the initial public
offering price for 20 or the 30 consecutive trading days ending on the last
trading day of the 90-day period after the date of this prospectus. These
shares will be released on the later to occur of the 90-day period after the
date of this prospectus and the second trading day after the first public
release of our quarterly results. An additional 25% of the shares subject to
the restrictions described above will be released from these restrictions if
the reported last sale price of the common stock on The Nasdaq National Market
is at least twice the initial public offering price for 20 of the 30
consecutive trading days ending on the last trading day of the 135-day period
after the date of this prospectus.
At our request, the underwriters have reserved up to 7% of the common stock
offered by this prospectus for sale at the initial public offering price for
some of our employees, friends and other people and entities with whom we
maintain business relationships who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent these persons
purchase, orally or in writing, such reserved shares. Any reserved shares not
purchased or confirmed for purchase will be offered by the underwriters to the
general public on the same basis as the other shares offered by this
prospectus.
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<PAGE>
We have applied to have our shares of common stock approved for listing on
The Nasdaq National Market under the symbol "INFL." In order to meet the
requirements for listing the common stock on The Nasdaq National Market, the
underwriters have undertaken to sell lots of 100 or more shares to a minimum of
400 beneficial owners.
First Union Capital Partners, Inc. and First Union Capital Partners, LLC,
affiliates of First Union Securities, Inc., beneficially own 21.14% of the
common stock of Inflow. First Union Capital Partners, Inc. has the right to
designate one director in accordance with the provisions of our current
stockholders agreement. Messr. Perper is the First Union Capital Partners,
Inc.'s designee who is currently serving on the board of directors, with a term
expiring in 2002. The provisions of the stockholders agreement will terminate
upon the completion of this offering; however, this individual will remain as a
director until his resignation or until his replacement. In addition, DLJ
Merchant Banking Funding III, Inc and entities affiliated with DLJ Merchant
Banking Funding III, Inc. , affiliates of Donaldson, Lufkin & Jenrette
Securities Corporation, beneficially own 6.82% of the common stock of Inflow.
DLJ Merchant Banking Funding III, Inc. has been granted certain observer rights
relating to meetings held by our Board of Directors.
Under Rule 2720 of the Conduct Rules of the National Association of
Securities Dealers, or NASD, we are considered an affiliate of First Union
Securities, Inc. This offering is being conducted in accordance with Rule 2720,
which provides that, among other things, when a NASD member participates in the
underwriting of an affiliate's equity securities, the price to the public can
be no higher than that recommended by a qualified independent underwriter
meeting certain standards. In accordance with this requirement, Chase
Securities, Inc. has assumed the responsibilities of acting as qualified
independent underwriter and will recommend a maximum price to the public in
compliance with the requirements of Rule 2720. In connection with the offering,
Chase Securities, Inc. is performing due diligence investigations and reviewing
and participating in the preparation of this prospectus and the registration
statement of which this prospectus forms a part. As compensation for the
services of Chase Securities, Inc. as qualified independent underwriter, we
have agreed to pay Chase Securities, Inc. a fee of $5,000 in addition to the
underwriting compensation Chase Securities, Inc. will otherwise receive.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the common stock included
in this offering in any jurisdiction where action for that purpose is required.
The shares included in this offering may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
83
<PAGE>
Pricing of this Offering
Prior to this offering, there has been no public market for our common
stock. The initial public offering price offered by this prospectus will be
determined by negotiation between the representatives and us. The principal
factors to be considered in determining the public offering price include:
. the information in this prospectus or available to the underwriters;
. the history and the prospects for the industry in which we compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our developments and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for publicly traded common
stock of generally comparable companies.
Stabilization
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot the offering by
making short sales. Short sales involve the sales by the underwriters of a
greater number of shares than they are required to purchase. There are two
types of short sales. "Covered" short sales are sales made in an amount not
greater than the amount of shares the underwriters can purchase pursuant to
their over-allotment option. "Naked" short sales are sales made in excess of
their over-allotment option. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure
on the trading price of shares in the open market that could affect investors
who purchase shares in the offering. The underwriters may reduce or close out
their covered short position either by exercising the over-allotment option or
by purchasing shares in the open market. In determining which of these
alternatives to pursue, the underwriters will consider, among other things, the
price at which shares are available for purchase in the open market as compared
to the price at which they may purchase shares by exercising their over-
allotment option. Any "naked" short position, however, will be closed out by
purchasing shares in the open market. Purchases to cover a short position may
have the effect of preventing or retarding a decline in the market price of the
common stock following this offering. As a result, the price of the common
stock may be higher than the price that might otherwise exist in the open
market. The underwriters may also bid for and purchase shares of common stock
in the open market to stabilize the price of the common stock. In addition, the
underwriting syndicate may reclaim selling concessions if the syndicate
repurchases previously distributed common stock in syndicate covering
transactions, in stabilization transactions or in some other way or if
Donaldson, Lufkin & Jenrette Securities Corporation receives a report that
indicates clients of such syndicate members have "flipped" the common stock.
These activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
84
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Broomfield, Colorado. As of August 15,
2000, attorneys at Brobeck, Phleger & Harrison LLP, individually and through an
investment fund, beneficially owned a total of 54,530 shares of our common
stock. Legal matters in connection with the offering will be passed upon for
the underwriters by Paul, Hastings, Janofsky & Walker LLP, New York, New York.
EXPERTS
The financial statements at December 31, 1998 and 1999 and for the period
from September 26, 1997 (inception) through December 31, 1997 and for each of
the two years in the period ended December 31, 1999 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information about us and the shares of common stock to
be sold in the offering, please refer to the registration statement and the
exhibits and schedules.
You may read and copy all or any portion of the registration statement or
any other information we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
can request copies of these documents upon payment of a duplicating fee, by
writing to the Securities and Exchange Commission. Please call the Securities
and Exchange Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, will also be available to you on the
Securities and Exchange Commission's Web site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing audited
financial statements and to make available quarterly reports containing
unaudited financial information.
85
<PAGE>
INFLOW, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Inflow, Inc.
The stock split described in the last paragraph of Note 11 to the financial
statements has not been consummated at August 31, 2000. When it has been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Inflow, Inc. at December 31,
1998 and 1999, and the results of its operations and its cash flows for the
period from September 26, 1997 (inception) through December 31, 1997 and for
each of the two years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above."
