-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QMPbsadfmCXQIeaBsQYiwAMCzFJg29shXlcnG3lfA+9Z5SKdU9LYbe7zINl2Yh5k lQbvexbWjXJH86A6OFpMbQ== 0000891618-99-001422.txt : 19990408 0000891618-99-001422.hdr.sgml : 19990408 ACCESSION NUMBER: 0000891618-99-001422 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABOVENET COMMUNICATIONS INC CENTRAL INDEX KEY: 0001026819 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 770424796 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-75795 FILM NUMBER: 99588558 BUSINESS ADDRESS: STREET 1: 50 W SAN FERNANDO ST STREET 2: SE 1010 CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4083676666 MAIL ADDRESS: STREET 1: 50 W SAN FERNANDO STREET 2: STE 1010 CITY: SAN JOSE STATE: CA ZIP: 95113 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 7, 1999. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ABOVENET COMMUNICATIONS INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN OUR CHARTER) DELAWARE 4813 77-0424796 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
50 W. SAN FERNANDO STREET, SUITE #1010 SAN JOSE, CALIFORNIA 95113 (408) 367-6666 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) SHERMAN TUAN CHIEF EXECUTIVE OFFICER 50 W. SAN FERNANDO STREET, SUITE #1010 SAN JOSE, CALIFORNIA 95113 (408) 367-6666 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: CARLA S. NEWELL, ESQ. JORGE DEL CALVO, ESQ. BENNETT L. YEE, ESQ. STANTON D. WONG, ESQ. ALLISON M. WING, ESQ. GABRIELLA A. LOMBARDI, ESQ. TODD W. SMITH. ESQ. CHRISTINE F. NAKAGAWA, ESQ. GUNDERSON DETTMER STOUGH PILLSBURY MADISON & SUTRO LLP VILLENEUVE FRANKLIN & HACHIGIAN, LLP 2550 HANOVER STREET 155 CONSTITUTION DRIVE PALO ALTO, CA 94304 MENLO PARK, CA 94025 (650) 233-4500 (650) 321-2400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]__________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]__________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE(2) - ------------------------------------------------------------------------------------------------------------------------- Common stock, $0.001 par value.................. 4,600,000 shares $123.00 $565,800,000 $157,295.00 - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
(1) Includes 600,000 shares of common stock that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(c) under the Securities Act, based on the average of the high and low prices for the common stock on the Nasdaq National Market on April 6, 1999. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 SUBJECT TO COMPLETION, DATED APRIL 7, 1999 THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. 4,000,000 SHARES LOGO ABOVENET COMMUNICATIONS INC. COMMON STOCK $ PER SHARE - -------------------------------------------------------------------------------- AboveNet Communications Inc. is offering 2,700,000 shares and the selling stockholders identified in this prospectus are offering 1,300,000 shares with this prospectus. AboveNet will not receive any proceeds from the sale of shares by the selling stockholders. This is a firm commitment underwriting. The common stock is listed on the Nasdaq National Market under the symbol "ABOV." On April 6, 1999, the last reported sale price of the common stock on the Nasdaq National Market was $123.00 per share. INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
PER SHARE TOTAL --------- ---------- Price to the public........................... $ $ Underwriting discount......................... Proceeds to AboveNet.......................... Proceeds to the selling stockholders..........
AboveNet has granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 600,000 additional shares from AboveNet within 30 days following the date of this prospectus to cover over-allotments. - -------------------------------------------------------------------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CIBC WORLD MARKETS LEHMAN BROTHERS PAINEWEBBER INCORPORATED VOLPE BROWN WHELAN & COMPANY The date of this Prospectus is , 1999 3 TABLE OF CONTENTS
PAGE --------- Prospectus Summary.......................................... 4 Risk Factors................................................ 7 Special Note Regarding Forward-Looking Statements........... 19 Use of Proceeds............................................. 20 Dividend Policy............................................. 20 Price Range of Common Stock................................. 20 Capitalization.............................................. 21 Dilution.................................................... 22 Selected Financial and Operating Data....................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 24 Business.................................................... 35 Management.................................................. 51 Certain Transactions........................................ 64 Principal and Selling Stockholders.......................... 66 Description of Capital Stock................................ 69 Shares Eligible for Future Sale............................. 72 Underwriting................................................ 74 Legal Matters............................................... 76 Experts..................................................... 76 Change in Accountants....................................... 76 Additional Information...................................... 76 Index to Financial Statements............................... F-1
------------------------------------ As used in this prospectus, the terms "we," "us," "our" and AboveNet mean AboveNet Communications Inc. and the term "common stock" means our common stock, $0.001 per share. Our principal executive offices are located at 50 W. San Fernando Street, Suite #1010, San Jose, California 95113. Our telephone number is (408) 367-6666. Unless otherwise stated herein, all information contained in this prospectus assumes no exercise of the overallotment option granted to the underwriters. On March 29, 1999, we announced a 2 for 1 stock split of our common stock. The stock split will be effected through the issuance of a stock dividend and will entitle each stockholder of record on April 14, 1999, to receive one share for every outstanding share of common stock held by them on that date. The dividend is expected to be distributed to stockholders on May 7, 1999. All common share numbers in this prospectus do not reflect the stock split. The underwriters are offering the shares subject to various conditions and may reject all or part of any order. The shares should be ready for delivery on or about ,1999 against payment in immediately available funds. EtherValve is our registered trademark. Cabriolet and MRTG are our trademarks. We have applied for federal trademark registration for the following names: AboveNet APS, ASAP, As-Ur-Here and Internet Service Exchange. All other trademarks, servicemarks or tradenames referred to in this prospectus are the property of their respective owners. 3 4 PROSPECTUS SUMMARY The summary highlights information contained in other parts of this prospectus, including "Risk Factors." It is not complete and may not contain all of the information that you should consider before investing in the shares. You should read the entire prospectus carefully. OUR COMPANY AboveNet is a leading provider of facilities-based, managed services for customer-owned Web servers and related equipment, known as co-location, and high performance Internet connectivity solutions for electronic commerce and other business critical Internet operations. We have developed a network architecture based upon strategically located facilities. These facilities, known as Internet service exchanges, allow Internet content providers direct access to Internet service providers. We are establishing two campuses, one located on the West Coast and one located on the East Coast. Our West Coast campus is comprised of our two San Jose, California Internet service exchange facilities, one of which is under development. Our East Coast campus is comprised of our existing Vienna, Virginia Internet service exchange facility and our planned facilities in New York, New York and the Washington D.C. area. On March 31, 1999, we had 257 public and private data exchange connections, known as peering arrangements, including relationships with most major network providers. Our network architecture and extensive peering relationships are designed to reduce the number of network connections or "hops" for data traveling across the Internet. By having both Internet content providers and Internet service providers co-located at our Internet service exchanges we enable our Internet service provider customers to offer their users "one hop" connectivity, through our local area network, to the sites of the Internet content providers that are co-located at our facilities. As of March 31, 1999, we had 458 customers, including Internet content providers, Web hosting companies and Internet service providers. The Internet has experienced tremendous growth and is emerging as a global medium for communications and commerce. Internet-based businesses and other enterprises need non-stop, high performance Internet operations that can handle the growth in their businesses and allow them to communicate and transact business globally over the Internet. However, many businesses that are seeking to establish these operations lack the resources and expertise to cost-effectively develop, maintain and enhance the necessary facilities and network systems. As a result, many businesses are seeking to outsource these functions to third party service providers to enhance their Web site reliability and performance, provide continuous operation of their Internet solutions, reduce related operating expenses and focus on their core businesses. We design our solutions to be very flexible and to allow our customers to easily expand their use of our services as their Internet operations grow. We charge our customers based on how much space and bandwidth they use. This provides our customers with a flexible, cost-effective method to increase their Internet operations. We design our services to enhance performance through a high speed network and we provide our customers with monitoring, notification and diagnostic services twenty-four hours a day, seven days a week. Our internally developed software monitors all of our direct and indirect network connections for delays in delivery of data packets and loss of data packets. This monitoring software allows our network engineers to enhance performance by rerouting data traffic as problems occur to avoid congested points. We also provide our customers with sophisticated monitoring, reporting and management tools that can be accessed by customers remotely from their own facilities to control their Internet operations. By providing a means to reduce the number of "hops" in the transmission of data, we believe that our network design can provide significant benefits to Internet service providers and their users as they seek to gain fast, reliable access to the sites of Internet content providers. 4 5 Our objective is to become the leading global provider of co-location and high performance Internet connectivity for Internet content providers, Web hosting companies and Internet service providers that require high-bandwidth, business critical Internet operations. To achieve this objective, we intend to do the following: - Increase awareness of the AboveNet name on a global basis. - Expand our customer base through increased sales and marketing efforts and establish relationships with channel partners. - Expand our global Internet service exchange network by connecting centralized facilities in key domestic and international locations. As part of this strategy, in March 1999, we entered into strategic agreements to establish regional Internet service exchanges in Austria, Germany and the United Kingdom. - Leverage our Internet service exchange model to increase our customer base and to generate additional recurring monthly revenues. - Address the emerging requirements of Internet technologies such as audio and video streaming and voice over the Internet. Our customers include AT&T Solutions, CNET Download.com, e-Media, LLC, Got.Net, IntelliChoice, Inc., iXL, Inc., KDD America, Netscape Communications Corporation (acquired by America Online, Inc.), RealNetworks, Inc., RemarQ Communities, Inc. (formerly named Supernews, Inc.), WebMD, Inc. and The Web Zone, Inc. Our customer base increased from 221 at March 31, 1998, to 278 at June 30, 1998, to 316 at September 30, 1998, to 382 at December 31, 1998 to 458 at March 31, 1999. THE OFFERING Common stock offered by AboveNet........ 2,700,000 shares Common stock offered by the selling stockholders............................ 1,300,000 shares Common stock to be outstanding after the offering................................ 16,322,599 shares Use of proceeds......................... For capital expenditures related to the build out of ISX facilities and increasing network capacity, potential strategic investments, working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol........... ABOV - ------------------------- The number of shares outstanding is based on shares outstanding as of December 31, 1998 and, excludes: - 1,897,124 shares of common stock issuable upon exercise of options outstanding under our 1996 and 1997 Stock Option Plans and non-plan options at a weighted average exercise price of $4.50 per share and 1,555,127 shares of common stock reserved for issuance under our 1998 Stock Incentive Plan. From December 31, 1998 through March 31, 1999, we issued options to purchase 237,150 shares of common stock; - 172,658 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $8.76 per share; and - 156,250 shares of common stock reserved for issuance under our 1998 Employee Stock Purchase Plan. 5 6 SUMMARY FINANCIAL AND OPERATING DATA (In thousands, except per share and customer data)
PERIOD FROM SIX MONTHS ENDED MARCH 8, 1996 YEAR ENDED JUNE 30, DECEMBER 31, (INCEPTION) TO ------------------- ----------------- JUNE 30, 1996 1997 1998 1997 1998 -------------- -------- -------- ------- ------- STATEMENT OF OPERATIONS DATA: Revenues.......................... $ 79 $ 552 $ 3,436 $ 1,105 $ 4,446 Loss from operations.............. (78) (1,804) (5,327) (1,150) (8,333) Net loss.......................... $ (78) $(1,803) $(5,425) $(1,266) $(8,543) ====== ======= ======= ======= ======= Basic and diluted loss per share........................... $(0.62) $ (9.17) $(20.68) $ (5.91) $ (4.50) ====== ======= ======= ======= ======= Shares used in basic and diluted loss per share.................. 125 197 262 214 1,897 OTHER OPERATING DATA: Capital expenditures.............. $ 101 $ 850 $ 4,145 $ 298 $20,075 Number of customers at period end............................. 10 110 278 178 382
DECEMBER 31, 1998 ---------------------- ACTUAL AS ADJUSTED ------- ----------- BALANCE SHEET DATA: Cash and equivalents........................................ $67,904 $380,939 Working capital............................................. 58,724 371,759 Total assets................................................ 95,732 408,767 Long-term obligations, net of current portion............... 6,500 6,500 Total stockholders' equity.................................. 76,869 389,904
The "as adjusted" numbers in the table above give effect to our receipt of the net proceeds from the sale of 2,700,000 shares of common stock by us at an assumed public offering price of $123.00 per share, after deducting the estimated underwriting discount and estimated offering expenses payable by us. Capital expenditures in the table above represent purchases of property and equipment, including non-cash transactions such as the acquisition of equipment under capital leases. See Notes 1 and 7 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used to compute basic and diluted loss per share. 6 7 RISK FACTORS You should carefully consider the following factors and other information in this prospectus before deciding to invest in the shares. The risks and uncertainties described below may not be the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In this event, the trading price of our common stock could decline, and you may lose all or part of your investment. Please see the "Special Note Regarding Forward-Looking Statements" on page 18 of this prospectus. BECAUSE WE HAVE A LIMITED OPERATING HISTORY, OUR BUSINESS IS DIFFICULT TO EVALUATE We were incorporated in March 1996 and began offering our co-location and Internet connectivity services to content providers through our first facility in July 1996. We introduced our co-location and Internet connectivity services to Internet service providers in August 1997 and began operating our second Internet service exchange facility in Vienna, Virginia, in July 1998. Accordingly, we have a limited operating history, and we face all of the risks and uncertainties encountered by early-stage companies. Also, because we have a limited operating history, our past results may not be meaningful and you should not rely on them as indicators of our future performance. In addition, our prospects must be considered in light of the risks, expenses and difficulties associated with the new and rapidly evolving market for co-location and Internet connectivity services. In sum, because of our limited history and the youth and inherent risks of our industry, predictions of our future performance are very difficult. WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING AND INCREASING LOSSES Since our inception we have incurred substantial losses. We expect our losses to significantly increase as we make further investments. We experienced net losses of $1.8 million, $5.4 million and $8.5 million in fiscal years 1997 and 1998, and for the six months ended December 31, 1998. As of December 31, 1998, we had an accumulated deficit of $15.8 million. Our losses are expected to increase as we intend to: - substantially increase our sales and marketing activities; - establish additional Internet service exchange facilities in San Jose, California, New York, New York, and the Washington D.C. area; - purchase additional rights to use capacity on fiber optic cable systems; - establish joint ventures with foreign entities developing international Internet service exchanges; and - expand our global network through purchases of long-term capacity and related equipment. We face significant challenges before we can become profitable. These challenges include our ability to: - increase our customer base and maintain existing customer relationships; - expand domestically and internationally; - provide scalable, reliable and cost-effective services; - develop our infrastructure to accommodate expanded and new facilities, additional customers and the increase of our network capacity; - expand our channels of distribution; - effectively establish our brand name; - retain and motivate qualified personnel; and - continue to respond to competitive developments. 7 8 Although we have experienced significant growth in revenues in recent periods, we do not believe that this growth rate is necessarily a good indication of future operating results. We might not ever achieve or sustain profitability. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more detailed information concerning our losses and other operating results. OUR BUSINESS WILL SUFFER IF WE DO NOT EXPAND AND MAINTAIN OUR CUSTOMER BASE Our success depends on the continued growth of our customer base and the retention of our customers. Our ability to attract new customers depends on a variety of factors, including: - the willingness of businesses to outsource their Internet operations; - the reliability and cost-effectiveness of our services; and - our ability to effectively market such services. To attract new customers we intend to significantly increase our sales and marketing expenditures. However, our efforts might not result in more sales as a result of the following factors: - we may be unsuccessful in implementing our marketing strategies; - we may be unsuccessful in hiring a sufficient number of qualified sales and marketing personnel; and - any implemented strategies might not result in increased sales. Our marketing efforts include developing relationships with hardware providers, system integrators, value added resellers and Web hosting companies. We may limit our ability to increase revenues if we fail to develop these relationships. In the past, we have lost customers to other service providers for various reasons, including lower prices and other incentives offered by competitors that we do not match. Our customers might terminate or decide not to renew their commitments to use our services. A majority of our customer contracts are cancelable on 30 days notice. WE EXPECT OUR OPERATING RESULTS TO FLUCTUATE We have experienced significant fluctuations in our operating results from quarter to quarter. As a result of these fluctuations, period-to-period comparison of our operating results is not necessarily meaningful and should not be relied upon as an indicator of future performance. We expect our future operating results to fluctuate. Factors that are likely to cause these fluctuations include: - demand for and market acceptance of our services; - capacity utilization of our Internet service exchange facilities; - fluctuations in data communications and telecommunications costs; - customer retention; - the timing and magnitude of capital expenditures; - costs relating to the expansion of operations; - expansion of existing facilities and completion of new facilities; - fluctuations in bandwidth used by customers; - introductions of new services or enhancements by us and our competitors; - the timing of customer installations and related payments; - the ability to maintain or increase peering relationships; 8 9 - provisions for customer discounts and credits; - changes in our pricing policies and those of our competitors; - changes in regulatory laws and policies; - economic conditions, particularly those related to the Internet industry; - difficulties in collecting accounts receivable, particularly because many of our customers are in an emerging stage; - compensation costs related to certain option grants and warrants; and - decreased revenues during the summer months and other seasonal effects on sales. