<PAGE>
FILED PURSUANT TO RULE 424(B)(4)
FILE NO. 333-35278
9,000,000 Shares
[LOGO OF IASIAWORKS, INC.]
Common Stock
----------------
This is an initial public offering of shares of iAsiaWorks, Inc. All of the
9,000,000 shares of common stock are being sold by iAsiaWorks.
Prior to this offering, there has been no public market for the common stock.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "IAWK".
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price........................... $13.00 $117,000,000
Underwriting discount................................... $ 0.91 $ 8,190,000
Proceeds, before expenses, to iAsiaWorks................ $12.09 $108,810,000
</TABLE>
To the extent that the underwriters sell more than 9,000,000 shares, the
underwriters have the option to purchase up to an additional 1,350,000 shares
from iAsiaWorks at the initial public offering price less the underwriting
discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on August 8, 2000.
Goldman, Sachs & Co. Morgan Stanley Dean Witter
Salomon Smith Barney
----------------
Prospectus dated August 2, 2000.
<PAGE>
Inside Front Cover of Prospectus
. iAsiaWorks logo and name overlaying two pictures.
. Caption on page: "Global Technology. Asian Focus."
. Right side of page: iAsiaWorks name in large print.
Gate Fold
. Main caption on page: "Data Center and Network Facilities"
. Subcaption on page: "Services and support at facilities across the
Asia-Pacific region."
. Map depicting iAsiaWorks' data centers and network facilities.
. Bottom of page: iAsiaWorks name in large print.
Inside Back Cover
. iAsiaWorks logo and name overlaying two pictures
. Caption on page: "Global Technology. Asian Focus"
. Bottom of page: List of addresses for iAsiaWorks offices in the
United States, Australia, Hong Kong, South Korea and Taiwan.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our consolidated financial statements and notes to those
statements appearing elsewhere in this prospectus.
Our Business
We offer a broad range of Internet services that allow our customers to
conduct business on the Internet throughout the Asia-Pacific region. Our
service offerings consist primarily of high-speed, leased-line access to the
Internet, and hosting services that allow our customers to store their web
pages, applications, data and other Internet content in our Internet data
centers and to conduct business in their targeted markets. To complement these
services, we offer our customers managed services to assist them to optimize
the performance and maintenance of their Internet content and its delivery.
These managed services include performance monitoring, security services and
other technical support services. In addition, through our strategic
relationships, we add value to our customers by offering services such as
language translation, web design services and regulatory compliance advice to
assist our customers in customizing their Internet content for users in the
Asia-Pacific region.
We assist our customers in entering markets that are complex and difficult
for non-indigenous businesses to penetrate. We serve as a single point of
contact for customers requiring Internet services in markets throughout the
Asia-Pacific region and in the United States and are able to provide these
services for our customers in Hong Kong, South Korea, Taiwan, Australia,
mainland China, India, Japan, Singapore, the Philippines, Thailand, New Zealand
and the United States. We target our services to Asia-Pacific businesses that
desire to establish or expand their Internet operations within the Asia-Pacific
region or into the United States, as well as businesses located outside the
region that wish to conduct their Internet operations in the Asia-Pacific
region.
From inception in August 1995, we primarily provided high-speed Internet
access to business customers in selected markets in the Asia-Pacific region. In
mid-1999, we began to implement a significant change in our business strategy
to focus on providing hosting and managed services. Our hosting services, which
are conducted at our Internet data centers located throughout the Asia-Pacific
region and in the United States, include dedicated hosting and co-location
services. Dedicated hosting is the storage and delivery of our customers'
Internet content on server computers owned by us in our Internet data centers,
while co-location services allow our customers to maintain their Internet
content on servers owned by them and located in our Internet data centers.
Our current Internet data centers are not large-scale facilities. However, we
are in the process of building-out our Internet data center capacity and expect
our new Internet data centers generally to be high-performance and large-scale,
with most expected to exceed 50,000 square feet. These centers will house a
large number of servers in structurally enhanced facilities with redundant
direct connections to telecommunication and Internet service provider networks.
From these facilities, which also feature climate control, secured access and a
reliable electricity and power supply, we can store and deliver our customers'
Internet content in their targeted markets. By hosting a customer's Internet
content at an Internet data center located in a local market that we serve, the
distance and number of interconnections between the location of our customer's
content and its targeted local users is minimized, allowing our customer to
increase the speed and reliability of the delivery of its Internet content
while reducing Internet connection and usage costs.
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<PAGE>
Our shift in focus from Internet access to hosting and managed services makes
our future growth heavily dependent upon the successful rollout of our new
Internet data centers and our ability to obtain additional financing. We have
incurred significant losses during our limited operating history. Due to the
substantial costs necessary to establish and operate our new Internet data
centers, we believe that we will continue to incur operating and net losses for
at least the next several years, and that our losses will increase
significantly from current levels.
We believe that no company currently offers as comprehensive a range of
hosting and related services in as many markets in the Asia-Pacific region as
we do. We have been operating in the Asia-Pacific region since our inception,
and we believe that we have the people, experience and relationships in major
markets that allow us to address the complexities our customers face in
conducting business on the Internet in the region. In addition, our
headquarters location in Silicon Valley gives us access to developing
technology and experienced personnel that we believe will facilitate the
implementation of our business plan in the Asia-Pacific region.
Building on this foundation, it is our goal to become a pre-eminent provider
of business Internet services throughout the Asia-Pacific region with a primary
focus on dedicated hosting, co-location and managed services. To achieve this
goal, we intend to pursue a strategy that emphasizes the following elements:
. develop large-scale, high performance Internet data center capacity in
the Asia-Pacific region;
. broaden and deepen our geographic presence in the Asia-Pacific region;
. expand our sales force in the U.S. and the Asia-Pacific region; and
. pursue acquisitions and strategic relationships.
Corporate Information
iAsiaWorks, Inc. was incorporated in California in August 1995 as AUNET
Corporation. In December 1999, we changed our name to iAsiaWorks, Inc. We
reincorporated in Delaware in August 2000. Our principal executive offices are
located at 2000 Alameda de las Pulgas, Suite 125, San Mateo, California 94403
and our telephone number is (650) 524-1790. Our Asia-Pacific regional
headquarters are located at Hong Kong Telecom Tower, 27th floor, Taikoo Place,
979 Kings Road, Quarry Bay, Hong Kong, and the telephone number is 852-2511-
3848.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered............................... 9,000,000 shares
Common stock to be outstanding after the offering.. 39,261,624 shares*
Use of proceeds ................................... For establishment of
Internet data center
facilities, general
corporate purposes and
acquisitions. See "Use of
Proceeds" on page 18.
Nasdaq National Market symbol...................... "IAWK"
</TABLE>
At our request the underwriters have reserved for sale at the initial public
offering price up to 630,000 shares of our common stock as directed shares.
--------
* The number of shares of common stock to be outstanding after this offering as
of June 30, 2000 excludes:
. 5,784,601 shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 2000 at a weighted average exercise price of
$4.54 per share;
. 10,000,000 shares of common stock reserved for issuance under our 2000
Stock Incentive Plan, which incorporates our 1995 Stock Plan;
. 600,000 shares of common stock reserved for issuance under our 2000
Employee Stock Purchase Plan; and
. 212,013 shares of common stock issuable upon exercise of outstanding
warrants to purchase Series B preferred stock at an exercise price of
$4.50 per share.
For additional information about these items, see "Capitalization," on page 19,
"Benefit Plans," beginning on page 54, and "Description of Capital Stock,"
beginning on page 65.
----------------
Except as set forth in the consolidated financial statements or as otherwise
specified in this prospectus, all information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option;
. assumes the exercise for cash of all outstanding warrants other than
warrants to purchase 212,013 shares of common stock issuable upon
exercise of outstanding warrants to purchase Series B preferred stock at
an exercise price of $4.50 per share;
. gives effect to the automatic conversion of all of our outstanding
preferred stock into 25,764,677 shares of common stock upon the closing
of this offering;
. reflects the 3 for 1 reverse stock split effected on August 1, 2000; and
. reflects our reincorporation from a California corporation into a
Delaware corporation on August 1, 2000.
See "Description of Capital Stock" and "Underwriting" beginning on pages 65 and
70, respectively.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
(unaudited)
------------------------------
Historical Pro Forma (2) Three Months
----------------- ------------- Ended March
Year Ended December 31, 31, (3)
-------------------------------- ----------------
1998 1999 1999 1999 2000
------- -------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenue............... $ 3,490 $ 5,629 $ 15,859 $ 834 $ 4,722
Gross margin................ (1,131) (189) 1,122 (265) 461
Stock-based compensation.... 220 4,070 4,070 244 2,792
Other operating expenses.... 5,302 7,981 23,279 1,464 7,576
Total operating expenses.... 5,522 12,051 27,349 1,708 10,368
Loss from operations........ (6,653) (12,240) (26,227) (1,973) (9,907)
Net loss.................... (6,823) (12,317) (26,091) (1,940) (9,440)
Dividend accretion on
preferred stock............ 1,814 2,287 2,287 597 --
Net loss attributable to
common stockholders........ $(8,637) $(14,604) $(28,378) $(2,537) $(9,440)
Net loss per share
attributable to common
stockholders, basic and
diluted.................... $(30.85) $ (14.87) $ (28.90) $ (7.29) $ (3.22)
Shares used in computing net
loss per share attributable
to common stockholders,
basic and diluted.......... 280 982 982 348 2,936
Unaudited pro forma net loss
per share attributable to
common stockholders, basic
and diluted(1) ............ $ (1.11) $ (2.15) $(0.33)
Shares used in computing
unaudited pro forma net
loss per share attributable
to common stockholders,
basic and diluted.......... 13,177 13,177 28,550
</TABLE>
--------
(1) The pro forma net loss per share data reflect the automatic conversion of
preferred stock as described in Note 2 of Notes to Consolidated Financial
Statements--Pro forma net loss per share (unaudited) beginning on page F-
13.
(2) The unaudited summary pro forma combined statement of operations data at
December 31, 1999 reflects the conversion set forth in the preceding item
(1) and the acquisition of AT&T EasyLink as if it had occurred on January
1, 1999, and after giving effect to purchase accounting adjustments. For a
further discussion, see Note 3 of Notes to Consolidated Financial
Statements beginning on page F-14.
(3) Comparison of the financial data for the three months ended March 31, 2000
with the three months ended March 31, 1999 may not be meaningful as the
financial data for the quarter ended March 31, 2000 reflects a significant
acquisition completed in December 1999 accounted for by the purchase
method of accounting.
6
<PAGE>
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities................................... $ 38,471 $38,491 $145,001
Working capital............................... 35,102 35,122 141,632
Total assets.................................. 87,333 87,353 193,863
Long-term obligations, net of current
portion...................................... 377 377 377
Convertible preferred stock................... 115,642 -- --
Total stockholders' equity (deficit).......... (35,999) 79,663 186,173
</TABLE>
The consolidated balance sheet data as of March 31, 2000 are set forth:
. on an actual basis;
. on a pro forma basis reflecting 26,093,375 total shares of common stock
outstanding, which gives effect to:
. the exercise of warrants to purchase 426,344 shares of common stock
at an exercise price of $0.03 per share,
. the exercise of warrants to purchase 1,666 shares of Series B
preferred stock at an exercise price of $4.50 per share and
. the automatic conversion of all outstanding shares of the convertible
preferred stock into 25,664,676 shares of common stock upon the
closing of this offering; and
. on a pro forma as adjusted basis to reflect the estimated net proceeds
from the sale of 9,000,000 shares of our common stock in this offering
at the initial public offering price of $13.00 per share after deducting
the underwriting discount and the estimated offering expenses.
See "Use of Proceeds" and "Capitalization" on pages 18 and 19, respectively.
7
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding to invest in shares of our common stock.
Investing in our common stock may expose you
to the following risks inherent in our business
We may not grow our business or become profitable if we are not successful in
implementing a change in our strategic focus.
From inception in August 1995 until July 1999, we focused on providing high-
speed, leased-line Internet access in selected markets in the Asia-Pacific
region. In July 1999, we began to implement a significant change in our
business strategy to focus on providing dedicated hosting, co-location and
managed services throughout the Asia-Pacific region. Our inability to
successfully execute this business strategy could compromise our future growth
and profitability.
Our Internet data center expansion plans may be delayed, never be completed or
experience other significant problems, which would delay or prevent us from
realizing our expected growth and ultimate profitability.
The Internet data centers currently operated by us or our strategic partners
are not large-scale facilities. Our anticipated growth and ultimate
profitability will be jeopardized if we cannot establish significant new
Internet data center capacity, which may not occur due to inadequate facilities
available for sale or lease, construction delays, inability to obtain necessary
authorizations or technological problems.
We do not have a proven track record for the construction or the operation of
large-scale, high performance Internet data centers and therefore will be
dependent upon third party project managers, contractors, other service
providers and strategic partners. In addition, if any of these risks affect our
Internet data center expansion plans, the benefits of our substantial
investment in these Internet data centers may be delayed or never occur. In
that case, we will be delayed or prevented from realizing our expected growth
and ultimate profitability.
If we are successful in establishing our new Internet data centers, we will
need to greatly expand our customer base to benefit from these investments.
We will incur significant costs to establish and operate our new Internet
data centers. If we are unable to significantly grow our customer base, we will
not be able to achieve the economies of scale necessary to offset our fixed and
other operating costs. We have limited experience in attracting and servicing
our hosting, co-location, managed services and other value-added services
customers. Our ability to attract and retain additional customers for these
services depends on a variety of factors including the willingness of
businesses to outsource their Internet operations and the quality, reliability
and cost-effectiveness of our services. If we are unable to significantly
increase our customer base for hosting, co-location, managed services and other
value added services, we will not realize our expected growth or achieve
profitability.
We expect significant increases in our operating expenses and continued losses.
We may not be able to grow our business or continue operating if we cannot
raise additional financing.
We have never achieved profitability, have accumulated net losses of $38.1
million from our inception through March 31, 2000 and have had to rely on the
proceeds of the sale of equity
8
<PAGE>
securities to fund our operations. We believe that we will continue to incur
losses for at least the next several years and that our losses will increase
significantly from current levels. We expect to fund our growth through equity
or debt financings. Our inability to finance our operations may limit our
growth potential or render us unable to continue operating. Furthermore, we may
not be able to obtain financing on satisfactory terms. If we issue securities
to raise capital, our existing stockholders may experience additional dilution
or the new securities may have rights senior to those of our common stock.
We operate in a relatively new and evolving market with rapid technological
changes and uncertain prospects for growth. This market may evolve in a manner
that jeopardizes our prospects for growth and profitability.
The market for our services in the Asia-Pacific region has only recently
begun to develop and is evolving rapidly. Projected growth of this market may
not be realized. The market for our services may not grow, our services may not
be adopted and businesses may not use these Internet-based services to the
degree or in the manner that we expect. In addition, if we are not able to
effectively respond to technological changes or, if technological advances
diminish the benefits derived by our customers from the use of our products and
services, future demand for our services could be reduced. For example, it is
possible that businesses may find it cheaper, more secure or otherwise
preferable to host their web sites and applications internally and decide not
to outsource the management of their web sites and applications. If we are not
able to react quickly to changes in the market, if the market fails to develop
or develops more slowly than expected or if our services do not achieve market
acceptance, we will not achieve growth levels necessary to become profitable.
The potential market for Internet services in the Asia-Pacific region may
attract new and existing competitors, which could narrow our margins and limit
our growth prospects.
The market for Internet access, as well as for hosting, co-location and
managed services, is extremely competitive and there are few substantial
barriers to entry. New market entrants or the creation of stronger competitors
through combinations could result in increased price competition, which would
make it difficult for us to attract new customers, retain existing customers,
or attain revenue and gross margin levels sufficient to generate a return on
our prior investment in our business.
We are dependent upon businesses, such as national telecommunications
carriers that are monopolies or have significant regulatory advantages over us,
that provide us with resources we need to provide services in one or more
markets. These businesses either currently compete with us or may compete with
us in the future. Increasingly, Internet service providers, hosting companies,
telecommunications companies and equipment manufacturers based in North America
have announced plans to enter into or expand their operations in markets in the
Asia-Pacific region. For example, companies such as PSINet, AboveNet
Communications, and its parent Metropolitan Fiber Networks, Exodus
Communications, Inc., Global Crossing GlobalCenter, Level 3, WorldCom and Intel
have announced plans to enter into or expand their current operations in the
Asia-Pacific region. When these companies expand their presence in the Asia-
Pacific region, customers may decide to use their services in the region
instead of ours.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, certain of these competitors may be able to develop and expand
their network infrastructures and service offerings more quickly, adapt to new
or emerging technologies and changes in customer requirements more readily,
take advantage of acquisition and other opportunities more effectively, devote
greater resources to the marketing and sale of their products and adopt more
aggressive pricing policies than we can. In addition, these
9
<PAGE>
competitors have entered and will likely continue to enter into joint ventures
or consortiums to provide additional value-added services competitive with
those provided by us. We may not have, or be able to acquire, the resources or
expertise to compete successfully in the future, which could narrow our margins
and limit our growth prospects.
Our limited operating history makes forecasting difficult. Because most of our
expenses are based on planned operating results, failure to achieve forecast
revenue could significantly increase our net losses in any given period.
As a result of our limited operating history, particularly since our recent
change in strategic focus, it is difficult to accurately forecast our revenue,
and we have limited meaningful historical financial data upon which to base
planned operating expenses. We base our current and future expense levels on
our operating plans, the anticipated dates that our new large-scale, high
performance Internet data centers will be completed and available for customer
use, expected use of our new Internet data centers and estimates of future
revenue. Because our significant expenses are to a large extent fixed in the
short term, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could
significantly increase our net losses in any given period.
Our operating results are difficult to predict. If we fail to meet the
expectations of public market analysts and investors, the market price of our
common stock may decline significantly.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to a variety of factors, many of
which are outside of our control. For example, for several quarters beginning
in late 1997, our operating results were adversely affected by the economic
crisis in the Asia-Pacific region. It is possible that, in the future, our
quarterly operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of our common stock
may decline significantly.
If we cannot effectively manage our growth in the number of personnel, our
increasing geographic breadth and our acquisitions, our projected revenue
growth may not occur, and we may not be able to achieve our projected plan and
operating results.
We expect to grow our business by hiring additional personnel and acquiring
businesses in our existing markets and other markets in the Asia-Pacific
region. The additional personnel, increased geographic breadth of our
operations, and challenges presented by an evolving corporate culture, will
make it increasingly difficult to effectively manage our operations in order to
implement our business plan and effectively oversee our personnel. We may be
unable to maintain uniform standards, controls, procedures and policies if we
fail in these efforts. If we cannot effectively manage our growth, our
projected revenue growth may not occur, we may not be able to achieve our
projected plan and operating results.
We may be unable to hire and retain the skilled engineering and technical
personnel necessary to develop our business.
We intend to hire a significant number of additional engineering and
technical personnel. Competition for these individuals with relevant experience
and expertise is intense, and we may not be able to attract, assimilate or
retain highly qualified personnel in the future. The market for qualified
engineering and technical personnel in the Asia-Pacific region is extremely
limited and finding individuals with relevant country specific experience may
be difficult. Our failure to attract and retain the highly trained engineering
and technical people who are integral to our business may limit our growth rate
and harm our business. We expect to face greater difficulty attracting these
personnel with equity incentives as a public company than we did as a privately
held company.
10
<PAGE>
The expansion of our network is dependent upon the availability of adequate
connectivity with third party providers and failure or delay in obtaining
necessary connectivity would limit our growth.
In building our network we rely upon connectivity and bandwidth from Internet
service providers and local and international telecommunications carriers. In
some of our markets we are dependent on one or a limited number of connectivity
providers. Many of these carriers are our competitors. Because of market and
competitive factors, it is uncertain whether we will be able to obtain the
requisite network connectivity at commercially viable prices or that the
necessary connectivity will be available on a timely basis or at all. Failure
to obtain this connectivity would jeopardize our ability to conduct our
business in the Asia-Pacific region and would restrict our growth.
We must offer services priced above the overall cost of bandwidth, and any
failure to do so could cause us to sell our services at a loss.
We purchase our bandwidth capacity in amounts based upon projected usage by
our customers on a fixed-price basis in advance of the sale of our services. We
sell our services, by contract, on the basis of actual usage. If we do not
obtain adequate bandwidth capacity on acceptable terms and realize appropriate
customer volume for such bandwidth, we will not achieve positive gross profit.
We expect that the cost of obtaining bandwidth for the transport of data over
our network will decline over time as a result of, among other things, the
large amount of capital currently being invested to build network
infrastructure. We expect the prices we charge for data transported over our
network will also decline over time as a result of, among other things, the
lower cost of obtaining bandwidth and existing and new competition in the
markets we address. If we fail to accurately predict the decline in costs of
bandwidth, are unable to sell our services at acceptable prices, or fail to
offer additional services from which we can derive additional revenue, the
value of our services will be substantially reduced, our revenue will decrease
and our business, results of operations and financial condition will suffer.
If we lose the services of key members of our management, in particular our
Chief Executive Officer and our Chief Financial Officer and President--U.S., we
may not be able to effectively execute our business plan and our trading price
may suffer.
Our future success depends to a significant degree on the skills, experience
and efforts of JoAnn Patrick-Ezzell, our Chief Executive Officer, Jonathan
Beizer, our Chief Financial Officer and President--U.S., and other key
personnel. The loss of the services of any of these individuals could
compromise our ability to effectively operate our business. In addition, we
have not obtained key person life insurance on any of our key employees. If any
of our key employees left or was seriously injured and unable to work and we
were unable to find a qualified replacement, our business, results of
operations and financial condition could be harmed.
We could lose customers and be exposed to liability if our service to our
customers is disrupted or damaged or the security of confidential information
stored in our computer systems is compromised.
Our success, in particular our ability to successfully provide our services
in a high quality and reliable manner, largely depends upon the efficient and
uninterrupted operation of our Internet data centers, including our computer
and communications hardware and software systems and the power and cooling
systems upon which they rely. Any of the acts or events described below could
lead to interruptions, physical or electronic loss of data, delays or cessation
of service to our customers or a decrease in responsiveness, which could harm
our relationships with our customers, result in liability
11
<PAGE>
for damages and reduce revenue. Our systems and operations are vulnerable to
damage or interruption from:
. earthquake, fire, flood and other natural disasters;
. failure of our internal systems, including failure of our computer
systems or our telecommunications network, operator negligence, improper
operation by or supervision of our employees;
. third party or systemic infrastructure failures, including Internet
network outages, power and utility loss and problems with the satellite
systems used for our data back-up; and
. disruptions due to human intervention, including computer viruses,
interruption, break-ins, security breaches, misappropriation, denial of
service, vandalism and similar disruptive problems caused by our
customers or Internet hackers.
Furthermore, any inappropriate use of the network by third parties could
potentially jeopardize the security of confidential information stored in our
computer systems and our customers' computer systems, which may result in
liability to us and act as a deterrent to potential customers. Although we
intend to continue to implement security measures, any measures we implement
may be circumvented in the future. The costs and resources required to
eliminate computer viruses and alleviate other security problems may divert
resources from other activities and may result in interruptions or delays to
our customers that could cause our business, results of operations and
financial condition to suffer.
Because of the significant stock ownership of our officers, directors and
significant stockholders, you will be unable to exert significant control over
our future direction.
Based upon our shares outstanding as of June 30, 2000 and treating as
outstanding all options exercisable within 60 days of June 30, 2000 held by
them, after this offering, our executive officers and directors, their
affiliates and other significant stockholders will together control
approximately 59.2% of our outstanding common stock as a result of their
shareholdings prior to the offering and the directed share program which, if
they act together, would enable them to control all matters requiring our
stockholders' approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may delay,
prevent or deter a change in control, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
iAsiaWorks or its assets and might adversely affect the trading price of our
common stock. For more information about our principal stockholders, see
"Principal Stockholders" beginning on page 62.
Provisions of our certificate of incorporation and bylaws may make changes of
control difficult, even if they would be beneficial to stockholders.
Anti-takeover provisions of Delaware law and in our certificate of
incorporation and bylaws may make a change in control of iAsiaWorks difficult,
even if a change in control would be beneficial to our stockholders. These
provisions may allow our board of directors to prevent or make changes in the
management and control of iAsiaWorks.
In addition, under Delaware law, our board of directors may adopt additional
anti-takeover measures in the future. The rights of holders and the price of
our common stock could be adversely affected by these anti-takeover provisions.
For additional information about our capital stock, see "Description of Capital
Stock" beginning on page 65.
12
<PAGE>
Risks specific to the Internet, our industry and our markets
The political, legal and economic climate in the Asia-Pacific region is
volatile, uncertain, subject to change and presents risks that could adversely
affect our business.
We currently operate throughout the Asia-Pacific region. As a result, our
results of operation and future growth depend on the economies in these
markets. There are certain risks inherent in conducting business in the Asia-
Pacific region, that could affect our profitability, including:
. political and economic instability;
. risk of expropriation;
. risk of currency exchange controls and repatriation;
. export restrictions, tariffs and other trade barriers;
. changes in regulatory requirements;
. legal restrictions on the business practices of United States companies
operating outside of the United States, such as the Foreign Corrupt
Practices Act; and
. lack of clarity, transparency and consistency in the application of laws
in various jurisdictions
. potential adverse tax consequences.
Beginning in mid-1997, many countries in the Asia-Pacific region experienced
significant economic downturns and related difficulties. As a result of the
decline in the value of the region's currencies, many governments in the Asia-
Pacific region and companies operating in the region had difficulties servicing
foreign currency denominated debt and many corporate borrowers defaulted on
their payments. These currency fluctuations, as well as resulting higher
interest rates and other factors, materially and adversely affected the
economies of many countries in the Asia-Pacific region. While the region has
generally shown signs of improvement in recent periods, the economic conditions
in the Asia-Pacific region may not continue to improve and any recent
improvements may not be sustained.
Governmental regulation and the application of existing laws of countries in
the Asia-Pacific region often lack clarity and are subject to change without
notice. Such uncertainty and transparency may result in unexpected liabilities
and increases the likelihood of our unknowingly violating local law, especially
with regard to obtaining local and national government approvals, limitations
on foreign investments and the purchase of real property, and complying with
zoning, environmental, labor and similar regulatory requirements.
Any new adverse political, legal or economic development in the Asia-Pacific
region could materially and adversely affect our markets and our business. For
example, while Hong Kong is a Special Administrative region under the
government of mainland China, with its own government and legislature, it may
not remain autonomous from mainland China. Any loss of autonomy could affect
the regulation of business in Hong Kong, hinder our ability to operate in Hong
Kong, and destabilize the Asia-Pacific region. Similarly, any conflict between
mainland China and Taiwan or between North Korea and South Korea may also
destabilize the region and render us unable to transact business in the region.
If any of these events were to occur, our business model would be undermined.
Governmental regulation and the application of existing laws to the Internet
may slow the Internet's growth, increase our costs of doing business and create
potential liability for the dissemination of information over the Internet.
Laws and regulations directly applicable to Internet communications are
becoming more prevalent. Uncertainty and new laws and regulations, as well as
the application of existing law to the Internet, in our markets could prevent
or limit our ability to operate in certain of our markets, expose us to
compliance costs and substantial liability and could result in costly and time
consuming litigation, all of which could materially harm our business,
operating results and financial condition.
13
<PAGE>
The international nature of the Internet and the possibility that we may be
subject to conflicting laws of, or the exercise of jurisdiction by, different
countries may make it difficult or impossible to comply with all the laws that
may govern our activities. Furthermore, the law relating to the liability of
online service providers for information carried on or disseminated through
their networks is currently unsettled.
Underdeveloped telecommunications and Internet infrastructure may limit the
growth of the Internet in the Asia-Pacific region and the growth of our
business.
Access to the Internet requires advanced telecommunications infrastructure.
The telecommunications infrastructure in many parts of the Asia-Pacific region
is not as well developed as in the United States and is owned and operated by
current or former national monopoly telecommunications carriers or may be
subject to a restrictive regulatory environment. The quality and continued
development of telecommunications infrastructure in the Asia-Pacific region
will have a substantial impact on our ability to deliver our services and on
the market use and acceptance of the Internet in general.
In addition, the recent growth in the use of the Internet has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by Internet service providers and other
organizations with links to the Internet. Any perceived degradation in the
performance of the Internet as a whole could undermine the benefits of our
services. The quality of our services is ultimately limited by and reliant upon
the speed and reliability of the networks operated by third parties.
Consequently, the emergence and growth of the market for our services is
dependent on improvements being made to the entire Internet infrastructure in
the Asia-Pacific region to alleviate overloading and congestion.
Currency fluctuations could decrease our revenue or increase our costs. In
addition, restrictions on currency exchange could prevent us from effectively
using our funds.
We conduct business in multiple countries in the Asia-Pacific region and
generate revenue, expenses and liabilities in multiple Asia-Pacific currencies.
Gains and losses on the conversion of foreign payments may contribute to
fluctuations in our results of operations and fluctuating exchange rates could
cause reduced revenue and gross margins from our international sales. We
currently engage only in very limited currency hedging activities. In addition,
some of the countries in which we operate or plan to operate impose exchange
controls. As a result, we may not be able to freely convert the relevant local
currencies into other Asia-Pacific or non-Asia-Pacific currencies, including
U.S. dollars, which could prevent us from effectively using our funds. Currency
rate fluctuations and exchange controls could negatively impact our financial
performance by increasing costs and offsetting revenue or income from our
operations.
Our business and prospects will suffer if the Internet does not develop into an
effective commercial and information medium in the Asia-Pacific region.
The market for Internet services in the Asia-Pacific region has only begun to
develop. Because the Internet is an unproven medium for information,
advertising and other commercial services in the Asia-Pacific region, our
future operating results and prospects depend substantially on the increased
acceptance and use of the Internet for publication, distribution and commerce
in the Asia-Pacific region. Many potential customers may have limited
experience with the Internet, may not have devoted a significant portion of
their available funds to web site development and may not find the Internet to
be effective for promoting, distributing or conducting their products and
services relative to traditional means. Furthermore, critical issues concerning
the commercial use of the Internet in the Asia-Pacific region, such as
security, reliability, cost, ease of deployment, administration and quality of
services, may affect the adoption of the Internet to solve business needs.
14
<PAGE>
Risks related to this offering
We may apply the proceeds of this offering to uses that do not enhance our
operating results or market value.
We intend to use a substantial portion of the proceeds from this offering to
establish new Internet data centers. The remainder will be used for general
corporate purposes and acquisitions. We will, in any case, have broad
discretion over how we use these proceeds. You will not have the opportunity to
evaluate the economic, financial or other information on which we base our
decisions regarding how to use the proceeds from this offering, and we may
spend these proceeds in ways with which you may disagree. Pending any of these
uses, we plan to invest the proceeds of this offering in short-term,
investment-grade, interest-bearing securities. These investments may not yield
a favorable return.
You will pay more for our common stock than your pro rata portion of our assets
is worth; as a result, you will likely receive much less than you paid for your
stock if we liquidate our assets and distribute the proceeds.
The initial public offering price is substantially higher than the net
tangible book value per share of our common stock. Therefore, you will incur
immediate dilution in net tangible book value of $9.07 per share, at an initial
public offering price of $13.00 per share, because you will pay more for your
shares than the underlying assets are worth. You may incur additional dilution
if holders of stock options, whether currently outstanding or subsequently
granted, exercise their options or if warrantholders exercise their warrants to
purchase common stock at a price less than book value per share. As a result,
you will likely receive much less than you paid for our stock if we liquidate
our assets and distribute the proceeds. For additional information about the
dilution you may suffer, see "Dilution" on page 21.
Substantial amounts of our common stock could be sold in the near future, which
could depress our stock price.
Prior to this offering, there has been no public market for our common stock,
and market sales of shares of common stock or the availability of shares of
common stock for sale could reduce the market price of the common stock
prevailing from time to time. If our stockholders sell substantial amounts of
our common stock in the public market following this offering, including shares
issued upon the exercise of outstanding options and warrants, the trading price
of our common stock could fall. These sales also might make it more difficult
for us to sell equity securities or securities exercisable for or convertible
into equity securities in the future at a time and price that we deem
appropriate. Based upon our shares outstanding as of June 30, 2000, upon
completion of this offering, we will have outstanding 39,261,624 shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options or warrants. All of the shares we are
selling in this offering may be resold in the public market immediately.