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Broomfield, Colorado
February 4, 2000
F-2
<PAGE>
INFLOW, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity
---------------------- June 30, (Deficit)
1998 1999 2000 June 2000
--------- ----------- ------------ -------------
(Unaudited) (Unaudited)
(Note 1)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............... $ 23,605 $ 965,058 $ 21,267,995
Short-term investments..... -- 56,387,515 102,500,024
Accounts receivable, net
of allowance of $0,
$56,000 and $46,433 at
December 31, 1998 and
1999 and June 30, 2000
(unaudited),
respectively.............. 23,644 581,168 2,271,422
Prepaid expenses and
other, net................ 3,104 2,015,517 4,754,401
--------- ----------- ------------
Total current assets..... 50,353 59,949,258 130,793,842
Property and equipment,
net........................ 769,829 12,362,791 57,730,422
Restricted cash and
deposits................... 11,960 570,243 3,814,037
--------- ----------- ------------
Total assets............. $ 832,142 $72,882,292 $192,338,301
========= =========== ============
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable........... $ 22,892 $ 4,240,590 $ 18,026,117
Accrued and other
liabilities............... 98,401 829,042 2,642,705
Deferred revenue........... -- 164,227 434,263
Current portion of long-
term debt................. 155,864 -- --
Convertible demand notes
payable to stockholders... 1,000,000 -- --
--------- ----------- ------------
Total current
liabilities............. 1,277,157 5,233,859 21,103,085
Deferred rent
reimbursements............. 129,595 1,308,867 2,976,679
Long-term debt, net of
current portion............ 298,740 -- --
--------- ----------- ------------
Total liabilities........ 1,705,492 6,542,726 24,079,764
--------- ----------- ------------
Commitments and
contingencies (Notes 8,10
and 11)
Mandatorily redeemable
convertible preferred
stock, at redemption value,
$.001 par value:
Series A mandatorily
redeemable convertible
preferred stock;
3,310,000 shares
authorized; 3,309,953
shares issued and
outstanding at December
31, 1999 and June 30,
2000, none authorized,
issued and outstanding
pro forma (unaudited)..... -- 12,108,201 12,256,021 $ --
Series B mandatorily
redeemable convertible
preferred stock;
7,000,000 shares
authorized; 6,896,552
shares issued and
outstanding at December
31, 1999 and June 30,
2000, none authorized,
issued and outstanding
pro forma (unaudited) .... -- 65,684,938 65,984,415 --
Series C mandatorily
redeemable convertible
preferred stock;
7,318,000 shares
authorized; 5,707,317
shares issued and
outstanding at June 30,
2000, none authorized,
issued and outstanding
pro forma (unaudited)..... -- -- 233,295,505 --
Stockholders' equity
(deficit):
Common stock, voting,
$.001 par value;
115,533,317 shares
authorized actual and
150,000,000 shares
authorized pro forma
(unaudited); 8,343,527,
8,452,593 and 9,966,644
(unaudited) shares issued
and outstanding actual at
December 31, 1998 and
1999 and June 30, 2000,
respectively; 49,450,123
pro forma shares issued
and outstanding
(unaudited)............... 8,343 8,452 9,966 49,450
Common stock, non-voting,
$.001 par value; none
authorized actual and
5,000,000 authorized pro
forma (unaudited), none
issued and outstanding
actual, 3,907,832 pro
forma shares issued and
outstanding (unaudited)... -- -- -- 3,908
Additional paid-in
capital................... 9,057 7,680,316 35,423,019 346,915,568
Deferred compensation...... -- (8,905,223) (29,001,103) (29,001,103)
Stock subscriptions
receivable and other...... (14,400) (150,911) (409,647) (409,647)
Accumulated deficit........ (876,350) (10,086,207) (149,299,639) (149,299,639)
--------- ----------- ------------ ------------
Total stockholders'
equity (deficit)........ (873,350) (11,453,573) (143,277,404) $168,258,537
--------- ----------- ------------ ------------
Total liabilities,
mandatorily redeemable
convertible preferred
stock and
stockholders' equity
(deficit)............. $ 832,142 $72,882,292 $192,338,301
========= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INFLOW, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period
September 26,
1997
(Inception) Year Ended Six Months Ended
through December 31, June 30,
December 31, ------------------------ ------------------------
1997 1998 1999 1999 2000
------------- ---------- ------------ --------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ 45,032 $ 1,998,164 $ 486,470 $ 4,704,609
Costs of data network
exchange facilities:
Direct................. -- 118,848 2,681,591 541,291 7,695,190
Indirect............... -- 173,846 866,254 139,796 3,223,322
---------- ---------- ------------ --------- -------------
Gross profit (loss) from
data network exchange
facilities............. -- (247,662) (1,549,681) (194,617) (6,213,903)
---------- ---------- ------------ --------- -------------
Other operating
expenses:
Sales and marketing.... 3,704 -- 653,186 89,172 3,304,618
General and
administrative........ 31,660 298,985 1,937,254 307,004 6,593,343
Product development.... 36,829 170,263 706,008 87,264 1,269,049
Stock compensation..... -- -- 575,483 41,905 7,038,936
---------- ---------- ------------ --------- -------------
Total operating
expenses............ 72,193 469,248 3,871,931 525,345 18,205,946
---------- ---------- ------------ --------- -------------
Loss from operations.... (72,193) (716,910) (5,421,612) (719,962) (24,419,849)
---------- ---------- ------------ --------- -------------
Other income (expense):
Interest expense....... (11,941) (81,640) (61,858) (46,021) (6,463)
Interest income........ 2,627 3,707 753,845 102,618 1,585,080
---------- ---------- ------------ --------- -------------
Total other income
(expense)........... (9,314) (77,933) 691,987 56,597 1,578,617
---------- ---------- ------------ --------- -------------
Net loss................ $ (81,507) $ (794,843) $ (4,729,625) (663,365) (22,841,232)
Accretion of convertible
preferred stock........ -- -- (696,897) -- (455,693)
Deemed dividend related
to beneficial
conversion feature of
Series B and Series C
preferred stock........ -- -- (5,655,173) -- (116,372,200)
---------- ---------- ------------ --------- -------------
Net loss available to
common stockholders.... $ (81,507) $ (794,843) $(11,081,695) $(663,365) $(139,669,125)
========== ========== ============ ========= =============
Net loss per common
share (basic and
diluted)............... $ (0.01) $ (0.10) $ (1.35) $ (0.08) $ (16.27)
========== ========== ============ ========= =============
Weighted average common
shares (basic and
diluted)............... 8,179,929 8,179,929 8,180,040 8,179,929 8,582,491
========== ========== ============ ========= =============
Pro forma net loss per
common share (basic and
diluted)--unaudited.... $ (0.59) $ (3.70)
============ =============
Pro forma weighted
average common shares
(basic and diluted)--
unaudited.............. 17,496,175 37,598,295
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INFLOW, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Stock
Common Stock Additional Subscriptions
----------------- Paid-in Deferred Receivable Accumulated
Shares Amount Capital Compensation and Other Deficit Total
--------- ------ ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 26,
1997 (inception)....... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuances of common
stock.................. 8,179,929 8,180 (5,180) -- -- -- 3,000
Net loss................ -- -- -- -- (81,507) (81,507)
--------- ------ ----------- ------------ --------- ------------- -------------
Balance at December 31,
1997................... 8,179,929 8,180 (5,180) -- -- (81,507) (78,507)
Sale of common stock.... 163,598 163 14,237 -- (14,400) -- --
Net loss................ -- -- -- -- -- (794,843) (794,843)
--------- ------ ----------- ------------ --------- ------------- -------------
Balance at December 31,
1998................... 8,343,527 8,343 9,057 -- (14,400) (876,350) (873,350)
Reclassification of
accumulated earnings
(deficit) upon
conversion to taxable
status................. -- -- (1,174,941) -- -- 1,174,941 --
Deferred compensation
from stock options and
sales of stock ........ -- -- 9,480,706 (9,480,706) -- -- --
Satisfaction of stock
subscription
receivable............. -- -- -- -- 14,400 -- 14,400
Amortization of deferred
compensation........... -- -- -- 575,483 -- -- 575,483
Accretion of preferred
stock.................. -- -- (696,897) -- -- -- (696,897)
Sale of preferred
stock.................. -- -- -- -- (87,500) -- (87,500)
Issuance of common stock
upon exercise of
options................ 81,799 82 22,418 -- -- -- 22,500
Sale of common stock.... 27,267 27 39,973 -- (40,000) -- --
Beneficial conversion
feature related to
issuance of Series B
preferred stock........ -- -- -- -- -- (5,655,173) (5,655,173)
Unrealized loss on
investments available
for sale............... -- -- -- -- (23,411) -- (23,411)
Net loss................ -- -- -- -- -- (4,729,625) (4,729,625)
--------- ------ ----------- ------------ --------- ------------- -------------
Balance at December 31,
1999................... 8,452,593 8,452 7,680,316 (8,905,223) (150,911) (10,086,207) (11,453,573)
Deferred compensation
from stock options and
sale of stock
(unaudited)............ -- -- 27,134,816 (27,134,816) -- -- --
Satisfaction of stock
subscription receivable
(unaudited)............ -- -- -- -- 5,418 -- 5,418
Amortization of deferred
compensation
(unaudited)............ -- -- -- 7,038,936 -- -- 7,038,936
Accretion of preferred
stock (unaudited)...... -- -- (455,693) -- -- -- (455,693)
Repurchase of stock
(unaudited)............ (6,952) (7) (6,518) -- -- -- (6,525)
Beneficial conversion
feature related to
issuance of Series C
preferred stock
(unaudited)............ -- -- -- -- -- (116,372,200) (116,372,200)
Issuance of common stock
upon exercise of
options (unaudited).... 1,521,003 1,521 1,070,098 -- -- -- 1,071,619
Unrealized loss on
investments available
for sale (unaudited)... -- -- -- -- (264,154) -- (264,154)
Net loss (unaudited).... -- -- -- -- -- (22,841,232) (22,841,232)
--------- ------ ----------- ------------ --------- ------------- -------------
Balance at June 30, 2000
(unaudited)............ 9,966,644 $9,966 $35,423,019 $(29,001,103) $(409,647) $(149,299,639) $(143,277,404)
========= ====== =========== ============ ========= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INFLOW, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period
September 26,
1997
(Inception) Year Ended December Six Months
through 31, Ended June 30,
December 31, ----------------------- ------------------------
1997 1998 1999 1999 2000
------------- --------- ------------ ---------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net loss............... $(81,507) $(794,843) $ (4,729,625) $ (663,365) $(22,841,232)
Adjustments to
reconcile net loss to
net cash in operating
activities:
Depreciation and
amortization........ 349 67,827 412,858 55,995 1,528,681
Amortization of
deferred
compensation........ -- -- 575,483 41,904 7,038,936
Provision for
doubtful accounts... -- -- 56,000 -- 110,991
Other................ -- -- 14,400 -- 5,418