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to data communications and telecommunications costs, depreciation, real estate and personnel. Our future operating results will be particularly sensitive to fluctuations in revenues because of these and other short-term fixed costs. Our operating results in the future may fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock will likely decrease significantly. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed analysis of our period-to-period results. WE MAY FACE PROBLEMS IN CONNECTION WITH OUR EXPANSION PLANS We are currently expanding our West Coast campus by developing an additional Internet service exchange facility in San Jose, California. In addition, we are planning to expand our East Coast campus by developing additional Internet service exchange facilities in New York, New York and in the Washington D.C. area. The successful expansion of these facilities will involve significant planning and resources. We may face problems in connection with our expansion plans and, as a result, these expansion plans may be delayed or never completed. We have not yet entered into a facility lease for our planned expansion in the Washington D.C. area. Please see "Business -- Facilities" for a more detailed description of our planned Internet service exchange facilities. Our expansion plans will face many obstacles. In order to carry out our expansion plans, we must: - obtain the necessary permits and approvals; - enter into leases for proposed facilities; - pass the required inspections; and - hire the necessary contractors, builders, electricians, architects and designers. Our expansion plans are subject to risks, such as: - construction delay; - cost estimation errors or overruns; - equipment and material delays or shortages; - inability to obtain necessary permits on a timely basis; - strain on management and diversion of our attention from day-to-day operations; - failure to timely hire the necessary employees, including management and sales personnel; and - failure to predict customer demand for new facilities. 9 10 In addition, our costs will increase as we expand. These increased costs include: - expenses associated with hiring; - training and managing new employees; - purchasing new equipment; - implementing power and redundancy systems; - implementing multiple data communications and telecommunications connections; and - leasing additional real estate and depreciation. For a discussion of the risks associated with our needs for additional funding, please see the Risk Factor entitled "Additional funding may not be available if we need it." WE HAVE A LONG SALES CYCLE A customer's decision to purchase our services involves a significant commitment of resources. As a result, we have a long sales cycle. We also need to educate customers regarding the benefits of co-location and Internet connectivity services. We generally incur significant expenses in sales and marketing prior to getting customer commitments for our services. As a result, our inability to get customer commitments or delays due to the lengthy sales cycles could significantly harm our operating results. WE DEPEND ON THIRD PARTIES TO ESTABLISH AND OPERATE INTERNATIONAL INTERNET SERVICE EXCHANGES As part of our strategy, we plan to continue to make investments in joint ventures and foreign companies that are expected to develop regional Internet service exchange facilities in Europe and Asia and license our trademarks and technology to these entities. We do not expect to control or manage any of these foreign entities. As a result, we will be required to depend on the management of these foreign entities to successfully establish and operate these regional Internet service exchange facilities. The ability of these foreign companies to successfully establish and operate Internet service exchange facilities is subject to a number of risks over which we will have little or no control. These risks include: - the inability to set up a data communications and telecommunications infrastructure in a cost-effective manner; - the inability to compete effectively in international markets; and - a potentially more rigorous set of laws within each foreign country. These foreign companies are expected to operate under the AboveNet name. If these foreign companies are not successful, they could significantly damage our reputation and brand equity. Also, we have granted exclusive licenses in Austria, Germany and the United Kingdom and expect to do the same in other countries. Under the terms of the license agreements in those countries, the foreign companies have at least one year in which to meet their performance targets before they risk losing exclusivity in their territories. Because of these restrictions, if the foreign companies are not successful, we will not be able to enter those markets on our own or with other third parties for a significant period of time. For a description of our international Internet service exchanges, please see "Business -- International Internet Service Exchanges." While our international sales are typically denominated in U.S. dollars, fluctuations in currency exchange rates could cause our services to become relatively more expensive to customers in a particular country, potentially leading to a reduction in sales to local customers. 10 11 WE FACE INTENSE COMPETITION FROM OTHER COMPANIES Our business is intensely competitive. We expect to face additional competition from existing competitors and new market entrants in the future as there are few substantial barriers to entering the co-location service business. We must distinguish ourselves through the quality of our network performance, service offerings and brand name recognition. We may be unsuccessful in doing this. In addition, our business model of establishing centralized Internet service exchange facilities may not be widely adopted over the model established by other outsource providers who have developed and are continuing to develop numerous geographically dispersed facilities. We cannot be certain that we will have the resources or expertise to compete successfully in the future. Some of our competitors have certain advantages over us. These advantages include: - substantially greater financial, technical and marketing resources; - larger customer bases; - longer operating histories; - greater name recognition; and - more established relationships in the industry. Our competitors may be able to utilize these advantages to: - expand their offerings more quickly; - adapt to new or emerging technologies and changes in customer requirements more quickly; - take advantage of acquisitions and other opportunities more readily; - devote greater resources to the marketing and sale of their services; and - adopt more aggressive pricing and incentive policies. In addition, some of our competitors have offered co-location services at prices lower than ours. Furthermore, some competitors offer incentives we do not match. These incentives include free start-up and domain name registration, periods of free service and low-priced Internet access. This and future price competition may have a material adverse effect on our business and operating results. In addition, some competitors have entered into joint ventures, consortiums or consolidations to provide services competitive with our services. As a result, these competitors may be able to provide customers with additional benefits, including reduced communications costs, which could reduce the overall costs of their services relative to our services. We might not be able to offset the effects of those price reductions. We also believe that companies seeking co-location and Internet connectivity for their business critical Internet operations may use more than one company to provide this service. As a result, these customers would be able to more easily shift the amount of service and bandwidth usage from one provider to another. We may also face competition from our suppliers. WE MAY NOT BE ABLE TO MANAGE OUR GROWTH EFFECTIVELY Our operating results and financial condition could suffer if we do not effectively manage any growth that may occur. We have recently experienced a period of rapid growth with respect to the expansion of our Internet service exchange facilities and our customer base. To manage our growth effectively we must continue to: - expand our operating and financial procedures and controls; - replace or upgrade our operational, financial and management information systems; 11 12 - attract, train, motivate, manage and retain key employees; and - increase substantially the size of our sales and marketing organization. WE MAY NOT BE ABLE TO HIRE OR RETAIN THE KEY EMPLOYEES WE NEED The market for highly qualified personnel is very competitive. Particularly, we are dependent on our ability to significantly increase the size of our sales and marketing organization. If we are unable to hire the key personnel we need, we may provide poor service and/or have difficulty signing up new customers. In addition, we depend on the ability of a new management team to effectively execute our strategies. We recently hired many of our key employees. Between August and December 1998, we hired our Senior Vice President and Chief Financial Officer, our Vice President of Construction and Real Estate and our Vice President of Marketing. In December 1998, we also promoted an employee to Vice President of Sales. Our Vice President of Engineering joined us in February 1999. Because many members of our management team have worked together for a short period of time, we have to effectively integrate these managers into our operations. We may lose some of our current key personnel and any loss may have an adverse effect on our business. It is important that we retain our Chief Executive Officer, Sherman Tuan, President and Chief Operating Officer, Warren J. Kaplan, Chief Technical Officer, David Rand, and Senior Vice President of Sales and Marketing, David Dembitz. Any of our officers or employees can quit at any time. We maintain a key man insurance policy in the amount of approximately $1.1 million on the life of Mr. Tuan, but not on any other executive officers. Also, all options to purchase common stock held by Mr. Kaplan vested upon the our initial public offering. WE MUST MAINTAIN AND INCREASE PEERING RELATIONSHIPS The Internet is comprised of network providers who operate their own networks and interconnect their networks at various public and private points. These interconnections are called peering arrangements. Our establishment and maintenance of peering relationships is necessary in order to effectively exchange traffic with Internet service providers without having to pay the higher costs of transit services and in order to maintain high network performance levels. These arrangements are not subject to regulation and are subject to changes in terms, conditions or costs. We may not be able to provide our customers with affordable services if we are unable to maintain and increase peering relationships with Internet service providers. In addition, any increase in the costs associated with access to the Internet that we are unable to pass to our customers may affect our financial condition and operating results. We may have to spend more to maintain our relationships with Internet service providers to the point where it becomes necessary to find alternatives. These Internet service providers may increase their prices. In turn, we may be required to identify alternative methods to distribute our customers' content. These alternatives may not exist. WE DEPEND ON THIRD PARTY SUPPLIERS We depend on third parties to maintain and provide us key components for our network infrastructure. Our financial condition may suffer if the third parties we depend on to provide our network infrastructure either increase their cost to us or fail to maintain the operational integrity of their networks. We, and our customers, depend upon data communications and telecommunications providers, such as MCI WorldCom, Sprint, Pacific Bell, Teleport Communications Group, a subsidiary of AT&T, and WinStar Communications, Inc., to provide the data communications and/or telecommunications capacity we require. As a result, the service we provide our customers may be interrupted if our data communications and telecommunications providers' systems fail. If these systems fail, our reputation could be harmed or 12 13 our customers could leave. In addition, MCI WorldCom is a current competitor of ours. Other data communications providers are potential competitors of ours. Furthermore, some equipment we depend on is available only from limited sources because of the quantities and quality we demand. Currently, we order all of our routers from Cisco Systems, Inc. We believe we could find alternative sources to supply routers in the event routers from Cisco Systems were unavailable. However, we would need to train our personnel in the use of these alternative routers. This training could cause delay or interruption of our services. We have purchased fiber optic cable capacity between the U.S. and the United Kingdom from Global Crossing Ltd. In March 1999, we entered into an agreement with Global Crossing to purchase fiber optic cable capacity between the U.S. and the Netherlands. This agreement is subject to us entering into an additional agreement with Global Crossing for fiber optic cable capacity connecting certain European cities. If the contemplated agreements are entered into we will be dependent on Global Crossing Ltd. for fiber connectivity to and within Europe. OUR SYSTEMS OR OTHER SYSTEMS ON WHICH WE DEPEND MAY FAIL Our customers depend on our ability to provide continuous service. As a result, if our service is interrupted, our reputation will be harmed and our customers may leave. Our systems and our customers' systems risk damage from numerous forces, including: - human error; - fire; - earthquakes; - floods; - power loss; - telecommunications failures; or - sabotage or vandalism. In addition, our operations may be disrupted due to unannounced or unexpected changes in transmission protocols or other technology. We may be subject to legal claims and be liable for losses suffered by our customers for disruption of service or damage to customer equipment. Our contracts with our customers attempt to eliminate our liability for consequential or punitive damages and for damage to customer equipment not caused by our gross negligence or willful acts. However, those provisions may not protect us from being held liable for those damages. THE MARKET FOR CO-LOCATION AND INTERNET CONNECTIVITY SERVICES IS NEW AND MAY NOT GROW The market for co-location and Internet connectivity services is new and evolving. As a result, our financial condition will be harmed if our market fails to develop, or develops more slowly than we expect. The growth of our market depends on several uncertain events or occurrences. These events or occurrences include: - the growth of the Internet as a global communication and commerce medium; - the willingness of businesses to co-locate their Internet operations; and - our ability to successfully and cost-effectively market our services to a sufficiently large number of customers. Our business may also suffer if our services do not achieve widespread acceptance in this new market. 13 14 WE MUST BE ABLE TO EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE We must continue to expand and adapt our network as the number of its users grow, as its users place increasing demands on it, and as requirements change. If we are unable to expand and adapt our network infrastructure, we may lose customers. We have had limited deployment of our services. Accordingly, it is difficult to determine if our network will be able to handle, connect and manage large numbers of users at high transmission speeds. We may not be able to provide our customers with the increasing levels of data transmission capacity that they may require for a number of reasons, such as our possible inability to raise the funds needed to develop the network infrastructure to maintain adequate data transmission speeds and the lack of additional network capacity from third-party suppliers. In addition, any future attempts we make to bolster our network may be delayed or cause further complications. We may encounter equipment or software incompatibility, among other things, if we upgrade our network to increase its capacity. This may cause delays in our attempts to expand or improve our services. For more detailed information regarding our network, please see "Business -- Network Architecture". WE MAY FACE RISKS AND COSTS ASSOCIATED WITH POTENTIAL FUTURE ACQUISITIONS The costs and risks we may face if we pursue acquisitions of key technologies or companies in the future may have an adverse impact on us. An acquisition may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt or amortization expenses related to goodwill and other intangible assets. Any acquisitions we may engage in may involve numerous risks. These risks include: - difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company; - the diversion of management's attention from other business concerns; - risks of entering markets in which we have no or limited direct prior experience; and - potential loss of key employees of the acquired company. Our financial condition and operating results may be adversely affected if any acquisitions occur. WE DEPEND ON THE GROWTH AND PERFORMANCE OF THE INTERNET Our success will depend in large part on growth in the use of the Internet. The growth of the Internet is highly uncertain and depends on a variety of factors. These factors include security, reliability, cost, ease of access, quality of service and necessary increases in bandwidth availability. In addition, broad adoption of the Internet for most business applications will require the acceptance of a new medium of conducting business and exchanging information. The recent growth in the use of the Internet has placed strain on the Internet. This increased use has required 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 weakening in the performance of the Internet could undermine the benefits of our services. The benefits of our services are ultimately dependent upon the speed and reliability of the networks operated by third parties. Consequently, the emergence and growth of our market is dependent on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion. WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES OR EMERGING INDUSTRY STANDARDS Our services will become relatively less useful to our customers if we are unable to respond to technological advances. Our future success depends, in part, on our ability to address the increasingly 14 15 sophisticated and varied needs of our current and prospective customers. Keeping pace with technological advances in our industry may require substantial expenditures and lead time. In addition, future advances in technology may harm our business. We may not be able to incorporate technology advances on a cost-effective or timely basis into our business. Future technological advances may also make our services unnecessary or less cost-effective for our customers. Also technological advances may encourage businesses to rely on in-house personnel and equipment to furnish the services we currently provide. We currently intend to support emerging standards if they become established and our failure to conform to prevailing standards or the failure of a common standard to emerge could hurt our business. WE FACE RISKS ASSOCIATED WITH THE SECURITY OF OUR SYSTEMS Despite our design and implementation of a variety of network security measures, unauthorized access, computer viruses, accidental or intentional action and other disruptions could occur. In addition, we may incur significant costs to prevent breaches in security or to alleviate problems caused by such breaches. Any breaches that may occur could result in liability to us, loss of existing customers and the deterrence of future customers. We have been sued by a customer alleging that we negligently allowed the customer's consultant access to the customer's servers co-located at our San Jose facility. Please see "Business -- Legal Proceedings" for a more detailed description of this lawsuit. WE OPERATE IN AN UNCERTAIN LEGAL LANDSCAPE The adoption and interpretation of any future or currently existing regulations might have a negative impact on our business. The Internet and our market are relatively new. Many of the laws and regulations that govern us have yet to be interpreted or enforced. It is likely that in the future many new laws will take effect that will regulate the Internet and our industry. The applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. Current and future laws and regulations may: - decrease the growth of the Internet; - decrease demand for our services; and - impose taxes or other costly technical requirements or otherwise increase the cost of doing business. We operate over the Internet in multiple states and foreign countries. In addition, we facilitate sales by our customers to end users located in many states and foreign jurisdictions. As a result, we are potentially subject to the laws and regulations of jurisdictions in which we are not qualified to do business. These jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each such state or foreign country, potentially subjecting us to additional taxes and lawsuits in these jurisdictions. WE MAY FACE LIABILITY AND OTHER RISKS AS A RESULT OF INFORMATION DISSEMINATED THROUGH OUR NETWORK The liability we may face as a result of information disseminated through our network could have a negative impact on our financial condition. The law relating to the liability of online services companies and Internet access providers for information carried on or disseminated through their networks is currently unsettled. It is possible that claims could be made against online services companies, co-location companies and Internet access providers under both United States and foreign law for defamation, negligence, copyright or trademark infringement or other legal theories. Content distributed by some of our current or future customers may be regulated or banned. As a result, we may lose some of our customers if their content is regulated. We have received letters from recipients of information transmitted by our customers objecting to the nature and content of the information. Several private lawsuits seeking to impose liability on online services companies and Internet access providers are currently pending. In addition, legislation has been recently passed and continues to be proposed that imposes liability for or prohibits the transmission over the Internet of certain types of information. 