Another 29,233,207 shares are subject to lock-up agreements and will become
available for resale in the public market beginning 180 days after the date of
this prospectus subject, in some cases, to volume limitations. As restrictions
on resale end, our stock price could drop significantly if the holders of these
restricted shares sell them or are perceived by the market as intending to sell
them. For additional information about when our outstanding shares may be sold
on the public market, see "Shares Eligible for Future Sale" beginning on page
68.
After this offering, if various conditions are met, the holders of
approximately 25,764,677 shares of common stock and holders of 212,013 shares
of common stock issuable upon the exercise of outstanding warrants to purchase
Series B preferred stock will be entitled to require us to register their
shares under the Securities Act. These stockholders also have the right to
participate in any registration of our shares that we may undertake on our own.
If these stockholders exercise their
15
<PAGE>
registration rights, a large number of our shares may be registered and sold in
the public market. This could adversely affect the trading price for our
shares. If we attempt to raise money through a registration and sale of our
stock and these stockholders require us to allow them to participate in the
registration, our ability to raise the amount of money that we need to execute
our business plan may be jeopardized. For additional information about our
obligations to register our outstanding shares, see "Description of Capital
Stock--Registration Rights" beginning on page 65.
16
<PAGE>
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus are forward-looking statements that
reflect our current views and expectations of future events. These forward-
looking statements can be identified by words or phrases such as "may,"
"anticipate," "expect," "intend," "plan," "believe," "seek," "estimate,"
"is/are likely to," "could have" or other similar expressions. The forward-
looking statements included in this prospectus relate to, among other things,
. our goals, strategies and challenges;
. our future business development, results of operations and financial
condition;
. the expected growth of, change in and demand for Internet-related
technologies and services; and
. governmental policies, laws and regulations regarding Internet and
technology.
These forward-looking statements are not guarantees of future performance and
are subject to risks and uncertainties and other factors that are difficult to
predict and could cause actual results to differ materially from those
expressed or implied by these forward-looking statements. These risks and
uncertainties include those described in "Risk Factors" and elsewhere in this
prospectus.
17
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the 9,000,000 shares of common stock
offered will be approximately $106.5 million at the initial public offering
price of $13.00 per share, after deducting the underwriting discount and
estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, the aggregate net proceeds we will receive will be
approximately $122.8 million.
We intend to use the net proceeds of this offering over an approximate nine
month period. We estimate that we will use between $60 to $90 million of the
proceeds for the establishment of additional Internet data center facilities,
the hiring of additional personnel and the remainder for general corporate
purposes and acquisitions. We are currently in negotiations for the
establishment of additional Internet data centers. None of these negotiations
has resulted, and it is uncertain that these negotiations will result, in
binding commitments. For a discussion of the factors that may affect our
expenditures to establish additional Internet data centers, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" on page 31. Pending these uses, we will invest
the net proceeds of this offering in short-term, interest-bearing, investment
grade securities. For additional information on our use of proceeds, see "Risk
Factors--We may apply the proceeds of this offering to uses that do not enhance
our operating results or market value" on page 15.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We intend
to retain future earnings, if any, to finance operations and the expansion of
our business and do not anticipate declaring or paying cash dividends in the
foreseeable future. Payments of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
TRADEMARKS
We have filed an application with the United States Patent and Trademark
office seeking to register "iAsiaWorks" as a trademark in the U.S., and
iAsiaWorks(TM) with the accompanying design and the iAsiaWorks logo are
trademarks of iAsiaWorks, Inc. Each trademark, trade name or service mark of
any other company appearing in this prospectus belongs to its holder. The
inclusion of other companies' brand names and products in this prospectus is
not an endorsement by us. These companies are not involved with the offering of
our securities.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of iAsiaWorks as of March
31, 2000:
. on an actual basis;
. on a pro forma basis reflecting 26,093,375 total shares of common stock
outstanding, which gives effect to:
. the exercise of warrants to purchase 426,344 shares of common stock
at an exercise price of $0.03 per share,
. the exercise of warrants to purchase 1,666 shares of Series B
preferred stock at an exercise price of $4.50 per share and
. the automatic conversion of all outstanding shares of the
convertible preferred stock into 25,664,676 shares of common stock
upon the closing of this offering; and
. on a pro forma as adjusted basis to reflect the estimated net proceeds
from the sale of 9,000,000 shares of our common stock in this offering
at an initial public offering price of $13.00 per share after deducting
the underwriting discount and the estimated offering expenses.
This table should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements appearing elsewhere
in this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Long-term obligations.......................... $ 377 $ 377 $ 377
-------- -------- --------
Convertible preferred stock: $0.001 par value,
authorized: 83,100,000 shares, actual and
pro forma; 20,000,000 shares, pro forma as
adjusted; issued and outstanding: 24,650,161
shares, actual; no shares, pro forma or pro
forma as adjusted............................. 115,642 -- --
-------- -------- --------
Stockholders' equity (deficit):
Common stock: $0.001 par value, authorized:
115,000,000 shares, actual and pro forma;
300,000,000 shares, pro forma as adjusted;
issued and outstanding: 3,054,650 shares,
actual; 29,148,025 shares, pro forma;
38,148,025 shares, pro forma as adjusted.... 3 29 38
Additional paid-in capital................... 22,324 137,960 244,461
Deferred stock-based compensation............ (19,150) (19,150) (19,150)
Accumulated other comprehensive loss......... (1,113) (1,113) (1,113)
Accumulated deficit.......................... (38,063) (38,063) (38,063)
-------- -------- --------
Total stockholders' equity (deficit)....... (35,999) 79,663 186,173
-------- -------- --------
Total capitalization....................... $ 80,020 $ 80,040 $186,550
======== ======== ========
</TABLE>
The number of shares outstanding as of March 31, 2000 excludes:
. 5,292,938 shares of Common Stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $0.88 per share;
19
<PAGE>
. 10,000,000 shares of common stock reserved for issuance under the 2000
Stock Incentive Plan, which incorporates our 1995 Stock Plan;
. 600,000 shares of common stock reserved for issuance under the 2000
Employee Stock Purchase Plan; and
. 212,013 shares of common stock issuable upon exercise of outstanding
warrants to purchase Series B preferred stock at an exercise price of
$4.50 per share.
See "Benefit Plans," "Description of Capital Stock" and Note 7 of Notes to
Consolidated Financial Statements beginning on pages 54, 65 and F-20,
respectively.
20
<PAGE>
DILUTION
Our net tangible book value as of March 31, 2000, was approximately $41.9
million, or $1.46 per share. Net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding after giving effect to the conversion of all
outstanding convertible preferred stock. After giving effect to the sale of
9,000,000 shares of common stock being offered at an initial public offering
price of $13.00 per share, and after deducting underwriting discounts and
commissions and estimated offering expenses, our net tangible book value at
March 31, 2000, would have been $148.4 million, or $3.93 per share. This
represents an immediate increase in net tangible book value of $2.47 per share
to existing stockholders and an immediate dilution of $9.07 per share to new
investors purchasing shares of common stock in this offering. Pro forma net
tangible book value dilution per share represents the incremental dilutive
effect of the exercise of warrants to purchase 426,344 shares of common stock
and the exercise of Series B warrants which convert into 2,355 shares of common
stock. Dilution is defined as the diminution in the proportion of income, or
earnings per share, to which each share is entitled due to the issuance of
additional shares. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $13.00
Net tangible book value per share as of March 31, 2000....... $1.46
Increase per share attributable to new investors............. 2.47
-----
Net tangible book value per share after the offering........... 3.93
------
Dilution per share to new investors............................ 9.07
Incremental dilution occurring upon exercise of warrants..... 0.04
------
Pro forma dilution per share to new investors.................. $ 9.03
======
</TABLE>
The following table summarizes, as of March 31, 2000, on a pro forma basis,
the total number of shares and consideration paid to us and the average price
per share paid by existing stockholders and by new investors purchasing shares
of common stock in this offering at an initial public offering price of $13.00
per share (before deducting the underwriting discount and estimated offering
expenses):
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
------------------ ---------------- Price
Number Percent Amount Percent Per Share
---------- ------- -------- ------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 29,148,025 76% $110,317 49% $ 3.78
New public investors........... 9,000,000 24 117,000 51 13.00
---------- --- -------- ---
Totals....................... 38,148,025 100% $227,317 100%
========== === ======== ===
</TABLE>
The foregoing computations are based on the number of shares of common stock
outstanding as of March 31, 2000 and exclude:
. 5,292,938 shares of common stock issuable upon exercise of stock options
outstanding at a weighted average exercise price of $0.88 per share;
. 10,000,000 shares of common stock reserved for issuance under the 2000
Stock Incentive Plan that incorporates our 1995 Stock Plan;
. 600,000 shares of common stock reserved for issuance under the 2000
Employee Stock Purchase Plan;
. 212,013 shares of common stock issuable upon exercise of outstanding
warrants to purchase Series B preferred stock at an exercise price of
$4.50 per share.
To the extent that any of these options or warrants are exercised, there
could be further dilution to new investors. See "Capitalization", "Benefit
Plans," "Description of Capital Stock" and Notes 6, 7 and 8 to Notes to
Consolidated Financial Statements beginning on pages 19, 54, 65, F-16, F-20 and
F-22, respectively.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the fiscal years ended
December 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of
December 31, 1998 and 1999 are derived from our audited consolidated financial
statements included elsewhere in this prospectus. The consolidated statement of
operations data for the fiscal years ended December 31, 1995 and 1996 and the
consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are
derived from our audited consolidated financial statements not included in this
prospectus. The consolidated statement of operations data for the three months
ended March 31, 1999 and 2000 and the consolidated balance sheet data as of
March 31, 2000 are derived from the unaudited consolidated financial statements
included elsewhere in the prospectus. Comparison of the financial data for the
three months ended March 31, 2000 with the three months ended March 31, 1999
may not be meaningful as the financial data for the quarter ended March 31,
2000 reflect a significant acquisition completed in December 1999 accounted for
by the purchase method of accounting. The pro forma statement of operations
data for the fiscal year ended December 31, 1999 has been derived from the
unaudited pro forma combined consolidated statement of operations included
elsewhere in this prospectus. In the opinion of management, the unaudited
consolidated financial statements include all adjustments, consisting
principally of normal recurring adjustments, necessary for a fair presentation
of the results of operations and balance sheet for the period. The historical
results are not necessarily indicative of the operations to be expected for
future periods.
You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to consolidated financial statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------- Three Months ------------
Years Ended December 31, Ended March 31, Year Ended
------------------------------------------- ---------------- December 31,
1995 1996 1997 1998 1999 1999 2000 1999**
------ ------- ------- ------- -------- ------- ------- ------------
(in thousands of dollars except per (unaudited) (unaudited)
share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Internet access and
related services...... $ -- $ 1 $ 1,597 $ 3,490 $ 5,384 $ 834 $ 3,533 $ 14,591
Hosting, co-location
and other managed
services.............. -- -- -- -- 245 -- 1,189 1,268
------ ------- ------- ------- -------- ------- ------- --------
Total revenue.......... -- 1 1,597 3,490 5,629 834 4,722 15,859
Cost of revenue:
Cost of Internet access
and related services.. -- 53 2,199 4,621 5,417 1,013 3,696 13,497
Cost of hosting, co-
location and other
managed services...... -- -- -- -- 401 86 565 1,240
------ ------- ------- ------- -------- ------- ------- --------
Total cost of revenue.. -- 53 2,199 4,621 5,818 1,099 4,261 14,737
------ ------- ------- ------- -------- ------- ------- --------
Gross margin............ -- (52) (602) (1,131) (189) (265) 461 1,122
Operating expenses:
Network operations and
support............... -- 330 1,538 1,628 1,539 373 854 1,539
Sales and marketing.... 15 923 2,391 1,471 2,372 370 1,455 2,922
General and
administrative........ 149 1,252 1,935 2,203 3,511 721 1,803 5,410
Amortization of
intangible assets..... -- -- -- -- 559 -- 3,464 13,408
Stock-based
compensation.......... -- -- -- 220 4,070 244 2,792 4,070
------ ------- ------- ------- -------- ------- ------- --------
Total operating
expenses.............. 164 2,505 5,864 5,522 12,051 1,708 10,368 27,349
------ ------- ------- ------- -------- ------- ------- --------
Loss from operations.... (164) (2,557) (6,466) (6,653) (12,240) (1,973) (9,907) (26,227)
Interest income......... 4 153 353 238 288 81 511 289
Interest expense........ (110) (388) (384) (49) (98) (384)
Other income (expense),
net.................... 20 (16) (2) (18) 19 1 54 231
------ ------- ------- ------- -------- ------- ------- --------
Loss before provision
for income taxes....... (140) (2,420) (6,225) (6,821) (12,317) (1,940) (9,440) (26,091)
Provision for income
taxes.................. -- -- 11 2 -- -- -- --
------ ------- ------- ------- -------- ------- ------- --------
Net loss................ (140) (2,420) (6,236) (6,823) (12,317) (1,940) (9,440) (26,091)
Dividend accretion on
preferred stock........ (197) (487) (1,376) (1,814) (2,287) (597) -- (2,287)
------ ------- ------- ------- -------- ------- ------- --------
Net loss attributable to
common stockholders.... (337) (2,907) (7,612) (8,637) (14,604) (2,537) (9,440) (28,378)
Other comprehensive
loss:
Change in unrealized
gain (loss) on
marketable
securities............ -- 3 -- 4 (4) -- (4)
Change in foreign
currency translation
adjustments........... (1) (4) (560) 139 (477) (103) (213) (477)
------ ------- ------- ------- -------- ------- ------- --------
Comprehensive loss...... $ (338) $(2,908) $(8,172) $(8,494) $(15,085) $(2,640) $(9,653) $(28,859)
====== ======= ======= ======= ======== ======= ======= ========
Net loss per share
attributable to common
stockholders, basic and
diluted................ $(1.87) $(16.15) $(42.29) $(30.85) $ (14.87) $ (7.29) $ (3.22) $ (28.90)
====== ======= ======= ======= ======== ======= ======= ========
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................ 180 180 180 280 982 348 2,936 982
====== ======= ======= ======= ======== ======= ======= ========
Pro forma net loss per
share attributable to
common stockholders,
basic and diluted
(unaudited)*........... $ (1.11) $ (0.33) $ (2.15)
======== ======= ========
Shares used in computing
pro forma net loss per
share attributable to
common stockholders,
basic and diluted
(unaudited)............ 13,177 28,550 13,177
======== ======= ========
</TABLE>
-------
* The pro forma net loss per share data reflect the automatic conversion of
preferred stock as described in Note 2 of Notes to Consolidated Financial
Statements--Pro forma net loss per share(unaudited) beginning on page F-13.
** The unaudited summary pro forma combined statement of operations data at
December 31, 1999 reflects the acquisition of AT&T EasyLink as if it had
occurred on January 1, 1999, and after giving effect to purchase accounting
adjustments.
22
<PAGE>
The diluted net loss per share attributable to common stockholders
computation excludes potential shares of common stock (preferred stock,
warrants to purchase preferred stock or common stock, options to purchase
common stock and common stock subject to repurchase rights held by us), since
their effect would be antidilutive. See Note 2 of Notes to Consolidated
Financial Statements--Net loss per share on page F-12 for a detailed
explanation of the determination of the shares used to compute actual and pro
forma basic and diluted net loss per share.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1995 1996 1997 1998 1999 March 31, 2000
------- ------- -------- -------- -------- --------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 3,227 $ 6,774 $ 1,204 $ 2,654 $ 42,222 $ 38,276
Marketable securities... -- -- -- 4,433 -- 195
Working capital......... 3,180 8,870 2,493 6,506 40,264 35,102
Total assets............ 3,262 10,797 5,314 10,796 91,355 87,333
Long-term obligations,
net of current
portion................ -- -- -- 677 435 377
Convertible preferred
stock.................. 3,536 13,467 15,994 26,712 114,699 115,642
Total stockholders'
deficit................ $ (325) $(3,235) $(11,407) $(18,435) $(29,201) $(35,999)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
From inception in August 1995 until July 1999, we focused on providing
high-speed, leased-line Internet access to business customers in selected
markets in the Asia-Pacific region and derived substantially all of our revenue
from these services. In July 1999, we began to implement a significant change
in our business strategy to focus on providing dedicated hosting, co-location
and managed services. Prior to that time, we derived virtually no revenue from
hosting and co-location services. During the quarters ended December 31, 1999
and March 31, 2000, hosting and co-location services accounted for 11% and 25%,
respectively, of our revenue. We expect hosting, co-location and managed
services to continue to grow both in absolute terms and as a percentage of
total revenue and, if we are successful in implementing our business plan, will
represent a substantial majority of our revenue over the next several years. We
intend to continue offering Internet access and derive increased revenue from
Internet access in absolute terms, but expect Internet access revenue to
decline significantly as a percentage of total revenue.
Internet access, hosting, co-location and certain managed services, such as
security and monitoring services, are billed on a monthly basis. Contracts for
these services are generally for an initial one-year term. Certain other
managed services and value-added services are typically billed on a usage
basis.
Cost of revenue consists primarily of the cost of contracting for lines from
telecommunication providers worldwide and, to a lesser extent, the cost of our
network operations. We lease lines under contracts of one year or more. The
leasing of international private lines comprises the largest component of our
telecommunications expense, with additional costs arising from leasing local
circuits into our Internet data centers. In the future, we expect to increase
the size and number of circuits leased as our network volume grows and we
expand geographically.
We intend to establish a network of large-scale, high performance Internet
data centers throughout the Asia-Pacific region with most expected to exceed
50,000 square feet. As we establish these facilities, we will also need to
increase substantially our sales, marketing, product development and network
operations support staff and infrastructure to support our network growth and
geographic expansion. Most of these developmental costs will be incurred prior
to the realization of any significant growth in revenue. As a result, we
believe that we will continue to incur operating and net losses for at least
the next several years, and that our losses will increase significantly from
current levels. Our net losses in 1999 of $12.3 million and in the first
quarter of 2000 of $9.4 million do not include any of the significant costs
associated with the establishment of our new Internet data centers.
24
<PAGE>
Results of Operations
We believe that period-to-period comparisons of our historical operating
results are not necessarily meaningful and should not be relied upon as being
indicative of future performance. Our prospects must be considered in light of
the risks, expenses and difficulties frequently experienced by companies in
early stages of development, particularly companies in new and rapidly evolving
markets like ours. Although we have experienced significant revenue growth
recently, this trend may not continue. Furthermore, we may not achieve or
maintain profitability in the future. The following table presents selected
financial data for the periods indicated as a percentage of total revenue.
<TABLE>
<CAPTION>
Three Months
Years Ended Ended March
December 31, 31,
------------------------ ---------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Internet access and related
services....................... 100.0% 100.0% 95.6% 100.0% 74.8%
Hosting, co-location and other
managed services............... 0.0 0.0 4.4 0.0 25.2
------ ------ ------ ------ ------
Total revenue................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of internet access and
related services............... 137.7 132.4 96.3 121.4 78.3
Cost of hosting, co-location and
other managed services......... 0.0 0.0 7.1 10.3 12.0
------ ------ ------ ------ ------
Total cost of revenue......... 137.7 132.4 103.4 131.7 90.3
------ ------ ------ ------ ------
Gross margin...................... (37.7) (32.4) (3.4) (31.7) 9.7
------ ------ ------ ------ ------
Operating expenses:
Network operations and support.. 96.3 46.6 27.3 44.7 18.1
Sales and marketing............. 149.7 42.1 42.1 44.3 30.8
General and administrative...... 121.2 63.1 62.4 86.4 38.2
Amortization of intangible
assets......................... 0.0 0.0 9.9 -- 73.3
Stock-based compensation........ 0.0 6.4 72.4 29.3 59.1
------ ------ ------ ------ ------
Total operating expenses...... 367.2 158.2 214.1 204.7 219.5
------ ------ ------ ------ ------
Loss from operations.............. (404.9) (190.6) (217.5) (236.4) (209.8)
Interest income (expense), net.... 15.2 (4.3) (1.7) 3.8 8.7
Other income (expense), net....... (0.8) (0.6) 0.2 0.1 1.1
------ ------ ------ ------ ------
Net loss.......................... (390.5%) (195.5%) (219.0%) (232.5%) (200.0%)
====== ====== ====== ====== ======
</TABLE>
Quarters Ended March 31, 1999 and 2000
Comparison of the financial data for the three months ended March 31, 2000
with the three months ended March 31, 1999 may not be meaningful as the
financial data for the quarter ended March 31, 2000 reflect a significant
acquisition completed in December 1999 accounted for by the purchase method of
accounting as well as the shift in the focus of our business strategy in mid-
1999.
Revenue
Total revenue increased from $834,000 in the first quarter of 1999 to $4.7
million in the first quarter of 2000, which represents an increase of 466%. The
increases in revenue were due primarily to acquisitions made in late 1999 and
early 2000, an increase in the number of customers, and the addition of
hosting, co-location and managed services to the product line. Revenue from
these acquisitions in the first quarter of 2000 was $2.6 million. Hosting, co-
location and other managed services represented $1.2 million, or 25%, of the
revenue for the first quarter of 2000. We did not
25
<PAGE>
offer these services in the first quarter of 1999. Based upon our projections,
which include assumptions that may not be correct, we believe that, if we
successfully execute our business plan, revenue from dedicated hosting, co-
location and managed services could constitute 75% or more of our total revenue
by the end of 2002.
Expenses
Cost of Revenue
Cost of revenue increased from $1.1 million to $4.3 million from the first
quarter of 1999 as compared to the first quarter of 2000. As a percentage of
sales, cost of revenue decreased from 131.7% to 90.3%. In the first quarter of
2000, as a percentage of revenue, Internet access and related services was
78.3% and hosting, co-location and managed services was 12.0%.
We expect cost of revenue for Internet access and related services to remain
relatively constant as a percentage of revenue and expenses for hosting, co-
location and managed services to increase as a percentage of revenue. We expect
the gross margin for hosting, co-location and managed services to significantly
decrease until we have achieved the necessary revenue levels to offset the
initial fixed costs and expenses included in our investments in Internet data
center facilities and other infrastructure.
Network Operations and Support
Network operations expenses increased from $373,000 to $854,000 from the
first quarter of 1999 to the first quarter of 2000, an increase of 129%.
Network operations expense increased primarily due to an increase in our
engineering staff. We expect network operations expenses to increase at a
greater rate than we have historically experienced as we deploy additional new
Internet data centers.
Sales and Marketing
Sales and marketing expenses increased from $370,000 in the first quarter of
1999 to $1.5 million in the first quarter of 2000. This 293% increase is
primarily related to hiring more sales and marketing staff in our offices in
the Asia-Pacific region and the deployment of a United States sales force. In
the first quarter of 2000, we opened sales offices in San Mateo, Los Angeles,
Boston and New York City. We expect sales and marketing expenses to continue to
increase as we open more sales offices and expand our current offices in the
United States. In addition, we intend to launch an advertising campaign in the
third quarter of 2000, which will also increase our sales and marketing
expenses.
General and Administrative
General and administrative expenses increased from $721,000 in the first
quarter of 1999 to $1.8 million in the first quarter of 2000. This 150%
increase was due primarily to the hiring of additional executive management
staff. We expect that general and administrative costs will increase further as
we continue to build our management team.
Amortization of Intangible Assets
In connection with acquisitions in mid-December 1999 and early January 2000,
we recorded amortization of intangible assets of $3.3 million and $125,000,
respectively, in the first quarter of 2000. We recorded no comparable expenses
in the first quarter of 1999. Total goodwill of $41.7 million is being
amortized over a period of three years.
26
<PAGE>
Stock-Based Compensation
In connection with the grant of stock options to employees and consultants,
we recorded stock-based compensation of approximately $244,000 in the first
quarter of 1999 and $2.8 million in the first quarter of 2000. These amounts
were recorded as a component of stockholders' equity and are being amortized as
charges to operations over the vesting periods of the options. For additional
information on our stock-based compensation, see Note 7 of Notes to
Consolidated Financial Statements beginning on page F-20.
Interest Income (Expense), Net
Interest income (expense), net increased from $32,000 in the first quarter of
1999 to $413,000 in the first quarter of 2000. The increase was due to
increased levels of interest earning bank deposits as a result of the sale of
our Series D preferred stock.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
March 31, 2000. We have recorded a valuation allowance for the full amount of
our net deferred tax assets, as the future realization of the tax benefits is
not currently likely.
Years Ended December 31, 1997, 1998 and 1999
Revenue
Total revenue increased from $1.6 million in 1997 to $3.5 million in 1998,
and to $5.6 million in 1999, which represents an increase of 119% from 1997 to
1998, and of 61% from 1998 to 1999. These increases in revenue were due
primarily to an increase in the number of customers, which more than offset a
decline in average revenue per customer due to decreasing prices for Internet
access. Revenues in 1999 included $409,000 resulting from the acquisition of a
Hong Kong Internet business from AT&T in mid-December 1999, which was accounted
for using the purchase method. Internet access and related services represented
100% of total revenues for 1997 and 1998, and 95.6% of total revenue for 1999.
Hosting, co-location and other managed services, which we began offering in
1999, accounted for $245,000 or 4.4% of total revenue in 1999.
The following table shows our revenue, based on location of customers, for
each of the last three years in the countries shown:
<TABLE>
<CAPTION>
Years ended
December 31,
--------------------
1997 1998 1999
------ ------ ------
(in thousands)
<S> <C> <C> <C>
South Korea............................................. $ 22 $ 436 $3,750
Taiwan.................................................. $1,448 $2,700 $1,362
United States........................................... $ 75 $ 220 $ 37
</TABLE>
Aggregate revenue in all countries, excluding the United States, was $1.5
million for 1997, $3.3 million for 1998 and $5.6 million for 1999. As a result
primarily of an acquisition in December 1999, revenue of $2.4 million from Hong
Kong in the first quarter of 2000 represented 50% of our total revenue for that
quarter.
Our South Korea operations were started in late 1997, and from then until
December 31, 1999 have experienced consistent and rapid growth. Our operations
in Taiwan, which were substantially established in 1997, experienced
significant growth in 1998 due to increased investment in the
27
<PAGE>
business and the effect of a large one-time sale. In late 1998, our Taiwanese
business was down-sized due to adverse economic conditions leading to lower
revenues in 1999. Prior to the current fiscal year, we had not focused on
growing our U.S. revenues. Historic revenue variability in the U.S. is due to
the gain or loss of a few leased-line Internet access customers.
Expenses
Cost of Revenue
Cost of Internet access and related services increased from $2.2 million for
1997 to $4.6 million for 1998 and to $5.4 million for 1999, which represents an
increase of 110% from 1997 to 1998, and of 17% from 1998 to 1999. As a
percentage of revenue from Internet access and related services, cost of
revenue for these services was 137.7% for 1997, 132.4% for 1998 and 100.6% for
1999. The increased gross margin for 1999 was due primarily to economies of
scale in buying bandwidth and equipment and decreased costs of international
private lines.
As we invest in Internet data center facilities and other infrastructure, we
expect the gross margin for hosting, co-location and managed services to
significantly decrease until we have achieved the necessary revenue growth to
offset the significant front-end costs of establishing facilities and
infrastructure to support our strategic focus on providing these services.
Network Operations and Support
Although network operations and support expenses have been relatively flat
for the last three years, we expect these expenses will increase significantly
as we deploy and staff our planned new large-scale, high performance Internet
data center facilities.
Sales and Marketing
Sales and marketing expenses decreased from $2.4 million in 1997 to $1.5
million in 1998 and increased to $2.4 million in 1999. The decrease in 1998 was
due primarily to downsizing of our sales and marketing staff in reaction to the
Asian economic crisis. The increase in 1999 reflected primarily an increase in
staffing and related expenses both in the Asia-Pacific region and in the United
States. We expect that these expenses will increase significantly as we
continue to expand our Asia-Pacific and U.S.-based sales force and presence.
General and Administrative
General and administrative expenses increased from $1.9 million in 1997 to
$2.2 million in 1998 and to $3.5 million in 1999, which represents an increase
of 14% from 1997 to 1998, and of 59% from 1998 to 1999. The increase from 1998
to 1999 was due primarily to the recruitment and hiring of executive
management. We expect that general and administrative costs will increase
further as we continue to build the organization to support our expansion
plans.
Amortization of Intangible Assets
In connection with the acquisition of a Hong Kong Internet business from AT&T
in mid-December 1999, we recorded amortization of intangible assets of $559,000
in 1999.
Stock-Based Compensation
In connection with the grant of stock options to employees and consultants,
we recorded deferred stock-based compensation of approximately $1.5 million in
the year ended December 31,
28
<PAGE>
1998, compared to $16.1 million in 1999. These amounts were recorded as a
component of stockholders equity and are being amortized as charges to
operations over the vesting periods of the options. We recorded stock-based
compensation of approximately $0.2 million in 1998 and $4.1 million in 1999.
For options granted through December 31, 1999, we expect to record additional
amortization expense for deferred compensation as follows: $7.0 million in
2000, $3.7 million in 2001, $1.9 million in 2002 and $0.6 million in 2003,
assuming no additional stock option cancellations. We will also record an
additional $8.7 million of deferred stock compensation related to options to
purchase approximately 1,003,000 shares of common stock granted during the
first quarter of 2000. For additional information on our stock-based
compensation, see Note 7 of Notes to Consolidated Financial Statements
beginning on page F-20.
Interest Income (Expense), Net
Interest income (expense), net was $243,000 in 1997, ($150,000) in 1998, and
($96,000) in 1999. Net interest expense in 1998 reflected an increase in
outstanding debt as compared to 1997. The decrease in interest expense in 1999
reflected primarily interest earned from the investment of the proceeds from
the sale of preferred stock.
Provision for Income Taxes
We have incurred operating losses for all periods from inception through
December 31, 1999. We have recorded a valuation allowance for the full amount
of our net deferred tax assets, as the future realization of the tax benefit is
not currently likely.
As of December 31, 1999, we had net operating loss carry-forwards for federal
and state tax purposes of approximately $6.5 million and $238,000,
respectively. These federal and state tax loss carry-forwards are available to
reduce future taxable income and expire at various dates between 2003 and 2018
if not utilized. Under the provisions of the Internal Revenue Code, certain
substantial changes in our ownership may limit the amount of net operating loss
carry-forwards that could be utilized annually in the future to offset taxable
income.
29
<PAGE>
Quarterly Results of Operations
The following tables set forth a summary of our unaudited quarterly operating
results for each of the five quarters in the period ended March 31, 2000.
Comparison of the financial data for the three months ended March 31, 2000 with
the three months ended March 31, 1999 may not be meaningful as the financial
data for the quarter ended March 31, 2000 reflect a significant acquisition
completed in December 1999 accounted for by the purchase method of accounting.
