<PAGE>
As filed with the Securities and Exchange Commission on June 8, 2000
Registration No. 333-34342
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
GENUITY INC.
(Exact Name of Registrant as Specified in its Charter)
----------------
Delaware 7370 74-2864824
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
----------------
3 Van de Graaff Drive
Burlington, Massachusetts 01803
(781) 262-4000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
PAUL R. GUDONIS
Chairman and Chief Executive Officer
3 Van de Graaff Drive
Burlington, Massachusetts 01803
Telephone: (781) 262-4000
Telecopy: (781) 262-3408
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
KEITH F. HIGGINS, ESQ. IRA H. PARKER, ESQ. JOHN T. BOSTELMAN, ESQ.
PATRICK O'BRIEN, ESQ. General Counsel Sullivan & Cromwell
Ropes & Gray Genuity Inc. 125 Broad Street
One International Place 3 Van de Graaff Drive New York, New York 10004
Boston, Massachusetts Burlington, Massachusetts Telephone: (212) 558-4000
02110 01803 Telecopy: (212) 558-3588
Telephone: (617) 951-7000 Telephone: (781) 262-4000
Telecopy: (617) 951-7050 Telecopy: (781) 262-3408
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 of 1933, 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated June 8, 2000.
PROSPECTUS
173,913,000 Shares
LOGO OF GENUITY
Class A Common Stock
------------
We are offering 173,913,000 shares of our Class A 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 will be between $12 and
$15 per share.
------------
Our Class A common stock has been approved for listing on the Nasdaq National
Market under the symbol "GENU".
------------
Investing in our Class A common stock involves risks. See "Risk Factors"
beginning on page 9.
------------
PRICE $ PER SHARE
------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount Genuity
-------- ------------ -----------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have granted the underwriters the right to purchase up to an additional
26,087,000 shares to cover over-allotments. Morgan Stanley & Co. Incorporated
and Salomon Smith Barney Inc. expect to deliver the shares to purchasers on
, 2000.
------------
Joint Book-Running Managers
Morgan Stanley Dean Witter Salomon Smith Barney
------------
Bear, Stearns & Co. Inc.
Chase H&Q
Credit Suisse First Boston
Goldman, Sachs & Co.
Merrill Lynch & Co.
------------
Deutsche Banc Alex. Brown
Donaldson, Lufkin & Jenrette
J.P. Morgan & Co.
UBS Warburg LLC
, 2000
<PAGE>
Inside Front Cover
Top Caption -- The "Genuity" logo appears across the top right.
Middle Left -- This is a picture of a blue globe on a black background.
Right Caption -- "Yesterday you knew us as GTE Internetworking and BBN, the firm
that brought you the Internet's first backbone. Today, Genuity brings
enterprises and service providers fully integrated solutions by capitalizing on
our:
. State-of-the-art network
. Tier 1 Internet backbone
. On-network users and content
. Comprehensive service offerings
. Internet heritage and focus
Bottom Right -- There are four separate pictures of our network operations
center and our data center. The first top right picture is of a person looking
at a server. The second top left picture is of computer cables. The third
bottom right picture is of computers in our network operations center. The
fourth bottom left picture is of a person working on the back of an open server.
Bottom Caption -- "Enabling the Internet Revolution"
<PAGE>
Gatefold
Top Caption -- "Genuity's e-Business Network Infrastructure"
Center -- This is a picture of a map of the U.S. with our network. There are
orange lines that depict our current fiber cable network and aqua lines that
depict additions to our fiber cable network at year-end 2001. Orange diamonds
represent points of presence on our Internet backbone. Orange silo shapes
represent the current locations of our network operations centers and aqua silo
shapes represent additional locations of our network operations centers at the
end of 2001. Orange pyramids represent the current locations of our data
centers and aqua pyramids represent the additional locations of our data centers
at year-end 2001.
Bottom -- There are three boxes with maps. The first box is titled "Japan" with
a map of Japan and a smaller map of Hawaii. The Japan map shows one current data
center in orange and an aqua line for projected fiber cable at year-end 2001.
The second box is titled "Latin America, Mexico, Puerto Rico." This map shows
one point of presence, one projected data center at year-end 2001 and our
projected fiber cable network at year-end 2001. The third box is titled
"Europe." This map shows seven current points of presence on our Internet
backbone, our current fiber cable network and our data center in the United
Kingdom.
In addition, there is a legend in a box which has the following: orange lines
represent current fiber cable, aqua lines represent projected 2001 fiber cable,
orange diamonds represent backbone POPs, orange silo shapes represent current
NOCs, aqua silo shapes represent projected 2001 NOCs, orange pyramids represent
current data centers and aqua pyramids represent projected 2001 data centers.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 9
Special Note Regarding Forward-Looking Statements........................ 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Combined Financial Data......................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 37
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management............................................................... 62
Related Party Transactions............................................... 73
Sole Stockholder......................................................... 80
Description of Capital Stock............................................. 81
Important United States Tax Consequences to Non-U.S. Holders of Class A
Common Stock............................................................ 89
Shares Eligible for Future Sale.......................................... 92
Underwriting............................................................. 93
Validity of Class A Common Stock......................................... 96
Experts.................................................................. 96
Where You Can Find More Information...................................... 97
Index To Combined Financial Statements................................... F-1
</TABLE>
----------------
Until , 2000, which is the 25th day after the date of this
prospectus, all dealers that buy, sell or trade our Class A common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with information that is different from that contained in this prospectus.
We are offering to sell and seeking offers to buy these securities only in
jurisdictions where offers and sales are permitted.
For investors outside the United States, neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
Genuity is our registered trademark in the United States and the Genuity
logo is subject to our pending application for registration as a trademark in
the United States. All other trademarks or trade names appearing elsewhere in
this prospectus are the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about Genuity and the Class A common stock being offered in this
offering and our combined financial statements and accompanying notes appearing
elsewhere in this prospectus. In this prospectus, "GTE" refers to GTE
Corporation and its subsidiaries other than Genuity, "Bell Atlantic" refers to
Bell Atlantic Corporation and its subsidiaries prior to the merger with GTE and
"Verizon" refers to Bell Atlantic doing business as Verizon Communications, the
name under which Bell Atlantic will operate after the merger with GTE, and its
subsidiaries, including GTE. "Genuity", "we", "us" and "our" each refers to
Genuity Inc. and its subsidiaries and not to the underwriters, GTE, Bell
Atlantic or Verizon. Except as otherwise indicated, all information in this
prospectus assumes no exercise of the underwriters' option to purchase
additional shares of Class A common stock to cover over-allotments and also
assumes that the merger between Bell Atlantic and GTE closes concurrently with,
or immediately following, the completion of this offering.
GENUITY
We are a leading e-business network provider delivering managed Internet
infrastructure services to enterprises and service providers. An e-business
network provider is a facilities-based Internet infrastructure supplier
offering a comprehensive set of managed Internet access, web hosting and value-
added services to businesses that conduct transactions over the Internet, which
we refer to as e-business. The combination of these services allows customers
to purchase integrated e-business solutions. Our comprehensive suite of managed
Internet infrastructure services includes:
. Internet access through dial-up, dedicated and digital subscriber lines;
. web hosting and content delivery; and
. value-added e-business services, such as virtual private networks for
secure data transmission and security services.
We operate a state-of-the-art global network that consists of:
. recently deployed broadband fiber optic cable in the United States;
. points of presence, which are locations where we provide Internet access
to end users;
. secure data centers with redundant fiber connections to our network and
backup power sources; and
. undersea and international fiber optic cable capacity.
Our large base of on-network users and content, combined with our extensive
network, positions us as one of the leading Internet backbone providers in the
world, a status commonly referred to as a Tier 1 Internet backbone provider. An
Internet backbone is an Internet Protocol-based network that connects users and
web content. We believe that service providers are increasingly connecting to
networks with substantial on-network content to improve the quality of their
customers' experience, which in turn drives demand by enterprises seeking to
connect to networks with large numbers of users. We believe that by taking
advantage of this demand cycle, which we call the "network effect", we will
continue to drive significant demand for our services from both enterprises and
service providers and differentiate ourselves from non-Tier 1 Internet backbone
providers. As of March 31, 2000, we provided services to approximately 5,000
enterprises, such as Carrier Corporation, Computer Sciences, CNN, Microsoft,
Sun Microsystems and ZDNet, and to approximately 400 service providers, such as
Akamai Technologies, America Online, Earthlink, NetZero and WebTV in the United
States and I.NET and Tiscali in Italy. Our revenues were approximately $706
million in 1999 and $248 million for the first quarter of 2000, and we incurred
net losses of approximately $647 million in 1999 and $210 million in the first
quarter of 2000.
1
<PAGE>
Unlike many recent entrants into the Internet industry, we have more than
three decades of experience in designing and implementing the architecture of
the Internet and with solving computer networking problems. In 1969, our
predecessor, BBN Corporation, designed and helped to implement ARPAnet, which
is widely recognized as the basis for the Internet today. Our network is
recognized as the first Internet backbone and, accordingly, was designated AS-
1. We also developed the first Internet router, delivered the world's first e-
mail message and pioneered the use of the "@" symbol as a universal addressing
standard for electronic mail. More recently, we were one of the first to offer
commercial installation, maintenance and support of web sites, which is
referred to as managed web hosting services, and managed security services
through outsourced firewall monitoring.
THE OPPORTUNITY
The Internet has experienced tremendous growth in the past decade and has
emerged as an important global medium for communications and commerce. As the
Internet and data traffic have grown, the cost and complexity for enterprises
and service providers to manage their own network infrastructure demands in-
house has increased. As a result, enterprises and service providers seek to
outsource their infrastructure needs to Internet infrastructure service
providers that can:
. speed their time-to-market;
. improve performance, security and the ability to rapidly increase the
capacity needed to deliver services, which is referred to as scalability;
. provide continuous operation of their web sites; and
. reduce the costs and risks associated with developing an in-house
solution.
As enterprises and service providers continue to outsource these
requirements, they demand that Internet infrastructure service providers
deliver a high quality Internet experience for their users. We believe leading
Internet infrastructure service providers must offer a comprehensive suite of
managed Internet infrastructure services, a large base of on-network users and
content, reliable and scalable network facilities, Tier 1 Internet connectivity
and the experience and expertise necessary to provide a complete Internet
infrastructure solution.
OUR SOLUTION
Our e-business network solution enables our customers to outsource their
Internet infrastructure requirements to a single provider and to scale their
Internet operations in a cost-effective and reliable manner. The key elements
of our solution include:
. Comprehensive Suite of Managed Internet Infrastructure Services. We offer
a broad range of managed Internet infrastructure services, including:
Internet access; web hosting and content delivery; and value-added e-
business services.
. Large Base of On-Network Users and Content. We carry a significant amount
of traffic over our Tier 1 Internet backbone, allowing enterprises and
service providers to directly route traffic to, or receive content from,
a significant number of other customers without the need to pass through
other Internet backbones.
. State-of-the-Art Network. We operate a state-of-the-art, high capacity
global fiber optic network that is highly reliable and scalable and has
been equipped with advanced optical electronic equipment. Our network
includes over 17,500 route miles of fiber optic cable in the United
States, undersea and international fiber optic cable capacity and 10 data
centers for web hosting services.
2
<PAGE>
. High Performance, Tier 1 Internet Connectivity. We provide high
performance connectivity to the Internet through our Tier 1 Internet
backbone and extensive high speed private connections with other major
Internet backbone providers.
. Significant Internet Protocol Engineering and Architectural Expertise.
Drawing upon the breadth and depth of our IP and networking experience
and expertise, including over 750 engineers and over 1,100 technicians,
we are able to quickly and cost-effectively identify the Internet
infrastructure requirements of our customers and design and implement
appropriate solutions.
OUR STRATEGY
Our objective is to be the leading e-business network provider by
architecting, building and operating the infrastructure for the Internet
economy. The principal elements of our strategy for pursuing this objective
include:
. leveraging the network effect;
. expanding our capacity and state-of-the-art network;
. continuing to build and own our network facilities;
. expanding our distribution capabilities;
. pursuing strategic transactions and alliances;
. using our extensive IP and networking expertise to develop new services;
and
. establishing Genuity as a leading brand for e-business network services.
Our strategy is subject to risks and uncertainties, as we describe in the
section entitled "Risk Factors" below, and will require additional funding. We
may not be successful in implementing our strategy.
OUR CORPORATE INFORMATION
We have recently changed our name from GTE Internetworking Incorporated to
Genuity Inc. Our principal executive offices are located at 3 Van de Graaff
Drive, Burlington, Massachusetts 01803 and our telephone number is (781) 262-
4000.
3
<PAGE>
OUR RELATIONSHIP WITH VERIZON
We are currently a wholly owned subsidiary of GTE. In July 1998, Bell
Atlantic and GTE agreed to enter into a merger of equals transaction. We
anticipate that the merger, which must be approved by the Federal
Communications Commission, will close concurrently with, or immediately
following, the completion of this offering. Following the merger, Bell Atlantic
and GTE will operate under the name Verizon Communications.
Section 271 of the Telecommunications Act of 1996 generally prohibits each
of Bell Atlantic's local telephone operating companies from providing long
distance services that originate in any state in which it is an incumbent local
telephone operating company. This prohibition also extends to services provided
by any company in which Bell Atlantic owns an interest greater than 10%.
Because we provide services that could be characterized as long distance
services in states where Bell Atlantic operates an incumbent local telephone
operating company, Bell Atlantic and GTE have made a proposal to the FCC under
which Verizon will not own more than 10% of our common stock at the closing of
their merger.
Under the proposal to the FCC, GTE will exchange all of its shares of our
outstanding common stock for shares of our Class B common stock, and we will
make this offering of our Class A common stock to the public. Immediately
following the completion of this offering, the Class A common stock will
represent 90.5% of our outstanding common stock, and the Class B common stock
will represent 9.5%.
If Verizon has eliminated applicable Section 271 restrictions, it may
increase its ownership interest in us by converting the Class B common stock.
Section 271 provides that the restrictions will be lifted as to a particular
state when the incumbent local telephone company satisfies a competitive
checklist prescribed by the Telecommunications Act and obtains authority from
the FCC to provide long distance services in that state. Bell Atlantic has
received the necessary authorization in New York to provide long distance
services originating in that state. Verizon must eliminate applicable Section
271 restrictions in the other states in which it operates an incumbent local
telephone operating company, either through the Section 271 process or
otherwise, including through legislation, in order to increase its ownership in
us.
Under the proposal to the FCC, Verizon cannot convert its Class B common
stock into more than 10% of our outstanding common stock until it has
eliminated, as to at least 50% of the total billable access telephone lines
owned in 1999 by Bell Atlantic in its region, the Section 271 restrictions
applicable to its operation of our business. We refer to the total billable
access telephone lines owned in 1999 by Bell Atlantic in its region as "Bell
Atlantic in-region lines." When Verizon has eliminated the applicable Section
271 restrictions as to at least 50% of Bell Atlantic in-region lines, it could
transfer its shares of our Class B common stock to a disposition trustee for
sale to one or more third parties that would then be able to convert all of our
Class B common stock into 800 million shares of Class A common stock. When
Verizon has eliminated the applicable Section 271 restrictions as to 100% of
Bell Atlantic in-region lines, it could convert its Class B common stock into
800 million shares of our Class A common stock or Class C common stock, subject
to the terms of the proposal to the FCC.
If accepted by the FCC, the terms of the proposal will permit Bell Atlantic
and GTE to complete their merger. The proposal will also permit Verizon to hold
an ownership interest in us that complies with the Telecommunications Act and
provides the opportunity for Verizon to increase its interest in us if and when
it is lawfully authorized to do so.
For more information about our capital stock, including the conversion of
the Class B common stock, you should refer to the section "Description of
Capital Stock."
4
<PAGE>
THE OFFERING
Class A Common Stock
Offered................... 173,913,000 shares
Common Stock to be
Outstanding:
After this Offering...... 192,169,000 Shares
Assuming Maximum Class B
Conversion............. 973,913,000 Shares
We have authorized Class A common stock, Class B
common stock and Class C common stock. The table
below illustrates the number of shares outstanding
and the equity ownership and voting percentages
associated with these shares immediately following
the offering and assuming the conversion of the
Class B common stock into shares of Class C common
stock to the maximum extent permitted by our
certificate of incorporation. Each share of Class C
common stock entitles the holder to five votes per
share.
<TABLE>
<CAPTION>
After Offering Assuming Maximum Class B Conversion
------------------------ -------------------------------------
Total Equity
and Voting Total Equity Total Voting
Shares Percentage Shares Percentage Percentage
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Class A................. 173,913,000 90.5% 173,913,000 17.9% 4.2%
Class B................. 18,256,000 9.5% -- -- --
Class C................. -- -- 800,000,000 82.1% 95.8%
----------- ----- ----------- ----- -----
Total.................. 192,169,000 100.0% 973,913,000 100.0% 100.0%
=========== ===== =========== ===== =====
</TABLE>
The information in the above table is before giving
effect to options outstanding under our long-term
incentive plans and additional issuances of shares
of our common stock and assumes no exercise of the
underwriters' over-allotment option.
Conversion of Class B
Common Stock........... Under the proposal to the FCC:
If Verizon eliminates the applicable Section 271
restrictions as to 100% of Bell Atlantic in-region
lines, it could convert the Class B common stock
into 800 million shares of Class C common stock,
which immediately after this offering would
represent approximately 82% of our total equity and
approximately 96% of our total voting power.
If Verizon eliminates the applicable Section 271
restrictions as to at least 50% of Bell Atlantic
in-region lines and it first offers its shares to
us as described in the section in "Description of
Capital Stock" entitled "Common Stock--Genuity
Right of First Offer," it could transfer its shares
of Class B common stock to a disposition trustee
for sale to one or more third parties that would
then be able to convert the Class B common stock
into an aggregate of 800 million shares of Class A
common stock, which immediately after this offering
would represent approximately 82% of our total
equity and voting power.
5
<PAGE>
If Verizon does not eliminate the applicable
Section 271 restrictions as to at least 50% of Bell
Atlantic in-region lines, the Class B common stock
is convertible into shares of Class A common stock
representing only 10% of our total common stock
outstanding immediately after the conversion.
Our certificate of incorporation contains less
restrictive conversion provisions for the Class B
common stock than the conversion provisions under
the proposal to the FCC described above. You should
refer to the section in "Description of Capital
Stock" entitled "Common Stock--Conversion of Class
B Common Stock" for a description of the conversion
provisions under our certificate of incorporation.
Expiration of Class B
Common Stock Conversion
Rights.................. Under the proposal to the FCC, if Verizon has not
eliminated the applicable Section 271 restrictions
as to 100% of Bell Atlantic in-region lines on or
before , 2005, which date may be extended under
conditions that we describe in the section in
"Description of Capital Stock" entitled "Common
Stock--Conversion of Class B Common Stock",
Verizon's ability to convert the Class B common
stock into 800 million shares of Class A common
stock or Class C common stock will expire. If
Verizon has satisfied the applicable Section 271
restrictions as to 100% of Bell Atlantic in-region
lines on or before that date or any extension, its
ability to convert the Class B common stock into
800 million shares of Class A common stock or Class
C common stock will not expire. Class B common
stock transferred to a third party will not be
subject to the expiration limitation.
Genuity Right of First
Offer................... Under the proposal to the FCC, if Verizon seeks to
sell some or all of its shares of our Class B
common stock after eliminating the applicable
Section 271 restrictions as to at least 50% but
less than 95% of Bell Atlantic in-region lines,
Verizon must first offer to sell those shares to
us. You should refer to the section in "Description
of Capital Stock" entitled "Common Stock--Genuity
Right of First Offer" for a more detailed
description of our right of first offer.
Conversion of Class C
Common Stock............ Each share of Class C common stock is convertible
by the holder at any time into one share of Class A
common stock. Each share of Class C common stock
will automatically convert into one share of Class
A common stock if at any time the aggregate number
of outstanding shares of Class C common stock,
together with shares of Class C common stock
issuable upon conversion of Class B common stock,
constitutes less than 10% of our outstanding common
stock.
6
<PAGE>
Transfer of Class C
Common Stock............ Verizon can transfer shares of our Class C common
stock at any time. Each share of Class C common
stock so transferred will automatically convert
into one share of Class A common stock on the
earlier to occur of (1) any subsequent transfer of
ownership of such share or (2) the first
anniversary of the transfer of such share by
Verizon. Accordingly, persons other than Verizon
could own shares of Class C common stock.
Voting Rights............. Except as required by law or as described below,
the holders of our Class A common stock, Class B
common stock and Class C common stock vote together
as a single class on all matters submitted to a
vote of our stockholders.
Each share of Class A common stock entitles the
holder to one vote per share. So long as 50% or
more of the shares of Class B common stock
outstanding at the completion of this offering
remain outstanding, no holder or group of holders
of Class A common stock may vote any of their
shares in excess of 20% of the aggregate number of
the then outstanding number of shares of Class A
common stock.
Each share of Class B common stock entitles the
holder to one vote per share. The holders of the
Class B common stock, voting separately as a class,
are entitled to elect one of our directors. We are
also required to obtain the consent of the holders
of Class B common stock before taking specific
actions, including making significant acquisitions
or dispositions, entering into major business
combinations and incurring indebtedness or issuing
additional equity securities in excess of specified
limits. You should refer to the section in "Related
Party Transactions" entitled "Recapitalization
Agreement" and the section in "Description of
Capital Stock" entitled "Common Stock--Voting
Rights" for a more detailed description of these
consent requirements, including the circumstances
under which these consent requirements may be
transferred and when they terminate.
Each share of Class C common stock entitles the
holder to five votes per share.
Verizon's Right to
Acquire Additional
Shares................. If Verizon holds shares of Class A common stock and
Class C common stock that in the aggregate exceed
70% of the total number of shares of our
outstanding common stock, Verizon may acquire from
us a number of shares of Class A common stock so
that it will own shares of common stock equal to
80% of the total number of shares of our
outstanding common stock.
Use of Proceeds........... For capital expenditures in connection with the
expansion of our network infrastructure and general
corporate purposes, including working capital and
possible acquisitions of and investments in other
business and technolgies.
Nasdaq Stock Symbol....... GENU
7
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The following tables present our summary combined financial data. The
financial data presented in these tables are from "Selected Combined Financial
Data" and our combined financial statements and accompanying notes included
elsewhere in this prospectus. You should read those sections for a further
explanation of the financial data summarized here.
Our combined financial statements have been carved out from the consolidated
financial statements of GTE using the historical results of operations and
historical bases of the assets and liabilities of Genuity. Accordingly, the
historical financial information we have included in this prospectus does not
necessarily reflect what our financial position, results of operations and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented.
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
-------------------- --------------------
1998 1999 1999 2000
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Results of Operations Data:
Revenues........................ $ 446,002 $ 706,466 $ 157,283 $ 247,852
Cost of goods sold.............. 492,794 767,498 160,540 283,928
Selling, general and
administrative................. 312,916 396,522 93,123 108,336
Operating loss.................. (464,152) (645,182) (137,472) (198,198)
Net loss........................ (468,559) (647,046) (138,580) (209,826)
Basic and diluted loss per
common share................... (25.67) (35.44) (7.59) (11.49)
Basic and diluted weighted-
average common shares
outstanding.................... 18,256 18,256 18,256 18,256
Pro forma as adjusted basic and
diluted net loss per common
share (unaudited).............. $ (3.37) $ (1.09)
Pro forma as adjusted basic and
diluted weighted-average common
shares outstanding............. 192,169 192,169
</TABLE>
The pro forma as adjusted column in the combined balance sheet data below
reflects the capital contribution of $178 million by GTE and the sale of shares
of Class A common stock in this offering at an assumed initial public offering
price of $13.50 per share, after deducting estimated underwriting discounts and
offering expenses payable by us.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------
Pro Forma
As
Actual Adjusted
---------- ----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 17,118 $2,400,763
Working capital...................................... (180,484) 2,245,325
Property, plant and equipment, net................... 1,629,391 1,629,391
Total assets......................................... 2,461,854 4,843,663
Total long-term liabilities.......................... 70,584 68,584
Total liabilities.................................... 516,087 470,087
Stockholders' equity................................. 1,945,767 4,373,576
</TABLE>
8
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RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. You
should carefully consider the following factors, as well as other information
contained in this prospectus, before deciding to invest in shares of our Class
A common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could suffer, in which case the
trading price of our Class A common stock could decline and you may lose all or
part of your investment.
Risks Related to Our Business
We have a history of significant operating losses and expect these losses to
continue for at least the next several years.
We have experienced operating losses in each quarterly and annual period
since 1996. Given the level of our planned operating and capital expenditures,
we expect to continue to incur significant operating losses for at least the
next several years. We incurred operating losses of approximately $464 million
in 1998, approximately $645 million in 1999 and $198 million in the first
quarter of 2000. As of March 31, 2000, we had an accumulated deficit of
approximately $1.5 billion.
We plan to continue to make significant investments to expand our capacity
and network infrastructure, develop brand recognition, broaden the range of our
service offerings and expand our sales, marketing, technical and customer
support personnel. Our capital expenditures program, as currently contemplated,
will require between $11 billion and $13 billion during the five-year period
ending December 31, 2004, the majority of which will be for the expansion of
our network infrastructure. A substantial portion of these expenditures will be
made long before any significant revenue related to these expenditures may be
realized.
In addition, our operating expenses are based largely on anticipated revenue
trends and a significant portion of our expenses, such as personnel, the leased
portion of our network and our real estate facilities and depreciation of our
network infrastructure, is fixed. If our revenues fall below our expectations,
we would probably not be able to reduce our fixed or variable expenses in
sufficient time to respond to the shortfall. If we fail to achieve significant
increases in our revenues as a result of our investments, the size of our
operating losses may be larger than expected. We may never achieve
profitability or generate positive cash flows from operations, and if we do
achieve profitability or positive cash flows from operations in any period, we
may not be able to sustain or increase profitability or positive cash flows on
a quarterly or annual basis.
If we do not maintain or increase our market share and therefore are no
longer considered a Tier 1 Internet backbone provider, we may lose customers
and our free peering relationships with other Tier 1 Internet backbone
providers. If this occurs, our revenues and operating results may decline
significantly.
We rely significantly on our status as a Tier 1 Internet backbone provider
to maintain and grow our market share and compete with other Tier 1 Internet
backbone providers, several of which have a larger market share than we do. Any
significant loss of market share for our services could cause the loss of our
status as a Tier 1 Internet backbone provider, which would make our services
significantly less attractive to existing and potential customers and would
likely result in a significant loss of revenues. In addition, the loss of
market share or our status as a Tier 1 Internet backbone provider would
adversely affect our ability to maintain our free private peering relationships
with other Tier 1 Internet backbone providers. Currently, these relationships
permit us to have direct, cost-free exchange of traffic with other Tier 1
Internet backbone providers and allow us to avoid the congestion of public
peering points when directing traffic to users connected to those other
Internet backbones. If we are unable to maintain these free peering
relationships, our operating costs will increase and our results of operations
will suffer.
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To increase or at least maintain our market share and maintain our status as
a Tier 1 Internet backbone provider, it is critical that a significant amount
of worldwide Internet traffic be carried on our Internet backbone. To generate
significant Internet traffic, we must:
. continue to increase the amount of content available on our network
infrastructure by successfully marketing our web hosting and high speed
dedicated Internet access services to enterprises, particularly
enterprises that operate high traffic web sites; and
. continue to increase the number of users that access the Internet
through our Internet backbone by successfully marketing our Internet
access services to service providers.
We may not be successful in marketing our services to enterprises and
service providers if we fail to expand our capacity and network infrastructure
to meet increasing demand or to competitively price or expand our services or
if we experience network performance and reliability problems.
If we were to lose a significant portion of our revenues from America
Online, we would not be able to replace those revenues in the short term and
our operating losses would increase significantly.
The termination of, or a significant adverse change in, our relationship
with America Online would have a material adverse effect on our revenues.
America Online accounted for approximately 53% of our revenues in 1998, 52% of
our revenues in 1999 and 46% of our revenues in the first quarter of 2000. We
expect that revenues from America Online will continue to represent a
significant portion of our revenues for the next several years. America Online
has the right to terminate its agreement with us on 30 days notice if we
materially breach the agreement, including our failure to meet specific
performance targets, and fail to cure the breach within that notice period.
America Online also has the right to terminate its agreement with us
immediately without notice if we commit repeated material breaches of the
agreement or if we violate the terms of a few specific material provisions
under the agreement. America Online also has the right to reduce its purchase
commitments if we, among other things, fail to meet specific delivery and
performance targets or fail to meet our obligation to provide most favored
customer pricing. In addition, upon a change in control of Genuity, America
Online has the right to terminate the agreement. A transfer of Verizon's
interest in Genuity to an unrelated party may constitute a change in control of
us. You should refer to the section in "Business" entitled "Our Relationship
With America Online" for additional information about our relationship with
America Online.
If we cannot obtain the additional capital we will require to fund our
operations and finance the expansion of our capacity and network
infrastructure, we will have to delay or abandon our development and expansion
plans.
We will need significant additional capital to fund our business plan and
achieve profitability. We currently intend to spend $11 billion to $13 billion
over the five-year period ending December 31, 2004, of which approximately $1.8
billion to $2.0 billion is expected to be spent during 2000, on the continued
expansion of our network infrastructure and other capital expenditures. During
the past three years, our capital needs have been satisfied with permanent
capital contributions from GTE or financing from its affiliates. However,
following this offering, Verizon is not obligated to provide funds to finance
our capital expenditures, working capital or other cash requirements. Under the
proposal to the FCC, Verizon is not permitted, before the conversion of its
shares of our Class B common stock, to provide more than 25% of the debt
financing that we are permitted to incur under the Recapitalization Agreement.
We may be unsuccessful in raising sufficient capital on terms that we consider
acceptable, when needed or at all. If this happens, we would have to delay or
abandon our development and expansion plans, which would adversely affect our
competitive position.
We currently intend to obtain additional capital through public offerings or
private placements of debt or equity securities or through borrowings under
future credit facilities. However, we are required to obtain the consent of the
holders of our Class B common stock before issuing any shares of our capital
stock in excess of specified amounts and our agreement with Verizon limits our
ability to incur debt in excess of specified
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<PAGE>
amounts without its consent. You should refer to the risks described below
under "Risks Related to Our Relationship with Verizon", the section in "Related
Party Transactions" entitled "Recapitalization Agreement" and the section
entitled "Description of Capital Stock" for more detailed discussions of the
rights of our Class B common stock.
If we do not compete effectively, particularly against established
participants with greater financial and other resources than ours, we will lose
market share, which will make our services less attractive to our existing and
prospective customers.
The market for managed Internet infrastructure services is extremely
competitive and subject to rapid change. We expect to encounter increased
competition in the future as a result of increased consolidation and strategic
alliances in the industry. In addition, we will increasingly compete with
foreign service providers as we expand internationally and as these service
providers increasingly compete in the United States. If we are unable to
compete successfully, we would experience a loss in customers and the revenues
that accompany that business.
Many of these existing competitors have and potential competitors may have
greater financial and other resources, more customers, a larger installed
network infrastructure, greater market recognition and more established
relationships and alliances in the industry. As a result, these competitors may
be able to develop and expand their network infrastructure and service
offerings more quickly, adapt more swiftly to new or emerging technologies and
changes in customer demands, devote greater resources to the marketing and sale
of their offerings, pursue acquisitions and other opportunities more readily
and adopt more aggressive pricing policies. UUNET, a subsidiary of WorldCom,
has substantially greater market share and resources than we do. In addition,
WorldCom and Sprint have announced a proposed merger. We believe this proposed
merger would substantially increase the market share and competitive position
of UUNET, even if it were required to divest itself of portions of its Internet
backbone as a condition of the merger. Some of our competitors are able to
bundle their Internet service offerings with other complementary services, such
as local and long distance voice, data transmission and video services, thereby
reducing the overall cost of their services compared with ours. We may not be
able to offset the effects of any of these actions.
We expect that the rates we charge for our services will decline over time,
and we may not be successful in reducing our operating expenses or introducing
new services that will compensate for these lost revenues.
We expect to continue to experience decreasing prices for our services as we
and our competitors increase transmission capacity on existing and new
networks, as a result of our current agreements with customers, through
technological advances or otherwise, and as volume-based pricing becomes more
prevalent. For example, at specified times during the course of our agreement
with America Online, America Online has the right to seek a reduction in the
fees paid to us for access ports and digital subscriber line and other
broadband services. Accordingly, our historical revenues are not indicative of
future revenues based on comparable traffic volumes. If the prices for our
services decrease for whatever reason and we are unable to offer additional
services from which we can derive additional revenues or otherwise reduce our
operating expenses, our operating results will decline and our business and
financial results will suffer.
Our strategy contemplates future international expansion but there are
significant operational and financial risks associated with international
operations.
Although we have not derived significant revenues from our international
operations in the past, an important component of our strategy is to expand
significantly our presence in international markets. As we expand, we will
substantially increase our exposure to the risks inherent in international
operations, including, among others, the following:
. general economic, social and political conditions;
. unexpected changes in legal or regulatory requirements resulting in
unanticipated costs and delays;
11
<PAGE>
. differences in technology standards;
. tariffs, export and exchange controls and other trade barriers;
. fluctuations in foreign currency exchange rates;
. difficulty of enforcing agreements and collecting accounts receivables;
. adverse tax consequences;
. changes in United States laws and regulations relating to foreign trade
and investment; and
. inability to offer some services in some countries due to regulatory and
other barriers.
You should refer to the section in "Business" entitled "Our International
Operations" for additional information about our existing and planned
operations in international markets.
Further, to expand our international operations, we may enter into joint
ventures or outsourcing agreements with third parties, acquire rights to high
bandwidth transmission capability, acquire complementary businesses or
operations or establish and maintain new operations outside the United States.
We may be heavily dependent on third parties to be successful in our
international operations. We may not be able to successfully sell our services
or adequately establish or maintain operations outside the United States.
If we are unable to manage our planned expansion effectively, we may incur
increased costs, experience capacity constraints and place too many demands
upon our management team.
We are currently experiencing a period of rapid expansion and, if our
business plan is successfully implemented, we expect our expansion to continue
for the foreseeable future. This expansion will increase our operating
complexity significantly and require significant time commitments from our
management team and severely restrict their ability to manage our existing
business. Our failure to manage our expansion effectively could increase our
costs, adversely affect our relations with customers and suppliers, result in
insufficient capacity over extended periods of time and adversely affect our
revenues and operating margins. Accordingly, our success depends on our ability
to effectively manage this expansion and the demands it will impose on our
management. In addition to training and managing an increasing number of highly
skilled employees, we will need to successfully expand our capacity and network
infrastructure and continually enhance our information, management and
operational and financial systems.
If we are not successful in achieving brand recognition for the Genuity
name, our competitive position will be weakened and we could lose market share.
We believe that establishing, maintaining and continually strengthening our
brand in domestic and international markets is a critical aspect of our efforts
to expand our customer base, solidify business relationships and successfully
implement our business strategy. The growing number of companies that offer
competing Internet infrastructure services increases the importance of
establishing and strengthening brand recognition. However, we only recently
changed our name to Genuity. Because our brand is new, it currently has very
limited recognition in the market. Our brand may not be viewed positively or be
accepted by the market. We intend to incur significant expenses to promote our
brand. The expenses we incur toward building our brand, however, may not result
in immediate returns and it may be a long time before enterprises, service
providers and business partners recognize and make positive connections with
our brand. In addition, our brand may be diluted if customers do not perceive
our services to be of high quality or if we fail to provide a satisfactory
customer service experience. We may not be successful in achieving these goals.
Our ability to develop, market and support our managed Internet
infrastructure services depends on retaining our management team and attracting
and retaining highly qualified individuals in the Internet industry.
Our future success depends to a significant extent on the continued services
of our management team. Our management team, which is described in the section
entitled "Management", has significant experience with data
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<PAGE>
communications, telecommunications and managed Internet infrastructure
services, as well as relationships with many of the enterprises, service
providers and business partners that we currently or may in the future rely on
in implementing our business plan. The loss of the services of our management
team or any significant portion of it could have a substantial detrimental
effect on our ability to execute our business strategy.
Our future success also depends on our continuing ability to identify, hire,
train, assimilate and retain large numbers of highly qualified technical,
sales, marketing and managerial personnel. The demand for qualified personnel
is high and competition for their services is intense. The competition for
qualified employees in the Internet industry is particularly intense in the
Boston, Massachusetts area where our principal operations are located. We have
from time to time experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. If we do not succeed in attracting new personnel or
retaining our current personnel, our business will suffer.
Our historical financial information may not be representative of our
results of operations as a separate entity.
The historical financial information we have included in this prospectus
does not necessarily reflect what our financial position, results of operations
and cash flows would have been had we been a separate, stand-alone entity
during the periods presented. GTE did not account for us, and we were not
operated, as a separate, stand-alone entity for the periods presented. Our
combined financial statements have been carved out from the consolidated
financial statements of GTE using the historical results of operations and
historical bases of the assets and liabilities of our business. Our costs and
expenses include allocations from GTE for centralized corporate services and
infrastructure costs, including legal, accounting, treasury, real estate,
information technology, distribution, customer service, sales, marketing and
engineering. These allocations have been determined on bases that we and GTE
considered to be reasonable reflections of the utilization of services provided
to or the benefit received by us. We have not made adjustments to our
historical financial information to reflect many significant changes that will
occur in our cost structure, funding and operations as a result of our
operating as a stand-alone company, including increased costs associated with
reduced economies of scale, increased marketing expenses related to building
brand identity separate from GTE and increased costs associated with being a
publicly traded, stand-alone company. Any increase in our costs related to
these or similar factors could adversely affect our operating results in future
periods, which could cause the market price of our Class A common stock to
decline.
If we do not respond effectively and on a timely basis to rapid
technological changes, our services may become obsolete and we would probably
lose customers and be unable to attract new ones.
The managed Internet infrastructure services industry is characterized by
rapid technological developments and frequent new product and service
introductions and enhancements. The introduction of new products or
technologies could render our network or service offerings obsolete, thereby
requiring us to spend more than we currently anticipate in future periods in
order to remain competitive and retain our existing customers and attract new
ones. Similarly, technological developments could reduce the cost or increase
the supply of services similar to those that we provide or plan to provide,
which could result in lower than expected revenues in future periods. We may
not be able to:
. anticipate or adapt to these new products or technologies on a timely and
cost-effective basis;
. obtain the necessary funds to develop or acquire new technologies or
products needed to compete; or
. address the increasingly sophisticated and varied needs of our current
and prospective customers.
Our ability to compete could be jeopardized if our network and services do
not properly operate with the existing or future equipment of our customers.
We believe that our ability to compete successfully is dependent upon the
continued compatibility of our network and service offerings with products,
services and architectures offered by others, particularly our
13
<PAGE>
enterprise and service provider customers. Although we often work with vendors
in testing newly developed products, these products may not be compatible with
our infrastructure. In addition, although we currently intend to support
emerging standards, there can be no assurance industry standards will be
established or, if they become established, that we will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Our competitive position would be adversely affected if we fail to
conform to the prevailing standards, or if common standards fail to emerge.
We may lose customers if we experience system failures that significantly
disrupt the availability and quality of the services that we provide.
Our operations depend on our ability to avoid and mitigate any damages,
physical or otherwise, from natural disasters, power losses, capacity
limitations, physical or electronic breaches of security, software defects,
telecommunications failures and intentional acts of vandalism, including
computer viruses. The failure of any equipment or facility on our network could
result in interruptions in service or reduced capacity for our enterprise and
service provider customers until we make the necessary repairs or install
replacement equipment. In addition, our customers may experience interruptions
in service if carriers or other service providers fail to provide the
communications capacity that we have leased in order to provide service to our
customers or if our peering arrangements suffer significant disruption. For
example, in 1999 a third party provider from whom we lease capacity experienced
a significant disruption. Further, a majority of our traffic is transmitted
over capacity that we lease from third parties. The failure of any one of these
connections also could result in reduced performance.
These interruptions in service or performance problems could undermine
confidence in our services and cause us to lose customers or make it more
difficult to attract new ones. For example, America Online has the right to
reduce its purchase commitments and terminate its agreement with us if we fail
to meet agreed upon performance levels. In addition, because many of our
services are critical to the businesses of many of our customers, any
significant interruption in our service could result in lost profits or other
loss to our customers. Although we attempt to disclaim liability in our service
agreements, a court might not enforce a limitation on our liability, which
could expose us to financial loss. In addition, we often provide our customers
with guaranteed service level commitments. If we do not meet the required
service levels as a result of service interruptions, we may be obligated to
provide credits, generally in the form of free service for a short period of
time, to our customers, which could significantly reduce our revenues.
If we do not safeguard the security and privacy of our network
infrastructure, our reputation could be damaged and we could lose existing and
prospective customers and the potential revenues they represent.
The secure transmission of confidential information over networks, including
our network, is critical to the acceptance of the Internet. Internet usage
could decline if any well-publicized compromise of security occurs. Our
customers often maintain confidential information on our servers, such as
credit card and bank account numbers. We provide managed security services that
are intended to provide a high level of protection for our customers' networks.
Our managed security services include monitoring the network perimeters of our
enterprise customers and using firewall management, maintenance and proactive
response techniques to help ensure the security of access points into our
customers' computing infrastructure. We rely on encryption and authentication
technology to provide secure transmission of confidential information.
Despite our efforts, we may not be successful in maintaining information as
confidential or adequately safeguarding our customers' networks. Someone who is
able to circumvent our security measures could misappropriate proprietary
information or cause disruptions in our operations and those of our customers.
Any compromise of security in our network could damage our reputation and cause
us to lose existing and prospective customers. We may be required to expend
significant capital and other resources to protect against, or to alleviate
problems caused by, security breaches. In addition, a compromise of security
may result in claims against us, which could be successful. These claims,
regardless of their ultimate outcome, could result in costly litigation and
adversely affect our ability to attract and retain customers.
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We rely on limited sources for supplying critical components of our network
infrastructure. If we are unable to obtain sufficient quantities of critical
equipment from these sources when needed, we may be forced to delay our
development and expansion plans, which would negatively affect our competitive
position.
We depend on vendors to supply the critical components of our network
infrastructure as we expand our network both domestically and internationally.
If we are unable to obtain these critical components on a timely basis, we may
have to abandon or delay our expansion plans, which would adversely affect our
competitive position. Some of our networking equipment is available only from
one or a small number of sources. For instance, we rely on Cisco Systems for
our network routers and Nortel Networks for our optical electronic equipment.
We typically purchase or lease all of our components under purchase orders
placed from time to time. We do not carry significant inventories of components
and have no guaranteed supply arrangements with vendors. Our vendors also sell
products to our competitors and we cannot assure you that they will not enter
into exclusive arrangements with our competitors.
We need to obtain additional capacity for our network from other providers
in order to serve our customers and keep our costs down.
We lease telecommunications capacity and obtain rights to unused fiber optic
strands from both long distance and local telecommunications carriers in order
to extend the range of our network. Our inability to obtain this additional
capacity on acceptable terms, or at all, could adversely affect our ability to
quickly expand our network, attract new customers and serve our existing
customers or could increase our costs of doing so.
We must obtain permits and rights-of-way to develop our network
infrastructure. If we do not obtain them in a timely fashion, we may have to
delay our expansion plans.