15 16 We may need to implement measures to reduce our exposure to this potential liability. These measures may require the expenditure of substantial resources. We also may need to discontinue certain service offerings. The increased attention focused upon liability issues as a result of these lawsuits, new laws and legislative proposals could impact the growth of Internet use. We carry general liability insurance, but it may not be adequate to compensate or may not cover us in the event we become liable for information carried on or disseminated through our networks. In addition, some of our customers have sent unsolicited commercial e-mails from servers co-located at our facilities to massive numbers of people, typically to advertise products or services. This practice, known as "spamming," can lead to complaints against service providers that enable such activities, particularly where recipients view the materials received as offensive. Internet service providers and other online services companies might deny network access to us if undesired content or spamming were to be transmitted from servers co-located by us. The loss of these services could adversely affect our business and operating results. THE PROTECTION OF OUR PROPRIETARY INFORMATION IS LIMITED We have no patented technology. We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect certain proprietary rights in our technology. The steps we have taken to protect our intellectual property may be insufficient. Our technology may be misappropriated or a third party may independently develop similar technologies. The laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the U.S. WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS Our business may be adversely affected by a claim that we are infringing the proprietary rights of others. We have not been notified that we infringe the proprietary rights of third parties. However, we might face claims of infringement in the future. Any claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service delays or require us to enter into royalty or licensing agreements. Any royalty or licensing agreements required might not be available at all or on terms acceptable to us. ADDITIONAL FUNDING MAY NOT BE AVAILABLE IF WE NEED IT Our business may suffer if we require additional funding and are not able to obtain it. We expect to incur significant expenditures as part of our expansion plans. In March 1999, we entered into a commitment to pay $7.5 million for additional fiber optic capacity. This $7.5 million commitment is subject to us entering into an additional commitment to purchase fiber optic capacity connecting certain European cities, which commitment is expected to be approximately $11.0 million. We intend to enter into additional arrangements to secure fiber optic capacity for Europe, Asia and the Pacific Rim. These agreements may require us to make substantial up front payments for long-term capacity that could require us to seek additional debt or equity financing. In addition, we have investment commitments and plan to continue to make future investments in joint ventures and foreign companies to develop international Internet service exchanges. We believe that, following this offering, our cash reserves and available borrowings will be adequate to fund our operations for at least the next 12 months. However, we may require additional funds either during or after such 12 month period. Please see "Use of Proceeds." Additional financing may not be available if required or may only be available on terms that are not favorable to us. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders could be significantly diluted. Any new equity securities may have rights, preferences or privileges senior to those of our stockholders. For a more detailed description of our capital commitments and resources, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 4, 9 and 12 of Notes to Financial Statements. 16 17 WE FACE RISKS ASSOCIATED WITH THE YEAR 2000 COMPUTER PROBLEM Although we have taken precautions, we may still encounter problems attributable to the Year 2000 issue. Many currently installed computer systems and software products are coded to accept only two digit dates. These systems will need to distinguish 21st century dates from 20th century dates. Any inability to do so could result in system failures or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. We are in the process of establishing procedures for evaluating and managing the risks and costs associated with this problem. We believe our computer systems on a stand-alone basis are currently Year 2000 compliant. We cannot assure you that our computer systems are Year 2000 compliant. We may face losses due to the failure of our customers or suppliers to ensure that their systems are Year 2000 compliant. Many of our customers' and suppliers' Internet operations may be impacted by Year 2000 complications. This impact may result in decreased Internet usage or the delay or inability to obtain necessary data communications and telecommunications capacity. These delays may have a direct effect on our operations. WE ARE SUBJECT TO INFLUENCE FROM PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS Some of our stockholders own a large enough stake in us to have an influence on matters presented to the stockholders. Our executive officers, directors and greater than 5% stockholders (and their affiliates) will, in the aggregate, own approximately 25.5% of our outstanding common stock after this offering. If these parties acted in concert they could influence, among other things, the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may delay or prevent a change in control, merger, consolidation, takeover or other business combination involving us. They may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. As a result, this concentration of ownership may have an adverse effect on our value. OUR STOCK PRICE IS VOLATILE The market price of our stock has and is likely to experience extreme fluctuations in response to a number of factors. These factors include: - actual or anticipated variations in our results of operations; - announcements of technological innovations; - new services introduced by us or our competitors; - changes in financial estimates by security analysts; - conditions and trends in the Internet industry; - general market conditions; and - potential volatility due to the increase in the number of publicly traded shares in connection with this offering. The Nasdaq National Market has experienced extreme price and volume fluctuations, as have other stock markets. For example, from December 10, 1998, the date of the initial public offering of our common stock, through March 31, 1999, our stock price rose from $13.00 per share to $130.88 and has on many days fluctuated more than 10%. Similar market fluctuations have particularly affected the market prices of equity securities of many technology companies. The effects on the stock prices of these companies have often been unrelated or disproportionate to the operating performance of these companies. The trading 17 18 prices of many technology companies' stocks are at or near historical highs and reflect valuations substantially above historical levels. These trading prices and valuations may fall significantly. In addition, these broad market factors may adversely affect the market price of our common stock. Our stock price may also be adversely affected by general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations. Class action litigation has often been instituted following periods of volatility in the market price of a company's securities. We would be adversely affected if such litigation were brought against us. THIS OFFERING WILL BENEFIT SOME OF OUR EXISTING STOCKHOLDERS The selling stockholders will receive substantial proceeds from selling their shares of common stock in this offering. We will pay the offering expenses of the selling stockholders in this offering other than the underwriting discount. At an assumed offering price of $123.00 per share, the net proceeds to the selling stockholders, most of whom are our affiliates, will be approximately $151.1 million. In addition, as a result of this offering, the pro forma net tangible book value per share to existing stockholders will immediately increase and the net tangible book value per share to new investors will immediately be diluted. WE HAVE BROAD DISCRETION AS TO USE OF PROCEEDS We estimate the net proceeds of this offering to be approximately $313.0 million. We expect to use the net proceeds for capital expenditures related to the build-out of our facilities, increasing network capacity, potential strategic investments, working capital and general corporate purposes. However, we may change the allocation of these proceeds in response to economic or industry developments or changes. Our management can spend the proceeds from this offering in ways with which the stockholders may not agree. We cannot predict that such proceeds will be invested to yield a favorable return. See "Use of Proceeds." WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND THERE ARE PROVISIONS OF DELAWARE LAW THAT COULD PREVENT OR DELAY A CHANGE IN CONTROL OF OUR COMPANY Our certificate of incorporation, our bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Such provisions include: - authorizing the issuance of up to 5,000,000 shares of "blank check" preferred stock; - providing for a classified board of directors with staggered, three year terms; and - prohibiting certain stockholder action by written consent. We are currently considering other anti-takeover measures, including a stockholders' rights plan. Please see "Description of Capital Stock" for a more complete discussion of these matters. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE STOCK YOUR PURCHASE The assumed public offering price is substantially higher than the net tangible book value per outstanding share of common stock. Purchasers of our common stock will incur immediate and substantial dilution of $99.07 per share in the net tangible book value of our common stock from the assumed public offering price of $123.00. Additional dilution will occur upon the exercise of outstanding options. 18 19 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements about our plans, objectives, expectations, intentions and assumptions and other statements contained in this prospectus that are not statements of historical fact. You can identify these statements by words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions. We cannot guarantee future results, levels of activity, performance or achievements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include those discussed in "Risk Factors" and elsewhere in this prospectus. 19 20 USE OF PROCEEDS The net proceeds from the sale of the 2,700,000 shares of common stock offered by us will be approximately $313.0 million assuming a public offering price of $123.00 per share and after deducting the estimated underwriting discount and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders. We currently expect to use $56.0 million to $72.0 million of the net proceeds of this offering for capital expenditures associated with our planned expansion of our West and East Coast campuses. We also expect to use a significant amount of the net proceeds for the purchase of fiber optic capacity and related equipment. In addition, we intend to use a portion of the net proceeds for strategic investments in companies developing Internet service exchange facilities in Europe and Asia. The balance of the net proceeds of this offering will be used for working capital and general corporate purposes. Although we may use a portion of the net proceeds for possible acquisitions of businesses or technologies that are complementary to our business, there are no current plans in this regard. We may, however, change the allocation of these proceeds in response to developments or changes that affect our business, our industry. Our management may spend the proceeds from this offering in ways with which the stockholders may not deem desirable. Pending use of the net proceeds for the above purposes, we plan to invest such funds in short-term, investment grade, interest-bearing securities. We cannot predict that the proceeds will be invested to yield a favorable return. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our debt facilities contain restrictive covenants that limit our ability to pay cash dividends without the prior written consent of the lender. PRICE RANGE OF COMMON STOCK Our common stock began trading publicly on the Nasdaq National Market on December 10, 1998 and is traded under the symbol "ABOV." The following table shows the high and low per share closing prices of our common stock, as reported by the Nasdaq National Market for the periods indicated.
HIGH LOW -------- ------- 1998 Second Fiscal Quarter (beginning December 10, 1998)....... $ 25.75 $ 12.13 1999 Third Fiscal Quarter...................................... $131.88 $ 19.44 Fourth Fiscal Quarter (through April 6, 1999)............. $130.88 $118.00
On April 6, 1999, the closing price of our common stock on the Nasdaq National Market was $123.00 per share, and on March 31, 1999 there were approximately 147 holders of record of the common stock. 20 21 CAPITALIZATION The following table sets forth the following information as of December 31, 1998: - our actual capitalization; and - our "as adjusted" capitalization that gives effect to the sale of 2,700,000 shares of common stock at an assumed public offering price $123.00 per share in this offering, less the estimated underwriting discount and our estimated offering expenses.
DECEMBER 31, 1998 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (in thousands) Long term obligations, less current portion................. $ 6,500 $ 6,500 Stockholders' equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding, actual and as adjusted........................................ -- -- Common stock, $0.001 par value; 60,000,000 shares authorized, 13,593,956 shares issued and outstanding, actual; 16,293,956 shares issued and outstanding, as adjusted............................................... 89,327 402,362 Common stock options...................................... 3,467 3,467 Deferred stock compensation............................... (77) (77) Accumulated deficit....................................... (15,848) (15,848) -------- -------- Total stockholders' equity........................ 76,869 389,904 -------- -------- Total capitalization.............................. $ 83,369 $396,404 ======== ========
The number of outstanding shares of common stock excludes: - 1,897,124 shares of common stock issuable upon exercise of options outstanding under our 1996, 1997 and 1998 Stock Option Plans and non-plan options at a weighted average price of $4.50; - 172,658 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $8.76 per share; - 1,555,127 shares of common stock reserved for future issuance under our 1998 Stock Option Plan; and - 156,250 shares of common stock reserved for future issuance under our 1998 Employee Stock Purchase Plan. 21 22 DILUTION The net tangible book value of our common stock as of December 31, 1998, was $76.9 million, or approximately $5.65 per share. "Net tangible book value" per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Dilution in the net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the net tangible book value per share of common stock immediately afterwards. After giving effect to the sale of 2,700,000 shares of common stock offered by this prospectus and after deducting the estimated underwriting discount and our estimated offering expenses, our net tangible book value would have been $389.9 million, or approximately $23.93 per share. This represents an immediate increase in net tangible book value of $18.28 per share to existing stockholders and an immediate dilution in net tangible book value of $99.07 per share to new investors. The following table illustrates this per share dilution: Public offering price per share............................. $123.00 ------- Net tangible book value per share as of December 31, 1998................................................... $ 5.65 ------ Increase in net tangible book value per share attributable to the offering........................................ 18.28 ------ Net tangible book value per share after giving effect to the offering.................................................. 23.93 ------- Net tangible book value dilution per share to new investors in the offering........................................... $ 99.07 =======
This table excludes all options and warrants that were outstanding as of December 31, 1998. See Notes 6 and 12 of Notes to Financial Statements. The exercise of the outstanding options and warrants having an exercise price less than the offering price would increase the dilutive effect to new investors. 22 23 SELECTED FINANCIAL AND OPERATING DATA This section presents historical financial data of AboveNet Communications Inc. You should read carefully the financial statements included in this prospectus, including the notes to the financial statements. The selected data in this section is not intended to replace the financial statements. We derived the statement of operations data for the period from March 8, 1996 (inception) to June 30, 1996 and the years ended June 30, 1997 and 1998 and balance sheet data as of June 30, 1997 and 1998 from the audited financial statements included in this prospectus. Those financial statements were audited by Deloitte & Touche LLP, our independent auditors. We derived the balance sheet data as of June 30, 1996 from unaudited financial statements that are not included in this prospectus. We derived the statement of operations data for the six months ended December 31, 1997 and 1998 and balance sheet data as of December 31, 1998 from the unaudited financial statements included in this prospectus. We believe that the unaudited historical financial statements contain all adjustments needed to present fairly the information included in those statements, and that the adjustments made consist only of recurring adjustments.