The information has been derived from our consolidated unaudited financial
statements that, in management's opinion, have been prepared on a basis
consistent with the audited consolidated financial statements contained
elsewhere in this prospectus and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair statement of such
information when read in conjunction with our audited consolidated financial
statements and notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1999 1999 1999 1999 2000
--------- -------- --------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
Internet access and
related services........ $ 834 $ 1,167 $ 1,529 $ 1,854 $ 3,533
Hosting, co-location and
other managed
services................ -- 7 13 225 1,189
------- ------- ------- ------- -------
Total revenue.......... 834 1,174 1,542 2,079 4,722
------- ------- ------- ------- -------
Cost of revenue:
Cost of Internet access
and related services.... 1,013 1,153 1,404 1,847 3,696
Cost of hosting, co-
location and other
managed services........ 86 88 86 141 565
------- ------- ------- ------- -------
Total cost of revenue.. 1,099 1,241 1,490 1,988 4,261
------- ------- ------- ------- -------
Gross margin.............. (265) (67) 52 91 461
------- ------- ------- ------- -------
Operating expenses:
Network operations and
support................. 373 369 317 480 854
Sales and marketing...... 370 556 657 789 1,455
General and
administrative.......... 721 696 828 1,266 1,803
Amortization of
intangible assets....... -- -- -- 559 3,464
Stock-based
compensation............ 244 263 1,527 2,036 2,792
------- ------- ------- ------- -------
Total operating
expenses.............. 1,708 1,884 3,329 5,130 10,368
------- ------- ------- ------- -------
Loss from operations...... (1,973) (1,951) (3,277) (5,039) (9,907)
------- ------- ------- ------- -------
Interest income (expense),
net...................... 32 12 (93) (47) 413
Other income (expense),
net...................... 1 -- (1) 19 54
------- ------- ------- ------- -------
Net loss............... (1,940) (1,939) (3,371) (5,067) (9,440)
Dividend accretion on
preferred stock.......... (597) (597) (597) (496) --
------- ------- ------- ------- -------
Net loss attributable to
common stockholders...... $(2,537) $(2,536) $(3,968) $(5,563) $(9,440)
======= ======= ======= ======= =======
As a Percentage of Total
Revenue:
Revenue:
Internet access and
related services........ 100.0% 99.4% 99.2% 89.3% 74.8%
Hosting, co-location and
other managed
services................ 0.0 0.6 0.8 10.7 25.2
------- ------- ------- ------- -------
Total revenue.......... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of Internet access
and related services.... 121.4 98.2 91.1 88.8 78.3
Cost of hosting, co-
location and other
managed services........ 10.3 7.5 5.5 6.8 12.0
------- ------- ------- ------- -------
Total cost of
revenues.............. 131.7 105.7 96.6 95.6 90.3
------- ------- ------- ------- -------
Gross margin.............. (31.7) (5.7) 3.4 4.4 9.7
------- ------- ------- ------- -------
Operating expenses:
Network operations and
support................. 44.7 31.4 20.6 23.1 18.1
Sales and marketing...... 44.3 47.4 42.6 38.0 30.8
General and
administrative.......... 86.4 59.2 53.7 60.9 38.2
Amortization of
intangible assets....... 0.0 0.0 0.0 26.9 73.3
Stock-based
compensation............ 29.3 22.4 99.0 98.0 59.1
------- ------- ------- ------- -------
Total operating
expenses.............. 204.7 160.4 215.9 246.9 219.5
------- ------- ------- ------- -------
Loss from operations...... (236.5) (166.1) (212.5) (242.5) (209.8)
------- ------- ------- ------- -------
Interest income (expense),
net...................... 3.8 0.9 (6.0) (2.2) 8.7
Other income (expense),
net...................... 0.1 0.0 (0.1) 0.9 1.1
------- ------- ------- ------- -------
Net loss.................. (232.5) (165.2) (218.6) (243.8) (200.0)
Divident accretion on
preferred stock.......... (71.6) (50.9) (38.7) (23.9) 0.0
------- ------- ------- ------- -------
Net loss attributable to
common stockholders...... (304.1%) (216.1%) (257.3%) (267.7%) (200.0%)
======= ======= ======= ======= =======
</TABLE>
30
<PAGE>
The amount and timing of our operating expenses generally will vary from
quarter to quarter depending on our level of actual and anticipated business
activities. Our revenue and operating results are difficult to forecast and
will fluctuate. We believe that period-to-period comparisons of our operating
results will not necessarily be meaningful. As a result, you should not rely
upon them as an indication of future performance.
Liquidity and Capital Resources
From inception, we have financed our operations primarily from private sales
of convertible preferred stock, net of issuance costs, totaling $109.4 million
and, to a lesser extent, from bank borrowings and lease financings.
Net cash used in our operating activities for 1999 was $5.8 million and for
investing activities was $40.1 million. Net cash provided by financing
activities was $85.5 million and is related primarily to the issuance of our
Series D preferred stock.
At March 31, 2000, we had cash and cash equivalents aggregating $38.2 million
and restricted cash totaling $201,000. Our restricted cash secures a letter of
credit issued in connection with the lease of our corporate offices. In
addition, our debt balance at March 31, 2000 was $530,000, which related to the
remaining balance on a line of credit that expired in 1999, and we had capital
lease obligations of $392,000 at March 31, 2000.
We expect to devote substantial resources to continue to establish additional
Internet data centers throughout the Asia-Pacific region, expand our sales,
support, marketing and product development organizations and build the
infrastructure necessary to support our growth.
Our capital expenditures over the next nine months are estimated to be
between $60 million and $90 million for the establishment of additional
Internet data center facilities. As part of these estimated expenditures, we
have entered into commitments for fiscal year 2000 and fiscal year 2001, which
are estimated to be $46.2 million and $8.8 million, respectively. Included in
these commitments is our agreement to purchase a building and land in South
Korea, which we intend to use primarily as an Internet data center, our lease
of an Internet data center facility in Hong Kong and our agreement to purchase
a building and land in Taiwan, which we intend to use primarily as an Internet
data center and the title to which is to be transferred to us when the building
is completed. We are currently in negotiations for the establishment of
additional Internet data centers. None of these negotiations has resulted, and
it is uncertain that these negotiations will result, in binding commitments.
Except as set forth above, we are unable to accurately predict the level of our
capital expenditures associated with establishing new Internet data centers
because these expenses can vary significantly based upon the quality, timing,
location and size of each Internet data center as well as the manner of
financing, such as whether we acquire or lease the center. We expect to
continue to make decisions regarding our Internet data center deployment based
upon what is most appropriate in light of the status of our business and the
opportunities available in the specific markets at the relevant times. For
budgeting purposes and to estimate the use of proceeds of this offering, we
have assumed that it will cost an average of $20 to $30 million to establish
each Internet data center. However, based upon our experience to date and due
to the factors described above, the actual cost of establishing each Internet
data center may be significantly below or above this average cost range. For
further discussion of these commitments, see Note 14 of Notes to Consolidated
Financial Statements on page F-27.
In connection with the acquisition of a hosting business in January 2000, we
agreed to a contingent payment of up to $1.75 million and approximately 287,000
shares of Series D preferred stock upon achievement of certain financial
milestones through June 30, 2000. Although it is not yet possible to determine
the amount of this contingent payment, based on preliminary estimates, we
expect that a substantial payment will be due. For more information concerning
this obligation, see Note 14 of Notes to Consolidated Financial Statements on
page F-27.
31
<PAGE>
Although we believe that the proceeds of this offering, together with our
current cash and cash equivalents and our borrowing capacity, will be
sufficient to fund our activities for at least the next nine months, we may
require additional financing within this time frame and that additional
funding, if needed, may not be available on terms acceptable to us or at all.
In addition, we are regularly evaluating potential acquisitions, and we may
need to rely on additional equity or debt financings to finance future
acquisitions.
Market Risk from Operations
We are exposed to market risks inherent in our operations, primarily related
to currency risk. This risk arises from transactions and operations entered
into in the normal course of business.
Our subsidiaries primarily operate in foreign markets, and predominantly have
their local currencies as their functional currencies. These subsidiaries do
not have third party borrowings in currencies other than their local
currencies, and therefore there are no appropriate quantitative disclosures.
Our primary currency rate risk exposures relate to:
. our decentralized operations, whereby approximately 94% of our revenues
are derived from operations in the Asia-Pacific region, denominated in
currencies other than the U.S. dollar;
. the ability of our United States operations to satisfy cash flow
requirements of predominantly U.S. dollar denominated long-term debt
without the need to repatriate into the United States foreign earnings
and profits, which are denominated in currencies other than the U.S.
dollar; and
. our investments in foreign subsidiaries being primarily directly from us
as the U.S. parent, resulting in U.S. dollar investments in foreign
currency functional companies.
We manage our currency rate risks through a variety of measures. We operate
on a decentralized regional basis with operations located in most major Asia-
Pacific markets. As a result, our individual markets are not necessarily
impacted by changes in currency exchange rates. In addition, in certain limited
instances in fiscal 2000, we have entered into, and expect to enter into
additional, forward exchange contracts in connection with inter-company
transactions. We do not expect these contracts to extend longer than one year.
32
<PAGE>
BUSINESS
The Company
We offer a broad range of Internet services that allow business customers to
build or extend their presence across multiple markets in the Asia-Pacific
region. Our services include high-speed, leased-line Internet access, hosting,
co-location, managed services and other value-added services. Our customers
include Asia-Pacific businesses that desire to establish or extend their
Internet operations within the Asia-Pacific region and into the United States
and businesses located outside the region that wish to conduct Internet
operations in the Asia-Pacific region. We help our customers enter markets that
are complex and difficult for non-indigenous businesses to penetrate.
From inception in August 1995 until July 1999, we established local business
operations, built Internet data centers and provisioned direct Internet
connectivity to the major Internet service providers. During this period, we
focused nearly exclusively on providing high-speed, leased-line Internet access
to business customers in selected markets in the Asia-Pacific region. In July
1999, we began to implement a significant change in our business strategy to
focus on providing dedicated hosting, co-location and managed services in
addition to our Internet access services. At that time, we were operating in
Hong Kong, Taiwan, South Korea and the United States. To enhance our ability to
deliver hosting and co-location services throughout the Asia-Pacific region, we
subsequently established relationships with Internet service providers and
hosting companies in mainland China, India, Japan, Australia, New Zealand, the
Philippines, Thailand and Singapore.
To facilitate our strategic business shift, we acquired a Hong Kong Internet
business from AT&T in December 1999. This acquisition provided us with an
Internet data center in Hong Kong, substantial local peering and international
interconnectivity, an established hosting and co-location operation serving
businesses in Hong Kong and mainland China, and experienced, knowledgeable
employees in Hong Kong. This year, we have also acquired two hosting
businesses, one based in the U.S. and one in Australia, which provide us with
technologically sophisticated hosting capabilities and experienced local
management. We have also recently entered into agreements to purchase buildings
and land in both Taiwan and South Korea that we intend to operate primarily as
additional Internet data center facilities.
Our hosting and co-location services utilize our high-quality Internet data
centers. Internet data centers are facilities that provide our customers the
physical environment necessary to keep their servers up and running 24 hours a
day, seven days a week. Typically, these facilities are custom designed with
high volume air conditioning temperature control systems, 24 x 7 secured
access, ample electricity supply, connections to high-bandwidth
telecommunications lines and other infrastructure. The purpose of these
facilities is to house, protect and maintain server computers that store and
deliver Internet content, such as web pages, applications and data, to users in
our customers' targeted local markets.
Our Internet data centers are strategically located throughout the Asia-
Pacific region and provide our customers with high-speed, direct connections to
telecommunication networks and Internet service providers, and avoid much of
the congestion that exists on the telecommunication networks between countries
in the Asia-Pacific region. By housing each of our customer's Internet content
at an Internet data center in the target market the customer is trying to
reach, we minimize the number of telecommunication network interconnections
that the customer's content must cross, thereby reducing the possibility of
performance bottlenecks and increasing the speed and reliability of the
customer's delivery of Internet content to users. These Internet data centers
provide secure and reliable domestic and international Internet connectivity to
support our customers' Internet initiatives. We are in the process of expanding
our Internet data center capacity in most of the major markets in the Asia-
Pacific region.
33
<PAGE>
To complement our dedicated hosting and co-location services and to offer
end-to-end solutions for our business customers, we provide a broad range of
managed and value-added services. In addition to establishing a customer's
Internet presence, we are able to provide managed services such as 24 x 7
performance monitoring, enhanced security and administration services to
support its Internet operations. Additionally, our value-added services allow
us to assist our customers in navigating the complexities of operating in
markets with which they are not familiar. For example, we can help our
customers tailor their Internet content to each local market as well as enable
commercial transactions over the Internet and the associated logistics and
distribution fulfillment.
To provide a full suite of value-added services to our customers, we created
our Works Group alliance program. Through this program, we have established
contractual relationships with web development, translation, localization,
legal and regulatory compliance, e-commerce transaction processing, fulfillment
and logistics companies, in the United States and various markets in the Asia-
Pacific region.
Our goal is to become a pre-eminent single source provider of business
Internet services throughout the Asia-Pacific region with a primary focus on
dedicated hosting, co-location and managed services. To achieve this goal, we
intend to establish large-scale, high-performance Internet data centers, expand
our U.S. and Asia-Pacific sales, marketing and customer support services, and
continue to pursue acquisition and strategic partnership opportunities.
Industry Background
The Asia-Pacific and United States Internet Market
International Data Corporation, or IDC, a market research firm, projects that
the Internet market in the Asia-Pacific region will be the fastest growing
major region in the world. IDC estimates that the number of Internet users in
the Asia-Pacific region will grow from 24 million at the end of 1998 to
approximately 138 million by the end of 2003, representing a compounded annual
growth rate, or CAGR, of 41%. This compares to IDC's estimate that Internet
users in the U.S. will grow from 69 million at the end of 1998 to 197 million
by the end of 2003, representing a CAGR of 23%. Similarly, IDC expects e-
commerce revenues in the Asia-Pacific region during this period to grow from
$5.5 billion to $304.5 billion, which represents a CAGR of 124%, while e-
commerce revenue in the U.S. is estimated to increase from $44.8 billion to
$726.1 billion, representing a CAGR of 75%.
This growth in e-commerce and Internet usage has stimulated the demand for
Internet hosting, co-location, managed services and other value-added services
throughout the world. As an indication of the potential of the Internet hosting
market, IDC predicts U.S.-based Internet hosting and co-location revenue will
increase at a CAGR of 87% from $822.7 million in 1998 to $18.9 billion in 2003.
While IDC has not reported estimates of hosting and co-location growth during
this period in the Asia-Pacific region, we believe that, as in the United
States, the demand for Internet hosting and co-location services in the Asia-
Pacific region will be closely correlated to the growth in number of e-commerce
and Internet users.
34
<PAGE>
Within the Asia-Pacific region, the 11 markets of Hong Kong, South Korea,
Taiwan, Australia, mainland China, India, Japan, Singapore, the Philippines,
Thailand and New Zealand represent approximately 96% of the Internet user
market, as adjusted for multiple site use. The following regional map provides
an overview of the key Internet growth projections for various countries
within the Asia-Pacific region.
<TABLE>
<CAPTION>
[MAP CONTAINING THE FOLLOWING DATA AND
INFORMATION AS OBTAINED FROM IDC/EIU]
------------------------------
HONG KONG
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 0.7 2.3 26.9%
Internet Penetration Rate 10.4% 31.5% 24.8%
E-Commerce (US$) 60.8 3,160.3 120.4%
<CAPTION>
------------------------------
SOUTH KOREA
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 1.7 9.2 39.5%
Internet Penetration Rate 3.7% 18.9% 38.7%
E-Commerce (US$) 56.5 10,290.0 183.2%
<CAPTION>
------------------------------
TAIWAN
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 1.0 4.5 34.9%
Internet Penetration Rate 4.6% 19.9% 33.8%
E-Commerce (US$) 45.2 5,213.3 158.4%
<CAPTION>
------------------------------
AUSTRALIA
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 3.8 9.9 21.1%
Internet Penetration Rate 20.2% 50.0% 19.5%
E-Commerce (US$) 432.7 14,222.2 101.1%
<CAPTION>
------------------------------
MAINLAND CHINA
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 2.4 25.2 60.0%
Internet Penetration Rate 0.2% 1.9% 56.9%
E-Commerce (US$) 8.1 6,547.3 281.4%
<CAPTION>
------------------------------
INDIA
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 0.5 11.3 88.8%
Internet Penetration Rate 0.1% 1.1% 61.5%
E-Commerce (US$) 2.9 1,635.2 253.8%
</TABLE>
<TABLE>
<CAPTION>
------------------------------
JAPAN
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 11.5 60.3 39.3%
Internet Penetration Rate 9.1% 46.8% 38.8%
E-Commerce (US$) 4,729.7 253,218.2 121.7%
<CAPTION>
------------------------------
SINGAPORE
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 0.6 1.9 27.3%
Internet Penetration Rate 18.8% 55.9% 24.3%
E-Commerce (US$) 35.2 2,811.4 140.2%
<CAPTION>
------------------------------
PHILIPPINES
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 0.3 1.7 42.8%
Internet Penetration Rate 0.4 2.0 37.9%
E-Commerce (US$) 6.8 1,011.6 171.6%
<CAPTION>
------------------------------
THAILAND
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 0.6 3.0 40.3%
Internet Penetration Rate 1.0 4.7 36.3%
E-Commerce (US$) 9.8 1,345.7 167.9%
<CAPTION>
------------------------------
NEW ZEALAND
------------------------------
1998 2003 CAGR
---- ---- ----
<S> <C> <C> <C>
Internet Users 0.5 1.8 28.8%
Internet Penetration Rate 13.2 45.0 27.8%
E-Commerce (US$) 39.9 1,565.9 108.3%
</TABLE>
Information contained in the map above reflects all amounts in US$ million;
Internet user numbers in millions.
In general, we see a number of favorable factors driving the growth of the
Internet in the Asia-Pacific region:
. telecommunications deregulation in what had formerly been monopoly
controlled markets;
. a significant expansion and corresponding cost reduction of
international bandwidth;
. proliferation of lower cost Internet access devices;
. reliance on trade; and
. development of and increase in local language content.
Opportunity
We believe that the growth in e-commerce revenue and Internet users in the
Asia-Pacific region will increasingly lead businesses to implement and expand
their Internet presence and e-commerce capabilities in the region. However,
due to the lack of adequate interconnection among providers and the congestion
and high cost of international circuits, businesses will often find Internet
connections within the Asia-Pacific region to be slower, less reliable and
more expensive than in the United States. For these reasons, businesses will,
in our view, want to place their Internet content in close proximity to users
in the region to ensure fast, high-quality and less expensive delivery of
their Internet content. To deploy a high-quality and reliable Internet
presence in a single market in the
35
<PAGE>
Asia-Pacific region, a business would need, either itself or through service
providers, to perform the following tasks in each market:
. build high performance Internet data center facilities, establish
Internet connectivity with Internet service providers and hire and
supervise technical personnel; or
. lease space in high performance Internet data center facilities and
contract with service providers to monitor the servers and other
equipment.
A business implementing its Internet operations throughout the diverse Asia-
Pacific region would have to repeat these tasks in each market. This complex
process would require the commitment of significant time, expense and
management resources. The business would also have to overcome the challenges
each market poses with respect to language or dialect, culture, business
practices, regulations, politics, currency and Internet infrastructure.
There are a variety of providers of hosting, co-location, managed services
and other value-added services in the Asia-Pacific region that can help a
business accomplish these tasks. However, these providers may deliver only a
subset of the Internet services a business needs. Furthermore, many providers
operate only in a single market or in a limited number of markets in the
region. Unless a business is able to find a single provider that can offer all
the services it requires in each local market it wishes to enter, it will face
an ongoing commitment of resources necessary to monitor and manage multiple
service providers and administer its operations in each market.
We believe a better solution would involve a single service provider that
can:
. arrange, administer and manage all of the Internet services that a
business needs in each major market in the Asia-Pacific region;
. deliver high-quality facilities and services in each market in the Asia-
Pacific region;
. bill for all services on a single invoice in the business' language and
currency of choice; and
. provide 24X7, high quality, responsive customer support in the business'
language of choice.
Our Solution
Our solution provides the following advantages to our customers:
Single source provider across the Asia-Pacific region. We currently can
deliver a broad range of Internet services to customers in Hong Kong, South
Korea, Taiwan, Australia, mainland China, India, Japan, Singapore, the
Philippines, Thailand, New Zealand and the United States. We believe no company
currently offers as comprehensive a range of hosting and co-location services
in as many markets in the Asia-Pacific region as we do. We can also provide
Internet access service in Hong Kong, South Korea, Taiwan and the United
States.
Local market expertise and resources. We have been serving business customers
in the Asia-Pacific region since we commenced operations, and as of June 30,
2000, 151 of our 210 employees were located in the region. We have people,
experience and relationships in multiple markets in the Asia-Pacific region
that allow us to address the complexities our customers face with respect to
language or dialect, culture, business practices, regulations, politics,
currency and Internet infrastructure. The experience and knowledge of our local
employees facilitates our ability to deal with the legal, governmental and
administrative systems of these markets and to establish alliances with local
companies in these markets.
Comprehensive offering of high performance services. Our services are
designed to provide the availability and reliability that customers need for
mission-critical Internet operations. In
36
<PAGE>
addition, our services are designed to be flexible and scalable to provide
customers with a consistently high level of performance as their Internet
operations expand. Currently we offer:
. geographically distributed Internet data centers;
. strong in-country and international Internet connectivity, traffic
exchange and network access;
. the ability to quickly scale the amount of hosting space, power,
bandwidth and managed services;
. 24X7 managed services and technical support, including administration,
monitoring, security, backup, content distribution and other managed
services; and
. value-added services, such as consulting, system integration, web
development, translation, localization, legal and regulatory compliance,
e-commerce transaction processing, fulfillment and logistics services.
Ready access to new technology and highly qualified personnel. Because we are
headquartered in Silicon Valley, we have early and on-going access to the
latest developments in Internet technology, products and services. As a result
of our significant presence in both Silicon Valley and the Asia-Pacific region,
we believe that we are able to identify, evaluate and introduce these
innovations into the region before other service providers. We also have access
to a pool of highly qualified technical and management professionals in Silicon
Valley who can train our in-country personnel in the Asia-Pacific region, as
well as facilitate the implementation of these technologies. For example, we
believe that we are the first provider of hosting services in the Asia-Pacific
region to employ Cisco's recently introduced Net Flow technology, which allows
us to provide our customers with a detailed profile of their Internet usage
patterns.
Experienced management. Our senior management team, located both in the Asia-
Pacific region and the United States, possesses a deep understanding of the
local markets and has extensive business experience and strong technical
knowledge. For example, our Chief Executive Officer, who is located in Hong
Kong, has worked in the region for five years and was formerly the Chief
Executive Officer and President of AT&T Asia/Pacific. Additionally, our Vice
President of Internet and Data Center Technology, who is located in the U.S.,
has seven years of experience in building Internet data centers and the
complementary network infrastructure. We believe that the development of the
Internet in the Asia-Pacific region is following many of the same trends
exhibited in the U.S., and that our management team is well positioned to apply
their collective experience to anticipate and take advantage of the
opportunities in the region.
Localized customer service. We provide high quality, responsive, 24X7
customer service. Customers can communicate with us in either English or the
local language of any market we service, whereas many of our competitors are
only equipped to do business in a single language, typically that of the local
market. Additionally, we offer customers the opportunity to meet face-to-face
with our sales staff, network support staff and technical engineers, during all
phases of the implementation process. Our customers benefit from our ability to
provide information about and solutions in the markets we serve without the
time or expense of travelling or the inconvenience of dealing with time-zone
differences.
Our Strategy
Our goal is to become the pre-eminent single source provider of business
Internet solutions throughout the Asia-Pacific region with a primary focus on
dedicated hosting, co-location and managed services. To achieve this goal, we
intend to pursue a strategy that emphasizes the following elements:
Develop large-scale, high performance Internet data center capacity. We
intend to establish large-scale, high performance Internet data center capacity
in most of the major markets in
37
<PAGE>
the Asia-Pacific region. These proposed Internet data centers will provide
scalability, reliability, security and substantial network capacity. Currently,
there is a scarcity of these Internet data centers in the Asia-Pacific region.
We believe that businesses are going to require these new Internet data centers
as they increase their reliance upon the Internet for mission-critical business
functions in the region. We expect to have at least three of these Internet
data centers operational before the end of the first quarter of 2001, and may
have as many as eight of these Internet data centers operational by the end of
2003. For additional information on our plans to develop Internet data center
capacity, see "Our Technology--Internet Data Centers" on page 40.
Broaden and deepen our geographic presence in the Asia-Pacific region. We
currently offer services in certain countries in the Asia-Pacific region
through our own facilities and personnel and in others, through strategic
partnerships. Where we currently offer services through strategic partnerships,
we intend, where practicable, to establish operations using our own facilities
and personnel. In addition, to maximize our growth, we intend to expand our
operations within each of our current markets in the Asia-Pacific region by
hiring additional personnel, investing in our existing operations, establishing
new facilities, and acquiring companies with complementary businesses. We also
expect to expand into markets in the Asia-Pacific region, where we do not
currently have an operational presence such as Indonesia and Malaysia. Since
the beginning of December 1999, we have made three acquisitions and we are
actively pursuing other opportunities.
Expand our sales force in the U.S. and the Asia-Pacific region. We believe
that there is great strategic importance to being the first to provide
solutions to businesses that need to address the complexities of doing business
in multiple markets in the Asia-Pacific region. As a result, we are rapidly
expanding our sales force both in the U.S. and in the Asia-Pacific region. We
feel that an expanded sales force is instrumental to establishing our position
as the leading single source provider of business Internet services in multiple
markets in the Asia-Pacific region.
Pursue strategic relationships. We intend to continue to establish strategic
relationships with companies that have the technology, resources, distribution
capability, expertise, relationships and local influence to help us achieve our
business objectives. These relationships will allow us to enhance our service
offerings and provide access to technological developments and to new sales and
business opportunities. One recent example is a strategic alliance with
iAdvantage Limited which is a subsidiary of Sun Hung Kai Properties Ltd., a
major real estate developer in Hong Kong, through which we will obtain
significant high performance capacity in Internet data centers currently under
construction in Hong Kong, Beijing and Shanghai. Another is with Integra, a
leading pan-European hosting provider, whereby they will refer to us, on a
commission basis, their customers that desire to establish a presence in
markets in the Asia-Pacific region, and we will do the same with them in regard
to our customers that wish to establish a presence in major European markets.
None of these relationships is currently material from a financial perspective.
Our Services
We currently offer a comprehensive range of Internet services in the Asia-
Pacific region. Our goal is to provide all of the services business customers
need to conduct their Internet operations in multiple markets in the Asia-
Pacific region. The specific services we offer in each market are determined by
the needs of the market, our resources within the market, local regulations and
competition.
Internet access services. In Hong Kong, South Korea and Taiwan we provide
high-speed Internet access services to business customers. These services are
provided over leased-line connections with speeds ranging from 64Kbps, or
kilobits per second, to T3, or 45 megabits per second.
In addition to our flat rate leased-lines, we also offer a "burstable," pay-as-
you-go, billing product that allows our customers to purchase additional
bandwidth without prior commitment. We also offer
38
<PAGE>
business and consumer dial-up Internet access in Hong Kong. In addition, we
provide business travelers a global roaming service, which allows our customers
to connect to the Internet from more than 5,000 access points in 150 countries
throughout the world. We offer a managed virtual private network service, which
provides our customers the ability to securely transmit proprietary data
between their office locations using the public Internet and offers a less-
expensive alternative than private networks. We also offer a full range of
hardware and software system integration solutions required to connect our
customers to the Internet.
Hosting and co-location services. We offer hosting and co-location services
to business customers throughout the Asia-Pacific region and in the U.S.
Typically, hosting provides businesses a presence on the Internet without the
physical need for wholly-owned and maintained equipment and support personnel.
While we provide both dedicated and shared hosting services, our primary focus
is on dedicated hosting, in which a single customer site is hosted on one or
more of our servers. Shared hosting involves the hosting of multiple customers'
sites on a single server owned by us. Co-location services enable our customers
to house their servers in our Internet data centers and thereby take advantage
of our network access, bandwidth and facilities.
Managed services. We offer our business customers a full range of managed
hosting services, including:
. administration services--installation, configuration and maintenance of
a customer's site or equipment to meet its hardware, software and
network needs;
. monitoring services--monitoring, evaluating and reporting usage and
performance to ensure a high level of service;
. security services--providing security for Internet data center, network
and server infrastructure to protect mission-critical Internet
operations;
. backup services--backup and retrieval services to prevent the loss of
mission-critical data;
. content distribution services--replication and management of traffic
flows for efficient transmission; and
. other managed services--procurement and management of network, equipment
and systems to support our customers' access and hosting needs.
Value-added services. Through strategic relationships we offer a variety of
value-added services. These services include:
. legal and regulatory compliance;
. web design and development, including translation and cultural
adaptation of web sites; and
. enabling of e-commerce, including transaction processing, currency
conversion, logistics and distribution fulfillment.
Our Technology
Network
Currently, we operate Internet network infrastructure and facilities in Hong
Kong, South Korea, Taiwan, and the United States. Our network provides Internet
connections within these markets via extensive peering, purchased transit and a
number of international private lines. The foundation of our network is our
extensive peering relationships. In peering relationships, Internet service
providers agree to carry each others' traffic on their networks, or peer, to
improve performance, reduce congestion and lower costs. Where we do not have
peering relationships, we purchase transit from other providers to maintain a
high level of connectivity for our customers. Currently, our high speed network
comprises peering and transit interconnections with more than 100 providers,
including many of the largest providers in the Asia-Pacific region and the
United States.
39
<PAGE>
Hong Kong. Our facility in Hong Kong consists of a point of presence, or POP,
from which we have OC3, or 155 megabits per second, connections to the Hong
Kong Internet Exchange, or HKIX, augmented by private line transit connections
to major Internet service providers. Within the HKIX, we currently have peering
relationships with more than 50 Internet service providers. In addition, we
have several direct international private lines between our POP in Hong Kong
and our facilities in the United States. We also have a dedicated circuit
between our facilities in Hong Kong and Taiwan.
Taiwan. Our facilities in Taiwan consist of POPs in Taipei, Hsinchu,
Taichung, Kaohsiung and Taoyuan. We peer with virtually all of the major
Internet service providers in Taiwan, via a T3 connection to the Taiwan
Internet Exchange and via another T3 connection to a major Internet service
provider. In support of our Taiwan operation, we also maintain international
private lines between Taipei and our facilities in the United States and
redundant connections via Hong Kong.
South Korea. Our facility in South Korea consists of a centralized POP in
Seoul, from which we have an OC3 connection to the Korean Internet Network
Exchange, or KINX. Our facility in Seoul takes advantage of public peering via
the KINX, where we peer with virtually all of the major Internet service
providers in South Korea. Additionally, we have private T3 connections to the
domestic gateways and private connections to the international gateways of the
two largest Internet providers in Korea.
United States. In the United States, we have facilities in San Francisco,
South San Francisco, San Jose and the Palo Alto Internet Exchange. An OC3
circuit in the South San Francisco location allows us to link all of these
facilities into a high-speed network. This network, in conjunction with our
various U.S.-based peering relationships, provides a centralized transit point
for all of our traffic between the Asia-Pacific region and the United States.
Internet Data Centers
Currently, our Internet data centers, operated directly or by strategic
partners, are located in Hong Kong, South Korea, Taiwan, Australia, mainland
China, India, Japan, Singapore, the Philippines, Thailand, New Zealand and the
United States. Each of our current facilities is of high-quality and provides
substantial domestic and international Internet connectivity, reliable back-up
power supply and secure network and infrastructure. Our current Internet data
centers are not large-scale facilities.
We intend to establish significant additional Internet data center capacity
in most of the major markets in the Asia-Pacific region utilizing the latest
technologies available. These additional Internet data centers will generally
be large-scale, with most expected to exceed 50,000 square feet, and will be
high performance, high-capacity, carrier-neutral facilities with
interconnection to major Internet service providers and telecommunication
providers in each market.
Customers
We have established a diversified base of customers in a wide range of
industries, including finance, entertainment, high technology, publishing,
Internet, manufacturing and advertising. As of June 30, 2000, we had more than
4,000 business customers. We provide more than 1,200 of these customers with
leased-line Internet access services and more than 175 with dedicated hosting
and co-location services. Most of the remaining customers utilize shared
hosting and dial-up services. The following is a list of five of our largest
customers, all of which utilize our co-location and managed services in more
than one market, and the markets in which we have contracted to provide
services for each of them. As of June 30, 2000, none of these customers had
accounted for more than 5% of the current year's total revenues.
40
<PAGE>
<TABLE>
<CAPTION>
Customer Markets
-------- -------
<C> <S>
Adero..................... Hong Kong, South Korea, Taiwan, mainland China, the
Philippines, Thailand, New Zealand
Akamai.................... Hong Kong, South Korea, Taiwan, Australia, mainland
China, Japan, Singapore, the Philippines, Thailand,
New Zealand
Digital Island/Sandpiper.. Hong Kong, South Korea, Taiwan, mainland China, New
Zealand
DoubleClick............... South Korea, Taiwan, mainland China
Outblaze.................. Hong Kong, Taiwan
</TABLE>
Sales and Marketing
Our sales and marketing objective is to achieve broad market penetration by
targeting business customers in and outside the Asia-Pacific region that desire
to extend their Internet operations across multiple markets in the Asia-Pacific
region. We also target business customers in the Asia-Pacific region who wish
to extend their Internet operations into the United States. As of June 30,
2000, we had 62 employees engaged in sales and nine in marketing.
Sales
We sell our high-speed Internet access services to businesses through our
direct sales force and through independent distributors. To date, our hosting
and co-location and managed service sales have been made exclusively through
our direct sales force. In addition, we are currently developing indirect sales
channels for these non-access services and our other value-added services. We
are actively seeking to increase our sales distribution capabilities and
coverage both in the United States and throughout the Asia-Pacific region.