Changes in:
Accounts
receivable........ -- (23,644) (613,524) (236,227) (1,801,245)
Prepaid expenses
and other, net.... -- (3,104) (1,869,563) (572,125) (2,738,884)
Deposits........... -- (11,960) (201,133) (200) (529,276)
Accounts payable... 21,199 1,693 4,217,698 383,086 13,785,527
Accrued and other
liabilities....... 16,091 211,905 789,464 170,729 1,813,663
Deferred revenue... -- -- 164,227 83,241 270,036
Deferred rent
reimbursements.... -- -- 1,179,272 5,354 1,667,812
-------- --------- ------------ ---------- ------------
Net cash used in
operating
activities...... (43,868) (552,126) (4,443) (731,608) (1,689,573)
-------- --------- ------------ ---------- ------------
Cash Flows From
Investing Activities:
Purchase of property
and equipment......... (18,592) (819,413) (12,005,820) (544,939) (46,897,357)
Purchase of
investments, net...... -- -- (56,410,926) (9,046,032) (46,376,663)
Repurchase of common
stock................. -- -- -- -- (6,525)
Restricted cash........ -- -- (500,000) -- (2,714,518)
-------- --------- ------------ ---------- ------------
Net cash used in
investing
activities...... (18,592) (819,413) (68,916,746) (9,590,971) (95,995,063)
-------- --------- ------------ ---------- ------------
Cash Flows From
Financing Activities:
Proceeds from issuance
of preferred stock,
net of issuance
costs................. -- -- 70,043,733 10,060,198 116,915,954
Proceeds from issuance
of common stock....... 3,000 -- 22,500 -- 1,071,619
Cash overdraft......... -- -- 31,013 -- --
Proceeds from long-term
debt.................. -- 467,593 200,000 200,000 --
Repayments of long-term
debt.................. -- (12,989) (654,604) (181,255) --
Proceeds from
convertible notes
payable............... 600,000 400,000 220,000 220,000 --
-------- --------- ------------ ---------- ------------
Net cash provided
by financing
activities...... 603,000 854,604 69,862,642 10,298,943 117,987,573
-------- --------- ------------ ---------- ------------
Net increase (decrease)
in cash............... 540,540 (516,935) 941,453 (23,636) 20,302,937
Cash and cash
equivalents, beginning
of period............. -- 540,540 23,605 23,605 965,058
-------- --------- ------------ ---------- ------------
Cash and cash
equivalents, end of
period................. $540,540 $ 23,605 $ 965,058 $ (31) $ 21,267,995
======== ========= ============ ========== ============
Supplemental Disclosure
of Other Cash and Non-
cash Investing and
Financing Activities:
Interest paid.......... $ -- $ 22,949 $ 42,628 -- --
Series A preferred
stock issued for a
stock subscription
receivable............ -- -- 87,500 -- --
Common stock issued for
a stock subscription
receivable............ -- 14,400 40,000 -- --
Conversion of
convertible notes
payable and accrued
interest to Series A
preferred stock....... -- -- 1,309,836 1,309,836 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies
Organization
InFlow, Inc. (the "Company") provides customers with equipment co-location
and value-added services for mission-critical e-business and data
communications applications through its secure, carrier-neutral data network
exchange facilities ("DNXs"). The Company focuses on small and medium-sized
businesses in need of reliable and scalable outsource solutions in underserved
markets. The Company was incorporated on September 26, 1997 (inception) and
opened its first DNX in Denver in July 1998. As of December 31, 1999 the
Company operates three DNXs; one in Denver, one in Raleigh-Durham and one in
Minneapolis.
Interim Financial Information
The financial information at June 30, 2000 and for the six months ended June
30, 1999 and 2000, and the related notes, are unaudited but include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation, in all material respects, of its
financial position, operating results, and cash flows for the interim date and
periods presented. Results for the six-month period ended June 30, 2000 are not
necessarily indicative of results for the entire fiscal year or future periods.
Revenue Recognition
Revenue consists of monthly fees for colocation, network connectivity,
systems management, and value-added services. Customer contracts for the lease
of cabinet space, network connectivity and value-added services are renewable
and range from one to three years in duration with payments due on a monthly
basis. The Company also derives revenue from installation services. Monthly
recurring service revenue is recorded in the month the services are rendered.
Fees related to installation services are recorded as deferred revenue and
recognized on a straight-line basis over the term of the customer service
contracts. The incremental direct costs incurred related to the origination of
customer contracts are capitalized and recognized on a straight-line basis over
the same term.
Direct costs of DNXs consist primarily of the incremental costs of
installation services, costs for local loop and Internet connectivity, net rent
expense, utilities and maintenance, operations personnel salaries and benefits,
and depreciation and amortization at the DNXs. Indirect costs consist primarily
of costs related to the sales, marketing and administrative personnel working
at the DNXs.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments purchased with original
maturities of three months or less. All cash equivalents are carried at cost,
which approximates fair value. Restricted cash represents certificates of
deposit used to collateralize irrevocable letters of credit, which are held as
collateral for certain long-term office leases. There were no outstanding
irrevocable letters of credit as of December 31, 1998. As of December 31, 1999,
there was $142,850 of restricted cash included in prepaid expenses and other,
net and $357,150 of restricted cash included in restricted cash and other
noncurrent assets.
F-7
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investments
Investments are classified as available-for-sale as defined in Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and accordingly are carried at fair
value. Gains or losses on the sale of investments are recognized on the
specific identification method. Unrealized gains or losses are treated as a
separate component of stockholders' equity (deficit) until the security that
the unrealized gain or loss was recorded is sold. At December 31, 1999, the
amortized cost basis, aggregate fair value and gross unrealized holding gains
and losses by major security type were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Aggregate Unrealized Unrealized
Security Type Cost Basis Fair Value Gains Losses
------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Investment grade bonds........ $18,487,170 $18,457,157 $ -- $30,013
Commercial paper.............. 34,931,041 34,943,498 12,457 --
Federal agencies.............. 2,992,715 2,986,860 -- 5,855
----------- ----------- ------- -------
Total investments............. $56,410,926 $56,387,515 $12,457 $35,868
=========== =========== ======= =======
</TABLE>
Fair Value of Financial Instruments
The Company's financial instruments include cash, cash equivalents,
investments, restricted cash, accounts receivables, prepaid expenses and other
current assets, accounts payable, accrued liabilities and debt. The carrying
amounts of the Company's financial instruments approximate fair value.
Concentration of Credit Risk and Major Customers
The Company extends trade credit terms to its customers based upon ongoing
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. There was no revenue for the period from
September 26, 1997 (inception) through December 31, 1997. For the year ended
December 31, 1998, the Company had three significant customers representing
approximately 36%, 30%, and 16% of revenue. As of December 31, 1998, these
three customers represented approximately 19%, 26% and 23% of accounts
receivable. For the year ended December 31, 1999, the Company had five
customers that represented approximately 46% of revenue. Of these five
customers, one customer represented approximately 14% of revenue for the year
ended December 31, 1999. As of December 31, 1999, this customer represented
approximately 13% of gross accounts receivable. No other customer individually
represented more than 10% of revenue for the year ended December 31, 1999.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
generally three to seven years. Internally developed software costs are
expensed until the point of technological feasibility, after which time such
costs are capitalized and amortized on a straight-line basis over the estimated
useful lives of the assets, generally three years. Leasehold improvements are
amortized over the lessor of the estimated useful lives of the respective
assets or the lease term. Repair and maintenance costs are charged to expense
when incurred. Upon retirement or disposition of assets, related gains or
losses are recognized in operations.
F-8
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-Lived Assets and Impairments
The Company periodically evaluates the carrying value of long-lived assets,
including, but not limited to, purchased and internally developed software,
property and equipment and other assets, when events and circumstances warrant
such a review. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized to the extent that the carrying value exceeds the fair value of the
long-lived asset. Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved.
Stock Options
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
permits the use of either a fair value-based method or the method defined in
Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees ("APB No. 25"), to account for stock-based compensation arrangements.
The Company has elected to determine the value of stock-based compensation
arrangements under the provisions of APB No. 25, and has included the pro forma
disclosures required under SFAS No. 123 in Note 5.
Income Taxes
The financial statements for the period from September 26, 1997 (inception)
through December 31, 1997 and the year ended December 31, 1998 do not include a
provision for income taxes, as the Company was an S Corporation. Under Internal
Revenue Service regulations, the income of the S Corporation and the income tax
liability is borne by the stockholders of the S Corporation. During 1999, the
Company became a taxable entity. For the period the Company was a taxable
entity, deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to
be realized. If the Company had been a taxable entity from inception through
December 31, 1998, the Company would not have recorded any tax expense or
benefit for any period because of the taxable losses incurred and the need for
a full valuation allowance against any available deferred tax assets.
Product Development
Product development costs primarily relate to the development of internally
developed software and the Company's network architecture that are not
capitalizable under Statement of Position 98-1 Accounting for the Costs of
Computer-Software Developed or Obtained for Internal Use. These costs are
expensed as incurred.