The expansion of our network infrastructure will require that we obtain
licenses, permits and other rights, including rights-of-way and encroachment
agreements and other permits to install conduit and related network equipment,
from private landowners, utilities, railroads, local exchange carriers, state
highway authorities, local governments and transit authorities. The process of
obtaining these licenses, permits and rights can be time consuming and
burdensome. In addition, if we are unable to obtain these licenses and permits
on acceptable terms and on a timely basis, our ability to expand and operate
our network would be severely limited and our business will not grow as we have
planned.
Risks Related to Our Relationship With Verizon
Verizon's interests as a minority investor and potential future majority
stockholder of Genuity will be protected by investor safeguards. Under these
safeguards, we need the consent of Verizon before taking the actions described
below. Verizon is not required to grant its consent and may have interests that
are different from ours.
We are required under our certificate of incorporation to obtain the
approval of the holders of a majority of our Class B common stock before we
take specific actions, including amending our certificate of incorporation,
entering into major business combinations and materially changing the nature or
scope of our business. We are also required under our recapitalization
agreement to obtain the consent of Verizon before we take other actions,
including making significant acquisitions or dispositions and incurring
indebtedness or issuing additional equity securities in excess of specified
limits. After this offering, Verizon could prevent us from taking any of these
actions. Verizon's interests and objectives, which may diverge from ours, may
influence whether Verizon is willing to grant us any approvals we may request.
We may not be able to resolve potential conflicts between Verizon and us to our
satisfaction, and if we cannot, our business may be harmed. You should refer to
the section in "Description of Capital Stock" entitled "Common Stock--Voting
Rights" and the section in "Related Party Transactions" entitled
"Recapitalization Agreement" for a more detailed description of these approval
requirements, including the circumstances under which these approval
requirements may be transferred and when they terminate.
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Some or all of the shares of Class B common stock owned by Verizon could be
transferred to one or more persons. Verizon also may assign its contractual
rights under the recapitalization agreement to a transferee of the Class B
common stock. In that event, these persons would be able to prevent us from
taking the actions described above.
If Verizon is able to convert its shares of our Class B common stock into
shares of our Class C common stock, it will have the ability to exert
significant control over our business and we will become subject to additional
regulation.
Although upon completion of this offering Verizon will hold shares of our
Class B common stock that represent 9.5% of our outstanding common stock at
that time, under the terms of the proposal to the FCC, if Verizon is permitted
to own more than 10% of our outstanding shares of common stock, it could
convert its shares into 800 million shares of Class C common stock. Based on
the shares of common stock outstanding immediately after this offering, these
shares would possess approximately 96% of the total voting power of our common
stock. After conversion of its shares of our Class B common stock, if Verizon
continues to own shares of capital stock representing more than 50% of the
voting power of our outstanding capital stock, Verizon will be able to exercise
a controlling influence over us, including with respect to the election of our
directors and the outcome of any corporate transaction or other matter
submitted to our stockholders for approval. The voting power of Verizon could
have the effect of delaying or preventing a change in control. The interests of
Verizon may differ from the interests of our other stockholders.
When Verizon converts its shares of Class B common stock into shares of
Class A common stock or Class C common stock that represent more than 10% of
our outstanding common stock, we will become an affiliate of Verizon for
purposes of the Telecommunications Act. As an affiliate of Verizon, we will be
subject to additional regulation, including the requirements of Section 272 of
the Telecommunications Act, which restricts the extent and nature of the
intercompany relationships between us and Verizon. In its proposal to the FCC,
Verizon has agreed that once it has eliminated applicable Section 271
restrictions and is able to exercise its conversion rights, it will comply with
Section 272 to the same extent that Section 272 would apply if Verizon
exercised its conversion rights. You should refer to the section in "Business"
entitled "Regulatory Matters--Federal Telecommunications Regulation--Section
272 Restrictions" for a more detailed description of the limitations imposed by
Section 272 of the Telecommunications Act.
Even if Verizon does not eliminate the applicable Section 271 restrictions
on all Bell Atlantic in-region lines, a controlling interest could still be
transferred to someone who could exert significant control over our business.
Verizon may be able to transfer some or all of its shares of Class B common
stock without our consent or the consent of the holders of our Class A common
stock. If Verizon transfers all of the Class B common stock to a disposition
trustee for sale to one or more third parties after it has eliminated the
applicable Section 271 restrictions as to at least 50% of Bell Atlantic in-
region lines, the transferee would be able to convert those shares into 800
million shares of our Class A common stock and exercise significant control
over our business. Even if Verizon transfers fewer than all of its shares of
our Class B common stock, the transferee might be able to exercise a
controlling influence over us after converting its shares of our Class B common
stock. In addition, Verizon could convert its shares of our Class B common
stock into Class C common stock and transfer those shares to one or more
persons who could then exercise a controlling influence over us.
We have contracted with Verizon to provide us with a variety of transitional
services for a limited period of time. We may experience transitional problems
if we are unable to replace these services in a timely manner or on similar
terms.
We have not been operating as a stand-alone company. Affiliates of Verizon
are contractually obligated to provide us with office and operating facilities
and specified transitional services upon completion of this offering. If
Verizon does not perform its contractual obligations under these agreements, we
may not receive these services at the same level or obtain the same benefits as
when we were part of GTE. The transitional services agreements
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have a term of one year, but the term of many services will be less than one
year. After the termination of these various arrangements, we may not be able
to replace these transitional services or enter into appropriate leases in a
timely manner or on terms and conditions, including cost, similar to those we
will receive from Verizon or are otherwise acceptable to us. You should refer
to the section entitled "Related Party Transactions" for more information
about these arrangements.
Risks Related to Legal Uncertainty
Our competitive position would be harmed if we are unable to protect our
intellectual property rights.
Despite the precautions we take to protect our intellectual property, it
may be possible for a third party to copy or otherwise misappropriate and use
our technology without authorization, particularly in foreign countries where
the laws may not protect our proprietary rights to the same extent as do the
laws of the United States, or for our competitors to develop substantially
equivalent or superior technology independently. If competitors are able to
use our proprietary technology or develop similar technology, our ability to
compete effectively would be seriously harmed. We may need to resort to
litigation in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial
costs and diversion of resources.
We may be subject to infringement claims that could subject us to
significant liability or otherwise adversely affect our operating results.
We expect that participants in our markets will be increasingly subject to
infringement claims. Third parties may try to claim our services infringe
their intellectual property. Any claim, whether meritorious or not, could be
time consuming, result in costly litigation or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements might
not be available on terms acceptable to us or at all, in which case we would
have to cease selling, incorporating or using those services that incorporate
the challenged intellectual property and expend substantial amounts of
resources to redesign our services. If we are forced to enter into
unacceptable royalty or licensing agreements or to redesign our services, our
business and prospects would suffer.
Some of the services we provide may in the future be regulated by the FCC,
states or foreign governments, which would significantly increase our
operating complexity and expenses and adversely affect our ability to compete.
Our existing and planned managed Internet infrastructure services are
currently classified as "information services" and, therefore, are exempt from
regulation by the FCC or any other government agency of the United States,
except to the extent that any regulations apply to businesses generally.
However, the regulatory characterization of Internet infrastructure services
is currently unsettled, and some private parties and regulators have raised
questions about the current regulatory status of Internet service offerings.
As a result, the FCC may choose to impose a new set of regulations on Internet
infrastructure services or reclassify them as either private carrier services
or telecommunications services. If existing telecommunications regulations are
extended to the Internet, or if new regulations are imposed, we may be
restricted in the way we offer our services, our cost of doing business could
increase and we could be required to exit some or all of our businesses. You
should refer to the section in "Business" entitled "Regulatory Matters" for a
more detailed description of the federal, state and international regulations
that could apply to our business if any of our services were reclassified as
either private carrier services or telecommunications services.
Although we believe that any regulation that applies to our business will
likewise apply to our competitors offering similar services, some of our
competitors are already regulated as telecommunications carriers due to their
other service offerings. As a result, these companies may be better able to
operate in a regulated environment than we are. Accordingly, regulatory
changes of the type described above could adversely affect our ability to
compete effectively against these competitors. There is no way to predict the
future regulatory framework of our industry.
17
<PAGE>
The regulation of the Internet is unsettled and future regulations could
adversely affect our operating costs and business.
In addition to potential regulation of the Internet and related services by
the FCC and actual regulation of the operations of one of our subsidiaries,
our business may be adversely affected by the adoption of other laws and
regulations in the United States or abroad that apply generally to commerce
and communication over the Internet, including laws or regulations relating to
intellectual property, telecommunications, privacy, consumer protection,
taxation and dissemination of unlawful or otherwise disfavored content. The
adoption or consideration of additional legislation or regulation affecting
the Internet could inhibit the continued growth of the Internet or decrease
its acceptance as a commercial medium, impose additional operating and other
costs on us, expose us to greater potential liability from regulatory actions
or private legal proceedings or otherwise adversely affect our business
operations or performance. We cannot predict the impact, if any, that future
laws and regulations relating to the Internet or legal or regulatory changes
may have on our business. You should refer to the section in "Business"
entitled "Regulatory Matters--Other Potential Regulation" for a more detailed
discussion of existing and potential laws and regulations that could affect
our business.
We may be subject to regulation, taxation, enforcement or other liabilities
in unexpected jurisdictions.
We provide our managed Internet infrastructure services to customers
located throughout the United States and internationally. As a result, we may
be required to qualify to do business, or be subject to tax or other laws and
regulations, in these jurisdictions even if we do not have a physical presence
or employees or property in these jurisdictions. The application of these
multiple sets of laws and regulations is uncertain, but we could become
subject to regulation, taxation, enforcement or other liability in unexpected
ways, which could materially adversely affect our business, financial
condition and results of operations.
If Verizon is unable to convert its Class B common stock to Class C common
stock, we will not be able to realize the benefits of being a majority-owned
subsidiary of Verizon.
If Verizon is unable to convert its Class B common stock into Class C
common stock, we may not realize the full benefits of our relationship with
Verizon. These benefits include the ability to:
. offer combined packages of Internet infrastructure services and telephony
services;
. obtain financing on more favorable terms than we otherwise could;
. integrate network infrastructure and reduce overhead costs; and
. take further advantage of the purchasing power of Verizon.
Risks Related to the Securities Markets and this Offering
The trading price of the Class A common stock will anticipate the dilution
that will result from future conversion of the Class B common stock.
We expect that upon completion of this offering, the trading price of the
Class A common stock will reflect the dilution that would result from the
future conversion of Class B common stock. This will likely result in the
shares of our Class A common stock trading at prices substantially lower than
they otherwise would without this future dilution. After this offering, the
Class A common stock will represent 90.5% of our outstanding common stock and
the Class B common stock will represent 9.5% of our outstanding common stock.
If Verizon is able to convert into 800 million shares of our Class A common
stock or Class C common stock, it or its transferees would be able to convert
their shares into shares of common stock representing up to 82% of our
outstanding common stock after this offering. Therefore, investors should
recognize that the Class B common stock may well be converted into
approximately 82% of our outstanding common stock, leaving the Class A common
stock as representing approximately 18% of our outstanding common stock.
18
<PAGE>
The market price of our Class A common stock may be volatile, which could
cause the value of your investment to decline.
The stock market has recently experienced significant price and volume
fluctuations that have affected the market price for the securities of
companies such as ours that depend on the Internet. As a result, investors in
our Class A common stock may experience a decrease in the value of their Class
A common stock regardless of our operating performance or prospects. The price
at which our Class A common stock will trade following this offering is likely
to be highly volatile and may fluctuate substantially. The price of the Class A
common stock that will prevail in the market after this offering may be higher
or lower than the price you pay.
You may suffer substantial dilution in the book value of your investment.
Assuming the Class B common stock outstanding on the date of this offering
converted into the maximum number of shares of common stock permitted under our
certificate of incorporation, the initial public offering price per share will
significantly exceed the net tangible book value per share. Accordingly,
investors purchasing shares in this offering may suffer substantial dilution of
$9.55 per share in their investment, assuming the conversion of Class B common
stock into Class A common stock and an initial public offering price of $13.50
per share. You should refer to the information in the section entitled
"Dilution" for more information.
19
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary", "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may", "might", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates", "intends",
"future", "potential" or "continue", the negative of these terms and other
comparable terminology. These forward-looking statements, which are subject to
risks, uncertainties, and assumptions about us, may include, among other
things, projections of our future financial performance, our anticipated growth
strategies and anticipated trends in our business as well as projections
relating to our capital expenditure requirements, our network expansion plans,
locations of new data centers, network operations centers and points of
presence, expected deployment dates for capacity on trans-oceanic cable, our
plans for transitioning customer traffic from leased capacity to our network,
research and development initiatives and increases in sales and marketing
personnel. These statements are only predictions based on our current
expectations and projections about future events. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause our actual results, level of activity, performance or achievements
to differ materially from the results, level of activity, performance or
achievements expressed or implied by the forward-looking statements, including
those factors discussed under the caption entitled "Risk Factors". You should
specifically consider the numerous risks outlined under "Risk Factors".
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of the 173,913,000 shares of
Class A common stock we are offering will be approximately $2.3 billion,
assuming an initial public offering price of $13.50 per share and after
deducting estimated underwriting discounts and offering expenses payable by us.
If the underwriters' over-allotment option is exercised in full, we estimate
that our net proceeds will be approximately $2.6 billion.
Of the net proceeds of this offering, we intend to use approximately $1.8
billion for capital expenditures, including approximately $1.2 billion in
connection with the expansion of our fiber network and approximately $600
million for expansion of our product lines for delivery of advanced data
services to our customers. The balance will be used for general corporate
purposes, including approximately $300 million for working capital and
approximately $500 million for operating expenses. We may also use a portion of
the net proceeds to acquire or invest in businesses or products or to obtain
the right to use complementary technologies. We have no current commitments or
agreements with respect to any acquisition or investment. Pending these uses,
we intend to invest the net proceeds in short-term, investment-grade, interest-
bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain earnings, if any, to finance the growth and
development of our business. Therefore, we do not anticipate declaring or
paying cash dividends on our common stock in the foreseeable future. The
decision to pay dividends will be made by our board of directors from time to
time in light of conditions then existing including, among other things, our
results of operations, financial condition and capital expenditure
requirements. We must also obtain the consent of Verizon to declare
extraordinary dividends or make other extraordinary distributions on our Class
A common stock. You should refer to the section in "Related Party Transactions"
entitled "Recapitalization Agreement" for more information on this limitation.
21
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
. on an actual basis giving effect to the recapitalization that will take
effect before this offering;
. on a pro forma basis to give effect to a $178 million capital
contribution by GTE; and
. on a pro forma as adjusted basis to give effect to the sale of the shares
of Class A common stock offered by us in this offering at an assumed
initial public offering price of $13.50 per share, after deducting
estimated underwriting discounts and offering expenses payable by us.
This table should be read in conjunction with "Selected Combined Financial
Data", "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our combined financial statements and accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(in thousands except share data)
<S> <C> <C> <C>
Short-term obligations, including
current maturities..................... $ 74,220 $ 74,220 $ 74,220
----------- ----------- -----------
Long-term obligations................... 57,563 57,563 57,563
----------- ----------- -----------
Stockholders' equity:
Class A common stock, par value $.01
per share, 0 shares authorized,
issued and outstanding, actual and
pro forma; and 1,600,000,000 shares
authorized and 173,913,000 shares
issued and outstanding, pro forma as
adjusted.............................. -- -- 1,739
Class B common stock, par value $.01
per share, 21,000,000 shares
authorized, 18,256,000 shares issued
and outstanding, actual, pro forma
and pro forma as adjusted............. 183 183 183
Class C common stock, par value $.01
per share, 800,000,000 shares
authorized, 0 shares issued and
outstanding, actual, pro forma and
pro forma as adjusted................. -- -- --
Additional paid-in-capital.............. 3,460,604 3,638,387 5,886,674
Other comprehensive income.............. 1,721 1,721 1,721
Accumulated deficit..................... (1,516,741) (1,516,741) (1,516,741)
----------- ----------- -----------
Total stockholders' equity............. 1,945,767 2,123,550 4,373,576
----------- ----------- -----------
Total capitalization................. $ 2,077,550 $ 2,255,333 $ 4,505,359
=========== =========== ===========
</TABLE>
22
<PAGE>
DILUTION
After this offering, the Class A common stock will represent 90.5% of our
outstanding common stock and the Class B common stock will represent 9.5% of
our outstanding common stock. The Class B common stock is convertible at any
time into shares of our Class A common stock representing 10% of our total
common stock outstanding after the conversion. In circumstances that we
describe elsewhere in this prospectus, our Class B common stock can convert
into 800 million shares of Class A common stock or Class C common stock. We
have prepared the information below to show the effect of this offering on our
pro forma net tangible book value per share under either conversion.
Our pro forma net tangible book value as of March 31, 2000 was approximately
$1.6 billion. Pro forma net tangible book value per share represents our total
tangible assets, assuming a capital contribution of $178 million by GTE, less
our total liabilities. Assuming conversion of the Class B common stock into
shares of Class A common stock representing 10% of our total common stock
outstanding after the conversion, our pro forma net tangible book value per
share as of March 31, 2000 was approximately $82.75 per share. Assuming the
conversion of the Class B common stock into 800 million shares of Class A
common stock or Class C common stock, our pro forma net tangible book value per
share as of March 31, 2000 was approximately $2.00 per share. The accretion or
dilution in pro forma net tangible book value per share shown in the table
below represents the difference between the amount per share paid by purchasers
of shares of our Class A common stock in this offering and the net tangible
book value per share of our common stock immediately following this offering.
Without taking into account any changes in pro forma net tangible book value
after March 31, 2000, other than to give effect to the sale of the shares of
Class A common stock offered by us at an assumed initial public offering price
of $13.50 per share, after deducting estimated underwriting discounts and
offering expenses payable by us, our pro forma as adjusted net tangible book
value as of March 31, 2000 would have been approximately $3.8 billion, or
$19.92 per share of common stock assuming a 10% conversion, and $3.95 per share
of common stock assuming a conversion into 800 million shares. Such amounts
result in dilution of $62.83 per share to GTE, our sole stockholder, on the 10%
conversion basis and dilution of $9.55 per share to new investors purchasing
shares of Class A common stock on the 800 million share basis. If the initial
public offering price is higher or lower, the accretion or dilution to new
investors will be greater or less. The following table illustrates the
accretion and dilution in pro forma net tangible book value per share to new
investors:
<TABLE>
<CAPTION>
800 Million
10% Conversion Share Conversion
--------------- ----------------
<S> <C> <C> <C> <C>
Initial public offering price per share...... $13.50 $ 13.50
Pro forma net tangible book value per share
as of March 31, 2000....................... $ 82.75 $ 2.00
(Decrease)/Increase per share attributable
to new investors........................... (62.83) 1.95
------- -------
Pro forma as adjusted net tangible book value
per share after this offering............... 19.92 3.95
------ --------
(Accretion)/Dilution per share to new
investors................................... $(6.42) $ 9.55
====== ========
</TABLE>
23
<PAGE>
The following table summarizes on a pro forma basis after giving effect to
the recapitalization and the capital contribution discussed above, as of March
31, 2000, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by GTE as our
sole stockholder, both on a 10% conversion basis and an 800 million share
conversion basis. It also includes amounts to be paid by new investors
purchasing shares of Class A common stock in this offering at an assumed
initial public offering price of $13.50 per share, before deducting estimated
underwriting discounts and offering expenses payable by us.
<TABLE>
<CAPTION>
800 Million
Share
10% Conversion Conversion Total
Shares Shares Consideration
--------------- --------------- ------------------
Average
Price Per
Share in
Average Price 800
Per Share in Million
10% Share
Number Percent Number Percent Amount Percent Conversion Conversion
------- ------- ------- ------- ---------- ------- ------------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GTE..................... 19,324 10% 800,000 82% $1,599,061 41% $82.75 $ 2.00
New investors........... 173,913 90 173,913 18 2,347,826 59 $13.50 $13.50
------- --- ------- --- ---------- ---
Total................. 193,237 100% 973,913 100% $3,946,887 100%
======= === ======= === ========== ===
</TABLE>
24
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements and
accompanying notes included elsewhere in this prospectus. The selected combined
balance sheet data as of December 31, 1998 and December 31, 1999 and the
selected combined results of operations for each of the years in the three-year
period ended December 31, 1999 have been derived from our combined financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The selected
combined balance sheet data as of March 31, 2000 and results of operations for
each of the quarters ended March 31, 1999 and 2000 have been derived from our
unaudited financial statements included in this prospectus. The results of
operations of the predecessor to Genuity for the six months ended June 30,
1997, have also been derived from financial statements which have been audited
by Arthur Andersen LLP and are included elsewhere in this prospectus.
Our selected combined balance sheet data as of December 31, 1995, 1996 and
1997 and March 31, 1999 and the selected combined statement of operations data
for each of the years in the two year period ending December 31, 1996 were
derived from unaudited financial statements that are not included in this
prospectus. The selected combined balance sheet data of the predecessor to
Genuity as of December 31, 1995 and 1996 and June 30, 1997 and the selected
combined results of operations data of the predecessor for each of the years in
the two year period ended December 31, 1996 were derived from unaudited
financial statements that are not included in this prospectus. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the results of
operations for these periods.
Our selected combined financial data set forth below, as of December 31,
1995, 1996, 1997, 1998 and 1999 and for each of the five years in the period
ended December 31, 1999 include the financial position and results of
operations of those operations that will constitute Genuity as of the
completion of this offering. The selected combined financial data as of
December 31, 1995 and 1996 and the results of operations for each of the years
in the two-year period ended December 31, 1996 do not include the financial
data of BBN Corporation. GTE acquired BBN Corporation effective June 30, 1997.
This acquisition was accounted for as a purchase business combination and,
consequently, the results of operations of BBN Corporation, excluding the
operations of BBN Technologies, which are being retained by GTE, are only
included in our results of operations for periods after June 30, 1997. The
results of operations of our predecessor represent the results of operations of
BBN Corporation, excluding the operations of BBN Technologies. The operations
of BBN Technologies are not included in the financial results of either the
predecessor or Genuity.
We have prepared the accompanying table to reflect our historical combined
financial information in a manner consistent with stand-alone operations by
reflecting transactions of GTE and balances attributable to us in our financial
statements for all periods presented. The historical financial information may
not be indicative of our future performance and does not necessarily reflect
what our financial position and results of operations would have been had we
operated as a separate, stand-alone entity during the periods covered.
25
<PAGE>
<TABLE>
<CAPTION>
Predecessor Genuity
------------------------------- -------------------------------------------------------------------------
Year Ended Six Months Three Months Ended
December 31, Ended Year Ended December 31, March 31,
------------------- June 30, ------------------------------------------------- ----------------------
1995 1996 1997 1995 1996 1997 1998 1999 1999 2000
--------- -------- ---------- ------- ------- --------- ---------- ---------- ---------- ----------
(in thousands, (in thousands,
except per share data) except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of
Operations Data:
Revenues
Access............ $ 24,323 $112,109 $ 94,126 $ -- $ -- $ 128,838 $ 350,777 $ 555,603 $ 128,038 $ 183,285
Hosting........... 1,045 7,769 9,601 -- -- 9,690 33,469 48,811 10,028 21,692
Transport......... -- -- -- 33,961 38,463 41,920 46,876 64,483 13,535 23,625
Other............. 300 2,452 2,591 -- -- 3,035 14,880 37,569 5,682 19,250
--------- -------- -------- ------- ------- --------- ---------- ---------- ---------- ----------
Total revenues.. 25,668 122,330 106,318 33,961 38,463 183,483 446,002 706,466 157,283 247,852
Operating expenses
Cost of goods
sold............. 17,778 85,287 92,670 14,812 15,606 166,040 492,794 767,498 160,540 283,928
Selling,
general and
administrative... 28,341 68,602 38,801 552 4,378 142,962 312,916 396,522 93,123 108,336
Depreciation and
amortization..... 6,786 13,160 10,536 6,062 6,731 49,444 104,444 187,628 41,092 53,786
Operating income
(loss)............ (27,237) (44,719) (35,689) 12,535 10,656 (174,963) (464,152) (645,182) (137,472) (198,198)
Net income (loss).. $ (35,404) $(41,600) $(37,663) $ 8,485 $ 7,309 $(174,928) $ (468,559) $ (647,046) $ (138,580) $ (209,826)
Basic and diluted
income (loss) per
common share...... -- -- -- $ 0.46 $ 0.40 $ (9.58) $ (25.67) $ (35.44) $ (7.59) $ (11.49)
Basic and diluted
weighted-average
common shares
outstanding....... -- -- -- 18,256 18,256 18,256 18,256 18,256 18,256 18,256
Pro forma as
adjusted basic and
diluted net loss
per common share.. -- -- -- -- -- -- -- $ (3.37) -- $ (1.09)
Pro forma as
adjusted basic and
diluted weighted
average common
shares
outstanding....... -- -- -- -- -- -- -- 192,169 -- 192,169
Other Data:
Cash flow provided
by (used in)
operating
activities........ $ (60,200) $(32,717) $ 2,496 $15,028 $ 8,349 $ (90,927) $ (512,928) $ (403,842) $ (133,479) $ (119,395)
Capital
expenditures...... 13,190 42,945 23,255 616 3,360 299,491 587,831 744,356 105,157 163,093
<CAPTION>
As of December 31, As of As of December 31, As of March 31
------------------- June 30, ------------------------------------------------- ----------------------
1995 1996 1997 1995 1996 1997 1998 1999 1999 2000
--------- -------- ---------- ------- ------- --------- ---------- ---------- ---------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents....... $ 36,082 $102,870 $ 78,773 $ 222 $ 304 $ 3,063 $ 13,883 $ 6,044 $ 541 $ 17,118
Working capital.... 96,332 98,950 62,041 14,712 698 370,765 43,060 (287,362) 114,361 (180,484)
Property, plant and
equipment, net.... 25,671 56,865 72,179 26,292 33,951 367,688 908,980 1,520,934 986,205 1,629,391
Total assets....... 157,432 216,589 218,102 60,123 58,735 1,094,576 1,685,969 2,343,132 1,785,867 2,461,854
Total long-term
liabilities....... 82,840 80,495 83,334 6,162 1,964 132,462 176,649 133,553 170,035 70,584
Total liabilities.. 105,132 110,478 140,876 23,156 25,818 609,208 351,242 675,026 311,510 516,087
Stockholders'
equity............ 52,300 106,111 77,226 36,967 32,917 485,368 1,334,727 1,668,106 1,474,357 1,945,767
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our combined
financial statements and the accompanying notes and other financial information
appearing elsewhere in this prospectus.
Components of Revenues
We derive our revenues from three operating segments: access, hosting and
transport. Our other revenues include international and value-added e-business
services.
Access. Our Internet access services include dial-up, dedicated and digital
subscriber lines. Our access revenues, which are derived from service providers
and enterprise customers, are the largest component of our total revenues.
Internet access customers typically sign one or two-year contracts providing
for monthly-recurring service fees that are either fixed or based on capacity
utilization. We also include in our access segment those revenues relating to
the development, operation and maintenance of a nationwide dial-up network for
America Online. We derived approximately 42% of our total revenues from America
Online in 1997, approximately 53% in 1998, 52% in 1999 and 46% in the first
quarter of 2000. Although we expect our revenues from America Online to
increase in absolute dollar amounts, we also expect these revenues to decline
as a percentage of our total revenues as we expand and broaden our revenue
base. In December 1999, we extended our strategic relationship with America
Online to provide it with additional dial-up as well as broadband backbone
Internet services. In December 1999, we agreed to operate the existing dial-up
network for AOL Japan, Inc., and we will be responsible for a significant
portion of the continued expansion of that network. Our expanded contractual
relationship with America Online extends through 2006. You should refer to the
section in "Business" entitled "Our Relationship With America Online".
We also include in access revenues those revenues derived from our provision
of dedicated Internet access to AT&T for resale to customers of its Business
Communications Services Division in the United States. We derived approximately
10% of our total revenues from AT&T in 1997. That percentage decreased to
approximately 7% in 1998 and approximately 2% in 1999 because our strategic
relationship with AT&T, under which BBN Corporation acted as the exclusive
provider for these services, was terminated in September 1997.
Hosting. Our web hosting services provide reliable hosting and a high speed
network infrastructure as well as flexible, fast and secure hosting platforms
and an experienced technical support staff. Our web hosting services include
managed hosting, collocation, content delivery and high availability services.
Our hosting revenues are based primarily on monthly fees for server management,
physical facilities and bandwidth utilization. Our web hosting services
contracts typically range from one to two years.
Transport. We provide a broad range of transport services. These services
are generally purchased by telecommunications carriers and Internet service
providers requiring additional capacity and do not include Internet access
services. Our transport revenues are typically based on available bandwidth.
Our transport services contracts typically range from one to two years.
Other. Other revenues include the results of our international business,
which consist primarily of Internet access, and domestic value-added e-business
services, such as managed security services, virtual private networks for
secure data transmission and the transport of voice communications that have
been converted to IP, commonly referred to as voice-over-IP. We charge for
international access and hosting revenues on a basis consistent with our
domestic services. We charge for our security and virtual private network
services on a fixed, monthly recurring fee basis and we charge for our voice-
over-IP services based on usage. The terms of our value-added e-business
service contracts typically range from one to two years.
27
<PAGE>
We believe that our hosting and other revenues will increase substantially
as a percentage of our total revenues. We also expect to continue to experience
declining prices in our access and transport services in the foreseeable
future.
Components of Operating Expenses
Cost of Goods Sold. Cost of goods sold consists primarily of the costs of
leasing telecommunications circuits and labor and expenses of operating our
network infrastructure. We also include in cost of goods sold the salaries and
benefits of our technical, operations and customer service personnel as well as
facilities administration, including rent, maintenance and utilities to support
our data centers.
We expect our network infrastructure requirements to grow in conjunction
with the growth of our overall business and, accordingly, expect our cost of
goods sold to increase significantly in the future. We believe our investments
in network infrastructure will cause our total data transmission costs to
increase substantially in the near term because of higher network operating and
maintenance expenses associated with this expansion. Although we expect our
total data transmission costs to increase significantly in absolute dollar
amounts as we expand, we also expect them to decline as a percentage of
revenues in the future as we add and utilize additional capacity and migrate
customers from our leased facilities to our own network.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefits for our marketing, sales
and support personnel, advertising, trade shows, professional fees and legal
and accounting services and other miscellaneous expenses. We expect selling,
general and administrative expenses in the future to increase in absolute
dollar amounts as we hire additional personnel, expand our operations, invest
in new support systems and incur additional costs related to the growth of our
business. More specifically, we expect that advertising expenses will increase
substantially in the near term as we launch our advertising and branding
campaign and substantially increase our sales force. However, we expect
selling, general and administrative expenses to decline as a percentage of
revenues.
Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of depreciation of our network infrastructure, including data
center equipment and related assets, and amortization of our goodwill and other
intangible assets. We expect these expenses to increase in the future as we
invest significant capital to expand our network infrastructure and data center
capacity.
In 1999, we completed the initial build-out of our high speed fiber network
infrastructure in the United States and have started adding additional layers
of capacity to meet existing and anticipated market demand. Our network
infrastructure has over 17,500 route miles of optical fiber connecting over 100
metropolitan areas in the United States. Through our recent investments in
undersea fiber optic cable capacity, we have expanded the reach of our network
into Europe and Asia.
Basis of Presentation
Our selected combined financial data as of December 31, 1995, 1996, 1997,
1998 and 1999 and March 31, 1999 and 2000 and for each of the five years in the
period ended December 31, 1999 and the three months ended March 31, 1999 and
2000 include the financial position and results of operations of those
operations that will constitute Genuity as of the completion of this offering.
Our combined financial data as of December 31, 1995 and December 31, 1996 and
our results of operations for each of the two years in the period ended
December 31, 1996 do not include the financial data of BBN Corporation. GTE
acquired BBN Corporation effective June 30, 1997. This acquisition was
accounted for as a purchase business combination and, consequently, the results
of operations of BBN Corporation, excluding the operations of BBN Technologies,
which are being retained by GTE, are only included in our results of operations
for periods after June 30, 1997. The results of operations of our predecessor
represent the results of operations of BBN Corporation, excluding the
operations of BBN Technologies.
28
<PAGE>
The following table sets forth our results of operations data derived from
our audited financial statements and unaudited financial statements for the
three months ended March 31, 1999 and 2000. For the purposes of the following
discussion and analysis, the pro forma results of operations for the year ended
December 31, 1997 combine the results of operations of our predecessor for the
six months ended June 30, 1997 with the results of operations of Genuity for
the year ended December 31, 1997, which includes the post-acquisition results
of our predecessor effective July 1, 1997. This presentation was included to
permit useful and complete year-to-year comparisons between the results of
operations for the years ended December 31, 1997, 1998 and 1999. However, this
pro forma restated information is not necessarily indicative of the operating
results we would have achieved if we had acquired our predecessor on January 1,
1997. The first six months of 1997 did not include some operating expenses,
amortization expense and allocations from GTE for centralized corporate
services and infrastructure costs, which were included in the second six months
of the year.
Results of Operations
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------- --------------------
Pro Forma
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 289,801 $ 446,002 $ 706,466 $ 157,283 $ 247,852
Operating expenses:
Cost of goods sold.... 258,710 492,794 767,498 160,540 283,928
Selling, general and
administrative....... 181,763 312,916 396,522 93,123 108,336
Depreciation and
amortization......... 59,980 104,444 187,628 41,092 53,786
--------- --------- ---------- --------- ---------
Total operating
expenses........... 500,453 910,154 1,351,648 294,755 446,050
Operating loss.......... (210,652) (464,152) (645,182) (137,472) (198,198)
Other income (expense)
Interest expense,
net.................. (1,824) (20) (183) (434) (2,973)
Other, net............ 318 (2,924) (32) (341) (8,067)
--------- --------- ---------- --------- ---------
Loss before income
taxes.................. (212,158) (467,096) (645,397) (138,247) (209,238)
Income taxes............ 433 1,463 1,649 333 588
--------- --------- ---------- --------- ---------
Net loss................ $(212,591) $(468,559) $ (647,046) $(138,580) $(209,826)
========= ========= ========== ========= =========
</TABLE>
29
<PAGE>
The following table sets forth our results of operations data, including the
pro forma data for 1997, expressed as a percentage of total revenues, for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
------------------ ---------------
Pro
Forma
1997 1998 1999 1999 2000
----- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues............................... 100% 100% 100% 100% 100%
Operating expenses:
Cost of goods sold................... 89 110 109 102 115
Selling, general and administrative.. 63 70 56 59 44
Depreciation and amortization........ 21 23 27 26 22
--- ---- --- ------- -------
Total operating expenses........... 173 203 192 187 181
Operating loss......................... (73) (103) (92) (87) (81)
Other income (expense)
Interest expense, net................ (1) -- -- -- (1)
Other, net........................... -- (1) -- -- (3)
--- ---- --- ------- -------
Loss before income taxes............... (74) (104) (92) (87) (85)
Income taxes........................... -- -- -- -- --
--- ---- --- ------- -------
Net loss............................... (74)% (104)% (92)% (87)% (85)%
=== ==== === ======= =======
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues
<TABLE>
<CAPTION>
Three Months Ended March
31,
--------------------------
1999 2000
------------ ------------
Amount % Amount %
-------- --- -------- ---
(dollars in thousands)
<S> <C> <C> <C> <C>
Access.............................................. $128,038 81% $183,285 74%
Hosting............................................. 10,028 6 21,692 9
Transport........................................... 13,535 9 23,625 9
Other............................................... 5,682 4 19,250 8
-------- --- -------- ---
Total............................................. $157,283 100% $247,852 100%
======== === ======== ===
</TABLE>
Our revenues in the first quarter of 2000 increased $91 million, or 58%,
over the first quarter of 1999. The first quarter of 1999 included
approximately $11 million of revenues associated with our strategic
relationship with AT&T. This contract has been terminated. If we exclude those
revenues from the first quarter of 1999, total revenues increased 70%.
Access. Our access revenues in the first quarter of 2000 increased $55
million, or 43%, over the first quarter of 1999. The increase in access
revenues reflects an 80% increase in dial-up access modems deployed and a 24%
increase in dedicated access customers. These increases were offset in part by
lower prices, including the pricing structure associated with our new contract
with America Online.
Hosting. Our hosting revenues in the first quarter of 2000 increased $12
million, or 116%, over the first quarter of 1999, due to an increase in the
number of our managed hosting customers.
Transport. Our transport revenues in the first quarter of 2000 increased $10
million, or 75%, over the first quarter of 1999 due primarily to the increased
sale of private line services.
30
<PAGE>
Other. Other revenues in the first quarter of 2000 increased $14 million, or
239%, over the first quarter of 1999 due to a $5 million increase in sales of
Internet access services in international markets and an $8 million increase in
value-added e-business services.
Operating Expenses
Costs of Goods Sold. Our cost of goods sold in the first quarter of 2000
increased $123 million, or 77%, over the first quarter of 1999. The increase
was the result of the continued build out of our network infrastructure to
provide access to a broader base of customers, support a growing customer base
and provide increased scope to service customers of our Internet access
services. Cost of goods sold, as a percentage of total revenues, was 115% in
the first quarter of 2000 compared to 102% in the first quarter of 1999. The
new pricing structure associated with the America Online contract contributed
to the increase.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses in the first quarter of 2000 increased $15 million, or
16%, over the first quarter of 1999. This increase is attributable to costs
associated with the expansion of our sales force and our marketing
organization.
Depreciation and Amortization. Our depreciation and amortization in the
first quarter of 2000 increased $13 million, or 31%, over the first quarter of
1999. The increase is the result of capital expenditures associated with the
continued build out of our network infrastructure.
Net Loss
Our net loss increased to $210 million in the first quarter of 2000 compared
to $139 million in the first quarter of 1999. We expect to continue to incur
significant net losses over the next several years, given our planned operating
and capital expenditures.
1999 Compared to 1998 and 1998 Compared to 1997
Revenues
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
Pro Forma
1997 1998 1999
------------ ------------ ------------
Amount % Amount % Amount %
-------- --- -------- --- -------- ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Access................................ $222,964 77% $350,777 79% $555,603 79%
Hosting............................... 19,291 7 33,469 8 48,811 7
Transport............................. 41,920 14 46,876 10 64,483 9
Other................................. 5,626 2 14,880 3 37,569 5
-------- --- -------- --- -------- ---
Total............................... $289,801 100% $446,002 100% $706,466 100%
======== === ======== === ======== ===
</TABLE>
Our revenues for 1999 increased $260 million, or 58%, over 1998. Our
revenues for 1998 increased $156 million, or 54%, over 1997.
Access. Our access revenues in 1999 increased $205 million, or 58%, over
1998. Our access revenues in 1998 increased $128 million, or 57%, over 1997.
These increases were due to an 87% increase in 1999 and a 76% increase in 1998
in the number of dial-up access modems deployed, primarily resulting from our
expanded relationship with America Online, and to a lesser extent, an increase
in the number of dedicated access customers. These increases were, in each
year, offset in part by lower prices.
Hosting. Our hosting revenues in 1999 increased $15 million, or 46%, over
1998, due to a 23% increase in the number of our managed hosting customers. Our
hosting revenues in 1998 increased $14 million, or 73%, over 1997 due in large
part to our acquisition of a web hosting company in December 1997.
31
<PAGE>
Transport. Our transport revenues in 1999 increased $18 million, or 38%,
over 1998, due to the sale of excess capacity on our network as we brought new
network segments on line. Our transport revenues in 1998 increased $5 million,
or 12%, due to increased sale of private line services.
Other. Other revenues in 1999 increased $23 million, or 152%, over 1998 due
to an $18 million increase in sales of Internet access services in
international markets and a $4 million increase in sales of voice-over-IP and
managed security services. Other revenues in 1998 increased $9 million, or
164%, over 1997, due to a $5 million increase in international revenues and a
$3 million increase in sales of managed security services.
Operating Expenses
Cost of Goods Sold. Our cost of goods sold in 1999 increased $275 million,
or 56%, over 1998, and our cost of goods sold in 1998 increased $234 million,
or 90%, over 1997. Our cost of goods sold, in each case, increased as a result
of the build-out of our network infrastructure to provide access to a broader
base of customers, support a growing customer base and provide increased scope
to service customers of our Internet access services. Our continued expansion
of the dial-up network operated for America Online also contributed to the
increase in cost of goods sold in 1999.
Our cost of goods sold, as a percentage of total revenues, was 89% in 1997,
110% in 1998 and 109% in 1999. To the extent we are able to increase our base
of customers and correspondingly increase our revenues, we expect cost of goods
sold to decrease as a percentage of our total revenues. Our telecommunications
circuit costs represent a substantial percentage of cost of goods sold. These
costs, which largely relate to long haul circuits, are expected to decrease as
a percentage of our revenues as we migrate customers from our leased facilities
to our own network.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses in 1999 increased $84 million, or 27%, over 1998. This
increase was due to a $67 million increase in selling expenses that were
directly attributable to an increase in the number of sales and sales-related
employees, both domestically and internationally. The growth in our sales force
resulted in higher training expenses and additional costs for expansion of
field offices. Also contributing to this increase was a $17 million increase in
general and administrative expense resulting from the hiring of additional
management staff and related operating expenses, increased facilities costs and
increased information technology expenses.
Our selling, general and administrative expenses in 1998 increased $131
million, or 72%, over 1997. Selling expenses increased $45 million due to
customer growth, higher new product development costs and investment in our
sales and marketing infrastructure, including expansion of sales channels,
advertising costs and other promotional activities related primarily to
Internet-based services for enterprise and service providers. General and
administrative expenses increased $86 million due to increases in management
staff and related operating expenses across the organization, as well as
increased cost of Year 2000 renovation and system testing.
Depreciation and Amortization. Our depreciation and amortization expenses in
1999 increased $83 million, or 80%, over 1998. This increase reflects our
continuing investment in our network infrastructure in order to support our
growth in customers and services. At December 31, 1999, over 17,500 miles of
our fiber optic network were operational and, therefore, being depreciated.
Our depreciation and amortization increased $44 million, or 74%, in 1998
over 1997. The increase reflects the continuing investment in our network
infrastructure, which had over 5,900 miles of fiber deployed and operational
and, therefore, being depreciated. In 1998 we also had a full year of
amortization of goodwill related to two acquisitions in 1997, compared to a
half year of amortization expense in 1997.
32
<PAGE>
Net Loss
Our net losses increased to $647 million in 1999 compared to $469 million in
1998 and $213 million in 1997. Our net losses increased to $210 million in the
first quarter 2000 compared to the first quarter 1999. Given our planned
operating and capital expenditures, we expect to continue to incur significant
net losses over the next several years.