Direct Sales
U.S. Based Sales. We have sales offices in San Francisco, Los Angeles, New
York and Boston. We plan to expand our direct sales group over the next 12
months by opening offices in the Washington, D.C. area, Texas, Chicago, Seattle
and Atlanta. When fully operational, we expect each of our U.S.-based sales
organizations to consist of six account managers and one sales engineer and, in
selected markets, one tele-sales representative. Our U.S. direct sales force
currently consists of 20 people, 17 of whom have been hired during the current
fiscal year. All of them have between five and 10 years of proven sales results
within industries such as Internet hosting, co-location, data and
telecommunications network services.
In-Country Based Sales. We have sales offices in Hong Kong, South Korea,
Taiwan and Australia. We have been expanding our sales force in the Asia-
Pacific region significantly and as of June 30, 2000, we had 29 account
managers, nine in Hong Kong, six in South Korea, 12 in Taiwan and two in
Australia. Of these, 20 have been hired during the current fiscal year. Most of
our account managers have had substantial experience selling Internet or
telecom related products. Typically, our account managers focus on high-speed,
leased-line Internet access; hosting and co-location; or targeted specific
industries. We also use independent distributors to sell high-speed Internet
access services, primarily in South Korea and Taiwan.
Indirect Sales
We have been developing what we term internally as our Works Group alliance
program as a means both to provide value-added services and to develop indirect
sales channels for our dedicated hosting, co-location and managed services. As
part of this program, we have established contractual or informal relationships
with companies that can offer the following services to our customers primarily
in the United States and in various markets in the Asia-Pacific region:
. web design and development services to assist our customers in designing
their Internet content to address local preferences; for example,
Allindia.com;
41
<PAGE>
. translation services for Internet content and localization services to
assist our customers in customizing their Internet content and
operations for their targeted local markets, including translating their
web sites into the local language; for example, eTranslate;
. legal and regulatory compliance services to assist our customers in
navigating the local regulatory requirements; for example, International
Counsel;
. e-commerce transaction processing to assist our customers in providing
secured payments for online transactions; for example, FirstEcom; and
. logistics and distribution fulfillment services which assist our
customers in delivering their goods to and from the local market; for
example, NetCel360.
In addition, we have formed alliances with vendors of key hardware such as our
servers--for example, with Cobalt.
These relationships are structured so that we can work with our indirect
sales channel partners and can jointly market both our services and their
services, as well as refer each other's services to our respective business
customers. Although none of these relationships is material from a financial
standpoint, typically, there is a referral fee, commission or other revenue
producing opportunity for both parties in each relationship.
Marketing
Our marketing organization employs a broad range of marketing communications
and public relations activities to stimulate product demand. Marketing
communications activities have included participation in local trade shows and
Internet conferences. We have been particularly active in a Hong Kong-based
organization called "I-and-I," which brings large groups of Internet business
people together once a week and sponsors Internet conferences around the Asia-
Pacific region. Going forward, we will be coordinating efforts on a regional
basis and regularly sponsoring or participating in major trade shows or trade
conferences throughout the Asia-Pacific region and the United States.
Additionally, we will continue to seek exposure through speaking engagements,
which focus on cultivating industry analysts and media relationships with the
goal of securing broad media coverage and visibility. As an example of this
effort, our Chief Executive Officer has been the keynote speaker in several
trade shows, including Internet World, which is a high-profile Internet
conference. We are also planning to run advertisements and promotions targeted
at companies that are interested in taking advantage of hosting and co-location
services in the Asia-Pacific region.
Business and Product Development
As an adjunct to both our sales and marketing groups, we have recently
established a business and product development group. This group is responsible
for identifying and evaluating the latest Internet technology, products and
services whether from Silicon Valley, the Asia-Pacific region or elsewhere,
with a view to early implementation of these developments in each of our
markets. As of June 30, 2000, we employed five persons in business and product
development.
Customer Service
We believe that we offer superior customer service by understanding the
technical requirements and business objectives of our customers. We are able to
assist customers from multiple locations, in either English or their local
language. By working closely with each of our customers, we are able to
optimize the performance of their Internet operations, minimize downtime,
resolve quickly any problems that may arise and make appropriate adjustments in
services as the customer's needs change over time.
42
<PAGE>
Our customer service efforts begin before a sale, when we provide technical
support for complex orders. During the installation phase, we assign a
transition team and a project manager, who also retains responsibility for the
account after installation. After installation, our network operations support
staff at each Internet data center's network control center is available 24X7
to answer customer calls, monitor site and network operations and dispatch
teams to solve any problems that arise. As of June 30, 2000, we had 82
employees dedicated to network center operations technical support and 13
employees in customer service.
Competition
The market we serve is highly competitive. There are few substantial barriers
to entry, and we expect that we will face additional competition from diverse
existing competitors and new market entrants in the future. The principal
competitive factors that we are addressing in this market include:
. broad geographic presence throughout the Asia-Pacific region;
. network capability, reliability, quality and security and scalability of
service;
. the variety of services offered, pricing and the timing of introductions
of new services to the market;
. customer service support and technical expertise;
. brand name;
. the ability to maintain and expand effective distribution channels;
. financial resources; and
. conformity with developing industry standards.
For businesses located outside of the Asia-Pacific region that desire to
conduct Internet operations in the region, we believe that, in order of
importance, the factors considered in their decision when choosing a hosting
company are customer service, the speed in which their operations can be
deployed into the markets we serve, the scope of geographic coverage offered,
quality of offered services, and price. In contrast, for businesses located in
the Asia-Pacific region that desire to establish or extend their Internet
operations within the region, we believe that they typically focus on the
quality of offered services and price in choosing their hosting provider.
Our major current competitors are:
. current or former national monopoly telecom providers, such as Korea
Telecom, Chunghwa Telecom in Taiwan, and Hong Kong Telecom;
. global service providers, such as PSINet and WorldCom; and
. smaller intra-country Internet service providers, hosting and co-
location companies, such as Dacom in Korea and SeedNet in Taiwan.
We currently have a number of competitors in each of the markets we serve. We
believe that our competitors in each market generally include several small,
local Internet service providers, a few national telecommunications providers,
and at least one, but no more than 10, global service providers or hosting
companies. However, we believe that only a few of our competitors currently
compete with us in multiple markets in the Asia-Pacific region and have
sufficient capitalization and infrastructure to do so.
Increasingly, Internet service providers, hosting companies,
telecommunication carriers and equipment manufacturers based in North America
have been announcing plans to enter or expand into markets throughout the Asia-
Pacific region. For example, companies such as PSINet, AboveNet Communications,
and its parent Metropolitan Fiber Networks, Exodus Communication, Inc., Global
43
<PAGE>
Crossing GlobalCenter, Level 3, WorldCom and Intel have all announced plans to
establish Internet data centers in the Asia-Pacific region.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
There is no assurance that customers that use the non-Asia-Pacific based
carriers outside of the Asia-Pacific region will be willing to use our services
in the Asia-Pacific region. As a result, certain of these competitors may be
able to develop and expand their network infrastructures and service offerings
more quickly, adapt to new or emerging technologies and changes in customer
requirements more readily, take advantage of acquisition and other
opportunities more effectively, devote greater resources to the marketing and
sale of their products and adopt more aggressive pricing policies than we can.
In addition, these competitors have entered and will likely continue to enter
into joint ventures or consortiums to provide additional value-added services
competitive with those provided by us.
New market entrants could also include local companies, such as real estate
developers, that may take advantage of their local expertise and relationships
to compete with us. In addition, we believe that our competitors are likely to
combine their efforts in the near future, including through acquisitions, joint
ventures and other alliances. New market entrants or the creation of stronger
competitors through combinations could result in increased price and other
competition, which would make it difficult for us to attract new customers,
retain existing customers, or attain revenue and gross margin levels sufficient
to generate a return on our investments.
For additional information regarding our existing and potential competitors,
see "Risk Factors--The potential market for Internet services in the Asia-
Pacific region may attract new and existing competitors, which could narrow our
margins and limit our growth prospects" on page 9.
Employees
As of June 30, 2000, we had 210 employees, including 62 employees in
Hong Kong, 39 employees in South Korea, 34 in Taiwan, 16 employees in
Australia, and 59 employees in the United States and all of our other offices.
Of those employees, 62 were in sales, nine in marketing, five in business and
product development, 95 in network operations and customer service support and
39 in finance and administration. We are rapidly hiring personnel in the United
States and across the Asia-Pacific region and believe that our future success
will depend in part on our continued ability to attract, hire and retain
qualified personnel. None of our employees is represented by a labor union, and
we believe that our relationships with our employees are good.
Facilities
Our executive headquarters are located in approximately 7,800 square feet of
leased office space located in San Mateo, California under a lease expiring in
October 2004 and a sublease expiring in April 2002. Our Internet data center
facilities, with approximately 11,000 aggregate gross square footage, are in
leased premises in Hong Kong, South Korea, Taiwan, Australia, mainland China,
India, Japan, Singapore, the Philippines, Thailand, New Zealand and the United
States. These facilities generally are leased for initial terms of one year or
longer, renewable for additional fixed terms or continuing on a month-to-month
basis.
Contingencies
We are not a party to any legal proceedings. However, two service providers
have contacted us with regard to claims for additional cash and stock payments
in relation to their services. If we fail to resolve these claims favorably, we
may incur material charges to operations. For additional information regarding
these claims, see Note 10 of Notes to Consolidated Financial Statements--Claims
on page F-24.
44
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information regarding the executive
officers and directors of iAsiaWorks as of June 30, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
JoAnn F. Patrick-Ezzell.. 46 Chief Executive Officer and Chairman of the Board of Directors
Jonathan F. Beizer....... 35 Chief Financial Officer and President--U.S.
Suzanne S. Chu........... 36 Vice President of Marketing
David S. Holub........... 39 Vice President of Internet and Data Center Technology
Daryl B. Horn............ 33 Vice President of Sales
Nicholas K. Pianim....... 33 Vice President of Global Business Development
Farrokh K. Billimoria.... 45 Director
Daniel A. Carroll........ 40 Director
Robert Lee............... 51 Director
Peter T. Morris.......... 44 Director
William R. Stensrud...... 49 Director
William P. Tai........... 38 Director
</TABLE>
JoAnn F. Patrick-Ezzell has served as our Chairman and Chief Executive
Officer since August 1999. Before joining iAsiaWorks, she spent 24 years with
AT&T, most recently serving as President and Chief Executive Officer of AT&T
Asia/Pacific, responsible for AT&T's multi-billion dollar business throughout
the region. Before that, she was President of AT&T Online Services,
Asia/Pacific. She also served as chairman of AT&T Jens, a joint venture between
AT&T and 25 Japanese corporations. Ms. Patrick-Ezzell holds a B.A. in Economics
from Bucknell University and was a Sloan Fellow at Stanford University's
Graduate School of Business, where she received an M.S. in Management.
Jonathan F. Beizer joined us in September 1998 and currently serves as our
Chief Financial Officer and President--U.S. From March to August 1999, Mr.
Beizer served as our interim Chief Executive Officer. From 1992 to April 1998,
Mr. Beizer served with Phoenix Network, then a publicly-traded
telecommunications services provider, most recently as Chief Financial Officer.
Prior to becoming Chief Financial Officer of Phoenix Network, Mr. Beizer served
as its Vice President of Corporate Development and was responsible for
executing its mergers and acquisitions strategy. Mr. Beizer holds a B.A. in
Psychology and Social Relations from Harvard University and an M.B.A. from
Stanford University's Graduate School of Business.
Suzanne S. Chu has served as our Vice President of Marketing since February
2000. From September 1998 to November 1999, Ms. Chu served as the Director of
Marketing for Deltathree.com, Inc., an Internet telephony company. From August
1995 to August 1998, Ms. Chu worked at AT&T Communication Services, most
recently as Sales Manager. Ms. Chu holds a B.S. in Electrical Engineering and
Computer Science from the University of California, Berkeley and an M.B.A. from
the Harvard Business School.
David S. Holub has served as our Vice President of Internet and Data Center
Technology since November 1999. Mr. Holub served as a consultant to us from
September 1999 to November 1999. From July 1998 to May 1999, Mr. Holub served
as the Director of Marketing for Vayu Communications, an internet research and
development company. Mr. Holub served as a Vice President of Vixie Enterprises,
an Internet infrastructure company, from May 1997 to July 1998. From December
1993 to May 1997, Mr. Holub served as the President and Chief Technology
Officer of Hooked/Whole Earth Networks, an Internet service provider.
Daryl B. Horn has served as our Vice President of Sales since February 1999.
From April 1998 to January 1999, Mr. Horn served as President of Qwest
Communications' International Callback
45
<PAGE>
Division, a provider of telecommunications services. From October 1996 to March
1998, Mr. Horn was President of Phoenix Network International, a division of
Phoenix Network. From 1994 to September 1996, Mr. Horn worked as a Regional
Sales Director for Phoenix Network. Mr. Horn holds a B.A. in Communications
from California State University, Sacramento.
Nicholas K. Pianim has served as our Vice President of Global Business
Development since March 2000. From April 1999 to March 2000, Mr. Pianim served
as a Principal for Eureka Capital, a private investment company. From June 1998
to April 1999, Mr. Pianim served as a manager at Cellular One, a wireless
carrier. From September 1994 to June 1998 Mr. Pianim served as a principal at
Idaho Partners, a private investment company. Mr. Pianim holds a B.S. in
Electrical Engineering from Tufts University and an M.B.A. from Stanford
University's Graduate School of Business.
Farrokh K. Billimoria has served as a member of our board of directors since
December 1999. He is a general partner with Sprout Group, a venture capital
firm that he joined in April 1999. He came to Sprout from Hambrecht & Quist, or
H&Q, where he was a senior technology analyst covering the communications and
networking sector and was actively involved in H&Q's corporate finance and
venture capital initiatives. Mr. Billimoria worked at H&Q from May 1996 to
April 1999. From January 1995 to May 1996, he was an equity analyst at
Unterberg Towbin. Mr. Billimoria currently serves on the boards of Astral Point
Communications, Cyoptics, Net Effect, Silicon Access and Perfecto Technologies.
Mr. Billimoria holds a B.E. in Electrical Engineering from the College of
Engineering, Pune, India and an M.S. in Computer Science from the Stevens
Institute of Technology.
Daniel A. Carroll has served as a member of our board of directors since
December 1999. He is currently Managing Director of Newbridge Capital Group, an
Asian private equity firm he joined in 1995, and a Principal of Texas Pacific
Group. Prior to 1995, Mr. Carroll spent nine years with H&Q, where he played a
key role in the development of that firm's private equity investment operations
in Asia. Mr. Carroll currently serves on the boards of Korea First Bank and
Asiacontent.com, Ltd. Mr. Carroll holds a B.A. in Economics from Harvard
University and an M.B.A from Stanford University's Graduate School of Business.
Robert Lee has served as a member of our board of directors since February
1999. From May 1998 to February 1999, Mr. Lee served as an advisor to us. From
1972 to May 1998, Mr. Lee was employed by Pacific Bell, a telecommunications
provider. His last position with Pacific Bell, which he held from 1996 until
his retirement in 1998, was the President of Business Communications. Mr. Lee
also currently serves on the board of directors of CIDCO and Micron
Electronics. He also serves on the board of directors of several privately held
companies. Mr. Lee holds a B.S. in Electrical Engineering from the University
of Southern California and an M.B.A. from the University of California,
Berkeley.
Peter T. Morris, one of our co-founders, has served as a member or our board
of directors since August 1995. He is a general partner of New Enterprise
Associates, a venture capital investment firm that he joined in 1992. He
specializes in information technologies with a focus on communications and the
internet. His current board memberships include Actelis, Gadzoox, LoanCity.com,
LuxN, Mayan Networks, Network Photonics, Packetcom, Packeteer, Tiara Networks,
Virata Limited and Yipes Communications. Mr. Morris holds a B.S. in Electrical
Engineering from Stanford University and an M.B.A from Stanford University's
Graduate School of Business.
William R. Stensrud has served as a member of our board of directors since
August 1998. He has been a general partner of Enterprise Partners, a
California-based venture-capital company, since January 1997. From 1992 to
1996, he served as CEO of Primary Access. He is a founder of StrataCom, and a
founding director of Juniper Networks, Rhythms Netconnections, GlobeSpan and
Paradyne. His current board memberships include Juniper Networks, Packeteer,
Paradyne and Rhythms NetConnections. Mr. Stensrud also serves on the board of
directors of several privately held
46
<PAGE>
companies, including AirFiber, Chromisys and Ensemble Communications. Mr.
Stensrud holds a BS in Electrical Engineering and Computer Science from the
Massachusetts Institute of Technology.
William P. Tai, one of our co-founders, has served as a member of our board
of directors since August 1995. From August 1995 to February 1998, he served as
our founding Chief Executive Officer, and he served as chairman of the board
until August 1999. Mr. Tai has been a general partner and managing director of
Institutional Venture Partners, a venture capital firm, since July 1997. From
September 1991 to July 1997, he was affiliated with the Walden Group of Venture
Capital Funds, a venture capital firm. Mr. Tai also serves on the board of
directors of Netergy Networks, Inc., a provider of IP telephony solutions, and
several privately held companies, including Chemconnect Inc., Ensemble
Communications, GW Com Inc., Microtune, Inc. and Transmeta Corp. He holds a
B.S. in electrical engineering, with Honors, from the University of Illinois,
and an M.B.A. from the Harvard Graduate School of Business.
Board of Directors and Committees
Following this offering, the board will consist of seven directors divided
into three classes, with each class serving for a term of three years. At each
annual meeting of stockholders, directors will be elected by the holders of
common stock to succeed the directors whose terms are expiring. Messrs. Morris
and Lee are Class I directors whose terms will expire at the 2001 annual
meeting of stockholders, Messrs. Billimoria and Carroll are Class II directors
whose terms will expire at the 2002 annual meeting of stockholders and
Messrs. Tai and Stensrud and Ms. Patrick-Ezzell are Class III directors whose
terms will expire at the 2003 annual meeting of stockholders. The officers
serve at the discretion of the board. None of our officers is related to any
member of the board of directors.
iAsiaWorks has established an audit committee composed of independent
directors that:
. reviews and supervises iAsiaWorks' financial controls, including the
selection of its auditors;
. reviews the books and accounts;
. meets with its officers regarding its financial controls;
. acts upon recommendations of the auditors; and
. takes further actions as the audit committee deems necessary to complete
an audit of iAsiaWorks' books and accounts, as well as other matters
that may come before it or as directed by the board.
The audit committee currently consists of Messrs. Lee, Morris and Tai.
iAsiaWorks has established a compensation committee that reviews and approves
the compensation and benefits for iAsiaWorks' executive officers, administers
its stock plans and performs other duties as may from time to time be
determined by the board. The compensation committee currently consists of
Messrs. Carroll, Stensrud and Tai.
Compensation Committee Interlocks and Insider Participation
The compensation committee consists of Messrs. Carroll, Stensrud and Tai,
none of whom is an employee. None of our executive officers serve as a director
or member of the compensation committee or other board committee performing
equivalent functions of another entity that has one or more executive officers
serving on our board of directors or compensation committee.
Director Compensation
We do not currently compensate any non-employee member of the board.
Directors who are also employees of iAsiaWorks do not receive additional
compensation for serving as directors. However, non-employee directors will be
eligible to receive discretionary option grants and stock issuances under the
2000 Stock Incentive Plan. In addition, under the automatic option grant
47
<PAGE>
program in effect for non-employee directors under the 2000 Stock Incentive
Plan, each non-employee director will receive an automatic option grant for
3,500 shares at each annual stockholders meeting during his or her period of
continued service on the board, with such shares to vest upon completion of one
year of board service measured from the grant date, and each new non-employee
director will receive, at the time of his or her initial election or
appointment to the board, an automatic option grant for 15,000 shares which is
to vest over the first four years of board service. The 2000 Stock Incentive
Plan also contains a director fee option grant program. Should this program be
activated in the future, each non-employee board member will have the
opportunity to apply all or a portion of any annual retainer fee otherwise
payable in cash to the acquisition of an option with an exercise price at a
discount from the then fair market value. For more information concerning the
automatic grant and director fee option grant programs for the non-employee
directors, see "Benefit Plans" beginning on page 54.
Executive Compensation
Summary Compensation Table
The following table sets forth certain information concerning all
compensation earned during the year ended December 31, 1999 by our current
Chief Executive Officer, our former Chief Executive Officer and each of the
four other most highly compensated executive officers who earned an annualized
salary of more than $100,000 for the fiscal year ended December 31, 1999,
referred to in this prospectus as the named executive officers. No other
individual who would otherwise have been includable in the table on the basis
of salary and bonus earned during 1999 resigned or otherwise terminated
employment during 1999. The compensation table excludes other compensation in
the form of perquisites and other personal benefits that constitutes the lesser
of $50,000 or 10% of the total annual salary and bonus earned by each of the
named executive officers for fiscal 1999.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------- ------------
Fiscal Other Annual Securities
Name and Principal Year Compensation Underlying
Position Ended Salary ($) Bonus ($) ($) Options (#)
------------------ ------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
JoAnn F. Patrick-
Ezzell(1)............... 1999 197,582 100,000 50,108 1,992,329
Chief Executive Officer
Jonathan F. Beizer(2).... 1999 211,917 18,045 -- --
Chief Financial Officer
and
President-U.S. and
Interim Chief
Executive Officer
Michael Chan(3).......... 1999 70,917 -- -- --
Chief Executive Officer
Daryl B. Horn(4)......... 1999 83,000 -- 500 36,666
David S. Holub(5)........ 1999 18,750 -- -- 133,333
Jacob D. Gale(6)......... 1999 58,333 -- 12,000 200,000
</TABLE>
--------
(1) Ms. Patrick Ezzell joined us in August 1999. Her annualized salary for 1999
was $500,000. She earned an aggregate of $50,108 in perquisites in fiscal
1999, of which $35,250 was for housing expenses, and $13,376 was for a car
allowance.
(2) Mr. Beizer served as our Interim Chief Executive Officer from March 1999 to
August 1999. His annualized salary for 1999 was $211,917.
(3) Mr. Chan served as Chief Executive Officer from February 1998 to February
1999. His annualized salary for 1999 was $185,000.
48
<PAGE>
(4) Mr. Horn received commissions of $500 during 1999. His annualized salary
for 1999 was $90,000.
(5) Mr. Holub joined us in November 1999. His annualized salary for 1999 was
$150,000.
(6) Mr. Gale joined us in August 1999 and left us in May 2000. His annualized
salary for 1999 was $175,000. Mr. Gale received $12,000 for housing
expenses in 1999.
Option Grants in the Most Recent Fiscal Year
The following table sets forth certain information with respect to stock
options granted to each of the named executive officers in 1999, including the
potential realizable value over the 10-year term of the options, based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. No
stock appreciation rights were granted during 1999.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable Value
Number of at Assumed Annual Rates
Securities of Stock Price Appreciation
Underlying Percent of Total for Option Term
Options Options Granted Exercise at Public Offering Price ($)
Granted to Employees in Price Expiration -----------------------------
Name (#) Fiscal 1999 (%) ($/Share) Date 5% 10%
---- ---------- ---------------- --------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
JoAnn F. Patrick-
Ezzell................. 1,992,329 51.9 .45 7/31/09 41,292,274 66,282,100
Jonathan F. Beizer...... -- -- -- --
Michael Chan............ -- -- -- --
Daryl B. Horn........... 33,333 1.0 .45 2/1/09 690,847 1,108,944
3,333 .90 11/22/09 67,579 109,385
David S. Holub.......... 133,333 3.5 .90 8/12/09 2,703,411 4,375,809
Jacob D. Gale........... 200,000 5.2 .45 8/1/09 4,145,126 6,653,730
</TABLE>
In 1999, we granted options to purchase up to an aggregate of 3,838,718
shares to employees, directors and consultants under iAsiaWorks' 1995 Stock
Plan at exercise prices equal to the fair market value of our common stock on
the date of grant, as determined in good faith by the board of directors.
In general, the options granted to the named executive officers (other than
Ms. Patrick-Ezzell) will vest and become exercisable for the option shares as
follows: the option will become exercisable for 25% of the shares upon the
officer's completion of one year of service with us, and, as to the remaining
shares, will become exercisable in a series of 36 successive equal monthly
installments during the named executive's term of continuing service. Ms.
Patrick-Ezzell's options will vest and become exercisable for 12.5% of the
option shares upon her completion of six months of service with us, will become
exercisable for another 12.5% upon her completion of one year of service, and
the remaining shares will become exercisable in 36 successive equal monthly
installments upon her completion of each of the 36 months thereafter.
The potential realizable value is calculated using the public offering price
of $13.00 per share less the aggregate exercise price on the date of grant, and
assuming that the stock price appreciates at the indicated rate for the entire
term of the option and that the option is exercised and sold on the last day of
its term at the appreciated price. All options listed have a term of 10 years.
Stock price appreciation of 5% and 10% is assumed pursuant to the rules of the
Securities and Exchange Commission. We can give no assurance that the actual
stock price will appreciate over the 10-year option term at the assumed 5% and
10% levels or at any other defined level. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our common stock.
Unless the market price of the common stock appreciates over the option term,
no value will be realized from the option grants made to the named executive
officers.
49
<PAGE>
The following table sets forth stock option grants to our named executive
officers since January 1, 2000 and until June 30, 2000.
<TABLE>
<CAPTION>
Number of
Securities Underlying Exercise Price
Name Options Granted ($/Share)
---- ---------------------- --------------
<S> <C> <C>
Jonathan F. Beizer................. 172,035 0.90
182,515 15.00
36,502 12.00
Suzanne S. Chu..................... 83,333 0.90
33,332 15.00
24,166 12.00
Daryl B. Horn...................... 10,000 0.90
7,333 6.00
61,766 12.00
David S. Holub..................... 33,333 15.00
54,666 12.00
Nicholas K. Pianim................. 50,000 6.00
33,333 12.00
</TABLE>
In general, each of the options to the named executive officers will vest and
become exercisable for the option shares as follows: the option will become
exercisable for 25% of the shares upon the officer's completion of one year of
service with us, and the balance of the option shares will become exercisable
in a series of 36 successive equal monthly installments upon the officer's
completion of each of the next 36 months thereafter. However, until February
2000, follow-on grants to certain employees who had been employed by us for
more than one year vest monthly over a 48-month period measured from the grant
date.
Aggregated Option Exercises In The Most Recent Fiscal Year And Year-End Option
Values
The following table sets forth information concerning the number and value of
shares of common stock underlying the unexercised options held by the named
executive officers. No options or stock appreciation rights were exercised
during 1999, and no stock appreciation rights were outstanding as of December
31, 1999. The value realized is based on the fair market value of our common
stock on the date of exercise, as determined by the board, less the exercise
price payable for the shares. The value of unexercised in-the-money options at
December 31, 1999 is calculated on the basis of the initial public offering
price of $13.00, less the aggregate exercise price of the options.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Number Options at December 31, In-the-Money Options at
of Shares 1999 December 31, 1999($)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
JoAnn F. Patrick-
Ezzell(1).............. -- -- -- 1,992,329 -- 25,003,729
Jonathan F. Beizer...... -- -- 155,650 342,432 1,953,408 4,297,522
Michael Chan............ -- -- -- -- -- --
Daryl B. Horn........... -- -- -- 36,666 -- 458,658
David S. Holub.......... -- -- -- 133,333 -- 1,613,329
Jacob D. Gale(2)........ -- -- -- 200,000 -- 2,510,000
</TABLE>
--------
(1) Ms. Patrick-Ezzell purchased 33,333 shares of her outstanding options on
April 4, 2000 at an exercise price of $0.45 per share.
(2) Options for 150,000 of these shares expired upon his departure from the
Company in May 2000 pursuant to the terms of a separation agreement dated
June 29, 2000.
50
<PAGE>
Employment Contracts, Termination of Employment Agreements and Change in
Control Arrangements
We have entered into employment agreements with Ms. Patrick-Ezzell, Mr.
Beizer, Ms. Chu, Mr. Holub, and Mr. Horn each of whom are officers of
iAsiaWorks.
JoAnn F. Patrick-Ezzell. On July 10, 2000, JoAnn Patrick-Ezzell, our Chief
Executive Officer and Chairman of the board of directors, entered into an
employment agreement with us. This agreement provides for an annual salary of
$500,000. Ms. Patrick-Ezzell received a signing bonus of $100,000 in the form
of an interest free loan which is to be forgiven upon her completion of one
year of service with us on August 9, 2000 or in the event of death, disability
or involuntary termination without cause. In connection with her employment Ms.
Patrick-Ezzell was also granted options to purchase up to 1,992,329 shares of
our common stock at a per share exercise price of $0.45. These options were
granted, and vesting commenced, on August 1, 1999. These options, as of April
3, 2000, are subject to vesting terms of 12 1/2% after six months from August
1, 1999 and 12 1/2% after another six months with 1/36 of the remaining options
vesting each month thereafter. We have agreed to provide for monthly living
expenses for Ms. Patrick-Ezzell in Hong Kong. Subsequent annual bonus amounts
will be determined by the Compensation Committee but will not be less than
$100,000. In the event Ms. Patrick-Ezzell were involuntarily terminated without
cause or her employment is terminated upon a change of control, and
Ms. Patrick-Ezzell loses her job within 12 months of the change of control, she
will receive severance pay equal to 12 months of salary, the full amount of the
then current period bonus plan agreed to with the Compensation Committee of the
board of directors, and all of her unvested options would vest immediately upon
termination.
Jonathan F. Beizer. On August 26, 1998, Jonathan F. Beizer, our Chief
Financial Officer and President--U.S., accepted our offer of employment. A
subsequent employment agreement was entered into on June 7, 2000. This
employment agreement provides for an annual salary of $250,000. Mr. Beizer is
also entitled to an annual bonus of up to $100,000. A minimum of $50,000 of
this bonus will be guaranteed, in the form of deferred compensation, to be paid
in two equal, biannual payments. The remaining 50% of the bonus will be based
on performance criteria to be mutually agreed upon between Mr. Beizer and the
Company, and approved by the CEO of the Company. In connection with his
employment, Mr. Beizer was granted options to purchase up to 498,082 shares of
our common stock at an exercise price of $0.45. These options were granted, and
vesting commenced, on September 1, 1998. These options are subject to our
standard vesting terms of 25% after twelve months from September 1, 1998 with
1/36 of the then unvested options vesting each month thereafter. In the event
Mr. Beizer were involuntarily terminated without cause, he would be entitled to
a lump sum severance payment equal to nine months of his base salary. He would
also receive a pro-rata share of his annual bonus for time worked during the
year of termination, and all of his unvested options would vest immediately
upon termination. In the event of a change of control in which Mr. Beizer is
terminated without cause, Mr. Beizer will receive severance pay equal to
nine months of salary, the full amount of his target bonus for the year in
which he is terminated, and all of his unvested options would vest immediately
upon termination. Upon the filing of this registration statement, Mr. Beizer
became eligible to receive an option to purchase shares representing one-half
of one percent of the then fully diluted stock of iAsiaWorks. An option grant
to this effect was approved by the board of directors in April 2000 for 182,515
shares.
Suzanne S. Chu. On May 14, 2000, Suzanne S. Chu, our Vice President of
Marketing, entered into an employment agreement with us. This agreement
provided for an annual salary of $150,000. Ms. Chu is also eligible for an end-
of-year bonus not to exceed $37,500. In connection with her employment, Ms. Chu
was granted options to purchase up to 83,333 shares of our common stock at an
exercise price of $0.90. These options were granted, and vesting commenced, on
February 10,
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<PAGE>
2000. These options are subject to our standard vesting terms of 25% after
twelve months from February 10, 2000 with 1/36 of the then unvested options
vesting each month thereafter. In the event Ms. Chu were involuntarily
terminated without cause she will receive a lump sum severance payment equal to
four months of her base salary.
David S. Holub. On May 5, 2000, David Holub, our Vice President of Internet
and Data Center Technology entered into an employment agreement with us. As per
the terms specified in the agreement, Mr. Holub's annual salary is $150,000. In
connection with his employment, we granted Mr. Holub options to purchase up to
133,333 shares of our common stock at a per share exercise price of $0.90.