Advertising
The Company expenses advertising costs as incurred. Advertising expenses for
the period from September 26, 1997 (inception) through December 31, 1997 and
for the years ended December 31, 1998 and 1999, were approximately $1,856,
$26,464 and $99,692, respectively.
F-9
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unaudited Pro Forma Stockholders' Equity (Deficit)
The board of directors authorized management of the Company to file a
registration statement with the Securities and Exchange Commission ("SEC")
permitting the Company to sell shares of its voting common stock to the public.
If the Company's initial public offering is consummated under the terms
presently anticipated, all of the Series A, Series B and Series C mandatorily
redeemable convertible preferred stock (collectively referred to as "preferred
stock") will automatically convert into 49,450,123 shares of voting common
stock and 3,907,832 shares of non-voting common stock (see note 11). Unaudited
pro forma stockholders' equity (deficit) as of June 30, 2000, as set forth in
the accompanying balance sheet, is adjusted for the anticipated conversion of
preferred stock.
Net Loss Per Share and Unaudited Pro Forma Net Loss Per Common Share
Net loss per common share is calculated in accordance with SFAS No. 128,
Earnings per Share ("SFAS No. 128") and SEC Staff Accounting Bulletin No. 98
("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income
(loss) per common share is computed by dividing the net income (loss) available
to common stockholders for the period by the weighted-average number of common
shares outstanding during the period. Diluted net income (loss) per common
share is computed by dividing the net income (loss) available to common
stockholders for the period by the weighted-average number of common and
potential shares outstanding during the period if their effect is dilutive.
Potential common shares consist of shares subject to repurchase by the Company,
incremental common shares issuable upon the exercise of stock options, common
shares issuable upon conversion of the preferred stock and convertible
promissory notes.
The Company has computed unaudited pro forma basic net loss per common share
in accordance with the methodology in SFAS No. 128. The Company's historical
capital structure is not indicative of its prospective structure due to the
automatic conversion of all shares of preferred stock into common stock
concurrent with the closing of the Company's anticipated IPO. Accordingly,
historical basic net loss per common share should not be used as an indicator
of future earnings per common share.
Unaudited pro forma basic net loss per common share is computed using the
weighted-average number of common shares outstanding during the period. The
Company has assumed the conversion of all outstanding preferred stock issued
into voting and non-voting common stock as of the date issued on a weighted
average basis.
F-10
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of the numerators and
denominators in the basic, diluted and pro forma net loss per common share
calculations for the periods indicated:
<TABLE>
<CAPTION>
Period
September 26,
1997
(Inception) Year Ended December Six Months Ended
through 31, June 30,
December 31, ----------------------- ------------------------
1997 1998 1999 1999 2000
------------- --------- ------------ --------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss............................. $ (81,507) $(794,843) $ (4,729,625) $(663,365) $ (22,841,232)
Accretion of convertible preferred
stock............................... -- -- (696,897) -- (455,693)
Deemed dividend related to beneficial
conversion feature of Series B
and Series C preferred stock........ -- -- (5,655,173) -- (116,372,200)
--------- --------- ------------ --------- -------------
Net loss available to common
stockholders.......................... (81,507) (794,843) (11,081,695) (663,365) (139,669,125)
Effect of pro forma conversion of
securities:
Accretion of convertible preferred
stock............................... -- -- 696,897 -- 455,693
--------- --------- ------------ --------- -------------
Pro forma net loss available to common
stockholders--unaudited............... $ (81,507) $(794,843) $(10,384,798) $(663,365) $(139,213,432)
========= ========= ============ ========= =============
Denominator:
Weighted average common shares (basic
and diluted)........................ 8,179,929 8,179,929 8,180,040 8,179,929 8,582,491
Weighted average effect of pro forma
securities:
Series A convertible preferred
stock............................... -- -- 6,671,493 -- 9,025,060
Series B convertible preferred
stock............................... -- -- 2,644,642 -- 18,804,436
Series C convertible preferred
stock............................... -- -- -- -- 1,186,308
--------- --------- ------------ --------- -------------
Pro forma weighted average common
shares (basic and diluted)--
unaudited............................. -- -- 17,496,175 -- 37,598,295
========= ========= ============ ========= =============
</TABLE>
Potential dilutive securities totaling 163,598, 883,432, 30,338,143 and
(47,875,206) (unaudited) for the period September 26, 1997 (inception) through
December 31, 1997, for each of the years ended December 31, 1998 and 1999, and
for the six months ended June 30, 2000, respectively, were excluded from
historical basic and diluted loss per common share because of their anti-
dilutive effect.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting comprehensive income and its components in financial
statements. Comprehensive income includes
F-11
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
all changes in equity during a period from non-owner sources. For the year
ended December 31, 1999, total comprehensive income (loss) was $4,753,036,
which included a $23,411 unrealized holding loss on investments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Recent Accounting Pronouncements
In December, 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements" as amended. SAB 101
provides specific guidance, among other things, as to the recognition of
revenue related to up-front non-refundable fees and services charges received
in connection with a contractual arrangement. The Company has applied the
provisions of SAB 101 in the year ended December 31, 1999. The adoption of SAB
101 did not have a material impact on the Company's financial condition or
results of operations. See Note 1, Revenue Recognition, for a discussion of our
accounting for fees from the contractual arrangements with our customers.
2. Balance Sheet Components
Certain balance sheet components are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
--------------------- -----------
1998 1999 2000
-------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Property and equipment
Construction-in-progress at DNXs.......... $ -- $ 3,342,744 $25,830,551
Furniture and office equipment............ -- 725,242 1,433,026
Leasehold improvements and building
equipment................................ 466,682 5,537,702 21,744,246
Network equipment......................... 262,686 2,006,478 7,461,822
Internally developed software............. 20,000 179,493 623,189
Computer equipment and software........... 88,637 1,052,166 2,647,302
-------- ----------- -----------
838,005 12,843,825 59,740,137
Less accumulated depreciation and
amortization............................. (68,176) (481,034) (2,009,715)
-------- ----------- -----------
$769,829 $12,362,791 $57,730,422
======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- --------
<S> <C> <C>
Accrued liabilities
Salaries, wages and benefits.................................. $ -- $351,017
Sales, use and franchise taxes................................ -- 205,735
Deferred rent reimbursements.................................. 12,396 131,757
Other......................................................... 86,005 140,533
------- --------
$98,401 $829,042
======= ========
</TABLE>
F-12
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Notes Payable and Long-term Debt
The Company borrowed a total of $1,220,000 from its founding stockholders,
in the form of convertible demand promissory notes (the "Notes"). The Notes
bear interest equal to 8% per annum. The Notes, including accrued but unpaid
interest, were convertible, at the option of the founding stockholders, into
shares of Series A mandatorily redeemable convertible preferred stock (the
"Series A preferred stock"). Interest expense related to these Notes was
$11,941, $70,606 and $7,290 for the period from September 27, 1997 (inception)
through December 31, 1997, for the year ended December 31, 1998 and for the
year ended December 31, 1999, respectively. In April 1999, the Notes and
accrued interest were converted into shares of Series A preferred stock (see
Note 4).
During 1998, the Company entered into a loan and security agreement with a
bank, which was amended in March 1999. At December 31, 1998 and 1999, the
Company owed $454,604 and $0, respectively, under this agreement. Interest
accrued at 1.50% above the prime rate. The founding stockholders personally
guaranteed this long-term debt and the agreement expired during 1999.
4. Mandatorily Redeemable Convertible Preferred Stock
In April 1999 and June 1999, the Company issued a total of 2,895,714 shares
of $0.001 par value Series A preferred stock at $3.50 per share and received
proceeds, net of issuance costs, totaling $10,060,198. Concurrently,
outstanding convertible demand notes plus accrued interest of $1,309,836 were
converted into 374,239 shares of Series A preferred stock.
In September 1999, the Company agreed to sell shares of its $0.001 par value
Series B mandatorily redeemable preferred stock (the "Series B preferred
stock") at $8.70 per share. In October and November 1999, the Company closed
this round of financing and issued a total of 6,896,552 shares of Series B
preferred stock $0.001 par value at $8.70 per share and received proceeds, net
of issuance costs, totaling $59,931,035. The difference between the offering
price and the deemed fair value of the Series B preferred stock resulted in a
beneficial conversion feature in the amount of approximately $5,655,000 which
was calculated in accordance with Emerging Issues Task Force No. 98-5
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios. The beneficial conversion feature is
reflected as a deemed dividend in the statement of operations for the year
ended December 31, 1999.