Income Taxes
Our tax provision was computed on a stand-alone basis. Since July 1, 1997,
our federal income tax returns have been filed on a consolidated basis with
GTE. We generated taxable losses of $115 million in 1997, $527 million in 1998,
$638 million in 1999 and $179 million in the first quarter of 2000, which were
benefited by GTE in its consolidated income tax return. We received
reimbursements for these tax benefits of $40 million, $186 million and $224
million for the years ended December 31, 1997, 1998 and 1999 and $62.5 million
for the three-month period ended March 31, 2000. To reflect our income tax
provision on a basis that will be comparable to future periods, these
reimbursements have been accounted for as capital contributions. Our tax
provision represents amounts owed for state taxes. Our ability to use net
operating losses may be subject to annual limitations. We may also pay income
taxes in the future due to operating income in some states and foreign
countries. In the future, if we achieve operating profits and the net operating
losses have been exhausted or have expired, we may experience significant tax
expense.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly results of operations
data for each of the nine quarters in the period ended March 31, 2000. This
data has been derived from our unaudited combined financial statements. We
believe that this information has been prepared on the same basis as our
audited combined financial statements and that all necessary adjustments,
consisting only of normal recurring adjustments, have been included to present
fairly the selected quarterly information when read in conjunction with our
audited combined financial statements and accompanying notes included elsewhere
in the prospectus. The operating results for any particular quarter are not
necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999 1999 1999 1999 2000
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 96,863 $ 109,731 $ 115,018 $ 124,390 $ 157,283 $ 165,545 $ 181,548 $ 202,090 $ 247,852
Operating expenses:
Cost of goods sold.. 101,397 118,173 127,613 145,611 160,540 178,856 206,260 221,842 283,928
Selling,
general and
administrative..... 78,009 77,493 75,539 81,875 93,123 94,178 97,970 111,251 108,336
Depreciation and
amortization....... 21,071 23,272 28,071 32,030 41,092 44,148 49,831 52,557 53,786
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses.......... 200,477 218,938 231,223 259,516 294,755 317,182 354,061 385,650 446,050
Operating loss....... (103,614) (109,207) (116,205) (135,126) (137,472) (151,637) (172,513) (183,560) (198,198)
Other income
(expense):
Interest income
(expense), net..... (340) 200 2,115 (1,995) (434) 391 948 (1,088) (2,973)
Other, net.......... (152) (377) (219) (2,176) (341) (1,714) (336) 2,359 (8,067)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Loss before income
taxes............... (104,106) (109,384) (114,309) (139,297) (138,247) (152,960) (171,901) (182,289) (209,238)
Income taxes......... 326 343 358 436 333 369 463 484 588
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net loss............. $(104,432) $(109,727) $(114,667) $(139,733) $(138,580) $(153,329) $(172,364) $(182,773) $(209,826)
========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
33
<PAGE>
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods. We have funded these cash requirements principally through permanent
contributions to capital from GTE and borrowings from its affiliates. Capital
contributions amounted to $611 million in 1997, $1.3 billion in 1998, $974
million in 1999 and $488 million in the first quarter of 2000. We expect to
continue to fund all of our cash requirements prior to this offering through
permanent contributions of capital from GTE.
Net cash used in operating activities was $91 million in 1997, $513 million
in 1998 and $404 million in 1999. Net cash used in operating activities was
$119 million in the first quarter of 2000. Net cash used in operating
activities for these years and the three-month period was primarily the result
of operating losses.
Net cash used in investing activities was $774 million in 1997, $505 million
in 1998 and $701 million in 1999. Net cash used in investing activities in each
of these years was primarily the result of capital expenditures for
construction of our network infrastructure, as well as leasehold improvements,
furniture, fixtures, computers and other equipment. Our capital expenditures
for the three-year period ended December 31, 1999 totaled over $1.4 billion.
Our net cash for investing activities in 1997 included the acquisitions of BBN
Corporation, our predecessor, and a web hosting company, which together totaled
$518 million. Net cash used in investing activities was $212 million for the
first quarter of 2000 due primarily to the result of capital expenditures for
the continued construction of our network infrastructure. Our capital
expenditures in the first quarter of 2000 were $211 million.
We currently intend to spend approximately $1.8 billion to $2.0 billion
during the year ended December 31, 2000 on capital expenditures, of which
approximately $1.2 billion is expected to be spent on the continued expansion
of our fiber optic network and approximately $250 million is expected to be
spent on the construction of additional data centers. As of March 31, 2000, we
had entered into $401 million in commitments for these projected expenditures.
Our capital expenditures program, as currently contemplated, will require
between $11 billion and $13 billion over the five-year period ending December
31, 2004, the majority of which will be for the expansion of our network
infrastructure. We expect capital expenditures to continue to increase
significantly beyond this period, depending on the pace at which we build and
expand our network infrastructure and increase our employee base to support our
operations and invest in our selling and marketing organization. In the near
term, we believe that the proceeds from this offering, along with the capital
contribution from GTE prior to this offering that will offset intercompany debt
as well as any outstanding external debt as of the closing of the offering,
should be sufficient to meet our cash needs through the first quarter of 2001.
Our future cash requirements, however, will depend on a number of factors,
including:
. the pace at which we expand our network infrastructure and the
associated costs;
. the rate at which customers purchase our services and the pricing of
those services;
. the level of marketing required to build our brand, to acquire and retain
customers and to maintain a competitive position in the marketplace;
. the rate at which we invest in support systems and engineering; and
. investment opportunities in complementary businesses or technologies.
We will be required to raise additional capital to fund our business plan as
currently contemplated. We cannot predict the timing and exact amount of
capital that we will be required to raise. We expect to raise this capital
principally through public offerings or private placements of debt or equity
securities, depending on market conditions. The issuance of additional equity
would be dilutive to the holders of our Class A common stock. We are required
to obtain the consent of Verizon or other future holders of our Class B common
stock
34
<PAGE>
prior to issuing shares of our capital stock in excess of specified limits and
our agreement with Verizon limits our ability to incur debt in excess of agreed
upon amounts. You should refer to "Description of Capital Stock" and the
section in "Related Party Transactions" entitled "Recapitalization Agreement"
for more information regarding limitations imposed on us by our charter and
contractual relationship with Verizon. If we are unable to obtain required
additional capital through the issuance of these securities or are required to
obtain it on terms less satisfactory than we desire, we may be required to
delay the expansion of our business.
As of March 31, 2000, our indebtedness included $49 million of 6%
convertible subordinated debentures. These debentures are due in 2012 and may
be converted at any time by the bondholders into cash at an exchange ratio of
$966.67 for each $1,000 in principal amount of debentures. The debentures are
unsecured obligations of Genuity and are subordinated in right of payment to
our senior indebtedness, if any. We are required to contribute to a sinking
fund annual payments equal to 5% of the aggregate principal amount issued. As
of December 31, 1999, we had purchased and retired debentures with an aggregate
principal of $37.3 million, which satisfies the annual sinking fund
requirements through 2006.
As of March 31, 2000, our indebtedness also included $83 million in capital
leases. The capital leases bear interest at 5.07% to 9.50% and have terms of 5
years from the date of purchase, with principal and interest payable quarterly
in advance.
In addition, in the future we may wish to selectively pursue possible
strategic investments in businesses, technologies or products complementary to
ours in order to expand our geographic presence and achieve operating
efficiencies. We may not have sufficient liquidity, or we may be unable to
obtain additional debt or equity financing on favorable terms or at all, to
finance these investments.
Year 2000
We do not believe that the Year 2000 rollover has had, or will have, any
material adverse impact on our operating results or liquidity. We have not
experienced any material contingencies with customers or major suppliers nor
have we experienced any significant Year 2000 events. The estimated total cost
of our Year 2000 compliance efforts is expected to total approximately $60
million, of which $54 million has been expended through March 31, 2000.
Inflation
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
Recently Issued Accounting Pronouncements
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3,
1999. We are required to adopt this new accounting guidance, as amended by SAB
No. 101A, no later than the second quarter of 2000. We implemented this
accounting guidance in the first quarter of 2000.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133, as amended by SFAS No.
137, is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. This new standard is not anticipated to have an impact on our
combined financial statements based on our current structure and operations.
35
<PAGE>
Quantitative and Qualitative Disclosure About Market Risk
While our long-term debt bears fixed interest rates, the fair value of our
fixed rate long-term debt is sensitive to changes in interest rates. There is a
risk that market rates will increase and the required payments will exceed
those based on the current market rates. The estimated fair value of long-term
debt based on a debt pricing model was lower than its recorded value by
approximately $1.2 million as of December 31, 1998, by approximately $6.6
million as of December 31, 1999 and by approximately $6.8 million as of March
31, 2000. Under our current risk management policies, we do not use interest
rate derivative instruments to manage our exposure to interest rate changes.
36
<PAGE>
BUSINESS
Overview
We are a leading e-business network provider of high quality, managed
Internet infrastructure services to enterprises and service providers. We use
the term e-business to refer to commercial transactions conducted over the
Internet. We offer a comprehensive suite of managed Internet infrastructure
services, including:
. Internet access through dial-up, dedicated and digital subscriber lines;
. web hosting and content delivery; and
. value-added e-business services, such as virtual private networks for
secure data transmissions and security services.
We operate a state-of-the-art global network that consists of:
. recently deployed broadband fiber optic cable in the United States;
. points of presence, which are locations where we provide Internet access
to end users;
. secure data centers with redundant fiber connections to our network and
backup power sources; and
. undersea and international fiber optic cable capacity.
Our large base of on-network users and content, combined with our extensive
network, positions us as one of the leading Internet backbone providers in the
world, a status commonly referred to as a Tier 1 Internet backbone provider.
Tier 1 Internet backbone providers have the network scale and on-network
traffic to offer their customers connectivity to virtually all addresses on the
Internet either directly through their Internet backbone or through cost-free,
high speed private connections to other Tier 1 Internet backbones. We believe
that service providers are increasingly connecting to networks with substantial
on-network content to improve the quality of their customers' experience, which
in turn drives demand by enterprises seeking to connect to networks with large
numbers of users. We believe that by taking advantage of this demand cycle,
which we call the "network effect", we will continue to drive significant
demand for our services from both enterprises and service providers and
differentiate ourselves from non-Tier 1 Internet backbone providers.
Industry Background
The Growing Importance of the Internet
The Internet has experienced tremendous growth in the past decade and has
emerged as an important global medium for communications and commerce. The
growth in data that is transmitted over the Internet is driven by a number of
factors, including the rapidly increasing number of network-enabled and
Internet-based applications, the growing number of personal computers linked to
the Internet, advances in network-enabled devices, servers and routers and the
increasing availability of broadband connections.
The explosive growth of the Internet and the increasing demand for data
services are expected to continue. According to International Data Corporation,
the number of Internet users worldwide will increase from 142 million at the
end of 1998 to approximately 502 million by the end of 2003. In addition,
according to International Data Corporation, the number of web pages is
expected to grow from 1.7 billion in 1999 to approximately 13.1 billion in
2003. This growth is expected to lead to a substantial increase in the demand
for bandwidth and other Internet infrastructure services.
The proliferation of the Internet within the business environment, in
particular, has been substantial. Once primarily used for e-mail and retrieving
information, the Internet is now being used as a communications platform for an
increasing number of mission-critical Internet-based applications, such as
those relating to
37
<PAGE>
e-commerce, internal networks or intranets, telephone and facsimile
capabilities, supply chain management, customer service and project
coordination via extranets. The Gartner Group estimates that worldwide
business-to-business e-commerce sales will grow from $145 billion in 1999 to
approximately $7.3 trillion in 2004.
To improve the effectiveness and scalability, of their critical Internet-
based applications, both enterprises and service providers are requiring
increasing levels of network performance, including capacity, reliability,
security and manageability, across the Internet.
The Growing Demand for Outsourced Internet Infrastructure Solutions
As the Internet and data traffic have grown, the cost and complexity for
enterprises and service providers to manage their own network infrastructure
demands in-house has increased. Traditionally, enterprises were required to
make substantial investments in developing the Internet expertise and
infrastructure necessary to ensure the quality, reliability, security and
availability of their Internet operations. The implementation and maintenance
of Internet infrastructure solutions also require significant technical
expertise and capital expenditures in a number of other areas, such as e-
commerce systems, security and privacy technologies, advanced user interface
and multimedia production. Moreover, the information technology departments
within enterprises are constantly challenged by the need to implement their
Internet business strategy, adopt new and rapidly changing technologies,
transition to new broadband content applications and continuously update
dynamically changing content. As a result, enterprises are seeking Internet
infrastructure service providers that can minimize their exposure to the
capital, human and technological risks associated with in-house solutions. To
increase their competitive edge, enterprises are now outsourcing their critical
Internet operations to increase performance and scalability, speed time-to-
market and reduce costs.
Similarly, service providers are challenged by the rapid growth and
increasing complexity of the Internet infrastructure, the dramatic increase in
data traffic and the growing need to meet the demands of broadband
applications. Service providers are increasingly required to devote substantial
capital and human resources to expanding the capacity and the technological
capabilities of their networks. As the demands of their customer base grow,
these service providers find it more difficult to quickly, cost-effectively and
efficiently deliver service through internal infrastructure expansion. As a
result, service providers are increasingly focusing their resources on sales
and marketing and outsourcing their Internet infrastructure requirements to
organizations focused on developing and enhancing a high capacity Internet
infrastructure that can be quickly expanded to meet their requirements.
The Development of the Internet Infrastructure Services Market
The growing demand from enterprises and service providers for outsourced
Internet infrastructure services has led to the development of an Internet
infrastructure service market comprised of companies focused on solving these
outsourcing requirements. Many of these companies have endeavored to build or
otherwise acquire network facilities in order to provide Internet access, while
others have addressed more specific solutions, such as web hosting or security
services. According to Forrester Research, the Internet access and web hosting
markets in the United States are expected to grow from an aggregate of $4
billion in 1998 to $57 billion by 2003, representing a compound annual growth
rate of approximately 70%.
Enterprises and service providers are increasingly demanding Internet
infrastructure service providers that can deliver a high quality Internet
experience for their users. The ability to deliver this high quality experience
has become more difficult, largely as a result of an increasing number of
Internet users and richer content, including graphics, photographs and
streaming video and audio. In addition, as the number of networks connected to
the Internet has grown, the delay and loss of data that is transmitted over the
Internet has increased. This is particularly true at the major public peering
points where multiple Internet service providers exchange data over shared
facilities. To increase performance, a number of Internet backbone providers
have established high-speed private connections with other networks to exchange
traffic over dedicated fiber circuits.
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These connections are referred to as private peering connections. The quality
of an experience on the Internet is therefore highly dependent on the quality,
capacity and reliability of the physical facilities over which Internet
services are provisioned and the Internet backbone through which Internet
access is provided and content is delivered.
The critical elements of delivering a high quality user experience are a
large base of on-network users, content, and high speed, well-managed private
peering relationships with other Tier 1 Internet backbones. Internet backbone
providers that have these competitive strengths are able to route traffic to
virtually all Internet addresses and avoid the need to route traffic across
multiple networks and congested public peering points. Consequently, their
users encounter fewer delays due to transmission bottlenecks across public
peering points, and enterprise and service providers using these Internet
infrastructure service providers are better able to manage the quality of
experience of their end users.
Accordingly, enterprises and service providers increasingly look to the
limited number of providers that offer a comprehensive suite of managed
Internet infrastructure services, a large base of on-network users and content,
and reliable and scalable network facilities. We believe that we are among only
a few companies in the world that offer the full complement of these attributes
as part of their e-business network solution.
Our Solution
Our e-business network solution enables our customers to outsource their
Internet infrastructure needs to a single provider and to scale their Internet
operations in a cost-effective and reliable manner. The key elements of our
solution include:
Comprehensive Suite of Managed Internet Infrastructure Services. We offer a
broad range of managed Internet infrastructure services, including: Internet
access; web hosting and content delivery; and value-added e-business services,
such as virtual private networks for secure data transmission, security
services and voice-over-IP. Our services are designed to enable customers to
purchase the level of service, features, access speed and functionality that
meet their existing requirements, while at the same time allowing them to
easily upgrade services over time. We believe there is significant opportunity
to offer integrated services to enterprise customers as their requirements
evolve from Internet connectivity to more critical Internet applications. As
part of our solution, we install, configure, maintain and monitor industry-
leading hardware and software, offer technical consulting and support, provide
high-volume backup and recovery systems and monitor our Internet backbone
operations 24 hours a day, seven days a week. Additionally, we provide flexible
service pricing that allows our customers to be billed according to their
bandwidth and capacity utilization.
Large Base of On-Network Users and Content. Because we provide Internet
access services to many of the leading Internet service providers, including
America Online, Earthlink, NetZero and Web TV, web hosting services for popular
web sites as Yahoo! and ZDNet, and high speed connections to enterprises that
host their own web sites, such as Microsoft, we carry a significant amount of
traffic over our Tier 1 Internet backbone. We believe enterprises and service
providers choose to connect to our Internet backbone because they can directly
route traffic to, or receive content from, a significant number of other
customers on our network. This capability results in higher transmission
speeds, lower instances of data loss and greater quality of service, thereby
improving the overall quality of experience for Internet users. We believe that
service providers are increasingly connecting to networks with substantial on-
network content to improve the quality of their customers' experience, which in
turn drives demand by enterprises seeking to connect to networks with large
numbers of users. We believe that by taking advantage of this demand cycle,
which we call the "network effect", we will continue to drive significant
demand for our services from both enterprises and service providers and
differentiate ourselves from non-Tier 1 Internet infrastructure service
providers.
State-of-the-Art Network. We operate a state-of-the-art, high capacity
global fiber optic network that is highly reliable and scalable. Over 85% of
our fiber has been deployed within the past two years, and a majority
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of our optical electronic equipment has been installed within the past year.
Our highly redundant fiber optic network architecture is designed to minimize
service interruptions in our network operations. We have significant additional
capacity on our fiber network, which already carries a substantial portion of
our traffic. This capacity allows us to scale quickly at favorable incremental
capital costs as we meet increased customer demands and continue our transition
from leased capacity. We also operate eight data centers in the United States,
one data center in the United Kingdom and one in Japan, through which we
provide managed and collocated web hosting services for enterprises with
critical Internet operations. Through our technologically advanced data
centers, we offer customers a secure environment to house critical Internet
operations and to obtain high bandwidth connectivity to the Internet.
High Performance, Tier 1 Internet Connectivity. We provide high performance
connectivity to the Internet through our Tier 1 Internet backbone and extensive
high speed private connections to other major Internet backbone providers and,
to a lesser extent, public peering points. Our extensive private peering
relationships permit us to have direct, cost-free exchange of traffic with a
significant number of telecommunications carriers and Internet infrastructure
service providers, thus avoiding the congestion of public peering points when
directing traffic to users connected to those Internet backbones. As a result,
we are able to offer our customers direct access to our on-network users and
content. In addition, over 80% of the traffic we deliver to the rest of the
Internet is delivered through private peering connections.
Significant Internet Protocol Engineering and Architectural Expertise.
Drawing upon the breadth and depth of our IP and networking experience and
expertise, including over 750 engineers and over 1,100 technicians, we are able
to quickly and cost-effectively identify the Internet infrastructure
requirements of our customers and design and implement appropriate solutions.
For service providers, this entails testing, certifying, deploying and scaling,
within our network, the latest fiber optic and IP routing, switching and web
hosting technology to provide cost-effective and highly reliable managed
Internet infrastructure services. For our enterprise customers, we provide high
quality IP solutions comprised of one or more of our services. For example, we
combine our Internet access, web hosting, virtual private networks and managed
security services to enable secure intranets and extranets for enterprises.
Our Strategy
Our objective is to be the leading e-business network provider by
architecting, building and operating the infrastructure for the Internet
economy. The principal elements of our strategy for pursuing this objective
include:
Leveraging the Network Effect. We intend to continue to target enterprises
and service providers with significant Internet infrastructure demands. The
addition of an increasing number of service providers enables us to cost-
effectively scale our network and attract enterprises that seek to connect to
networks with a large number of users. The additional users that these service
providers bring to our network attract enterprises that want to market their
products and services directly to a larger base of users. We believe that
attracting these customers will enhance our position as a leading provider of
managed Internet infrastructure services as a result of the consolidation of a
growing number of users and large volumes of content on our Tier 1 Internet
backbone. We also believe that over time the scale associated with an
increasing customer base will also allow us to pursue premium pricing with
enterprise customers and minimize operating expenses sometimes associated with
private peering connections to other Internet backbones.
Expanding Our Capacity and State-of-the-Art Network. We intend to continue
to expand our capacity and state-of-the-art network in advance of the capacity
demands of our customers. We plan to do this by accomplishing the following by
the end of 2001:
. extending our coverage by deploying up to an additional 4,500 route miles
of fiber optic cable serving approximately 120 metropolitan service areas
and 11 additional international markets;
. expanding our network capacity in the United States to the equivalent of
10 layers of 10 gigabit capacity each;
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. increasing our number of dedicated points of presence to nearly 300 and
deploying local fiber rings within selected metropolitan service areas to
increase our reach to end users;
. adding seven additional data centers in key locations worldwide to
address the growing demands for our web hosting and content delivery
services;
. expanding our network collocation facilities to enable our service
provider customers to reach new markets quickly and cost-effectively; and
. deploying state-of-the-art optical electronic equipment to maximize the
capacity of our fiber network.
Continuing to Build and Own Our Network Facilities. As we expand, both
domestically and internationally, we intend to build and own the majority of
our network facilities rather than leasing them from other facilities-based
providers. We believe that owning our network facilities:
. provides greater control over the performance, reliability and breadth of
our managed Internet infrastructure services;
. enables us to increase our capacity more quickly to meet increasing
bandwidth demands;
. generates higher gross margins than would be generated through leasing
circuits from other facilities-based providers; and
. improves service delivery to customers by reducing reliance on third-
party providers.
Expanding Our Distribution Capabilities. We intend to develop and expand our
direct sales force and our strategic alliances with other Internet-focused
companies in order to expand our distribution capabilities. Currently, we have
over 350 persons in our direct sales force, and we intend to substantially
increase this sales force by the end of 2001. During the same period, we plan
to substantially increase our Electronic Business Consultant organization,
which is a group of highly skilled sales consultants that aid our existing and
potential customers in designing e-business solutions based on our managed
Internet infrastructure services. In addition, through our eP@rtner Program, we
have formed alliances with leading web integrators, e-business consultants,
interactive agencies and other technology providers. We have formed similar
alliances with international Internet service providers through our
Net.Alliance program. This program enables these Internet service providers to
offer our portfolio of IP-based services to their customers and is designed to
allow us to provide our services to private and commercial customers in key
European, Pacific Rim and Latin American markets. Our current partners in these
programs include, among others, Agency.com, Cambridge Technology Partners,
Cisco Systems, Ernst & Young, Hewlett-Packard, IBM, Lante, Microsoft, Nortel
Networks and Sapient in the United States, Energis in the United Kingdom and
I.NET and Tiscali in Italy. These alliances serve as a valuable, cost-effective
channel for marketing our services. We also plan to expand our existing
reseller relationships to significantly enhance our distribution capabilities.
Pursuing Strategic Transactions and Alliances. We intend to pursue selective
acquisitions that will allow us to quickly and cost-effectively extend our
geographic presence and customer base, particularly in international markets.
Additionally, we intend to make strategic investments in or enter into joint
ventures or alliances with complementary businesses to broaden our market
presence or expand our strengths in key services. We believe that successfully
pursuing these strategic transactions or alliances will enable us to expand our
geographic and service reach and to broaden our Internet infrastructure
services for our customers.
Using Our Extensive Internet Protocol and Networking Expertise to Develop
New Services. We intend to use our long history of IP and networking expertise
to strengthen our reputation as a leader in the development and deployment of
innovative Internet infrastructure services. We were one of the first to offer
commercially managed web hosting services and managed security services. We
plan to continue to develop and introduce innovative services that address the
evolving requirements of our enterprise and service provider customers. We are
pursuing initiatives such as IP-based voice virtual private networks, enhanced
multi-media streaming and
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content distribution services and wireless and satellite access services. In
addition, we plan to partner with or make investments in innovative Internet
start-ups and other organizations to enhance both our access to and
incorporation of leading technologies.
Establishing Genuity as a Leading Brand for e-Business Network Services. We
intend to establish Genuity as a leading brand for e-business network services
worldwide. We plan to increase brand awareness by pursuing an aggressive
marketing strategy involving television, radio and print advertising as well as
extensive public relations efforts. We will pursue additional marketing
campaigns specifically targeted at enterprises and service providers. We also
intend to build brand recognition by continuing to work closely with our
eP@rtners and Net.Alliance partners to increase our exposure to a broader base
of customers.
Our Services
We provide a comprehensive suite of managed Internet infrastructure services
targeted to two primary customer groups, enterprises and service providers. Our
services fall into the following four categories:
. Internet access;
. web hosting;
. value-added e-business services; and
. transport services.
Our enterprise customers rely on our comprehensive suite of managed Internet
infrastructure services to create and implement their e-business strategies.
Our service provider customers rely primarily on our Internet access and web
hosting services, which enable them to focus on the retail aspects of their
business while we provide and manage the underlying scalable infrastructure
necessary to deliver services to their customers. We believe our focus on
developing and tailoring services to meet the needs of our target customers, as
well as the scale and diversity of our services, differentiates us from our
competitors.
Internet Access. We offer a variety of Internet access services to our
enterprise and service provider customers, including dial-up, dedicated and
digital subscriber lines. We also provide a range of customer premise equipment
that is necessary to connect to the Internet, including routers, channel
service units or data services units, modems, software and other products. Our
Internet access services, which accounted for over 77% of our total revenues in
1999, include:
. Dial-up Access. Our dial-up access service enables users to connect to
the Internet using a local telephone number. Our customers can connect to
our Internet backbone through more than 800 local access points in the
United States and, through our reseller relationship with iPass, a remote
access provider, through approximately 1,500 international local access
points in more than 150 countries. DiaLinxSM, which is our remote dial-up
access service for enterprises that enables them to provide their mobile
professionals, telecommuters, customers and business partners with
guaranteed, cost-effective local dial-up access to their intranets and
extranets, as well as the Internet, from around the world. Similarly, our
DiaLinx ISP service enables Internet service providers to expand their
existing dial-up access service without incurring substantial up-front
capital costs and ongoing operational expenses. For other Internet
service providers and organizations that want to quickly offer their
customers a private-label, Internet dial-up access service without
incurring up-front and ongoing investments in network infrastructure or
the burden of providing back office support, we offer a virtual Internet
service provider service, called DiaLinx VISP SM.
. Dedicated Access. Our Internet Advantage SM and ISP Direct SM services
connect enterprises and service providers directly to the Internet
through a dedicated high speed connection. These services are available
throughout the United States and in more than 60 other countries. We
offer a broad spectrum of dedicated connection types with flexible
pricing structures, as well as comprehensive service level guarantees. We
offer dedicated Internet access at speeds ranging from T1, including
fractional up to 1.5 megabits per second, to OC-12, which is capable of
transmitting data at 622 megabits per second.
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. Digital Subscriber Line Access. Our digital subscriber line access
service enables high speed digital transmission over telephone lines.
This service allows an end user to use the telephone while connected to
the Internet with only one connection. Unlike dial-up access services,
our digital subscriber line access service provides a full-time
connection that is "always on". We currently offer service in 24 major
metropolitan service areas throughout the United States, with expansion
planned to over 50 major metropolitan service areas, covering over 60% of
the United States population, by the end of 2000. Our digital subscriber
line access services are available in a wide range of dedicated access
speeds, from 144 kilobits per second to 1.5 megabits per second. Our
digital subscriber line access services for enterprises are designed to
meet the needs of telecommuters, branch offices and small businesses by
providing high quality Internet access at speeds faster than dial-up and
Integrated Services Digital Network and offered for a fixed monthly fee.
In addition, for our service provider customers, we coordinate all
activities necessary to provide digital subscriber line access service,
including service establishment, network connectivity, bulk billing and
second tier technical support.
Web Hosting. Our web hosting services, which accounted for 7% of our total
revenues in 1999, enable enterprises and application service providers to
outsource the storage and management of their web servers to our special
purpose web hosting facilities. Our Enterprise Advantage SM web hosting service
provides reliable web hosting and high speed network infrastructure, flexible,
fast, and secure web hosting platforms and experienced technical support staff.
We currently operate 10 data centers throughout the world, with eight in the
United States, one in Leeds, England and one in Tokyo, Japan. Each data center
is located in the same building as, or in close proximity to, our network
access points. Our data centers are technologically advanced facilities with
redundant, high speed connectivity to the Internet, uninterruptible power
supplies, back-up generators, fire suppression, raised computer floors,
separate cooling zones, seismically braced racks and high levels of security.
Our Enterprise Advantage services include:
. Managed Web Hosting. Our managed web hosting service provides fully
managed, secure and reliable web hosting capabilities for businesses
operating in Windows NT or UNIX environments that want to use our
expertise to implement and manage their web site infrastructure. We
manage the systems and platforms and also retain ownership of equipment
and software.
. Customer Managed Web Hosting. Our customer managed web hosting service is
designed for enterprises that require administrative control of their web
sites but prefer to partner with an experienced, reliable web hosting
provider. This service provides our customers with pre-configured server
hardware and software, Internet access and the benefit of secure and
continuously monitored data centers. Our customers retain full
responsibility for the content and administration of their web sites.
. Collocation Web Hosting. Our collocation web hosting service is designed
for enterprises that seek to own their own equipment and retain full
responsibility for management, content and administration of their web
sites, but need a secure and scalable hosting facility with high
performance connectivity.
. Content Delivery and High Availability Services. For customers with high
traffic web sites, we also offer optional, high availability services
that can increase web site capacity and performance. We currently offer
four high availability services:
. LoadBalancer. Our LoadBalancer SM service creates a single web
address that represents multiple web servers located in a single data
center. These web servers utilize advanced load balancing techniques,
based on the number of users seeking access to the web site, to
connect users to the web server that will produce the fastest
response to their request.
. Traffic Distributor. Our Traffic Distributor service is designed for
web sites requiring high reliability and involves hosting web servers
in multiple data centers. Enabled by our patent-pending Hopscotch(TM)
load distribution technology, this service enhances the experience of
an end user by directing their content requests to the web server
offering the fastest and most reliable service.
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. Site Replicator. Site Replicator enhances web site availability by
mirroring web site content between multiple servers. Site Replicator
copies new files, scripts and web images from the primary server to
the other servers within its defined group. Site Replicator is a
flexible web data replication tool, using efficient algorithms and
intelligent data transfer techniques to minimize overhead and ensure
that content on all web servers is synchronized.
. Site Accelerator. Site Accelerator replicates web site content on
servers throughout our Internet backbone and brings this content
geographically closer to our users, a process known as caching. This
process reduces web page load times. Because this service is
performed in our network, our customers receive the benefits of
caching without any capital investment. Site Accelerator splits the
task of serving content between the cache servers in our network and
the dedicated web site servers. When the content is moved to our
cache servers, the dedicated web site servers are freed up,
permitting more users and more transactions without sacrificing
performance from the perspective of the end user.
Value-added e-Business Services. As enterprises and service providers
continue to use the Internet as a business-critical tool, we believe they will
increasingly demand a wider range of e-business services to ensure security,
enhance productivity, reduce costs and improve service reliability and
scalability. Today, we offer a range of value-added e-business services,
including:
. Virtual Private Networks. With our virtual private network service, we
enable an enterprise and its employees, customers, suppliers and business
partners to securely send and receive information to and from each other
via encrypted dial-up, dedicated, digital subscriber line or cable-modem
Internet connections. Our VPN Advantage SM service is a managed virtual
private network service that makes it possible to communicate securely
over our Internet backbone and over the Internet from virtually anywhere
in the world. With VPN Advantage, our customers benefit from the
capabilities of a large, shared IP-based network infrastructure while
maintaining the look and feel of their own private corporate network.
. Managed Security Services. Our managed security services are scalable and
can be customized to our customers' needs and provide a high level of
protection for their corporate networks. Our managed security services
include monitoring the network perimeters of our enterprise customers, 24
hours a day, seven days a week, and use of firewall management,
maintenance and proactive response techniques to ensure the security of
access points into their computing infrastructure. Our Site Patrol SM for
FireWall-1(R) and our Security Advantage SM are Internet security
services that help to significantly reduce exposure to Internet security
threats and firewall breaches. In addition, we offer a vulnerability
assessment service, Site Scan SM, that helps enterprises strengthen their
network perimeter security by periodically testing for potential
weaknesses and generating recommendations for correcting them.
. Voice-over-Internet Protocol. Through our suite of voice-over-IP
services, including International VoIP Direct SM and ESP Direct SM, we
offer low-cost, high-quality voice-over-IP network transport to Internet
service providers, Internet telephony service providers, enhanced service
providers and telecommunications companies providing voice-over-IP
services to their customers. We seek to provide our customers with
accelerated time-to-market for their customers through innovative,
enhanced solutions enabling voice services such as personal computer-to-
phone and personal computer-to-personal computer.
Transport. Our transport services are generally purchased by
telecommunications carriers and Internet service providers requiring additional
capacity. In delivering these services, we provide a single point of contact
for planning, ordering, installing, billing, maintaining and managing the
transport services of our customers. Our transport services, which accounted
for 12% of our total revenues in 1999, include:
. ATM Service. Our asynchronous transfer mode, or ATM, transport service, a
form of high speed data transfer, is targeted primarily at carriers and
Internet service providers with high bandwidth voice, video and data
transmission requirements. We provide ATM connections between one or more
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locations. Our ATM transport services provide logical permanent virtual
connections, thereby supporting applications that send information at a
constant or variable bit rate. We offer a wide range of speeds at one
megabit per second increments and match the application needs to the
desired amount of bandwidth.
. Private Line Service. Our private line service provides dedicated point-
to-point transport services through non-switched, non-usage sensitive
dedicated facilities. Our private line service is supported over our
dedicated Synchronous Optical Network, or SONET, facilities, which
results in a highly reliable network. These services are comprised of
bandwidth delivered in units of: (1) DS-3, which is capable of
transmitting data at 44.736 megabits per second; (2) OC-3, which is
capable of transmitting data at 155.520 megabits per second; (3) OC-12,
which is capable of transmitting data at 622.080 megabits per second;
and (4) OC-48, which is capable of transmitting data at 2.488 gigabits
per second.
. Network Collocation Services. Our collocation services provide our
customers with a physical location to collocate communications equipment
at our points of presence. This service allows our service provider
customers to expand their market areas without extensive recurring real
estate charges, build-out fees and overhead costs.
Our Network
We operate a state-of-the-art, facilities-based global fiber optic network
designed specifically for IP technology. We own the core components of our
network infrastructure in the United States through indefeasible rights of use,
or IRUs, for the underlying fiber optic cable. Within the United States we also
lease capacity from third parties to provide service to our customers. We
estimate that a majority of our traffic is currently transmitted over this
leased capacity. We are in the process of transitioning traffic from leased
capacity to our network infrastructure and expect that over 80% of our traffic
will travel over our owned network by the end of 2001. We also own undersea
capacity through IRUs and lease capacity internationally. Our current network
infrastructure consists of:
. over 17,500 route miles of owned inter-city fiber cable in the United
States that passes through the largest 100 metropolitan service areas
and substantial additional leased capacity;
. undersea capacity to Europe via Atlantic Crossing-1 and to Asia via TPC-
5;
. approximately 70 facilities-based points of presence in the United States
that provide direct access to our fiber network;
. over 70 dedicated Internet access service delivery points in the United
States;
. over 800 local points of presence for dial-up access in the United
States and, through our reseller relationship with iPass, an additional
1,500 local access points of presence in more than 150 other countries;
. 10 points of presence in international markets, including Amsterdam,
Dublin, Frankfurt, London (2), Milan, Paris, Stockholm, Sydney and
Tokyo, with the ability to provide service from over 300 additional
points of presence in over 60 countries though leased facilities; and
. eight data centers located in the United States and one each in the
United Kingdom and Japan.
We plan to substantially expand our network infrastructure, both
domestically and internationally. Through the end of 2001, we plan to:
. extend our coverage by deploying an additional 4,500 route miles of
fiber cable serving approximately 120 additional metropolitan service
areas in the United States and building local fiber rings in major
metropolitan service areas in the United States;
. utilize additional international undersea capacity to: (1) Europe via
TAT-14 and FLAG Atlantic; (2) Latin America via Americas II; (3) the
Caribbean via ARCOS-1; and (4) Asia via Japan-US cable network;
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. expand our network capacity in the United States to the equivalent of 10
layers of 10 gigabit capacity each;
. add more than 25 facilities-based points of presence in the United
States that provide direct access to our fiber network;
. add more than 200 additional dedicated Internet access service delivery
points in the United States;
. add an additional nine points of presence in key international markets;
. add approximately 800,000 additional modems to our North American dial-
up infrastructure and expand our coverage to an additional 300 local
markets in North America;
. expand our broadband coverage to 80 metropolitan service areas and
surrounding cities in the United States; and
. build seven additional data centers in key locations worldwide, which
will increase our existing capacity by approximately 1.2 million square
feet.
As we expand our network infrastructure, both domestically and
internationally, we intend to primarily build and own our facilities rather
than lease them from other facilities-based providers. In addition, we have
taken the flexible approach of utilizing multiple fiber providers to ensure
higher reliability, quicker deployment of new technology and faster
provisioning for our customers. Our network infrastructure has the following
characteristics:
High Performance, Reliability and Quality. The geographic reach and state-
of-the-art nature of our network enhance our ability to provide a high quality
user experience. We have incorporated a variety of technologies in our network
to ensure high performance and reliable transmission. These technologies
include OC-192, which is capable of transmitting data at 10 gigabits per
second, and SONET transmission equipment employing self-healing protection
switching. These technologies, combined with our ring-based architecture,
increase network reliability and minimize the risk of service outages. In the
event of a failure in any segment of our network infrastructure, traffic is
automatically rerouted across different fiber strands with virtually no
interruption in service. Additionally, our network infrastructure makes
extensive use of railroad rights-of-way that typically offer greater protection
for the fiber than fiber deployed over other rights-of-way such as highways,
telephone poles or overhead power transmission.
Capacity on Demand. We currently have an indefeasible right to use over
17,500 route miles of fiber in the United States, with virtually all of these
fiber route miles having 24 separate strands. These fiber route miles, which
form the core of our network infrastructure in the United States, were
operational at the end of 1999. The majority of the fiber deployed in our
network infrastructure is state-of-the-art Lucent True Wave(R) fiber that
supports multiple wavelengths, each running at 10 gigabits per second, thus
allowing for more capacity on a single fiber strand. Our fiber network,
combined with our network design, enables us to take advantage of the most
recent advances in optical electronic transmission equipment. For example, we
generally are using only four of our existing 24 strands of fiber, each of
which supports up to eight wavelengths per fiber at 10 gigabits per second data
transmission using current generation optical electronic transmission
equipment. However, as optical electronic transmission equipment providing 16,
32, 50 or even higher numbers of wavelengths per fiber becomes commercially
available, we plan to deploy this equipment as needed on unused fiber strands
to expand the capacity of our network infrastructure. With the advanced nature
of our fiber network and the advances in optical electronic transmission
equipment, we believe we will have sufficient capacity on our existing fiber in
the United States for the foreseeable future. In addition to our owned
facilities, we supplement our existing route miles with leased capacity from
other providers.
Advanced Network Architectures. We believe that owning our network allows us
to implement new network architectures as they become technologically feasible.
For example, IP over dense wave division multiplexing, which is an optical
technology that increases the amount of data that can be transmitted over a
single fiber by dividing that fiber into multiple lightpaths or wavelengths,
will eliminate the need for the SONET network layer by relying on IP routers
and the dense wave division multiplexing equipment to perform the re-routing
that SONET currently performs. Furthermore, advanced optical networking
transmission
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equipment will enable traffic to be switched and routed without being converted
to an electrical signal first. We believe our engineering and architectural
expertise will enable us to quickly deploy these new architectures and
technologies, thereby reducing the complexity of data systems, increasing
flexibility and reducing costs.
Flexible Platform for Multiple Services. Our network has been specifically
designed for IP and can carry any form of packet data, including voice, video
and traditional data services. While many carriers and service providers use
multiple networks and platforms to deliver these distinct services, our IP-
optimized network provides a single platform that simplifies network
management, customer support and service delivery. In addition, ownership of
our facilities enables us to deploy new or enhanced services more quickly. For
example, we designed and deployed one of the first architectures to transmit
real-time voice and data packets with reliability and performance substantially
equivalent to the public switched telephone network. Moreover, our architecture
allows for rapid scalability of capacity, quick geographic expansion and cost-
efficient implementation of new services and features.
Our Data Centers
We currently operate 10 data centers that have been specifically designed
for managed web and application hosting services and high capacity connectivity
to our network. We have eight data centers in the United States, located in
Palo Alto, California; San Jose, California; Los Angeles, California; Phoenix,
Arizona; Chicago, Illinois; Cambridge, Massachusetts; Chantilly, Virginia; and
New York, New York. We also have one data center in each of Leeds, England, and
Tokyo, Japan.
Our data centers are strategically located in the same building, or in close
proximity to, network access points, and all are directly connected to our
Internet backbone. Our data centers are technologically advanced facilities
with:
. redundant, high speed connectivity to the Internet;
. uninterruptible power supplies;
. back-up generators;
. fire suppression;
. computer floors;
. separate cooling zones;
. seismically braced racks; and
. high levels of physical and network security.
Our highly trained staff monitors these systems 24 hours a day and seven
days a week. By the end of 2001, we plan to add seven data centers, adding
approximately 1.2 million square feet of additional capacity. Each of these new
data centers will be directly connected to our network and will be designed
specifically for mission-critical servers with complete redundancy of all
support systems. We expect these seven new data centers will be located in: Los
Angeles, California; Mountain View, California; Atlanta, Georgia; Cambridge,
Massachusetts; Carteret, New Jersey; Chicago, Illinois; and Chantilly,
Virginia.
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Our International Operations
We provide global coverage for our international customers. Today, we lease
our network facilities in international markets, including back haul services
from over 300 local points of presence in 60 countries and a SONET fiber ring
connecting London, Paris, Frankfurt and Amsterdam, which is capable of
transmitting data at 155.520 megabits per second. We are able to provide
dedicated access services in more than 60 countries and enable global dial-up
access service in more than 150 countries. We provide web hosting services out
of our data centers in the United Kingdom and Japan and we have the capability
to provide managed security and virtual private network services in over 39
countries. We have 10 points of presence in international markets, including:
Amsterdam; Dublin; Frankfurt; London (2); Milan; Paris; Stockholm; Sydney; and
Tokyo. All of our international points of presence are capable of accepting
voice-over-IP traffic for delivery in the United States.
By the end of 2000, we plan to add nine additional points of presence in the
following locations: Manchester; Madrid; Dusseldorf; Hamburg; Hong Kong; Sao
Paulo; Rio de Janeiro; San Juan; and Mexico City.
By the end of 2000, we also plan to deploy one of the first OC-48 fiber
rings in Europe employing IP over dense wave division multiplexing. We believe
this fiber ring network connecting London, Amsterdam, Frankfurt and Paris will
dramatically improve our ability to provide high-end data services and is
required to meet our rapidly growing traffic in Europe.
GTE has granted the exclusive right to our existing trademarks and
proprietary technology to TELUS Corporation for use solely in Canada for the
provision of telecommunications services, including Internet services. The
TELUS agreement limits our ability to provide Internet services in Canada. We
are currently negotiating an arrangement with TELUS that would govern our
relationship after this offering when we are not an affiliate of GTE.
In terms of trans-oceanic capacity, over the past two years we have entered
into a number of agreements for indefeasible rights of use to cable systems
that are either deployed or in the process of deployment. The following table
details our current and planned international cable capacity. The expected
dates of deployment represent approximate time frames in which we believe our
capacity on this cable will become operational. These dates are, to a large
extent, beyond our control and deployment may occur significantly later than we
expect.