These options were granted on December 23, 1999 and vesting commenced on August
12, 1999. These options are subject to our standard vesting terms of 25% after
twelve months from August 12, 1999 with 1/36 of the then unvested options
vesting each month thereafter. Mr. Holub is eligible for bonuses of up to
$60,000 and 50,000 additional options to purchase Company common stock. In
order to be eligible for these bonuses, Mr. Holub must complete each of three
sets of Data Centers within prescribed time frames and budgets. For each set
completed as prescribed, Mr. Holub will receive one-third of the above
mentioned bonus amount. In the event Mr. Holub were involuntarily terminated
without cause, all of Mr. Holub's unvested shares will immediately vest and he
will receive a lump sum severance payment equivalent to six months of his base
salary.
Daryl B. Horn. On April 27, 2000, Daryl Horn, our Vice President of Sales,
entered into an employment agreement with us. This agreement provided for an
annual salary of $100,000. Mr. Horn is also eligible for commissions on a
monthly basis upon achievement of specified revenue-based milestones. In
connection with his employment agreement, we granted Mr. Horn options to
purchase up to 33,333 of our common stock at a per share exercise price of
$0.45. These options were granted, and vesting commenced, on February 1, 1999.
These options are subject to our standard vesting terms of 25% after twelve
months with 1/36 of the then unvested options vesting each month thereafter. In
addition, Mr. Horn can earn additional stock option grants based upon sales
group revenue performance. In the event Mr. Horn were involuntarily terminated
without cause, he would be entitled to a lump sum severance payment equal to
four months of his base salary. In the event of a change of control, in which
Mr. Horn is terminated without cause, all of Mr. Horn's unvested options would
vest immediately upon termination.
Limitation of Liability and Indemnification
Our certificate of incorporation eliminates, to the maximum extent allowed by
the Delaware General Corporation Law, subject to certain exceptions, directors'
personal liability to us or our stockholders for monetary damages for breaches
of fiduciary duties. The certificate of incorporation does not, however,
eliminate or limit the personal liability of a director for the following:
. any breach of the director's duty of loyalty to us or our stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we shall indemnify our directors and executive
officers to the fullest extent permitted under the Delaware General Corporation
Law and may indemnify our other officers, employees and other agents as set
forth in the Delaware General Corporation Law. In addition, we have entered
into an indemnification agreement with each of our directors and officers. The
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indemnification agreements contain provisions that require us, among other
things, to indemnify our directors and executive officers against certain
liabilities (other than liabilities arising from intentional or knowing and
culpable violations of law) that may arise by reason of their status or service
as directors or executive officers of iAsiaWorks or other entities to which
they provide service at our request and to advance expenses they may incur as a
result of any proceeding against them as to which they could be indemnified. We
believe that these bylaw provisions and indemnification agreements are
necessary to attract and retain qualified directors and officers.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. A stockholder's investment in us may be adversely affected to the
extent we pay the costs of settlement or damage awards against our directors
and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of iAsiaWorks where indemnification will
be required or permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
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BENEFIT PLANS
2000 Stock Incentive Plan
Introduction. Our 2000 Stock Incentive Plan is intended to serve as the
successor equity incentive program to our 1995 Stock Option Plan. Our 2000 plan
was adopted by our board on June 28, 2000 and approved by the stockholders on
July 31, 2000. Our 2000 plan will become effective on the date on which the
underwriting agreement for this offering stock is signed. At that time, all
outstanding options under the predecessor 1995 Stock Option Plan will be
transferred to our 2000 plan, and no further option grants will be made under
that predecessor plan. The transferred options will continue to be governed by
their existing terms, unless our compensation committee elects to extend one or
more features of our 2000 plan to those options. Except as otherwise noted
below, the transferred options have substantially the same terms as will be in
effect for grants made under the discretionary option grant program of our 2000
plan.
Share Reserve. 10,000,000 shares of common stock have been authorized for
issuance under our 2000 plan. Such share reserve consists of the number of
shares that were authorized under our 1995 Stock Option Plan and that we
estimate will be carried over from this plan, plus an additional increase of
approximately 2,501,938 shares. The number of shares of common stock reserved
for issuance under our 2000 plan will automatically increase on the first
trading day in January of each calendar year, beginning in calendar year 2001,
by an amount equal to 4.5% of the total number of shares of common stock
outstanding on the last trading day in December of the preceding calendar year,
but in no event will any such annual increase exceed 3,500,000 shares. In
addition, no participant in our 2000 plan may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 750,000 shares of common stock per calendar year.
Equity Incentive Programs. Our 2000 plan is divided into five separate
components:
. the discretionary option grant program, under which eligible individuals
in our employ or service may be granted options to purchase shares of
common stock at an exercise price not less than 100% of the fair market
value of those shares on the grant date;
. the stock issuance program, under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at
a price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the attainment of performance milestones
or the completion of a specified period of service or both;
. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below-market stock option grants;
. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to our non-employee board
members to purchase shares of common stock at an exercise price equal to
100% of the fair market value of those shares on the grant date; and
. the director fee option grant program, under which our non-employee
board members may be given the opportunity to apply a portion of the
annual retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.
Eligibility. The individuals eligible to participate in our 2000 plan include
our officers and other employees, our non-employee board members and any
consultants we hire.
Administration. The discretionary option grant program and the stock issuance
program will be administered by the compensation committee. This committee will
determine which eligible
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individuals are to receive option grants or stock issuances under those
programs, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock option or a non-
statutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the exclusive authority to select the executive officers and other
highly compensated employees who may participate in the salary investment
option grant program in the event that program is activated for one or more
calendar years.
Plan Features. Our 2000 plan will include the following features:
. The exercise price for the shares of common stock subject to option
grants made under our 2000 plan may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. The
option may also be exercised through a same-day sale program without any
cash outlay by the optionee. In addition, the plan administrator may
provide financial assistance to one or more optionees in the exercise of
their outstanding options or the purchase of their unvested shares by
allowing such individuals to deliver a full-recourse, interest-bearing
promissory note in payment of the exercise price and any associated
withholding taxes incurred in connection with such exercise or purchase.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including options
transferred from the 1995 Stock Option Plan, in return for the grant of
new options for the same or a different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
. Stock appreciation rights are authorized for issuance under the
discretionary option grant program. Such rights will provide the holders
with the election to surrender their outstanding options for an
appreciation distribution from us equal to the fair market value of the
vested shares of common stock subject to the surrendered option, less
the aggregate exercise price payable for those shares. Such appreciation
distribution may be made in cash or in shares of common stock. None of
the outstanding options under our 1995 Stock Option Plan contain any
stock appreciation rights.
. The 2000 plan will include the following change in control provisions,
which may result in the accelerated vesting of outstanding option grants
and stock issuances:
. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program that
is not to be assumed by the successor corporation will automatically
accelerate in full, and all unvested shares under the discretionary
option grant and stock issuance programs will immediately vest,
except to the extent our repurchase rights with respect to those
shares are to be assigned to the successor corporation.
. The compensation committee will have complete discretion to
structure one or more options under the discretionary option grant
program so those options will vest as to all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of outstanding shares under the stock
issuance program may be accelerated upon similar terms and
conditions.
. The compensation committee will also have the authority to grant
options that will immediately vest in the event we are acquired,
regardless of whether those options are assumed by the successor
corporation.
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The compensation committee may grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will vest in
connection with a successful tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board through one or more
contested elections for board membership. Such accelerated vesting may occur
either at the time of such transaction or upon the subsequent termination of
the individual's service. The options currently outstanding under our 1995
Stock Option Plan will immediately vest in the event we are acquired by merger
or sale of substantially all our assets, unless those options are assumed by
the acquiring entity or our repurchase rights with respect to any unvested
shares subject to those options are assigned to such entity. However, a number
of those options also contain a special acceleration provision pursuant to
which the shares subject to those options will immediately vest upon an
involuntary termination of the optionee's employment within 12 months following
an acquisition in which the repurchase rights with respect to those shares are
assigned to the acquiring entity. In addition, certain members of our Board of
Directors who hold options are entitled to full acceleration of those options
upon an acquisition by merger or sale of substantially all of our assets,
provided that this treatment of the options does not, under the circumstances,
prevent the accounting of the acquisition from being treated as a pooling of
interests.
Salary Investment Option Grant Program. In the event the compensation
committee elects to activate the salary investment option grant program for one
or more calendar years, each of our executive officers and other highly
compensated employees selected for participation may elect, prior to the start
of the calendar year, to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who files such a timely election will automatically be
granted, on the first trading day in January of the calendar year for which his
or her salary reduction is to be in effect, an option to purchase that number
of shares of common stock determined by dividing the salary reduction amount by
two-thirds of the fair market value per share of our common stock on the grant
date. The option will be exercisable at a price per share equal to one-third of
the fair market value of the option shares on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal
to the amount by which the optionee's salary is reduced under the program. The
option will become exercisable in a series of 12 equal monthly installments
over the calendar year for which the salary reduction is to be in effect.
Automatic Option Grant Program. Under the automatic option grant program,
each individual who first becomes a non-employee board member at any time after
the completion of this offering will automatically receive an option grant for
15,000 shares on the date such individual joins the board, provided such
individual has not been in our prior employ. In addition, on the date of each
annual stockholders meeting held after the completion of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 3,500 shares of common stock,
provided such individual has served on our board for at least six months.
Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of ten years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid
per share, any shares purchased under the option which are not vested at the
time of the optionee's cessation of board service. The shares subject to each
initial 15,000 share automatic option grant will vest in a series of four
successive equal annual installments upon the optionee's completion of each
year of board service over the four-year period measured from the grant date.
The shares subject to each annual 3,500-share automatic option grant will vest
upon the optionee's completion of one year of board service measured from the
grant date. However, the shares will immediately vest in full upon certain
changes in control or ownership or upon the optionee's death or disability
while a board member.
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Director Fee Option Grant Program. Should the director fee option grant
program be activated in the future, each non-employee board member will have
the opportunity to apply all or a portion of any cash retainer fee for the year
to the acquisition of a below-market option grant. The option grant will
automatically be made on the first trading day in January in the year for which
the retainer fee would otherwise be payable in cash. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date, and the number of shares subject to the option
will be determined by dividing the amount of the retainer fee applied to the
program by two-thirds of the fair market value per share of our common stock on
the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the portion of the retainer fee
applied to that option. The option will become exercisable in a series of 12
equal monthly installments over the calendar year for which the election is to
be in effect. However, the option will become immediately exercisable for all
the option shares upon the optionee's death or disability while serving as a
board member.
Our 2000 plan will also have the following features:
. Outstanding options under the salary investment, automatic option and
director fee option grant programs will immediately vest if we are
acquired by a merger or asset sale or if there is a successful tender
offer for more than 50% of our outstanding voting stock or a change in
the majority of our board through one or more contested elections.
. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.
. The board may amend or modify the 2000 plan at any time, subject to any
required stockholder approval. The 2000 plan will terminate no later
than July 31, 2010.
Employee Stock Purchase Plan
Introduction. Our Employee Stock Purchase Plan was adopted by the board on
June 28, 2000 and approved by the stockholders on July 31, 2000. The plan will
become effective immediately upon the signing of the underwriting agreement for
this offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
Share Reserve. 600,000 shares of our common stock will initially be reserved
for issuance. The reserve will automatically increase on the first trading day
in January each calendar year, beginning in calendar year 2001, by an amount
equal to 0.5% of the total number of outstanding shares of our common stock on
the last trading day in December in the prior calendar year. In no event will
any such annual increase exceed 350,000 shares.
Offering Periods. The plan will have a series of successive overlapping
offering periods, with a new offering period beginning on the first business
day of February and August each year. Each offering period will have a duration
of 24 months, unless otherwise determined by the compensation committee.
However, the initial offering period may have a duration in excess of 24 months
and will start on the date the underwriting agreement for this offering is
signed and will end on the last business day in July 2002. The next offering
period will start on the first business day in February 2001 and end on the
last business day of January 2003.
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Eligible Employees. Individuals scheduled to work more than 20 hours per week
for more than five calendar months per year may join an offering period on the
start date of that period. However, employees may participate in only one
offering period at a time.
Payroll Deductions. A participant may contribute up to 15% of his or her cash
earnings through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the start date of the offering period in which the participant is
enrolled or, if lower, 85% of the fair market value per share on the semi-
annual purchase date. Semi-annual purchase dates will occur on the last
business day of January and July each year. However, a participant may not
purchase more than 250 shares on any purchase date, and not more than 150,000
shares may be purchased in total by all participants on any purchase date. Our
compensation committee will have the authority to change these limitations for
any subsequent offering period.
Reset Feature. If the fair market value per share of our common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price in effect for each
participant will be equal to 85% of the market value per share on the start of
the offering period in which the participant is enrolled at the time the
acquisition occurs or, if lower, 85% of the fair market value per share
immediately prior to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of July
2010; and
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
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TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES
Sales of Securities
Since August 1995, we have been a party to several transactions in which the
amount involved exceeded $60,000 and in which the following persons had a
direct or indirect material interest:
. any of our directors or executive officers;
. any nominee for election as one of our directors;
. any person or entity who is known by us to own beneficially more than
five percent of our outstanding stock; or
. any member of the immediate family of any of the foregoing persons.
These transactions include:
. In August 1995 and November 1995, we issued to various investors,
including New Enterprise Associates VI Limited Partnership and entities
affiliates with Walden Capital Partners II, L.P. an aggregate of
4,499,995 shares of our Series A preferred stock for an aggregate
consideration of $3,375,000. Mr. William Tai, one of our founders and
then serving as our Chief Executive Officer, is a limited partner in the
general partner which manages Walden Capital Partners II, L.P. and
Walden Technology Ventures II, L.P. Mr. Peter Morris, another of our
founders, is a general partner of New Enterprise Associates VI Limited
Partnership. At the time of this transaction, Mr. Tai became one of our
directors as did Mr. Morris.
. In October 1996 and April 1997, we issued to various investors,
including Zesiger Capital Group L.L.C., who became a five percent
stockholder as a result of the investment, entities affiliated with
Walden Group and entities affiliated with New Enterprise Associates an
aggregate of 2,260,840 shares of our Series B preferred stock and
warrants to purchase an additional 399,943 shares of Series B preferred
stock at an exercise price of $4.50 per share for an aggregate
consideration of $10,173,851.
. In August 1998, we issued to various investors including Enterprise
Partners IV, L.P. and Institutional Venture Partners VIII, L.P., both of
which became five percent stockholders as a result of the investment and
entities affiliated with New Enterprise Associates and entities
affiliated with Zesiger Capital Group L.L.C. an aggregate of
3,268,995 shares of our Series C preferred stock and warrants to
purchase an additional 2,845,242 shares of our common stock for an
aggregate consideration of $9,807,047. At the time of the transaction,
Mr. William Stensrud, a general partner of Enterprise Management
Partners IV, L.P., became one of our directors.
. In August 1999, we issued to various investors including entities
affiliated with Enterprise Partners, entities affiliated with
Institutional Venture Partners and entities affiliated with Zesiger
Capital Group L.L.C. warrants to purchase 100,711 shares of our common
stock and convertible promissory notes in the aggregate principal amount
of $2,014,322.
. In December 1999, we issued to various investors including Newbridge
Asia II, L.P. and Sprout Group L.P. both of which became five percent
stockholders as a result of the investment and entities affiliated with
Enterprise Partners, entities affiliated with Institutional Venture
Partners, entities affiliated with New Enterprise Associates, entities
affiliated with PacVen Walden Ventures IV, L.P. and entities affiliated
with Zesiger Capital Group L.L.C., an aggregate of 13,926,686 shares of
our Series D preferred stock for an aggregate consideration of
approximately $85,000,000, including cancellation of outstanding
indebtedness. At the time of the transaction, Mr. Farrokh Billimoria, a
general partner of Sprout Group, L.P., became one of our directors as
did Mr. Daniel Carroll, a partner of Newbridge Asia II, L.P. In
addition, concurrent with the Series D preferred stock financing New
Enterprise Associates, PacVen Walden Ventures IV, L.P., and Zesiger
Capital Group L.L.C. were issued and exercised warrants to purchase
11,111, 11,111 and 75,028, shares of Series B preferred stock,
respectively.
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The following table summarizes the shares of common stock and preferred stock
purchased by our executive officers, directors and five percent stockholders
and persons associated with them since January 1996 through June 30, 2000. The
number of total shares reflects the conversion to common stock for each share
of Series A, Series A1, Series B, Series C and Series D preferred stock, on an
as converted basis, including any necessary adjustments as a result of the
antidilution provisions of the preferred stock.
<TABLE>
<CAPTION>
Warrants to Total Shares
Series A Series A1 Series B Series C Series D Purchase on an
Common Preferred Preferred Preferred Preferred Preferred Common As-Converted
Investor Stock Stock Stock Stock Stock Stock Stock Basis
-------- --------- --------- --------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Entities affiliated with
Enterprise Partners.... 1,363,825 753,456 253,663 -- 1,067,304 502,593 -- 3,940,841
Entities affiliated with
Institutional Venture
Partners............... 1,326,087 246,543 83,002 -- 1,475,409 502,593 -- 3,633,634
Entities affiliated with
New Enterprise
Associates............. 282,635 1,479,999 -- 172,751 255,794 403,765 -- 2,594,944
Entities affiliated with
Newbridge Capital
Group.................. -- -- -- -- -- 6,226,055 -- 6,226,055
Entities affiliated with
Sprout Group........... -- -- -- -- -- 3,276,871 -- 3,276,871
Entities affiliated with
Walden International
Investment Group....... 119,999 1,066,666 -- 172,750 -- 491,530 -- 1,850,945
Entities affiliated with
Zesiger Capital Group
LLC.................... -- -- -- 1,338,619 169,316 321,125 161,946 1,991,006
Peter Morris............ -- 13,333 -- -- -- -- -- 13,333
WT Technology........... -- 756,953 -- -- -- 80,445 -- 837,398
Jonathan F. Beizer...... 116,666 -- -- -- -- -- -- 116,666
William P. Tai.......... 416,273 -- -- -- -- -- 416,273
Robert Lee.............. 8,333 -- -- -- -- -- -- 8,333
Daryl B. Horn........... 9,930 -- -- -- -- -- -- 9,930
JoAnn F. Patrick-
Ezzell................. 36,666 -- -- -- -- -- -- 36,666
</TABLE>
Holders of shares of preferred stock are entitled to registration rights in
respect of the common stock issued or issuable upon conversion thereof. See
"Description of Capital Stock--Registration Rights" beginning on page 65.
The following members of our board of directors are affiliated with the
investors set forth above in the manner prescribed below:
Mr. Tai, a member of our board of directors, is a general partner and
managing director of Institutional Venture Partners and, from September 1991
until July 1997, he was affiliated with Walden. William Tai or his immediate
family members may be deemed the beneficial owners of shares held by
WT Technology. Mr. Morris, a member of our board of directors, is a general
partner of New Enterprise Associates. Mr. Carroll, a member of our board of
directors, is a managing director of Newbridge Capital. Mr. Billimoria, a
member of our board of directors, is a general partner with Sprout Group.
Agreements with Executive Officers and Directors
In January 1999 we issued a loan in the amount of $60,000 to Jonathan Beizer,
our Chief Financial Officer and President-U.S. Including interest, Mr. Beizer
was never in debt to us for more than $62,277 under this loan. The loan, and
all accrued interest, was paid off by December 31, 1999. The interest rate
charged on the loan was 5%.
We have entered into employment arrangements with our executive officers. See
"Management --Employment Contracts, Termination of Employment Agreements and
Change in Control Arrangements" beginning on page 51.
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We have granted options and issued common stock to our executive officers and
directors. In January 1996, we granted options to purchase 23,333 shares of our
common stock at an exercise price of $0.45 per share to Mr. Tai. In July 1999,
we granted options to purchase 392,939 shares of our common stock at an
exercise price of $0.45 per share to Mr. Tai and options to purchase 392,939
shares of our common stock at an exercise price of $0.45 per share to
Mr. Stensrud. We also granted options to Mr. Lee for 8,333 shares on May 5,
1998 and an additional option for 83,333 shares on February 10, 1999. Each of
Mr. Lee's options has an exercise price of $0.45 per share. All of the director
option grants vest as to 25% of the option shares upon completion of one year
of board service measured from the grant date and as to the balance of the
shares in a series of 36 successive monthly installments upon the completion of
each of the next 36 months of board service thereafter. Mr. Tai exercised his
option for 23,333 shares of common stock on April 14, 2000 and exercised his
option for 392,939 shares on April 28, 2000. Mr. Stensrud exercised his
392,939-share option on April 28, 2000. In addition, Mr. Lee exercised his
8,333-share option on April 26, 2000. See "--Sales of Securities,"
"Management--Director Compensation" and "Principal Stockholders" beginning on
pages 59, 47 and 62 respectively.
We have entered into an indemnification agreement with each of our executive
officers and directors containing provisions that may require us, among other
things, to indemnify our officers and directors against certain liabilities
that may arise by reason of their status or service as officers or directors
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance expenses incurred as a result of any proceeding against them as
to which they could be indemnified. See "Management--Limitation of Liability
and Indemnification" beginning on page 52.
We have entered into non-competition and confidentiality agreements with our
officers.
We believe that all of the transactions set forth above were made on terms no
less favorable to us than could have been otherwise obtained from unaffiliated
third parties. All future transactions, including loans, if any, between us and
our officers, directors and principal stockholders and their affiliates and any
transactions between us and any entity with which our officers, directors or
five percent stockholders are affiliated will be approved by a majority of the
board of directors, including a majority of the independent and disinterested
outside directors of the board of directors and will be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership of
our common stock as of June 30, 2000, by the following individuals or groups:
. each person or entity who is known by us to own beneficially more than
five percent of our outstanding stock,
. each of the named executive officers,
. each of our directors, and
. all directors and executive officers as a group.
Each stockholder's percentage ownership in the following table is based on
30,987,025 shares of common stock outstanding as of June 30, 2000, which
includes shares of common stock issuable upon the conversion of all outstanding
shares of preferred stock and the exercise of all outstanding warrants, other
than warrants to purchase 212,013 shares of common stock, upon the closing of
this offering, and treating as outstanding all options exercisable within 60
days of June 30, 2000 held by the particular stockholder and that are included
in the first column. The numbers shown in the table below assume the
assumptions set forth on page 5 hereof.
Unless otherwise indicated, the principal address of each of the stockholders
below is c/o iAsiaWorks, Inc., 2000 Alameda de las Pulgas, Suite 125, San
Mateo, CA 94403. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares ------------------------
Beneficially Prior to After the
Name and Address of Beneficial Owner Owned Offering (%) Offering(%)
------------------------------------ ------------ ------------ -----------
<S> <C> <C> <C>
Entities affiliated with Enterprise
Partners(1)............................ 3,940,841 12.7 9.9
Entities affiliated with Institutional
Venture Partners(2).................... 4,887,305 15.8 12.2
Entities affiliated with New Enterprise
Associates(3).......................... 2,594,944 8.4 6.5
Entities affiliated with Newbridge
Capital Group(4)....................... 6,226,054 20.1 15.6
Entities affiliated with Sprout
Group(5)............................... 3,276,871 10.6 8.2
Entities affiliated with Walden
International Investment Group(6)...... 3,104,618 10.0 7.8
Entities affiliated with Zesiger Capital
Group L.L.C.(7)........................ 1,991,006 6.4 5.0
JoAnn F. Patrick-Ezzell(8).............. 501,414 1.6 1.3
Jonathan F. Beizer(9)................... 260,167 * *
Suzanne S. Chu.......................... -- -- --
David S. Holub(10)...................... 33,333 * *
Daryl B. Horn(11)....................... 13,749 * *
Nicholas K. Pianim...................... -- -- --
Robert Lee(12).......................... 91,666 * *
Peter T. Morris(3)...................... 2,594,944 8.4 6.5
William R. Stensrud(13)................. 3,940,841 12.7 9.9
William P. Tai(14)...................... 6,738,252 21.7 16.9
Daniel A. Carroll(4).................... 6,226,054 20.1 15.6
Farrokh K. Billimoria(5)................ 3,276,871 10.6 8.2
All directors and executive officers as
a group (12 persons)(15)............... 23,677,291 76.4 59.2
</TABLE>
--------
* Less than 1%.
62
<PAGE>
(1) Includes 3,625,575 shares held by Enterprise Partners IV, L.P., and
315,266 shares held by Enterprise Partners IV Associates, L.P. Mr. William
Stensrud is a General Partner of each of these stockholders, and as such
may be deemed to be the beneficial owner of these shares. Some of the
shares held by each of Enterprise Partners IV, L.P. and Enterprise
Partners IV Associates, L.P. are subject to repurchase rights by
iAsiaWorks. Mr. Stensrud disclaims beneficial ownership of these shares
except for his pecuniary interest therein. The business address of
Enterprise Partners is 7979 Ivanhoe Avenue, Suite 550, La Jolla, CA 92037.
(2) Includes 3,548,479 shares held by Institutional Venture Partners VIII,
L.P., 45,143 shares held by IVM Investment Fund VIII, L.L.C., 12,417
shares held by IVM Investment Fund VIII-A L.L.C., and 27,595 shares held
by IVP Founders Fund I, L.P. William P. Tai is a general partner or
managing director of funds managed by Institutional Venture Partners, and
as such may be deemed to be the beneficial owner of these shares. Mr. Tai
disclaims beneficial ownership of these shares except for his pecuniary
interest therein. This amount also includes 416,273 shares of common stock
held by Mr. Tai, some of which shares are subject to repurchase rights by
iAsiaWorks, and 837,398 shares held by WT Technology, which Mr. Tai or his
family members may be deemed to beneficially own. The business address of
Institutional Venture Partners is 3000 Sand Hill Road, Building 2, Suite
290, Menlo Park, CA 94025.
(3) Consists of 13,333 shares held by NEA Ventures 1995, and 2,581,611 shares
held by New Enterprise Associates VI, Limited Partnership. Peter T. Morris
is a general partner of NEA Ventures 1995 and New Enterprise Associates
VI, Limited Partnership, and as such may be deemed to be the beneficial
owner of these shares. Mr. Morris disclaims beneficial ownership of these
shares except for his pecuniary interest therein. The business address of
New Enterprise Associates is 2490 Sand Hill Road, Menlo Park, CA 94025.
(4) Consists of 5,734,524 shares held by Newbridge Asia II, L.P., and 491,530
shares held by Tarrant Ventures Partners. Daniel A. Carroll holds a
general partnership interest in Newbridge Asia II, L.P. The business
address of Newbridge Asia II is 201 Main Street, Fort Worth, Texas.
(5) Consists of 9,503 shares held by DLJ Capital Corporation for the benefit
of an employee deferred compensation plan, 247,879 shares held by DLJ ESC
II, L.P. for the benefit of an employee deferred compensation plan,
170,914 shares held by Sprout Venture Capital L.P. and 2,848,575 shares
held by Sprout Capital VIII, L.P. Farrokh K. Billimoria is a general
partner of Sprout Group Venture Capital and as such may be deemed to be
the beneficial owner of these shares. Mr. Billimoria disclaims beneficial
ownership of these shares except for his pecuniary interest therein. The
business address of the Sprout Group is 3000 Sand Hill Road, Building 3,
Suite 170, Menlo Park, CA 94025.
(6) Consists of 481,715 shares held by International Venture Capital
Investment Corp., 450,569 shares held by PacVen Walden Ventures IV, L.P.
and PacVen Walden Ventures IV Associates Fund, L.P., 785,686 shares held
by Walden Capital Partners II, L.P., and 132,977 shares held by Walden
Technology Ventures II, L.P. William P. Tai is a limited partner in the
general partnership of funds managed by Walden, a shareholder in Walden
International Investment Group, the manager of International Venture
Capital Investment Corp. and PacVen Walden Ventures IV, L.P., and as such
may be deemed to be the beneficial owner of these shares. Mr. Tai
disclaims beneficial ownership of these shares except for his pecuniary
interest therein. This amount also includes 416,273 shares of common stock
held by Mr. Tai and 837,398 shares owned by WT Technology, which Mr. Tai
or his family members may be deemed to beneficially own. The business
address of Walden International Investment Group is 750 Battery Street,
7th Floor, San Francisco, CA 94111.
(7) Includes 1,829,060 shares and warrants to purchase 161,946 shares of
common stock for which Zesiger Capital Group, L.L.C. is a registered
investment advisor with the Securities and Exchange Commission under the
Investment Advisors Act of 1940. These shares are held in
63
<PAGE>
numerous investment advisory accounts and members accounts. Zesiger
Capital Group, L.L.C., in its capacity as investment advisor, exercises
sole voting and sole investment power over such shares. Zesiger Capital
Group, L.L.C. disclaims beneficial ownership of these shares. The
business address of Zesiger Capital Group is 320 Park Avenue, New York,
NY 10022.
(8) Consists of 36,666 shares of common stock held by JoAnn F. Patrick-Ezzell
and 464,748 shares of common stock subject to options exercisable within
60 days of June 30, 2000.
(9) Consists of 116,666 shares of common stock held by Jonathan F. Beizer and
143,501 shares of common stock subject to options exercisable within 60
days of June 30, 2000.
(10) Consists of 33,333 shares of common stock subject to outstanding options
exercisable within 60 days of June 30, 2000.
(11) Consists of 9,930 shares of common stock held by Daryl B. Horn and 3,819
shares of common stock subject to options exercisable within 60 days of
June 30, 2000.
(12) Includes 8,333 shares of common stock and 83,333 shares of common stock
subject to outstanding options exercisable within 60 days of June 30,
2000.
(13) Consists of 392,939 shares of common stock as well as 3,547,902 shares
held by entities affiliated with Enterprise Partners.
(14) Consists of 416,273 shares of common stock owned by Mr. Tai and 837,398
shares owned by WT Technology, which William P. Tai and his family
members may be deemed to beneficially own, 3,633,634 shares owned by
entities affiliated with Institutional Venture Partners, and 1,850,947
shares owned by entities affiliated with Walden International Investment
Group.
(15) Consists of 728,734 shares of common stock subject to options exercisable
within 60 days of June 30, 2000, 977,474 shares of common stock issued to
Mr. Tai, Mr. Stensrud, Ms. Patrick-Ezzell, Mr. Beizer, Mr. Horn and Mr.
Lee, upon the exercise of stock options, 3,333 shares of common stock
held by Ms. Patrick-Ezzell, 837,398 shares held by WT Technology,
2,594,944 shares owned by entities affiliated with New Enterprise
Associates, 3,547,902 shares owned by entities affiliated with Enterprise
Partners, 3,633,634 shares held by entities affiliated with Institutional
Venture Partners, 1,850,947 shares held by entities affiliated with
Walden International Investment Group, 6,226,054 shares owned by entities
affiliated with Newbridge Capital Group and 3,276,871 shares owned by
entities affiliated with Sprout Group.
64
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As soon as practicable after the closing of this offering, we will be
authorized to issue 300,000,000 shares of common stock, $0.001 par value, and
20,000,000 shares of undesignated preferred stock, $0.001 par value, after
giving effect to the amendment of our certificate of incorporation to delete
references to the existing preferred stock following conversion of that stock.
The following description of capital stock gives effect to the second amended
and restated certificate of incorporation to be filed as soon as practicable
after the closing of this offering. Based upon our shares outstanding as of
June 30, 2000, immediately following the closing of this offering, and assuming
no exercise of the underwriters' over-allotment option, an aggregate of
39,208,291 shares of common stock will be issued and outstanding, and no shares
of preferred stock will be issued and outstanding.
The following description of our capital stock is subject to and qualified by
our second amended and restated certificate of incorporation and amended and
restated bylaws and by the provisions of the applicable Delaware law.
Common Stock
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock that may come into existence,
the holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by the board of directors out of
funds legally available for dividends. See "Dividend Policy" on page 18. In the
event of liquidation, dissolution or winding up of iAsiaWorks, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be outstanding upon completion of this offering will be fully paid and
nonassessable.
Preferred Stock
Our board of directors is authorized to issue from time to time, without
stockholder authorization, in one or more designated series, any or all of the
authorized but unissued shares of our preferred stock with any dividend,
redemption, conversion and exchange provisions as may be provided in the
particular series. Any series of preferred stock may possess voting, dividend,
liquidation and redemption rights superior to those of the common stock. The
rights of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that may be
issued in the future. Issuance of a new series of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of entrenching our board of
directors and making it more difficult for a third party to acquire, or
discourage a third party from acquiring, a majority of outstanding voting
stock. We have no present plans to issue any shares of or designate any series
of preferred stock.