On October 15, 1999, 40,000 shares of Series A preferred stock were sold to
an employee at $3.50 per share in exchange for $52,500 and a full recourse note
of $87,500. The stock subscription receivable accrues interest at 6% per annum
and is due on or before October 15, 2002. The entire unpaid principal and
accrued interest is immediately due and payable upon certain accelerating
events, as defined in the note. The employee vests in all of the Series A
preferred stock on October 15, 2002. The Company has the right to repurchase
the unvested portion of the Series A preferred stock at the purchase price of
$3.50 at the time of the cessation of service. The Company estimated the fair
value of the Series A preferred stock to be $9.52 at the date of the sale. The
difference between the price paid and the estimated fair value of the shares
times the number of shares, or $240,800, was recorded as deferred compensation.
The amortization of this deferred compensation resulted in $87,028 of expense
during the year ended December 31, 1999. The remaining deferred compensation as
of December 31, 1999, will be amortized to compensation expense on a straight-
line basis over the remaining vesting period.
F-13
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The holders of the preferred stock have the following rights and
preferences:
Voting Rights
The holders of the preferred stock and the common stock, voting together as
a single class, are entitled to vote upon any matter submitted to the
shareholders. The holders of the preferred stock are entitled to one vote for
each share of common stock that such holder would be entitled to receive if the
preferred stock were converted into common stock. The holders of common stock
have one vote per share of common stock.
Dividends
The holders of the preferred stock are entitled to receive dividends prior
and in preference to any dividend on common stock, payable only when, and if
declared by the board of directors. No dividends have been declared to date.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the preferred stock are entitled to receive in exchange for and
in redemption of each share of preferred stock, prior and in preference to
common stock, an amount equal to the greater of (i) the sum of the original
issue price, as appropriately adjusted for subsequent stock dividends, stock
splits plus an amount per share determined by dividing $0.28 per annum,
compounded annually, measured from April 5, 1999 to the date of liquidation
multiplied by the number of outstanding shares of Series A preferred stock, by
the total number of outstanding shares of preferred stock or (ii) the amount
per share that would be distributed among the holders of the preferred stock
and common stock pro rata based on the number of shares of common stock held by
each holder assuming conversion of all preferred stock.
Redemption
Within 90 days following the receipt by the Company of a written redemption
demand from the preferred stockholders of not less than 75% of the outstanding
shares of preferred stock delivered at any time after November 1, 2006, the
Company shall redeem all but not less than all the preferred stock, and the
holders of the preferred stock shall sell all but not less than all of the
preferred stock to the Company, for a per share purchase price equal to the sum
of (A) the sum of the original issue price, plus (B) an amount per share
determined by dividing $0.28 per annum, compounded annually, measured from
April 5, 1999 to the date of such redemption, multiplied by the number of
outstanding shares of Series A preferred stock, by the total number of
outstanding shares of preferred stock.
Conversion
The preferred stock is convertible, at the option of the holder, at any time
after the date of issuance and prior to the redemption date, into shares of
common stock as is determined by dividing the original issue price by the
conversion price in effect on the date the certificate is surrendered for
conversion. The conversion price is the original issue price as adjusted for
certain dilutive issuances, splits and combinations. Upon the effective date of
the common stock split discussed in footnote 11, the conversion ratio is 1
preferred share for approximately 2.73 common shares (unaudited).
F-14
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Automatic conversion occurs immediately upon the earlier of (i) the
consummation of a firm commitment underwritten public offering of common stock
registered under the Securities Act of 1933, at a public offering price of not
less than $9.53 per share (as adjusted to reflect subsequent stock dividends
and splits), resulting in gross proceeds to the Company of not less than
$50,000,000 and after which the common stock is either listed on a national
securities exchange or traded in the NASDAQ national market system or (ii) the
date specified by written consent or agreement of the required holders.
5. Benefit Plans
The Company maintains a stock option/stock issuance plan (the "Plan") which
provides for two separate equity programs. The board of directors has reserved
4,594,393 shares of common stock for issuance under the Plan.
Stock Option Program
The Plan provides for the grant of incentive stock options to directors, key
employees and consultants to purchase common stock of the Company. The grants
may be structured in the form of option awards that vest over the optionee's
service period. The grants may also be unvested options that can be exercised,
but all of the acquired but unvested shares will be subject to repurchase at
the exercise price, at the option of the Company within 90 days of the
optionee's termination of employment. The options expire ten years after the
date of grant. These shares vest 25% after the initial 12 months of service
measured from the grant date. The balance of the shares vest in equal monthly
installments over the next 36 months of service.
The Company applies APB No. 25 in accounting for stock options and
recognized $8,991,606 in deferred compensation during the year ended December
31, 1999. During 1999, the amortization of this deferred compensation resulted
in $488,455 of compensation expense. The remaining deferred compensation of
$8,503,151 as of December 31, 1999 will be amortized to compensation expense
using an accelerated method as described in Financial Accounting Standards
Board Interpretation No. 28 over the remaining vesting period, as defined
above. Had compensation expense for the stock options been determined based on
the fair values at the grant dates for awards under the Plan consistent with
the method of accounting prescribed by SFAS No. 123, the effect on the
Company's pro forma net loss would have been immaterial.
F-15
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following summarizes stock option activity:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Number of Exercise Options Exercise
Shares Price Exercisable Price
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
Options outstanding at September
26, 1997 (inception)............ -- $ -- -- $ --
Granted at market.............. 163,598 $0.08
---------
Options outstanding at December
31, 1997........................ 163,598 $0.08 163,598 $ .08
Granted at market.............. 556,235 $0.08
---------
Options outstanding at December
31, 1998........................ 719,833 $0.08 719,833 $ .08
Granted below market........... 2,086,945 $0.72
Forfeited...................... (407,197) $0.20
Exercised...................... (81,799) $0.27
---------
Options outstanding at December
31, 1999........................ 2,317,782 $0.63 2,317,782 $0.63
=========
</TABLE>
Total stock options outstanding and exercisable under the Stock Option
Program as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Range of Number of Contractual Exercise
Exercise Prices Shares Life (Years) Price
--------------- --------- ----------- --------
<S> <C> <C> <C>
$0.08-0.27 1,395,223 9.17 $0.19
$0.45 79,890 9.79 0.45
$0.73 87,252 9.90 0.73
$1.46 755,416 10.00 1.46
</TABLE>
The weighted-average grant date fair value of options granted during 1998
and 1999 was $.01 and $2.17, respectively. The weighted-average remaining
contractual life of options outstanding at December 31, 1998 and 1999 was 9.25
years and 9.49 years, respectively.
In accordance with the guidance provided under SFAS 123, fair values are
based on minimum values. The fair value of each option grant was estimated on
the date of grant using a Black-Scholes type option-pricing model with the
following weighted average assumptions used for grants in the period from
September 26, 1997 (inception) through December 31, 1997 and the years ended
December 31, 1998 and 1999; dividend yield of zero; expected volatility of
zero; risk-free interest rates ranging from 4.22% to 6.30%; and an expected
term of four years. The risk-free interest rate used in the calculation is the
yield on the grant date of the U.S. Treasury Strip with a maturity equal to the
expected term of the option.
Stock Issuance Program
The Plan also allows the Company to directly issue common stock to eligible
persons, either through immediate purchase or as a bonus for services rendered
to the Company. Such shares may be fully vested when issued, may be subject to
a reverse vesting schedule, or may vest over the period of service or upon
attainment of specified performance objectives.
F-16
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pursuant to this program and during 1998, 163,598 shares of the Company's
common stock were sold to a director of the Company for approximately $0.09 per
share in exchange for a full recourse note. During 1999, the stock subscription
receivable and related accrued interest were satisfied through consulting
services rendered by the director. The total fair value of services offset
against the receivable was equal to the balance of the stock subscription
receivable.
Pursuant to this program and during 1999, 27,267 shares of the Company's
common stock were sold to a nonemployee consultant for approximately $1.46 per
share in exchange for a full recourse note. The stock subscription receivable
accrues interest at 6.5% per annum and is due on or before December 31, 2001,
unless certain accelerating events occur. The stock subscription receivable can
be satisfied by services rendered by the consultant. The consultant vests in
the common shares in a series of twenty-four equal monthly installments based
upon the consultant's completion of each successive month of service under the
consulting agreement, beginning on December 31, 1999. The Company has the right
to repurchase the unvested portion of the common shares at the purchase price
of approximately $1.46 at the time of the cessation of service under a
consulting agreement entered into with consultant. The Company estimated the
fair value of common stock to be approximately $10.57 per share at the date of
sale. The difference between the price paid and the estimated fair value of the
shares times the number of shares, or $248,300, was recorded as deferred
compensation. The deferred compensation will be amortized to compensation
expense using an accelerated method as described in Financial Accounting
Standards Board Interpretation No. 28 over the vesting period and will be
subject to variable plan accounting during the two-year reverse vesting period.