<TABLE>
<CAPTION>
Expected
Cable System Capacity Terms Deployment
------------- -------------------------------------- -------------- ----------
<S> <C> <C> <C>
Americas II U.S.-Brazil (One STM-1)(1) 25 Years (IRU) Q3 2000
U.S.-Venezuela (One STM-1)
U.S.-Puerto Rico (One DS-3)(2)
Atlantic U.S.-United Kingdom (Two STM-1s) 25 Years (IRU) In Service
Crossing-1 U.S.-Germany (One STM-1) Lease
United Kingdom-Netherlands (One STM-1) Lease
United Kingdom-Germany (One STM-1) Lease
Japan-U.S. U.S.-Japan (Six STM-1s) 25 Years (IRU) Q4 2000
Cable Network U.S.-Hawaii (One STM-1)
Upgrade Capability to 28.5 STM-1s
TAT-14 U.S.-France-Netherlands-Germany- 25 Years (IRU) Q1 2001
Denmark-U.S. (30 STM-1s)
FLAG U.S.-United Kingdom-France-U.S. 25 Years (IRU) Q2 2001
Atlantic-1 Portable Capacity
Seven STM-1s Initially
Upgrade Capability to over 50 STM-1s
ARCOS-1 U.S.-Caribbean Portable Capacity, 25 Years (IRU) Q1 2001
Two STM-1s Initially
Upgrade Capability to 21 STM-1s
TPC-5 U.S.-Japan (One DS-3) Lease In Service
</TABLE>
--------
(1) STM-1 is capable of transmitting data at 155.520 megabits per second.
(2) DS-3 is capable of transmitting data at 44.736 megabits per second.
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Research and Development
We believe that the task of building an Internet infrastructure services
business is primarily one of integrating third-party systems, technologies,
communications equipment, software and services to provide reliable, highly
scalable and cost-effective Internet infrastructure services. Therefore, we
generally use commercially available equipment. Our 30 years of IP and
networking experience and expertise not only enables us to assess the
technology and quality of potential vendors and to assist them in making their
products more responsive to the needs of our customers.
We continually monitor research developments in the various industries
supporting our business. We work closely with the engineering groups of our
existing vendors, technology partners, innovative start-up companies and
complementary service providers to incorporate advanced technology, features
and services. For example, we have worked closely with Cisco Systems, one of
our primary suppliers, to develop new equipment and have been regular
participants in its Technical Advisory Group. Through this and other
cooperative programs, we strive to ensure that new hardware designs address the
evolving requirements of our business and those of our customers.
In addition, we plan to work with innovative start-up companies to assist
them in developing and implementing advanced technologies and converting these
technologies into market-ready products and services. A key component of our
strategy will be to develop strategic relationships with those start-ups that
have technology or services that can help us expedite the execution of our
business plan. The strategic nature of these relationships could take the form
of acquisitions, technology transfers, equity investments or joint product
development.
Our Customers
We primarily target enterprises and service providers. We have established a
large and diversified base of enterprise customers in a wide range of
industries, including financial services, manufacturing, media and publishing,
consulting services and high technology. As of March 31, 2000, we had
approximately 5,000 enterprise customers, the majority of which were located in
the United States. The following is a representative list of our enterprise
customers.
<TABLE>
<CAPTION>
High Technology Manufacturing
--------------- -------------
<S> <C> <C>
Cabletron Carrier Corporation
Compaq FMC Corporation
Microsoft Hasbro Interactive
Sun Microsystems Avid Technology
<CAPTION>
Media and Publishing Consulting Services
-------------------- -------------------
<S> <C> <C>
CNN Computer Sciences Corp.
DoubleClick ENTEX Information Systems
Yahoo! Hewitt Associates
ZDNet Sapient
Other Services
--------------
Block Financial
e-Speed
Stanford University
</TABLE>
Our customer base also includes many service providers, including
application service providers, Internet service providers and
telecommunications carriers. As of March 31, 2000, we had approximately 400
service provider customers, the majority of which were located in the United
States. The following is a representative list of our service provider
customers.
49
<PAGE>
<TABLE>
<CAPTION>
Consumer Internet Service Providers Business Internet Service Providers
----------------------------------- -----------------------------------
<S> <C>
America Online I.NET S.p.A.
Earthlink iPass
NetZero Planet Online
WebTV Shore.net
<CAPTION>
Telecommunications Carriers Internet-Centric Related Services
--------------------------- ---------------------------------
<S> <C>
Pacific Gateway Exchange Akamai Technologies
Tiscali S.p.A. Dialpad
TLD of Puerto Rico Digital Island
</TABLE>
Our Relationship With America Online
We have supplied managed, dial-up access services in the United States to
America Online since 1995. During the year ended December 31, 1999, America
Online accounted for approximately 52% of our total revenues. We entered into a
new agreement with America Online effective as of December 31, 1999, pursuant
to which America Online has agreed to purchase additional dial-up Internet
access services from us for a seven-year term through December 31, 2006. Under
the new agreement, America Online has also agreed to purchase managed digital
subscriber line and other broadband network access services from us for a five-
year term through December 31, 2004. The components and resources used to
provide dial-up access and broadband connections to our network backbone for
America Online are dedicated to them and may not be used by us to service other
customers. In addition, our Columbia, Maryland network operations center is
dedicated to servicing America Online.
Dial-Up Services. Under the new agreement, America Online has committed to
purchase from us agreed upon minimum quantities of dial-up network access
services as measured by the number of dial-up access ports, or modems,
available for America Online customers. America Online has agreed to increase
the number of dial-up access ports to be managed by us through June 2002,
subject to the terms and conditions of the agreement. America Online pays us a
fixed monthly fee for each activated dial-up access port managed by us for it.
Under the agreement, the monthly per access port fee to which we are entitled
will be reduced at specified intervals over the term of the agreement. In
addition, we have agreed, subject to limitations, that if we offer a third
party better pricing for comparable dial-up access services than that paid by
America Online, America Online may gain the benefit of this better pricing.
At specified times during the course of the new agreement, America Online
has the right to seek a reduction in the fees paid to us for access ports based
on the then prevailing market prices for comparable dial-up access services in
the manner described in the new agreement. If we do not agree to reduce the
fees we charge to America Online for the applicable dial-up access ports to the
market price, America Online may, subject to advance notice and other
limitations, terminate future dial-up service commitments to us and
decommission an equal number of its existing dial-up access ports with us.
Similarly, America Online may reduce its dial-up service commitments in the
event we fail to meet monthly or geographic delivery targets.
Beginning January 1, 2003, America Online may, subject to advance notice and
other limitations, decommission dial-up access ports managed by us in
proportion to their decommissioning of dial-up access ports provided by other
vendors. We are required to maintain a dedicated network operations center to
service the portions of our network dedicated to America Online.
Broadband Services. Under the agreement, we also provide broadband services
to America Online in connection with their digital subscriber line service
offerings. America Online also has agreed to purchase additional network
services from us in connection with its other broadband service offerings,
including cable modem, wireless and satellite, as they offer additional
broadband access options to their customers. America Online has committed to
purchase from us the network services necessary to serve specified percentages
of
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their digital subscriber line and other broadband customers. In connection with
providing digital subscriber line service to an America Online customer,
America Online is responsible for providing its customers with the local access
circuit and we are responsible for the interconnection of that circuit to our
backbone, transmission of the traffic to America Online and the monitoring,
management and control of the network.
We receive a specified monthly fee for each America Online digital
subscriber line and other broadband customer for whom we provide network
services. Under the agreement, America Online pays us monthly fees based on the
number of America Online broadband customers that are connected to our network,
which fees are subject to agreed upon reductions as the number of America
Online digital subscriber line and other broadband customers for whom we are
providing services increases. In addition, we have also agreed to extend
broadband network services. At specified times during the course of the new
agreement, America Online has the right to seek a reduction in the fee paid to
us for broadband backhaul services based on then prevailing market prices for
comparable broadband backhaul services. If we do not agree to reduce our fees
to America Online for broadband network services to the market price in the
manner described in the new agreement, America Online may, subject to advance
notice and other limitations, terminate future broadband service purchase
commitments to us and terminate existing broadband service. America Online may
also terminate future broadband service purchase commitments in the event we
fail to deliver services to a new local access and transport area within a
specified period.
General. In providing America Online services under the agreement, we are
obligated to comply with specified minimum service levels. Either party may
terminate the agreement in the event the other party commits a material breach
which is not cured within 30 days after notice of the breach. In addition,
America Online has the right to terminate the agreement in the event of:
. repeated material breaches by us even if cured;
. a violation of the most favored customer pricing provisions;
. a total or near total outage of any of the services provided by us that,
even if lasting fewer than 30 days, is widespread and prolonged;
. our inability to meet our service level commitments or to expand service
availability as required under the agreement; and
. a change in control of us other than changes in control resulting from or
arising out of the closing of the proposed merger of GTE and Bell
Atlantic.
We are also obligated to provide America Online assistance in the 12 months
following any termination of the agreement to ensure a smooth transition of
services. The agreement provides America Online with a right of first refusal
with respect to the sale of our dial-up network access business.
Under a separate agreement, we have agreed to provide dial-up network access
services to America Online in Japan. This agreement includes similar provisions
to those described above regarding minimum purchase requirements on the part of
America Online Japan, market pricing adjustments, service level requirements
and termination provisions.
Operations and Customer Support
We believe that a high level of operational and customer support is critical
to our success in attracting and retaining enterprise and service provider
customers. We provide superior customer support by understanding the evolving
and often complex technical requirements and business objectives of our
customers. We assist our customers by initially assembling design teams
comprised of product specialists from all relevant areas of our organization,
including Internet access, web hosting and security. These design teams work
closely with our customers from the very beginning of the relationship to
properly identify their Internet infrastructure requirements and design
appropriate solutions. We also assign a project manager to this team when a
customer is prepared to implement its solution. Our design teams can range from
a small group for single service
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<PAGE>
solutions to a dedicated multi-discipline team for complex solutions. We also
assign an implementation engineer to coordinate all of our activities with a
customer. Our implementation engineers assist customers in developing
operational processes and databases for use within their internal support
environment after installation.
We provide toll-free phone access, as well as e-mail or facsimile access, to
our customer support centers. In addition, our web-enabled customer service
tools allow our customers to track order and service status and request
upgrades online. In addition, we have event management teams available 24 hours
a day, seven days a week, to work with the appropriate organizations in the
event of any major Internet-wide event that disrupts service. In these
circumstances, we also utilize our automated emergency broadcast capability to
quickly reach our customer by e-mail, telephone, facsimile or pager.
We provide operational support for all services 24 hours a day, seven days a
week. We also have network engineers and operational support agreements with
our vendors to provide us with support 24 hours a day, seven days a week.
Currently our primary Network Operations Center is located in our Burlington,
Massachusetts headquarters facility. This Network Operations Center is
supported by redundant power served from separate sources, extensive failover
battery backup and dual, on premises power generation stations. We plan to
relocate our primary Network Operations Center from Burlington, Massachusetts
to our new Woburn, Massachusetts campus that is currently under construction.
In addition, we have a Network Operations Center in Columbia, Maryland and are
finalizing plans for a new Network Operations Center in the Dallas, Texas area
to replace a facility we currently share with GTE. Our Columbia, Maryland
Network Operations Center is dedicated to servicing America Online. We also
have Operations Support Centers in Cambridge, Massachusetts and Chantilly,
Virginia. Our centers can perform disaster back-up for other centers. Our data
centers are designed with these same commitments to availability, and we
guarantee these capabilities with service level guarantees.
Sales and Marketing
Within the United States, we rely primarily on a direct sales force. This
direct sales force focuses on U.S.-based enterprises and service providers with
domestic and international service requirements. Our sales force within the
United States generally works with the managers of the marketing, sales or
finance departments, as well as with information technology officers within the
enterprise. In addition, through our eP@rtners program, we have formed
alliances with leading web integrators, e-business consultants, interactive
agencies and other technology providers, which increases our access to
potential service provider and enterprise customers. Our current partners in
this program include:
<TABLE>
<S> <C>
. Agency.com . IBM
. Cambridge Technology Partners . Lante
. Cisco Systems . Microsoft
. Ernst & Young . Nortel Networks
. Hewlett-Packard . Sapient
</TABLE>
These alliances enable us to provide comprehensive e-business solutions and
also serve as a valuable, cost-effective channel for marketing our services. We
also plan to expand our existing reseller relationships to significantly
enhance our distribution capabilities.
Internationally, we have both a direct sales force and a channel partner
program, which we call our Net.Alliance program. Our international direct sales
force focuses primarily on the international service provider segment, while
our Net.Alliance partners are our primary channel to multinational companies
based outside of the United States. Many of our Net.Alliance partners are both
customers and resellers of our services. This channel gives us distribution
capabilities in over 14 countries globally. Our current partners in this
program include Energis in the United Kingdom and Tiscali and I.NET in Italy.
52
<PAGE>
All of our sales representatives participate in extensive technical and
consultative sales training programs that we believe enable them to better
comprehend, respond to and resolve the complex networking problems of our
customers. As of March 31, 2000, we had a direct sales force of over 350
people.
We only recently changed our name to Genuity. To be successful, we must
establish and strengthen our brand recognition. We intend to incur significant
expenses to promote our brand. Our marketing organization is responsible for
developing the strength and awareness of the Genuity brand on a local, national
and international basis. We intend to build brand awareness through a variety
of methods, including radio, print advertising in trade journals and special-
interest publications and our web site. In addition, we also employ public
relations personnel in-house and work with an outside public relations agency
to provide broad coverage in the Internet and computer networking fields. To a
limited extent, we also directly market our services at seminars and trade
shows such as Internet World, ISPCon, COMnet, CeBit and various Gartner Group
information technology conferences.
Competition
The market for Internet infrastructure services is extremely competitive and
subject to rapid technological change. We expect to encounter increased
competition in the future as a result of increased consolidation and
development of strategic alliances in the industry. In addition, we will
compete with foreign service providers as we expand internationally and as
these service providers increasingly compete in the United States market. Our
principal competitors in the Internet infrastructure services market may be
divided into Internet infrastructure service providers and niche players
offering services competitive with one or more of our services.
Internet Infrastructure Service Providers. We are recognized by industry
sources as one of a limited number of Tier 1 Internet backbone providers that
offer managed Internet infrastructure services. Accordingly, we believe our
primary competitors are those Internet infrastructure service providers that
offer a similar breadth of services and possess the on-network users and
content to offer their customers connectivity to virtually all addresses on the
Internet, either through their Internet backbone or through high speed private
peering relationships that permit them to have direct, cost-free exchange of
traffic with a significant number of carriers and other Internet service
providers. These competitors include UUNET Technologies, a subsidiary of
WorldCom, AT&T, Cable & Wireless and Sprint. UUNET has substantially greater
market share than we do, and some of the others also have greater market share
than we do. UUNET is a competitor for America Online's access requirements and
is reported to provide a substantial portion of those requirements. In
addition, WorldCom and Sprint have announced a proposed merger. We believe this
proposed merger would substantially increase the market share and competitive
position of UUNET, even if it were required to divest itself of portions of its
Internet backbone as a condition to the merger. Some of these competitors also
are able to bundle their Internet service offerings with non-Internet data
services, such as frame relay, and traditional voice services, such as local
and long distance, thereby reducing the price of their services relative to
ours. We may not be able to offset the effects of any price reductions because
we only offer IP-based services. We also compete with an increasing number of
Internet service providers that have a significant regional, national or
international presence but do not offer as broad a range of services or possess
fewer users and less on-network content than the infrastructure service
providers listed above. These competitors include, among others, Level 3
Communications, Qwest Communications, KPNQwest, Deutsche Telekom, PSINet, Verio
Communications and Williams Communications Group. As a result of the increase
in the number of competitors and the vertical and horizontal integration that
is occurring in this industry, we currently encounter and expect to continue to
encounter significant competition, which could force us to, among other things,
reduce our rates and invest more heavily in infrastructure.
We believe we compete with these competitors primarily on the basis of
quality and quantity of on-network users and content, breadth of service
offerings, geographic reach and quality of network infrastructure, capacity,
quality of service and price. While we believe that our network infrastructure,
comprehensive suite of services and expertise in designing, developing and
implementing managed Internet infrastructure solutions distinguish us
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<PAGE>
from our competitors, many of our existing and potential competitors have
greater financial and other resources, more customers, a larger installed
network infrastructure, greater market recognition and more established
relationships and alliances in the industry. As a result, these competitors may
be able to develop and expand their network infrastructure and service
offerings more quickly, adapt more swiftly to new or emerging technologies and
changes in customer demands, devote greater resources to the marketing and sale
of their offerings, pursue acquisition and other opportunities more readily and
adopt more aggressive pricing policies.
Niche Players. There are numerous competitors that service generally one or
a small number of the specific Internet infrastructure requirements of
enterprise customers. These competitors include, among others:
. web-hosting companies, such as Digex and Exodus Communications;
. broadband Internet access providers such as Covad Communications and
Rhythms NetConnections, both of which focus on digital subscriber line
services;
. providers of security and virtual private networks, such as Pilot
Network Services; and
. transport service providers, such as Level 3 Communications, Qwest
Communications and Williams Communications Group.
We believe that there are relatively few barriers to entry in these markets.
We compete with these niche players on the basis of technical expertise,
quality of service, reliability and price.
There are numerous other companies from a variety of industries that have
also focused on our target market. For example, many of the major cable
companies have begun offering, or are exploring the possibility of offering,
Internet access through their current networks to include Internet access
capabilities. Direct broadcast satellite and wireless communications providers
have also entered the Internet access market with various wireless and
satellite-based service technologies. We believe that direct broadcast
satellite and wireless communications providers have also entered the Internet
access market.
As we continue to expand our operations in markets outside the United
States, we will also encounter new competitors and competitive environments.
Our foreign competitors may enjoy a government-sponsored monopoly on
telecommunications services essential to our business, and will generally have
a better understanding of their local industry and longer working relationships
with local infrastructure providers.
Employees
As of March 31, 2000, we had a total of 3,557 employees, of which 1,263 were
in customer service and support, 866 were in engineering, 761 were in sales and
marketing, 345 were in information technology and 322 were in finance and
administration. We believe that relations with our employees are good. Our
employees are not represented by any collective bargaining agreement.
Real Estate Facilities
We currently occupy our headquarters and primary Network Operations Center
in Burlington, Massachusetts under a lease that expires in 2009. This lease
includes renewal options for two three-year periods. We are constructing a two-
building campus in Woburn, Massachusetts that is scheduled for completion in
the next 12 months. We plan to move our corporate headquarters operations,
including executive staff, finance, human resources and information technology
organizations, to our Woburn, Massachusetts campus. We anticipate that our
network operations organization, including our primary Network Operations
Center, also will relocate from Burlington, Massachusetts to Woburn,
Massachusetts. We intend to retain our Burlington, Massachusetts facility to
house our engineering, sales and marketing and service line organizations. We
lease space for our other Network Operating Center in Columbia, Maryland and
are finalizing plans for a new Network Operations Center in the Dallas, Texas
area to replace a facility we currently share with GTE.
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<PAGE>
Proprietary Rights
We rely on a combination of patent, copyright, trademark and trade secret
laws and contractual restrictions to establish and protect our technology. We
own, either exclusively or jointly, an interest in nearly 200 inventions that
are the subject of patents, patent applications or patent disclosures. These
legal protections provide only limited protection. Further, the market for
Internet infrastructure services is subject to rapid technological change.
Accordingly, while we intend to continue to protect our proprietary rights
where appropriate, we believe that our success in maintaining a technology
leadership position is more dependent on the technical expertise and innovative
abilities of our personnel than on these legal protections.
Despite our efforts to protect our proprietary technology, we cannot assure
you that the steps taken by us will be adequate to prevent misappropriation of
our technology or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technology.
The laws of many countries do not protect our proprietary technology to as
great an extent as do the laws of the United States. We may need to resort to
litigation in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of invalidity. We are
also subject to the risk of adverse claims and litigation alleging infringement
of the intellectual property rights of others. Any resulting litigation could
result in substantial costs and diversion of management and other resources and
could have a material adverse effect on our business and financial condition.
Regulatory Matters
The following summarizes regulatory developments and legislation that we
believe are currently material to us. It does not describe all present and
proposed federal, state, local and foreign regulation and legislation affecting
the telecommunications industry.
Our existing and planned Internet operations are not actively regulated by
the Federal Communications Commission or any other government agency of the
United States at the present time, other than regulations that apply to
businesses generally. However, one of our wholly owned subsidiaries is
classified as an "interexchange carrier" and provides primarily private-line
data services. As a result, this subsidiary is regulated as a
telecommunications carrier and is subject to the requirements described below
under "Telecommunications Services". Furthermore, the regulations governing the
telecommunications industry generally are often subject to regulatory,
judicial, or legislative modification and are in a state of flux at the present
time. Some private parties and regulators have called the current regulatory
status of various Internet service offerings into question.
We cannot predict the actions of the regulatory authorities that have
jurisdiction in this area or whether any of these authorities will attempt to
impose new regulations on Internet services or expand their interpretations of
existing regulations to make them apply directly to Internet services.
Accordingly, we do not know whether current or future regulations could have a
material adverse effect on us. If any regulatory authority imposes new
regulations or expands their interpretations of existing regulations to make
them applicable to Internet operations, some or all of the following rules may
be applied to those operations. However, if new regulations are imposed on our
industry, or existing regulations are expanded to cover our industry, these
regulations will almost certainly also apply to all similarly situated parties
offering comparable services, including our competitors.
Federal Telecommunications Regulation
Federal regulations have undergone major changes in the last four years as
the result of the enactment of the Telecommunications Act. The
Telecommunications Act is the most comprehensive reform of the
telecommunications law in the United States since the Communications Act was
enacted in 1934. For example, the Telecommunications Act imposes
interconnection and access requirements on telecommunications carriers and on
all local exchange carriers, including incumbent local exchange carriers and
competitive local exchange carriers.
55
<PAGE>
Under the current regulatory regime, communications related services are
generally classified into one of the following three definitional categories:
. information services;
. private carrier services; and
. telecommunications services or common carriage.
Because the boundaries between these categories are neither precise nor well-
fixed, and the industry is so dynamic, we cannot predict where particular
services will be classified, now or in the future. The regulations associated
with each type of classification are described below.
Information Services. Except for the provision of underlying basic
transmission capability, Internet services have generally been considered to be
"information services". Under current law, operators of information services
are exempt from regulation by the FCC, but operators of telecommunications
services are not similarly exempt. However, the FCC continues to review its
regulatory position on the usage of the basic network and communications
facilities used by Internet service providers. Whether it will assert
regulatory authority over the Internet, and the level of any asserted
authority, is a pending issue. While the FCC has determined in an April 1998
report to Congress that Internet access providers should not be treated as
telecommunications carriers and therefore should not be regulated, it is
expected that the status of various types of Internet service providers will
continue to be uncertain.
In the same report, the FCC also concluded that some of the services
currently offered over the Internet, such as phone-to-phone IP telephone
services, may be functionally indistinguishable from traditional
telecommunications service offerings, and that their non-regulated status may
have to be reexamined. The report also indicated that the FCC would determine
on a case-by-case basis whether to subject IP telephone service providers to
regulation, including whether to require them to contribute financially to
universal service support mechanisms, which could also subject these services
to other forms of regulation. The FCC has also stated that it may require
Internet service providers that use their own transmission facilities to
provide Internet access services to contribute to universal service mechanisms,
and has previously considered and rejected the possibility of regulating
Internet backbone peering arrangements, although that issue remains subject to
further review.
Private Carrier Services. The offering of private carrier services typically
entails the offering of telecommunications to a limited class of users on the
basis of individually negotiated terms and conditions. As a result, they do not
meet the definition of a telecommunications service under the
Telecommunications Act. These private carriers are generally unregulated by the
FCC, but are subject to regulation for intrastate offerings in some states and
incur universal service payment obligations, discussed below, based on their
gross revenues from end users. These private carriers may also be subject to
access charges if interconnected to local exchange facilities.
Telecommunications Services. A significant amount of regulation applies to
providers of telecommunications services. The Communications Act defines
telecommunications carriers as entities offering telecommunications services,
which are in turn defined as the offering of telecommunications for a fee,
directly to the public or to classes of users so as to be effectively available
directly to the public. The law does not distinguish on the basis of the
facilities used to provide these services. "Telecommunications" is defined as
the transmission, between or among points specified by the user, of information
of the user's choosing, without change in the form or content of the
information as sent and received. The FCC has found that the definition of
"telecommunications carrier" is essentially the same as the definition of
"common carrier". Telecommunications carriers are subject to regulatory
requirements that may impose substantial administrative and other burdens on
their operations.
The FCC imposes regulations on some common carriers that have been found by
the FCC to have some degree of market power, otherwise known as dominant
carriers. The FCC imposes less regulation on other common carriers, which have
been found not to have market power, otherwise known as "non-dominant
carriers". A subsidiary of GTE is classified as a non-dominant carrier. These
non-dominant carriers do not need
56
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express prior authorization to provide domestic services and can file tariffs
on one day's notice. The FCC requires common carriers to obtain a formal
authorization to construct and operate telecommunications facilities and to
provide or resell telecommunications services between the United States and
international points. The FCC also regulates carrier exits from markets.
General Obligations. All telecommunications carriers are subject to the
complaint process and rules and regulations of the FCC, as well as various
other requirements set out in Title II of the Communications Act of 1934, as
amended. In addition, telecommunications carriers have general obligations,
including the following:
. not to charge unreasonable rates or engage in unreasonable practices;
. to provide service on reasonable request;
. not to unreasonably discriminate in their service offerings;
. to comply with reporting requirements;
. to offer customer premises equipment for sale on an unbundled basis to
the extent that it is offered;
. to allow resale of their services in some circumstances; and
. to restrict their use of customer information.
In addition, telecommunications carriers are subject to further regulatory
requirements, some of which are discussed in greater detail below.
Telecommunications carriers must also pay regulatory fees associated with
filing license applications and other documents with the FCC.
Interconnection Obligations. All telecommunications carriers have the basic
duty to interconnect and interoperate, either directly or indirectly, with the
facilities of other telecommunications carriers.
Section 214 Authorizations. Common carriers are obligated to obtain, under
Section 214 of the Communications Act, authorization from the FCC to provide
services between the United States and other countries, and to disclose, among
other things, the extent to which they are owned or controlled by foreign
entities. The compliance with these regulatory requirements imposes
administrative and other burdens on these carriers.
Tariffs and Pricing Requirements. The FCC has eliminated the requirements
that non-dominant interstate interexchange carriers maintain tariffs on file
with the FCC for domestic interstate services. One of our wholly owned
subsidiaries is a non-dominant interstate interexchange carrier. Under the
rules of the FCC, after a transition period currently scheduled to expire on
January 31, 2001, relationships between interstate carriers and their customers
would be set by contract. At that point, the FCC would no longer permit the use
of tariffs for interstate, domestic interexchange services. Competitive local
exchange carriers do not have to file tariffs for their exchange access
services, but may if they choose to do so. The FCC is considering whether to
impose mandatory detariffing on them as well. There has been no proposal to
detariff international services.
Customer Proprietary Network Information. The use by a telecommunications
carrier of customer proprietary network information, which generally includes
any information regarding a subscriber's use of a telecommunications service
obtained by a carrier solely by virtue of the carrier-customer relationship, is
subject to statutory restrictions. This customer proprietary network
information does not include a subscriber's name, telephone number and address,
if that information is published or accepted for publication in any directory
format. A telecommunications carrier may use a customer's proprietary network
information only to market a service that is "necessary to, or used in" the
provision of a service that the carrier already provides to the customer,
unless it receives the customer's prior oral or written consent to use that
information to market other services. The initial rules of the FCC regarding
customer proprietary network information have been struck down in the courts
and other rules adopted on reconsideration have not gone into effect, leaving
the current state of the customer proprietary network information requirements
uncertain. The FCC is expected to initiate
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further proceedings to address this issue. Any such rules, either as adopted or
as modified, may impede the ability of a telecommunications carrier to
effectively market integrated packages of services and to expand existing
customers' use of its services.
Universal Service. The FCC has recently expanded aid to schools and
libraries and extensively revamped the support structure for high cost-of-
service areas. These providers of interstate telecommunications services, as
well as some other entities, such as private carriers offering excess capacity
to end user customers, must contribute to a fund to pay for these programs. The
schools and libraries and rural health care support mechanisms are assessed
against interstate and international end-user revenues. The contribution level
and overall size of federal support may change. Several petitions for
administrative reconsideration of various FCC universal service orders are
pending, and there are a number of other proceedings relating to universal
service at the FCC and federal courts of appeals that are still ongoing. The
rules of the FCC also require that telecommunications carriers contribute to
the Number Portability Fund, the Telecommunications Relay Services Fund and the
North American Numbering Plan Administrator Fund.
Communications Assistance for Law Enforcement Act. Telecommunications
carriers may incur significant expenses to assure that their networks comply
with the requirements of the Communications Assistance for Law Enforcement Act.
Under this statute, telecommunications carriers are required to:
. provide law enforcement officials with call content and call identifying
information pursuant to a valid electronic surveillance warrant; and
. provide sufficient capacity for use by law enforcement officials in
executing authorized electronic surveillance.
While the telecommunications industry is attempting to negotiate legislative
and administrative provisions that would compensate carriers for some of the
costs associated with complying with this statute, as it stands today those
issues have not been definitively resolved.
Local Exchange Carriers. Telecommunications carriers that are classified as
local exchange carriers are subject to special regulatory provisions, in
addition to those described above. A local exchange carrier is defined as a
provider of telephone exchange service or exchange access. Telephone exchange
service is defined as service within a telephone exchange or connected system
of exchanges operated to provide inter-communicating service of the character
ordinarily furnished by a single exchange, covered by the local exchange
charge, or comparable service provided through a system of switches,
transmission equipment or other facilities, or combination thereof, by which a
subscriber can originate and terminate a telecommunications service. The
universe of carriers that are classified as local exchange carriers has never
been fully defined by the FCC. If an entity is found to be a local exchange
carrier, it will have the following obligations:
. Reciprocal Compensation. This requires all local exchange carriers to
establish compensation arrangements with other carriers for the
transport and termination of telecommunications.
. Resale. This requires all local exchange carriers to permit resale of
their telecommunications services without unreasonable restrictions or
conditions.
. Number Portability. This requires all local exchange carriers to permit
users of telecommunications services to retain existing telephone
numbers without impairment of quality, reliability or convenience when
switching to another service provider at the same location.
. Non-discriminatory Access and Dialing Parity. This requires all local
exchange carriers to provide nondiscriminatory access to telephone
numbers, operator services, directory assistance and directory listing
with no unreasonable dialing delays and to give customers access to
their selected carrier without having to dial extra digits.
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. Access to Rights-of-Way. This requires all local exchange carriers to
permit competing carriers access to poles, ducts, conduits and rights of
way at reasonable and nondiscriminatory rates, terms and conditions.
. Section 272 Restrictions. Under the Telecommunications Act, Bell
operating companies, including the Bell Atlantic local telephone
operating companies, are subject to additional restrictions. In
particular, Section 272 of the Telecommunications Act requires Bell
operating companies to offer manufacturing and specified long distance
services through a separate affiliate. Once Verizon owns more than 10%
of the capital stock of Genuity, Genuity will be considered an affiliate
that must be separated from and must operate independently from the Bell
Atlantic local telephone operating companies. Any transactions with the
affiliated telephone operating companies must be publicly disclosed.
Moreover, in its dealings with the separate affiliate, a telephone
operating company may not discriminate in the provision or procurement
of goods, services, facilities, and information, or in the establishment
of standards. The joint marketing and sale of long distance services is
not considered to violate the nondiscrimination provisions of the
statute. Other than specific nondiscrimination requirements, the
obligations of Section 272 of the Telecommunications Act will no longer
apply three years after a Bell operating company or its affiliates is
authorized to provide long distance telecommunications services under
Section 271(d) of the Telecommunications Act, unless that period is
extended by the FCC by rule or order.
In its proposal to the FCC, Verizon has agreed once it has eliminated
applicable Section 271 restrictions and is able to exercise its conversion
rights, it will comply with Section 272 to the same extent that Section 272
would apply if Verizon exercised its conversion rights.
In addition, incumbent local exchange carriers also face additional pricing,
network unbundling, and other obligations.
State Telecommunications Regulation
States also regulate telecommunications services, including through
certification of providers of intrastate services, regulation of intrastate
rates and service offerings, and other regulations. The Telecommunications Act
prohibits state and local governments from enforcing any law, rule or legal
requirement that prohibits or has the effect of prohibiting any person from
providing any interstate or intrastate telecommunications service. In addition,
under current policies of the FCC, any dedicated transmission service or
facility that is used more than 10% of the time for the purpose of interstate
or foreign communication is subject to the jurisdiction of the FCC. Under the
Telecommunications Act, states retain jurisdiction to adopt regulations
necessary to preserve universal service, protect public safety and welfare,
ensure the continued quality of communications services and safeguard the
rights of consumers. Accordingly, the degree of state involvement in local
telecommunications services may be substantial. Furthermore, states generally
give municipal authorities responsibility over the access to rights-of-way,
franchises, zoning, and other matters of local concern, which means that
localities may also have involvement in the regulation of the
telecommunications industry.
Other Potential Regulation
The laws and regulations relating to the liability of Internet access
providers for information carried on or disseminated through their networks are
currently unsettled both in the United States and abroad. In the United States,
the Children's Online Protection Act of 1998 imposes criminal penalties and
civil liability on anyone engaged in the business of selling or transferring
material that is harmful to minors by means of the Internet without restricting
access to this type of material by underage persons. In addition, similar
legislation has been passed or is being considered in many states and foreign
jurisdictions. Several private lawsuits seeking to impose this type of
liability on online service companies and Internet access providers are
pending. The imposition of potential liability on us and other Internet access
providers for information carried on or disseminated through our systems could
require us to implement measures to reduce our exposure to this liability,
which may require the expenditure of substantial resources or the
discontinuance of various service
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offerings. While we carry professional liability insurance, it may not cover
this type of liability and otherwise may not be adequate to compensate us for
any damages or costs incurred in defending against these claims. The costs of
defending against any claims and potential adverse outcomes of these claims
could have a material adverse effect on our business.
Due to the increase in Internet use and publicity, it is possible that other
laws and regulations that apply to commerce and communication over the Internet
will be adopted. The United States Congress has recently enacted or considered
enacting Internet laws regarding children's privacy, copyrights, the
transmission of sexually explicit material, the taxation of Internet services
and transactions and universal service contribution requirements for Internet
access providers. The European Union also recently enacted its own privacy
regulations. The laws governing the Internet, however, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, telecommunications, privacy, libel, taxation and other
issues apply to the Internet. In addition, the growth and development of the
market for electronic commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, which may impose
additional burdens on companies conducting business over the Internet.
Other companies in our industry are not generally subject to direct
regulation by the FCC or any other governmental agency of the United States,
other than regulations that apply to all business organizations. However, in
connection with the merger between Bell Atlantic and GTE, the FCC has reviewed
our relationship with Verizon. In addition, the FCC continues to review its
regulatory position on the usage of the basic network and communications
facilities by Internet companies. To the extent that future regulatory licenses
or permissions are necessary or useful for us to provide IP-based services, we
will seek to obtain those licenses and permissions.
Recently, the FCC adopted rules that direct incumbent local exchange
carriers to share their telephone lines with providers of high speed Internet
access and other data services. This ruling enables competitive carriers to
provide digital subscriber line-based services over the same telephone lines
simultaneously used by incumbent local exchange carriers to provide basic
telephone service. These changes may increase competitive pressures on
incumbent local exchange carriers in the offering of advanced
telecommunications services, including digital subscriber line services.
International Regulatory Matters
The laws relating to the provision of Internet and telecommunications
services in other countries vary substantially from country to country and are
undergoing a rapid process of development and change. There are a variety of
regulations in different jurisdictions regarding authorizations to provide
services and the manner in which services are to be provided. In addition, some
countries impose liability for providing access to prohibited content and
restrict the transfer of personal information. As we continue to expand into
international markets, these laws will have an increasing impact on our
operations. We do not know whether new or existing laws or regulations could
have a material adverse effect on us or our ability to offer some or all of our
services in any country.
The ability for us to provide some or all of our Internet and other
services, including the ownership and operation of the necessary assets and
facilities in any particular country, will depend upon the extent to which
applicable laws and regulations permit us to provide our services. We believe
that the provision of some services, such as our voice-over-IP services, is
more likely to be subject to local country regulation than other Internet
services provided by us. Foreign countries treat voice-over IP differently.
Some countries impose no regulation on the service, while others allow voice-
over-IP but grant only a limited number of licenses to providers. In some
instances, the country requires licenses, but will grant an unlimited number of
licenses to providers. Finally, there are some countries that prohibit the
service altogether. Whether an entity can provide voice-over-IP services in any
given country thus heavily depends on local regulations and the actions of
local governments.
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We currently have the ability to provide Internet services in many countries
without obtaining regulatory authorizations, approvals, or licenses. In eight
countries where we currently have or are in the process of commencing
operations, we have either obtained or have applied for regulatory approvals,
authorizations, or licenses for at least some of these services. These eight
countries include Brazil, Germany, Ireland, Italy, Japan, Mexico, The
Netherlands and Spain. In addition, as we enter new markets, we anticipate
obtaining similar approvals, authorizations and licenses as required by
applicable local rules and regulations in order to acquire, own and operate the
necessary assets and facilities, and to provide services, in these countries.
We do not know if we will obtain the necessary local regulatory approvals to
own and operate the assets and facilities necessary to provide service, or to
provide the services themselves, in any country, or that local country laws or
regulations will not change. Any failure to obtain approvals, or loss of
authorization, to provide services in any country could have a material adverse
effect on us.
Legal Proceedings
We are not involved in any legal proceedings which we believe would, if
adversely determined, have a material adverse effect upon our business,
financial condition or results of operations.
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MANAGEMENT
The following table sets forth information concerning our executive officers
and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Paul R. Gudonis......... 46 Chairman of the Board and Chief Executive Officer
Joseph C. Farina........ 50 President and Chief Operating Officer
Daniel P. O'Brien....... 45 Executive Vice President, Chief Financial Officer and Treasurer
Ira H. Parker........... 43 Senior Vice President, General Counsel and Secretary
Steven H. Blumenthal.... 46 Senior Vice President, Network Planning, Design and Engineering
Susan H. Bowman......... 46 Senior Vice President, Human Resources
James L. Freeze......... 39 Senior Vice President, Chief Strategy Officer and Director (1)
Charles J. Gibney....... 54 Senior Vice President, Enterprise Solutions and Director (1)
Michael J. Kalagher..... 54 Senior Vice President, Network Operations
Paul A. O'Brien......... 47 Senior Vice President, Sales and Marketing
Richard Stuntz.......... 46 Senior Vice President, Network Services
Philippe P. Dauman...... 46 Director Nominee (2)
Duncan M. Davidson...... 47 Director Nominee (2)
John W. Gerdelman....... 47 Director Nominee (2)
Debra L. Lee............ 45 Director Nominee (2)
Michael T. Masin........ 55 Director Nominee (2)(3)
</TABLE>
--------
(1) These individuals will resign as directors immediately upon the completion
of this offering.
(2) These individuals will become directors immediately upon the completion of
this offering.
(3) This individual will be elected by our Class B common stock.
Paul R. Gudonis has served as our Chairman and Chief Executive Officer since
April 2000. He has led the growth of Genuity since 1994, becoming President of
Genuity in 1998, one year after GTE acquired BBN. From 1990 to 1994, he served
as Vice President/General Manager-International of the Communications Industry
Group of EDS Corporation. Prior to 1990, Mr. Gudonis served as a senior
executive at several venture-backed start-up companies in the Boston,
Massachusetts area specializing in software and telecommunications services. He
started his career at AT&T, launching the first cellular phone operation in the
United States as Vice President-Marketing for Ameritech Mobile Communications.
Mr. Gudonis serves as a director of Boston Communications Group, Inc., a
provider of information technology services to the wireless industry. In
addition, he is Vice Chairman of the Massachusetts High Tech Council, a
director of the Massachusetts Software and Internet Council and a director of
the Massachusetts Telecommunications Council. He is a founding member of the
Global Internet Project, a group of Internet chief executive officers who
engage in public policy advocacy in support of Internet growth and expansion.
Mr. Gudonis holds a B.S. in Electrical Engineering from Northwestern University
and an M.B.A. from Harvard Business School.
Joseph C. Farina will serve as our President and Chief Operating Officer
upon the completion of this offering. From 1998 to 2000, he served as President
and Chief Executive Officer of Bell Atlantic's Data Solutions Group. He was
Executive Vice President-Operations Assurance for Bell Atlantic from 1995 to
1998. From 1993 to 1995, Mr. Farina served as both Vice President-Corporate
Business Development of NYNEX Corporation, a Regional Bell Operating Company
that is now part of Bell Atlantic, and President of the NYNEX Network Systems
Company, leading NYNEX's international expansion into Europe and Asia. Prior to
that time, he served as President of NYNEX Properties and Vice President-
Operations of NYNEX Mobile Communications, where he launched the inaugural
wireless service in New York City and Boston. Mr. Farina holds a B.S. from
Fordham University and an M.B.A. from St. John's University.
Daniel P. O'Brien will serve as our Executive Vice President and Chief
Financial Officer upon the completion of this offering. Since June 1998, Mr.
O'Brien served as the Executive Vice President--Finance and Chief Financial
Officer of GTE. From July 1997 to June 1998, he served as Vice President and
Treasurer of GTE, and from October 1995 to July 1997 he served as Assistant
Treasurer-Capital Markets of GTE Service Corporation. Prior to 1993, when he
joined the Treasury Department of GTE, Mr. O'Brien held several
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positions with the Electrical Products Group of GTE, including Vice President-
Controller of GTE European Lighting in Geneva, Switzerland from August 1991 to
January 1993. Mr. O'Brien holds a B.S. in Chemistry from Boston College and an
M.B.A. from the University of Chicago.
Ira H. Parker will serve as our Senior Vice President, General Counsel and
Secretary upon completion of this offering. From November 1997 to the
completion of this offering, he served as Vice President and General Counsel
with Genuity. In 1999, in addition to his General Counsel position at Genuity,
Mr. Parker was appointed Vice President and Deputy General Counsel of GTE
Service Corporation. From July 1993 to November 1997, Mr. Parker was a partner
in the Washington, D.C. office of the law firm of Alston & Bird, where he
founded and headed the Electronic Commerce Practice Area. Prior to 1993, Mr.
Parker served in a number of positions with the United States Federal Deposit
Insurance Corporation, including Assistant General Counsel for Litigation and
Policy from August 1989 to May 1992 and Deputy General Counsel for Litigation
for the Resolution Trust Corporation from May 1992 to June 1993. In 1978, Mr.
Parker received his B.A. from Brooklyn College and he received his J.D. from
Emory University in 1981.
Steven H. Blumenthal will serve as our Senior Vice President, Network
Planning, Design and Engineering upon the completion of this offering. Since
1977, he has held several positions with Genuity, including Vice President for
Network Engineering and Technology. Mr. Blumenthal has been responsible for the
engineering of Genuity's network infrastructure and the development of Internet
services. He also led the design and construction of our network
infrastructure. Mr. Blumenthal holds a B.S.E.E. and M.S.E.E. from the
Massachusetts Institute of Technology.
Susan H. Bowman will serve as our Senior Vice President, Human Resources
upon the completion of this offering. From September 1997 to the completion of
this offering, Ms. Bowman served as Vice President, Human Resources for Genuity
and GTE Technology Service Corporation. Prior to that time, she held several
positions with GTE, including serving as the Director of Staffing and
Development for GTE Service Corporation from August 1995 to September 1997.