SIX MONTHS PERIOD FROM ENDED MARCH 8, 1996 YEAR ENDED JUNE 30, DECEMBER 31, (INCEPTION) TO -------------------- ----------------- JUNE 30, 1996 1997 1998 1997 1998 -------------- -------- -------- ------- ------- (In thousands, except per share and customer data) STATEMENT OF OPERATIONS DATA: Revenues........................................... $ 79 $ 552 $ 3,436 $ 1,105 $ 4,446 ------ ------- ------- ------- ------- Costs and expenses: Data communications and telecommunications....... -- 559 2,200 629 2,830 Network operations............................... 20 417 1,572 444 2,023 Sales and marketing.............................. 19 382 1,618 475 3,493 General and administrative....................... 66 434 1,621 476 2,061 Depreciation and amortization.................... 52 133 476 182 1,203 Stock-based compensation expense................. -- -- 1,276 49 1,169 Joint venture termination fee.................... -- 431 -- -- -- ------ ------- ------- ------- ------- Total costs and expenses........................... 157 2,356 8,763 2,255 12,779 ------ ------- ------- ------- ------- Loss from operations............................... (78) (1,804) (5,327) (1,150) (8,333) Interest expense................................... -- (7) (161) (126) (493) Interest income.................................... -- 8 63 10 283 ------ ------- ------- ------- ------- Net loss........................................... $ (78) $(1,803) $(5,425) $(1,266) $(8,543) ====== ======= ======= ======= ======= Basic and diluted loss per share................... $(0.62) $ (9.17) $(20.68) $ (5.91) $ (4.50) ====== ======= ======= ======= ======= Shares used in basic and diluted loss per share.... 125 197 262 214 1,897 OTHER OPERATING DATA: Capital expenditures............................... $ 101 $ 850 $ 4,145 $ 298 $20,075 Number of customers at period end.................. 10 110 278 178 382
JUNE 30, ----------------------------- DECEMBER 31, 1996 1997 1998 1998 ------- ------- ------- ------------ (in thousands) BALANCE SHEET DATA: Cash and equivalents.................................. $ 89 $ 331 $ 8,141 $67,904 Working capital (deficit)............................. 88 (946) 5,061 58,724 Total assets.......................................... 151 1,171 13,693 95,732 Long-term obligations, net of current portion......... 210 116 9,325 6,500 Total stockholders' equity (deficiency)............... (73) (262) 661 76,869
See Notes 1 and 7 of Notes to Financial Statements for an explanation of the method used to determine the number of shares used in computing basic and diluted loss per share. Capital expenditures in the table above represent purchases of property and equipment, including non-cash transactions such as the acquisition of equipment under capital lease. 23 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read this together with the financial statements and other financial information included in this prospectus. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in the forward-looking statements. Please see the "Special Note Regarding Forward-Looking Statements" elsewhere in this prospectus. Our fiscal year ends on June 30. The fiscal year ended June 30, 1997 is referred to as fiscal 1997 and the fiscal year ended June 30, 1998 is referred to as fiscal 1998. OVERVIEW We are a leading provider of high performance, managed co-location and Internet connectivity solutions for electronic commerce and other business critical Internet operations. We were founded in March 1996 and, in July 1996, began providing co-location and Internet connectivity services to content providers at our San Jose, California facility. In August 1997, we expanded our service offerings to provide co-location and Internet connectivity services to Internet service providers, enabling the development of our Internet service exchange model. In July 1998, we opened our second Internet service exchange facility, located in Vienna, Virginia, and completed an expansion of our San Jose Internet service exchange facility. The San Jose facility currently has approximately 6,800 square feet of co-location space and the Vienna facility has approximately 12,000 square feet of co-location space. We derive most of our revenues from bandwidth charges, with additional revenues generated from charges related to space requirements and one-time installation fees. Bandwidth and space requirement charges are billed on a monthly basis. Space requirement charges include access to our network, proprietary tools and management services. In most instances, we charge our customers for a set amount of bandwidth availability and charge incremental fees if the customer uses additional bandwidth. Our contracts range from month-to-month to multiple year commitments, a majority of which are cancelable on 30 days notice. Revenues relating to bandwidth usage and space requirement charges are generally recognized in the period in which the services are performed. Installation fees are recognized in the period of installation. A significant component of our expenses relates to data communications and telecommunications costs. Data communications costs consist primarily of payments to network providers, such as MCI WorldCom, Sprint, Pacific Bell, Teleport Communications Group, a subsidiary of AT&T, and WinStar Communications, Inc. Telecommunications charges generally consist of one time fees for circuit installation and variable recurring circuit charges. Monthly circuit charges vary based upon circuit type, the distance the circuit spans and/or the circuit usage, as well as the term of the contract. We intend to create a global Internet service exchange network by connecting centralized facilities in key domestic and international locations. As part of this strategy we have made and intend to continue to make strategic investments in joint ventures and foreign companies to develop Internet service exchanges in Europe and Asia. In March 1999, we made an aggregate investment of approximately $600,000 in foreign entities in Austria, Germany and the United Kingdom. These entities will establish regional Internet service exchanges in those markets. Under our agreements with these entities, we are required to invest an additional $1.9 million in the quarter ending June 30, 1999. We have committed to invest up to an additional $6.5 million in the aggregate in the German and United Kingdom entities. We will account for these investments under the equity method of accounting, which requires us to recognize our proportionate share of the net income or loss of these entities. To further our global strategy, we entered into a series of agreements in December 1998 with Global Crossing Ltd. providing for the acquisition of a right to use capacity on a fiber optic cable system between the U.S. and the United Kingdom. The agreements, which have 25 year terms, provide for us to pay Global Crossing up to approximately $8.3 million for the capacity in installments during December 1998 24 25 and the third quarter of fiscal 1999. The capacity became available in March 1999. In the short term, we plan to resell all or a portion of the additional capacity. In March 1999, we entered into another agreement with Global Crossing for the acquisition of a right to use capacity on a fiber optic cable system between the U.S. and the Netherlands. The agreement commits us to pay $7.5 million in a series of installments through December 30, 1999. Any outstanding amounts will bear interest at the rate of 10.5% per year. Our commitment to pay the $7.5 million to Global Crossing is conditioned on us entering into another agreement with Global Crossing for the right to use capacity on a fiber optic cable system connecting certain European cities. If we enter into this contemplated agreement, we expect to pay up to $11 million for this capacity. We might not enter into the contemplated agreement on expected terms, or at all. We intend to enter into additional rights to use capacity on fiber optic cable systems or other types of arrangements to secure capacity for Europe, Asia and the Pacific Rim. These agreements may require us to make substantial up front payments for long-term capacity which could be a significant use of the proceeds of this offering. See Note 12 of Notes to Financial Statements. We are establishing a West Coast campus by developing a second San Jose, California Internet service exchange facility of approximately 124,000 square feet, including approximately 61,000 square feet of co-location space. In March 1999, we opened this new facility with 4,500 square feet of co-location space and we intend to build out an additional 6,800 square feet of co-location space by the fall of 1999. Afterwards, we intend to build out approximately 13,000 additional square feet of co-location space by the spring of 2000. The build-out of additional co-location space will occur incrementally over time based on customer demand. In addition, we are establishing an East coast campus. We have entered into a lease in New York, New York and intend to develop a smaller Internet service exchange facility there. We intend to connect the New York facility to our Vienna, Virginia facility by a high speed, high capacity fiber optic cable connection. The New York facility is expected to be approximately 27,000 square feet, including approximately 11,000 square feet of co-location space. The new facility is targeted to open in the fall of 1999. We intend to complete the initial build-out of approximately 5,500 square feet of co-location space and the build-out of additional co-location space incrementally over time based on customer demand. We also plan to expand our East coast campus by developing an Internet service exchange facility in the Washington D.C. area. We target opening the facility in the second half of calendar year 2000. We have not yet signed a lease for this facility. The development and equipping of these facilities will significantly increase our fixed and operating expenses, including expenses associated with hiring, training and managing new employees, purchasing new equipment, implementing power and redundancy systems, implementing multiple data communications and telecommunications connections, leasing additional real estate and depreciation. In connection with our international Internet service exchange investments and our expansion plans, we expect our data communications and telecommunications costs to significantly increase in order to expand our network capacity. We expect this increase in costs to begin in the quarter ending June 30, 1999. A key aspect of our strategy is to significantly increase our sales and marketing activities through the expansion of our sales force, increased focus on developing reseller channels and increased marketing efforts to build the AboveNet brand. We expect sales and marketing expenses to increase substantially in future periods. We recently hired many of our key employees and officers. Our President and Chief Operating Officer joined us in November 1997. Our Senior Vice President of Sales and Marketing joined us in April 1998. Our Vice President of Construction and Real Estate and Vice President of International -- Europe each joined us in August 1998. Our Chief Financial Officer joined us in November 1998 and, in December 1998, we hired a Vice President of Marketing and promoted an existing employee to serve as the new Vice President of Sales. Our Vice President of Engineering joined us in February 1999. During late fiscal 1997 and 1998, we granted stock options and warrants to strategic business partners and non-employees. Additionally, during fiscal 1998 and the first quarter of fiscal 1999, we granted a key executive stock options at an exercise price below market. As a result, we recognized stock-based compensation expense of approximately $1.3 million and $1.2 million in fiscal 1998 and the first 25 26 six months of fiscal 1999, respectively. At December 31, 1998, we had $77,000 of deferred stock compensation which will be amortized through fiscal 2000. In connection with our investments in international Internet service exchanges in March 1999, we agreed to grant options to purchase up to 300,000 shares of common stock to employees of those Internet service exchanges upon meeting certain annual performance criteria over the next four years. We will recognize compensation expense for these options as the performance criteria are being achieved. In addition, we granted 42,500 options to purchase shares of common stock to three non-employees, two of whom are members of our board of directors. These options vest annually over three years and have a three-year term. We will begin to recognize compensation expense for these service options in the quarter ending June 30, 1999. While the ultimate amount of compensation expense for these arrangements is unknown, the amount could be substantial as it will be measured based on the value of the options when the options vest. Since our inception in March 1996, we have experienced operating losses and negative cash flows from operations in each quarterly and annual period. As of December 31, 1998, we had an accumulated deficit of $15,848,500. The revenue and income potential of our business and market is unproven, and our limited operating history makes an evaluation of us and our prospects difficult. In addition, although we have experienced significant growth in revenues in recent periods, we do not believe that this growth rate is necessarily indicative of future operating results. We may never achieve profitability or, if we achieve profitability, we might not sustain profitability. RESULTS OF OPERATIONS The following table sets forth certain statements of operations data as a percentage of revenues for the period from March 8, 1996 (Inception) to June 30, 1996, for the years ended June 30, 1997 and 1998 and for the six months ended December 31, 1997 and 1998. This information should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this prospectus.