Employee Savings and Retirement Plan
In November 1999, the Company adopted an employee savings and retirement
plan (the "401(k) Plan") covering substantially all of the Company's employees.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the statutory prescribed limit and have the
amount of such reduction contributed to the 401(k) Plan. The Company makes
matching contributions of 50% of participant contributions not to exceed 6% of
participant compensation. During 1999, the Company contributed $22,427.
7. Income Taxes
Prior to April 1999, the Company elected to be taxed as an S Corporation.
Accordingly, the Company's tax losses passed through to the shareholders. In
April 1999, the Company revoked its tax-free status and elected to become a
taxable corporation.
The Company's net deferred tax assets at December 31, 1999 are as follows:
<TABLE>
<S> <C>
Allowance for bad debt....................................... $ 20,888
Accrued employee bonuses..................................... 83,378
Accrued sales and use tax.................................... 61,318
Depreciation................................................. 49,312
Net operating loss carryforwards............................. 1,193,945
-----------
Subtotal................................................. 1,408,841
Valuation allowance.......................................... (1,408,841)
-----------
Net deferred tax asset....................................... $ --
===========
</TABLE>
F-17
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
SFAS No. 109 requires that a valuation allowance be provided if it is more
likely than not that some portion or all of a deferred tax asset will not be
realized. The Company has concluded that a full valuation allowance should be
provided as of December 31, 1999.
The Company's effective tax rate differs from the federal income tax rate as
follows:
<TABLE>
<S> <C>
Statutory federal income tax rate.................................... 34%
State income taxes, net of federal benefit........................... 3
Change in valuation allowance........................................ (30)
Stock compensation expense........................................... (4)
Other................................................................ (3)
---
Total................................................................ 0%
===
</TABLE>
At December 31, 1999 the Company has approximately $2.9 million of net
operating loss carryforwards to offset future regular and alternative minimum
taxable income. Past or future changes in the Company's ownership may limit its
ability to utilize net operating losses to offset taxable income.
8. Commitments
The Company enters into non-cancelable operating lease agreements for its
corporate offices and DNXs. The terms of the lease agreements require base
rentals with various annual increases as well as various operating cost
increases.
Additionally, the Company received tenant improvement reimbursements of
$126,104 in 1998 and $1,084,542 in 1999. Such reimbursements are deferred and
recorded as an offset to rent expense over the term of the related leases.
Future annual minimum non-cancelable operating lease payments, net of
deferred rent as of December 31, 1999, are as follows:
<TABLE>
<S> <C>
2000.......................................................... $ 1,828,386
2001.......................................................... 2,309,735
2002.......................................................... 2,339,295
2003.......................................................... 2,378,319
2004.......................................................... 2,427,152
Thereafter.................................................... 12,197,441
-----------
$23,480,328
===========
</TABLE>
Rent expense, net of deferred rent amortization for the period from
September 26, 1997 (inception) through December 31, 1997 and for the years
ended December 31, 1998 and 1999 was $0, $82,793 and $604,886, respectively.
Certain telecommunications services that the Company offers, and intends to
offer in the future, including private line connectivity, are, or may be,
subject to regulation and certification requirements at the state level. To
date, the Company has not registered as a public utility in any state or been
certified to provide any form of regulated telecommunications services within
any jurisdiction. While the Company believes that the law regarding regulation
of these and similar types of services is
F-18
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
unclear in certain jurisdictions in which the Company currently operates or
intends to operate, and the Company continues to evaluate the status with
outside counsel, it is likely that we have provided certain of our
telecommunications services without the requisite regulatory approval or
certification in a limited number of jurisdictions. The Company intends to
obtain any such authorizations or approvals that may be necessary. The Company
believes that it will also be required to obtain and to apply for similar
authorizations in other states in which the Company expects to operate in the
future.
The Company cannot predict, with accuracy, the outcome of these events,
however, the Company believes that based on the information currently
available, the outcome of these events would not have a material effect on the
Company's financial position or results of operations. In the event of an
adverse outcome, the ultimate potential loss could have a material, adverse
effect on the Company's financial position, reported results of operations, or
cash flows.
9. Related Parties
During 1999, an entity owned by an immediate family member of the Chief
Executive Officer of the Company provided consulting services and sold office
furnishings to the Company for an aggregate of approximately $296,000 to the
Company. As of December 31, 1999, the Company owed this related party
approximately $66,500.
10. Subsequent Events
In January 2000, the Company signed an irrevocable standby letter of credit
in the amount of $500,000. The Company utilizes letters of credit to
collateralize security deposits on certain long-term office leases.
From January 1, 2000 through February 4, 2000, the Company granted 871,435
stock options to certain employees under the Plan with exercise prices below
the deemed fair market value of the Company's common stock at the date of
grant. The Company recorded deferred compensation related to these grants of
approximately $9,171,000 for the difference between the exercise price of the
stock options and the deemed fair market value of the Company's common stock at
the date of grant. This deferred compensation will be amortized to expense over
the vesting period of the options, generally four years, using an accelerated
method as described in Financial Accounting Standards Board Interpretation No.
28.
From January 1, 2000 through February 4, 2000, the Company entered into
operating leases for DNXs. The future minimum lease payments under these
agreements total approximately $13,700,000 over the next ten years.
11. Subsequent Events (unaudited)
From February 5, 2000 to June 30, 2000, the Company granted 1,663,252 stock
options to certain employees under the Plan with exercise prices below the
deemed fair market value of the Company's common stock at the date of the
grant. The Company recorded deferred compensation related to these grants of
approximately $17,963,800 for the difference between the exercise price of the
stock options and the deemed fair market value of the Company's common stock at
the date of
F-19
<PAGE>
INFLOW, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
grant. Subsequent to June 30, 2000 the Company granted 200,000 stock options to
certain employees under the Plan with exercise prices below the deemed fair
market value of the Company's common stock at the date of grant. The Company
expects to record deferred compensation related to these grants of
approximately $5,778,000 for the difference between the exercise price of the
stock options and the deemed fair market value of the Company's common stock on
the date of grant. This deferred compensation will be amortized to expense over
the vesting period of the options, generally four years, using an accelerated
method as described in Financial Accounting Standards Board Interpretation No.
28.
Subsequent to February 4, 2000, the Company entered into additional
operating leases for DNXs. The future minimum lease payments under these
agreements total approximately $69,447,859 over the next ten years.
Subsequent to February 4, 2000, the Company increased one of their
irrevocable standby letters of credit to $1,000,000 from $300,000. The Company
also added approximately $1,189,500 in additional letters of credit subsequent
to February 4, 2000.
On May 8, 2000 and June 30, 2000, the Company issued 5,707,317 shares of
$.001 par value Series C mandatorily redeemable convertible preferred stock
(the "Series C preferred stock") at $20.50 per share and received proceeds, net
of issuance costs, totaling approximately $116,916,000. On August 11, 2000, the
Company issued an additional 1,902,440 shares of Series C preferred stock at
$20.50 per share and received proceeds, net of issuance costs, of approximately
$38,850,000. The holders of the Series C preferred stock have senior rights and
preferences to the Series A and Series B preferred stock except that the
redemption and liquidation amounts are based on the original issue price plus
all accrued but unpaid dividends. Dividends on each share of Series C preferred
stock shall accrue daily at a rate of 8% per annum. Such dividends are payable
only when, as and if declared by the Board of Directors. The Company has
recorded a beneficial conversion charge of approximately $116,372,200 related
to the Series C preferred stock in the quarter ended June 30, 2000. Based on
currently available information, the Company expects to record an additional
beneficial conversion charge of approximately $38,800,000 related to the Series
C preferred stock issued in August 2000.
On June 30, 2000, the Company increased the authorized shares of common
stock from 20,000,000 shares to 115,533,317.
The Company intends to effect an approximate 2.73 to 1 split of its common
stock. All references in the financial statements to common shares, common
share prices, and per share amounts have been adjusted retroactively for all
periods presented to reflect this stock split. The Company's actual preferred
shares, preferred share prices, and per share amounts have not been adjusted
for this stock split. However, as a result of the common stock split, the
preferred stock conversion ratio has been adjusted from 1:1 to approximately
1:2.73 (see Note 4).
F-20
<PAGE>
The Company intends to amend and restate their certificate of incorporation
to provide for the issuance of non-voting common stock and allow for any holder
of preferred stock to convert its shares into either common stock or non-voting
common stock. The Company is undertaking this change in its capital structure
to accommodate a regulatory concern of one of our principal stockholders. Upon
the conversion of the preferred stock, this principal stockholder will convert
all of its shares of preferred stock into 7,135,159 shares of common stock and
3,907,832 shares of non-voting common stock. The Company does not expect any of
the other preferred stockholders will elect to receive shares of non-voting
common stock upon the conversion of their preferred shares. Therefore, the
conversion of preferred stock into voting common and non-voting common stock in
the pro forma stockholders' equity (deficit) December 31, 1999 column on the
Balance Sheet assumes that only 1,433,203 preferred shares will be converted
into non-voting common shares, with the remainder of the preferred shares
converting into voting common shares based on a 1:2.73 ratio.