From September 1994 to August 1995, Ms. Bowman served as the Strategic Human
Resources Business Partner for the Network Operations Group. From December 1993
to September 1994, she served as the Director of Incentive Compensation for GTE
Telephone Operations. Ms. Bowman holds a Ph.D. in industrial/organizational
psychology from the University of South Florida.
James L. Freeze has served as a Director since April 2000 and will serve as
our Senior Vice President and Chief Strategy Officer upon the completion of
this offering. Mr. Freeze will resign as a Director immediately upon the
completion of this offering. From August 1999 to the completion of this
offering, he served as Vice President of Business Development for Genuity. From
July 1998 to August 1999, he served as a senior telecommunications analyst at
Forrester Research, Inc., an Internet research firm. From June 1997 to June
1998, Mr. Freeze served as Vice President of Sales and Marketing of Genuity,
Inc., an Internet service provider and web hosting company that was acquired by
us in June 1998. In April 2000, we changed our name from GTE Internetworking
Incorporated to Genuity Inc. Prior to 1997, he held several positions with
CompuServe Inc., a worldwide provider of network access hosting and Internet
services to the business and consumer markets, including Director of Marketing
and Business Development from January 1995 to May 1997 and Group Manager from
June 1994 to December 1994. Mr. Freeze holds a B.S. and M.A. from Ohio State
University and a J.D. from Capital University.
Charles J. Gibney has served as a Director since April 2000 and will serve
as our Senior Vice President, Enterprise Solutions upon the completion of this
offering. Mr. Gibney will resign as a Director immediately upon the completion
of this offering. From April 1998 to May 2000, he served as President and
General Manager of Enterprise Services of Genuity. From January 1988 to March
1998, he served as Senior Vice President of International and Corporate
Business of Cable & Wireless Inc., a global communications company. From 1962
to 1988, Mr. Gibney held various positions including the director of National
Sales for Sprint, a telecommunications company, and from 1962 to 1974, he held
several positions with Pacific Bell, a Regional Bell Operating Company.
Michael J. Kalagher will serve as our Senior Vice President, Network
Operations upon the completion of this offering. From January 2000 to the
completion of this offering, Mr. Kalagher served as Vice President of
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Operations and Customer Service for Genuity. From July 1995 to December 1999,
Mr. Kalagher has held several positions, including Divisional VP of Operations
and Customer Service and Vice President of Operations for our DiaLinx remote
access service. From 1969 to 1995, he held several positions with Digital
Equipment Corp., a supplier of networked computer systems, software and
services, including serving as Operations Manager for Worldwide Marketing and
Field Service Manager in the Central European Region. Mr. Kalagher studied
Electrical Engineering and Business at the undergraduate level, and is a 1982
P.mD. graduate of the Harvard Business School.
Paul A. O'Brien will serve as our Senior Vice President, Sales and Marketing
upon the completion of this offering. From October 1999 to the completion of
this offering, he served as our Vice President of Sales and Marketing. From
April 1998 to October 1999, he was Vice President and General Manager of our IP
Telecom Services business unit. From January 1995 to April 1998, Mr. O'Brien
served as Vice President of the Communications Industry Business unit of
National Cash Register, a provider of information technology business
solutions. From May 1990 to December 1994, he served as Vice President of
Marketing for Cincinnati Bell Telephone, a telecommunications company. Prior to
1990, Mr. O'Brien held several positions with AT&T and New England Telephone.
Mr. O'Brien holds a B.S. from Westfield College and an M.B.A from Suffolk
University.
Richard Stuntz will serve as our Senior Vice President, Network Services
upon the completion of this offering. From April 1998 to the completion of this
offering, he served as Vice President and General Manager of On-Line Services
for Genuity. He was previously the Vice President for Business Planning and
Management from March 1997 to April 1998. From 1992 to 1997, Mr. Stuntz was
first Director, and then Vice President of Contracts for Genuity. Prior to
joining Genuity in 1986, he held several positions with Westinghouse Electric
Corporation, a public utilities, manufacturing and defense contracting company.
Mr. Stuntz holds a B.A. from Duke University.
Philippe P. Dauman will serve as a Director upon the completion of this
offering. Mr. Dauman has served as Chairman and Chief Executive Officer of DND
Capital Partners, L.L.C., a private equity firm, since May 2000. From January
1996 to May 2000, Mr. Dauman was Deputy Chairman and Executive Vice President
of Viacom, Inc., a diversified entertainment company. Prior to January 1996,
Mr. Dauman served as Executive Vice President, General Counsel and Chief
Administrative Officer of Viacom, Inc. In addition, he is a director of Viacom,
Inc., Blockbuster, Inc. and Lafarge Corporation. Mr. Dauman received his B.A.
from Yale University and received his J.D. from Columbia University School of
Law.
Duncan M. Davidson will serve as a Director upon the completion of this
offering. Mr. Davidson has served as Senior Vice President, business
development of InterTrust, a software development company, since July 1997.
Before joining InterTrust, Mr. Davidson was managing partner of Gemini McKenna,
an alliance between Gemini Consulting and Regis-McKenna, Inc., and The McKenna
Group, from August 1995 to July 1997. Mr. Davidson was also Vice President of
Gemini Consulting, the management consulting arm of Cap Gemini, a systems
integrator and its predecessor, The MAC Group, from April 1989 to August 1995.
Mr. Davidson is a founder of Covad Communications, a telecommunications company
providing DSL services, and serves on its board of advisors. Mr. Davidson
received a Sc.B. in Physics-Mathematics from Brown University and a J.D. from
the University of Michigan.
John W. Gerdelman will serve as a Director upon the completion of this
offering. Mr. Gerdelman has served as a managing member of Morton Group, LLC, a
partnership investing in early stage companies, since September 1999. From
April 1999 to September 1999, Mr. Gerdelman served as Chief Executive Officer
of USA.Net, an electronic messaging services company and from September 1994 to
April 1999, he served as President--Network Services of MCI Communications
Corporation, a telecommunications company. In addition, he serves as a director
of Sycamore Networks, Inc. Mr. Gerdelman received his B.S. in Chemistry from
the College of William and Mary.
Debra L. Lee will serve as a Director upon the completion of this offering.
Ms. Lee has served as President and Chief Operating Officer of BET Holdings,
Inc., a media company, since March 1996. From 1986
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to 1996, Ms. Lee served as Executive Vice President and General Counsel of BET
Holdings, Inc. In addition, she is a director of Eastman Kodak Company. Ms. Lee
holds an A.B. from Brown University, an M.P.P. from the John F. Kennedy School
of Government and a J.D. from Harvard Law School.
Michael T. Masin will serve as a Director upon the completion of this
offering. Mr. Masin has served as Vice Chairman of GTE Corporation since
January 2000. Upon completion of the merger between GTE and Bell Atlantic, he
will serve as Vice Chairman and President of Verizon, with responsibility for
international wireline and wireless operations, international connectivity,
domestic and international directory and information services and
internetworking. Mr. Masin was previously employed by GTE Corporation as Vice
Chairman and President--International from June 1995 to January 2000, and as
Vice Chairman from October 1993 to June 1995. He is also a director of
Citigroup, Inc. and TELUS Corporation. Mr. Masin holds a B.A. from Dartmouth
College and a J.D. from the University of California at Los Angeles.
Composition of Board of Directors
Upon completion of this offering, our bylaws will provide that our board of
directors will consist of no less than three persons and no more than 21. Under
the terms of the proposal to the FCC and under our bylaws, upon the completion
of this offering our board of directors will consist of six persons, including
four persons that have not previously been employees or directors of GTE, Bell
Atlantic or any of their respective affiliates and one person that will be
appointed by the holder of the Class B common stock. Within 90 days of the
completion of this offering, our board of directors will be expanded to 13, and
the four unaffiliated directors will appoint the seven additional directors to
fill the vacancies caused by the increase in the size of the board of
directors.
Under the terms of the proposal to the FCC, the director appointed by the
holder of the Class B common stock will not exercise a vote until we have at
least 10 directors.
Under the terms of the proposal to the FCC, we have agreed to hold an
initial meeting of our stockholders not later than the date that is nine months
after the completion of this offering. At that meeting, our stockholders will
elect 13 directors as follows:
. four Class I directors, whose terms will expire at the annual meeting of
stockholders in 2001;
. four Class II directors, whose terms will expire at the annual meeting
of stockholders in 2002;
. four Class III directors, whose terms will expire at the annual meeting
of stockholders in 2003; and
. one director elected annually by the holder or holders of the Class B
common stock, voting separately as a class.
For our initial meeting of stockholders and each subsequent annual meeting
of stockholders, our board of directors will determine the nominees for
directors in the classes or class of directors to be elected at the meeting.
Committees of Board of Directors
We expect to form an executive compensation committee and an audit committee
following this offering. The executive compensation committee will have the
authority to approve salaries and bonuses and other compensation matters for
our officers and consultants, to approve employee benefit plans and to
administer our stock option plans. The audit committee, which will be comprised
of independent directors, will have the authority to recommend the appointment
of our independent auditors and to assist our board of directors in its review
of the results and scope of audits, internal accounting controls and other
accounting related matters.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors
or executive compensation committee of any entity which has one or more
executive officers serving as a member of our board of directors or
compensation committee.
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Director Compensation
We intend to pay cash compensation to non-employee members of our board of
directors in the amount of $30,000 annually. We will reimburse each member of
the board of directors for reasonable expenses incurred in connection with
attending a meeting of the board of directors or any committee thereof. In
addition, non-employee directors who have agreed to serve on our board of
directors at the time of this offering will receive, effective upon the
completion of this offering, options to purchase 30,000 shares of Class A
common stock at an exercise price equal to the initial public offering price.
In addition, non-employee directors who agree after the initial public offering
to serve on the board of directors will receive, effective upon election to the
board of directors, options to purchase 30,000 shares of Class A common stock
at an exercise price equal to the fair market value at the time of the grant.
We also expect to grant options to purchase 30,000 shares of Class A common
stock to each director elected at subsequent annual meetings of stockholders,
other than directors that are re-elected at the first meeting of stockholders
following this offering. Options issued to the directors will vest in three
equal installments. The first installment will immediately vest on the date of
grant, but will not become exercisable until the day immediately before the
first annual meeting of the stockholders. The second installment will vest and
become immediately exercisable on the day immediately before the second annual
meeting of the stockholders. The third installment will vest and become
immediately exercisable on the day immediately before the third annual meeting
of the stockholders.
Executive Compensation
The following table shows the cash compensation paid or accrued for the
fiscal year ended December 31, 1999 to our chief executive officer and each of
our four most highly compensated executives other than the chief executive
officer. GTE will not compensate our officers going forward and therefore this
compensation is indicative only of the historical compensation paid by GTE to
these officers and is not indicative of the compensation that Genuity will pay
to these individuals in the future. The arrangements regarding the future
compensation and other incentives of our executive officers are currently under
study.
The options granted below represent options to acquire common stock of GTE.
Under the existing terms of the GTE Corporation 1997 Long-Term Incentive Plan,
the offering will not result in accelerated vesting of the remaining unvested
portion of these options. Instead, these options will continue to vest
according to their terms. These options were granted in recognition of past
service to GTE. These officers will not receive future grants of GTE or Verizon
options following the offering.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ ---------------------------------------------
Shares of
Restricted GTE Common GTE
Stock Stock LTIP All Other
Name and Principal Other Annual Awards Underlying Payments Compensation
Position Salary ($) Bonus ($)(1) Compensation ($)(2)(3) Options (#) ($)(4) ($)(5)
------------------ ---------- ------------ ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul R. Gudonis......... 349,308 305,300 -- 80,642 43,400 1,027,500 5,000
Chairman and Chief
Executive Officer
Charles J. Gibney....... 289,808 126,200 -- 27,018 15,700 319,300 14,911
Senior Vice President,
Enterprise Solutions
Ira H. Parker........... 214,404 137,100 -- 21,535 20,900 216,400 7,200
Senior Vice President,
General Counsel and
Secretary
David B. Monaghan....... 221,708 109,700 -- 26,855 12,200 333,800 12,372
Vice President, Finance
Paul A. O'Brien......... 208,962 88,100 -- 5,506 35,700 -- 13,533
Senior Vice President,
Sales and Marketing
</TABLE>
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<PAGE>
--------
(1) These amounts represent the annual bonus received by each executive under
the GTE Corporation 1997 Executive Incentive Plan for the year ended
December 31, 1999, of which a portion has been deferred into restricted
stock units payable at maturity, generally a minimum of three years from
the time of deferral, in common stock of GTE. GTE restricted stock units
will not be granted to these officers in the future.
(2) The number of restricted stock units received was calculated by dividing
the sum of deferrals under (a) the annual bonus and (b) the LTIP payments
by the average closing price of the common stock of GTE on the New York
Stock Exchange Composite Transactions Tape for the 20 consecutive trading
days following the release to the public of the financial results of GTE
for the fiscal year in which the bonus and LTIP payments were earned. Each
executive received matching restricted stock units on the basis of one
additional restricted stock unit for every four restricted stock units
earned. The dollar value of the matching restricted stock units is based
on the average closing price of the common stock of GTE on the date of
grant for each related restricted stock unit as described above.
Additional restricted stock units were received on each dividend payment
date based upon the amount of the dividend paid and the closing price of
the common stock of GTE on the New York Stock Exchange Composite
Transactions Tape on the dividend declaration date.
(3) The aggregate amount of the restricted stock units as of the end of the
year ended December 31, 1999 was 12,416, 1,981, 1,000 and 4,406 for Messrs.
Gudonis, Gibney, Parker and Monaghan. The aggregate value of these
restricted stock units was $876,104, $139,784, $70,562 and $310,898 for
Messrs. Gudonis, Gibney, Parker and Monaghan based solely upon the closing
price of the common stock of GTE on December 31, 1999.
(4) These amounts represent payments under the GTE Corporation 1997 Long-Term
Incentive Plan, of which a portion has been deferred into restricted stock
units payable at maturity, generally a minimum of three years from the time
of deferral, in common stock of GTE. These awards became immediately non-
forfeitable and payable when the GTE stockholders and Bell Atlantic
stockholders approved the merger. Each payment equaled the average of the
performance percentage for each individual for the three award cycles
completed prior to the date the merger was approved. We also included in
these amounts projected dividends through the end of the award cycle. GTE
restricted stock units will not be granted to these officers in the future.
(5) These amounts consist of contributions under the BBN Corporation Retirement
Trust Agreement of $5,000 for Mr. Gudonis and under the GTE Savings Plan of
$7,200 for Messrs. Gibney, Parker, Monaghan, and O'Brien. This column also
includes contributions by GTE to the GTE Executive Salary Deferral Plan of
$7,711, $5,172 and $6,333 for Messrs. Gibney, Monaghan and O'Brien. These
executives will not be eligible to contribute to the GTE Savings Plan or
the GTE Executive Salary Deferral Plan following the offering.
Option Grants in Last Fiscal Year
The following table describes grants of stock options to purchase GTE common
stock to those executive officers listed in the Summary Compensation Table for
the year ended December 31, 1999. These options vest as to one-third of the
aggregate number of shares each year, commencing one year after the date of
grant. These stock option grants included a replacement stock option feature.
This feature provides that, if an executive exercises a stock option by
delivering previously owned shares that are sufficient to pay the exercise
price plus applicable tax withholdings, the executive will receive an
additional one-time stock option grant. The number of shares represented by
that option will be equal to the number of previously owned shares surrendered
in this transaction. This replacement stock option will be granted with an
exercise price equal to the fair market value on the date of grant. No stock
appreciation rights were granted for the year ended December 31, 1999. These
options were granted in recognition of past service to GTE. These officers will
not receive future grants of GTE or Verizon options following the offering.
The potential realizable value is calculated based on the term of the option
at its date of grant. It is calculated assuming that the fair market value of
the common stock of GTE on the date of grant appreciates at the indicated
annual rates compounded annually for the entire term of the option and that the
option is
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exercised and sold on the last day of its term for the appreciated stock price.
These numbers are calculated based on the requirements of the Securities and
Exchange Commission and do not reflect our estimate of future stock price
growth.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
------------------------------------------ ---------------------
Shares of % of Total
GTE Common Options Exercise
Stock Granted to or Base
Underlying Employees Price
Options in Per Expiration
Name Granted Fiscal Year Share Date
---- ---------- ----------- -------- ----------
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Gudonis......... 43,400 * $65.0313 2/15/2009 $1,774,355 $4,498,105
Charles J. Gibney....... 15,700 * 65.0313 2/15/2009 642,092 1,627,194
Ira H. Parker........... 400 * 63.0313 1/10/2009 16,013 40,580
10,100 * 65.0313 2/15/2009 413,065 1,046,794
5,600 * 68.7500 9/1/2009 242,123 613,589
4,800 * 73.8400 11/03/2009 222,312 564,904
David B. Monaghan....... 12,200 * 65.0313 2/15/2009 498,950 1,264,444
Paul A. O'Brien......... 8,900 * 65.0313 2/15/2009 363,988 922,422
20,000 * 66.7500 4/29/2009 839,569 2,127,642
6,800 * 73.8400 11/03/2009 315,792 800,280
</TABLE>
--------
* Less Than One Percent.
Fiscal Year End Option Values
The following table provides information for the executive officers listed
in the Summary Compensation Table regarding exercises of GTE options during the
year ended December 31, 1999 and GTE options held as of December 31, 1999. The
values in the table have been calculated on the basis of the fair market value
of the shares of common stock of GTE on December 31, 1999 less the applicable
exercise price. These options were granted in recognition of past service to
GTE. These officers will not receive further grants of GTE or Verizon options
following the offering.
<TABLE>
<CAPTION>
Shares of GTE Common
Stock Underlying Value of Unexercised
GTE Unexercised Options at In-the-Money Options
Common Stock Fiscal Year End (#) Fiscal Year End ($)
Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Gudonis......... 0 0 229,075 79,400 5,426,247 923,380
Charles J. Gibney....... 0 0 29,700 15,700 271,947 85,371
Ira H. Parker........... 6,000 189,750 9,700 20,900 156,111 67,271
David B. Monaghan....... 6,500 282,750 38,500 12,200 839,048 66,339
Paul A. O'Brien......... 0 0 15,000 35,700 167,815 122,775
</TABLE>
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<PAGE>
Awards Under Long Term Incentive Plans in Last Fiscal Year
The following table sets forth grants under the GTE Corporation 1997 Long-
Term Incentive Plan to those executive officers listed in the Summary
Compensation Table for the year ended December 31, 1999. These executives will
receive no further awards under the GTE Corporation 1997 Long-Term Incentive
Plan as of the date of the offering. In addition, any payouts to these
executives will be reduced on a pro-rata basis as of the date of the offering.
<TABLE>
<CAPTION>
Performance Estimated Future Payouts
or Other Under Non-Stock
Shares, Period Price-Based Plans
Units or Until -------------------------
Other Maturation Threshold Target Maximum
Name Rights (#) or Payout (Units) (Units) (Units)
---- ---------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Paul R. Gudonis................ 6,400 Three years 1,798 6,915
Charles J. Gibney.............. 1,800 Three years 506 1,945
Ira H. Parker.................. 2,070 Three years 575 2,211
David B. Monaghan.............. 1,200 Three years 337 1,297
Paul A. O'Brien................ 1,350 Three years 374 1,438
</TABLE>
The estimated future payouts in the above table are calculated for
illustrative purposes only and are based upon the dividend rate and price of
the common stock of GTE at the close of business on December 31, 1999. The
target award is the dollar amount derived by multiplying the number of units
credited to the participant at the end of the award cycle by the average
closing price of the common stock of GTE as reported on the New York Stock
Exchange Composite Transactions Tape during the last 20 business days of the
award cycle.
The maximum amount of the award has intentionally been left blank because it
is not possible to determine the maximum number of units until the award cycle
has been completed. The maximum amount of the award is determined by the extent
to which the actual results of GTE for five key financial measures exceed the
target levels.
Pension Plan
The following table illustrates the estimated annual benefits payable under
the defined benefit pension plans of GTE. The information assumes normal
retirement at age 65 and is calculated on a single life annuity basis, based
upon final average earnings, integrated with social security as described
below, and years of service.
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------
Final Average Earnings 15 20 25 30 35
---------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 300,000................... $ 63,765 $ 85,020 $106,275 $127,530 $148,785
400,000................... 85,515 114,020 142,525 171,030 199,535
500,000................... 107,265 143,020 178,775 214,530 250,285
600,000................... 129,015 172,020 215,025 258,030 301,035
700,000................... 150,765 201,020 251,275 301,530 351,785
800,000................... 172,515 230,020 287,525 345,030 402,535
900,000................... 194,265 259,020 323,775 388,530 453,285
1,000,000................... 216,015 288,020 360,025 432,030 504,035
</TABLE>
Messrs. Gibney, Parker, Monaghan and O'Brien participate in the GTE Service
Corporation Plan for Employees' Pensions. The GTE Service Corporation Plan is a
noncontributory pension plan for the benefit of all employees of GTE Service, a
wholly owned subsidiary of GTE, and participating affiliates who are not
covered by collective bargaining agreements. It provides a benefit based on a
participant's years of service and earnings. Pension benefits provided by GTE
Service and contributions to the GTE Service Corporation Plan are related to
basic salary and incentive payments, exclusive of overtime, differentials, some
types of incentive compensation
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<PAGE>
and other similar types of payments. Under the GTE Service Corporation Plan,
pensions are computed on a two-rate formula basis of 1.15% and 1.45% for each
year of service, with the 1.15% service credit being applied to that portion of
the average annual salary for the five highest consecutive years that does not
exceed $33,000, which is the portion of salary subject to the Federal Social
Security Act, and the 1.45% service credit being applied to that portion of the
average annual salary for the five highest consecutive years that exceeds this
level up to the statutory limit on compensation.
As of February 29, 2000, the credited years of service under the GTE Service
Corporation Plan were 11, 2, 31 and 1 for Messrs. Gibney, Parker, Monaghan and
O'Brien. Although these executives will no longer be employed by GTE Service
and will no longer accrue a pension under the GTE Service Pension Plan as of
the date of the offering, they along with other active employees of Genuity who
participate in the GTE Service Corporation Plan will continue to be credited
with additional years of age and service with Genuity for purposes of early
retirement eligibility under the GTE Service Corporation Plan. In addition,
they will have an assumed annual salary growth of 3.5% under the GTE Service
Corporation Plan. These special provisions will expire upon the earliest to
occur of the following:
. the date that is five years after the date of offering;
. an employee's termination of employment with Genuity; or
. the date that Genuity becomes a majority-owned subsidiary of Verizon.
Service credit for GTE retiree welfare benefits will be provided in a
similar manner to the service recognition for pension purposes.
Under federal law, an employee's benefits under a qualified pension plan,
such as the GTE Service Corporation Plan, are limited to set maximum amounts.
GTE maintains the Excess Pension Plan, which supplements the benefits of any
participant in the GTE Service Corporation Plan in an amount by which any
participant's benefits under the GTE Service Corporation Plan are limited by
law. In addition, the GTE Supplemental Executive Retirement Plan provides
additional retirement benefits under management incentive plans or special
arrangements as determined by GTE Service or one of its affiliates. The
Supplemental Executive Retirement Plan and the Excess Pension Plan benefits are
payable in a lump sum or an annuity.
Long-Term Stock Incentive Plan
Our employees have historically been among those granted options to purchase
common stock of GTE. Our Long-Term Stock Incentive Plan has been adopted by our
board of directors and our sole stockholder. The Long-Term Stock Incentive Plan
provides for the following awards based on the Class A common stock: stock
options, stock appreciation rights, performance bonuses and other stock-based
awards. Awards may be granted to employees of Genuity or any entity in which it
owns at least a 10% interest. The Long-Term Stock Incentive Plan will be
administered by the executive compensation committee of our board of directors.
The administrator has the authority to determine eligibility, grant awards and
make all other determinations under the Long-Term Stock Incentive Plan. The
period or periods during which an award will be exercisable or remain
outstanding, including the manner of exercise and other details of awards will
be determined by the administrator consistent with the Long-Term Stock
Incentive Plan. Except in connection with promotions or significant increases
in responsibility or to ensure appropriate comparability with awards granted to
other participants, a person may receive only one award during the first four
years of the Long-Term Stock Incentive Plan. Our board of directors has the
power to amend or terminate the Long-Term Stock Incentive Plan. Unless
terminated earlier, the Long-Term Stock Incentive Plan will terminate on the
date of the annual meeting of stockholders in the year ending December 31,
2010.
Stock options granted under the Long-Term Stock Incentive Plan may have a
term of up to 10 years and may be either incentive stock options, as defined in
the Internal Revenue Code, or nonqualified stock options. Stock options granted
under the Long-Term Stock Incentive Plan may not be assigned other than by will
or by applicable laws of descent and distribution. The option exercise price of
each stock option granted under the
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Long-Term Stock Incentive Plan in connection with the offering will be the
offering price and in the case of other stock options will not be less than the
fair market value of the Class A common stock as of the date of grant. In
general, stock options and other awards may not be repriced after grant.
The aggregate number of shares of Class A common stock available for awards
under the Long-Term Stock Incentive Plan will be 8.95% of the outstanding
number of shares of Class A common stock at the time of the offering, assuming
the conversion of the Class B common stock into Class A common stock to the
maximum extent permitted by our certificate of incorporation. Assuming the
underwriters exercise in full the over-allotment option, there would be
89,500,000 shares of Class A common stock reserved for issuance under the Long
Term Incentive Plan. Of this amount, 5% will be available for awards to
employees who were employed on or before April 6, 2000; 1% will be available
for awards to individuals who first became or become employees after April 6,
2000 and on or before January 6, 2001; and 2.95% will be available for awards
in connection with promotions and to individuals who first become employed
after January 6, 2001. Any shares attributable to the expiration of the awards
without exercise and similar events will be available for awards to individuals
regardless of their date of hire with the Company. In no event will more than
50,000,000 shares be issued in satisfaction of incentive stock options granted
under the Long-Term Stock Incentive Plan. The maximum number of shares for
which stock options or stock appreciation rights may be granted to any
participant in any calendar year is 2,000,000. These limits, as well as the
exercise price of outstanding awards and other award terms, are subject to
appropriate adjustment to reflect stock splits, stock dividends, and similar
events.
Outside Directors' Compensation Plan
We have an Outside Directors' Compensation Plan which, unless earlier
terminated, will terminate on the date of the annual meeting of stockholders in
the year ending December 31, 2010. The aggregate number of shares of Class A
common stock available for awards under the Outside Directors' Compensation
Plan will be .05% of the outstanding shares of Class A common stock at the time
of the offering, assuming the conversion of the Class B common stock into Class
A common stock to the fullest extent permitted by our certificate of
incorporation. Assuming the underwriters exercise in full the over-allotment
option, there would be 500,000 shares of Class A common stock reserved for
issuance under the Outside Directors' Compensation Plan. Pursuant to the
Outside Directors' Compensation Plan, non-employee directors who have agreed to
serve on our board of directors at the time of this offering will receive,
effective upon the completion of this offering, a $30,000 annual cash fee and
options to purchase 30,000 shares of Class A common stock at an exercise price
equal to the initial public offering price. In addition, non-employee directors
who agree after the initial public offering to serve on the board of directors
will receive, effective upon election to the board of directors, a $30,000
annual cash fee and options to purchase 30,000 shares of Class A common stock
at an exercise price equal to the fair market value at the time of the grant.
We also expect to grant options to purchase 30,000 shares of Class A common
stock to each director elected at subsequent annual meetings of stockholders,
other than existing directors that are re-elected at the first meeting of
stockholders following this offering. Options issued to the directors will vest
in three equal installments. The first installment will immediately vest on the
date of grant, but will not become exercisable until the day immediately before
the first annual meeting of the stockholders. The second installment will vest
and become immediately exercisable on the day immediately before the second
annual meeting of the stockholders. The third installment will vest and become
immediately exercisable on the day immediately before the third annual meeting
of the stockholders. The number of shares subject to each award, the exercise
price and other terms of stock options under the Outside Directors'
Compensation Plan are subject to appropriate adjustment in the event of a stock
split, stock dividend or similar event. If a director is not re-elected to the
board of directors, any then unvested stock options would be forfeited and any
vested stock options would remain exercisable for five years, subject to the
maximum term of the stock option and except as otherwise provided by the
executive compensation committee of our board of directors. Our board of
directors has the power to amend or terminate the Outside Directors'
Compensation Plan.
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<PAGE>
Employment Agreements
We have entered into employment agreements with Messrs. Gudonis, D. O'Brien,
Farina and Parker. Under these agreements, the executives will receive the
following base salaries: Mr. Gudonis, $500,000; Mr. D. O'Brien, $375,000; Mr.
Farina, $400,000; and Mr. Parker, $260,000. In addition to these base salaries,
we will provide each of these individuals with the opportunity to earn an
annual performance-based cash bonus in accordance with the terms of our
Executive Incentive Plan and to receive stock-based awards under our Long-Term
Stock Incentive Plan. Each employment agreement has a three year term
commencing on the effective date of this offering, but the term is
automatically extended for a fourth year unless we give written notice to the
contrary at least 90 days prior to the third anniversary of the offering.
Pursuant to their respective employment agreements, each of Messrs. Gudonis, D.
O'Brien, Farina and Parker will be entitled to severance benefits in the event
that we terminate their employment for any reason other than cause or if the
executive terminates his employment for good reason, as defined in the
agreement, and we do not cure the basis for the termination within a specified
period of time. If the termination occurs during the initial three year term of
an employment agreement, the employee will become entitled to a severance
payment equal to the greater of:
. his then-current annual base pay plus his then-current target annual
bonus for the remainder of the term of the employment agreement, payable
over the remainder of the term of the agreement; or
. two times the sum of his then-current annual base pay and his then-
current target annual bonus, payable over the two-year period following
termination of employment.
If the termination occurs during or at the conclusion of a fourth year under
the agreement, the employee will receive a severance payment equal to two times
the sum of his then-current annual base pay and his then-current target annual
bonus, payable over the two-year period following termination of employment.
Under the agreements, Messrs. Gudonis, D. O'Brien, Farina and Parker agree
that during employment and during any period of time in which the employee is
eligible to receive severance payments under his employment agreement or, if
longer, for a period of 12 months following termination of employment, they
will not compete with Genuity or any related companies and that during
employment and during any period of time in which the employee is eligible to
receive severance payments under his employment agreement or, if longer, for a
period of 24 months following termination of employment, they will not
interfere with the business relations of Genuity or any related companies,
including for example by soliciting employees or clients.
Indemnification of Directors and Executive Officers and Limitation on Liability
Our certificate of incorporation provides that our directors will not be
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty, except to the extent otherwise required by the Delaware General
Corporation Law. This provision will not prevent our stockholders from
obtaining injunctive or other relief against our directors nor does it shield
our directors from liability under federal or state securities laws.
Our certificate of incorporation also requires us to indemnify our directors
and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to a few very limited exceptions where indemnification
is not permitted by applicable law. Our certificate of incorporation also
requires us to advance expenses, as incurred, to our directors and executive
officers in connection with any legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law. These rights are not
exclusive.
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RELATED PARTY TRANSACTIONS
We have provided below a summary description of the significant agreements
that we expect to execute with GTE Service Corporation and other affiliates of
GTE. These agreements will become effective at the completion of this offering.
These descriptions, which summarize the material terms of the agreements, are
not complete. You should read the full text of these agreements, which have
been filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part. We believe that the
terms of these agreements are comparable to those that would have resulted from
arms-length negotiations with parties other than GTE and its affiliates. We
intend to negotiate any future agreements with Verizon on the same basis.
Transition Services Agreements
GTE and its affiliates currently provide a range of administrative and
support services to us. We will enter into an Agreement for Transition Services
and an Agreement for Information Technology Transition Services with GTE
Service.
Agreement for Transition Services. Under this agreement, GTE Service will
provide, to the extent we continue to require them on a brief transitional
basis, the following services currently provided to us by various GTE
affiliates:
. accounting and cash processing services, including payroll, asset
accounting and accounts payable;
. billing and collection processing services;
. human resources services and benefits administration, including
relationships with employee benefits providers; and
. real estate support services, including project management and
environmental and safety services.
Agreement for Information Technology Transition Services. We and GTE Service
will enter into this agreement in order to provide or receive, to the extent
either party continues to require them on a transitional basis, the following
services:
. software support services to ensure that software continues to run
effectively after the offering; and
. hardware support services, including help desk support for personal
computers, systems support centers for critical servers and local area
network support.
In addition, we will provide wide area network support to GTE Service, and
GTE Service will provide us with wide area network support in areas outside of
Bell Atlantic's local service region. GTE Service also will provide us with
computer programming and technical services, including the development of
software interfaces and modifications and enhancements to existing systems.
Unless otherwise agreed, the ownership of any work product, including
intellectual property, created during the provision of services under either of
the transition service agreements will be determined under the terms and
conditions of the Software Development and Technical Services Agreement
described below. Similarly, any licenses relating to software will be granted
on the same terms and conditions as used in the Software License Agreement
described below.
The fees for these transition services are fixed under the agreements and
were negotiated based on historical costs and comparable market prices. Both
agreements have a non-renewable term of one year, but the term of many services
will be less than a year. We will be able to terminate each or any portion of
the agreements at any time upon 120 days notice to GTE Service. As an
exception, the billing and collection
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<PAGE>
processing services require 180 days notice in order to provide adequate
transition time. GTE Service has the right to terminate the agreements on 120
days notice only with respect to the information technology services that it
receives from us. Until termination or expiration, GTE Service will be
obligated to cooperate with us to transition the work to another provider and
to use commercially reasonable efforts to secure our continued use of any
necessary third party technology.
Purchase, Resale and Marketing Agreement
We will enter into a Purchase, Resale and Marketing Agreement under which
Verizon will purchase services from us that will include Internet access,
value-added e-business services and private line and asychronous transfer mode
transport services. Verizon will be permitted to use these services internally
or resell them on a stand-alone basis or as part of a bundled solution. Those
services resold by Verizon may be co-branded with us or may be branded without
use of our marks. To the extent we jointly market our services with Verizon, we
will do so in compliance with all applicable federal law. We will not jointly
market our services with Verizon in states in which Verizon would not have
legal authority under applicable federal law to operate our company. We have
granted Verizon most favored customer pricing and volume-based discounts. Under
the terms of the agreement, Verizon will purchase at least $500 million of our
services over a five-year period. In the event that Verizon has not purchased
$200 million in services by the end of the third year of the contract, it would
be required to pay to us at that time the difference between the amount of
services purchased to date and $200 million. Similarly, in the event Verizon
has not purchased $500 million in services by the end of the fifth year of the
contract, it would be required to pay to us at that time the difference between
the amount of services purchased to that date, including any shortfall payment
made at the end of the third year, and $500 million. The minimum purchase
commitment is reduced in the event we do not comply with various obligations as
to competitive pricing and other aspects of service, sale and delivery. If the
merger between Bell Atlantic and GTE is not completed, this agreement does not
become effective and Bell Atlantic is not obligated to purchase any services
from us.
In order for us to properly plan for increasing demands for our services by
our customers, Verizon is required to provide us with 18-month forecasts of its
requirements on a quarterly basis. The agreement will remain in effect for five
years and is renewable for additional one-year periods by mutual consent of the
parties. Verizon may terminate the agreement on 90 days notice if a legislative
or regulatory order materially or adversely changes its rights, obligations or
risks in relation to the resale of our services. In this event, Verizon is
obligated to cooperate with us to ensure the orderly transition to us of all
outstanding reseller agreements, including the assignment of these agreements,
and to reimburse us for costs incurred by us relating to this transition.
Under the agreement, if Verizon were to cause us to adjust our business as
described below in this paragraph in order to convert its Class B common stock,
it must provide us with 180 days prior written notice of the date on which it
intends to convert its Class B common stock. This notice will also indicate if
there are any states in which Verizon does not expect to have legal authority
under applicable federal law to operate a long distance business at the time of
the conversion of the Class B common stock. Upon receipt of this notice, we
will adjust our operations in the states designated by Verizon in a manner
necessary to allow Verizon to be in compliance with applicable federal law in
these states after Verizon obtains a greater than 10% equity interest in our
capital stock. In no event will the states designated by Verizon account for
more than 3% of our total revenues during the preceding 12 months and in no
event shall the adjustment of our operations result in the loss of overall
revenue in excess of 3% of our total revenues during the preceding 12 months.
Verizon will agree to pay an amount necessary to make us financially whole as a
result of our modification of our business pursuant to this arrangement.
In conjunction with the Purchase, Resale and Marketing Agreement described
above, we also plan to provide to Verizon undersea cable capacity in the ARCOS-
1 Caribbean Ring System and have committed to negotiate with Verizon with
respect to operating capacity on the Americas III Cable Network currently under
construction.
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Intellectual Property Agreements
We intend to enter into the following agreements with GTE Service in order
to allocate rights relating to existing and future patents, software, other
types of intellectual property and technical services.
Intellectual Property Ownership and Cross License Agreement. This agreement
will apportion the ownership of existing patents, patent applications and other
types of intellectual property between GTE Service and us. Under the agreement,
existing patents and patent applications that relate exclusively to us will be
owned exclusively by us. Existing patents and patent applications that relate
to both us and GTE Service will be jointly owned by us and GTE Service. The
remaining existing patents and patent applications that relate to GTE Service
will be owned exclusively by GTE Service. Both we and GTE Service will grant
each other a perpetual, non-exclusive, royalty-free worldwide license to each
other's existing patents and patent applications. In addition, we will jointly
own any currently existing, non-statutory intellectual property. Those patents
and patent applications that either GTE Service or we develop in the future
will be owned pursuant to applicable laws or any controlling agreements.
Software License Agreement. We plan to enter into a Software License
Agreement with GTE Service under which it will grant us a non-exclusive, non-
transferable, worldwide license to use software programs owned by GTE Service
for our internal operations. In addition, GTE Service will provide us with
updates to the licensed software programs pursuant to the Agreement for
Information Technology Transition Services described above. In exchange for the
license, we will pay GTE Service an annual license fee for each licensed
software program. The term of each license will be one year and will be
automatically renewable for successive one-year periods upon the payment of
annual license fees. We may terminate or cancel any software license upon 30
days written notice to GTE Service. The licenses that GTE Service will grant us
pertain to the object code of the licensed software programs only. The source
code of the licensed software programs will be placed in an escrow account and
will be made available to us pursuant to the terms and conditions of a separate
escrow agreement.
Software Development and Technical Services Agreement. Under this agreement,
GTE Service will provide us with software development and other technical
services. For services related exclusively to our business, the newly created
deliverable, including any newly created software and accompanying
documentation, and all intellectual property rights in the deliverable, will be
transferred to us by GTE Service. In return, we will grant to GTE Service a
perpetual, royalty-free worldwide license to any deliverable owned by us for
the internal use of GTE Service only. For services not related exclusively to
us, GTE Service will retain ownership of any deliverable and will grant us a
non-exclusive, royalty-free, non-sublicensable, non-transferable license to use
the deliverable owned by GTE Service for our internal use only. The agreement
will have a term of one year and will be renewable for successive one-year
terms by mutual consent of the parties. We may terminate the agreement at any
time following written notice to GTE Service.
Network Monitoring Agreement
Under the terms of an existing agreement, we receive continuous monitoring
for some elements of our network infrastructure from GTE Network Services,
including monitoring of network-enabling devices and processes to detect
anomalies occurring in the network. The fees for monitoring services are fixed
under the agreement and were negotiated based on historical costs and
comparable market prices. The agreement may be terminated by us on 90 days
notice. Verizon will cease providing network monitoring services to us by
October 31, 2000.
Real Estate Agreements
We plan to enter into several agreements with Verizon to allocate space in
various leased and owned properties between us and Verizon. None of the
properties involved are material to our operations or business. Provisions of
each agreement, including the lease and sublease payment of rent terms, vary
depending on the underlying lease at the specified property and the result of
negotiations pertaining to specific issues at a specified property.
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In order to effect our transition to a stand-alone company, GTE also has
agreed to issue new guaranties and to continue existing guaranties in order to
support our real estate obligations. GTE has agreed to continue to issue new
guaranties until six months following this offering or the date on which both
Standard & Poor's and Moody's publish a credit rating for us, whichever occurs
first. We have agreed to pay GTE a commercially reasonable fee during the time
the guaranties are in force.
Registration Rights Agreement
Immediately after the completion of this offering, under a Registration
Rights Agreement dated , 2000, Verizon and its transferees or assignees
will be entitled to cause us to register shares of Class A common stock that
are issued following the conversion of either our Class B common stock or our
Class C common stock. We may postpone the filing of any registration statement
up to two times for a total of 90 days in the event that the filing (1) would
require the disclosure of sensitive information that would be seriously
detrimental to us or (2) would occur at a time in which we are working on our
annual audited financial statements. If marketing reasons dictate, the
managing underwriter of any underwritten offering will have the right to limit
the number of shares of common stock that Verizon and its transferees or
assignees include in any registration statement. We will pay all expenses
incurred in connection with the filings described below, except for
underwriters' and brokers' discounts and commissions, which will be paid by
each of the selling stockholders.
Demand Registration Rights. At any time after six months following this
offering, Verizon and its transferees or assignees can request on sixteen
occasions that we register all or a portion of their shares of Class A common
stock on a registration statement so long as the total number of shares
requested to be registered is at least the greater of (1) the value of five
percent of the shares of Class A common stock issued and outstanding on the
date of this offering and (2) an aggregate value of $100,000,000. We are not
required to file more than one demand registration statement within 90 days of
the effectiveness of any registration statement, other than a shelf
registration statement as described below.
Piggyback Registration Rights. At any time after six months following this
offering, if we register any of our securities for public sale, either for our
own account or for the account of any holder of our securities, Verizon and
its transferees or assignees will have the right to include their shares of
common stock in such registration. This right, however, applies only to a
registration statement relating to an underwritten public offering for cash.
Shelf Registration Rights. At any time after twelve full calendar months
following this offering, in the event that Verizon or one of its affiliates
issues any securities that are convertible into or exchangeable for shares of
Class A common stock owned by Verizon, Verizon will have the right to request
that we file a registration statement relating to the conversion or exchange
of the securities issued by Verizon or its affiliates. However, we will not be
required to make such a filing unless the total number of shares requested to
be registered is at least the greater of (1) the value of five percent of the
shares of Class A common stock issued and outstanding on the date of this
offering and (2) an aggregate value of $100,000,000, in each case based on the
closing trading price of the Class A common stock on the date the demand to
file the shares is made.