Warrants
As of June 30, 2000, there were warrants outstanding to purchase a total of
212,013 shares of common stock issuable upon exercise of outstanding warrants
to purchase Series B preferred stock at an exercise price of $4.50 per share
expiring through May 2001.
Registration Rights
Upon closing of the offering, the holders of an aggregate of approximately
25,764,677 shares of common stock and 212,013 shares of common stock issuable
upon the exercise of outstanding
65
<PAGE>
warrants to purchase Series B preferred stock at an exercise price of $4.50 per
share will be entitled to certain rights with respect to the registration of
the shares under the Securities Act of 1933. Under the terms of the
registration rights agreement, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of
other security holders exercising registration rights, these holders are
entitled to notice of the registration and are entitled to include shares of
common stock in the registration. The rights are subject to conditions and
limitations, among them the right of the underwriters of an offering subject to
the registration to limit the number of shares included in the registration.
Holders of these rights may also require us to file a registration statement
under the Securities Act at our expense with respect to their shares of common
stock, and we are required to use our best efforts to effect the registration,
subject to conditions and limitations. Furthermore, stockholders with
registration rights may require us to file additional registration statements
on Form S-3, subject to conditions and limitations.
Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws
and Delaware Law
Our certificate of incorporation authorizes the board to establish one or
more series of undesignated preferred stock, the terms of which can be
determined by the board at the time of issuance. For additional information on
our preferred stock, see "Description of Capital Stock--Preferred Stock" on
page 65. In particular, our certificate of incorporation and bylaws will
provide, among other things, that:
. our authorized but unissued common stock will be available for future
issuance without stockholder approval;
. our board of directors will be divided into three classes that will
serve staggered three year terms and the board of directors will be
authorized to fill vacancies, including newly created directorships;
. directors will be removable by the stockholders only for cause and only
upon a two-thirds vote of the outstanding shares of voting stock;
. stockholder actions will have to be effected at a duly called meeting
and may not be effected by written consent; and
. only the board of directors will be permitted to call a special meeting
of the stockholders, 120 days' advance written notice will be required
for stockholders to bring business or to nominate candidates for
election as directors before an annual meeting of stockholders and a
two-thirds vote of the stockholders will be required to amend our
certificate of incorporation or our bylaws.
These provisions of our certificate of incorporation and the bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of iAsiaWorks. These provisions also may have the effect of
preventing changes in our management.
We are subject to Section 203 of the Delaware General Corporation Law, that,
subject to exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three
years following the time that the stockholder became an interested stockholder,
unless:
. prior to that time, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of
66
<PAGE>
the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding
those shares owned:
. by persons who are directors and also officers; and
. by employee stock plans in which employee participants do not have
the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
. at or subsequent to that time, the business combination is approved by
the board of directors of the corporation and authorized at an annual or
special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock
that is not owned by the interested stockholder.
Section 203 defines "business combination" to include the following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision would be expected
to have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held
by stockholders.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is EquiServe Trust
Company, N.A.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock,
and we cannot predict the effect, if any, that market sales of shares of common
stock or the availability of shares of common stock for sale will have on the
market price of the common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of common stock in the public market could
adversely affect the market price of our common stock and could impair our
future ability to raise capital through the sale of our equity securities.
Based upon our shares outstanding as of June 30, 2000, upon the closing of
this offering, we will have 39,261,624 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options and warrants. Of the outstanding shares, all of the
shares sold in this offering will be freely tradable, except that any shares
held by our "affiliates," as that term is defined in Rule 144 promulgated under
the Securities Act, may only be sold in compliance with the limitations
described below. The remaining 29,148,025 shares of common stock will be deemed
"restricted securities" as defined under Rule 144. Restricted shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
<TABLE>
<CAPTION>
Approximate
Shares
Eligible
for Future
Relevant Dates Sale* Comment
-------------- ----------- -------
<C> <C> <S>
On the date of this prospectus.............. 9,000,000 Shares sold in this
offering.
90 days after the date of this prospectus... 11,464 Shares tradeable under
Rules 144 and 701.
180 days after the date of this prospectus.. 29,233,207 All shares subject to
lock-up released; shares
tradeable under Rule 144
and 701.
</TABLE>
--------
* Assumes no exercise of the Underwriters' option to purchase additional
shares in the offering.
Lock-up Agreements
We have agreed, and each of our officers, directors and substantially all of
our employees and securityholders have agreed not to offer, sell, contract to
sell or otherwise dispose of, directly or indirectly, any shares of our common
stock, or any of our securities that are substantially similar to the common
stock, including but not limited to any securities convertible into or
exchangeable for, or represent the right to receive shares of our common stock
or any such securities, for a period of 180 days after the date of this
prospectus; except that if any of these persons acquires less than 10,000
shares of common stock following the date of the final prospectus, then such
shares will be exempt from the above lock-up restrictions. Transfers or
dispositions can be made sooner:
. with prior written consent of Goldman, Sachs & Co.;
. as a bona fide gift; or
. to any trust for the benefit of any officer, director or security holder
or his or her immediate family.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person (or a group of persons whose shares are
required to be aggregated), including any of our affiliates, who has
beneficially owned shares for at least one year, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 392,616 shares immediately after this offering;
or
68
<PAGE>
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on
which notice of such sale is filed on Form 144 with the Securities and
Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner then an affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k)"
shares may be sold immediately upon the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, each
of our employees, consultants or advisors who purchases shares of our common
stock from us in connection with a compensatory share plan or other written
agreement is eligible to resell such shares 90 days after the effective date of
this offering in reliance on Rule 144, but without compliance with some
restrictions, including the holding period, contained in Rule 144.
The SEC has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options (including exercises after the date of this
prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates", as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144 and by "affiliates" under Rule 144 without
compliance with its one year minimum holding period requirement.
Stock Options
As of June 30, 2000, options to purchase a total of 5,984,601 shares of
common stock were outstanding, 513,917 of which were then exercisable. We
intend to file a Form S-8 registration statement under the Securities Act to
register all shares of common stock issuable under our 2000 Stock Incentive
Plan and our 2000 Employee Stock Purchase Plan. Accordingly, shares of common
stock underlying these options will be eligible for sale in the public markets,
subject to vesting restrictions or the lock-up agreement described above. See
"Benefit Plans" beginning on page 54.
Registration Rights
Following this offering, under specified circumstances and subject to
customary conditions, holders of 25,764,677 shares of our outstanding common
stock and 212,013 shares of our common stock issuable upon the exercise of
outstanding warrants will have certain demand registration rights with respect
to their shares of common stock, subject to the 180-day lock-up arrangement
described above, to require us to register their shares of common stock under
the Securities Act, and certain rights to participate in any future
registration of securities by us. If the holders of these registrable
securities request that we register their shares, and if the registration is
effected, these shares will become freely tradable without restriction under
the Securities Act. Any sales of securities by these stockholders could have a
material adverse effect on the trading price of our common stock. See
"Description of Capital Stock--Registration Rights" beginning on page 65.
69
<PAGE>
UNDERWRITING
iAsiaWorks and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to the conditions
in the underwriting agreement, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs
& Co., Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. are the
underwriters.
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... 4,050,000
Morgan Stanley & Co. Incorporated .......................... 2,700,000
Salomon Smith Barney Inc. .................................. 2,250,000
---------
Total..................................................... 9,000,000
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,350,000 shares from us to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will separately purchase shares in approximately the same proportion as set
forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by iAsiaWorks. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase 1,350,000 additional shares.
<TABLE>
<CAPTION>
Paid by iAsiaWorks
------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ 0.91 $ 0.91
Total............................................ $8,190,000 $9,418,500
</TABLE>
Shares sold by the underwriters to the public initially will be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $0.55 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $0.10 per share from
the initial public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change the offering
price and the other selling terms.
iAsiaWorks has been advised by the underwriters that certain of the
underwriters are expected to make offers and sales both inside and outside of
the United States through their respective selling agents.
iAsiaWorks, its directors, officers, principal stockholders and substantially
all of its employees have agreed with the underwriters not to dispose of or
hedge any of their common stock or securities convertible into or exchangeable
for shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of Goldman, Sachs & Co. See "Shares Eligible for
Future Sale" on page 68 for a discussion of certain transfer restrictions.
Each underwriter has represented and agreed that (1) it has not offered or
sold and prior to the date six months after the date of issue of the shares
will not offer or sell any shares to persons in the United Kingdom, except to
persons whose ordinary activities involve in them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their businesses or otherwise in circumstances that have not resulted and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995; (2) it has
70
<PAGE>
complied, and will comply with, all applicable provisions of the Financial
Services Act 1986 of Great Britain with respect to anything done by it in
relation to the shares in, from or otherwise involving the United Kingdom; and
(3) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance of
the shares to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
of Great Britain or is a person to whom the document may lawfully be issued or
passed on.
The shares may not be offered, sold, transferred or delivered in or from The
Netherlands, as part of their initial distribution or as part of any re-
offering, and neither this prospectus nor any other document in respect of the
offering may be distributed or circulated in The Netherlands, other than to
individuals or legal entities which include, but are not limited to, banks,
brokers, dealers, institutional investors and undertakings with a treasury
department, who or which trade or invest in securities in the conduct of a
business or profession.
Each underwriter has acknowledged and agreed that the shares have not been
registered under the Securities and Exchange Law of Japan and are not being
offered or sold and may not be offered or sold, directly or indirectly, in
Japan or to or for the account of any resident of Japan, except (1) pursuant to
an exemption from the registration requirements of the Securities and Exchange
Law of Japan and (2) in compliance with any other applicable requirements of
Japanese law. As part of the offering, the underwriters may offer shares in
Japan to a list of 49 offerees in accordance with the above provisions.
This prospectus has not been delivered for registration to the Registrar of
Companies in Hong Kong and, accordingly, must not be issued, circulated or
distributed in Hong Kong other than to persons whose ordinary business it is to
buy or sell shares or debentures, whether as principal or agent, within the
meaning of the Hong Kong Companies Ordinance (the "Ordinance") or in
circumstances which do not constitute an offer to the public for the purposes
of the Ordinance. Unless permitted by the securities laws of Hong Kong, no
person may issue or cause to be issued in Hong Kong this prospectus or any
amendment or supplement hereto or other invitation, advertisement or document
relating to the shares of common shares to anyone other than a person whose
business involves the acquisition and disposal, or holding, of securities
whether as principal or agent.
Each of the underwriters has acknowledged that this prospectus has not been
and will not be registered as a prospectus with the Registrar of Companies and
Businesses in Singapore. Accordingly, each of the underwriters has represented
and agreed that it has not offered or sold, and will not offer or sell, any
shares, nor will it circulate or distribute this prospectus or any other
offering document or material relating to the shares, directly or indirectly,
to the public or any member of the public in Singapore other than (1) to an
institutional investor or other person specified in Section 106C of the
Companies Act, Chapter 50 of Singapore (the "Singapore Companies Act"), (2) to
a sophisticated investor, and in accordance with the conditions, specified in
Section 106D of the Singapore Companies Act, or (3) otherwise pursuant to, and
in accordance with the conditions of, any applicable provision of the Singapore
Companies Act.
No action has been or will be taken in any jurisdiction other than the United
States that would permit a public offering of the shares or the possession,
circulation or distribution of this prospectus in any jurisdiction where action
for that purpose is required. Accordingly, the shares may not be offered or
sold, directly or indirectly, and neither this prospectus nor any other
offering material or advertisements in connection with the shares may be
distributed or published in or from any country or jurisdiction except under
circumstances that will result in compliance with any applicable rules and
regulations of any such country or jurisdiction.
71
<PAGE>
Prior to the offering, there had been no public market for the shares. The
initial public offering price was negotiated between iAsiaWorks and the
representatives. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, was
iAsiaWorks' historical performance, estimates of the business potential and
earnings prospects of iAsiaWorks, an assessment of iAsiaWorks' management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
iAsiaWorks' will have its common stock quoted on the Nasdaq National Market
under the symbol "IAWK."
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Shorts sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from iAsiaWorks in the offering. The
underwriters may close out any covered short position by either exercising
their option to purchase additional shares or purchasing shares in the open
market. "Naked" short sales are any sales in excess of such option. The
underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of
various bids for or purchases of common stock made by the underwriters in the
open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have the
effect of preventing or retarding a decline in the market price of iAsiaWorks'
stock, and together with the imposition of the penalty bid, may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on NASDAQ NMS, in
the over-the-counter market or otherwise.
At the request of iAsiaworks, the underwriters are reserving up to 630,000
shares of common stock for sale at the initial public offering price to
directors, officers, employees and friends through a directed share program.
The number of shares of common stock available for sale to the general public
in the offering will be reduced to the extent these persons purchase these
reserved shares. Any shares not so purchased will be offered by the
underwriters to the general public on the same basis as other shares offered
hereby.
Morgan Stanley Dean Witter Equity Fund, Ltd., an affiliate of Morgan Stanley
& Co. Incorporated, holds 327,687 shares of our Series D preferred stock, which
will convert into 327,687 shares of our common stock upon closing of this
offering. Salomon Smith Barney Inc. holds 88,699 shares of our Series D
preferred stock and 366,666 shares of our Series B preferred stock, which will
convert, in aggregate, into 606,956 shares of our common stock upon closing of
this offering.
A prospectus in electronic format may be made available on the Web sites
maintained by one or more underwriters or securities' dealers. The
representatives of the underwriters may agree to
72
<PAGE>
allocate a number of shares to underwriters for sale to their online brokerage
account holders. Internet distribution will be allocated by the representatives
to underwriters that may make Internet distributions on the same basis as other
allocations. In addition, shares may be sold by the underwriters to securities
dealers who resell shares to online brokerage account holders.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
iAsiaWorks estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$2,300,000.
iAsiaWorks has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
73
<PAGE>
VALIDITY OF SECURITIES
The validity of the common stock offered will be passed upon for us by
Brobeck, Phleger & Harrison LLP, Palo Alto, California and for the underwriters
by Sullivan & Cromwell, New York, NY. Brobeck, Phleger & Harrison LLP, its
employees and its attorneys beneficially own an aggregate of 12,288 shares of
our common stock.
EXPERTS
The consolidated financial statements of iAsiaWorks, Inc. as of December 31,
1998 and 1999 and for each of the three years in the period ended December 31,
1999 included in this prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of AT&T EasyLink Services Asia/Pacific Limited
(subsequently renamed as iAsiaWorks (HK) Limited) as of December 31, 1998 and
November 30, 1999 and for the year ended December 31, 1998 and for the eleven
months ended November 30, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers Hong Kong,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act a registration statement on Form S-1 relating
to the common stock offered. This prospectus does not contain all of the
information set forth in the registration statement and its exhibits and
schedules. For further information with respect to us and the shares we are
offering pursuant to this prospectus you should refer to the registration
statement and its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete, and you should refer to the copy of
that contract or other document filed as an exhibit to the registration
statement. You may read or obtain a copy of the registration statement at the
Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the Commission at 1-800-SEC-0330. The Commission maintains a web
site that contains reports, proxy information statements and other information
regarding registrants that file electronically with the Commission. The address
of this Web site is http://www.sec.gov.
We intend to furnish holders of our common stock with annual reports
containing, among other information, audited consolidated financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed consolidated financial information for the first
three quarters of each fiscal year. We intend to furnish other reports as we
may determine or as may be required by law.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
iAsiaWorks, Inc.
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations and Comprehensive Loss............. F-4
Consolidated Statements of Stockholders' Deficit......................... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Pro Forma Combined Consolidated Statement of Operations
Overview................................................................. F-29
Unaudited Pro Forma Combined Consolidated Statement of Operations........ F-30
AT&T Easy Link Services Asia/Pacific Limited
Report of Independent Accountants........................................ F-31
Balance Sheets........................................................... F-32
Statements of Operations................................................. F-33
Statements of Changes in Shareholder's Deficit........................... F-34
Statements of Cash Flows................................................. F-35
Notes to Financial Statements............................................ F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
iAsiaWorks, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and comprehensive loss, of
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of iAsiaWorks, Inc. and its subsidiaries (the
Company) at December 31, 1998 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
April 14, 2000, except for
Note 14
as to which the date is August
1, 2000
F-2
<PAGE>
IASIAWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ March 31, March 31,
1998 1999 2000 2000
-------- -------- --------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS (Note 2)
Current assets:
Cash and cash equivalents........ $ 2,654 $ 42,222 $ 38,276
Marketable securities............ 4,433 -- 195
Restricted cash.................. 186 50 201
Accounts receivable, less
allowance for doubtful accounts
of $228, $554 and $484 at
December 31, 1998, 1999 and
March 31, 2000, respectively.... 414 2,735 2,010
Prepaids and other current
assets.......................... 661 679 1,733
-------- -------- --------
Total current assets............ 8,348 45,686 42,415
Property and equipment, net........ 2,127 5,585 6,432
Goodwill, intangibles and other
assets............................ 321 40,084 38,486
-------- -------- --------
Total assets.................... $ 10,796 $ 91,355 $ 87,333
======== ======== ========
LIABILITIES, CONVERTIBLE PREFERRED
STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................. $ 1,238 $ 3,178 $ 4,524
Accrued liabilities.............. 273 1,516 1,647
Deferred revenue................. 115 275 597
Current portion of capital lease
obligations..................... -- 56 144
Current portion of long-term
debt............................ 216 397 401
-------- -------- --------
Total current liabilities....... 1,842 5,422 7,313
Capital lease obligations.......... -- 234 248
Long-term debt..................... 677 201 129
-------- -------- --------
2,519 5,857 7,690
-------- -------- --------
Convertible preferred stock:
Convertible preferred stock;
83,100 shares authorized, $0.001
par value; 10,367 and 24,722
shares issued and outstanding at
December 31, 1998 and 1999,
respectively, and 24,649 shares
issued and outstanding at March
31, 2000 (unaudited); no shares
pro forma (Liquidation value:
$110,737) (unaudited)........... 26,712 114,699 115,642 $ --
-------- -------- -------- --------
Commitments and contingencies
(Notes 10, 13 and 14)
Stockholders' deficit:
Common stock, $0.001 par value,
115,000 shares authorized; 335
and 2,916 shares issued and
outstanding at December 31, 1998
and 1999, respectively, and
3,055 shares issued and
outstanding at March 31, 2000
(unaudited); 28,719 shares
issued and outstanding, pro
forma (unaudited)............... -- 3 3 29
Additional paid-in capital....... (473) 13,561 22,234 137,940
Deferred stock-based
compensation.................... (1,237) (13,242) (19,150) (19,150)
Accumulated other comprehensive
loss............................ (419) (900) (1,113) (1,113)
Accumulated deficit.............. (16,306) (28,623) (38,063) (38,063)
-------- -------- -------- --------
Total stockholders' equity
(deficit)...................... (18,435) (29,201) (35,999) $ 79,643
-------- -------- -------- ========
Total liabilities, convertible
preferred stock and
stockholders' deficit.......... $ 10,796 $ 91,355 $ 87,333
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IASIAWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended March 31,
---------------------------- ----------------
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Internet access and related
services.................... $ 1,597 $ 3,490 $ 5,384 $ 834 $ 3,533
Hosting, co-location and
other managed services...... -- -- 245 -- 1,189
-------- -------- -------- ------- -------
Total revenue.............. 1,597 3,490 5,629 834 4,722
Cost of revenue:
Cost of Internet access and
related services............ 2,199 4,621 5,417 1,013 3,696
Cost of hosting, co-location
and other managed
services.................... -- -- 401 86 565
-------- -------- -------- ------- -------
Total cost of revenue...... 2,199 4,621 5,818 1,099 4,261
-------- -------- -------- ------- -------
Gross margin............... (602) (1,131) (189) (265) 461
-------- -------- -------- ------- -------
Operating expenses:
Network operations and
support (excluding stock-
based compensation of $0,
$20 and $454 for the years
ended December 31, 1997,
1998 and 1999,
respectively, and $9 and
$293 for the three months
ended March 31, 1999 and
2000, respectively)......... 1,538 1,628 1,539 373 854
Sales and marketing
(excluding stock-based
compensation of $0, $4 and
$130 for the years ended
December 31, 1997, 1998 and
1999, respectively, and $16
and $330 for the three
months ended March 31, 1999
and 2000, respectively)..... 2,391 1,471 2,372 370 1,455
General and administrative
(excluding stock-based
compensation of $0, $196
and $3,486 for the years
ended December 31, 1997,
1998 and 1999,
respectively, and $219 and
$2,169 for the three months
ended March 31, 1999 and
2000, respectively)......... 1,935 2,203 3,511 721 1,803
Amortization of intangible
assets...................... -- -- 559 -- 3,464
Stock-based compensation..... -- 220 4,070 244 2,792
-------- -------- -------- ------- -------
Total operating expenses... 5,864 5,522 12,051 1,708 10,368
-------- -------- -------- ------- -------
Loss from operations.......... (6,466) (6,653) (12,240) (1,973) (9,907)
Interest income............... 353 238 288 81 511
Interest expense.............. (110) (388) (384) (49) (98)
Other income (expense), net... (2) (18) 19 1 54
-------- -------- -------- ------- -------
Loss before provision for
income taxes................. (6,225) (6,821) (12,317) (1,940) (9,440)
Provision for income taxes.... 11 2 -- -- --
-------- -------- -------- ------- -------
Net loss...................... (6,236) (6,823) (12,317) (1,940) (9,440)
Dividend accretion on
preferred stock.............. (1,376) (1,814) (2,287) (597) --
-------- -------- -------- ------- -------
Net loss attributable to
common stockholders.......... (7,612) (8,637) (14,604) (2,537) (9,440)
Other comprehensive loss:
Change in unrealized gain
(loss) on marketable
securities................... -- 4 (4) -- --
Change in foreign currency
translation adjustments...... (560) 139 (477) (103) (213)
-------- -------- -------- ------- -------
Comprehensive loss............ $ (8,172) $ (8,494) $(15,085) $(2,640) $(9,653)
======== ======== ======== ======= =======
Net loss per share
attributable to common
stockholders, basic and
diluted...................... $ (42.29) $ (30.85) $ (14.87) $ (7.29) $ (3.22)
======== ======== ======== ======= =======
Shares used in computing net
loss per share attributable
to common stockholders, basic
and diluted.................. 180 280 982 348 2,936
======== ======== ======== ======= =======
Pro forma net loss per share
attributable to common
stockholders, basic and
diluted (unaudited).......... $ (1.11) $ (0.33)
======== =======
Shares used in computing pro
forma net loss per share
attributable to common
stockholders, basic and
diluted (unaudited)(Note 2).. 13,177 28,550
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
IASIAWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Deferred Other Total
------------- Paid-in Stock-based Comprehensive Accumulated Stockholders'
Shares Amount Capital Comprehensive Loss Deficit Deficit
------ ------ ---------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997.................... 180 $-- $ 14 $ -- $ (2) $ (3,247) $ (3,235)
Change in foreign
currency translation
adjustment.............. -- -- -- -- (560) -- (560)
Dividend accretion on
preferred stock......... -- -- (1,376) -- -- (1,376)
Net loss................ -- -- -- -- -- (6,236) (6,236)
----- ---- ------- -------- ------- -------- --------
Balance at December 31,
1997.................... 180 -- (1,362) -- (562) (9,483) (11,407)
Issuance of common stock
warrants in connection
with Series C preferred
stock................... -- -- 1,208 -- -- -- 1,208
Issuance of shares of
common stock upon
exercise of options..... 155 -- 38 -- -- -- 38
Deferred compensation
expense in connection
with issuances of stock
options................. -- -- 1,457 (1,457) -- -- --
Amortization of deferred
compensation............ -- -- -- 220 -- -- 220
Change in unrealized
gain on marketable
securities.............. -- -- -- -- 4 -- 4
Change in foreign
currency translation
adjustment.............. -- -- -- -- 139 -- 139
Dividend accretion on
preferred stock......... -- -- (1,814) -- -- (1,814)
Net loss................ -- -- -- -- -- (6,823) (6,823)
----- ---- ------- -------- ------- -------- --------
Balance at December 31,
1998.................... 335 -- (473) (1,237) (419) (16,306) (18,435)
Issuance of common stock
warrants in connection
with bridge financing... -- -- 149 -- -- -- 149
Issuance of shares of
common stock upon
exercise of options..... 61 -- 24 -- -- -- 24
Issuance of shares of
common stock upon
exercise of warrants.... 2,520 3 73 -- -- -- 76
Deferred compensation
expense in connection
with issuances of stock
options................. -- -- 16,075 (16,075) -- -- --
Amortization of deferred
compensation............ -- -- -- 4,070 -- -- 4,070
Change in unrealized
gain on marketable
securities.............. -- -- -- -- (4) -- (4)
Change in foreign
currency translation
adjustment.............. -- -- -- -- (477) -- (477)
Dividend accretion on
preferred stock......... -- -- (2,287) -- -- (2,287)
Net loss................ -- -- -- -- -- (12,317) (12,317)
----- ---- ------- -------- ------- -------- --------
Balance at December 31,
1999.................... 2,916 3 13,561 (13,242) (900) (28,623) (29,201)
Issuance of shares of
common stock upon
exercise of options
(unaudited)............. 139 -- 63 -- -- -- 63
Deferred compensation
expense in connection
with issuances of stock
options (unaudited)..... -- 8,700 (8,700) -- -- --
Amortization of deferred
compensation
(unaudited)............. -- -- -- 2,792 -- -- 2,792
Change in foreign
currency translation
adjustment (unaudited).. -- -- -- -- (213) -- (213)
Net loss (unaudited).... -- -- -- -- -- (9,440) (9,440)
----- ---- ------- -------- ------- -------- --------
Balance at March 31,
2000 (unaudited)........ 3,055 $ 3 $22,324 $(19,150) $(1,113) $(38,063) $(35,999)
===== ==== ======= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
IASIAWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended March 31,
-------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(6,236) $(6,823) $(12,317) $(1,940) $(9,440)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 368 654 1,495 172 3,876
Stock-based compensation..... -- 220 4,070 244 2,792
Warrant accretion............ -- 158 149 38 23
Provision for doubtful
accounts.................... 189 260 325 (22) 19
Loss on sale of property and
equipment................... 1 42 8 2 --
Changes in operating assets
and liabilities:
Accounts receivable........ (714) (301) (898) (51) 707
Prepaids and other assets.. (872) (29) 234 (24) (2,922)
Accounts payable and
accrued liabilities....... 85 815 1,009 725 1,459
Deferred revenue........... 76 38 159 183 322
------- ------- -------- ------- -------
Net cash used in
operating activities.... (7,103) (4,966) (5,766) (673) (3,164)
------- ------- -------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment..................... (842) (1,093) (3,326) (652) (1,260)
Change in marketable
securities.................... 1,435 (3,379) 4,433 (838) (195)
Proceeds on sale of assets..... 1 27 180 -- --
Business acquisition, net of
cash acquired................. -- -- (41,446) -- --
Change in restricted cash and
deposits...................... -- (2) 48 135 (150)
------- ------- -------- ------- -------
Net cash provided by
(used in) investing
activities.............. 594 (4,447) (40,111) (1,355) (1,605)
------- ------- -------- ------- -------
Cash flows from financing
activities:
Proceeds from issuance of
common stock.................. -- 38 100 11 63
Proceeds from issuance of
preferred stock and preferred
stock warrants, net........... 1,151 9,749 85,700 -- 943
Proceeds from (repayments of)
long-term debt................ -- 1,105 (287) (52) 52
------- ------- -------- ------- -------
Net cash provided by
financing activities.... 1,151 10,892 85,513 (41) 1,058
------- ------- -------- ------- -------
Effect of exchange rate changes
on cash......................... (212) (28) (68) (220) (235)
Net increase (decrease) in cash
and cash equivalents............ (5,570) 1,451 39,568 (2,289) (3,946)
Cash and cash equivalents at
beginning of period............. 6,773 1,203 2,654 2,654 42,222
------- ------- -------- ------- -------
Cash and cash equivalents at end
of period....................... $ 1,203 $ 2,654 $ 42,222 $ 365 $38,276
======= ======= ======== ======= =======
Supplemental cash flow
disclosures:
Cash paid during the period
for:
Interest..................... $ -- $ 300 $ 219 $ 55 $ 51
======= ======= ======== ======= =======
Taxes........................ $ 12 $ 11 $ 2 $ -- $ 22
======= ======= ======== ======= =======
Disclosure of noncash activities:
Assets acquired under capital
lease......................... $ -- $ -- $ 369 $ 42 $ 77
======= ======= ======== ======= =======
Dividend accretion on preferred
stock......................... $(1,376) $(1,814) $ (2,287) $ (597) $ --
======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY:
iAsiaWorks, Inc. was incorporated in August 1995 as AUNET Corporation. In
December 1999, the Company changed its name to iAsiaWorks, Inc. The Company
offers a broad range of Internet solutions that allow business customers to
build or extend their presence across multiple markets in the Asia-Pacific
region. These Internet solutions include high-speed, leased-line Internet
access, hosting, co-location, managed services and other value added services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Business risks and uncertainties
The Company operates in the Internet services industry, which is
characterized by intense competition, rapid technological advances and evolving
regulatory requirements and industry standards. Factors that could affect the
Company's future operating results and cause actual results to vary materially
from expectations include, but are not limited to, dependence on an industry
that is new, characterized by rapid technological changes, fluctuations in end-
user demands, evolving industry standards, competition, and risks associated
with foreign currencies. Failure by the Company to anticipate or respond
adequately to technological developments in its industry, changes in customer
or supplier requirements or changes in regulatory requirements or industry
standards could have a material adverse effect on the Company's business and
operating results.
The Company's operations are concentrated in the Asia-Pacific region and
are subject to the laws, regulations and statutes of the countries in which it
does business. Changes in, or new interpretations of, existing laws or
regulations or other consequences of doing business outside the U.S. may have a
material adverse effect on the Company's business and operating results. The
Company operates in certain countries that maintain foreign currency exchange
regulations that place restrictions on the flow of foreign funds into and out
of those countries. The Company is required to comply with these regulations
when entering into transactions in foreign currencies.
The Company has generated net losses and negative cash flows since its
inception and has relied primarily on equity financing to fund its operations
and investing activity to date. Management forecasts that significant
additional financing will be required to fund operating activities and
anticipated capital expenditures. There can be no assurance that such financing
will be available to the Company.
During the Asian financial crisis which began in 1997, the economies of
many countries in the Asia-Pacific region experienced economic contractions, a
reduction in the availability of credit, increased interest rates, increased
inflation, negative fluctuations in currency exchange rates, increased
incidence of bankruptcies and increased unemployment. Recently, economic
conditions in several Asian countries have improved; however, significant
uncertainties still exist related to the economies in the Asia-Pacific region.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts
F-7
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Unaudited Interim Financial Information
The financial information as of March 31, 2000 and for the three months
ended March 31, 1999 and 2000 is unaudited and includes all adjustments,
consisting only of normal and recurring adjustments, that management considers
necessary for a fair presentation of its consolidated financial position,
operating results and cash flows. Results for the three months ended March 31,
2000 are not necessarily indicative of results to be expected for the full
fiscal year 2000 or for any future period.
Initial public offering
In April 2000, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public. If the
initial public offering is closed under the terms presently anticipated, all of
the preferred stock as of March 31, 2000, will automatically convert into
approximately 25,665,000 shares of common stock. Unaudited pro forma
stockholders' equity, as adjusted for the assumed conversion of the preferred
stock, is set forth on the balance sheet.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited in demand and money market
accounts in various financial institutions in the United States and Asia,
principally in Hong Kong and Korea. Deposits held with financial institutions
may exceed the amount of insurance provided on such deposits. The Company has
not experienced any losses on its deposits of cash and cash equivalents.
The Company extends credit to its customers, which are primarily comprised
of small to medium sized private companies in the Asia-Pacific region. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of individual accounts.
Foreign currency translation
Assets and liabilities of foreign operations where the functional currency
is the local currency are translated into U.S. dollars using the exchange rates
at the balance sheet date; income and expenses are translated at the average
rates of exchange prevailing during the year. The related translation
adjustments have been included in stockholders' equity as a component of
accumulated other comprehensive loss. Foreign currency transaction gains and
losses are included in net loss.
Financial instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, marketable securities, accounts receivable
and accounts payable approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of its debt obligations approximates fair
value.
F-8
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company considers all highly liquid investments with an original
maturity at date of purchase of three months or less to be cash equivalents.
Cash and cash equivalents includes cash on hand, money market funds,
certificates of deposit and short-term commercial paper.