SIX MONTHS PERIOD FROM YEAR ENDED ENDED MARCH 8, 1996 JUNE 30, DECEMBER 31, (INCEPTION) TO --------------- --------------- JUNE 30, 1996 1997 1998 1997 1998 -------------- ------ ------ ------ ------ Revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% Costs and expenses: Data communications and telecommunications............... -- 101.3 64.0 56.9 63.6 Network operations.................. 24.7 75.5 45.7 40.2 45.5 Sales and marketing................. 24.3 69.4 47.1 43.0 78.6 General and administrative.......... 84.1 78.6 47.2 43.0 46.3 Depreciation and amortization....... 65.6 24.1 13.8 16.4 27.1 Stock-based compensation expense.... -- -- 37.2 4.5 26.3 Joint venture termination fee....... -- 78.1 -- -- -- ----- ------ ------ ------ ------ Total costs and expenses......... 198.7 427.0 255.0 204.0 287.4 ----- ------ ------ ------ ------ Loss from operations.................. (98.7) (327.0) (155.0) (104.0) (187.4) Interest expense...................... -- (1.3) (4.7) (11.4) (11.1) Interest and other income............. -- 1.5 1.8 0.8 6.4 ----- ------ ------ ------ ------ Net loss.............................. (98.7)% (326.8)% (157.9)% (114.6)% (192.1)% ===== ====== ====== ====== ======
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1998 Revenues. We derive most of our revenues from monthly bandwidth charges, with additional revenues from space requirement charges and one-time installation fees. Our revenues increased 302% from 26 27 $1.1 million in the six months ended December 31, 1997, to $4.4 million in the six months ended December 31, 1998. This growth in revenues resulted primarily from an increase in the number of customers, from 178 customers at December 31, 1997, to 382 customers at December 31, 1998. One customer, RemarQ Communities, Inc. (formerly named Supernews, Inc.), accounted for 12% of revenues in the six months ended December 31, 1997 and 10% of revenues in the six months ended December 31, 1998. Our agreement with RemarQ Communities, Inc. has a term of one year, which expires July 1999, and does not contain any minimum bandwidth usage requirements. Data Communications and Telecommunications. Data communications costs consist primarily of payments to network providers. Telecommunications charges consist of one-time fees for circuit installation and variable recurring circuit charges. Our data communications and telecommunications expenses increased 350% from $629,000 in the six months ended December 31, 1997, to $2.8 million in the six months ended December 31, 1998. The increase is primarily due to the growth in our customer base and usage of additional bandwidth. We expect that data communications and telecommunications costs will continue to increase in absolute dollars as we continue to expand our network infrastructure. Network Operations. Network operations expenses are comprised primarily of salaries, benefits and related expenses for our operations and engineering personnel, as well as facility rent and expenses associated with maintaining our co-location facilities. Our network operations expenses increased 355% from $445,000 in the six months ended December 31, 1997, to $2.0 million in the six months ended December 31, 1998. The increase is primarily due to the hiring of additional operations and engineering personnel and associated costs. Most recently, a significant factor in the increase has been due to the increased staffing at the Vienna, Virginia Internet service exchange facility. We expect that network operations expenses will continue to increase in absolute dollars as we hire additional personnel to expand our operations. Sales and Marketing. Our sales and marketing expenses are primarily comprised of salaries, commissions and benefits related to our sales and marketing personnel, the cost of our marketing and promotional efforts, including advertising, printing and trade show costs, as well as related consultants' fees and travel and entertainment expenses. Sales and marketing expenses increased 635% from $475,000 in the six months ended December 31, 1997, to $3.5 million in the six months ended December 31, 1998. This increase was due primarily to increased compensation and related expenses resulting from the hiring of additional sales and marketing personnel and increases in trade show, advertising and marketing program costs. We expect that sales and marketing expenses will increase substantially in future periods as we continue to expand our sales force and our brand-building activities. General and Administrative. Our general and administrative expenses are comprised primarily of salaries and benefits for our management and administrative personnel, as well as fees paid for professional services and corporate overhead. General and administrative expenses increased 333% from $476,000 in the six months ended December 31, 1997, to $2.1 million in the six months ended December 31, 1998. This increase was primarily due to increased compensation and related benefits associated with additional personnel, increased professional services fees and the costs associated with supporting our expansion. We expect that general and administrative expenses will continue to increase in absolute dollars as we expand our operations and incur the higher costs associated with being a publicly-traded company. Depreciation and Amortization. Depreciation and amortization expenses relate primarily to our facility improvement and construction efforts as well as telecommunications equipment. Our depreciation and amortization expenses increased 562% from $182,000 in the six months ended December 31, 1997 to $1.2 million in the quarter ended December 31, 1998. The increase is primarily due to capital expenditures incurred during the second half of fiscal 1998 and the first half of fiscal 1999 related to facility improvement and construction costs in San Jose, California, the construction of our Internet service exchange facility in Vienna, Virginia, and additional telecommunications equipment. We expect to incur increased depreciation and amortization expenses related to our planned Internet service exchange facilities, as well as the amortization of the rights to use capacity on fiber optic cable systems. Stock-based Compensation. During fiscal 1998 and 1999, we granted stock options to a key executive at an exercise price below market prices on the dates of the grants. Additionally, during late fiscal 1997 and 27 28 fiscal 1998 and 1999, we granted stock options and warrants to strategic business partners and non-employees. Stock options and warrants result in stock-based compensation charges, a portion of which is deferred and expensed over the vesting period. On December 10, 1998, we completed our initial public offering, at which time the vesting of a significant number of these options accelerated. Consequently, the remaining deferred compensation costs related to those options were recognized. For the six months ended December 31, 1998 and December 31, 1997, stock-based compensation expenses were $1.2 million and $49,000. At December 31, 1998, we had $77,000 in deferred stock compensation which will continue to be amortized through fiscal 2000. Interest Income (Expense), Net. Interest income (expense), net was $(117,000) in the six months ended December 31, 1997 compared to $(210,000) in the quarter ended December 31, 1998. Interest expense for the six months ended December 31, 1998 related to borrowings to finance equipment purchases and improvements to our Internet service exchange facilities in San Jose, California and Vienna, Virginia. Interest expense during the quarter ended December 31, 1997, was primarily related to the issuance of warrants associated with our issuance of convertible debt. We expect that interest expense will continue to increase in absolute dollars as we enter into additional equipment leases and borrowing facilities to finance expansion, including the development of our planned Internet service exchange facilities. COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1997 AND 1998 Revenues. Our revenues increased 523% from $552,000 in fiscal 1997 to $3.4 million in fiscal 1998. This growth in revenues resulted primarily from an increase in the number of customers, from 110 customers at June 30, 1997 to 278 customers at June 30, 1998. One customer, RemarQ Communities, Inc. (formerly named Supernews, Inc.), accounted for 12% of revenues in fiscal 1997 and 14% of revenues in fiscal 1998. Data Communications and Telecommunications. Our data communications and telecommunications expenses increased 294% from $559,000 in fiscal 1997 to $2.2 million in fiscal 1998. This increase is primarily due to the growth in our customer base and usage of additional bandwidth. Network Operations. Our network operations expenses increased 277% from $417,000 in fiscal 1997 to $1.6 million in fiscal 1998. The increase is primarily due to the hiring of additional operations and engineering personnel and the costs associated therewith. Sales and Marketing. Sales and marketing expenses increased 323% from $383,000 in fiscal 1997 to $1.6 million in fiscal 1998. Sales and marketing expenses as a percentage of total revenues decreased from 69% in fiscal 1997 to 47% in fiscal 1998. Of this increase, approximately $700,000 was due to increased compensation and related expenses as the result of the hiring of additional sales and marketing personnel. The increase was also attributable to increased marketing program, trade show and advertising expenses. The decrease as a percentage of revenue in fiscal 1998 was primarily due to increased revenues associated with higher bandwidth utilization among the existing customer base, which had lower associated sales and marketing expenses. General and Administrative. General and administrative expenses increased 274% from $434,000 in fiscal 1997 to $1.6 million in fiscal 1998. General and administrative expenses as a percentage of revenues decreased from 79% in fiscal 1997 to 47% in fiscal 1998 due to the increase in revenues. Of this increase, approximately $500,000 was due to increased compensation and related benefits associated with additional personnel in management, finance and administration, while the remaining increase was primarily attributable to the costs associated with supporting our expansion. Depreciation and Amortization. Our depreciation and amortization expenses increased 258% from $133,000 in fiscal 1997 to $476,000 in fiscal 1998. The increase is due to additional capital expenditures incurred during fiscal 1998, primarily for telecommunications equipment. Stock-Based Compensation. Stock-based compensation expense during fiscal 1997 and fiscal 1998 was zero and $1.3 million, respectively. Stock-based compensation in fiscal 1998 related to services rendered 28 29 during fiscal 1998 and the acceleration of the vesting during the fourth quarter of 1998 of certain non-employee stock option and warrant grants. Joint Venture Termination Fee. In fiscal 1996, we entered into a joint venture agreement with DSK, Inc. to cooperatively market and develop our services. We paid $33,700 to DSK during the year ended June 30, 1997 related to this agreement. In the fourth quarter of fiscal 1997, we terminated this agreement and hired the majority shareholders of DSK as employees or consultants by issuing 500,000 fully vested shares of Series B preferred stock with a fair value of $1.20 per share, or $600,000, for the outstanding shares of common stock of DSK. We recorded the transaction by allocating the value of the shares issued to property and equipment (at DSK's net book value of $169,000, which approximated fair market value), with the balance of $431,000 reflected as a joint venture termination fee. Interest Income (Expense), Net. Interest income (expense), net decreased from $1,000 in fiscal 1997 to $(98,000) in fiscal 1998. The decrease was primarily the result of higher interest expense related to the issuance of stock purchase warrants in conjunction with the issuance of our convertible debt during the first half of fiscal 1998 as well as increased borrowings to finance equipment purchases and improvements to our San Jose, California Internet service exchange facility and construction of our Vienna, Virginia Internet service exchange facility. INCEPTION THROUGH JUNE 30, 1996 We generated $79,000 in revenues in the period from inception to June 30, 1996, primarily as a result of consulting services provided as we were developing our tools and preparing to commence our current co-location and Internet connectivity operations. Our costs and expenses during this period consisted primarily of salaries, depreciation and amortization expenses and consulting services. Given the stage of our business and the shortness of the period, we do not believe that the results of operations for this period are comparable to fiscal 1997. 29 30 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited statement of operations data for the six quarters ended December 31, 1998, as well as the percentage of our revenues represented by each item. This data has been derived from unaudited interim financial statements prepared on the same basis as the audited Financial Statements contained herein and, in the opinion of management, include all adjustments consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of such information when read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this prospectus. The operating results for any quarter should not be considered indicative of results of any future period.
THREE MONTHS ENDED ------------------------------------------------------------------- SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, 1997 1997 1998 1998 1998 1998 -------- -------- --------- --------- --------- --------- (IN THOUSANDS) Revenues...................... $ 430.9 $ 674.6 $ 963.3 $ 1,367.6 $ 1,793.1 $ 2,653.1 -------- -------- --------- --------- --------- --------- Costs and expenses: Data communications and telecommunications....... 256.0 372.8 639.1 931.9 1,079.9 1,749.8 Network operations.......... 221.8 222.8 411.8 715.4 772.8 1,250.0 Sales and marketing......... 258.6 216.4 433.4 710.3 1,355.8 2,137.0 General and administrative........... 198.9 276.9 483.8 661.9 812.7 1,248.1 Depreciation and amortization............. 86.4 95.4 117.6 176.1 659.8 543.5 Stock-based compensation expense.................. 14.3 35.1 459.6 767.4 436.2 733.4 -------- -------- --------- --------- --------- --------- Total costs and expenses............... 1,036.0 1,219.4 2,545.3 3,963.0 5,117.2 7,661.8 -------- -------- --------- --------- --------- --------- Loss from operations.......... (605.1) (544.8) (1,582.0) (2,595.4) (3,324.1) (5,008.7) Interest expense.............. (58.8) (67.0) (2.6) (32.4) (147.6) (345.9) Interest and other income..... 1.9 7.4 22.0 31.8 120.8 162.4 -------- -------- --------- --------- --------- --------- Net loss...................... $ (662.0) $ (604.4) $(1,562.6) $(2,596.0) $(3,350.9) $(5,192.2) ======== ======== ========= ========= ========= =========
THREE MONTHS ENDED ------------------------------------------------------------------- SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, 1997 1997 1998 1998 1998 1998 -------- -------- --------- --------- --------- --------- Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% -------- -------- --------- --------- --------- --------- Costs and expenses: Data communications and telecommunications....... 59.4 55.3 66.3 68.2 60.2 66.1 Network operations.......... 51.5 33.0 42.8 52.3 43.1 47.1 Sales and marketing......... 60.0 32.1 45.0 51.9 75.6 80.5 General and administrative........... 46.2 41.1 50.2 48.4 45.3 47.0 Depreciation and amortization............. 20.0 14.1 12.2 12.9 36.8 20.5 Stock-based compensation expense.................. 3.3 5.2 47.7 56.1 24.4 27.6 -------- -------- --------- --------- --------- --------- Total costs and expenses............... 240.4 180.8 264.2 289.8 285.4 288.8 -------- -------- --------- --------- --------- --------- Loss from operations.......... (140.4) (80.8) (164.2) (189.8) (185.4) (188.8) Interest expense.............. (13.6) (9.9) (0.3) (2.3) (8.2) (13.0) Interest and other income..... 0.4 1.1 2.3 2.3 6.7 6.1 -------- -------- --------- --------- --------- --------- Net loss...................... (153.6)% (89.6)% (162.2)% (189.8)% (186.9)% (195.7)% ======== ======== ========= ========= ========= =========
30 31 FACTORS AFFECTING OPERATING RESULTS We have experienced significant fluctuations in our results of operations from quarter to quarter. As a result of these fluctuations, period-to-period comparison of our operating results is not necessarily meaningful and should not be relied upon as an indicator of future performance. We expect our future operating results to fluctuate. Factors that are likely to cause these fluctuations include: - demand for and market acceptance of our services; - capacity utilization of our Internet service exchange facilities; - fluctuations in data communications and telecommunications costs; - customer retention; - the timing and magnitude of capital expenditures; - costs relating to the expansion of operations; - expansion of existing facilities and completion of new facilities; - fluctuations in bandwidth used by customers; - introductions of new services or enhancements by us and our competitors; - the timing of customer installations and related payments; - the ability to maintain or increase peering relationships; - provisions for customer discounts and credits; - changes in our pricing policies and our competitors; - changes in regulatory laws and policies; - economic conditions, particularly those related to the Internet industry; - difficulties in collecting accounts receivable as many of our customers are in an emerging stage; - compensation costs related to certain option grants and warrants; and - decreased revenues during the summer months and other seasonal effects on sales. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to data communications and telecommunications costs, depreciation, real estate and personnel. Our future results of operations will be particularly sensitive to fluctuations in revenues because of these and other short-term fixed costs. As a result of these and other factors, our future operating results may fall below the expectations of securities analysts and investors. In this event, the price of our common stock will likely decrease significantly. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to distinguish 21st century dates from 20th century dates. This could result in system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. We have begun the first phase of our Year 2000 readiness review. The review will include assessment, implementation, testing and contingency planning. To date, we have evaluated our internally developed software and believe that this software is Year 2000 compliant. However, we utilize software and hardware developed by third parties both for our network and internal information systems. We have not done any testing of such third party software to determine if such software is Year 2000 compliant. We have sought 31 32 assurances from some of our vendors, and intend to continue to seek assurances from others, that such vendors products are or will be Year 2000 compliant. We expect to continue assessing and testing our internal information technology and non-information technology systems into 1999. We are not currently aware of any material operations issues or costs associated with preparing our internal information technology and non-information technology systems for the Year 2000. However, we may experience material unanticipated problems and costs caused by undetected errors or defects in the technology used in our internal information technology and non-information technology systems. Based upon the public filings and press releases of our primary equipment, telecommunications and data communications providers, we are aware that all such providers are in the process of reviewing and implementing their own Year 2000 compliance programs. Since we do not believe that we will be afforded the opportunity to test the systems of these providers, we will seek assurances from them that they are Year 2000 compliant. If our primary vendors experience business interruptions as a result of the failure to achieve Year 2000 compliance, our ability to provide Internet connectivity could be impaired, which could have a material adverse effect on our business, results of operations and financial condition. We do not currently have any information regarding the Year 2000 status of our customers, most of whom are private companies. However, we are in the process of developing a plan to survey all of our customers regarding their Year 2000 compliance. As is the case with similarly situated companies, if our customers experience Year 2000 problems, which result in business interruptions or otherwise impact their operations, we could experience a decrease in the demand for our services, which could have a material adverse impact on our business, results of operations and financial condition. We have not incurred any significant expenses to date associated with our Year 2000 plan and are not aware of any material costs associated with our anticipated Year 2000 efforts. We believe that a material loss of revenues would arise if our major customers or providers fail to achieve Year 2000 readiness. We have not yet developed a comprehensive contingency plan to address the issues which could result from such failure. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to fluctuations in interest rates and market values of our investments. Our exposure to fluctuations in interest rates and market values of our investments relates primarily to our short-term investment portfolio, which is included in cash and cash equivalents and short-term investments. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in debt instruments of the U.S. Government, and, by policy, we limit the amount of credit exposure to any one issuer. Due to the short-term nature of our investments, the impact of interest rate changes would not be expected to have a significant impact on the value of these investments. The effect of interest rate and investment risk on us has not been significant. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities which have declined in market value due to changes in interest rates. We are also exposed to interest rate risk on our fixed rate debt obligations. At June 30, 1998 and December 31, 1998, fixed rate debt obligations totaled $1.2 million and $7.9 million, respectively. The fixed rate debt obligations bear interest at annual rates ranging from 14.3% to 15.1% and are payable in 42 monthly installments. While generally an increase in market interest rates will decrease the value of this debt, and decreases in rates will have the opposite effect, we are unable to estimate the impact that interest rate changes will have on the value of the substantial majority of this debt as there is no active 32 33 public market for the debt and we are unable to determine the market interest rate at which alternate financing would have been available. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations principally from the private and public sale of equity securities and, to a lesser extent, lease financing. We had cash and cash equivalents of approximately $67.9 million as of December 31, 1998. Net cash used in operating activities was $1.1 million and $6.9 million for the six months ended December 31, 1997 and 1998, respectively, and $777,000 and $1.8 million for fiscal years 1997 and 1998, respectively. Net cash used in operating activities is primarily attributable to our net losses. These losses were partially offset by depreciation and amortization, stock-based compensation expense and increases in accounts payable and accrued liabilities. Net cash used by investing activities was $298,000 and $14.6 million for the six months ended December 31, 1997 and 1998, respectively, and $475,000 and $3.7 million in fiscal years 1997 and 1998, respectively. Net cash used by investing activities consists primarily of purchases of property and equipment, including costs associated with the establishment of our Internet service exchange facility in Vienna, Virginia and the expansion of our Internet service exchange facility in San Jose, California. In addition, in the six months ended December 31, 1998, we used cash to pay the first installment of $1.9 million toward the purchase of an $8.3 million 25-year right to use fiber optic capacity. The remaining payments for that purchase were made in the quarter ended March 31, 1999. Net cash provided by financing activities was $2.4 million and $81.2 million for the six months ended December 31, 1997 and 1998, respectively, and $1.5 million and $13.3 million in fiscal years 1997 and 1998, respectively. Net cash provided by financing activities for the six months ended December 31, 1997, and in fiscal 1998 resulted primarily from the sale of notes and advances, partially offset by debt and capital lease repayments. Net cash provided by financing activities for the six months ended December 31, 1998 resulted primarily from the proceeds of our initial public offering and, to a lesser extent, the issuance of convertible preferred stock and utilization of our equipment financing facility, partially offset by debt and capital lease repayments. We have a $15 million equipment financing arrangement. Borrowings under this arrangement are payable in 42 monthly installments. Borrowings incurred prior to December 31, 1998, bear interest at the rate of 14.7% and borrowings subsequent to December 31, 1998, bear interest at 13.25%. As of December 31, 1998, approximately $6 million remained available for borrowings under this arrangement. We expect to utilize the available credit for the development of the planned second Internet service exchange facility in San Jose, California. The Company also has a $2.5 million equipment lease facility, of which $2.0 million was available for future use at December 31, 1998. We have a $750,000 line of credit facility with a bank, none of which was outstanding at December 31, 1998. Borrowings under the line of credit facility bear interest at the bank's prime rate plus 1% and the line of credit facility expires in May 1999. We currently expect to utilize approximately $56 million to $72 million for capital expenditures in connection with the development of additional Internet service exchange facilities in San Jose, California, New York, New York and in the Washington, D.C. area. In connection with a December 1998 agreement for the purchase of the right to use fiber optic capacity between the U.S. and the United Kingdom we have a remaining commitment to pay $800,000 as of March 31, 1999. In March 1999, we entered into an agreement for the purchase of the right to use capacity on a fiber optic cable system between the U.S. and the Netherlands which commits us to pay $7.5 million in a series of installments through calendar year 1999. Any outstanding amounts payable will bear interest at an annual rate of 10.5%. Our commitment to pay the $7.5 million is conditioned on us entering into an additional agreement for us to purchase fiber optic cable capacity connecting certain 33 34 European cities. If we enter into this contemplated agreement, we expect to pay up to $11.0 million for the right to use this capacity. We may enter into rights to use fiber capacity or other types of arrangements to secure capacity for Europe, Asia and the Pacific Rim. These agreements may require us to make substantial up front payments for long-term capacity. We believe that the net proceeds from this offering, together with existing cash balances and financing arrangements, will provide us with sufficient funds to finance our operations and planned capital expenditures for at least the next 12 months. We may require additional funds during or after this period to support our working capital requirements or for other uses and may seek to raise additional funds through public or private equity or debt financings or other sources. Additional financing might not be available at all or on favorable terms. 34 35 BUSINESS You should read the following description of our business together with the information included elsewhere in this prospectus. This description contains certain forward-looking statements based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. You can identify these statements by words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends" and similar expressions. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include those discussed in "Risk Factors" and elsewhere in this prospectus. GENERAL AboveNet is a leading provider of high performance, managed co-location and Internet connectivity solutions for electronic commerce and other business critical Internet operations. We have developed a network architecture based upon strategically located, fault-tolerant facilities that combine co-location services for Internet content providers with direct access to Internet service providers, or ISPs, to create Internet service exchanges, or ISXs. As of March 31, 1999, we had 257 direct public and private data exchange connections, known as peering arrangements, including relationships with most major network providers. Our network architecture and extensive peering relationships are designed to reduce the number of network connections or "hops" for data travelling across the Internet. By having both Internet content providers and ISPs at our ISXs we enable our ISP customers to provide their users with "one hop" connectivity, through our local area network, to the Web sites of the Internet content providers that are co-located at the same facility. As of March 31, 1999, we had 458 customers, including a wide range of Internet content providers, Web hosting companies and ISPs. INDUSTRY BACKGROUND The Growth of the Internet The Internet has experienced tremendous growth and is emerging as a global medium for communications and commerce. According to International Data Corporation, or IDC, the number of Internet users worldwide will grow from 69 million at the end of 1997 to 320 million by 2002. Of the total number of worldwide Internet users, IDC estimates that the number in Asia/Asia Pacific, excluding Japan, will grow from 6.6 million in 1997 to 34.2 million in 2002 and the number in Western Europe will grow from 16.8 million to 82.0 million in the same period. In addition, according to Forrester Research, Inc., or Forrester, the number of Internet sites worldwide is expected to grow from less than 500,000 in 1997 to approximately 4.0 million in 2002. The growth of the Internet is being driven by a number of factors, including the large and growing installed base of personal computers, improvements in network architectures, increasing numbers of network-enabled applications, the emergence of compelling content and commerce-enabling technologies, and easier, faster and cheaper Internet access. The future growth in Internet usage is also projected to be fueled by increased use of high speed access devices, such as cable, ADSL and other high speed access devices as these become more widely available and affordable. Forrester projects that the penetration of broadband Internet access through cable, ADSL and other high speed access devices will grow from approximately 200,000 households in 1997 to approximately 5.5 million households in 2000 and approximately 17.6 million households in 2002. The increase in the availability of high-speed access devices is also expected to increase the demand for emerging high bandwidth technologies such as audio and video streaming and voice over the Internet. 35 36 IDC estimates are based upon their Internet Commerce Market Model. This model uses both supply and demand-side research based on responses from 40,000 interviews per year. Other data components include Web usage figures, penetration rates, quarterly trend research, lead user research and device base information. The estimates are subject to the following assumptions: no catastrophic failure of the Internet will occur; regional economies will continue their current expansion without upheaval; and security on the Internet, as well as consumer confidence, will continue to improve slowly. The projected amounts in this report may not be achieved. Forrester estimates are based upon interviews with more than 41,000 households as part of Forrester's "Technographics '98" survey. In addition, Forrester's report stated that 81 ISPs were asked to provide detailed unit sales, prices and projections for 1996 through 1998. The ISP data was extrapolated to provide a total market size and direction. Finally, Forrester contacted 22 vendors of hosting services and related organizations. Actual results may differ significantly. The Expansion of Electronic Commerce The functionality and accessibility of the Internet and commercial online services have created an increasingly attractive commercial medium by providing features that historically have been unavailable through traditional channels. In the last several years, many enterprises that focus solely on delivering services over the Internet have emerged and many businesses have implemented Web sites and electronic commerce applications. Internet-based businesses have developed Internet products and services in areas such as finance, banking, entertainment, education and advertising, while other businesses are using the Internet for an expanding variety of applications, ranging from corporate publicity and advertising to sales, customer service, employee training and communication with business partners. The ability to offer these kinds of products and services requires high bandwidth Internet sites and operations. In addition, due to advances in on-line security and payment mechanisms, the number of businesses establishing commerce-enabled Web sites is expected to increase dramatically. IDC estimates that the number of consumers buying goods and services on the Internet will grow from 17.6 million in 1997 to 128.4 million in 2002, and that the total value of goods and services purchased over the Internet will increase from approximately $12 billion in 1997 to approximately $425 billion by 2002. The Internet Infrastructure The Internet is a worldwide network of private and public computer networks that link businesses, individuals, government agencies, universities and other users having disparate computer systems and networks. A multi-tiered system of local, regional and national ISPs has evolved to provide connectivity among Internet users. Data travelling across the Internet is broken down into multiple packets. ISPs exchange these packets of data generated by their users through either direct or indirect connections with other ISPs. Large ISPs often have multiple direct data exchange connections with other ISPs, known as peering relationships, either through private line connections between their routers or through a public peering arrangement where multiple ISPs can be connected through a single interface. However, significant peering relationships are generally unavailable to many small and mid-sized ISPs and, even if available, the associated telecommunications costs could be prohibitive. As a result, these ISPs typically need to purchase indirect connection services, known as "transit," from a third party ISP. To address the needs of ISPs to exchange data at centralized points, a series of Internet exchanges were established by Internet backbone providers. Although there are numerous exchanges, the Company believes the two principal exchanges in the United States, based upon traffic volume, are MAE West in San Jose, California, and MAE East in Vienna, Virginia. Despite the relatively centralized nature of these exchange points, data travelling across the dispersed Internet architecture often must make multiple connections or "hops" through a variety of local, regional and national ISPs, as data moves from the originating site to the Internet backbone and back to the destination site. 36 37 The Trend Toward Outsourcing of Internet Operations Internet operations are increasingly becoming critical to an enterprise's commercial and communication operations. Internet-based businesses and other enterprises need non-stop, non-congested, fault-tolerant and scalable Internet operations to allow them to perform sophisticated digital communications and commerce transactions globally over the Internet. However, many businesses that are seeking to establish these sophisticated Internet operations lack the resources and expertise to cost-effectively develop, maintain and continually enhance the necessary facilities and network systems. In addition, individuals with the expertise to establish and maintain a sophisticated Internet service are scarce and their services are costly. Furthermore, businesses often find it difficult to keep up with new technology introductions and to integrate new technologies into their own information technology infrastructure. Finally, many businesses are currently being forced to deploy their limited information technology resources to address the impending Year 2000 issues. As a result of these and other factors, many enterprises are seeking outsourcing arrangements to enhance Web site reliability and performance, provide continuous operation of their Internet solutions, reduce related operating expenses and focus on their core business. By outsourcing these services, businesses, particularly non Internet-centric enterprises, can focus on their core business rather than using their resources to support their Internet operations. Forrester estimates that by 2002, approximately 40% of Internet Web sites will be outsourced and that Internet hosting revenues for complex sites will increase from approximately $200 million in 1997 to almost $8 billion by 2002. The Emergence of Co-Location Services A variety of companies including Web hosting companies and ISPs have begun to focus on providing Internet co-location services. These co-location companies typically build networks of numerous geographically dispersed data centers in order to be physically close to their customers. As a result of this dispersed geographic network, data moving from one customer to another is subject to increased risks of latency and data loss, as data travels across multiple network connections or "hops." These problems are compounded by the lack of available tools to monitor all of the various connection points on the Internet in order to identify and avoid the congested links which can cause latency and data loss. While these problems existed to some extent with early, less data intensive applications, such as e-mail, they are becoming increasingly acute with the growth of bandwidth intensive applications such as audio and video streaming. In addition, many co-location providers do not have the flexibility or capacity to quickly scale their services to meet the sharp growth and high bandwidth requirements of business critical Internet operations. Internet co-location companies also typically fail to address the increasing need of local and regional ISPs to provide enhanced connectivity to compelling content for their customers. Without the ability to maintain extensive peering relationships with large ISPs, the cost of providing redundant, reliable and scalable connectivity is often prohibitive for these local and regional ISPs. As a result, they face increasing congestion as emerging applications consume more bandwidth. International ISPs are also seeking a means to obtain fast, reliable access to the large concentration of U.S.-based content. While many of these problems could be addressed if these ISPs co-located their facilities with content providers, many of the Web hosting and co-location companies also compete with ISPs for sales of Internet access and, therefore, ISPs are often reluctant to co-locate in their facilities. THE ABOVENET SOLUTION AboveNet provides high performance, managed co-location and Internet connectivity services to a wide range of Internet content providers, Web hosting companies and ISPs. Our ISX facilities provide high performance, reliable and scalable solutions for electronic commerce and other business critical applications. We currently operate two ISX campuses, located near MAE West and MAE East, using our suite of sophisticated network management and remote monitoring tools. We believe that our centralized 37 38 network architecture provides enhanced connectivity while eliminating the need to build numerous geographically dispersed data centers. Our ISX model offers customers the benefits of combining co-location services with direct ISP access. The convergence of content providers and ISPs at our ISXs enables ISPs to provide their users with "one hop" connectivity, through our local area network, to the co-located content site. This direct connectivity minimizes the risk of delays and data loss often encountered in the transmission of data over the public Internet infrastructure. Our solution provides the following key advantages to our customers: Scalability and Flexibility. Our services are designed to be highly scalable and flexible in order to meet the needs of our customers as their Internet operations expand. Our network is designed to enable us to quickly scale bandwidth to meet our customers' needs. In addition, since we charge our customers based on the amount of space and bandwidth they use, customers are afforded a flexible, cost-effective path to increasing their Internet operations. We also provide flexibility for our customers by supporting most leading Internet hardware and software systems vendor platforms. High Performance and Enhanced Connectivity. Our services are designed to enhance Internet performance through redundant and high speed network design and we provide monitoring, notification and diagnostic services twenty-four hours a day, seven days a week. We are able to address the high bandwidth needs and rapid growth of our customers' business critical operations by maintaining an extensive number of direct public and private network peering interconnections, including peering relationships with major network providers. In order to provide our customers with available and uncongested bandwidth during network traffic spikes, we are committed to maintaining excess network capacity. The amount of excess bandwidth at any given time depends upon many factors including the timing of the addition of new circuits, the timing of customer additions and increases in usage by existing customers. Enhanced Access for ISPs. By connecting within our ISX, ISPs have "one hop" connectivity to content providers co-located in the same facility. We believe that by providing a means to reduce the number of "hops" in the transmission of data, our network design offers significant benefits to international ISPs as they seek to gain fast, reliable access to U.S.