Recapitalization Agreement
GTE will execute a recapitalization agreement in connection with its
receipt of the Class B common stock. Under this agreement, GTE will exchange
all of the shares of our common stock for such number of shares of Class B
common stock that will equal 9.5% of the total number of shares of our common
stock outstanding immediately after the completion of this offering. The
recapitalization agreement contains customary representations and warranties,
including with respect to the issuance of the Class B common stock. The
recapitalization agreement also includes provisions enabling Verizon to
purchase additional shares of Class B common stock under the circumstances
described in the section in "Description of Capital Stock"
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entitled "Right to Purchase Additional Shares Upon Conversion." In addition,
the recapitalization agreement contains provisions requiring us to obtain the
consent of Verizon prior to taking the following actions:
. making any acquisition or series of related acquisitions with a purchase
price that exceeds 20% of our market capitalization at the time of such
acquisition or, if earlier, upon our entering into an agreement to
effect the acquisition, where market capitalization is determined by
multiplying the closing price of our Class A common stock on the date of
determination by the number of shares of common stock outstanding on
that date, assuming for purposes of this calculation that (1) shares of
Class B common stock that can never be converted into more than their
proportionate share of 10% of our total common stock outstanding shall
be considered to have been converted on that basis and (2) other shares
of Class B common stock shall be considered to have been converted to
the maximum extent permitted under our certificate of incorporation;
. making any acquisition with a purchase price in excess of $100 million
or entering into any joint venture in which our investment is more than
$100 million, in each case that is not closely related to our business;
. making any disposition or series of related dispositions for
consideration, including the assumption of indebtedness, in excess of
20% of our market capitalization at the time of such disposition or, if
earlier, of our entering into an agreement to effect such disposition;
. incurring indebtedness (including capital leases, guarantees of
indebtedness of others, letters of credit and indebtedness acquired in
connection with any acquisition, but excluding trade accounts payable)
(1) in any calendar year that exceeds $3.85 billion, net of any
indebtedness repaid during that same calendar year, or (2) at any time,
if immediately after the incurrence thereof, our indebtedness would
exceed $11.0 billion;
. entering into any agreement or arrangement that (1) binds or purports to
bind, or following conversion, would bind or purport to bind, Verizon or
any of its affiliates, or (2) contains provisions that trigger a default
or require a material payment when Verizon exercises its rights to
convert the Class B common stock;
. declaring extraordinary dividends or making other extraordinary
distributions to the holders of our capital stock;
. issuing any equity securities or securities convertible or exercisable
into equity securities except for:
(1) equity securities issued in connection with acquisitions, in an
aggregate amount not to exceed 30% of the shares of common stock
outstanding upon the completion of this offering, including shares
of common stock outstanding immediately after the exercise of the
underwriters' over-allotment option, if any;
(2) equity securities issued to fund operating needs, including
capital expenditures, in an aggregate amount not to exceed 5% of
the shares of common stock outstanding upon the completion of this
offering, including shares of common stock outstanding immediately
after the exercise of the underwriters' over-allotment option, if
any;
(3) equity securities issued or granted to our employees, provided
that:
(a) the number of equity securities issued or granted to individuals
who were employees on April 6, 2000 does not exceed in the
aggregate 5% of the shares of common stock outstanding upon the
completion of this offering, including shares of common stock
outstanding immediately after the exercise of the underwriters'
over-allotment option, if any;
(b) the number of equity securities issued or granted to individuals
who first become our employees within nine months of April 6,
2000, other than individuals who become our employees as a
result of their former employer being acquired by us, does not
exceed in the aggregate 1.0% of the shares of common stock
outstanding upon the completion of this
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offering, including shares of common stock outstanding immediately
after the exercise of the underwriters' over-allotment option, if
any;
(c) the number of equity securities issued or granted to individuals
who become our employees beginning on or after January 6, 2001,
other than individuals who become our employees as a result of
their former employer being acquired by us, does not exceed in
the aggregate 3.0% of the shares of common stock outstanding
upon the completion of this offering, including shares of common
stock outstanding immediately after the exercise of the
underwriters' over-allotment option, if any;
(d) the number of equity securities issued to a trustee or other
fiduciary, or granted or reserved for issuance to our employees
described in the previous clauses (a), (b) and (c) in connection
with our 401(k) or any similar plan does not exceed 0.5% of the
shares outstanding upon completion of this offering, including
shares of common stock outstanding immediately after the
exercise of the underwriters over-allotment option, if any; and
(e) the number of shares issued or granted to individuals who become
our employees as a result of their former employer being
acquired by us, including equity securities issued, granted or
reserved for issuance to a trustee or other fiduciary or to our
employees described in clause (d) in connection with our 401(k)
or any similar plan, does not exceed 6.0% multiplied by the
total of:
. the number of shares of common stock outstanding upon the
completion of this offering, plus
. the number of shares issued in connection with acquisitions
completed by us, minus
. the aggregate number of shares of common stock that may be
issued under clauses (a), (b), (c) and (d) above.
For the purpose of calculating the percentage of the shares of common stock
outstanding upon the completion of this offering in subsections (1), (2) and
(3) above, all shares of Class B common stock shall be deemed to have been
converted into shares of Class A common stock to the maximum extent permitted
under our certificate of incorporation. If options expire or terminate after
being granted under subsection (3) above, those shares become available for
any of the purposes stated in subsections (1) through (3).
We will not be required to obtain the consent of Verizon to take the above
actions if at any time:
. Verizon and its affiliates collectively do not have the right to vote
more than 50% of the then outstanding shares of Class B common stock; or
. the shares of common stock that Verizon and its affiliates collectively
own would constitute 10% or less of our then outstanding common stock on
an as converted basis; or
. any person and its affiliates, other than Verizon and its affiliates,
collectively own more than 50% of the then outstanding shares of Class B
common stock.
Verizon may assign these consent rights to a third party who may exercise
them so long as the third party directly or indirectly:
. owns and has the right to vote more than 50% of the then outstanding
shares of Class B common stock; and
. owns or has the right to acquire more than 50% of our then outstanding
common stock on an as converted basis.
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For purposes of calculating the ownership of our common stock on as as
converted basis in the two preceding paragraphs, shares of Class B common stock
that can never be converted into more than their proportionate share of 10% of
our total common stock outstanding shall be considered to have been converted
on that basis. All other shares of Class B common stock shall be considered to
have been converted to the maximum extent permitted under our certificate of
incorporation.
Indemnification Agreements. We transferred contracts to newly formed limited
liability companies that will become part of GTE prior to this offering. The
transferred contracts, entered into with the United States Government, include
primarily research and development contracts in the areas of mobile networking,
speech and language processing, applied physics, and acoustic signal
processing, as well as contracts for the management of government data
networks. Simultaneously with the transfer, we entered into indemnification
agreements that provide that GTE shall indemnify us for any claims arising
under these contracts.
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SOLE STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
will be owned by GTE. The mailing address of GTE Corporation is 1255 Corporate
Drive, Irving, Texas 75038. Upon completion of this offering, Verizon will
beneficially hold all of the outstanding shares of our Class B common stock,
which will represent 9.5% of the voting power of our outstanding capital stock
at that time, before giving effect to any outstanding options to purchase
shares of our Class A common stock under our long-term incentive plans. Except
for Verizon, we are not aware of any person or group that will beneficially own
more than five percent of our Class A common stock or Class B common stock upon
completion of this offering. There will not be any shares of our Class C common
stock outstanding immediately after this offering.
None of our directors and executive officers beneficially owns any shares of
our common stock. We intend to grant to our officers and directors options to
purchase an aggregate of 6,075,000 shares of our Class A common stock with an
exercise price equal to the public offering price set forth on the cover page
of this prospectus. Assuming the exercise of these options, these officers and
directors would beneficially own 3% of our Class A common stock.
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DESCRIPTION OF CAPITAL STOCK
Immediately following the completion of this offering, our authorized
capital stock will consist of 1,600,000,000 shares of Class A common stock, par
value $0.01 per share, 21,000,000 shares of Class B common stock, par value
$0.01 per share, 800,000,000 shares of Class C common stock, par value $0.01
per share, and 50,000,000 shares of preferred stock, par value $0.01 per share.
Immediately following the completion of this offering, there will be
outstanding:
. 173,913,000 shares of Class A common stock, all of which will be owned
by the investors purchasing shares in this offering;
. options to purchase approximately 50,000,000 shares of Class A common
stock;
. 18,256,000 shares of Class B common stock, all of which will be owned by
Verizon;
. no shares of Class C common stock; and
. no shares of preferred stock.
In the event that the underwriters exercise any portion of the over-
allotment option, we will subdivide our shares of Class B common stock so that
Verizon will beneficially own 9.5% of the total number of shares of common
stock then outstanding, before giving effect to any issuance of shares of Class
A common stock upon the exercise of outstanding options of Genuity.
Common Stock
The shares of our Class A common stock, Class B common stock and Class C
common stock are identical in all respects except for voting rights, conversion
rights and as otherwise described below. The rights, preferences and privileges
of holders of our Class A common stock, Class B common stock and Class C common
stock are subject to the rights of the holders of shares of any other class of
common stock that we may authorize and issue and any series of preferred stock
that we may designate and issue in the future.
Voting Rights. Each share of Class A common stock and Class B common stock
entitles the holder to one vote on each matter submitted to a vote of our
stockholders. Each share of Class C common stock entitles the holder to five
votes on each matter. Except as required by applicable law or as discussed
below, the holders of the Class A common stock, Class B common stock and Class
C common stock vote together as a single class on all matters submitted to a
vote of our stockholders.
So long as 50% of the shares of Class B common stock outstanding immediately
following the completion of this offering, including additional shares of Class
B common stock issued to Verizon in connection with the exercise of the over-
allotment option, remain outstanding, no person or group of persons acting
together, as determined pursuant to Rule 13d-3 under the Securities Exchange
Act of 1934, will be permitted to vote any of the shares of Class A common
stock beneficially owned by that person or group of persons in excess of 20% of
the aggregate number of then outstanding shares of Class A common stock, except
as set forth below. To the extent any person or group of persons beneficially
owns more than 20% of the shares of Class A common stock, the vote of any
excess shares will be apportioned among the other holders of Class A common
stock in accordance with their respective percentage ownership. In order to
enforce this limitation, our certificate of incorporation permits us to require
stockholders or groups that have filed or, in the reasonable judgment of our
board of directors after consultation with legal counsel, were required by law
to have filed, a Schedule 13D or Schedule 13G, or any successor schedules or
forms, under the Securities Exchange Act, to certify to us in writing the
number of shares of Class A common stock beneficially owned by them as of the
applicable record date. This prohibition on voting excess shares of Class A
common stock does not apply to Verizon or its affiliates or to any person or
group of persons to the extent any of them acquired Class A common stock by
converting Class B common stock or Class C common stock.
So long as any shares of Class B common stock remain outstanding, the
holders of Class B common stock, voting separately as a class, will have the
right to elect one member of our board of directors.
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The holders of Class B common stock are also entitled to vote with the holders
of the Class A common stock and Class C common stock in the election of the
other directors. You should refer to the section in "Management" entitled
"Composition of Board of Directors" for a more detailed description of our
board of directors.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of Class B common stock, voting separately as a class, is
required before we:
. amend our certificate of incorporation, or amend our bylaws in a way
that affects the rights of the holders of the Class B common stock;
. agree to enter into a merger, consolidation or sale, lease or other
disposition of all or substantially all of our assets;
. file or declare bankruptcy or liquidation;
. authorize additional shares of our capital stock;
. materially change the nature or scope of our business from the
description of the business and business plan in this prospectus; or
. take any action that would make it unlawful for a holder of Class B
common stock to exercise its conversion rights.
Except as described in the next paragraph, this class vote will not be
required if at any time:
. Verizon and its affiliates collectively do not have the right to vote
more than 50% of the then outstanding shares of Class B common stock;
. the shares of common stock that Verizon and its affiliates collectively
own would constitute 10% or less of our then outstanding common stock on
an as converted basis; or
. any person and its affiliates, other than Verizon and its affiliates,
collectively own more than 50% of the then outstanding shares of Class B
common stock.
The class vote of the holders of Class B common stock will still be required
if:
. Verizon has transferred shares of Class B common stock to a third party
that directly or indirectly owns and has the right to vote more than 50%
of the then outstanding shares of Class B common stock; and
. the Class B common stock at the time constitutes more than 50% of our
then outstanding common stock on an as converted basis.
For purposes of calculating the ownership of our common stock on an as
converted basis in the two preceding paragraphs, shares of Class B common stock
that can never be converted into more than their proportionate share of 10% of
our total common stock outstanding shall be considered to have been converted
on that basis. All other shares of Class B common stock shall be considered to
have been converted to the maximum extent permitted under our certificate of
incorporation.
We have also entered into an agreement that requires us to obtain the
consent of Verizon or its assignees prior to taking other actions. You should
refer to the section in "Related Party Transactions" entitled "Recapitalization
Agreement."
Dividends, Distributions and Stock Splits. Subject to preferences that may
apply to any outstanding series of preferred stock, the holders of each of our
three classes of common stock are entitled to receive dividends at the same
rate if, as and when dividends are declared by the board of directors out of
assets legally available therefor. In the case of dividends or distributions
payable in common stock, only shares of Class A common stock will be
distributed on Class A common stock, only shares of Class B common stock will
be distributed on Class B common stock and only shares of Class C common stock
will be distributed on Class C common stock. Except as described above, in no
event may any of the shares of Class A common stock, Class B common stock or
Class C common stock be subdivided or combined in any manner unless each other
class is subdivided or combined in the same proportion.
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Conversion of Class A Common Stock. The Class A common stock has no conver-
sion rights.
Conversion of Class B Common Stock. Immediately after the completion of this
offering, Verizon will own all of our outstanding shares of Class B common
stock. Although the ability of Verizon to convert its Class B common stock is
limited by the proposal to the FCC, these shares by their terms are convertible
at any time into either:
. shares of Class A common stock equal to 10% of our total common stock
immediately after the conversion; or
. 800 million shares of Class A common stock or, for Verizon or any of its
affiliates and at their election, Class C common stock, which in either
case represents approximately 82%, or 80% if the underwriters exercise
in full the over-allotment option, of our shares of common stock
outstanding immediately following this offering.
Under the proposal to the FCC:
. if Verizon has not eliminated, as to at least 50% of Bell Atlantic in-
region lines, Section 271 restrictions applicable to its operation of
our business, the outstanding shares of our Class B common stock can
only be converted into shares of our Class A common stock that after the
conversion will represent 10% of our total common stock then
outstanding. If Verizon transfers the Class B common stock before
meeting this 50% threshold, the transferee's conversion rights would be
similarly limited;
. if Verizon has eliminated applicable Section 271 restrictions as to at
least 50% of Bell Atlantic in-region lines and first offers its shares
to us, it could transfer its shares of Class B common stock to a
disposition trustee for sale to one or more third parties that would
then be able to convert them in the aggregate into 800 million shares of
Class A common stock;
. if Verizon has eliminated applicable Section 271 restrictions as to 100%
of Bell Atlantic in-region lines, Verizon or its affiliates could
convert the Class B common stock into 800 million shares of Class A
common stock or Class C common stock; and
. if Verizon has eliminated applicable Section 271 restrictions as to 95%
of Bell Atlantic in-region lines, Verizon may require us to reconfigure
our operations in one or more Bell Atlantic in-region states where
Verizon has not eliminated those restrictions in order to bring those
operations into compliance with Section 271 and therefore be able to
convert the Class B common stock into 800 million shares of Class A
common stock or Class C common stock. To require us to reconfigure our
operations, Verizon must give the FCC at least 90 days advance notice of
its intent to exercise its conversion rights and submit to the FCC a
plan for the reconfiguration of our operations in the relevant state or
states. The reconfiguration of our operations must not result in the
loss to us of more than 3% of our annual revenue and Verizon must
reimburse us for the cost of such reconfiguration.
If Verizon were to cause us to reconfigure our business in the manner
described in the preceding paragraph, it must also comply with the provisions
of the Purchase, Resale and Marketing Agreement, including providing us with
180 days prior written notice of the date on which it intends to convert its
Class B common stock and paying us an amount necessary to make us financially
whole as a result of these modifications to our business. You should refer to
the section in "Related Party Transactions" entitled "Purchase, Resale and
Marketing Agreement" for more information.
Notwithstanding the above provisions, if before Verizon has eliminated
applicable Section 271 restrictions as to at least 50% of Bell Atlantic in-
region lines, a court or governmental agency of competent jurisdiction rules
that Verizon's interest in us violates Section 271 of the Telecommunications
Act, then under the proposal to the FCC:
. Verizon can at that time convert its shares of our Class B common stock
into 800 million shares of our Class A common stock or Class C common
stock for the purpose of disposing of all such shares above 10%; or
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. Verizon can transfer some or all of its Class B common stock to a third
party that would then be able to convert such shares into 800 million
shares of our Class A common stock or Class C common stock.
Under the proposal to the FCC, if Verizon has not eliminated the applicable
Section 271 restrictions as to 100% of Bell Atlantic in-region lines on or
before , 2005, which date may be extended under conditions that we describe
below, Verizon's ability to convert the Class B common stock into 800 million
shares of Class A common stock or Class C common stock will expire. If Verizon
has satisfied the applicable Section 271 restrictions as to 100% of Bell
Atlantic in-region lines on or before that date, its ability to convert the
Class B common stock does not expire. Class B common stock transferred to a
third party will not be subject to this expiration limitation.
Under the proposal to the FCC, Verizon may file a petition to extend the
date by which Verizon must eliminate the applicable Section 271 restrictions,
and in the event of that filing, the date will be extended to , 2006 or
later at the discretion of the FCC, if by , 2005 Verizon has eliminated the
applicable Section 271 restrictions on:
(1) all but 10% of Bell Atlantic in-region lines; or
(2) all of Bell Atlantic in-region lines except for:
. lines in any one state, regardless of the number of Bell Atlantic in-
region lines accounted for by that state; and
. lines in additional states accounting for, in the aggregate, up to 5%
of Bell Atlantic in-region lines.
If on the original or extended date referred to above Verizon has offered to
sell shares of Class B common stock to us, the conversion period will be
extended to allow for the sale of the shares to us or, through a disposition
trustee, to another party.
Conversion of Class C Common Stock. The Class C common stock is convertible
into Class A common stock, in whole or in part, at any time and from time to
time at the option of the holder, on the basis of one share of Class A common
stock for each share of Class C common stock. Each share of Class C common
stock will automatically convert into one share of Class A common stock if at
any time the aggregate number of outstanding shares of Class C common stock,
together with any shares of Class C common stock issuable upon conversion of
Class B common stock, constitutes less than 10% of our then outstanding
common stock, assuming for the purposes of this calculation that (1) shares of
Class B common stock that can never be converted into more than their
proportionate share of 10% of our total common stock outstanding shall be
considered to have been converted on that basis and (2) other shares of Class B
common stock shall be considered to have been converted to the maximum extent
permitted under our certificate of incorporation.
Transfer of Class C Common Stock. If any party other than Verizon or its
affiliates converts shares of our Class B common stock, such party can only
receive shares of our Class A common stock. Verizon can receive shares of our
Class C common stock upon conversion of its Class B common stock, either after
eliminating applicable Section 271 restrictions as to 100% of Bell Atlantic in-
region lines or, in connection with a disposition of Verizon's shares of our
common stock, after eliminating applicable Section 271 restrictions as to at
least 50% of Bell Atlantic in-region lines. In either event, Verizon can
transfer shares of our Class C common stock to one or more persons, provided
that any shares of our Class C common stock so transferred will automatically
convert into shares of our Class A common stock on the earlier to occur of
(1) any subsequent transfer of ownership of such shares or (2) the first
anniversary of the transfer of such shares by Verizon. As a result of the
foregoing, one or more third parties could own shares of our Class C common
stock.
Genuity Right of First Offer. Under the proposal to the FCC, if Verizon
seeks to sell some or all of its shares of our Class B common stock, or the
shares of our common stock received by it on conversion of all or
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some of its shares of our Class B common stock, after eliminating the
applicable Section 271 restrictions as to at least 50% but less than 95% of
Bell Atlantic in-region lines, Verizon will first offer to sell those shares to
us with the purchase price payable in the form of an unsubordinated, marketable
debt instrument of Genuity with a fair market value equal to its face value.
The purchase price for all of the shares of Class B common stock will be equal
to the sum of:
. the value of a 10% equity interest in us at the time of such sale, based
on the average of the closing prices of the Class A common stock on the
thirty trading days prior to the date Verizon offers the shares to us;
and
. the amount Verizon would have had on the date of the completion of the
sale if it had taken the amount of its initial investment in us above a
10% interest, based on the initial public offering price for the Class A
common stock, and invested such amount at the time of the closing of
this offering in the S&P 500 Index.
We are required to notify Verizon of our intent to purchase the shares
within 90 days after Verizon's offer to us. If we decide to purchase the
shares, we will have 180 days from the date of the offer to complete the
purchase.
If we decline to purchase the shares or fail to complete the purchase,
Verizon will transfer the shares to a disposition trustee selected in
accordance with FCC rules, who will attempt to sell the shares to a third
party. Under the proposal to the FCC, Verizon is not entitled to retain tax
adjusted proceeds from the third party sale that exceed an amount determined in
the same manner as the amount for which we could have purchased the shares as
described above, and any tax adjusted proceeds in excess of that amount, or
such lesser amount as the FCC may determine, will be paid to the United States
Treasury.
Receipt of Portion of Class B Common Stock Appreciation Upon Conversion or
Sale by Verizon. After Verizon has eliminated applicable Section 271
restrictions as to 100% of Bell Atlantic in-region lines, Verizon may increase
its ownership of our capital stock to an amount in excess of 10% by converting
its shares of our Class B common stock into either Class A common stock or
Class C common stock. Under the proposal to the FCC, Verizon has agreed that at
the time of this conversion, or at the time of a sale of Verizon's shares of
our Class B common stock after Verizon has eliminated applicable Section 271
restrictions as to at least 95% of Bell Atlantic in-region lines, it will elect
either:
. to make a payment to us for distribution to the holders of our Class A
common stock; or
. to adjust the conversion ratio by receiving fewer shares of our Class A
common stock or Class C common stock than it would otherwise be entitled
to upon conversion, in which case we would distribute the shares
relinquished by Verizon to the holders of our Class A common stock.
In either event, the holders of our Class A common stock will receive a
portion of the appreciation of the shares of our Class B common stock converted
by Verizon.
Verizon will use the following calculation to determine the amount of the
cash paid to us or the number of shares relinquished by it upon conversion:
First, Verizon will engage a nationally recognized investment banker to
determine the total appreciation of its shares of our Class B common stock. The
appreciation will be determined in proportion to the appreciation in the
publicly traded Class A common stock as adjusted to eliminate any increase
reflecting the anticipation of the payment or conversion change and
distribution contemplated by this paragraph, minus the initial value of our
Class B common stock held by Verizon on an as-converted basis, based on the
initial offering price to the public.
Second, the appreciation that is attributable to Verizon's owning a 10%
interest in us will be subtracted from the total appreciation.
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Third, as of each anniversary of the closing of this offering, a percentage
will be determined equal to 25% multiplied by a fraction, the numerator of
which is the number of Bell Atlantic in-region lines as to which applicable
Section 271 restrictions have not been eliminated and the denominator of which
is the total number of Bell Atlantic in-region lines. Those annual percentages
will be averaged.
Finally, the amount of the cash that Verizon will pay to us or the number of
shares that it will relinquish is equal to the product of the average
percentages multiplied by the appreciation as determined using the calculation
explained in the prior paragraphs. If Verizon chooses to make a cash payment to
us for distribution to the holders of Class A common stock, this amount will be
tax adjusted to reflect the fact that Verizon would have to pay taxes if it
sold our stock, or other assets to raise the capital required for this payment.
If Verizon chooses instead to receive fewer shares of stock, the amount of
appreciation that Verizon will forego will be converted into a number of shares
of our Class A common stock that will be distributed to the other holders of
Class A common stock.
Right to Purchase Additional Shares Upon Conversion. If at any time during
the one year following the conversion by Verizon or its affiliates of any
shares of Class B common stock Verizon and its affiliates control shares of
Class A common stock and Class C common stock that together equal or exceed 70%
of the total number of shares of common stock then outstanding, Verizon will
have the right during the one year following the conversion to acquire from us
a number of shares of Class A common stock so that, immediately after the
acquisition, Verizon and its affiliates' combined ownership of Class A and
Class C common stock will be equal to 80% of the total number of shares of
common stock then outstanding. For purposes of calculating in the preceding
sentence the total number of shares of common stock outstanding (1) shares of
Class B common stock that can never be converted into more than their
proportionate share of 10% of our total common stock outstanding shall be
considered to have been converted on that basis and (2) other shares of Class B
common stock shall be considered to have been converted to the maximum extent
permitted under our certificate of incorporation. This right to purchase
additional shares may be exercised only one time. The price payable per share
in this purchase would consist of cash, stock or other property with a fair
market value equal to the average of the closing prices for the Class A common
stock for the 30 trading days immediately preceding the date of the purchase.
In the event Verizon elects to pay the purchase price in property, the fair
market value of such property will be established by an appraisal conducted by
a nationally recognized appraiser chosen by our independent directors. Verizon
shall not be permitted to pay the purchase price in property if our independent
directors determine that:
. our ownership of such property will violate the law including without
limitation any federal or state regulations applicable to us; or
. the property is not reasonably useful to us in light of our then
existing business plan.
Liquidation. In the event of any dissolution, liquidation, or winding up of
our affairs, whether voluntary or involuntary, the holders of the Class A
common stock, the Class B common stock and the Class C common stock will be
entitled to share ratably, in proportion to the number of shares they represent
of our outstanding common stock, in the assets legally available for
distribution to stockholders, in each case after payment of all of our
liabilities and subject to preferences that may apply to any series of
preferred stock then outstanding. We may not dissolve, liquidate or wind up our
affairs without obtaining the consent of the holders of the outstanding shares
of our Class B common stock.
Mergers and Other Business Combinations. If we enter into a merger,
consolidation or other similar transaction in which shares of our common stock
are exchanged for or converted into securities, cash or any other property, the
holders of each class of our common stock will be entitled to receive an equal
per share amount of the securities, cash, or other property, as the case may
be, for which or into which each share of any other class of common stock is
exchanged or converted; provided that in any such merger, consolidation or
other similar transaction, the holders of the shares of Class B common stock
shall be entitled to receive, at their election, either (1) the merger
consideration such holders would have received had they converted their shares
of Class B common stock immediately prior to the consummation of such
transaction or (2) a new security that
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is convertible into the merger consideration and has substantially identical
voting and other rights as the Class B common stock. In any transaction in
which shares of capital stock are distributed, the shares that are exchanged
for or converted into the capital stock may differ as to voting rights and
conversion rights only to the extent that the voting rights and conversion
rights of Class A common stock, Class B common stock and Class C common stock
differ at that time. As described above, the holders of the Class B common
stock, voting separately as a class, must consent to any merger, consolidation
or other similar transaction. The amount of consideration that Verizon may
retain from a merger, consolidation or other similar transaction is limited by
the terms of the proposal to the FCC as described above under "Conversion of
Class B Common Stock" and "Receipt of Portion of Class B Common Stock
Appreciation Upon Conversion by Verizon."
Other Provisions. The holders of our Class A common stock, Class B common
stock and Class C common stock are not entitled to preemptive rights. There are
no redemption provisions or sinking fund provisions that apply to the Class A
common stock, the Class B common stock or the Class C common stock.
Preferred Stock
Our board of directors has the authority, without further action by the
holders of our Class A common stock or Class C common stock, to issue from time
to time, shares of our preferred stock in one or more series. The issuance of
shares of preferred stock is, however, subject to the approval of holders of
the Class B common stock. Once the approval of the holders of the Class B
common stock has been obtained, our board of directors may fix the number of
shares, designations, preferences, powers and other special rights of the
preferred stock. The preferences, powers, rights and restrictions of different
series of preferred stock may differ. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to
holders of common stock or affect adversely the rights and powers, including
voting rights, of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, may also have the effect of discouraging, delaying or
preventing a change in control of our company, regardless of whether the
transaction may be beneficial to stockholders. After the closing of this
offering, there will be no shares of preferred stock outstanding and we have no
current plans to issue any shares of preferred stock.
Anti-takeover Effects of Delaware Law and our Certificate of Incorporation and
Bylaws
In addition to the special approval and conversion rights of the Class B
common stock and the provision referred to above relating to the voting of
beneficial ownership above 20% of our outstanding shares of Class A common
stock, there are provisions of the Delaware General Corporation Law and other
provisions of our certificate of incorporation and bylaws that may be deemed to
have an anti-takeover effect and may discourage, delay 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 our stockholders. Under our bylaws, the
provisions summarized below regarding our classified board, action by written
consent and stockholder meetings can be amended by the vote of either:
. both 80% of the voting power of all of our voting stock and 50% of the
voting power of our Class B common stock; or
. 80% of the voting power of the Class B common stock, provided that such
vote occurs in connection with the delivery of a conversion notice
pursuant to which the Class B common stock is converted into greater
than 10% of our common stock.
Classified Board of Directors. Other than the director elected by the
holders of our Class B common stock, our board of directors will be divided at
our initial meeting of stockholders into three classes of directors, as nearly
equal in size as possible, serving staggered three-year terms. Upon expiration
of the term of a class of directors, the directors in that class will be
elected for three-year terms at the annual meeting of stockholders in the year
in which the term for that class of directors expires. In addition, our bylaws
provide that directors, other than the director elected by the holders of the
Class B common stock, may be removed only for cause by
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the affirmative vote of the holders of a majority of the shares of capital
stock entitled to vote in the election of directors. Under our bylaws, a
vacancy on the board of directors, other than a vacancy with respect to the
director elected by the holders of the Class B common stock but including a
vacancy resulting from an enlargement of the board of directors, may only be
filled by vote of a majority of the directors then in office. The
classification of the board of directors and the limitations on removing
directors and filling vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of us.
Stockholder Action; Special Meeting of Stockholders. Our certificate of
incorporation eliminates the ability of our Class A common stock to act by
written consent. Our 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. These provisions could have the effect of
delaying until the next annual meeting of stockholders those actions that are
favored by the holders of a majority of our outstanding voting securities.
These provisions may also discourage another person from making a tender offer
for our common stock, because that person, even if it acquired a majority of
our outstanding voting securities, would be able to take action as a
stockholder, such as electing new directors or approving a merger, only at a
duly called meeting of stockholders and not by written consent.
Advance Notice Requirements for Stockholder Proposals and Directors
Nominations. Our 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
received at our principal executive offices not less than 90 days nor more than
120 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders. In the event that the annual meeting is called for a
date that is not within 30 days before or after the anniversary date, in order
to be timely, notice from the stockholder must be received no later than the
tenth day following the date on which notice of the annual meeting was mailed
to stockholders or made public, whichever occurred earlier. Our bylaws also
specify 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 approval of
the holders of Class A or Class C common stock. As described above, the vote of
the holders of the Class B common stock, voting separately as a class, is
required to issue equity securities in excess of specified limits. 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 render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest,
tender offer, merger or otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe.
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IMPORTANT UNITED STATES TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF CLASS A COMMON STOCK
This section is a general discussion of important United States federal
income and estate tax consequences of the ownership and disposition of our
Class A common stock by a non-U.S. holder. You are a non-U.S. holder if you
are, for United States federal income tax purposes:
. a non-resident alien individual;
. a foreign corporation;
. a foreign partnership; or
. an estate or trust that in either case is not subject to United States
federal income tax on a net income basis on income or gain from Class A
common stock.
We do not, however, discuss all aspects of United States federal taxation
that may be important to a particular non-U.S. holder in light of specific
facts and circumstances relevant to that non-U.S. holder. For example this
section does not describe special tax rules that could apply to a non-U.S.
holder who was previously a U.S. resident or citizen. This section also does
not address the treatment of a non-U.S. holder under the laws of any state,
local or foreign taxing jurisdiction. This section is based on the tax laws of
the United States, including the Internal Revenue Code of 1986, as amended,
existing and proposed regulations, and administrative and judicial
interpretations, all as currently in effect. These laws are subject to change,
possibly on a retroactive basis.
You should consult a tax advisor regarding the United States federal tax
consequences of acquiring, holding and disposing of Class A common stock in
your particular circumstances, as well as any tax consequences that may arise
under the laws of any state, local or foreign taxing jurisdiction
Dividends
Except as described below, if you are a non-U.S. holder of Class A common
stock, dividends paid to you are subject to withholding of United States
federal income tax at a 30% rate or at a lower rate if you are eligible for the
benefits of an income tax treaty that provides for a lower rate. Under
currently effective United States Treasury regulations, for purposes of
determining if dividends are subject to the 30% withholding tax, dividends paid
to an address in a foreign country are presumed to be paid to a resident of
that country, unless the person making the payment has knowledge to the
contrary. Under current interpretations of United States Treasury regulations,
this presumption also applies for purposes of determining whether a lower
withholding rate applies under an income tax treaty.
Under United States Treasury regulations that will generally apply to
dividends paid after December 31, 2000, you must satisfy certification
requirements in order to claim the benefit of a lower treaty rate.
Additionally, if you are a partner in a foreign partnership, you, in addition
to the foreign partnership, must satisfy the certification requirements and the
partnership must provide information as well. The Internal Revenue Service will
apply a look-through rule in the case of tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under a tax treaty, you may obtain a refund of any amounts withheld in excess
of that rate by filing a refund claim with the United States Internal Revenue
Service.
If the dividends are "effectively connected" with your conduct of a trade or
business within the United States, and, if required by a tax treaty, the
dividends are attributable to a permanent establishment that you maintain in
the United States, then the dividends generally are not subject to withholding
tax. Instead, "effectively connected" dividends are taxed at rates applicable
to United States citizens, resident aliens and domestic United States
corporations.
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If you are a corporate non-U.S. holder, "effectively connected" dividends
that you receive may be subject to an additional "branch profits tax" at a 30%
rate or at a lower rate if you are eligible for the benefits of an income tax
treaty that provides for a lower rate.
Gain on Disposition of Class A Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on gain that you recognize on a disposition of Class
A common stock unless:
. the gain is "effectively connected" with your conduct of a trade or
business in the United States, and the gain is attributable to a
permanent establishment that you maintain in the United States, if that
is required by an applicable income tax treaty as a condition for
subjecting you to United States taxation on a net income basis;
. you are an individual, you hold the Class A common stock as a capital
asset, you are present in the United States for 183 or more days in the
taxable year of the sale and other specific requirements are met; or
. we are or have been a United States real property holding corporation for
federal income tax purposes and you held, directly or indirectly, at any
time during the five-year period ending on the date of disposition, more
than 5% of the Class A common stock and you are not eligible for any
treaty exemption.
If you are a corporate non-U.S. holder, "effectively connected" gains that
you recognize may also, in some circumstances, be subject to an additional
"branch profits tax" at a 30% rate or at a lower rate if you are eligible for
the benefits of an income tax treaty that provides for a lower rate.
We have not been, are not and do not anticipate becoming a United States
real property holding corporation for United States federal income tax
purposes.
Federal Estate Taxes
Class A common stock held by an individual who is a non-U.S. holder at the
time of death will be included in the holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
Information Reporting and Backup Withholding
Under currently applicable law, if you are a non-U.S. holder, dividends paid
to you at an address outside the United States generally will not be subject to
United States information reporting requirements or backup withholding tax.
Beginning with payments made after December 31, 2000, a non-U.S. holder will be
entitled to such exemption only if the non-U.S. holder provides a Form W-8BEN
or otherwise meets documentary evidence requirements for establishing that it
is a non-U.S. holder, or otherwise establishes an exemption.
The gross proceeds from the disposition of Class A common stock may be
subject to information reporting and backup withholding tax at a rate of 31%.
If you sell your Class A common stock outside of the United States through a
non-U.S. office of a non-U.S. broker, and the sales proceeds are paid to you
outside the United States, then United States backup withholding and
information reporting requirements generally will not apply to that payment.
However, United States information reporting, but not backup withholding, will
apply to a payment of sales proceeds, even if that payment is made outside the
United States, if you sell your Class A common stock through a non-U.S. office
of a broker that:
. is a United States person;
. derives 50% or more of its gross income in specific periods from the
conduct of a trade or business in the United States;
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. is a "controlled foreign corporation" as to the United States; or
. with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
- one or more of its partners are U.S. persons, as defined in United
States Treasury regulations, who in the aggregate hold more than 50%
of the income or capital interests in the partnership;
- at any time during its tax year, the foreign partnership is engaged in
a United States trade or business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of Class A common stock to
or through a United States office of a broker, the payment is subject to both
United States backup withholding and information reporting unless you certify,
under penalties of perjury, that you are a non-U.S. person or you otherwise
establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund
claim with the United States Internal Revenue Service.
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SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our Class A common stock, including
shares issued upon exercise of outstanding options to purchase Class A common
stock, in the public market after this offering could adversely affect the
prevailing market price of our Class A common stock. Furthermore, because no
shares of Class A common stock will be available for sale shortly after this
offering due to the contractual restrictions on resale described in the section
entitled "Underwriting" and the legal restrictions on resale described below,
the sale of a substantial amount of common stock in the public market after
these restrictions lapse could adversely affect the prevailing market price of
our Class A common stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
173,913,000 shares of our Class A common stock and 18,256,000 shares of Class B
common stock. The Class B common stock is convertible into 800 million shares
of Class A common stock or Class C common stock as described elsewhere in this
prospectus. The Class C common stock is convertible into shares of Class A
common stock. All of the 173,913,000 shares of our Class A common stock sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are purchased by
"affiliates" as that term is defined in Rule 144 under the Securities Act. Any
shares purchased by an affiliate may not be resold except pursuant to an
effective registration statement or an applicable exemption from registration,
including an exemption under Rule 144 of the Securities Act. The shares of
Class A common stock issuable upon conversion of the Class B common stock or
Class C common stock will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act. These restricted securities may be sold in
the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act. All of the shares of Class B common stock are subject to lock-up
agreements as described more fully in the section entitled "Underwriting".
Stock Options
Immediately after the completion of this offering, there will be options to
purchase approximately 50 million shares of our Class A common stock
outstanding under our long-term incentive plans. Shortly after the completion
date of this offering, we expect to file a registration statement under the
Securities Act covering the shares of Class A common stock reserved for
issuance under our long-term incentive plans. The shares of our Class A common
stock registered under this registration statement would be immediately
available for sale in the open market, subject to vesting restrictions for
these options and the lock-up agreements.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. are acting
as representatives, have agreed to purchase, and we have agreed to sell to
them, the number of shares indicated below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ -----------
<S> <C>
Morgan Stanley & Co. Incorporated................................
Salomon Smith Barney Inc. .......................................
Bear, Stearns & Co. Inc..........................................
Chase Securities Inc.............................................
Credit Suisse First Boston Corporation...........................
Goldman, Sachs & Co..............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
Deutsche Bank Securities Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
J. P. Morgan Securities Inc......................................
UBS Warburg LLC..................................................
-----------
Total........................................................ 173,913,000
===========
</TABLE>
The underwriters are offering the shares of Class A common stock subject to
their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the underwriters to pay
for and accept delivery of the shares of Class A common stock offered by this
prospectus are subject to various conditions. The underwriters must take and
pay for all of the shares of Class A common stock offered by this prospectus if
any of these shares are taken. However, the underwriters are not required to
take or pay for the shares covered by the underwriters' over-allotment option
described below.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price listed on the
cover page of this prospectus and part to dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and dealers may reallow, a concession not in excess of
$ a share to other underwriters or to dealers. After the initial offering of
the shares of Class A common stock, the offering price and other selling terms
may from time to time be varied by the representatives of the underwriters.
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We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 26,087,000
additional shares of Class A common stock at the public offering price listed
on the cover page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose
of covering overallotments, if any, made in connection with the offering of the
shares of Class A common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated, subject to
conditions, to purchase about the same percentage of the additional shares of
Class A common stock as the number listed next to the underwriter's name in the
preceding table bears to the total number of shares of Class A common stock
listed next to the names of all underwriters in the preceding table. If the
underwriters exercise the option in full, the total price to the public would
be $ , the total underwriters' discounts and commissions would be $ and
total proceeds to us would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.
Our Class A common stock has been approved for listing on the Nasdaq
National Market under the symbol "GENU".
Each of Genuity, the directors and executive officers of Genuity, the
persons purchasing shares of our Class A common stock in the directed share
program and GTE has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated and Salomon Smith Barney Inc. on behalf of the
underwriters, it will not, during the period ending 180 days after the date of
this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of Class A common stock or any
securities convertible into or exercisable or exchangeable for Class A
common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
Class A common stock;
whether any transaction described above is to be settled by delivery of Class A
common stock or such other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. issuances of equity securities in connection with acquisitions, provided
these equity securities are subject to the lock-up restrictions described
above;
. our issuance of shares of Class A common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
. transactions by any person other than us relating to shares of Class A
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares.
The representatives of the underwriters may also waive the restrictions
described above in their discretion.
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters
may over-allot in connection with the offering, creating a short position in
the Class A common stock for their own account. In addition, to cover over-
allotments or to stabilize the price of the Class A common stock, the
underwriters may bid for, and purchase, shares of Class A common stock in the
open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or
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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.
We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
Directed Share Program
At our request, the underwriters have reserved for sale, at the initial
offering price, up to 8,695,650 shares of our Class A common stock offered by
this prospectus. These shares will be offered to our employees and other
individuals whom our officers may designate. The number of shares of Class A
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares that are
not so purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered hereby.
Pricing of the Offering
Prior to this offering, there has been no public market for the Class A
common stock. The initial public offering price will be determined by
negotiations between us and the representatives of the underwriters. The
factors to be considered in determining the initial public offering price will
include the future prospects of our company and its industry in general, sales,
earnings and other financial operating information of our company in recent
periods, and the price-earnings ratios, price-sales ratios, market prices of
securities and some financial and operating information of companies engaged in
activities similar to those of our company. The estimated initial public
offering price range indicated on the cover page of this preliminary prospectus
is subject to change as a result of market conditions and other factors.
95
<PAGE>
VALIDITY OF CLASS A COMMON STOCK
The validity of the Class A common stock offered by this prospectus will be
passed upon by Ropes & Gray, Boston, Massachusetts, for Genuity, and by
Sullivan & Cromwell, New York, New York, for the underwriters.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
96
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the Class A common stock to be sold in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules that are part of the registration statement. If a
contract or document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document that has been
filed. You may read and copy all or any portion of the registration statement
or any reports, statements or other information in the files at the following
public reference facilities of the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
Room 1024, Judiciary Plaza Seven World Trade Center 500 West Madison Street
450 Fifth Street, N.W. Suite 1300 Suite 1400
Washington, D.C., 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for
further information on the operation of its public reference rooms. Our
filings, including the registration statement, will also be available to you on
the Internet web site maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors.