F-21
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
, 2000
[LOGO OF INFLOW]
7,000,000 Shares of Common Stock
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Chase H&Q
First Union Securities, Inc.
DLJdirect Inc.
--------------------------------------------------------------------------------
Until , 2000 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealer's obligation to deliver a prospectus when acting as an underwriter
and with respect to unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth an estimate of the costs and expenses, other
than the underwriting discounts and commissions, payable by the Registrant in
connection with the issuance and distribution of the common stock being
registered.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 34,004
NASD fee...................................................... 13,380
NASDAQ listing fee............................................ 5,000
Director and officers insurance expenses...................... 100,000
Legal fees and expenses....................................... 600,000
Accounting fees and expenses.................................. 400,000
Printing expenses............................................. 600,000
Blue sky fees and expenses.................................... 5,000
Transfer Agent and Registrar fees and expenses................ 10,000
Miscellaneous................................................. 232,616
----------
Total..................................................... $2,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The registrant's certificate of incorporation in effect as of the date
hereof, and the Registrant's amended and restated certificate of incorporation
to be in effect upon the closing of this offering (collectively, the
"Certificate") provide that, except to the extent prohibited by the Delaware
General Corporation Law, as amended (the "DGCL"), the Registrant's directors
shall not be personally liable to the Registrant or its stockholders for
monetary damages for any breach of fiduciary duty as directors of the
Registrant. Under the DGCL, the directors have a fiduciary duty to the
registrant which is not eliminated by this provision of the Certificate and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving
intentional misconduct, for knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by DGCL. This
provision also does not affect the directors' responsibilities under any other
laws, such as the Federal securities laws or state or Federal environmental
laws. The Registrant intends to obtain liability insurance for its officers and
directors prior to the closing of this offering.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
II-1
<PAGE>
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant shall fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the registrant as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since September
26, 1997 (inception):
Common Stock. In September 1997, the Registrant issued (i) 2,726,643 shares
of its common stock, $0.001 par value per share, to Arthur H. Zeile, its co-
founder, in exchange for $1,000 of cash and (ii) 2,726,643 shares of its common
stock, $0.001 par value per share, to Joel C. Daly, its co-founder, in exchange
for $1,000 of cash and (iii) 2,726,643 shares of its common stock, $0.001 par
value per share, to Matt O'Connor, its co-founder, in exchange for $1,000 of
cash. The above securities were offered and sold by the Registrant in reliance
upon the exemption from registration pursuant to Section 4(2) of the Securities
Act.
In December 1998, the Registrant issued 163,598 shares of its common stock,
$0.001 par value per share, to Stephen O. James, in exchange for his execution
and delivery of a Note Secured by Stock Pledge Agreement in the amount of
$14,400. The above securities were offered and sold by the Registrant in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 701 promulgated thereunder.
On December 31, 1999, the Registrant issued 27,266 shares of its common
stock, $0.001 par value per share, to an individual for consulting services
rendered to the Registrant, in the amount of $40,000. The above securities were
offered and sold by the Registrant in reliance upon the exemption from
registration pursuant to Section 4(2) of the Securities Act and Rule 701
promulgated thereunder.
Preferred Stock. In a series of closings from April 5, 1999 through October
15, 1999, the Registrant issued an aggregate of 3,309,953 shares of its Series
A convertible preferred stock, $0.001 par value per share, to certain investors
in consideration for the payment of approximately $10,000,000. The above
securities were offered and sold by the Registrant in reliance upon the
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
In a series of closings from October 28, 1999 through November 30, 1999, the
Registrant issued an aggregate of 6,896,552 shares of its Series B convertible
preferred stock, $0.001 par value per share, to certain investors in
consideration for the payment of approximately $60,000,000. The above
II-2
<PAGE>
securities were offered and sold by the Registrant in reliance upon the
exemptions from registration pursuant to Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder.
In a series of closings from May 8, 2000 through August 11, 2000, the
Registrant consummated the issuance of 7,609,757 shares of its Series C
convertible preferred stock, $0.001 per value per share, to certain existing
and new investors, in consideration for the payment of approximately
$156,000,000. The above securities offered and sold by the Registrant in
reliance upon the exemptions from registration pursuant to Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder.
Options. The Registrant from time to time has granted stock options to
employees and directors in reliance upon exemption from registration pursuant
to either (i) Section 4(2) of the Securities Act or (ii) Rule 701 promulgated
under the Securities Act.
<TABLE>
<CAPTION>
Number of
Shares
Outstanding
Number of as of
Shares August 15, Exercise
Granted 2000 Prices
--------- ----------- --------
<S> <C> <C> <C>
September 26, 1997 to December 22, 1997.. -- -- --
December 23, 1997 through May 3, 1999.... 790,726 9,374 $0.08
May 4, 1999 through October 18, 1999..... 1,093,492 404,225 $0.27
October 19, 1999 through November 15,
1999.................................... 80,163 31,084 $0.45
November 16, 1999 through December 14,
1999.................................... 87,252 72,256 $0.73
December 15, 1999 through February 2,
2000.................................... 1,418,945 1,044,986 $1.46
February 3, 2000 - March 12, 2000........ 757,734 611,469 $2.93
March 13, 2000 - August 15, 2000......... 1,664,070 1,631,010 $4.40
</TABLE>
As of December 31, 1999, 81,799 shares of common stock have been issued upon
the exercise of options.
The common stock amounts and per share purchase and exercise prices in the
above discussion have been adjusted to reflect an approximate 2.73-for-1 stock
split to be effectuated on or before completion of the offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of underwriting agreement.
3.1 Form of fifth amended and restated certificate of incorporation.
3.2** Amendment to form of fifth amended and restated certificate of
incorporation.
3.3** Form of sixth amended and restated certificate of incorporation to
be in effect upon the closing of this offering.
3.4* Bylaws.
3.5** Form of amended and restated bylaws to be in effect upon the
closing of this offering.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.1** Specimen common stock certificate.
4.2 Please see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of
the certificate of incorporation and bylaws of the Registrant
defining the rights of holders of common stock of the Registrant.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Series A preferred stock Purchase Agreement by and among InFlow,
Inc. and the investors listed on Schedule A thereto, dated April
5, 1999.
10.2* Series A preferred stock Purchase Agreement by and among InFlow,
Inc. and the investors listed on Schedule A thereto, dated April
19, 1999.
10.3* Stock Purchase Agreement, by and between InFlow, Inc. and James
W. McHose, III, dated as of October 15, 1999.
10.4* Series B preferred stock Purchase Agreement by and among InFlow,
Inc. and Meritage Private Equity Fund, L.P., Meritage Private
Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.,
dated October 27, 1999.
10.5* Series B preferred stock Purchase Agreement by and among InFlow,
Inc. and First Union Capital Partners, Inc., dated October 28,
1999.
10.6* Series B preferred stock Purchase Agreement by and among InFlow,
Inc. and J.P. Morgan Investment Corporation, Sixty Wall Street
SBIC Fund, L.P., General Electric Capital Corporation and
Stolberg, Meehan and Scano II, L.P., dated November 30, 1999.
10.7 Amended and restated Series C preferred stock Purchase Agreement
by and among Inflow, Inc. and and the parties listed on the
signature page thereto, dated June 30, 2000.
10.8 Series C preferred stock Purchase Agreement by and among Inflow,
Inc. and and the parties listed on the signature page thereto,
dated August 11, 2000.
10.9 Fifth Amended and Restated Stockholders' Agreement by and among
InFlow, Inc., Art Zeile, Joel Daly and Stephen O. James and the
holders of the Series A, Series B and Series C preferred stock of
InFlow, Inc. listed on the signature pages thereto, dated as of
August 11, 2000.
10.10 Fifth Amended and Restated Investors' Rights Agreement by and
among InFlow, Inc., Art Zeile, Joel Daly and Stephen O. James and
the holders of the Series A, Series B and Series C preferred
stock of InFlow, Inc. listed on the signature pages thereto,
dated as of August 11, 2000.
10.11* Form of Data Center Services Agreement.
10.12*+ InFlow, Inc. Data Center Services Agreement by and between
InFlow, Inc. and Verio Rocky Mountain, Inc., dated August 31,
1998.
10.13**+ Amendment to InFlow, Inc. Data Center Services Agreement by and
between InFlow, Inc. and Verio Rocky Mountain, Inc., effective
September 1, 2000.