-based content. In addition, ISPs that participate in our Internet service exchanges are able to take advantage of peering relationships generally available only to major network providers. Sophisticated Network Management Services and Tools. By leveraging the knowledge gained from supporting many leading-edge Internet operations, we provide sophisticated network management and monitoring services on 24 hours a day, seven days a week basis. Our proprietary ASAP software monitors all of our direct and indirect network connections for latency and packet loss, allowing our network engineers to dynamically reroute traffic to avoid congested points. By utilizing ASAP, we are able to identify and resolve many potential problems before they impact an Internet site's availability or performance. Remote Management Capabilities. We provide our customers with sophisticated monitoring, reporting and management tools that can be accessed by customers remotely to control their Internet hardware, software and application environments. Our monitoring system probes each customer's equipment every five minutes and provides the customer with notice of potential problems. We believe that these tools, combined with our trained 24 hours a day, seven days a week support staff, provide customers with a highly effective means of monitoring, responding to and resolving problems, significantly reducing customers' needs for on-site access to their equipment. Fault-Tolerant Facilities. We have built fault-tolerant facilities designed to enable the uninterrupted operations necessary for business critical Internet operations. Each of our facilities is equipped with an uninterruptible DC and AC power supply and back-up generators for power redundancy, multi-tiered fire suppression systems, seismically braced racks, separate and redundant cooling zones and security systems. 38 39 STRATEGY Our objective is to become the leading global Internet service exchange network for business enterprises and ISPs that require high-bandwidth and business critical Internet operations. To achieve this objective, our strategy includes the following key elements: Build Brand Name. We intend to increase awareness of the AboveNet brand name among Internet content providers, Web hosting companies and ISPs on a global basis. We believe that associating the AboveNet brand with high quality and technologically advanced network and services for outsourcing business critical Internet operations is key to the expansion of our customer base. We have recently begun to aggressively invest in building the AboveNet brand through integrated marketing, including traditional and online advertising in business and trade publications, trade show participations and public relations campaigns. We also intend to continue to conduct seminars to increase awareness of our services among potential customers. Expand Customer Base. We intend to expand our customer base, which numbered 458 as of March 31, 1999, by significantly increasing our sales and marketing efforts. Our direct sales force has grown to 35 persons as of March 31, 1999. Our direct sales force is organized into groups to target leading Internet content providers, Web hosting companies and ISPs. In addition, we have personnel responsible for addressing the development of customers in the Asian and European markets. Our sales force is supported in their sales efforts by sales engineers and, in many instances, by our senior management. We intend to significantly expand our direct sales force and sales engineers, as well as hire experienced channel managers. We seek to establish and expand relationships with potential channel partners including hardware vendors, value added resellers, system integrators and Web hosting companies in order to leverage their sales organizations. Extend Internet Service Exchange Network Globally. We seek to create a global ISX network by connecting centralized facilities in key domestic and international locations. Domestically, we currently have ISXs in San Jose, California (near MAE West) and Vienna, Virginia (near MAE East) and are developing a second ISX facility in San Jose, California and a facility in New York, New York. Additionally, we are planning to develop an ISX facility in the Washington D.C. area. Internationally, we have formed joint ventures in Austria, Germany and the United Kingdom with experienced Internet management teams and strategic partners to develop regional ISXs. We intend to continue to expand our European network, primarily through strategic investments in additional joint ventures and foreign companies in major business centers and countries with high levels of Internet traffic. We also intend to make similar investments in Asian markets. Leverage Internet Service Exchange Model. We intend to leverage our ISX model to increase our customer base and generate recurring revenue. We believe that as our customer base expands, the benefits to both content providers and ISPs of our "one hop" solution will increase, creating greater incentives for new customers to use our services. Since we charge these customers monthly based upon space and bandwidth usage, we are generally able to increase revenue as our customers' Internet usage grows. In addition, since our service fees are based upon bandwidth usage, we believe that we are well positioned to capitalize on the requirements of high bandwidth applications. Address Emerging Internet Technology Markets. We believe that our centralized ISX network will enable us to address the needs of emerging Internet technologies such as audio and video streaming and voice over the Internet. Since these applications require a solution that provides low latency and packet loss, we believe that our high bandwidth, centralized network and enhanced connectivity capabilities will enable us to offer significant advantages to customers utilizing these emerging technologies. THE ABOVENET INTERNET SERVICE EXCHANGE Our ISX provides co-location services, Internet connectivity services and network management services and tools. Our ISXs are designed to provide customers with the high performance, scalability, connectivity, 39 40 security, reliability and expertise they need to enhance their business critical Internet applications. We create solutions for our customers based on their specific business and technical requirements, modifying the services as each customer's needs evolve. Our services are primarily delivered through centralized campuses located near MAE West and MAE East. Our planned New York facility will be connected to our facility located near MAE East by high speed, high capacity fiber optic cable. This planned facility is intended to facilitate access to European Internet traffic. Our management services and tools enable us and our customers to continuously manage customers' Internet operations jointly, proactively and remotely. Co-Location Services We provide co-location services designed to meet the demands of sophisticated, multi-vendor business critical Internet operations. We support most leading Internet hardware and software system vendor platforms, including those from Ascend Communications, Inc., Nortel Networks, Cisco Systems, Inc., Compaq Computer Corporation, Dell Computer Corporation, EMC Corporation, Hewlett-Packard Company, International Business Machines Corporation, Lucent Technologies Inc., Microsoft Corporation, Apple Computer, Inc., Network Appliance, Inc., Silicon Graphics Inc., Sun Microsystems Inc. and 3Com Corporation. This multi-vendor compatibility enables our customers to retain control over their choice of technical solution and to integrate their Internet operations into our existing information technology architecture. Because business critical Internet operations are dynamic and often require timely hardware and software upgrades to maintain targeted service levels, customers have twenty-four hours a day, seven days a week physical and remote access to the ISX facilities. Additional space and electrical power can be added as needed in order to provide our customers with access to additional server co-location services. Customers install and manage their own hardware and software at our facilities and we do not provide any Web hosting services. Our co-location facilities include dedicated electrical power circuits to ensure that each customer's electrical power requirements are met. Each ISX facility is constructed to address the requirements of business critical network operations with an uninterruptible DC and AC power supply and back-up generators, FM-200 Fire Suppression with pre-action backup, HVAC, separate cooling zones, seismically braced racks, twenty-four hours a day, seven days a week operations, and high levels of physical security. Any damage to or failure of the systems of our service providers could result in reductions in, or terminations of, services supplied to our customers, which could have a significant adverse effect on our business and operating results. See "Risk Factors -- Our systems or other systems on which we depend on may fail." Customers can select from shared rack facilities, secure cabinets or enclosed cage facilities, based upon their business and technical requirements. These facilities have the following features:
- --------------------------------------------------------------------------------------------------------- TYPE OF SPACE SIZE FEATURES - --------------------------------------------------------------------------------------------------------- Open Rack Single shelf, 1/4, 1/2, or full 9' or Entry-level service providing a 6' racks cost-effective solution for our customers who do not need dedicated environments. Secured environment that is shared by multiple customers. - --------------------------------------------------------------------------------------------------------- Cabriolet 9' or 6' stainless steel enclosed, secure Dedicated, locked cabinet. Provides a cabinet, 1/4, 1/2, or full rack single rack with the security of a dedicated environment. - --------------------------------------------------------------------------------------------------------- Cage 8' x 6', 8' x 8' or customized to Dedicated, locked cage. Provides order flexibility in designing and configuring Internet servers, including space for multiple racks and other equipment. - ---------------------------------------------------------------------------------------------------------
40 41 Internet Connectivity Our Internet connectivity services are designed to meet the requirements of high bandwidth, business critical Internet operations by providing highly reliable, scalable, non-stop and uncongested operations. On March 31, 1999, we had peering relationships with 257 network providers, including 78 private peering relationships. Any failure by us to maintain and increase peering relationships would have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors -- We must maintain and increase peering relationships." Our network is designed to minimize the likelihood of service interruptions. Each ISX has multiple physical fiber paths into the facility. We maintain multiple network links from multiple vendors and regularly check that our network traffic traverses physically separated paths. This network architecture enhances the availability of a customer's site, even in the event of a link failure. In addition, since our customers' Internet operations often experience network traffic spikes due to promotions or events, we have a policy of maintaining significant excess capacity. We might not be able to expand or adapt our telecommunications infrastructure to meet additional demand or our customers' changing requirements on a timely basis and at a commercially reasonable cost, or at all. See "Risk Factors -- We must be able to expand and adopt our network infrastructure." Our Internet connectivity services are also designed to reduce latency and to enhance network performance. Our engineering personnel continuously monitor traffic patterns and congestion points throughout the Internet and dynamically reroute traffic flows to improve end-user response times. We also enhance network performance by maintaining what we believe is among the largest number of direct public and private network peering interconnections in the industry. For customers seeking a direct communications link to the site of another customer that is located at the same ISX, we offer highly secure, fast and efficient cross-connections. Our connectivity services utilize our proprietary ASAP technology to enhance Internet connectivity by monitoring all of our direct and indirect network connections for congestion.
- --------------------------------------------------------------------------------------------------------- TOOL DESCRIPTION BENEFITS - --------------------------------------------------------------------------------------------------------- ASAP -- ASAP automatically monitors all of our major If packet loss and congestion is Asymmetric providers' and peers' direct and indirect detected on any of the links that Allocation of connections on a real-time 24-hour basis to directly affect customers' performance, Packets identify congestion. our network engineers are able to dynamically reroute traffic temporarily away from the problem link. This functionality is particularly important for emerging applications such as audio and video streaming and voice over the Internet. - ---------------------------------------------------------------------------------------------------------
Management Services and Tools Our management services and tools support business critical Internet operations by providing the customer with detailed monitoring, reporting and management tools to control their hardware, network, software and application environments. Through our network management services and tools, customers are able to remotely manage their business critical Internet operations housed at our ISX facilities. We believe that this provides an important advantage to enterprises that seek to outsource a portion of their Internet operations and to link the management of the outsourced operations with in-house operations. Our proactive management services and tools enable us to identify and resolve hardware, software, network and application problems, often before the customer is aware that a problem exists. 41 42 Customers may access their co-located equipment by visiting the ISX facility or by using our software tools and services for remote access. Using our remote access tools, customers can perform emergency tasks, control power functions and monitor their own system usage. These remote access tools alleviate the need for us to build numerous, geographically dispersed ISX facilities. In the event of a system problem, we notify our customer who can then attempt to resolve the issue remotely. We intend to continue to enhance our software tools in order to meet the needs of customers with business critical Internet operations. Our space requirement charges include access to all of our management services and tools. See "Risk Factors -- We may not be able to keep pace with rapid technological changes or emerging industry standards." We offer the tools and services summarized below: - ----------------------------------------------------------------------------------------------- TOOLS/SERVICES DESCRIPTION BENEFITS - ----------------------------------------------------------------------------------------------- MRTG MRTG is a widely used tool licensed by MRTG shows customers the amount of us that provides real-time monitoring bandwidth being used and, therefore, and management of bandwidth. Currently the actual cost of that business used by most major backbone providers, expense. Through a graphical MRTG generates HTML pages containing interface, users can view, in GIF images which provide a real-time real-time, the actual amount of visual representation of this traffic. bandwidth flowing through their MRTG can also be used to display servers and/or networking equipment. historical statistical data in graphic MRTG also allows us and our customers form. to view our connections and bandwidth usage with each of our backbone providers. - ----------------------------------------------------------------------------------------------- EtherValve EtherValve is a tool licensed by us EtherValve allows us to provide each that regulates the actual flow of customer a clear channel of the bandwidth from a customer's server bandwidth purchased. This assures through a 10 Mbps or 100 Mbps Ethernet customers that they will have the segment. bandwidth they have purchased available to them at any given time. EtherValve also allows the customer's bandwidth to be scaled up immediately, in increments as small as 8 bps (0.008 Kbps). - ----------------------------------------------------------------------------------------------- APS -- APS is a suite of proprietary tools APS provides real-time information Automatic developed to continually monitor the about a customer's remote equipment. Pro-Active performance of customer equipment. APS automatically notifies the Services Three levels of predetermined customer and our technical personnel escalation procedures include of system malfunctions. Predetermined automatic notification by e-mail, escalation procedures customized for notification by pager and automatic each customer are then carried out by power cycle. our personnel. Automatic rebooting and other predetermined procedures often serve to correct problems before the customer is aware of the problem. - ----------------------------------------------------------------------------------------------- As-Ur-Here As-Ur-Here provides various service As-Ur-Here allows customers to Service aspects including automatic remote maintain access and control over their power cycle and remote services equipment and perform effective terminal server access. equipment maintenance and problem solving while they outsource their servers and/or networking equipment. - -----------------------------------------------------------------------------------------------
42 43 CUSTOMERS We have established a diversified base of customers including Internet content providers, Web hosting companies and ISPs. As of March 31, 1999, we had approximately 458 customers. One customer, RemarQ Communities, Inc., (formerly named Supernews, Inc.) accounted for 12% and 14% of our revenues in fiscal 1997 and 1998, respectively. No other customer accounted for more than 10% of revenues in either fiscal 1997 or 1998. Our success is substantially dependent on the continued growth of our customer base and the retention of our customers. Our customer base increased from 278 at June 30, 1998 to 382 at December 31, 1998 to 458 at March 31, 1999. We had a monthly customer retention rate of 97.8% or greater in each of the nine months ended March 31, 1999. See "Risk Factors -- We must grow and retain our customer base." The following is a representative list of customers as of March 31, 1999:
- ---------------------------------------------------------------------------------------------------------- INTERNET CONTENT PROVIDERS WEB HOSTING COMPANIES ISPS - ---------------------------------------------------------------------------------------------------------- e-Media, LLC Bay Area Gold AT&T Solutions Imagine Radio, Inc. (acquired by MTV) CNET Download.com Direct Network Access, Ltd. IntelliChoice, Inc. FRNK Technology Group Flashcom Netscape Communications Corporation Floating Point Software Got.Net Corporation (acquired by America Online, Inc.) iXL, Inc. Hurricane Electric RealNetworks, Inc. Lars Mapstead Innetix RemarQ Communities, Inc. PulseWeb Ventures KDD America Visual Dynamics LLC The Web Zone, Inc. Linkage Online Limited WebMD, Inc. VirtuaLynx Internet, LLC PH Communications Westech ExpoCorp. WebAsyst Corporation Singapore Telecommunications - ----------------------------------------------------------------------------------------------------------