97
<PAGE>
GENUITY INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Combined Statements of Operations for the six months ended June 30, 1997
related to the Predecessor, for the years ended December 31, 1997, 1998
and 1999, and the three months ended March 31, 1999 and 2000 (unaudited)
related to Genuity...................................................... F-3
Combined Balance Sheets as of December 31, 1998 and 1999, as of March 31,
2000 (unaudited) and Pro Forma March 31, 2000 (unaudited)............... F-4
Combined Statements of Cash Flows for the six months ended June 30, 1997
related to the Predecessor and for the years ended December 31, 1997,
1998 and 1999, and the three months ended March 31, 1999 and 2000
(unaudited) related to Genuity.......................................... F-5
Combined Statements of Changes in Stockholder's Equity for the six months
ended June 30, 1997 related to the Predecessor, for the years ended
December 31, 1997, 1998 and 1999, and the three months ended March 31,
2000 (unaudited) and Pro Forma March 31, 2000 (unaudited) related to
Genuity................................................................. F-6
Combined Statements of Comprehensive Loss for the six months ended June
30, 1997 related to the Predecessor, for the years ended December 31,
1997, 1998 and 1999, and the three months ended March 31, 1999 and 2000
(unaudited) related to Genuity.......................................... F-7
Notes to Combined Financial Statements................................... F-8
</TABLE>
F-1
<PAGE>
After the recapitalization, issuance of Class B common stock and finalization
of agreements discussed in Notes 6, 13 and 14 to Genuity Inc.'s combined
financial statements are effected, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
June 5, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of Genuity Inc.:
We have audited the accompanying combined balance sheets of Genuity Inc. and
subsidiaries (comprised of certain operations of Genuity Inc. and wholly-owned
by GTE Corporation (GTE)) (the Company) as of December 31, 1998 and 1999, and
the related combined statements of operations, changes in stockholder's equity,
cash flows and comprehensive loss for each of the three years in the period
ended December 31, 1999. We have also audited the statements of operations,
changes in stockholder's equity, cash flows and comprehensive loss of the
Company's predecessor for the six months ended June 30, 1997, the period prior
to the acquisition by the Company. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 and the results
of operations and cash flows of the Predecessor for the six months ended June
30, 1997 in conformity with accounting principles generally accepted in the
United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Boston, Massachusetts
, 2000
F-2
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor Genuity
------------- -----------------------------------------------------
Three Months
Six Months Year Ended December 31, Ended March 31,
Ended ------------------------------- --------------------
June 30, 1997 1997 1998 1999 1999 2000
------------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $106,318 $ 183,483 $ 446,002 $ 706,466 $ 157,283 $ 247,852
Operating Expenses
Cost of goods sold.... 92,670 166,040 492,794 767,498 160,540 283,928
Selling, general and
administrative....... 38,801 142,962 312,916 396,522 93,123 108,336
Depreciation and
amortization......... 10,536 49,444 104,444 187,628 41,092 53,786
-------- --------- --------- --------- --------- ---------
Total operating
expenses........... 142,007 358,446 910,154 1,351,648 294,755 446,050
-------- --------- --------- --------- --------- ---------
Operating Loss.......... (35,689) (174,963) (464,152) (645,182) (137,472) (198,198)
Other Income (Expense)
Interest expense,
net.................. (478) (1,346) (20) (183) (434) (2,973)
Other, net............ (1,496) 1,814 (2,924) (32) (341) (8,067)
-------- --------- --------- --------- --------- ---------
Loss Before Income
Taxes.................. (37,663) (174,495) (467,096) (645,397) (138,247) (209,238)
Income Taxes............ -- 433 1,463 1,649 333 588
-------- --------- --------- --------- --------- ---------
Net Loss................ $(37,663) $(174,928) $(468,559) $(647,046) $(138,580) $(209,826)
======== ========= ========= ========= ========= =========
Basic and Diluted Loss
Per Common Share....... $ -- $ (9.58) $ (25.67) $ (35.44) $ (7.59) $ (11.49)
======== ========= ========= ========= ========= =========
Basic and Diluted
Weighted-Average Common
Shares Outstanding..... -- 18,256 18,256 18,256 18,256 18,256
======== ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE>
GENUITY INC.
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, 2000
December 31, -----------------------
----------------------- (unaudited)
1998 1999 Actual Pro Forma
---------- ----------- ----------- ----------
(Note 15)
Assets
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.. $ 13,883 $ 6,044 $ 17,118 $ 150,737
Receivables, less
allowances of $3,651,
$5,550 and $4,476
(unaudited)............... 148,355 193,978 185,107 185,107
Receivables--affiliates.... 18,077 40,462 29,497 29,497
Note receivable--GTE....... 18,239 -- 1,836 --
Other current assets....... 19,099 13,627 31,461 31,461
---------- ----------- ----------- ----------
Total current assets..... 217,653 254,111 265,019 396,802
Property, Plant and
Equipment, Net.............. 908,980 1,520,934 1,629,391 1,629,391
Goodwill and Other
Intangibles, Net............ 555,612 537,989 524,536 524,536
Other Assets................. 3,724 30,098 42,908 42,908
---------- ----------- ----------- ----------
Total assets............. $1,685,969 $ 2,343,132 $2,461,854 $2,593,637
========== =========== =========== ==========
Liabilities and Stockholder's
Equity
Current Liabilities:
Short-term obligations,
including current
maturities................ $ 20,499 $ 25,921 $ 74,220 $ 74,220
Note payable--GTE.......... -- 136,484 -- --
Accounts payable........... 73,711 142,752 135,705 135,705
Accounts payable--
affiliates................ 13,440 29,647 25,287 25,287
Accrued compensation and
related liabilities....... 15,763 49,637 64,553 20,553
Accrued circuits........... -- 51,775 74,843 74,843
Accrued liabilities........ 41,008 78,937 52,555 52,555
Advanced billings.......... 10,172 26,320 18,340 18,340
---------- ----------- ----------- ----------
Total current
liabilities............. 174,593 541,473 445,503 401,503
Long-Term Obligations........ 126,855 112,717 57,563 57,563
Employee Benefit Plan
Obligations and Deferred
Compensation................ 46,388 20,466 12,604 10,604
Other Liabilities............ 3,406 370 417 417
---------- ----------- ----------- ----------
Total long-term
liabilities............. 176,649 133,553 70,584 68,584
---------- ----------- ----------- ----------
Stockholder's Equity:
Class A common stock--$0.01
par value; authorized
1,600,000,000 shares; no
shares issued
and outstanding........... -- -- -- --
Class B common stock--$0.01
par value; 21,000,000
shares authorized;
18,256,000 shares
authorized, issued,
outstanding and pro
forma..................... 183 183 183 183
Class C common stock--$0.01
par value; 800,000,000
shares authorized;
no shares issued
and outstanding........... -- -- -- --
Additional paid-in
capital................... 1,990,485 2,972,142 3,460,604 3,638,387
Other comprehensive
income.................... 3,928 2,696 1,721 1,721
Accumulated deficit........ (659,869) (1,306,915) (1,516,741) (1,516,741)
---------- ----------- ----------- ----------
Total stockholder's
equity.................. 1,334,727 1,668,106 1,945,767 2,123,550
---------- ----------- ----------- ----------
Total liabilities and
stockholder's equity.... $1,685,969 $ 2,343,132 $ 2,461,854 $2,593,637
========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Genuity
----------- ---------------------------------
Three Months
Six Months Year Ended December 31, Ended March 31,
Ended June --------------------------------- ----------------------
30, 1997 1997 1998 1999 1999 2000
----------- --------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(37,663) $(174,928) $ (468,559) $ (647,046) $ (138,580) $ (209,826)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization..................... 10,536 49,444 104,444 187,628 41,094 53,786
Changes in current assets and current liabilities:
Receivables--net................................. (15,602) (19,934) (75,883) (68,008) (24,903) 19,836
Other current assets............................. 726 (9,341) (6,730) 5,472 (6,142) (17,834)
Other current liabilities........................ 46,265 96,667 (92,914) 170,338 5,596 40,017
Other, net........................................ (1,766) (32,835) 26,714 (52,226) (10,544) (5,374)
-------- --------- ---------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities......................................... 2,496 (90,927) (512,928) (403,842) (133,479) (119,395)
-------- --------- ---------- ---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures.............................. (2,830) (255,903) (505,303) (666,398) (132,733) (210,895)
Purchase of businesses, net of cash acquired...... -- (517,788) -- -- -- --
Capitalized software.............................. -- -- -- (34,580) -- (1,408)
-------- --------- ---------- ---------- ---------- ----------
Net cash used in investing activities............... (2,830) (773,691) (505,303) (700,978) (132,733) (212,303)
-------- --------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt....................... (34,012) (834) (29,547) (37,512) (8,742) (55,154)
Change in short-term obligations.................. 10,249 346 9,904 5,422 3,068 48,299
Change in note payable/receivable--GTE............ -- 257,178 (264,860) 154,723 (20,480) (138,320)
Issuance of Class B common stock.................. -- 183 -- -- -- --
Contributions from GTE............................ -- 610,505 1,313,554 974,348 279,024 487,947
-------- --------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing
activities......................................... (23,763) 867,378 1,029,051 1,096,981 252,870 342,772
-------- --------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents........................................ (24,097) 2,760 10,820 (7,839) (13,342) 11,074
Cash and cash equivalents, beginning of period...... 102,870 303 3,063 13,883 13,883 6,044
-------- --------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period............ $ 78,773 $ 3,063 $ 13,883 $ 6,044 $ 541 $ 17,118
======== ========= ========== ========== ========== ==========
Supplemental Cash Flows Disclosure
Cash paid during the year for:
Interest.......................................... $ 671 $ 2,142 $ 16,401 $ 4,403 $ 1,184 $ 802
======== ========= ========== ========== ========== ==========
State income taxes................................ $ -- $ 433 $ 1,463 $ 1,649 $ 333 $ 588
======== ========= ========== ========== ========== ==========
Noncash Investing and Financing Activities:
Capital lease obligation incurred for equipment
purchase......................................... $ 20,425 $ 21,469 $ 54,958 $ 23,374 $ 14,206 $ --
======== ========= ========== ========== ========== ==========
Accounts payable--work in process................. $ -- $ 22,119 $ 27,570 $ 54,584 $ (41,782) $ (47,802)
--------------------------------------------------
======== ========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Other
Class Class Class Class Compre-
A A B B Additional hensive Accum-
Common Common Common Common Common Paid-In Income ulated Treasury
Stock Shares Stock Shares Stock Capital (Loss) Deficit Shares Total
------- ------ ------ ------ ------ ---------- ------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31,
1996.................... $25,041 -- $-- -- $ -- $ 115,456 $ -- $ (5,967) $(28,419) $ 106,111
Stock option
exercises.............. 88 -- -- -- -- 1,912 -- -- -- 2,000
Conversion of
debentures............. 249 -- -- -- -- 7,562 -- -- -- 7,811
Net loss............... -- -- -- -- -- -- -- (37,663) -- (37,663)
Other.................. -- -- -- -- -- -- (1,033) -- -- (1,033)
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Balance, June 30, 1997.. $25,378 -- $-- -- $ -- $ 124,930 $(1,033) $ (43,630) $(28,419) $ 77,226
======= === === ====== ==== ========== ======= =========== ======== ==========
-------------------------------------------------------------------------------
GENUITY
Balance, December 31,
1996.................... $ -- -- $-- -- $ -- $ 47,758 $ -- $ (16,382) $ -- $ 31,376
Conversion of
Predecessor equity
instruments............ -- -- -- -- -- 16,186 -- -- -- 16,186
Issuance of Class B
common stock........... -- -- -- 18,256 183 -- -- -- -- 183
Capital contributions--
GTE.................... -- -- -- -- -- 610,505 -- -- -- 610,505
Net loss............... -- -- -- -- -- -- -- (174,928) -- (174,928)
Other.................. -- -- -- -- -- -- 2,046 -- -- 2,046
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Balance, December 31,
1997.................... -- -- -- 18,256 183 674,449 2,046 (191,310) -- 485,368
Tax benefit on exercise
of stock options--GTE.. -- -- -- -- -- 2,482 -- -- -- 2,482
Capital contributions--
GTE.................... -- -- -- -- -- 1,313,554 -- -- -- 1,313,554
Net loss............... -- -- -- -- -- -- -- (468,559) -- (468,559)
Other.................. -- -- -- -- -- -- 1,882 -- -- 1,882
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Balance, December 31,
1998.................... -- -- -- 18,256 183 1,990,485 3,928 (659,869) -- 1,334,727
Tax benefit on exercise
of stock options--GTE.. -- -- -- -- -- 7,309 -- -- -- 7,309
Capital contributions--
GTE.................... -- -- -- -- -- 974,348 -- -- -- 974,348
Net loss............... -- -- -- -- -- -- -- (647,046) -- (647,046)
Other.................. -- -- -- -- -- -- (1,232) -- -- (1,232)
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Balance, December 31,
1999.................... -- -- -- 18,256 183 2,972,142 2,696 (1,306,915) -- 1,668,106
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Tax benefit on exercise
of stock options--GTE.. -- -- -- -- -- 515 -- -- -- 515
Capital contributions--
GTE.................... -- -- -- -- -- 487,947 -- -- -- 487,947
Net loss............... -- -- -- -- -- -- -- (209,826) -- (209,826)
Other.................. -- -- -- -- -- -- (975) -- -- (975)
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Balance, March 31, 2000
(unaudited)............. -- -- -- 18,256 183 3,460,604 1,721 (1,516,741) -- 1,945,767
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Capital contribution--
GTE.................... -- -- -- -- -- 177,783 -- -- -- 177,783
------- --- --- ------ ---- ---------- ------- ----------- -------- ----------
Pro Forma Balance, March
31, 2000 (Note
15)(unaudited).......... $ -- -- $-- 18,256 $183 $3,638,387 $ 1,721 $(1,516,741) $ -- $2,123,550
======= === === ====== ==== ========== ======= =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
F-6
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- -----------------------------------------------------
Three Months Ended
Six Months Year Ended December 31, March 31,
Ended June 30, ------------------------------- --------------------
1997 1997 1998 1999 1999 2000
-------------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net Loss............................................. $(37,663) $(174,928) $(468,559) $(647,046) $(138,580) $(209,826)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments............ (113) (37) 32 118 768 550
Unrealized gain (loss) on securities................ (920) 2,083 1,850 (1,350) (1,062) (1,525)
-------- --------- --------- --------- --------- ---------
(1,033) 2,046 1,882 (1,232) (294) (975)
-------- --------- --------- --------- --------- ---------
Comprehensive Loss................................... $(38,696) $(172,882) $(466,677) $(648,278) $(138,874) $(210,801)
--------------------------------------------------
======== ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-7
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
1.Description of Business and Summary of Significant Accounting Policies:
Description of Business and Organization
Genuity Inc. (Genuity or the Company), a Delaware corporation, is a wholly-
owned subsidiary of GTE Corporation (GTE). Genuity is a leading facilities-
based provider of managed Internet infrastructure services. By leveraging a
technologically advanced, high-bandwidth global fiber-optic network, data
center facilities, and a rapidly growing base of business and consumer users
and content directly attached to its Internet backbone, Genuity engineers and
delivers a comprehensive suite of managed Internet infrastructure services.
These services include Internet access through dial-up, dedicated and digital
subscriber lines; web hosting and content delivery; and value added e-business
services, such as virtual private networks for secure data transmission,
security services and voice-over-IP. Genuity's services are provided to both
enterprises and service providers including Internet service providers,
application service providers and carriers.
Genuity's predecessor incurred net losses of $37.7 million for the six
months ended June 30, 1997. Genuity incurred net losses of $174.9 million,
$468.6 million and $647.0 million for the years ended December 31, 1997, 1998
and 1999, respectively, and $138.6 million and $209.8 million for the three
months ended March 31, 1999 and 2000 (unaudited), respectively. Through March
31, 2000, Genuity has incurred cumulative operating losses of $1,516.7 million
(unaudited). Given the level of planned operating and capital expenditures,
Genuity expects to continue to incur significant operating losses for the next
several years.
The markets in which Genuity operates can be characterized as rapidly
changing due to technological developments, evolving industry standards and
customer demands and frequent new product and service introductions and
enhancements. Genuity expects to continue to make significant investments to
expand its capacity and facilities infrastructure, develop brand recognition,
broaden the range of service offerings and expand its sales, marketing,
technical and customer support personnel. These efforts will require
significant expenditures, a substantial portion of which will be made before
any significant corresponding revenue may be realized.
Genuity is also dependent on a limited source of suppliers for a number of
components and parts necessary for its network buildout and operations. Genuity
does not carry significant inventories of components and has no guaranteed
supply arrangements with vendors. Shortages from these suppliers could cause
significant delays in or abandonment of the expansion of the network and could
have an adverse affect on Genuity's operating results.
Basis of Presentation
The accompanying combined financial statements of Genuity include the
financial position and results of operations of those operations that will
constitute Genuity as of the completion of the proposed initial public
offering. Certain of the operations and assets included in these combined
financial statements were transferred to Genuity on , 2000. The
accompanying financial statements have been restated to combine the assets,
liabilities, equity and results of operations of these transferred operations
as if the transfer had occurred as of January 1, 1997. GTE acquired BBN
Corporation effective June 30, 1997. This acquisition was accounted for as a
purchase business combination and, consequently, the results of operations of
BBN Corporation, excluding the operations of BBN Technologies (BBNT), which are
being retained by GTE, are included in the Genuity financial statements for the
periods after June 30, 1997. The results of operations of our predecessor
represent the results of BBN Corporation, excluding the operations of BBNT.
Genuity prepares its combined financial statements in accordance with
generally accepted accounting principles, which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from these estimates.
F-8
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
The combined financial statements of Genuity include the accounts of all
majority-owned subsidiaries. All significant intercompany amounts have been
eliminated.
Genuity purchases payroll, purchasing, electronic data processing services
and other general and administrative services from GTE and affiliates whose
business is the provision of these services. In management's view, the cost of
services provided to Genuity by GTE and affiliates reasonably approximates the
costs that Genuity would have incurred if it had performed the services. See
Note 13 for further discussion.
Interim Financial Statements
The accompanying combined financial statements as of March 31, 2000, and for
the three-month periods ended March 31, 1999 and 2000, are unaudited, but in
the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted with respect to the quarters, although
the Company believes that the disclosures included are adequate to make the
information presented not misleading. Results for the three months ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000.
Revenue Recognition
Revenue is generally recognized when services are rendered or products are
delivered to customers. The majority of Genuity's contracts consist of separate
agreements to provide Internet access, web-hosting, value added e-business or
transport services to customers.
Access
Internet access services include dial-up, dedicated and digital subscriber
lines. Internet access customers typically sign one or two-year contracts
providing for monthly recurring service fees that are earned and recognized
based on either fixed fees or capacity utilization. Access also includes
revenue associated with the development, operation and maintenance of a
nationwide dial-up network for America Online, based on a fee per modem per
month basis. The contract with America Online extends through 2006.
Web-Hosting
Web-hosting services include managed hosting, collocation, content delivery
and high availability services. Web-hosting customers typically sign one or
two-year contracts. Revenues are earned and recognized based on monthly fees
for server management, physical facilities and bandwidth utilization.
Transport
Transport services include services such as asynchronous transfer mode, or
ATM, and private line services. ATM transfer service, a form of high speed data
transfer, is targeted primarily at carriers and Internet service providers with
high bandwidth voice, video and data transmission requirements. Private line
service provides dedicated point-to-point transport services through non-
switched, non-usage sensitive dedicated facilities. Transport revenues are
earned and recognized based on customer usage of circuit mileage and capacity.
Transport customers typically sign one or two-year contracts.
Other
Other includes the results of the international business, which consists
primarily of Internet access, and domestic value-added e-business services,
such as managed security services, virtual private networks for
F-9
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
secure data transmission and voice-over-IP. Revenues for international access
and hosting are recognized on a basis consistent with domestic services.
Revenues for security and virtual private network services are earned and
recorded based on fixed, monthly recurring fees and revenues for voice-over-IP
services are based on usage. Value-added e-business service contracts typically
range from one to two years.
Billings made or payments received in advance of providing services are
deferred until the period these services are provided.
Certain of Genuity's contracts, primarily related to web hosting and value
added e-business services, include up-front charges for installation services.
It has been the Company's practice to recognize installation revenue only to
the extent of incurred costs. In the first quarter of 2000, the Company adopted
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements. The cumulative effect of this adoption had no net effect on the
accompanying statements of operations." In accordance with SAB No. 101, as
amended, this revenue and the corresponding costs are deferred and recognized
over the contract terms, which approximate 1 year.
Genuity has contracts with some customers that provide service level
commitments. If Genuity does not meet the required service levels, it may be
obligated to provide credits, usually in the form of free service for a short
period of time. These amounts are accounted for in cost of sales. To date,
credits issued under these arrangements for Genuity's failure to meet service
level commitments have not been material. During 1999, one of Genuity's vendors
experienced failures on its network, which resulted in a disruption to
Genuity's customers. Genuity's vendor provided credits to Genuity for the
service failure, which Genuity passed on to its customers.
Advertising Costs
Genuity expenses the cost of advertising as incurred. The Predecessor's
advertising expense was $5.1 million for the six months ended June 30, 1997.
Genuity's advertising expense was $4.6 million, $16.5 million and $21.5 million
for the years ended December 31, 1997, 1998 and 1999, respectively, and $2.8
million and $6.6 million for the three-month periods ended March 31, 1999 and
2000 (unaudited), respectively. Advertising expense is included as a component
of selling, general and administrative expenses in the accompanying combined
statements of operations.
Income Taxes
Genuity has historically filed its federal income tax return on a
consolidated basis with GTE. Upon completion of the proposed initial public
offering, Genuity will be deconsolidated from GTE for income tax return
purposes. Income tax payments and refunds will be determined based on the
stand-alone filings of Genuity. The accompanying combined financial statements
are presented as if Genuity was a stand-alone company for all periods
presented. The Predecessor was part of a stand-alone entity, and its taxes were
recorded on that basis.
Genuity and the Predecessor computed their current and deferred income tax
expense on a stand-alone basis in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets based upon the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using tax rates in
effect for the year in which the differences are expected to reverse. A
valuation allowance has been established to reflect the likelihood of
realization of deferred tax assets.
F-10
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
Genuity has approximately $39 million of net operating loss carryforwards
and $10 million of research credit carryforwards, which are limited in use due
to the fact that they were generated by the Predecessor.
Loss Per Common Share
Loss per common share is calculated based on the provisions of SFAS No. 128,
"Earnings per Share." The basic loss per share of Genuity was computed based on
the number of common shares that were issued in connection with the
recapitalization of Genuity, which occurred on , 2000. Genuity has no
potentially dilutive common shares.
Cash and Cash Equivalents
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
Deferred Commissions
Genuity defers certain customer acquisition costs in order to recognize
those direct costs in the same accounting period as the associated revenues,
provided the revenues are contractual. These deferred costs were included in
other current assets in the accompanying combined balance sheets.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed over the assets'
estimated useful lives using the straight-line method. Useful lives used in
computing depreciation are as follows: buildings and fixtures--10 to 30 years,
communications network--fiber-optic cable--20 to 25 years, communications
network--data processing equipment and machinery which include labor and other
direct costs--3 to 10 years and furniture--5 to 7 years. Leasehold improvements
are amortized over the shorter of the lease period or their estimated useful
lives using the straight-line method. Maintenance and repairs are charged to
expense as incurred; improvements are capitalized.
When property is sold or retired, the cost of the property and the related
accumulated depreciation are removed from the combined balance sheet and any
gain or loss on the transaction is included in the accompanying combined
statement of operations.
Work in progress represents costs incurred for the build-out and expansion
of the network infrastructure and includes engineering costs and capitalized
interest. When these assets are placed in service, the costs are recorded in
the appropriate property, plant and equipment accounts and depreciation begins.
Genuity leases data communications equipment under a capital lease
agreement. The assets and liabilities under the capital lease are recorded at
the present value of minimum lease payments. Assets under the capital lease are
depreciated over the term of the lease, which is generally 5 years.
Communications network--fiber optic cable primarily includes an indefeasible
right of use agreement with Qwest Communications International Inc. at December
31, 1999 and March 31, 2000 (unaudited).
Goodwill and Other Intangibles
Goodwill and other intangible assets pertain to the acquisitions of the
Predecessor and the assets of a web hosting business acquired in 1997, and
internal use software. Goodwill is being amortized on a straight-line basis
over the lesser of 20 years or the period benefited. Other intangible assets
include customer bases,
F-11
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
trademarks, developed technology and in-place work forces in connection with
the acquisitions, and internal use software. Customer bases and in-place work
forces are amortized in a manner consistent with historical attrition patterns
over 3 to 10 years. Trademarks, developed technology and internal use software
are amortized on a straight-line basis over 3 to 10 years.
Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Under the provisions of this
SOP, effective January 1, 1999, Genuity was required to capitalize and amortize
the cost of all internal-use software. Prior to the adoption of SOP 98-1,
primarily all software was expensed as incurred. Software expensed in 1997 and
1998 was approximately $17.3 million and $1.4 million, respectively.
Capitalized software is amortized over a useful life ranging from 3 to 5 years.
Software maintenance costs are expensed as incurred.
Employee Benefit Plans
For periods prior to the initial public offering, Genuity participated in
GTE's pension and postretirement health care and life insurance benefit plans.
The plans' cost and liability recorded by Genuity are based on Genuity's
participation in GTE's plans.
Valuation of Assets
The impairment of tangible and intangible assets is assessed when changes in
circumstances indicate that their carrying value may not be recoverable. Under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," a determination of impairment, if any, is made
based on estimated future cash flows, salvage value or expected net sales
proceeds depending on the circumstances. An impairment loss would be measured
based on the amount by which the carrying amount of the asset exceeds the fair
value of the asset. In instances where goodwill has been recorded in connection
with impaired assets, the carrying amount of the goodwill is first eliminated
before any reduction to the carrying value of tangible or identifiable
intangible assets. Genuity's policy is to record asset impairment losses as
well as net gains or losses on sales of assets as a component of other income.
Under Accounting Principles Board Opinion No. 17, "Intangible Assets," the
Company also annually evaluates the future period over which the benefit of
goodwill will be received, based on future cash flows, and changes the
amortization life accordingly.
Concentrations of Credit Risk and Significant Customers
Genuity's accounts receivable are subject to credit risk. Genuity performs
regular credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Genuity's risk of loss is limited due
to advance billings to some of its customers for services and the ability to
terminate service on delinquent accounts. The credit risk is also mitigated by
the large number of customers comprising the customer base, with the exception
of one large customer, America Online. Revenues from America Online in relation
to Genuity's and Predecessor's total revenues were significant. However, the
credit risk associated with America Online is mitigated by utilization of
advance billings and a history of timely collections. The average accounts
receivable balance of America Online represented 34%, 44% and 37% of Genuity's
receivable balance during the years ended 1998 and 1999, and the three-months
ended March 31, 2000 (unaudited),
F-12
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
respectively, while revenues from America Online represented 53% and 52% of
Genuity's total revenues for the years ended December 31, 1998 and 1999,
respectively, and 53% and 46% for the three-month periods ended March 31, 1999
and 2000 (unaudited), respectively.
Genuity has been a supplier of network access services in the United States
to America Online since 1995. Genuity entered into a new agreement with America
Online effective as of December 31, 1999, pursuant to which America Online has
agreed to purchase additional dial-up access services from Genuity for a seven-
year term through December 31, 2006. Under the new agreement, America Online
has also agreed to purchase managed digital subscriber line and other broadband
network access services from Genuity for a five-year term through December 31,
2004. This agreement includes provisions for minimum purchase requirements at
fixed monthly fees, subject to market pricing adjustments, service level
requirements and termination provisions.
In providing America Online services under the agreement, Genuity is
obligated to comply with specified minimum service levels. Either party may
terminate the agreement in the event the other party commits a material breach
which is not cured within the specified period. In addition, America Online has
the right to terminate the agreement in the event of: (1) repeated material
breaches by Genuity; (2) a violation of the most favored customer pricing
provisions; (3) a total or near total outage of any of the services provided by
Genuity that, while lasting fewer than thirty days, is widespread and
prolonged; (4) Genuity's inability to meet the service level commitments or to
expand service availability as required under the agreement; and (5) a change
in control other than through an initial public offering. Genuity is also
obligated to provide America Online assistance in the twelve months following
any termination of the agreement to ensure a smooth transition of services. The
agreement provides America Online with a right of first refusal with respect to
the sale of the dial-up network access business.
Under a separate agreement with America Online Japan and Genuity's Japanese
branch, Genuity has agreed to provide dial-up network access services to
America Online in Japan. This agreement also includes minimum purchase
requirements on the part of America Online Japan, market pricing adjustments,
service level requirements, and termination provisions.
Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, equity securities, accounts payable, notes payable and debt. The
fair values of financial instruments included in the combined balance sheets,
other than long-term debt, closely approximate their recorded values. The
recorded values of equity securities equal their fair values based on quoted
market prices, and are classified as available-for-sale securities. The
securities are included in other current assets in the accompanying combined
balance sheets and have a cost of $11.8 million and $3.5 million at December
31, 1998 and 1999, respectively, and $3.5 million at March 31, 2000
(unaudited). The estimated fair value of long-term debt based on a debt pricing
model was lower than its recorded value as of December 31, 1998 and 1999 by
approximately $1.2 million and $6.6 million, respectively, and as of March 31,
2000, by approximately $6.8 million (unaudited).
Comprehensive Loss
Comprehensive loss is the change in equity from transactions and other
events and circumstances that are not from owners. Included in other
comprehensive income (loss) are foreign currency translation gains and losses
and unrealized gains and losses on available-for-sale securities.
F-13
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable in Unaudited Periods)
GENUITY INC.
Foreign Currency Translation
Assets and liabilities of units operating in foreign countries are
translated into U.S. dollars using the exchange rates in effect on the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing throughout the period. Foreign assets, liabilities and results
of operations are not material in all periods presented.
Recent Accounting Pronouncements
On December 3, 1999, the Securities and Exchange Commission issued SAB No.
101. Genuity is required to adopt this accounting guidance, as amended by SAB
No. 101A, no later than the second quarter of 2000. Genuity adopted this
accounting in the first quarter of 2000. There was no impact to the Company's
combined statement of operations for the adoption of SAB No. 101, as it had
been the Company's practice to recognize installation revenue on its web
hosting contracts only to the extent of incurred costs. The Company, at March
31, 2000, has recorded deferred revenue of approximately $1.9 million and
deferred costs of approximately $1.9 million associated with the adoption of
SAB No. 101.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. This new standard is not anticipated to
have an impact on the Company's combined financial statements based on the
current structure and operations.
2.GTE's Proposed Merger with Bell Atlantic Corporation
Genuity is currently a wholly owned subsidiary of GTE. In July 1998, GTE and
Bell Atlantic agreed to enter into a merger of equals transaction. The new
combined company is Verizon Communications (Verizon). Under the terms of the
agreement, which was unanimously approved by the boards of directors of both
companies and a majority of the shareholders, GTE's shareholders will receive
1.22 shares of Verizon stock for each share of GTE's stock that they own. The
merger is subject to regulatory approvals.
Section 271 of the Telecommunications Act of 1996 generally prohibits each
of Bell Atlantic's local telephone operating companies from providing long
distance services that originate in any state in which it is an incumbent local
telephone operating company. This prohibition also extends to services provided
by any company in which Bell Atlantic owns an interest greater than 10%.
Because Genuity provides services that could be characterized as long distance
services in states where Bell Atlantic operates an incumbent local telephone
operating company, Bell Atlantic and GTE have made a proposal to the FCC under
which Verizon will not own more than 10% of our common stock at the closing of
their merger.
Under the proposal to the FCC, GTE will exchange all of its shares of
Genuity's outstanding common stock for shares of Genuity's Class B common
stock, and Genuity will complete an initial public offering of Class A common
stock. Immediately following the completion of this offering, the Class A
common stock will represent 90.5% of the outstanding common stock, and the
Class B common stock will represent 9.5%.
If Verizon has eliminated applicable Section 271 restrictions, it may
increase its ownership interest in Genuity by converting the Class B common
stock. Section 271 provides that the restrictions will be lifted as to
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
a particular state when the incumbent local telephone company satisfies a
competitive checklist prescribed by the Telecommunications Act and obtains
authority from the FCC to provide long distance services in that state. Bell
Atlantic has received the necessary authorization in New York to provide long
distance services originating in that state. Verizon must eliminate applicable
Section 271 restrictions in the other states in which it operates an incumbent
local telephone operating company either through the Section 271 process or
otherwise, including through liquidation, in order to increase its ownership in
Genuity.
Under the proposal to the FCC, Verizon cannot convert its Class B common
stock into more than 10% of Genuity's outstanding common stock until it has
eliminated, as to at least 50% of the total billable access telephone lines
owned in 1999 by Bell Atlantic in its region, the Section 271 restrictions
applicable to its operation of Genuity's business. When Verizon has eliminated
the applicable Section 271 restrictions as to at least 50% of Bell Atlantic in-
region lines, it could transfer its shares of Genuity's Class B common stock to
a disposition trustee for sale to one or more third parties that would then be
able to convert all of the Class B common stock into 800 million shares of
Class A common stock. When Verizon has eliminated the applicable Section 271
restrictions as to 100% of Bell Atlantic in-region lines, it could convert its
Class B common stock into 800 million shares of Genuity's Class A common stock
or Class C common stock, subject to the terms of the proposal to the FCC.
If accepted by the FCC, the terms of the proposal will permit Bell Atlantic
and GTE to complete their merger. The proposal will also permit Verizon to hold
an ownership interest in Genuity that complies with the Telecommunications Act
and provides the opportunity for Verizon to increase its interest in Genuity if
and when it is otherwise lawfully authorized to do so.
3.Property, Plant and Equipment, Net
Property, plant and equipment, net was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1998 1999 2000
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Land.................................... $ 4,644 $ 4,705 $ 4,705
Buildings and fixtures.................. 5,210 13,327 7,194
Communications network--fiber-optic
cable.................................. 300,035 481,573 537,113
Communications network--data processing
equipment and machinery................ 484,502 727,046 773,416
Furniture............................... 11,083 18,653 20,338
Leasehold improvements.................. 95,418 164,542 151,157
Work in progress........................ 177,607 402,740 465,621
---------- ---------- ----------
Subtotal.............................. 1,078,499 1,812,586 1,959,544
Accumulated depreciation................ (169,519) (291,652) (330,153)
---------- ---------- ----------
Total................................. $ 908,980 $1,520,934 $1,629,391
========== ========== ==========
</TABLE>
F-15
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
During 1999, Genuity completed its initial buildout of its communications
network in the United States. Costs directly related to the network have been
capitalized, including amounts associated with the indefeasible rights of use.
Genuity commenced depreciation as individual segments were placed in service.
The Predecessor's depreciation expense was $10.5 million for the six months
ended June 30, 1997. Genuity's depreciation expense was $18.7 million, $56.2
million and $135.4 million for the years ended December 31, 1997, 1998 and
1999, respectively, and $28.6 million and $38.9 million for the three-month
periods ended March 31, 1999 and 2000 (unaudited), respectively.
Interest and network engineering costs capitalized as part of property,
plant and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- ----------------------------------------
Three Months
Six Months Ended March
Ended June 30, Year Ended December 31, 31,
-------------- ------------------------- --------------
1997 1997 1998 1999 1999 2000
-------------- ------- -------- -------- ------- ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Network engineering
costs.................. $422 $ 1,422 $ 10,263 $ 23,148 $ 9,461 $9,511
Capitalized interest.... -- -- 17,700 6,408 1,818 298
---- ------- -------- -------- ------- ------
Total................. $422 $ 1,422 $ 27,963 $ 29,556 $11,279 $9,809
==== ======= ======== ======== ======= ======
</TABLE>
4.Goodwill and Other Intangibles, Net
Goodwill and other intangibles, net was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------ March 31,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Goodwill.................................... $495,348 $495,348 $495,348
Customer bases.............................. 77,000 77,000 77,000
Trademarks.................................. 34,000 34,000 34,000
Developed technology........................ 19,000 19,000 19,000
In-place work forces........................ 9,190 9,190 9,190
Internal use software....................... -- 34,580 35,988
-------- -------- --------
Subtotal.................................. 634,538 669,118 670,526
Accumulated amortization.................... (78,926) (131,129) (145,990)
-------- -------- --------
Total..................................... $555,612 $537,989 $524,536
======== ======== ========
</TABLE>
Genuity's amortization expense was $30.7 million, $48.2 million and $52.2
million for the years ended December 31, 1997, 1998 and 1999, respectively, and
$12.5 million and $14.9 million for the three month periods ended March 31,
1999 and 2000 (unaudited), respectively.
F-16
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
5.Debt
Long-term obligations and short-term obligations were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1998 1999 2000
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
6% convertible subordinated debentures........ $ 55,903 $ 48,948 $ --
Capital leases................................ 70,952 63,769 57,563
-------- -------- -------
Total long-term obligations................. $126,855 $112,717 $57,563
======== ======== =======
Note payable--GTE............................. $ -- $136,484 $ --
6% convertible subordinated debentures........ -- -- 48,812
Current portion of capital leases............. 20,499 25,921 25,408
-------- -------- -------
Total short-term obligations................ $ 20,499 $162,405 $74,220
======== ======== =======
</TABLE>
On April 1, 1987, Predecessor issued $84.7 million of 6% convertible
subordinated debentures. The 6% convertible subordinated debentures due 2012
may be converted by the bondholders into cash at an exchange ratio of $966.67
for each $1,000 in principal amount of debentures. The debentures are unsecured
obligations of Genuity and are subordinated in right of payment to Genuity's
senior indebtedness, if any. Debt issuance costs are being amortized over the
term of the debentures. The unamortized balance at December 31, 1999, and March
31, 2000 of $0.6 million and $0.5 million (unaudited), respectively, is
included in other assets in the accompanying combined balance sheets.
Genuity is required to contribute to a sinking fund annual payments equal to
5% of the aggregate principal amount issued. The sinking fund was calculated to
retire 70% of the original debentures prior to maturity. As of December 31,
1999 Genuity had purchased and retired debentures with a face value of $37.3
million which has been used to satisfy the annual sinking fund requirements
through 2006.
The interest rate on the note payable to/receivable from GTE is based on an
intercompany borrowing interest rate established by GTE, which fluctuated
between 4.85% and 6.58% in 1997, 5.41% and 6.24% in 1998, 6.04% and 6.75% in
1999, 5.00% and 5.68% in the first quarter of 1999 (unaudited) and 6.00% and
6.24% in the first quarter of 2000 (unaudited).
Genuity has entered into leasing agreements to finance some equipment
acquisitions. The underlying assets serve to collateralize the debt. The
borrowings bear interest at effective rates of 5.07% to 9.50% and have terms of
5 years from the date of purchase, with principal and interest payable
quarterly in advance. The leases include purchase and renewal options at fair
market values. The leases are classified as capital leases in accordance with
the provisions of SFAS No. 13, "Accounting for Leases."
Assets under capital leases were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1998 1999 2000
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Data processing equipment..................... $91,682 $115,056 $115,407
Accumulated depreciation...................... (25,936) (51,792) (57,409)
------- -------- --------
Total....................................... $65,746 $ 63,264 $ 57,998
======= ======== ========
</TABLE>
F-17
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
6.Stockholder's Equity
Common Stock
The authorized and issued common stock of Genuity is based on the number of
common shares that will be issued in connection with the recapitalization of
Genuity, which occurred on , 2000. In connection with the
recapitalization, the 1,000 shares of common stock issued and outstanding were
converted to 18,256,000 shares of Class B common stock.
Additional Paid-In Capital
Genuity received contributions from GTE of $610.5 million, $1,313.6 million
and $974.3 million, for the years ended December 31, 1997, 1998 and 1999,
respectively, and $487.9 million for the three-month period ended March 31,
2000 (unaudited).
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) includes cumulative foreign
currency translation adjustments and the cumulative unrealized loss on
investments in securities. The Predecessor's cumulative foreign currency
translation adjustment was a loss of $0.1 million as of June 30, 1997.
Genuity's cumulative foreign currency translation adjustment was a gain of $0.1
million as of December 31, 1999, and $0.8 million and $0.7 million as of March
31, 1999 and 2000 (unaudited), respectively. The Predecessor's cumulative
unrealized loss on investments in securities was $0.9 million as of June 30,
1997 and Genuity's cumulative unrealized gain on investments in securities was
$2.1 million, $3.9 million and $2.6 million as of December 31, 1997, 1998 and
1999, respectively, and $2.9 million and $1.1 million as of March 31, 1999 and
2000 (unaudited), respectively.
7.Stock-Based Compensation
GTE maintains broad-based stock option plans that have historically covered
substantially all Genuity employees. Genuity employees will not participate in
these plans after the initial public offering. Prior to 1997, options were
granted separately or in conjunction with stock appreciation rights (SARs).
Beginning in 1997, the granting of SARs was discontinued. In 1997, GTE's
shareholders approved the GTE Corporation 1997 Long-Term Incentive Plan (the
LTIP). Each option granted under the LTIP conveys the right to purchase, at
fair market value on the date of the grant, shares of GTE common stock.
Generally, options have a term of 10 years and become vested over a period not
to exceed three years. At December 31, 1999 and March 31, 2000, 1,595,984 and
1,961,045 (unaudited) options granted to Genuity employees, respectively, were
exercisable in shares of GTE common stock. Options granted under the
Predecessor's stock incentive plan were converted into GTE options or plan
participants received cash.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, GTE continues to apply the
recognition and measurement provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees." In accordance with
APB No. 25, compensation expense is not recognized for stock options on the
date of grant since it is GTE's practice to grant options with an exercise
price equal to the fair market value of its common stock on the date of grant.
Under SFAS No. 123, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service or vesting period.
Had compensation cost for GTE's stock options been determined under SFAS No.
123, based on the fair market value at the grant dates, pro forma net loss and
basic loss per share of Genuity would have been as follows (in thousands except
per share amounts):
F-18
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
<TABLE>
<CAPTION>
Genuity
-------------------------------
Year Ended
December 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net loss
As reported.............................. $(174,928) $(468,559) $(647,046)
Pro forma................................ (175,943) (474,364) (668,558)
Basic and diluted loss per share
As reported.............................. $ (9.58) $ (25.67) $ (35.44)
Pro forma................................ (9.64) (25.98) (36.62)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for GTE options granted during the years ended December 31, 1997,
1998 and 1999: expected volatility of 18%-19.5%, expected maturities of seven
years, risk-free interest rates equal to the yield on seven-year U.S. Treasury
notes on the grant date and expected dividend yield of approximately 3%.
8.Employee Benefit Plans
Genuity does not intend to offer a postretirement pension plan to employees
once its employees are no longer employees of GTE. Genuity does intend to offer
a defined contribution (401(k)) plan.
GTE sponsors several qualified and nonqualified pension plans and other
postretirement benefit plans for its employees, which prior to the initial
public offering, include Genuity's employees. The Predecessor did not sponsor
either a pension plan or an other postretirement benefit plan. Approximately
600 of Genuity's employees are covered under defined benefit pension plans and
postretirement health care and life insurance plans. Pension plans are
generally noncontributory by plan participants. Postretirement health care
plans are generally contributory and include a limit on the portion of the cost
of benefits for recent and future retirees paid by Genuity.
The cost and liability for the pension and other postretirement benefit
plans recorded by Genuity are based on Genuity's participation in GTE's plans.
Genuity's pension expense was $0.5 million, $0.9 million and $2.6 million for
the years ended December 31, 1997, 1998 and 1999, respectively, and $0.2
million and $0.1 million for the three-month periods ended March 31, 1999 and
2000 (unaudited), respectively. Genuity's other postretirement benefit expense
was $0.2 million, $0.4 million and $0.3 million for the years ended December
31, 1997, 1998 and 1999, respectively, and $0.1 million for the three-month
period ended March 31, 1999 (unaudited). Genuity's pension liability was $2.5
million and $5.1 million as of December 31, 1998 and 1999, respectively, and
$2.0 million as of March 31, 2000 (unaudited). Genuity's other postretirement
benefit liability was $2.0 million and $2.2 million as of December 31, 1998 and
1999, respectively, and $1.9 million as of March 31, 2000 (unaudited).