The Company's marketable securities are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Unrealized holding gains and losses are reflected as a net amount in equity as
a component of accumulated other comprehensive loss until realized. For the
purpose of computing realized gains and losses, cost is identified on a
specific identification basis.
Available-for-sale securities at December 31, 1998 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Unrealized Market
Cost Gains Value
------ ---------- ------
<S> <C> <C> <C>
U.S. government obligations..................... $2,500 $ 4 $2,504
Corporate obligations........................... 1,929 -- 1,929
------ ---- ------
$4,429 $ 4 $4,433
====== ==== ======
</TABLE>
Each marketable security has a contractual maturity of one year or less.
There were no marketable securities at December 31, 1999.
Restricted cash
In connection with a lease line arrangement with a telecommunications
company, the Company is required to maintain certificates of deposit of
$50,000.
Property and equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets
as follows:
<TABLE>
<S> <C>
Equipment.................................................. 3 to 5 years
Computers.................................................. 3 years
Furniture and fixtures..................................... 5 to 10 years
</TABLE>
Leasehold improvements are amortized over their estimated useful lives, or
the remaining lease term, whichever is shorter, using the straight-line
method. Upon sale or retirement, the asset's cost and related accumulated
depreciation are removed from the accounts and any related gain or loss is
reflected in operations.
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $129,000, $376,000 and $844,000, respectively.
Goodwill and other intangible assets
Intangible assets arose from the Company's acquisition of AT&T EasyLink
Services Asia/Pacific Limited. Goodwill is being amortized on a straight-line
basis over three years. Other intangible assets consist of acquired work force
and customer lists, which are being amortized on a straight-line basis over
their estimated useful lives of three years, respectively.
F-9
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-lived assets
Long-lived assets and certain intangible assets are reviewed for impairment
when events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Recoverability is measured by comparison of the
asset's carrying amount to future net undiscounted cash flows that the assets
are expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the projected discounted future net cash flows
arising from the asset.
Revenue recognition
The Company's revenues consist of contracts for Internet access and related
services and monthly fees from customer use of Internet data center sites,
managed services, and professional services and use of equipment provided by
the Company. Internet access, hosting and co-location revenues are generally
billed and recognized ratably over the term of the contract, which is generally
one year. Internet access related services include installation fees and
equipment sales. Installation fees and related direct costs are deferred and
recognized over the contract term, and equipment revenues are recognized when
the equipment is delivered to the customer or placed into service at one of the
Company's Internet data centers.
Managed and other value-added services include administration, monitoring,
security, data backup and consulting services. The Company recognizes revenue
from maintenance fees for ongoing customer support ratably over the period of
the maintenance contract. Payments for maintenance fees are generally made in
advance and are non-refundable. Consulting revenue is generally billed on a
time and materials basis, and is recognized as the consulting services are
rendered.
Income taxes
The Company accounts for income taxes under the liability method whereby
deferred tax liabilities and assets are determined based on the difference
between the financial statement and the tax bases of assets and liabilities
using enacted tax rates in effect for the year the differences are expected to
affect taxable income. A valuation allowance is provided, when necessary, to
reduce deferred tax assets to the amounts expected to be realized.
Advertising costs
The Company expenses advertising costs as they are incurred. Advertising
expense for the years ended December 31, 1997, 1998 and 1999 was approximately
$461,000, $371,000 and $303,000, respectively.
Comprehensive income
The Company has adopted the provisions of SFAS No. 130, Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components for general-purpose financial
statements. Comprehensive income is defined as net income plus all revenues,
expenses, gains and losses from non-owner sources that are excluded from net
income in accordance with generally accepted accounting principles.
F-10
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Derivative instruments and hedging
Beginning in March 2000, forward foreign exchange contracts have been
entered into by the Company to hedge certain operational ("cash-flow" hedges)
and balance sheet ("fair value" hedges) exposures resulting from changes in
foreign currency exchange rates. Such exposures primarily result from portions
of the Company's operations and assets that are denominated in currencies other
than the U.S. dollar. Initially, the Company has used forward foreign exchange
contracts to hedge against the Korean Won. These foreign exchange contracts are
entered into to hedge anticipated cash funding and recorded accounts receivable
made in the normal course of business, and accordingly, are not speculative in
nature. As part of its overall strategy to manage the level of exposure to the
risk of foreign currency exchange rate fluctuations, the Company will hedge a
portion of its foreign currency exposures anticipated over the ensuing twelve-
month period.
SFAS No. 133 requires that all derivatives, including foreign currency
exchange contracts, be recognized on the balance sheet at fair value.
Derivatives that are not hedges must be recorded at fair value through
earnings. If a derivative is a hedge, and depending on the nature of the hedge,
changes in the fair value of the derivative are either offset against the
change in fair value of assets, liabilities or firm commitments through
earnings or recognized in other comprehensive income until the hedged currency
is recognized in earnings. The ineffective portion of a derivative's change in
fair value is to be immediately recognized in earnings.
Beginning no later than 2001, the Company will record its foreign currency
exchange contracts at fair value in its consolidated balance sheet as accrued
and other current liabilities and the related gains or losses on these
contracts will be deferred as a component of other comprehensive income. These
deferred gains and losses will be reflected in operations in the period in
which the underlying anticipated transaction occurs. Unrealized gains and
losses resulting from the impact of currency exchange rate movements on forward
foreign exchange contracts designated to offset certain non-U.S. dollar
denominated assets will be recognized as other income or expense in the period
in which the exchange rates change and offset the foreign currency losses and
gains on the underlying exposures being hedged.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees, and Financial Accounting
Standards Board Interpretation ("FIN") No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans, and has
adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation. Under APB No. 25, compensation expense is based on the
difference, if any, on the date of grant, between the fair value of the
Company's common stock and the exercise price. SFAS No. 123 defines a "fair
value" based method of accounting for an employee stock option or similar
equity investment. The pro forma disclosures of the difference between the
compensation expense included in net loss and the related cost measured by the
fair value method are presented in Note 7. The Company accounts for equity
instruments issued to nonemployees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force No. 96-18, Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling Goods or Services.
F-11
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net loss per share
Basic net loss per share attributable to common stockholders is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of shares of common stock outstanding during the period. Diluted
net loss per share attributable to common stockholders is computed by dividing
the net loss for the period by the weighted average number of shares of common
stock and potential common stock outstanding during the period. However,
because the Company generated net losses in all periods presented, potential
common stock, comprised of incremental shares of common stock issuable upon the
exercise of stock options and warrants and upon conversion of convertible
preferred stock, are not included in diluted net loss per share attributable to
common stockholders because such shares are anti-dilutive.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months
Ended
Year Ended December 31, March 31,
-------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Numerator
Net loss attributable to
common stockholders..... $(7,612) $(8,637) $(14,604) $(2,537) $(9,440)
======= ======= ======== ======= =======
Denominator
Shares used in computing
net loss per share
attributable to common
stockholders, basic and
diluted................. 180 280 982 348 2,936
======= ======= ======== ======= =======
Net loss per share
attributable to common
stockholders, basic and
diluted................. $(42.29) $(30.85) $ (14.87) $ (7.29) $ (3.22)
======= ======= ======== ======= =======
</TABLE>
The following table sets forth potential shares of common stock that are
not included in the diluted net loss per share calculation above because to do
so would be anti-dilutive for the period indicated (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Weighted average effect of common stock equivalents
Options to purchase common stock.................. 553 835 2,630
Shares resulting from the conversion of:
Series A preferred stock........................ 4,500 4,500 4,500
Series A1 preferred stock....................... 337 337 337
Series B preferred stock........................ 3,104 3,196 3,213
Series C preferred stock........................ -- 1,306 3,269
Series D preferred stock........................ -- -- 877
Warrants to purchase preferred stock.............. 414 550 462
Warrants to purchase common stock................. -- 1,144 2,288
----- ------ ------
8,908 11,868 17,576
===== ====== ======
</TABLE>
F-12
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma net loss per share (unaudited)
Pro forma net loss per share attributable to common stockholders for the
year ended December 31, 1999 and the three months ended March 31, 2000 is
computed using the weighted average number of common shares outstanding,
including the pro forma effects of the automatic conversion of convertible
preferred stock into common stock effective upon the closing of the Company's
initial public offering as if such conversion occurred on January 1, 1999, or
at the date of original issuance, if later.
The following table sets forth the computation of pro forma basic and
diluted net loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1999 2000
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Numerator
Net loss attributable to common
stockholders................................ $(14,604) $(9,440)
======== =======
Denominator
Weighted average shares used in computing
basic and diluted net loss per share
attributable to common stockholders......... 982 2,936
Adjustment to reflect assumed conversion of
all preferred stock from date of issuance... 12,195 25,614
-------- -------
Shares used in computing pro forma basic and
diluted net loss per share attributable to
common stockholders......................... 13,177 28,550
======== =======
Basic and diluted pro forma net loss per share
attributable to common stockholders........... $ (1.11) $ (0.33)
======== =======
</TABLE>
Reclassifications
Certain prior year balances have been reclassified to conform with the
current year's presentation. These reclassifications had no impact on total
assets or net loss.
Recently issued accounting pronouncements
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 fiscal years beginning after
June 15, 2000, with earlier application encouraged. The Company is evaluating
the possible impact, if any, that SFAS No. 133 may have on its financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, Revenue Recognition, which provides
guidance on the recognition, presentation and disclosure on revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company believes that its current
revenue recognition policy is in compliance with SAB 101.
F-13
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000, but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000, but before the
effective date of July 1, 2000, the effects of applying this Interpretation are
recognized on a prospective basis from July 1, 2000. The adoption of FIN 44
will not have a material impact on the Company's financial statements.
NOTE 3--ACQUISITION:
Effective December 14, 1999, the Company acquired all outstanding shares of
AT&T EasyLink Services Asia/Pacific Limited ("EasyLink"), a company based in
Hong Kong which provides Internet services. The acquisition has been accounted
for using the purchase method of accounting. The total purchase consideration
was $42,030,000, consisting of cash of $42,000,000 and acquisition costs of
approximately $30,000. The purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The excess of the purchase
price over the fair value of the net tangible and identifiable intangible
assets acquired has been recorded as goodwill. The fair value of net assets
acquired was determined using a combination of the cost and market approach.
The cost approach establishes value based on the estimated cost of reproducing
or replacing the asset, less depreciation. The market approach estimates value
through an analysis of recent sales of comparable property. The allocation of
the purchase price is summarized below (in thousands):
<TABLE>
<S> <C>
Assembled workforce............................................... $ 580
Customer list..................................................... 2,074
Net assets acquired............................................... 1,775
Goodwill.......................................................... 37,601
-------
Total purchase price............................................ $42,030
=======
</TABLE>
The following unaudited pro forma summary financial information reflects
the consolidated results of operations of the Company for the years ended
December 31, 1998 and 1999 as if the acquisition of EasyLink had occurred on
January 1, 1998 and 1999, respectively, and after giving effect to purchase
accounting adjustments. The unaudited pro forma summary financial information
has been prepared for comparative purposes only and does not purport to be
indicative of what the Company's operating results would have been had the
acquisition actually taken place on January 1, 1998 and 1999, respectively, and
may not be indicative of future operating results (in thousands, except per
share date):
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Net revenue................................... $14,572 $ 15,859
Loss from operations.......................... (200) (26,227)
Net loss attributable to common stockholders.. (2,183) (28,378)
Basic and diluted net loss per share
attributable to common stockholders.......... $ (7.80) $ (28.90)
</TABLE>
F-14
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 4--BALANCE SHEET ACCOUNTS:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Equipment............................................. $ 2,291 $ 5,320
Computers............................................. 491 1,477
Furniture and fixtures................................ 84 239
Leasehold improvements................................ 174 312
------- -------
Total property and equipment........................ 3,040 7,348
Less: Accumulated depreciation and amortization....... (913) (1,763)
------- -------
$ 2,127 $ 5,585
======= =======
Goodwill, intangibles and other assets consist of the following (in
thousands):
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Assembled workforce................................... $ -- $ 580
Customer list......................................... -- 2,074
Goodwill.............................................. -- 37,601
Other assets.......................................... 321 388
------- -------
321 40,643
Less: accumulated amortization attributable to
goodwill and intangibles............................. -- (559)
------- -------
$ 321 $40,084
======= =======
Accrued liabilities consist of the following (in thousands):
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Accrued payments to vendors........................... $ 224 $ 1,146
Accrued payroll benefits.............................. 49 340
Other................................................. -- 30
------- -------
$ 273 $ 1,516
======= =======
</TABLE>
NOTE 5--LONG-TERM DEBT:
In November 1997, the Company entered into a loan and security agreement
(the "loan facility"). The loan and security agreement had a total capacity of
$6,000,000 and converted to term debt in December 31, 1998. Borrowings under
the loan facility bear interest at 11.81% per annum with principal and interest
payable monthly for 42 months. The final payment includes a terminal payment
equal to 15.0% of the original principal amount of the loan. The effective
interest rate, including the per annum interest payment and terminal payment,
equals 18.16%. Substantially all of the Company's assets are pledged as
collateral and the Company is required to comply with certain restrictive
covenants including a restriction on dividend payments. In connection with the
loan facility, the Company issued the lender warrants to purchase 150,000
shares of Series B preferred stock with an exercise price of $4.50 (see Note
8).
F-15
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt consists of the following (in thousands):
<TABLE>
<S> <C>
Note payable bearing interest @ 18.16%, principal and interest
payable monthly through July 2001.............................. $ 233
Note payable bearing interest @ 18.16%, principal and interest
payable monthly through July 2001.............................. 365
-----
598
Less: current portion........................................... (397)
-----
$ 201
=====
Principal payments on long-term debt are as follows at December 31, 1999
(in thousands):
2000............................................................ $ 397
2001............................................................ 201
-----
$ 598
=====
</TABLE>
NOTE 6--CONVERTIBLE PREFERRED STOCK:
Under the Company's articles of incorporation, as amended, the Company's
convertible preferred stock is issuable in series and the Company's Board of
Directors is authorized to determine the rights, preferences, and terms of each
series.
Convertible preferred stock set forth in the following table consists of
the following series at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Common
Shares
Reserved
Issued and for
Authorized Outstanding Conversion Liquidation
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Series A.......................... 13,500 4,500 4,500 $ 3,375
Series A-1........................ 1,010 337 337 505
Series B.......................... 7,843 2,452 3,466 11,036
Series C.......................... 10,000 3,269 3,269 9,807
Series D.......................... 43,000 13,914 13,914 84,924
Undesignated...................... 7,747 -- -- --
------ ------ ------ --------
83,100 24,472 25,486 $109,647
====== ====== ====== ========
</TABLE>
In October 1996, the Company issued 2,000,000 shares of Series B preferred
stock raising gross proceeds of approximately $9.0 million. Additionally, in
April 1997, the Company completed the second closing of the Series B
convertible preferred stock financing. The Company issued 261,000 shares of
Series B convertible preferred stock at $4.50 per share for gross cash proceeds
of $1,174,851.
In August 1998, the Company completed the issuance of its Series C
preferred stock financing. The Company issued 3,269,000 shares of Series C
convertible preferred stock and warrants to purchase 2,845,000 shares of common
stock (Note 8) at an aggregate unit price of $3.00 per share raising gross cash
proceeds of $9,807,407.
F-16
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Company issued 13,584,000 shares of Series D
convertible preferred stock at approximately $6.09 per share for gross cash
proceeds of $82,909,808. In August 1999, the Company obtained a $2.0 million
bridge loan from certain investors, which was converted into 330,000 shares of
Series D preferred stock at the time of the Series D financing.
Dividends
The holders of shares of Series A, A1, B, C and D convertible preferred
stock are entitled to receive non-cumulative dividends, when and if declared by
the Board of Directors, at a rate of $0.045, $0.09, $0.27, $0.18 and $0.36 per
share, respectively, per annum, prior and in preference to any declaration or
payment of any dividend on the common stock of the Company. No dividends or
other distributions may be made with respect to Series A, A1, B or C
shareholders until all such dividends have been paid or set apart for payment
to Series D shareholders.
As of December 31, 1999, no dividends on convertible preferred stock or
common stock have been declared.
Liquidation
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of the holders of Series D
convertible preferred stock are entitled to receive, prior and in preference to
any distribution of any assets of the Company to the holders of common stock,
Series A, Series A1, Series B and Series C convertible preferred stock, an
amount per share equal to approximately $6.09 for each share of Series D
convertible preferred stock plus declared but unpaid dividends. Upon payment in
full of the liquidation preference on the Series D convertible preferred stock,
the holders of Series C convertible preferred stock are entitled to receive,
prior and in preference to any distribution of any of the assets of the Company
to the holders of common stock, Series A, Series A1 and Series B convertible
preferred stock, an amount per share equal to $3.00 for each outstanding share
of Series C convertible preferred stock plus declared but unpaid dividends.
Upon payment in full of the liquidation preference on the Series C convertible
preferred stock, the holders of Series B convertible preferred stock are
entitled to receive, prior and in preference to any distribution of any of the
assets of the Company to the holders of Series A and Series A1 Stock an amount
per share equal to $4.50, plus declared but unpaid dividends. Upon payment in
full of the liquidation preference on the Series B convertible preferred stock,
the holders of Series A and Series A1 convertible preferred stock are entitled
to receive, prior and in preference to any distribution of any of the assets of
the Company to the holders of Common Stock an amount per share equal to $0.75
and $1.50, respectively, plus declared but unpaid dividends.
If the assets and funds thus distributed among the holders of Series D
convertible preferred stock are insufficient to permit the payment to such
holders of the full preferential amount, then the entire amount of the assets
and funds of the Company legally available for distribution shall be
distributed ratably to the holders of Series D preferred stock. If after the
holders of Series D convertible preferred stock have received their preference
amounts and the assets and funds thus distributed among the holders of Series C
convertible preferred stock are insufficient to permit the payment to such
holders of the full preferential amount, then the entire amount of the
remaining assets and funds of the Company legally available for distribution
shall be distributed ratably to the holders of Series C convertible preferred
stock. If after the holders of Series C convertible preferred stock have
received their preference amounts and the assets and funds thus distributed
among the holders of Series B convertible preferred stock are insufficient to
permit the payment to such holders
F-17
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the full preferential amount, then the entire amount of the remaining assets
and funds of the Company legally available for distribution shall be
distributed ratably to the holders of Series B convertible preferred stock. If
after payment of the Series D, Series C and Series B preferential amounts, the
assets and fund are insufficient to permit the payment of the full preferential
amount to the holders of Series A and Series A1 convertible preferred stock,
then the entire amount of the remaining assets and funds of the Company legally
available for distribution shall be distributed ratably to the holders of
Series A and Series A1 convertible preferred stock. After payment has been made
to the holders of convertible preferred stock in the full preferential amounts
set forth above, the entire remaining assets and funds of the Company legally
available for distribution, if any, shall be distributed ratably among the
holders of convertible preferred stock and the holders of common stock.
Mergers
A merger, reorganization, or sale of all, or substantially all, of the
assets of the Company in which the shareholders of the Company immediately
prior to the transactions possess less than 50% of the voting power of the
surviving entity (or its parent) immediately after the transaction shall be
deemed to be a liquidation, dissolution or winding up.
Voting
The holder of each share of Series A, Series A1, Series B, Series C and
Series D convertible preferred stock is entitled to the number of votes equal
to the number of shares of common stock into which such shares of convertible
preferred stock could be converted except as otherwise required by law, and has
voting rights and powers equal to the voting rights and powers of the common
stock.
Conversion
Each share of Series A, Series A1, Series B, Series C and Series D
convertible preferred stock is convertible, at the option of the holder, into
the number of fully paid and nonassessable shares of common stock which results
from dividing the conversion price per share in effect for the preferred stock
at the time of conversion into the per share conversion value of such shares.
The initial conversion price per share and the per share conversion value of
Series A, Series A1, Series B, Series C and Series D convertible preferred
stock is $0.75, $1.50, $3.183, $3.00 and $6.09, respectively, subject to
adjustments. Conversion is automatic at the then effective conversion rate
immediately upon the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of common stock in which the
public offering price equals or exceeds $19.50 per share and the aggregate
proceeds raised equal or exceed $20,000,000.
Redemption
Shares of Series A, Series A1, Series B and Series C convertible preferred
stock are redeemable if the Company has not completed an initial public
offering by January 1, 2002 involving an aggregate offering price to the public
of $20,000,000 with an offering price of $12.00 per share upon notification of
a majority of the preferred stockholders. The redemption price with respect to
Series A, Series A1, Series B, Series C and Series D convertible preferred
stock is equal to approximately $0.75, $1.50, $4.50, $3.00 and $6.09,
respectively, plus all declared but unpaid
F-18
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
dividends including an amount equal to a 10% annual dividend of the convertible
preferred stock purchase price.
The Company recorded $1,376,000, $1,814,000 and $2,287,000 in accreted
dividends relating to the convertible preferred stock for the years ended
December 31, 1997, 1998 and 1999, respectively. In connection with the issuance
of Series D preferred stock in December 1999, the stockholders agreed to
terminate the redemption rights and related dividend of the Series A,
Series A1, Series B and Series C convertible preferred stock.
F-19
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--STOCK OPTION PLAN:
The Company has a stock plan (the "Plan") under which 5,556,000 shares of
the Company's common stock have been reserved for the grant of stock options to
employees, directors, or consultants under terms and provisions established by
the Board of Directors. Under terms of the Plan, incentive options may be
granted to employees and nonstatutory options may be granted to employees and
non-employees, at prices not less then 100% and 85%, respectively, of the fair
market value of the Company's common stock at the date of grant, as determined
by the Board of Directors. If the employees or non-employees own stock
representing more than 10% of the voting power of all classes of stock of the
Company or a parent or subsidiary of the Company, the price of the options
granted must equal at least 110% of the fair market value of the common shares
on the date of the grant. Stock options granted under the Plan, which have a
term of 10 years, generally become exercisable over a four year period with 25%
of the options becoming exercisable one year after the grant and the remainder
ratably each month over 36 months.
A summary of the activity under the Company's stock option plan during the
period ended March 31, 2000 and information with respect to stock options that
have been granted is as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Outstanding
----------------------------
Weighted
Shares Average
Available Number Aggregate Exercise
for Grant of Shares Price Price
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Balances at January 1,
1997..................... 415 385 $ 92 $0.24
Options granted......... (409) 409 184 0.45
Options cancelled....... 27 (27) (12) 0.45
------ ----- ------
Balances at December 31,
1997..................... 33 767 264 0.33
Options authorized...... 3,923
Options granted......... (1,223) 1,223 550 0.45
Options exercised....... -- (155) (38) 0.24
Options cancelled....... 422 (422) (146) 0.36
------ ----- ------
Balances at December 31,
1998..................... 3,155 1,413 630 0.45
Options authorized...... 833
Options granted......... (3,839) 3,839 1,848 0.48
Options exercised....... -- (61) (24) 0.39
Options cancelled....... 713 (713) (320) 0.45
------ ----- ------
Balances at December 31,
1999..................... 862 4,478 2,134 0.48
Options authorized
(unaudited)............ 1,942
Options granted
(unaudited)............ (1,003) 1,003 2,637 2.64
Options exercised
(unaudited)............ -- (139) (63) 0.45
Options cancelled
(unaudited)............ 49 (49) (28) 0.57
------ ----- ------ -----
Balances at March 31, 2000
(unaudited).............. 1,850 5,293 $4,680 $0.88
====== ===== ======
</TABLE>
F-20
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The options outstanding and currently exercisable by exercise price at
December 31, 1999 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15 38 6.01 years $0.15 36 $0.15
$0.45 4,172 9.36 years $0.45 330 $0.45
$0.90 268 9.70 years $0.90 2 $0.90
----- ---
4,478 368
===== ===
</TABLE>
The options outstanding and currently exercisable by exercise price at
March 31, 2000 are as follows (unaudited) (in thousands, except per share
data):
<TABLE>
<CAPTION>
Options Currently
Options Outstanding Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.15 38 6.33 years $0.15 37 $0.15
$0.45 3,999 9.14 years $0.45 296 $0.45
$0.90 916 9.82 years $0.90 8 $0.90
$6.00 340 10.00 years $6.00 -- $6.00
----- ---
5,293 341
===== ===
</TABLE>
The weighted average fair value of options granted during each of the years
ended December 31, 1997, 1998 and 1999 was $0.12, respectively.
The fair value of each option grant is estimated on the grant date using
the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected life (years)....................... 5 5 5
Risk-free interest rate..................... 6.02% 5.50% 5.55%
Dividend yield.............................. 0% 0% 0%
</TABLE>
F-21
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Had compensation cost for the Plan
been determined based on the fair value at the grant date for awards during
1997, 1998 and 1999, consistent with the provisions of SFAS No. 123, the
Company's pro forma net loss and pro forma net loss per share would have been
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------- ----------------
1997 1998 1999 1999 2000
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders...... $(7,612) $(8,637) $(14,604) $(2,537) $(9,440)
======= ======= ======== ======= =======
Pro forma net loss
attributable to common
stockholders--SFAS
No. 123 adjusted......... $(7,624) $(8,681) $(14,880) $(2,555) $(9,868)
======= ======= ======== ======= =======
Net loss per share
attributable to common
stockholders--as reported
(Note 2)
Basic and diluted....... $(42.29) $(30.85) $ (14.87) $ (7.29) $ (3.22)
======= ======= ======== ======= =======
Pro forma net loss per
share attributable to
common stockholders--SFAS
No. 123 adjusted
Basic and diluted....... $(42.36) $(31.00) $ (15.15) $ (7.34) $ (3.36)
======= ======= ======== ======= =======
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure may not
be indicative of future amounts.
During 1998 and 1999, the Company recorded a total of approximately $17.5
million of deferred stock compensation in accordance with APB No. 25, SFAS No.
123 and EITF 96-18, related to options granted to employees and non-employees.
For options granted to non-employees during 1998 and 1999, the Company
determined the fair value using the Black Scholes option pricing model with the
following assumptions: expected volatility of 70%, risk-free interest rate of
5.55% and deemed values of common stock between $1.50 and $14.00 per share.
Stock compensation expense is being recognized in accordance with FIN 28 over
the vesting periods of the related options, generally four years. The Company
recognized stock compensation expense of approximately $0, $220,000 and
$4,070,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
NOTE 8--WARRANTS:
In conjunction with the Company's issuance of Series B convertible
preferred stock, the Company issued warrants to purchase 400,000 shares of
Series B convertible preferred stock for $4.50 per share. All of these warrants
were immediately exercisable. At December 31, 1999, of these warrants, warrants
to purchase 3,000 shares of Series B convertible preferred stock were
outstanding.
In connection with the Series C preferred stock financing, the Company
issued warrants to purchase 2,845,000 shares of the Company's common stock at
an exercise price of $0.03 per share
F-22
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and an expiration date of August 31, 2001. The warrants issued had a fair value
of $0.14 per warrant at the time of issuance using the Black Scholes pricing
model. The aggregate fair value of these common stock warrants of approximately
$1,207,829 has reduced the Series C preferred stock consideration. During 1999,
warrants to purchase 2,436,000 shares of common stock were exercised for
aggregate proceeds of approximately $73,000.
In connection with the Company's loan facility (Note 5), the Company issued
warrants to purchase 150,000 shares of the Company Series B preferred stock at
an exercise price of $4.50 per share with an expiration period of 6 years. The
warrants issued had a fair value of $2.46 per warrant at the time of issuance
using the Black Scholes valuation model. The aggregate fair value of these
warrants amounting to $369,000 has been recorded as a debt discount and is
being amortized over the term of the loan facility.
In connection with a bridge loan received by the Company in August 1999,
the Company issued warrants to purchase 101,000 shares of common stock for
$0.03 per share. The warrants expire on the earlier of 2001 or within 2 years
after an initial public offering. The warrants issued had a fair value of $1.47
per warrant at the time of issuance using the Black-Scholes valuation model.
The aggregate fair value of these warrants amounting to $148,000 has been
charged to interest expense over the term of the loan. During 1999, warrants to
purchase 84,000 shares of common stock were exercised for aggregate proceeds of
approximately $2,000.
In connection with the Series D preferred stock financing in December 1999,
the Company issued warrants to purchase 198,000 shares of Series B preferred
stock for $4.50 per share. The warrants expired six days after issuance. The
fair value of the warrants issued was not material at the time of issuance
using the Black-Scholes valuation model.
During December 1999, warrants to purchase 191,000 shares of Series B
convertible preferred stock were exercised for aggregate proceeds of
approximately $862,000.
NOTE 9--RELATED PARTY TRANSACTIONS:
The Company had an agreement to lease international circuits from UUNET, a
former stockholder. In consideration, the Company recognized charges amounting
to $1,543,547 for these circuits in 1998. In January 1999, the Company
terminated this agreement with UUNET.
On August 9, 1999, the Chief Executive Officer and Chairman of the Board of
Directors, entered into an employment agreement with the Company. The officer
received a signing bonus of $100,000 in the form of an interest free loan which
is due to be forgiven upon completion of one year of service. As of December
31, 1999 the Company has recorded a note receivable balance for $100,000.
NOTE 10--COMMITMENTS AND CONTINGENCIES:
The Company leases equipment and office space in the United States and in
various countries in the Asia-Pacific region under operating and capital lease
agreements. Rent expense was approximately $379,000, $445,000 and $564,000 for
1997, 1998 and 1999, respectively.
F-23
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, the aggregate future minimum lease payments under
all noncancelable operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Years Ending December 31, Leases Leases
------------------------- ------- ---------
<S> <C> <C>
2000.................................................... $144 $1,473
2001.................................................... 144 265
2002.................................................... 82 191
2003.................................................... -- 135
2004.................................................... -- 104
---- ------
Total minimum lease payments............................ 370 $2,168
======
Less: Amounts representing interest..................... (80)
----
Present value of capital lease obligations.............. 290
Less: Current portion................................... 56
----
Long-term portion....................................... $234
====
</TABLE>
The Company leases capacity on transcontinental telecommunication lines
from several communications companies in the Asia-Pacific region. Some of the
agreements provide for monthly lease terms. Under other agreements, the Company
is committed to lease capacity on lines for periods ranging from three to five
years. Future lease payments under these long-term agreements, determined using
1999 currency exchange rates, are presented below (in thousands). Actual
payments will vary based on changes in foreign currency exchange rates.
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000...................................... $2,971
2001...................................... 2,533
2002...................................... 2,090
2003...................................... 764
2004...................................... 382
------
$8,740
======
</TABLE>
Claims
The Company has been notified by two service providers of claims in 1999.
One provider seeks payment of approximately $1.1 million for amounts payable
for services rendered including cancellation fees and other disputed penalties,
a portion of which has been accrued by the Company as of December 31, 1999. The
second provider seeks additional compensation by way of a grant of options to
purchase approximately 56,000 shares of the Company's common stock at an
exercise price of $0.45 per share. If granted, such options would result in a
charge to operations equal to the fair value of the options as of the grant
date. The Company has not recognized a liability for this claim. The Company
does not believe that it is probable there will be any material losses not
currently reserved as a result of these claims. Because the outcome of these
claims is uncertain and the future value of the Company's stock is unknown, the
ultimate impact on the Company of these claims presently cannot be estimated.In
the event the Company is unsuccessful in resolving these claims, additional
payments or issuance of stock may be required and the resulting charges to
operations may be material.
In addition to the foregoing, from time to time the Company is subject to
possible claims or assessments from third parties arising in the normal course
of business. Management has reviewed
F-24
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
such possible claims and assessments with legal counsel and believes that it is
unlikely that they will result in a material adverse impact on the Company's
financial position or results of operations.
NOTE 11--INCOME TAXES:
Temporary differences which give rise to significant portions of deferred
tax assets and liabilities at December 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets and liabilities:
Net operating loss carry forwards.................... $ 4,543 $ 11,876
Capitalized start-up costs........................... 210 130
Accrued expenses..................................... 100 169
Depreciation......................................... 27 174
Other................................................ 16 115
------- --------
4,896 12,464
Less: Valuation allowance............................ (4,896) (12,464)
------- --------
Total.............................................. $ -- $ --
======= ========
</TABLE>
Due to uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its deferred tax assets. At such times as it is determined that it is
more likely than not that the deferred tax assets are realizable, the valuation
allowance will be reduced.