10.14**+ InFlow, Inc. Data Center Services Agreement by and between
InFlow, Inc. and Message Media, Inc., dated February 20, 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.15* Lease Agreement, between JER Denver, LLC and InFlow, Inc. (Denver
1).
10.16* Bannock Center (938 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver 2).
10.17* Bannock Center (900 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver NOC).
10.18* Lease Agreement between Timeshare Systems, Inc. and InFlow, Inc.
(Minneapolis), dated June 9, 1999.
10.19* Lease Agreement between Miami North, LLC and InFlow, Inc.
(Raleigh-Durham).
10.20* San Diego Tech Center Office Building Lease between San Diego Tech
Center, LLC and InFlow, Inc. (San Diego).
10.21* Lease Agreement between 1052 West Peachtree, LLC, and InFlow, Inc.
(Atlanta).
10.22* Triple Net Lease between AGB Norwood Park, L.P., and InFlow, Inc.
(Austin).
10.23* Sublease between Associates Information Services, Inc., and
InFlow, Inc. (Irvine).
10.24* Lease between Sterling Network Exchange, LLC, and Inflow, Inc.,
dated February 14, 2000 (Phoenix).
10.25* 1997 Stock Option/Stock Issuance Plan.
10.26* 2000 Stock Incentive Plan.
10.27* 2000 Employee Stock Purchase Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit
5.1).
24.1* Powers of Attorney
24.2 Power of Attorney for Andrew J. Armstrong
27.1 Financial Data Schedule.
</TABLE>
--------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been, or will be, requested for the redacted
portion of these exhibits, which have been, or will be, filed separately
with the Commission.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
II-5
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Denver, State of Colorado, on August 31, 2000.
INFLOW, INC.
By: /s/ Arthur H. Zeile
____________________________________
Name:Arthur H. Zeile
Title: President, Chief Executive
Officer
and Chairman of the Board
of
Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the registration statement has been signed by the following
persons in the capacities indicated below:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive August 31, 2000
____________________________________ Officer and Chairman of the
Arthur H. Zeile Board of Directors
(Principal Executive
Officer)
* Vice President, Chief August 31, 2000
____________________________________ Financial Officer and
James W. McHose, III Treasurer (Principal
Financial and Accounting
Officer)
* Vice President, Chief August 31, 2000
____________________________________ Operating Officer,
Joel C. Daly Secretary and Director
* Director August 31, 2000
____________________________________
Stephen O. James
* Director August 31, 2000
____________________________________
Scott B. Perper
* Director August 31, 2000
____________________________________
Andrew J. Armstrong, Jr.
* Director August 31, 2000
____________________________________
G. Jackson Tankersley, Jr.
* Director August 31, 2000
____________________________________
Donald F. Detampel, Jr.
/s/ James W. McHose, III As Attorney-in-Fact August 31, 2000
_______________________________
James W. McHose, III
*By:
</TABLE>
II-7
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Stockholders and Board of Directors of Inflow, Inc.:
Our audits of the financial statements referred to in our report dated
February 4, 2000 appearing in this Registration Statement on Form S-1 also
included an audit of the financial statement schedule included in this
Registration Statement. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
PricewaterhouseCoopers LLP
Broomfield, Colorado
February 4, 2000
<PAGE>
SCHEDULE II
Inflow, Inc.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance Charged Balance
at to Costs at End
Beginning and of
Description of Period Acquired Expenses Deductions Period
----------- --------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Period from Inception
(September 26, 1997) to
December 31, 1997:
Allowance for doubtful
accounts...................... $ -- -- -- -- $ --
======= ==== ======= ======== =======
Year ended December 31, 1998:
Allowance for doubtful
accounts...................... $ -- -- -- -- $ --
======= ==== ======= ======== =======
Year ended December 31, 1999:
Allowance for doubtful
accounts...................... $ -- -- 56,000 -- $56,000
======= ==== ======= ======== =======
Six-months ended June 30, 2000
(unaudited);
Allowance for doubtful
accounts...................... $56,000 $-- 110,991 (120,558) $46,433
======= ==== ======= ======== =======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1** Form of underwriting agreement.
3.1 Form of fifth amended and restated certificate of incorporation.
3.2** Amendment to form of fifth amended and restated certificate of
incorporation.
3.3** Form of sixth amended and restated certificate of incorporation to be
in effect upon the closing of this offering.
3.4* Bylaws.
3.5** Form of amended and restated bylaws to be in effect upon the closing
of this offering.
4.1** Specimen common stock certificate.
4.2 Please see Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5 for provisions of the
certificate of incorporation and bylaws of the Registrant defining
the rights of holders of common stock of the Registrant.
5.1** Opinion of Brobeck, Phleger & Harrison LLP.
10.1* Series A preferred stock Purchase Agreement by and among InFlow, Inc.
and the investors listed on Schedule A thereto, dated April 5, 1999.
10.2* Series A preferred stock Purchase Agreement by and among InFlow, Inc.
and the investors listed on Schedule A thereto, dated April 19, 1999.
10.3* Stock Purchase Agreement, by and between InFlow, Inc. and James W.
McHose, III, dated as of October 15, 1999.
10.4* Series B preferred stock Purchase Agreement by and among InFlow, Inc.
and Meritage Private Equity Fund, L.P., Meritage Private Equity
Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P., dated
October 27, 1999.
10.5* Series B preferred stock Purchase Agreement by and among InFlow, Inc.
and First Union Capital Partners, Inc., dated October 28, 1999.
10.6* Series B preferred stock Purchase Agreement by and among InFlow, Inc.
and J.P. Morgan Investment Corporation, Sixty Wall Street SBIC Fund,
L.P., General Electric Capital Corporation and Stolberg, Meehan and
Scano II, L.P., dated November 30, 1999.
10.7 Amended and restated Series C preferred stock Purchase Agreement by
and among Inflow, Inc. and and the parties listed on the signature
page thereto, dated June 30, 2000.
10.8 Series C preferred stock Purchase Agreement by and among Inflow, Inc.
and and the parties listed on the signature page thereto, dated
August 11, 2000.
10.9 Fifth Amended and Restated Stockholders' Agreement by and among
InFlow, Inc., Art Zeile, Joel Daly and Stephen O. James and the
holders of the Series A, Series B and Series C preferred stock of
InFlow, Inc. listed on the signature pages thereto, dated as of
August 11, 2000.
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.10 Fifth Amended and Restated Investors' Rights Agreement by and among
InFlow, Inc., Art Zeile, Joel Daly and Stephen O. James and the
holders of the Series A, Series B and Series C preferred stock of
InFlow, Inc. listed on the signature pages thereto, dated as of
August 11, 2000.
10.11* Form of Data Center Services Agreement.
10.12*+ InFlow, Inc. Data Center Services Agreement by and between InFlow,
Inc. and Verio Rocky Mountain, Inc., dated August 31, 1998.
10.13**+ Amendment to InFlow, Inc. Data Center Services Agreement by and
between InFlow, Inc. and Verio Rocky Mountain, Inc., effective
September 1, 2000.
10.14**+ InFlow, Inc. Data Services Agreement by and between InFlow, Inc. and
Message Media, Inc. dated February 20, 1999.
10.15* Lease Agreement, between JER Denver, LLC and InFlow, Inc. (Denver 1).
10.16* Bannock Center (938 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver 2).
10.17* Bannock Center (900 Bannock Building) Office Building Lease
Agreement, between 938 Bannock, LLC and InFlow, Inc. (Denver NOC).
10.18* Lease Agreement between Timeshare Systems, Inc. and InFlow, Inc.
(Minneapolis), dated June 9, 1999.
10.19* Lease Agreement between Miami North, LLC and InFlow, Inc. (Raleigh-
Durham).
10.20* San Diego Tech Center Office Building Lease between San Diego Tech
Center, LLC and InFlow, Inc. (San Diego).
10.21* Lease Agreement between 1052 West Peachtree, LLC, and InFlow, Inc.
(Atlanta).
10.22* Triple Net Lease between AGB Norwood Park, L.P., and InFlow, Inc.
(Austin).
10.23* Sublease between Associates Information Services, Inc., and InFlow,
Inc. (Irvine).
10.24* Lease between Sterling Network Exchange, LLC, and Inflow, Inc., dated
February 14, 2000 (Phoenix).
10.25* 1997 Stock Option/Stock Issuance Plan.
10.26* 2000 Stock Incentive Plan.
10.27* 2000 Employee Stock Purchase Plan.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2** Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1* Powers of Attorney
24.2 Power of Attorney for Andrew J. Armstrong
27.1 Financial Data Schedule.
</TABLE>
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* Previously filed.
** To be filed by amendment.
+ Confidential treatment has been, or will be, requested for the redacted
portion of these exhibits, which have been, or will be, filed separately
with the Commission.
ii