BBN Corporation maintained the BBN Corporation Retirement Trust (the BBN
401(k) plan), which is a 401(k) plan that includes matching and profit sharing
features. The plan covers most employees of Genuity who are not covered by the
GTE Savings Plan. It is anticipated that the plan will be sponsored and
maintained by Genuity or one of its affiliates after the proposed initial
public offering. GTE sponsors employee savings and stock ownership plans (the
GTE 401(k) plans) under section 401(k) of the Internal Revenue Code. Through
the
F-19
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
date of the proposed initial public offering the plans cover substantially all
full-time employees of Genuity. Under the plans, Genuity provides matching
contributions in either cash or GTE common stock based on qualified employee
contributions. The Predecessor's matching contribution charged to income
related to the BBN 401(k) plan was $0.6 million for the six months ended June
30, 1997. Genuity's matching contributions charged to income related to the GTE
401(k) plans and the BBN 401(k) plan were $1.0 million, $3.1 million, and $4.8
million for the years ended December 31, 1997, 1998 and 1999, respectively, and
$0.9 million and $2.2 million for the three-month periods ended March 31, 1999
and 2000 (unaudited), respectively.
9.Interest Expense, Net
The combined statements of operations reflect total interest expense, less
interest capitalized during construction and interest income as follows (in
thousands):
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- --------------------------------------------
Six Months Three Months
Ended June 30, Year Ended December 31, Ended March 31,
-------------- -------------------------- ----------------
1997 1997 1998 1999 1999 2000
-------------- ------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Interest expense........ $(2,951) $(1,346) $(17,720) $(9,952) $(2,439) $(3,271)
Interest capitalized.... -- -- 17,700 6,408 1,818 298
Interest income......... 2,473 -- -- 3,361 187 --
------- ------- -------- ------- ------- -------
Interest Expense,
Net.................. $ (478) $(1,346) $ (20) $ (183) $ (434) $(2,973)
======= ======= ======== ======= ======= =======
</TABLE>
10.Income Taxes
The income tax accounts included in the accompanying combined balance sheets
and statements of operations are presented as if Genuity were a stand-alone
company for all periods presented. The Predecessor was part of a stand-alone
entity, and its income taxes were recorded on that basis. Taxable losses of
Genuity aggregating $114.8 million, $526.7 million and $638.2 million for the
years ended December 31, 1997, 1998 and 1999, respectively, and $179.1 million
for the three-month period ended March 31, 2000 (unaudited), have benefited GTE
in its consolidated tax return. Genuity received reimbursements aggregating
$40.4 million, $185.7 million and $223.5 million for the years ended
December 31, 1997, 1998 and 1999, respectively, and $62.5 million for the
three-month period ended March 31, 2000 (unaudited). To present Genuity's tax
provisions on a basis consistent with future periods these reimbursements have
been accounted for as capital contributions. The tax provision included in the
accompanying combined statements of operations represents the amounts owed for
state taxes.
F-20
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
The significant components of Genuity's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, March
------------------ 31,
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Employee benefit obligations................. $ 21,183 $ 22,200 $ 23,039
NOL carryforward............................. 24,480 24,014 24,014
Predecessor goodwill......................... 10,241 11,830 12,228
Capitalized software......................... 3,548 5,256 5,256
Other........................................ 14,238 13,233 15,044
-------- -------- --------
Total deferred tax assets.................. 73,690 76,533 79,581
-------- -------- --------
Deferred tax liabilities:
Depreciation and amortization................ (7,100) (32,688) (37,428)
Other intangibles............................ (35,775) (29,247) (27,615)
Operating leases............................. (4,201) (4,201) (4,201)
Other........................................ (5,308) (2,090) (2,090)
-------- -------- --------
Net deferred tax asset..................... 21,306 8,307 8,247
-------- -------- --------
Deferred tax asset--current................ 7,604 7,785 7,443
Deferred tax asset--noncurrent............. 13,702 522 804
Valuation allowance........................ (21,306) (8,307) (8,247)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
The net operating losses included above relate to Predecessor and are
limited in their utilization under Internal Revenue Code Section 382. A full
valuation allowance has been recorded in the accompanying combined financial
statements to offset the net deferred tax asset because its future
realizability is uncertain.
The difference between the income tax rate computed by applying the
statutory federal income tax rate of 35% to income before income taxes and the
actual effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
Three-Months
Ended
March 31,
1997 1998 1999 2000
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Statutory rate...................... (35.0%) (35.0%) (35.0%) (35.0%)
Increase (decrease) resulting from--
State taxes, net of federal
benefit.......................... 0.2 0.2 0.2 0.2
Goodwill.......................... 4.1 2.7 2.0 1.5
Meals and entertainment........... 0.1 0.1 0.1 0.1
Change in valuation allowance..... 6.3 (3.1) (2.1) --
Tax losses benefited to GTE....... 25.2 35.3 35.0 33.4
Other............................. (0.6) 0.1 0.1 0.1
------- ------- ------- -----
0.3% 0.3% 0.3% 0.3%
======= ======= ======= =====
</TABLE>
F-21
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
11.Segment Reporting
Effective December 31, 1998, Genuity adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting financial information about operating segments in
annual and interim financial statements and requires restatement of prior year
information. Operating segments are defined as units of a business for which
financial information is available that is evaluated by the primary decision-
makers in determining the manner in which resources are allocated and in
assessing performance of the business.
Genuity's operations are reported in three segments, Access, Hosting and
Transport.
Access--Internet access pertains to a variety of global Internet access
services, including dial-up, dedicated, DSL and other broadband, by providing
and managing the underlying scaleable infrastructure. Genuity also provides a
range of customer premise equipment necessary to connect to the Internet,
including routers, channel service units/data services units, modems, software
and other products. Customers receive 24 hours per day, 7 days per week network
monitoring and technical support from Genuity's Network Operations Centers
(NOC).
Hosting--Hosting pertains to services that allow customers to successfully
implement their e-business strategies through scaleable, reliable and secure
Web sites, which serve as their e-business storefronts. Thee-business model
enables companies to decrease sales costs; accelerate time to market; access
new sales channels; increase revenues, productivity and customer satisfaction;
and gain competitive advantage. Genuity currently operates ten global data
centers, eight in the US, one in Leeds, England and one in Tokyo, Japan.
Through the web hosting operation center, Genuity monitors these systems 24
hours a day and 7 days a week.
Transport--Genuity provides a broad range of transport services to customers
through a single point of contact for planning, ordering, installing, billing,
maintaining and managing our customers transport services. Genuity provides
seamless operation of local loops, central office connections and interexchange
carrier transport. Through Genuity's NOC, network faults, intrusion or
environmental alarms are observed, diagnostics are performed, and referrals or
dispatches are initiated as needed.
Other--Includes revenue from international operations, sale of international
services and revenue generated from value-added Internet services of security,
virtual private networks and voice-over IP.
Network costs within GNI which are incurred to support the Access, Hosting
and Transport segments are not allocated to these segments for management
reporting or segment reporting purposes. Similarly, selling, general and
administrative expenses are not allocated to the segments for management or
segment reporting purposes.
Revenues for America Online in relation to the Predecessor's total revenues
represented 54% for the six months ended June 30, 1997. Revenues for America
Online in relation to Genuity's total revenues were 42%, 53% and 52% for the
years ended December 31, 1997, 1998 and 1999, respectively, and 53% and 46% for
the three-month periods ended March 31, 1999 and 2000 (unaudited),
respectively.
Management utilizes several measurements to evaluate its operations and
allocate resources. However, the principal measurements are consistent with
Genuity's financial statements. The accounting policies of the segments are the
same as those described in Note 1.
F-22
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
Financial information for Genuity's segments is as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- ---------------------------------
Three Months
Six Months Year Ended December 31, Ended March 31,
Ended June 30, --------------------------------- ---------------------
1997 1997 1998 1999 1999 2000
-------------- --------- --------- ----------- --------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues
Access................ $ 94,126 $ 128,838 $ 350,777 $ 555,603 $ 128,038 $ 183,285
Hosting............... 9,601 9,690 33,469 48,811 10,028 21,692
Transport............. -- 41,920 46,876 64,483 13,535 23,625
Other................. 2,591 3,035 14,880 37,569 5,682 19,250
-------- --------- --------- ----------- --------- ----------
Total revenues....... 106,318 183,483 446,002 706,466 157,283 247,852
Operating Expenses
Cost of goods sold.... 92,670 166,040 492,794 767,498 160,540 283,928
Selling, general and
administrative....... 38,801 142,962 312,916 396,522 93,123 108,336
Depreciation and
amortization......... 10,536 49,444 104,444 187,628 41,092 53,786
-------- --------- --------- ----------- --------- ----------
Total operating
expenses............ 142,007 358,446 910,154 1,351,648 294,755 446,050
-------- --------- --------- ----------- --------- ----------
Operating Loss.......... (35,689) (174,963) (464,152) (645,182) (137,472) (198,198)
Other Income (Expense)
Interest expense,
net.................. (478) (1,346) (20) (183) (434) (2,973)
Other, net............ (1,496) 1,814 (2,924) (32) (341) (8,067)
-------- --------- --------- ----------- --------- ----------
Loss Before Income
Taxes.................. $(37,663) $(174,495) $(467,096) $ (645,397) $(138,247) $ (209,238)
======== ========= ========= =========== ========= ==========
Property, Plant and
Equipment, Net
Access................ $ 44,212 $ 50,849 $ 100,884 $ 180,777 $ 109,663 $ 190,494
Hosting............... 7,957 23,023 29,310 52,998 30,421 66,686
Transport............. -- 27,313 26,752 26,974 26,263 26,342
GNI................... -- 263,467 705,892 1,162,287 764,194 1,243,404
Other................. 20,010 3,036 46,142 97,898 61,264 102,465
-------- --------- --------- ----------- --------- ----------
Total................ $ 72,179 $ 367,688 $ 908,980 $ 1,520,934 $ 991,805 $1,629,391
======== ========= ========= =========== ========= ==========
Capital Expenditures/1/
Access................ $ 21,741 $ 21,002 $ 57,344 $ 112,872 $ 15,376 $ 22,894
Hosting............... 402 6,422 14,801 34,258 4,111 17,352
Transport............. -- 215 7,485 5,377 1,454 547
GNI................... -- 263,610 458,038 531,719 74,214 103,238
Other................. 1,112 8,242 50,163 60,130 10,002 19,062
-------- --------- --------- ----------- --------- ----------
Total................ $ 23,255 $ 299,491 $ 587,831 $ 744,356 $ 105,157 $ 163,093
======== ========= ========= =========== ========= ==========
Depreciation and
Amortization
Access................ $ 6,375 $ 6,341 $ 12,649 $ 32,543 $ 6,597 $ 10,138
Hosting............... 138 2,534 8,514 12,585 3,000 3,664
Transport............. -- 6,852 8,012 7,180 1,943 1,782
GNI................... -- 143 19,119 72,475 14,971 20,654
Other................. 4,023 33,574 56,150 62,845 14,581 17,548
-------- --------- --------- ----------- --------- ----------
Total................ $ 10,536 $ 49,444 $ 104,444 $ 187,628 $ 41,092 $ 53,786
======== ========= ========= =========== ========= ==========
International
Revenues.............. $ 279 $ 710 $ 5,622 $ 22,816 $ 3,812 $ 8,682
Long-lived assets..... -- -- -- 1,855 427 4,654
</TABLE>
--------
/1/ Includes accruals and capital leases.
F-23
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
12.Commitments and Contingencies
Leases
Genuity leases office space and network equipment under long-term capital
and operating leases. These leases have options for renewal with provisions for
increased rent upon renewal. The Predecessor's rent expense was $2.1 million
for the six months ended June 30, 1997, and Genuity's rent expense was $5.1
million, $12.9 million and $19.9 million for the years ended December 31, 1997,
1998 and 1999, respectively, and $3.7 million and $6.6 million for the three-
month periods ended March 31, 1999 and 2000 (unaudited), respectively. Rent
expense is included in cost of goods sold and selling, general and
administrative expenses in the accompanying combined statements of operations.
As of December 31, 1999, future minimum lease payments under noncancelable
capital and operating leases with initial or remaining periods in excess of one
year were as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
2000..................................................... $ 33,475 $ 66,419
2001..................................................... 28,701 60,143
2002..................................................... 25,176 32,293
2003..................................................... 11,643 26,142
2004..................................................... 823 20,230
Subsequent years......................................... -- 56,502
-------- --------
Total minimum lease payments........................... 99,818 $261,729
========
Amount representing interest............................. (10,128)
--------
Present value of minimum lease payments................ $ 89,690
========
</TABLE>
GTE guarantees Genuity's existing real estate leases.
Contract Commitments
Genuity has entered into several agreements for indefeasible rights of use
(IRU) for its network infrastructure in the United States. The initial terms of
the IRUs are for 20-25 years, with options to extend the term. As of December
31, 1999 and March 31, 2000, the outstanding commitments under the agreements
is approximately $17.4 million and $16.6 million, respectively. Genuity is also
obligated to pay operating and maintenance costs under the contract terms.
Genuity has entered into a number of agreements for IRU to trans-oceanic
cable systems that are either deployed or in the process of being deployed. The
initial terms of the IRU is for 25 years. As of December 31, 1999 and March 31,
2000, outstanding commitments under these agreements total approximately $54.4
million and $52.5 million (unaudited), respectively.
F-24
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Appliable to Unaudited Periods)
Genuity has a noncancelable long-term purchase commitment with a circuit
provider. The purchase agreement contains provisions that require Genuity to
purchase a minimum amount of services annually through 2003. If Genuity does
not purchase the minimum services, it is required to pay the amount of the
shortfall between the minimum commitments and actual purchases. As of December
31, 1999, future minimum circuit payments under this noncancelable purchase
commitment were as follows (in thousands):
<TABLE>
<S> <C>
2000............................................................... $ 38,000
2001............................................................... 28,000
2002............................................................... 24,000
2003............................................................... 24,000
--------
Total minimum circuit purchases.................................. $114,000
========
</TABLE>
Contingencies
Some claims arising in the ordinary course of business are pending against
the Company. In the opinion of management, these claims are without merit and
are not expected to have a material effect on operations.
13.Related Party Transactions
Genuity recorded revenues for transport services that it provided to
affiliates in the amount of $13.6 million, $17.5 million and $24.1 million for
the years ended December 31, 1997, 1998 and 1999, respectively, and $5.5
million and $11.7 million for the three-month periods ended March 31, 1999 and
2000 (unaudited), respectively. The transport services provided are similar to
services provided to unaffiliated customers and are priced at comparable rates.
Genuity purchases payroll, purchasing, electronic data processing services
and other general and administrative services from GTE and affiliates whose
business is the provision of these services. The cost of these services to
Genuity was $39.6 million, $92.3 million and $84.1 million for the years ended
December 31, 1997, 1998 and 1999, respectively, and $25.2 million and $21.2
million for the three-month periods ended March 31, 1999 and 2000 (unaudited),
respectively, and were based on the cost of providing these services as
determined by cost and time studies performed periodically.
In management's view, the cost of services provided to Genuity by GTE and
affiliates reasonably approximates the costs that Genuity would have incurred
if it had performed the services.
Note payable to, and receivable from GTE include GTE funding of net cash
flows to and from Genuity. Accounts receivable from, and accounts payable to
affiliates represent balances from transactions in the ordinary course of
business between Genuity and affiliates.
Transition Services Agreements
GTE and its affiliates currently provide a range of administrative and
support services to Genuity. In connection with the proposed initial public
offering of Genuity's shares of Class A common stock, Genuity will enter into
(1) an Agreement for Transition Services under which GTE Service will continue
to provide Genuity with services such as accounting and cash processing,
billing and collection processing, human resource services, benefits
administration and real estate support services and (2) an Agreement for
Information Technology Transition Services under which Genuity and GTE Service
will provide each other with software and hardware support services.
F-25
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Appliable to Unaudited Periods)
In addition, GTE Service and Genuity will provide each other with wide area
network support and computer programming and technical services, including the
development of software interfaces and modifications and enhancements to
existing systems.
The fees for these transition services are fixed under the agreements and
were negotiated based on historical costs and comparable market prices. Both
agreements have a term of one year, but the term of many services will be less
than a year. We will be able to terminate each or any portion of the agreements
at any time upon 120 days notice to GTE Service. As an exception, the billing
and collection processing services require 180 days notice in order to provide
adequate transition time. GTE Service has the right to terminate the agreements
on 120 days notice only with respect to the information technology services
that it receives from Genuity. Until termination or expiration, GTE Service
will be obligated to cooperate with Genuity to transition the work to another
provider and to use commercially reasonable efforts to secure Genuity's
continued use of any necessary third party technology.
Purchase, Resale and Marketing Agreement
Genuity plans to enter into a Purchase, Resale and Marketing Agreement under
which Verizon will purchase services from Genuity, that will include Internet
access, value-added e-business services and private line and asynchronous
transfer mode transport services. Verizon will be permitted to use these
services internally or resell the services on a stand-alone basis or as part of
a bundled solution. Those services resold by Verizon may be co-branded with
Genuity or may be branded without use of Genuity's marks. To the extent Genuity
jointly markets services with Verizon, Genuity will do so in compliance with
all applicable federal law. Genuity will not jointly market its services with
Verizon in states in which Verizon would not have legal authority under
applicable federal law to operate Genuity. Genuity has granted Verizon most
favored customer pricing and volume-based discounts. Under the terms of the
agreement, Verizon will purchase at least $500 million of Genuity's services
over a five year period. In the event that Verizon has not purchased $200
million in services by the end of the third year of the contract, it would be
required to pay to Genuity at that time the difference between the amount of
services purchased to date and $200 million. Similarly, in the event Verizon
has not purchased $500 million in services by the end of the fifth year of the
contract, it would be required to pay to Genuity at that time the difference
between the amount of services purchased to that date, including any shortfall
payment made at the end of the third year, and $500 million. The minimum
purchase commitment is reduced in the event Genuity does not comply with
various obligations as to competitive pricing and other aspects of service,
sale and delivery. If the merger between Bell Atlantic and GTE is not
completed, this agreement does not become effective and Bell Atlantic is not
obligated to purchase any services from us.
In conjunction with the Purchase, Resale and Marketing Agreement, Genuity
also plans to provide to Verizon undersea cable capacity in the ARCOS-1
Caribbean Ring System and has committed to negotiate with Verizon with respect
to obtaining capacity on the Americas III Cable Network currently under
construction.
Intellectual Property Agreements
Genuity intends to enter into agreements with GTE Service in order to
allocate rights relating to existing and future patents, software, other types
of intellectual property and technical services.
Network Monitoring Agreement
Under the terms of an existing agreement, Genuity receives continual
monitoring for some elements of Genuity's network infrastructure from GTE
Network Services, including monitoring of network-enabling devices and
processes to detect anomalies occurring in the network. The fees for monitoring
services are fixed
F-26
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
under the agreement and were negotiated based on historical costs and
comparable market prices. The agreement may be terminated by Genuity on 90 days
notice. Verizon will cease providing network monitoring services to Genuity by
October 31, 2000.
Real Estate Agreements
Genuity plans to enter into several agreements with Verizon to allocate
space in various leased and owned properties between Genuity and Verizon. None
of the properties involved are material to Genuity's operations or business.
Provisions of each agreement, including the lease and sublease payment of rent
terms, vary depending on the underlying lease at the specified property and the
result of negotiations pertaining to specific issues at a specified property.
In order to effect a transition to a stand-alone company, GTE also has
agreed to issue new guaranties and to continue existing guaranties in order to
support Genuity's real estate obligations. GTE has agreed to continue to issue
new guaranties until six months following the proposed initial public offering
or the date on which both Standard & Poor's and Moody's publish a credit rating
for Genuity, whichever occurs first. Genuity has agreed to pay GTE a
commercially reasonable fee during the time the guaranties are in force.
Registration Rights Agreement
Immediately after the completion of Genuity's proposed initial public
offering, under a Registration Rights Agreement dated , 2000, Verizon and
its transferees or assignees will be entitled to cause Genuity to register
shares of Class A common stock that are issued following conversion of either
Genuity's Class B common stock or Genuity's Class C common stock. In addition,
this agreement will provide Verizon with certain demand, piggyback and shelf
registration rights after six months following the proposed initial public
offering.
14.Subsequent Events
Recapitalization
On , 2000, Genuity completed a recapitalization. As part of the
recapitalization, Genuity converted 1,000 shares of common stock issued and
outstanding to 18,256,000 shares of Class B common stock.
In connection with the recapitalization, GTE will execute a recapitalization
agreement in connection with its receipt of the Class B common stock. Under
this agreement, GTE will exchange all of the shares of its Genuity common stock
for such number of shares of Class B common stock that will equal 9.5% of the
total number of shares of the common stock outstanding immediately after the
completion of the proposed initial public offering. The recapitalization
agreement contains customary representations and warranties, including with
respect to the issuance of the Class B common stock. The recapitalization
agreement also includes provisions enabling Verizon to purchase additional
shares of Class B common stock under certain circumstances. In addition, the
recapitalization agreement contains provisions requiring Genuity to obtain the
consent of Verizon prior to taking actions such as making acquisitions with a
purchase price exceeding 20% of Genuity's market capitalization, making any
acquisitions with a purchase price in excess of $100 million or entering into
any joint venture with an investment in excess of $100 million that is not
closely related to Genuity's business, making any disposition, including the
assumption of indebtedness in excess of 20% of Genuity's market capitalization,
and certain other restrictions on incurring indebtedness and other
protective rights.
F-27
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
Common Stock
The shares of Genuity's Class A common stock, Class B common stock and Class
C common stock are identical in all respects except for voting rights,
conversion rights and as otherwise described below. The rights, preferences and
privileges of holders of our Class A common stock, Class B common stock and
Class C common stock are subject to the rights of the holders of shares of any
other class of common stock that Genuity may authorize and issue and any series
of preferred stock that Genuity may designate and issue in the future.
Voting Rights. Except as required by law or as described below, the holders
of the Class A common stock, Class B common stock and Class C common stock vote
together as a single class on all matters submitted to a vote of Genuity's
stockholders. Each share of Class A common stock entitles the holder to one
vote per share. So long as 50% or more of the shares of Class B common stock
outstanding at the completion of the proposed initial public offering remain
outstanding, no holder or group of holders of Class A common stock may vote any
of their shares in excess of 20% of the aggregate number of the then
outstanding number of shares of Class A common stock.
Each share of Class B common stock entitles the holder to one vote per
share. The holders of the Class B common stock, voting separately as a class,
are entitled to elect one of our directors.
Genuity is also required to obtain the consent of the holders of Class B
common stock, before taking specific actions, including making significant
acquisitions or dispositions, entering into major business combinations, and
incurring indebtedness or issuing additional equity securities in excess of
specified limits
Each share of Class C common stock entitles the holder to five votes per
share.
Conversion. Immediately after the completion of the proposed initial public
offering, Verizon will own all of the outstanding shares of Genuity's Class B
common stock.
Under the proposal to the FCC:
. if Verizon eliminates the applicable Section 271 restrictions as to 100%
of Bell Atlantic in-region lines, Verizon could convert the Class B
common stock into 800 million shares of Class C common stock which
immediately after the proposed initial public offering would represent
approximately 82% of our total equity and approximately 96% of the total
voting power;
. if Verizon eliminates the applicable Section 271 restrictions as to at
least 50% of the Bell Atlantic in-region lines and it first offers its
shares to Genuity it could transfer its shares of Class B common stock
to a disposition trustee for sale to one or more third parties that
would then be able to convert the Class B common stock into an aggregate
of 800 million shares of Class A common stock, which immediately after
this offering would represent approximately 82% of our total equity and
voting power; and
. if Verizon does not eliminate the applicable Section 271 restrictions as
to at least 50% of Bell Atlantic in-region lines, the Class B common
stock is convertible into shares of Class A common stock representing
only 10% of Genuity's total common stock outstanding immediately after
conversion.
F-28
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
Under the proposal to the FCC, if Verizon has not eliminated the applicable
Section 271 restrictions as to 100% of Bell Atlantic in-region lines on or
before , 2005, which date may be extended under certain conditions,
Verizon's ability to convert the Class B common stock into 800 million shares
of Class A common stock or Class C common stock will expire. If Verizon has
satisfied the applicable Section 271 restrictions as to 100% of Bell Atlantic
in-region lines on or before that date, or any extension, its ability to
convert the Class B common stock into 800 million shares of Class A common
stock or Class C common stock will not expire. The Class B common stock
transferred to a third party will not be subject to this expiration limitation.
Each share of Class C common stock is convertible by the holder at any time
into one share of Class A common stock. Each share of Class C common stock will
automatically convert into one share of Class A common stock if at any time the
aggregate number of outstanding shares of Class C common stock, together with
shares of Class C common stock issuable upon conversion of Class B common
stock, constitutes less than 10% of Genuity's outstanding common stock.
Verizon's Right to Acquire Additional Shares. If Verizon holds shares of
Class A common stock and Class C common stock that in the aggregate exceed 70%
of the total number of shares of outstanding common stock, Verizon may acquire
from Genuity a number of shares of Class A common stock so that it will own
shares of common stock equal to 80% of the total number of shares of the
outstanding common stock.
F-29
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Applicable to Unaudited Periods)
Liquidation. In the event of any dissolution, liquidation, or winding up of
Genuity's affairs, whether voluntary or involuntary, the holders of the Class A
common stock, the Class B common stock and the Class C common stock will be
entitled to share ratably, in proportion to the number of shares they represent
of Genuity's outstanding common stock, in the assets legally available for
distribution to stockholders, in each case after payment of all of Genuity's
liabilities and subject to preferences that may apply to any series of
preferred stock then outstanding. Genuity may not dissolve, liquidate or wind
up its affairs without obtaining the consent of the holders of the outstanding
shares of its Class B common stock.
Mergers and Other Business Combinations. If Genuity enters into a merger,
consolidation or other similar transaction in which shares of its common stock
are exchanged for or converted into securities, cash or any other property, the
holders of each class of Genuity's common stock will be entitled to receive an
equal per share amount of the securities, cash, or other property, as the case
may be, for which or into which each share of any other class of common stock
is exchanged or converted; provided that in any such merger, consolidation or
other similar transaction, the holders of the shares of Class B common stock
shall be entitled to receive, at their election, either (1) the merger
consideration such holders would have received had they converted their shares
of Class B common stock immediately prior to the consummation of such
transaction or (2) a new security that is convertible into the merger
consideration and has substantially identical voting and other rights as the
Class B common stock. In any transaction in which shares of capital stock are
distributed, the shares that are exchanged for or converted into the capital
stock may differ as to voting rights and conversion rights only to the extent
that the voting rights and conversion rights of Class A common stock, Class B
common stock and Class C common stock differ at that time. As described above,
the holders of the Class B common stock, voting separately as a class, must
consent to any merger, consolidation or other similar transaction.
Other Provisions. The holders of Class A common stock, Class B common stock
and Class C common stock are not entitled to preemptive rights. There are no
redemption provisions or sinking fund provisions that apply to the Class A
common stock, the Class B common stock or the Class C common stock.
Immediately following the closing of the proposed initial public offering,
Genuity's authorized capital stock will consist of 1,600,000,000 shares of
Class A common stock, par value $0.01 per share, 21,000,000 shares of Class B
common stock, par value $0.01 per share, 800,000,000 shares of Class C common
stock, par value $0.01 per share, and 0 shares of preferred stock, par value
$0.01 per share. Immediately following the closing of the initial public
offering, there will be outstanding: (1) 173,913,000 shares of Class A common
stock; (2) options to purchase approximately 50,000,000 shares of Class A
common stock; (3) 18,256,000 shares of Class B common stock, all of which will
be held of record by Verizon as of that date; (4) no shares of Class C common
stock; and (5) no shares of preferred stock.
Long-Term Stock Incentive Plan
Genuity's employees have historically been among those granted options to
purchase common stock of GTE. The Long-Term Stock Incentive Plan was adopted by
the board of directors and Genuity's sole stockholder. The Long-Term Stock
Incentive Plan provides for the following awards based on the Class A common
stock: stock options, stock appreciation rights, stock-based performance
bonuses and other stock-based awards. No cash awards will be permitted under
the plan (except in lieu of fractional shares). Awards may be granted to
employees of Genuity or any entity in which it owns at least a 10% interest.
The Long-Term Stock Incentive Plan will be administered by the executive
compensation committee of the Genuity board of directors. The administrator has
the authority to determine eligibility, grant awards and make all other
determinations under the plan.
F-30
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
(Including Data Appliable to Unaudited Periods)
Stock options granted under the Long-Term Stock Incentive Plan may have a
term of up to 10 years and may be either incentive stock options, as defined in
the Internal Revenue Code, or nonqualified stock options. Stock options granted
may not be assigned other than by will or by applicable laws descent and
distribution. The period or periods during which an award will be exercisable
or remain outstanding, including any periods following termination of service,
the manner of exercise and other details of awards will be determined by the
administrator consistent with the Long-Term Stock Incentive Plan.
The aggregate number of Class A common stock available for awards under the
Long-Term Stock Incentive Plan will be 8.95% of the outstanding number of
shares of Class A common stock at the time of the offering, assuming the
conversion of the Class B common stock into Class A common stock to the maximum
extent permitted by the certificate of incorporation.
Outside Directors' Compensation Plan
Pursuant to the Outside Directors' Compensation Plan, non-employee directors
who have agreed to serve on Genuity's board of directors at the time of the
proposed initial public offering will receive, effective upon the completion of
the proposed initial public offering, a $30,000 annual cash fee and options to
purchase 30,000 shares of Class A common stock at an exercise price equal to
the initial public offering price. In addition, non-employee directors who
agree after the initial public offering to serve on the board of directors will
receive, effective upon election to the board of directors, a $30,000 annual
cash fee and options to purchase 30,000 shares of Class A common stock at an
exercise price equal to the fair market value at the time of the grant. Options
issued to the directors will vest in three equal installments. The first
installment will immediately vest on the date of grant, but will not become
exercisable until the day immediately before the first annual meeting of the
stockholders. The second installment will vest and become immediately
exercisable on the day immediately before the second annual meeting of the
stockholders. The third installment will vest and become immediately
exercisable on the day immediately before the third annual meeting of the
stockholders.
15. Pro Forma (unaudited)
On , 2000 Genuity issued 18,256,000 shares of Class B common stock to
GTE in exchange for its existing outstanding shares. These shares have been
reflected as if issued on January 1, 1997.
The pro forma effect of GTE's capital contribution to Genuity of $178
million, of which $46 million will be utilized to fund certain accrued
compensation amounts and employee benefit plan obligations, has been presented
separately in Genuity's accompanying combined balance sheets and combined
statements of changes in stockholder's equity.
F-31
<PAGE>
GENUITY INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999 and the
Three Months Ended March 31, 2000 (Unaudited) for Genuity
and the Six Months Ended June 30, 1997 for the Predecessor
(in thousands)
(Including Data Applicable to Unaudited Periods)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- ------------------------- ------------ --------------
Balance at Charged to Charged to
beginning costs and other accts.-- Deductions-- Balance at end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
1997
Allowance for doubtful
accounts............... $ 948 $1,840 $ 1(a) $ (35)(c) $2,754
--------------------------------------------------------------------------------
GENUITY
1997
Allowance for doubtful
accounts............... $ 520 $1,898 $2,754(b) $ (850)(c) $4,322
1998
Allowance for doubtful
accounts............... $4,322 $2,256 $ 131(a) $(3,058)(c) $3,651
1999
Allowance for doubtful
accounts............... $3,651 $4,799 $ 201(a) $(3,101)(c) $5,550
March 31, 2000
(unaudited)
Allowance for doubtful
accounts............... $5,550 $1,553 $ 52(a) $(2,679)(c) $4,476
</TABLE>
--------
(a) Represent bad debt recoveries
(b) Represents the impact of acquiring the Predecessor
(c) Represent write-offs of uncollectible receivable balances
<PAGE>
Inside Back Cover
Top Caption -- The "Genuity" logo is centered across the top.
Middle Diagram -- In the center of the page is a picture of a globe with the
caption "The Network Effect" in white letters. There are two
arrows surrounding the globe. The blue arrow points down and
has the caption "On-Network Users" in white. The purple arrow
points up with the caption "On-network Content" in white.
Bottom Caption -- "We believe that service providers are increasingly connecting
to networks with substantial on-network content to improve
their customers' experience. In turn, this drives demand by
enterprises seeking to connect to networks with large numbers
of users. At Genuity, we capitalize on our large base of on-
network users and content to create a cycle of demand that we
call the "network effect."
<PAGE>
--------------------------------------------------------------------------------
173,913,000 Shares
Class A Common Stock
LOGO OF GENUITY
$ PER SHARE
Morgan Stanley Dean Witter Salomon Smith Barney
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission Registration Fee and the National
Association of Securities Dealers, Inc. Filing Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 792,000
National Association of Securities Dealers Filing Fee......... 30,500
Nasdaq National Market Listing Fee............................ 95,000
Blue Sky Fees and Expenses.................................... 20,000
Transfer Agent and Registrar Fees............................. 100,000
Accounting Fees and Expenses.................................. 1,850,000
Directors and Officers Liability Insurance.................... 870,000
Legal Fees and Expenses....................................... 1,300,000
Printing Expenses............................................. 500,000
Miscellaneous................................................. 449,044
==========
Total....................................................... $6,006,544
</TABLE>
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or the board of directors of a corporation to grant, indemnity to
directors and officers in terms sufficiently broad to permit indemnification
under some circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933.
As permitted by the Delaware General Corporation Law, the certificate of
incorporation of the Registrant provides that its directors shall not be liable
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent that the exculpation from
liabilities is not permitted under the Delaware General Corporation Law as in
effect at the time the liability is determined. As permitted by the Delaware
General Corporation Law, the certificate of incorporation of the Registrant
also provides that the Registrant shall indemnify its directors to the full
extent permitted by the laws of the State of Delaware.
The Registrant is in the process of obtaining policies of insurance under
which coverage will be provided (a) to its directors and officers against loss
arising from claims made by reason of breach of fiduciary duty or other
wrongful acts, including claims relating to public securities matters and (b)
to the Registrant with respect to payments which may be made by the Registrant
to these officers and directors pursuant to the above indemnification provision
or otherwise as a matter of law.
The Underwriting Agreement provides for the indemnification of officers and
directors of the Registrant by the Underwriters against some types of
liability.
ITEM 15. Recent Sales of Unregistered Securities.
In the three fiscal years prior to the effective date of this Registration
Statement, we have issued and sold the following unregistered securities:
On September 12, 1997, Genuity issued and sold 500 shares of its common
stock, par value $1.00 per share, to GTE Corporation for an aggregate price of
$500.
On , 2000, Genuity issued 18,256,000 shares of its Class B common
stock, par value $0.01 per share to GTE Corporation in exchange for 500 shares
of its common stock, par value $1.00 per share, held by GTE Corporation.
II-1
<PAGE>
The sales and issuances of securities listed above, other the sales and
issuances in Item , were deemed to be exempt from registration under Section
4(2) of the Securities Act or Regulation D thereunder as transactions not
involving a public offering. The sales and issuances of securities listed above
in Item were deemed to be exempt from registration under the Securities Act
by virtue of Rule 701 promulgated under Section 3(b) of the Securities Act of
1933 as transactions pursuant to compensation benefit plans and contracts
relating to compensation. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation*
3.2 Amended and Restated Certificate of Incorporation (To Be Filed Prior
To Closing Of Offering)*
3.3 Amended and Restated By-laws*
4.1 Specimen Class A Common Stock Certificate+
5.1 Opinion of Ropes & Gray*
10.1 2000 Long-Term Stock Incentive Plan+
10.2 Outside Directors' Compensation Plan
10.3 IRU Agreement dated as of May 2, 1997 by and between Qwest
Communications Corporation and GTE Intelligent Network Services
Incorporated(1)+
10.4 First Amendment to IRU Agreement dated as of August 13, 1997(1)+
10.5 Second Amendment IRU Agreement dated as of May 29, 1998(1)+
10.6 Third Amendment to IRU Agreement dated as of November 16, 1998(1)+
10.7 Fourth Amendment to IRU Agreement dated as of February 5, 1999(1)+
10.8 Network Services Agreement by and between America Online, Inc. and BBN
Corporation effective as of December 31, 1999(1)+
10.9 Form of Agreement for Transition Services between GTE Service
Corporation and Genuity Inc.(2)+
10.10 Form of Agreement for IT Transition Services between GTE Service
Corporation and Genuity Inc.(2)+
10.11 Form of Purchase, Resale and Marketing Agreement between Bell Atlantic
Corporation and Genuity Inc.(1)(2)+
10.12 Form of Software License Agreement between GTE Service Corporation and
Genuity Inc.(2)+
10.13 Form of Software Development and Technical Services Agreement between
GTE Service Corporation and Genuity Inc.(2)+
10.14 Form of Intellectual Property Ownership and Cross License Agreement
between GTE Service Corporation and Genuity Inc.(2)+
10.15 Form of Facility Lease Agreement(2)+
10.16 Form of Sublease Agreement(2)+
10.17 Form of Assignment and Assumption of Lease(2)+
10.18 Form of Financial Support Agreement Regarding Guaranty of Obligation
between GTE Corporation and Genuity Inc.(2)+
10.19 Form of Request by Genuity Inc. for Continuation of Financial Support
after Separation between GTE Corporation and Genuity Inc.(2)+
10.20 Master Services Agreement dated as of September 14, 1999 between GTE
Network Services and GTE Global Network Incorporated+
10.21 Form of First Amendment to Master Services Agreement between GTE
Network Services and GTE Incorporated(2)+
10.22 Form of Second Amendment to Master Services Agreement between GTE
Network Services and GTE Incorporated(2)+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.23 Executive Deferral Plan
10.24 2000 Executive Incentive Plan+
10.25 Executive Employment Agreement between Genuity Inc. and Paul R.
Gudonis*
10.26 Executive Employment Agreement between Genuity Inc. and Joseph C.
Farina*
10.27 Executive Employment Agreement between Genuity Inc. and Daniel P.
O'Brien*
10.28 Executive Employment Agreement between Genuity Inc. and Ira H. Parker*
10.29 Consent of Philippe P. Dauman
10.30 Consent of Duncan M. Davidson*
10.31 Consent of John W. Gerdelman
10.32 Consent of Debra L. Lee*
10.33 Consent of Michael T. Masin*
10.34 Registration Rights Agreement between Genuity Inc. and GTE Corporation
and Contel Federal Systems, Inc.*
10.35 Subscription and Recapitalization Agreement between Genuity Inc. and
GTE Corporation and Contel Federal Systems*
21.1 Subsidiaries*
23.1 Consent of Ropes & Gray (Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (Signature Page)+
27. Financial Data Schedule+
</TABLE>
--------
* To Be Filed By Amendment.
+ Previously Filed.
(1) There are portions of these agreements that have been omitted pursuant to
a request for confidential treatment filed separately with the Securities
and Exchange Commission.
(2) These agreements are being filed in the form in which they will be
executed immediately upon the closing of the merger of Bell Atlantic
Corporation and GTE Corporation.
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
ITEM 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under "Item 14--
Indemnification of Directors and Officers" above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
this indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against these 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 the director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
the indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of the issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
II-3
<PAGE>
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of these securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in the denominations and registered in the names required by the
underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Burlington, State of Massachusetts, on the 8th day of June, 2000.
GENUITY INC.
By /s/ Paul R. Gudonis
----------------------------------
Paul R. Gudonis
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul R. Gudonis Chief Executive Officer and June 8, 2000
____________________________________ Director (Principal
Paul R. Gudonis Executive Officer)
* Director June 8, 2000
____________________________________
Charles J. Gibney
* Director June 8, 2000
____________________________________
James L. Freeze
* Vice President, Finance June 8, 2000
____________________________________ (Principal Financial Officer
David B. Monaghan and Principal Accounting
Officer)
/s/ Paul R. Gudonis
____________________________________
*Paul R. Gudonis, Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation*
3.2 Amended and Restated Certificate of Incorporation (To Be Filed Prior
To Closing Of Offering)*
3.3 Amended and Restated By-laws*
4.1 Specimen Class A Common Stock Certificate+
5.1 Opinion of Ropes & Gray*
10.1 2000 Long-Term Stock Incentive Plan+
10.2 Outside Directors' Compensation Plan
10.3 IRU Agreement dated as of May 2, 1997 by and between Qwest
Communications Corporation and GTE Intelligent Network Services
Incorporated(1)+
10.4 First Amendment to IRU Agreement dated as of August 13, 1997(1)+
10.5 Second Amendment IRU Agreement dated as of May 29, 1998(1)+
10.6 Third Amendment to IRU Agreement dated as of November 16, 1998(1)+
10.7 Fourth Amendment to IRU Agreement dated as of February 5, 1999(1)+
10.8 Network Services Agreement by and between America Online, Inc. and BBN
Corporation effective as of December 31, 1999(1)+
10.9 Form of Agreement for Transition Services between GTE Service
Corporation and Genuity Inc.(2)+
10.10 Form of Agreement for IT Transition Services between GTE Service
Corporation and Genuity Inc.(2)+
10.11 Form of Purchase, Resale and Marketing Agreement between Bell Atlantic
Corporation and Genuity Inc.(1)(2)+
10.12 Form of Software License Agreement between GTE Service Corporation and
Genuity Inc.(2)+
10.13 Form of Software Development and Technical Services Agreement between
GTE Service Corporation and Genuity Inc.(2)+
10.14 Form of Intellectual Property Ownership and Cross License Agreement
between GTE Service Corporation and Genuity Inc.(2)+
10.15 Form of Facility Lease Agreement(2)+
10.16 Form of Sublease Agreement(2)+
10.17 Form of Assignment and Assumption of Lease(2)+
10.18 Form of Financial Support Agreement Regarding Guaranty of Obligation
between GTE Corporation and Genuity Inc.(2)+
10.19 Form of Request by Genuity Inc. for Continuation of Financial Support
after Separation between GTE Corporation and Genuity Inc.(2)+
10.20 Master Services Agreement dated as of September 14, 1999 between GTE
Network Services and GTE Global Network Incorporated+
10.21 Form of First Amendment to Master Services Agreement between GTE
Network Services and GTE Incorporated(2)+
10.22 Form of Second Amendment to Master Services Agreement between GTE
Network Services and GTE Incorporated(2)+
10.23 Executive Deferral Plan
10.24 2000 Executive Incentive Plan+
10.25 Executive Employment Agreement between Genuity Inc. and Paul R.
Gudonis*
10.26 Executive Employment Agreement between Genuity Inc. and Joseph C.
Farina*
10.27 Executive Employment Agreement between Genuity Inc. and Daniel P.
O'Brien*
10.28 Executive Employment Agreement between Genuity Inc. and Ira H. Parker*
10.29 Consent of Philippe P. Dauman
10.30 Consent of Duncan M. Davidson*
10.31 Consent of John W. Gerdelman
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.32 Consent of Debra L. Lee*
10.33 Consent of Michael T. Masin*
10.34 Registration Rights Agreement between Genuity Inc. and GTE Corporation
and Contel Federal Systems, Inc.*
10.35 Subscription and Recapitalization Agreement between Genuity Inc. and
GTE Corporation and Contel Federal Systems*
21.1 Subsidiaries*
23.1 Consent of Ropes & Gray (Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (Signature Page)+
27. Financial Data Schedule+
</TABLE>
--------
* To Be Filed By Amendment.
+ Previously Filed.
(1) There are portions of these agreements that have been omitted pursuant to
a request for confidential treatment filed separately with the Securities
and Exchange Commission.
(2) These agreements are being filed in the form in which they will be
executed immediately upon the closing of the merger of Bell Atlantic
Corporation and GTE Corporation.