At December 31, 1999, the Company had U.S. federal, state and foreign net
operating loss carryforwards of approximately $18.0 million, $3.4 million and
$32.9 million, respectively, available to offset future regular, alternative
minimum and foreign taxable income, if any. The operating loss carryforwards
expire between 2003 and 2018, except for certain foreign net operating loss
carryforward which are available indefinitely. For the years ended December 31,
1997, 1998 and 1999, the Company's effective income tax rate has differed from
the U.S. federal income tax rate of 34% due primarily to state and foreign
taxes, as well as the change in the deferred tax valuation allowance. Also
during these years, the provision for the valuation allowance amounted to
$2,655,000, $1,146,000 and $5,531,000, respectively.
For federal and state tax purposes, a portion of the Company's net
operating loss carryforwards are subject to certain limitations on annual
utilization due to a change in ownership, as defined by federal and state tax
law.
NOTE 12--SEGMENT INFORMATION:
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information effective December 31, 1998. SFAS No. 131
establishes standards for disclosure about operating segments and related
disclosures about products and services, geographic areas and major customers.
Comparative information has been provided for prior years. The Company operates
in a single business segment and sells its products and services directly to
customers in the United States and the Asia-Pacific region.
F-25
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue for geographic regions reported below are based upon the customers'
locations. Long-lived assets, predominately property and equipment, are
reported based on the location of the assets. Following is a summary of the
geographic information related to revenues, long-lived assets and information
related to significant customers for the years ended December 31, 1997, 1998
and 1999 (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Revenue
Asia-Pacific............................................ $1,521 $3,270 $ 5,592
North America and other ................................ 76 220 37
------ ------ -------
Total................................................. $1,597 $3,490 $ 5,629
====== ====== =======
Long-lived assets
Asia-Pacific............................................ $1,563 $2,139 $45,067
North America and other ................................ 78 309 602
------ ------ -------
Total................................................. $1,641 $2,448 $45,669
====== ====== =======
</TABLE>
Accounts Receivable
No customers accounted for more than 10% of accounts receivable as of
December 31, 1997, 1998 and 1999, respectively. The Company does not segregate
information related to operating income generated by its export sales.
NOTE 13--EMPLOYEE WELFARE PLANS:
United States
In February 1996, the Company adopted a defined contribution plan under
section 401(k) of the Internal Revenue Code (the "401(k) Plan"). All full-time
domestic employees of the Company who are at least 21 years of age and have
been employed with the Company for at least three months are eligible to
participate in the 401(k) Plan. The 401(k) Plan allows employees to contribute
up to 15% of their salaries on a pre-tax basis. The Company may make matching
or discretionary contributions at the end of the Plan year to eligible
participants. There were no Company contributions for 1998 and 1999.
Retirement Benefit Plan
The Company's Hong Kong subsidiary operates a defined contribution
retirement plan which is available to all eligible employees. Contributions to
the plan by the Company and the employees are calculated as 5% of the
employees' basic salaries. The Company's contributions to the retirement plan
are expensed as incurred and are reduced by contributions forfeited by those
employees who leave the plan prior to vesting fully in the contributions. The
assets of the plan are held separately from those of the Company in an
independently administered fund. Contributions to the plan during 1999 were
insignificant.
Severance Benefit Plan--Korea
Employees and directors of the Company's subsidiary in Korea with more than
one year of service are entitled to receive a lump-sum payment upon termination
of their employment, based on
F-26
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
their length of service and rate of pay at the time of termination. Accrued
severance benefits are adjusted annually for all eligible employees based on
their employment as of the balance sheet date. In accordance with the Korean
National Pension Act, a certain portion of severance benefits are required to
be remitted to the National Pension Fund and deducted from accrued severance
benefits. The amounts contributed will be refunded to employees from the
National Pension Fund upon retirement. The expense for severance benefits for
the years ended December 31, 1997, 1998 and 1999 amounted to approximately $0,
$13,000, and $36,000, respectively. Severance benefits are funded approximately
4% and 5% at December 31, 1998 and 1999, respectively through deposits to a
group severance insurance plan with several life insurance companies. The
amounts funded under this insurance plan are classified as long-term severance
deposits. The Company may fund subsequent accruals at its discretion. Accrued
severance benefits amount to $17,000, and $31,000 at December 31, 1998, and
1999, respectively.
NOTE 14--SUBSEQUENT EVENTS:
Reincorporation
In April 2000, the Company's board of directors approved the Company's
reincorporation in the State of Delaware prior to the effectiveness of the
public offering of the Company's stock. All references to the Company and the
share and par value information included in these consolidated financial
statements have been adjusted to reflect the reincorporation.
In April 2000 the board adopted the 2000 Stock Incentive Plan, intended to
serve as the successor equity incentive program to the 1995 Stock Option Plan.
The plan allows for 10,000,000 shares of common stock to be initially reserved
for issuance.
Stock Split
On June 15, 2000, the board of directors approved a 3-for-1 reverse stock
split of the common and preferred stock. Stockholder approval of the reverse
stock split was obtained on July 31, 2000. All share and per share amounts in
the accompanying financial statements have been adjusted retroactively.
Acquisitions
In January 2000, the Company acquired certain assets and liabilities of Web
Professionals, Inc. ("Web Professionals"). The total purchase consideration of
approximately $2.0 million consisted of cash in the amount of $0.8 million,
131,000 shares of Series D preferred stock with a fair value of $8.73 per share
and acquisition costs of approximately $25,000. The acquisition will be
accounted for using the purchase method of accounting and the purchase price
will be allocated to the tangible and intangible assets acquired and
liabilities assumed on the acquisition date. Web Professionals, the seller, is
entitled to $200,000 and 33,000 additional shares of Series D preferred stock,
originally placed in escrow, based upon the continued employment with the
Company of the owner of Web Professionals through June 30, 2000. Additionally,
the Company will pay Web Professionals cash consideration up to $1.75 million
and 287,000 shares of Series D preferred stock upon achievement of certain
financial milestones, as defined in the Asset Purchase Agreement, through June
30, 2000.
In April 2000, the Company acquired all the outstanding shares of Cyberhost
Pty Limited ("Cyberhost"). The total purchase consideration of approximately
$2.6 million consisted of cash in the amount of $0.6 million, 100,000 shares of
common stock with a value of $20.07 per share, assumed
F-27
<PAGE>
IASIAWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
liabilities of approximately $20,000 and acquisition costs of approximately
$25,000. The acquisition will be accounted for using the purchase method of
accounting and the purchase price will be allocated to the tangible and
intangible assets acquired and liabilities assumed on the acquisition date.
Forward contracts
In April 2000, the Company entered into forward contracts with a financial
institution to buy Korean Won. Under these contracts, the Company will buy
approximately $400,000 of Korean Won per month at pre-determined rates ranging
from 1,101 and 1,104 Korean Won, for twelve months from April 2000. The Company
has not entered into any other foreign exchange contracts.
Property Commitments
In March 2000, the Company signed a binding letter of intent to lease
office space for a term of three years.
In May 2000, the Company signed two purchase agreements in connection with
the purchase of a building and the underlying property in Taiwan. The building
and land are to be used primarily as an additional data center facility. Title
of the land and building will transfer to the Company upon completion of the
construction of the building, which is scheduled to take place in October 2000.
Also in May 2000, the Company signed a sublease for additional office space in
San Mateo. In July 2000, the Company entered into an agreement to purchase land
and a building in South Korea which the Company intends to use primarily as an
additional Internet data center.
In June 2000, the Company signed an agreement to lease data center space in
Hong Kong. The lease term is twelve years and will commence upon substantial
completion of the building under construction, estimated to be December 2000.
Under the terms of the lease the Company is committed to pay monthly rental
payments subject to an option for additional space and certain escalation
clauses over the lease term. The lease agreement provides the Company with an
option to extend the lease term for an additional eight years.
Assuming that the acquisition of the buildings and land closes, the future
annual property commitments arising from these leases and acquisitions are as
follows (stated in thousands):
<TABLE>
<S> <C>
2000................................................................ $ 46,170
2001................................................................ 8,805
2002................................................................ 8,535
2003................................................................ 7,950
2004................................................................ 7,800
thereafter.......................................................... 62,400
--------
$141,660
========
</TABLE>
F-28
<PAGE>
IASIAWORKS, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
OVERVIEW
Effective December 14, 1999, the Company acquired all outstanding shares of
AT&T EasyLink Services Asia/Pacific Limited ("EasyLink"), which provides
Internet services. The acquisition has been accounted for using the purchase
method of accounting. The total purchase consideration was $42,030,000,
consisting of cash of $42,000,000 and acquisition costs of approximately
$30,000. The purchase price was allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair values
on the acquisition date. The excess of the purchase price over the fair value
of the net tangible and identifiable intangible assets acquired has been
recorded as goodwill. The fair value of net assets acquired was determined
using a combination of the cost and market approach. The allocation of the
purchase price is summarized below (in thousands):
<TABLE>
<S> <C>
Assembled workforce............................................... $ 580
Customer list..................................................... 2,074
Net assets acquired............................................... 1,775
Goodwill.......................................................... 37,601
-------
Total purchase price............................................ $42,030
=======
</TABLE>
Goodwill and other identifiable intangible assets are being amortized on a
straight-line basis over their estimated useful economic life of three years.
The following unaudited pro forma combined consolidated financial
information reflects the results of operations for the year ended December 31,
1999 as if the acquisition of EasyLink had occurred on January 1, 1999, and
after giving effect to purchase accounting adjustments. This pro forma result
has been prepared for comparative purposes only and does not purport to be
indicative of what the Company's operating results would have been had the
acquisition actually taken place on January 1, 1999, and may not be indicative
of future operating results. The unaudited pro forma combined consolidated
statement of operations should be read in conjunction with the historical
consolidated financial statements and related notes of the Company and EasyLink
included elsewhere herein.
F-29
<PAGE>
IASIAWORKS, INC.
UNAUDITED PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------
iAsiaWorks EasyLink Adjustment Pro Forma
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Net revenue:
Internet access and related
services........................ $ 5,384 $19,541 $(10,334)(A) $ 14,591
Hosting, co-location and other
managed services................ 245 1,023 -- 1,268
-------- ------- -------- --------
Total revenue.................. 5,629 20,564 (10,334) 15,859
Cost of Internet access and
related services................ 5,417 13,378 (5,298)(A) 13,497
Cost of hosting, co-location and
other managed services.......... 401 839 1,240
-------- ------- -------- --------
5,818 14,217 (5,298) 14,737
-------- ------- -------- --------
Gross margin................... (189) 6,347 (5,036) 1,122
-------- ------- -------- --------
Operating expenses:
Network operations and support... 1,539 -- 1,539
Sales and marketing.............. 2,372 2,859 (2,309)(A) 2,922
General and administrative....... 3,511 3,920 (2,021)(A) 5,410
Amortization of intangible
assets.......................... 559 -- 12,849 (B) 13,408
Stock-based compensation......... 4,070 -- 4,070
-------- ------- -------- --------
Total operating expenses....... 12,051 6,779 8,519 27,349
-------- ------- -------- --------
Loss from operations............... (12,240) (432) (13,555) (26,227)
Interest income.................... 288 62 (61)(A) 289
Interest expense................... (384) -- -- (A) (384)
Other income (expense), net........ 19 517 (305)(A) 231
-------- ------- -------- --------
Net loss........................... (12,317) 147 (13,921) (26,091)
Dividend accretion on preferred
stock............................. (2,287) -- -- (2,287)
-------- ------- -------- --------
Net loss attributable to common
stockholders...................... $(14,604) $ 147 $(13,921) $(28,378)
======== ======= ======== ========
Net loss per share attributable to
common stockholders, basic and
diluted........................... $ (28.90)
========
Weighted average shares used in
computing net loss per share
attributable to common
stockholders, basic and diluted... 982
========
</TABLE>
--------
(A) The pro forma iAsiaWorks and EasyLink financial information for 1999 were
adjusted to eliminate results of operations of non-acquired divisions of
AT&T EasyLink. AT&T transferred certain businesses during 1999 to
affiliates of AT&T prior to the acquisition of EasyLink. EasyLink's
accounting systems and records were designed to record separately the
revenues, costs of sales and costs of the acquired and the non-acquired
businesses. Accordingly, most revenues and costs were specifically
identifiable with individual businesses. Other operating costs of the non-
acquired businesses have been allocated based on the following:
. Rental expenses have been allocated between the acquired and non-
acquired businesses based on the fixed monthly rentals and the estimated
space occupied by each individual business.
. Administrative costs have been allocated based upon the estimated time
spent on each business's affairs by the individuals involved.
. Salaries and related costs have been allocated to individual businesses
based on the principal responsibilities and activities of the employees
concerned.
(B) The pro forma iAsiaWorks and EasyLink financial information for 1999 were
adjusted to record the amortization of intangible assets and goodwill
related to iAsiaWorks' acquisition of EasyLink as if the transaction
occurred January 1, 1999. Acquired intangible assets and goodwill amounting
to $40.3 million are to be amortized over their estimated useful life of 3
years resulting in annual amortization of approximately $13,408,000.
F-30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of AT&T EasyLink Services
Asia/Pacific Limited
In our opinion, the accompanying balance sheets and the related statements
of operations, of shareholder's deficit and of cash flows present fairly, in
all material respects, the financial position of AT&T EasyLink Services
Asia/Pacific Limited (the Company) at December 31, 1998 and November 30, 1999,
and the results of its operations and its cash flows for the year ended
December 31, 1998 and the eleven months ended November 30, 1999 in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which are
substantially similar to International Standards of Auditing and which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers
Certified Public Accountants
Hong Kong
December 14, 1999,
except for Note 14 as
to which the date is
April 14, 2000
F-31
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
BALANCE SHEETS
(in thousands of Hong Kong dollars)
<TABLE>
<CAPTION>
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... HK$17,924 HK$ 4,048
Accounts receivable, less allowance for doubtful
accounts of HK$296 at December 31, 1998 and
HK$2,946 at November 30, 1999..................... 15,723 12,779
Due from affiliates................................ 2,875 782
Due from holding company........................... 5,865 --
Inventories........................................ -- 382
Prepaid expenses and other assets.................. 1,194 917
--------- ---------
Total current assets............................. 43,581 18,908
Property, plant and equipment (Note 6)............... 19,609 9,956
--------- ---------
Total assets..................................... HK$63,190 HK$28,864
========= =========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued liabilities........... HK$33,960 HK$ 7,700
Due to affiliates.................................. 4,918 15,193
--------- ---------
Total current liabilities........................ 38,878 22,893
Long term loan from an affiliate..................... 79,905 60,000
Long term loan from holding company.................. 194,015 --
--------- ---------
312,798 82,893
--------- ---------
Commitments and contingencies (Note 12)
Deficit on owner's equity:
Share capital, share of HK$10, authorized, issued
and fully paid.................................... 100 194,115
Accumulated deficit................................ (249,708) (248,144)
--------- ---------
Total deficit on owner's equity.................. (249,608) (54,029)
--------- ---------
Total liabilities and deficit on owner's equity.. HK$63,190 HK$28,864
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
STATEMENTS OF OPERATIONS
(in thousands of Hong Kong dollars)
<TABLE>
<CAPTION>
Eleven months
Year ended ended
December 31, November 30,
1998 1999
------------ -------------
<S> <C> <C>
Net revenues......................................... HK$87,239 HK$72,936
Cost of revenues..................................... 67,665 64,025
--------- ---------
Gross profits.................................... 19,574 8,911
Operating expenses
Research and development........................... -- --
Sales and marketing................................ 8,971 13,262
General and administration......................... 16,740 4,024
--------- ---------
Total operating expenses......................... 25,711 17,286
--------- ---------
Operating (loss)/profit.............................. (6,137) (8,375)
Interest............................................. -- --
Other income and expenses, net....................... -- 1,639
--------- ---------
Net (loss)/profit for continuing operations.......... (6,137) (6,736)
Profit from discontinued operations.................. 8,925 5,792
--------- ---------
Net (loss)/profit.................................... HK$ 2,788 HK$ (944)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT
(in thousands of Hong Kong dollars, except share data)
<TABLE>
<CAPTION>
Share capital
--------------------- Accumulated
Shares Amount deficit Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Owner's deficit as of January
1, 1998...................... 10,000 HK$ 100 HK$(252,496) HK$(252,396)
Net profit from statement of
operations................... -- -- 2,788 2,788
---------- ---------- ----------- -----------
Owner's deficit as of December
31, 1998..................... 10,000 100 (249,708) (249,608)
Net loss from statement of
operations................... -- -- (944) (944)
Capitalisation of loan from
holding company.............. 19,401,553 194,015 -- 194,015
Waiver of amount payable to
affiliate.................... -- -- 2,508 2,508
---------- ---------- ----------- -----------
Owner's deficit as of November
30, 1999..................... 19,411,553 HK$194,115 HK$(248,144) HK$ (54,029)
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
STATEMENTS OF CASH FLOWS
(in thousands of Hong Kong dollars)
<TABLE>
<CAPTION>
Period from
January 1,
Year ended 1999 to
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net profit/(loss) applicable to common
shareholders...................................... HK$ 2,788 HK$ (944)
Adjustments to reconcile net profit to net cash
used in operating activities:
Release of deferred costs........................ -- 663
Depreciation of tangible assets.................. 11,067 7,198
Loss on disposal of property, plant and
equipment....................................... 62 159
Interest income.................................. (846) (476)
Allowance for doubtful accounts receivable 601 (435)
Changes in operating assets and liabilities:
(Increase)/decrease in accounts receivable and
prepayments................................... 10,994 (30,080)
(Increase)/decrease in due from affiliates and
holding company............................... 14,092 7,725
(Increase)/decrease in inventories............. 2,722 (893)
Increase/(decrease) in accounts payable and
accrued liabilities........................... 6,038 (5,677)
Increase/(decrease) in due to affiliates....... (52,590) 12,332
--------- --------
Net cash used in operating activities........ (5,072) (10,428)
--------- --------
Cash flows provided by financing activities:
Advances from an affiliate......................... 12,475 --
Interest received.................................. 846 476
--------- --------
Net cash provided by financing activities........ 13,321 476
--------- --------
Cash flows used in investing activities:
Cash paid for property, plant and equipment........ (9,065) (3,924)
Proceeds from sale of property, plant and
equipment......................................... 191 --
--------- --------
Net cash used in investing activities............ (8,874) (3,924)
--------- --------
Net decrease in cash and cash equivalents............ (625) (13,876)
Cash and cash equivalents, beginning of period....... 18,549 17,924
--------- --------
Cash and cash equivalents, end of period............. HK$17,924 HK$4,048
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS
(in thousands of Hong Kong dollars, except share data)
1 The Company
AT&T EasyLink Services Asia/Pacific Limited (the Company) was incorporated
in Hong Kong in April 1988. The Company has two operations. The on-line Hong
Kong business provides internet related and electronic communications services
in Hong Kong and Mainland China. The non-online business provides
telecommunications services to third parties, provides support services to
related companies and sells telecommunications hardware and software in Asia-
Pacific. The assets and operations of the non-online business were sold to a
fellow subsidiary with effect from November 1, 1999.
2 Basis of preparation
The Company has incurred losses regularly and at November 30, 1999 had a
deficit on shareholders' equity of HK$54,029,000 and an excess of current
liabilities over current assets of HK$3,985,000. Nonetheless, these accounts
have been prepared on the going concern basis, which assumes the continued
financial support of the ultimate holding company, AT&T Corp. The directors
have satisfied themselves that the ultimate holding company is prepared to
provide sufficient additional support to the Company to enable it to carry on
its existing operations and to meet its liabilities as they fall due for at
least twelve months from the date of approval of these accounts. A fellow
subsidiary has also provided long term advances to the Company in order to
assist its operating activities. The advances are unsecured, interest free and
are not due within the next twelve months.
3 Significant accounting policies
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The significant accounting
policies are summarized as follows:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated
depreciation, except that amounts less than HK$78,000 are expensed as incurred.
Cost represents the purchase price of the asset and other costs incurred to
bring the asset into its existing use.
Leasehold improvements are depreciated over the periods of the lease or
their expected useful lives to the Company whichever is shorter. Other fixed
assets are depreciated over their estimated useful lives on a straight line
basis. The principal annual rates of depreciation are as follows:
<TABLE>
<S> <C>
Furniture and office equipment.............................. 20% - 33 1/3%
Computer equipment.......................................... 20%
Leasehold improvements...................................... 40%
</TABLE>
F-36
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands of Hong Kong dollars, except share data)
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories of equipment are stated at the lower of cost and net realisable
value. Cost is determined on the first-in, first-out basis. Net realisable
value is the price at which inventory can be sold in the normal course of
business, after costs of realisation.
Allowances for doubtful accounts
An allowance for doubtful accounts is provided based on an evaluation of
the recoverability of the receivables at the balance sheet date. Trade accounts
receivable are stated net of such allowance.
Revenue recognition
The Company's revenues consist of contracts for Internet access and related
services and monthly fees from customer use of Internet data center sites,
managed services, and professional services and use of equipment provided by
the Company. Internet access, hosting and co-location revenues are generally
billed and recognized ratably over the term of the contract, which is generally
one year. Internet access related services include installation fees and
equipment sales. Installation fees and related direct costs are deferred and
recognized over the contract term, and equipment revenues are recognized when
the equipment is delivered to the customer or placed into service at one of the
Company's Internet data centers.
Managed and other value-added services include administration, monitoring,
security, data backup and consulting services. The Company recognizes revenue
from maintenance fees for ongoing customer support ratably over the period of
the maintenance contract. Payment for maintenance fees are generally made in
advance and are non-refundable. Consulting revenue is generally billed on a
time and materials basis, and is recognized as the consulting services are
rendered.
Interest income is recognised on a time proportion basis, taking into
account the principal amounts outstanding and the interest rates applicable.
Advertising and promotion costs
Advertising and promotion costs are expensed as incurred.
Retirement benefit plans
The Company operates a defined contribution retirement scheme which is
available to all entitled employees. Contributions to the scheme by the Company
and the employees are calculated as 5% of the employees' basic salaries. The
Company's contributions to the defined contribution retirement scheme are
expensed as incurred and are reduced by contributions forfeited by those
F-37
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands of Hong Kong dollars, except share data)
employees who leave the scheme prior to vesting fully in the contributions. The
assets of the scheme are held separately from those of the Company in an
independently administered fund.
The retirement contributions incurred and borne by the Company were
HK$1,262,000 and HK$1,091,000 for the period from January 1, to November 30,
1999 and the year 1998 respectively.
Deferred income
Subscription income and income billed in advance is deferred and credited
to the statement of operations on a straight line basis over the related
period.
Operating leases
The Company leases certain office facilities under non-cancellable short
term leases. Rentals applicable to such operating leases are charged to the
statement of operations on a straight line basis over the lease term.
Translation of foreign currencies
The functional currency of the Company's operations is the Hong Kong
dollar.
Transactions in currencies other than the functional currency are
translated at exchange rates ruling at the transaction dates. Monetary assets
and liabilities expressed in foreign currencies at the balance sheet date are
translated at rates of exchange ruling at the balance sheet date. All exchange
differences arising are dealt with in the statement of operations.
Income taxes
The Company accounts for deferred income taxes using the liability method
under which the expected future tax consequences of temporary differences
between the financial reporting and the tax bases of its assets and liabilities
are recognised as deferred tax assets or liabilities. A valuation allowance is
established for any deferred tax asset when it is more likely than not that the
deferred tax asset will not be received.
4 Financial assets and liabilities
Financial assets of the Company include cash and cash equivalents, trade
accounts receivable, other assets, prepaid costs, amount due from holding
company and amounts due from affiliates under the common control of AT&T Corp.
Financial liabilities of the Company include accounts payable, accrued
liabilities, long term loan from holding company and affiliates under the
common control of AT&T Corp, amounts due to affiliates under the common control
of AT&T Corp. It is not practicable to estimate the fair value of the long term
loan from holding company and affiliates, and balances with holding company and
affiliates under the common control of AT&T Corp without incurring excessive
cost. The fair value of all other financial instruments approximate their
carrying amounts due to the nature or short maturity of these instruments.
F-38
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands of Hong Kong dollars, except share data)
5 Concentration of credit risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents,
trade receivables and deposits, prepayments and other receivables.
Cash and cash equivalents--substantially all the Company's cash and bank
balances are placed with a number of international banks in Hong Kong to which
the Company believes its exposure to risk is limited.
Trade receivables--these mainly represent service fee receivables from
numerous third parties.
Deposits, prepayments and other receivable--these are spread among
numerous third parties.
6 Property, plant and equipment
Property, plant and equipment comprises the following:
<TABLE>
<CAPTION>
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
Computer equipment................................ HK$65,658 HK$50,586
Leasehold improvements............................ 4,778 4,778
Office furniture and equipment.................... 6,051 5,157
--------- ---------
76,487 60,521
Less: accumulated depreciation.................... (56,878) (50,565)
--------- ---------
Property plant and equipment at net book value.... HK$19,609 HK$ 9,956
========= =========
</TABLE>
7 Current assets
Prepaid expenses and other assets comprise the following:
<TABLE>
<CAPTION>
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
Prepayments........................................ HK$ 729 HK$137
Deposits........................................... 486 191
Others............................................. (21) 589
-------- ------
HK$1,194 HK$917
======== ======
</TABLE>
Due from affiliates and holding company
The amounts due from the affiliates and holding company are unsecured,
non-interest bearing and have no fixed repayment terms.
F-39
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands of Hong Kong dollars, except share data)
8 Current liabilities:
Accounts payable and accrued liabilities comprise the following:
<TABLE>
<CAPTION>
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
External accounts payable.......................... HK$ 3,600 HK$3,385
Accruals........................................... 22,988 3,114
Temporary receipts................................. 5,693 1,201
Royalties payable.................................. 1,679 --
--------- --------
HK$33,960 HK$7,700
========= ========
</TABLE>
Due to affiliates
The amounts due to affiliates are unsecured, interest free and have no
fixed repayment terms.
Long term loan from an affiliate
The long term loan from an affiliate is unsecured, interest free and has
no fixed repayment terms.
Long term loan from holding company
The amount is unsecured, interest free and has no fixed repayment terms.
During the year the loan was settled by the issue of new shares to the holding
company (Note 9).
9 Share capital
The authorised share capital of the Company comprises 19,411,533 ordinary
shares of HK$10 each (1998: 10,000). In November 1999, 19,401,533 Class A
shares of HK$10 each were issued to the holding company at par in full
settlement of the long term loan from the holding company. Those shares rank
pari passu with the existing issued shares.
10 Related party transactions
During the period, the Company undertook the following transactions with
related parties:
<TABLE>
<CAPTION>
Period from
January 1,
Year ended 1999 to
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
Management service fees received from holding company
(Note a)............................................ HK$59,192 HK$41,474
--------- ---------
Network annual channel fee and transmission charges
payable to holding company (Note b)................. 18,748 15,127
--------- ---------
Recharges of operating leases, utilities,
administration expenses payable to a fellow
subsidiary (Note c)................................. 22,503 11,871
--------- ---------
Telecommunication income receivable from a fellow
subsidiary (Note d)................................. 5,667 2,393
--------- ---------
Circuit costs recoverable from a fellow subsidiary
(Note e)............................................ 7,628 3,720
--------- ---------
Commission income received from a fellow subsidiary
(Note f)............................................ 1,853 5,806
--------- ---------
IP Telephony management fee received from a fellow
subsidiary (Note g)................................. -- 2,326
--------- ---------
</TABLE>
F-40
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands of Hong Kong dollars, except share data)
--------
(a) The management service fee received from holding company was determined
based on an agreed percentage of total reimbursable items recorded in the
non-online Hong Kong business.
(b) The network annual channel fee and transmission charges were based on an
agreed rate for the total actual usage.
(c) The recharges of operating leases, utilities, administration expenses were
made by a fellow subsidiary based on an agreed rate for the occupancy of
the office premises located at Times Square, Hong Kong.
(d) Telecommunication income was charged to a fellow subsidiary based on a
monthly contracted amount.
(e) Circuit costs were charged to a fellow subsidiary based on a monthly
contracted amount.
(f) Commission income was charged based on an agreed rate of the debt collected
on behalf of the fellow subsidiary.
(g) IP Telephony management fee was charged to a fellow subsidiary based a
fixed monthly contracted amount.
11 Income taxes
The Company had no taxable income for the eleven month period ended
November 30, 1999 and for the year ended December 31, 1998.
Deferred income tax reflects the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and tax loss carryforwards.
There is no limitation in Hong Kong on the period in which the Company's tax
loss carryforwards can be utilized.
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31, November 30,
1998 1999
------------ ------------
<S> <C> <C>
Tax losses--assets............................... HK$ 40,318 HK$ 39,164
Accelerated depreciation, allowances and
liabilities..................................... (2,012) (1,133)
---------- ----------
38,306 38,031
---------- ----------
Less: valuation allowance........................ (38,306) (38,031)
---------- ----------
HK$ -- HK$ --
========== ==========
</TABLE>
12 Commitments and contingencies
The Company leases space for its equipment under a non-cancellable
operating lease, which expires March 2001.
As of November 30, 1999, estimated future minimum lease payments on all
operating leases are approximately as follows:
<TABLE>
<S> <C>
For the year ending November 30,
2000............................................................ HK$ 762
2001............................................................ 254
--------
HK$1,016
========
</TABLE>
F-41
<PAGE>
AT&T EASYLINK SERVICES ASIA/PACIFIC LIMITED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands of Hong Kong dollars, except share data)
The Company leases circuits from telecommunication providers based in Hong
Kong under various (non-cancellable) operating leases.
As of November 31, 1999, the estimated future minium payments on all
circuit leases are approximately as follows:
<TABLE>
<S> <C>
For the year ending November 30,
2000................................................................ HK$4,515
Thereafter.......................................................... --
========
</TABLE>
No contingencies existed as of November 30, 1999.
13 Supplementary cash flow information
The discontinued operations' assets and related net liabilities were
transferred to/assumed by a fellow subsidiary as at November 1, 1999. The
assets and liabilities of the operation comprised:
<TABLE>
<S> <C>
Fixed assets....................................................... HK$5,556
Inventories........................................................ 511
Accounts receivable and prepayments................................ 33,736
Accounts payable and accruals...................................... (20,582)
Amounts due to fellow subsidiaries................................. (21,962)
Amounts due from fellow subsidiaries............................... 233
--------
Net liabilities.................................................... (2,508)
========
Satisfied by increase in amount due to fellow subsidiary........... HK$2,508
========
</TABLE>
The Company's leasehold improvements and its cash balances were deemed to
be wholly attributable to the continuing business.
The resulting amount due to the fellow subsidiary was subsequently waived
by the fellow subsidiary.
14 Subsequent events
Subsequent to the period end, in accordance with a share sale and purchase
agreement dated December 4, 1999, the Company was acquired from AT&T
Communication Services International Inc by iAsiaWorks Inc. for a total cash
consideration of US$42 million. Shortly thereafter, the name of AT&T EasyLink
Services Asia/Pacific Limited was changed to iAsiaWorks (HK) Limited.
In March 2000, the Company signed a binding letter of intent to lease
office space in Hong Kong. The lease term is for three years. The Company is
committed to monthly rental and related costs of approximately HK$387.
In June 2000, the Company signed an agreement to lease data center space in
a new development in Hong Kong. The lease term is twelve years and will
commence upon substantial completion of the building, estimated to be December
2000. Under the terms of the lease, the Company is committed to pay a monthly
rental of approximately US$500,000 to US$800,000, subject to an option for
additional space and certain escalation clauses over the lease terms. The lease
agreement provides this Company with an option to extend the lease term for an
additional eight years.
F-42
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Summary Consolidated Financial Data...................................... 6
Risk Factors............................................................. 8
Cautionary Note on Forward-Looking Statements............................ 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Trademarks............................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 33
Management............................................................... 45
Executive Compensation................................................... 48
Aggregated Option Exercises in the Most Recent Fiscal Year and Year-End
Option Values........................................................... 50
Benefit Plans............................................................ 54
Transactions and Relationships with Related Parties...................... 59
Principal Stockholders................................................... 62
Description of Capital Stock............................................. 65
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 70
Validity of Securities................................................... 74
Experts.................................................................. 74
Additional Information................................................... 74
Index to Financial Statements............................................ F-1
</TABLE>
---------------
Through and including August 27, 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
-------------------------------------------------------------------------------
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9,000,000 Shares
iAsiaWorks, Inc.
Common Stock
---------------
[LOGO OF IASIAWORKS, INC.]
---------------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Salomon Smith Barney
-------------------------------------------------------------------------------
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