The following examples illustrate how our customers use our services: Internet Content Providers - - RealNetworks, Inc. RealNetworks is a leading developer of software products and services designed to enable users of personal computers and other consumer electronic devices to send and receive audio, video and other multimedia services using the World Wide Web. RealNetworks uses our facilities to host its Web site for users to download its client and server software. RealNetworks selected us because of the speed and high performance of our network (enabling fast, reliable downloading of their products), our ability to rapidly scale the amount of bandwidth and our extensive peering relationships. Since becoming a customer in February 1998, RealNetworks has co-located an increasing portion of their downloading operations with us. - - e-Media, LLC. e-Media's core focus is the production and broadcast of live events over the Internet. The viewers of these streaming events are sensitive to the visual degradation that occurs as a result of the Internet's packet loss and latency. e-Media moved to our facilities over six months ago to solve this degradation problem and meet the stringent demands of their Internet viewers. e-Media chose AboveNet because of our ability to scale to support the large and unpredictable number of online viewers for their live events. - - RemarQ Communities, Inc. RemarQ, formerly named Supernews, is a leading Internet discussion service for corporate, ISP and individual clients. RemarQ serves hundreds of thousands of users through corporations, ISPs and direct subscriptions. RemarQ supports over 30,000 newsgroups and an average of 30 gigabytes of data daily. As its business grew, RemarQ realized it had to outsource its Internet connectivity and the computers that served the Internet discussion groups. We reliably handle RemarQ's 43 44 traffic which can reach 300 Mbps. The cost savings realized by co-locating provided RemarQ the ability to focus on its core business. - - WebMD. WebMD is an Internet-based healthcare network that connects physicians, hospitals, third-party payers and consumers to a virtual world of medical information, tools, and services. WebMD needed to be able to send and receive their medical content quickly and securely. We provide WebMD with a secure, highly reliable co-location solution for the critical medical records located on WebMD's servers. Additionally, because WebMD's users come to the WebMD site from numerous ISPs, WebMD chose us because of our substantial public and private peering relationships. WebMD is co-locating at our San Jose, California and Vienna, Virginia ISXs. Web Hosting Companies - - CNET Download.com. CNET is an Internet media company that operates a network of sites on the Web. Download.com, a division of CNET, is a leading site for downloading software titles. CNET Download.com selected us to provide co-location and connectivity services for its servers due to the high performance of our network and peering relationships with major ISPs and other large companies, including America Online, Inc. Our scalable bandwidth also allows CNET Download.com the flexibility necessary to accommodate traffic surges accompanying new software releases. - - The Web Zone, Inc. The Web Zone, Inc. is a full service Internet and networking solutions company. Web Zone relies on us to offer its customers reliable, high performance Internet connection and secure facilities. Our connectivity and co-location services enable Web Zone to offer a full set of services including Web hosting to it's customers who want to focus on their core businesses and not the cost and problems associated with maintaining their own Web sites, servers and Internet connections. ISPs - - PH Communications. PH Communications is a San Francisco Bay Area ISP that provides its customers access, Web hosting, e-mail and support services. PH Communications chose us to provide highly reliable and high performance co-location and Internet connectivity services. PH Communications uses our management tools, including APS and MRTG, to enable it to remotely manage its equipment and bandwidth utilization on a twenty-four hours a day, seven days a week basis. PH Communications has relied on the scalability and extensive peering relationships of our solution to support the growth of its business over the last two years. - - KDD America. KDD America is a subsidiary of Japan's largest international telecommunications carrier, KDD Corporation. KDD America is a leading provider of global telecommunications services. KDD America selected AboveNet's San Jose, California facility as one of its primary U.S. Internet access points because of our scalable facility management and high performance network, our ability to rapidly scale the amount of available bandwidth and our extensive peering relationships. INTERNATIONAL INTERNET SERVICE EXCHANGES We are seeking to create a global network by investing in joint ventures and foreign companies that can develop regional ISXs in Europe and Asia. In March 1999, we entered into agreements with local partners to establish regional ISXs in Austria, Germany and the United Kingdom. We intend to continue to expand our European network through additional investments in joint ventures in other major business centers and countries with high levels of Internet traffic. These regional service exchanges will be based on our business model and facility design and will offer co-location and Internet connectivity services to both Internet content providers and ISPs in their markets. Austria. We founded AboveNet Austria GmbH (AboveNet Austria) in partnership with Raiffeisen Rechenzentrum RRZ, an affiliate of the Raiffeisen group. We acquired a 50% ownership interest in AboveNet Austria in consideration of a cash investment and the grant of a royalty-free license to our tools 44 45 and trademarks. The Austrian ISX expects to be operational by the second half of calendar year 1999. However, the development of this ISX might encounter unanticipated delays. Germany. We founded AboveNet Germany GmbH (AboveNet Germany) in partnership with three German nationals. The German partners include founders of EUNet Germany, a large German ISP which was subsequently acquired by UUNet, and managing directors of the German Internet exchange point DE-CIX. We acquired a 50% ownership interest in AboveNet Germany for a cash investment and the grant of a royalty-free license to our tools and trademarks. The German ISX is currently expected to be operational by the first quarter of calendar year 2000. However, the development of this ISX might encounter unanticipated delays. United Kingdom. We founded AboveNet UK Limited ("AboveNet UK") in partnership with two Scottish nationals who were the founders of Teledata Holdings, a call center and Internet services company which was acquired by Scottish Telecom in 1995. We currently have a 40% ownership interest in AboveNet UK for a cash investment and the grant of a royalty-free license for our tools and trademarks. The UK ISX is currently expected to be operational in the fourth quarter of calendar year 1999. However, the development of this ISX might encounter unanticipated delays. We have currently committed up to an aggregate of $6.5 million in additional financing to the joint ventures and have the right to participate in future financings to maintain our percentage of interest. We also have a right of first refusal to purchase the shares of our foreign partners if they seek to transfer them to a third party. In addition, in Germany and the United Kingdom, we have an option to purchase the shares of our partners in years three through five at a price determined through an independent appraisal mechanism. The investment in these regional ISXs subjects us to a number of risks. See "Risk Factors --We depend on third parties to establish and operate international Internet service exchanges." SALES AND MARKETING Our sales and marketing objective is to achieve broad market penetration and increase brand name recognition among Internet content providers, Web hosting companies and ISPs on a global basis through investments in the expansion of our sales organization and extensive marketing activities. As of March 31, 1999, we employed 46 persons in sales and marketing. We have developed a two-tiered sales strategy to target leading Internet content providers, Web hosting companies and ISPs through direct sales and channel relationships. See "Risk Factors -- We may not be able to hire and retain the key employees we need." Direct Sales Force We maintain a direct sales force of highly trained individuals in San Jose, California, and Vienna, Virginia. As of March 31, 1999, we had 35 persons in direct sales targeting Internet content providers, Web hosting companies and ISPs. We also have personnel responsible for addressing the development of customers in Asia and Europe. We are actively seeking to expand our direct sales force and sales engineers. Substantially all of our sales are currently generated by our direct sales force. Our sales force is supported in their sales efforts by our sales engineers and, in many instances, by our senior management. We believe that the integration of our sales engineers with our sales account managers assists in both the establishment of customer relationships as well as the migration of customers to increased use of our services. We have developed programs to attract and retain high quality, motivated sales representatives that have the necessary technical skills, consultative sales experience and knowledge of their local markets. These programs include technical and sales process training and instruction in consultative selling techniques. We have also developed sales compensation plans which provide for significant incentives for exceeding performance targets. 45 46 Under the terms of license, connectivity and marketing agreements entered into between us and the joint venture entities, we have granted those entities the exclusive right to use our tools and trademarks in their respective countries, subject to meeting certain minimum performance targets. In return, the joint ventures have agreed that, so long as they maintain their exclusivity under the license, connectivity and marketing agreements, we will be their exclusive provider of connectivity services. Develop Channel Relationships We are seeking to develop relationships with potential channel partners including hardware vendors, value added resellers, system integrators, application hosting and Web hosting companies in order to leverage their sales organizations. We believe that by leveraging the sales forces of these companies, we can attract customers for our services in a cost-effective manner, as well as provide co-branded Internet service offerings for our channel partners. For example, some of our Web hosting customers market our service as part of their overall bundled offering and we have been involved in joint marketing and sales efforts with those customers. We are actively seeking to hire experienced channel managers to focus exclusively on developing these relationships. We also plan to develop seminar programs and other cooperative sales programs to further develop these relationships. Marketing Our strategy is to significantly expand our marketing efforts to stimulate increased demand for our services and build the AboveNet brand. We plan to aggressively invest in building the AboveNet brand through integrated marketing campaigns, including traditional and online advertising in business and trade publications, trade show participations, direct mail and public relations campaigns to increase customer awareness and demand. We have also established a client advisory council to strengthen our relationship with our customers. NETWORK ARCHITECTURE Our high performance network is designed to provide enhanced connectivity to our customers. Our two Internet service exchange campuses are connected to one another with high speed SONET circuits, and connected to the Internet through public and private peering arrangements. Our Internet service exchange campuses are located near MAE West and MAE East and are connected to local Internet exchange points by multiple high-speed backbone connections, provided by MCI WorldCom, Sprint, Pacific Bell, Teleport Communications Group, a subsidiary of AT&T, and WinStar Communications. These links to the local exchange points, combined with private exchanges with ISPs, connect our customers' traffic to the Internet. We have engineered our peering using a geographically diverse fiber path to provide high reliability, even in the event of a link failure. We have developed dynamic rerouting and load balancing technologies to enhance the performance of our customers' connections Internet operations. We have determined that as voice, video and other services are carried across the Internet, the need for ATM in network infrastructures is reduced. We have built our network using DS-3 and OC-3 clear channel circuits. By using clear channel circuits, we are able to make highly efficient use of these connections, lowering infrastructure costs and providing high performance connectivity. Inside of each ISX facility, we have multiple local area networks, each connected to the outside network through redundant routers and network connections. These routers are configured such that in case of failure of a single connection, or piece of equipment, alternative equipment or network paths are automatically utilized, without human intervention, or performance degradation. See "Risk Factors -- We depend on third party suppliers." We utilize a combination of public and private peering in order to provide a high level of network performance. On March 31, 1999, we had peering relationships with 257 network providers including 78 46 47 private peering relationships. Our ISXs are connected to all of the major U.S. Internet exchange points. The combination of public and private peering sessions allows us to provide high levels of performance and reliability to their customers. To ensure that this connectivity is not degraded, we have a policy of providing significant excess capacity on all local area network, wide area network and Internet exchange point connections in our network. Any failure to maintain and increase peering relationships would have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors -- We must maintain and increase peering relationships." Our operations are dependent upon our ability to protect our network infrastructure and customers' equipment against damage from human error, fire, earthquakes, floods, power loss, telecommunications failures, sabotage, intentional acts of vandalism and similar events. Despite precautions taken by, and planned to be taken by us, the occurrence of a natural disaster or other unanticipated problem at one or more of our Internet service exchange facilities could result in interruptions in the services provided by us. Such an event could significantly impact the ability of suppliers to provide the data communications capacity required by us and could result in interruptions in our services. See "Risk Factors -- Our systems or other systems on which we depend on may fail" and "-- We face risks associated with the security of our systems." CUSTOMER SERVICE AND QUALITY ASSURANCE We offer a high level of customer service and quality assurance by understanding the technical requirements and business objectives of our customers and addressing their needs proactively on an individual basis. By working closely with our customers, we are able to enhance the performance of our customers' Internet operations, avoid downtime, resolve quickly any problems that may arise and make appropriate adjustments in services as customer needs change over time. We work with our customers to ensure that we are offering the appropriate types and quality of service. We use advanced software tools to aid in our customer monitoring and service efforts. We received our ISO 9002 certification in March 1998. As of March 31, 1999, we had 44 employees dedicated to customer service and quality assurance. Customer service begins 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, to assist the new customer with the installation process. After installation, the customer's equipment is overviewed by our network operation center in San Jose, California, which is operated twenty-four hours a day, seven days a week by engineers who answer customer calls, monitor site and network operations and activate teams to solve problems that arise. Our customer service personnel are also available to assist customers whose operations require specialized procedures. We believe that our quality assurance programs are key to building our brand name. The objectives of our quality assurance system are to comply with ISO 9002: 1994 quality administration systems; to achieve and maintain a level of quality that enhances our reputation with our customers; to ensure compliance with relevant safety and environmental requirements; and to endeavor to deliver high quality services to customers in an environment centered on adherence to high legal and ethical standards. COMPETITION Our business is intensely competitive. There are few substantial barriers to entering the co-location service business, and we expect that we will face additional competition from existing competitors and new market entrants in the future. We believe that participants in this market must grow rapidly and achieve a significant presence in the market in order to compete effectively. We believe that the principal competitive factors in our market are uncongested connectivity, quality of facilities, level of customer service, price, the financial stability and credibility of the provider, brand name and the availability of network management tools. We might not have the resources or expertise to compete successfully in the future. Our current and potential competitors in the market include: (i) providers of co-location services, such as Exodus Communications, Inc., Frontier GlobalCenter, Inc., which is being acquired by Global 47 48 Crossing Holdings, Ltd, Hiway Technologies, Inc., which was acquired by Verio Inc. and Globix Corporation; (ii) national and regional ISPs, such as Concentric Network Corporation, PSINet, Inc., MCI WorldCom and certain subsidiaries of GTE Corporation; (iii) global, regional and local telecommunications companies, such as Sprint, MCI WorldCom and regional bell operating companies, some of whom supply capacity to us; and (iv) large information technology outsourcing firms, such as International Business Machines Corporation and Electronic Data Systems. Some of these companies operate in one or more of these markets. In addition, many of our current and potential 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, some 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 quickly, take advantage of acquisitions and other opportunities more readily, devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than we can. In an effort to gain market share, some of our competitors have offered co-location services similar to ours at lower prices or with incentives not matched by us, including free start-up and domain name registration, periods of free service and low-priced Internet access. As a result of these policies, we may encounter increasing pricing pressure which could have a significant adverse effect on our business and operating results. In addition, these competitors have entered and will likely continue to enter into joint ventures, consortiums or consolidations to provide additional services competitive with those provided by us. As a result, such competitors may be able to provide customers with additional benefits in connection with their co-location and network management solutions, including reduced communications costs, which could reduce the overall costs of their services relative to our services. We might not be able to offset the effects of any such price reductions. In addition, we expect competition to intensify as our current and potential competitors incorporate a broader range of bandwidth, connectivity and Internet networking services and tools into their service offerings. We believe that companies seeking co-location and Internet connectivity providers for their critical Internet operations may use more than one company to provide this service. As a result, these customers would be able to shift the amount of service and bandwidth usage from one provider to another. We may also face competition from our suppliers. Our agreements with our suppliers and other partners do not limit or restrict those parties from offering similar services to our customers, thereby enabling such parties to compete against us. INTELLECTUAL PROPERTY RIGHTS We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect certain proprietary rights in our software. We have no patented technology that would preclude or inhibit competitors from entering our market. We have generally entered into confidentiality and invention assignment agreements with our employees in order to limit access to and disclosure of certain of our proprietary information. We cannot be certain that these contractual arrangements or the other steps taken by us to protect our intellectual property will prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the U.S. We also rely on certain technologies that we license from third parties. Two key technologies offered by us, MRTG and EtherValve, are licensed from David Rand, our Chief Technical Officer. We have perpetual, irrevocable, royalty-free worldwide licenses to both technologies. The license to MRTG is non-exclusive and the license to EtherValve is exclusive subject to one previously granted license. We do not license any other technology which is not generally available. To date, we have not been notified that we infringe the proprietary rights of third parties, but we cannot be certain that third parties will not claim infringement by us. We expect that participants in our markets will be increasingly subject to infringement claims as the number of technologies and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service delays or require us to enter into royalty or licensing agreements. 48 49 Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim could have a material adverse effect upon our business, results of operations and financial condition. GOVERNMENT REGULATION There is currently a small but growing body of laws and regulations directly applicable to access to or commerce on the Internet. Due to the increasing popularity and use of the Internet, it is likely that a growing number of laws and regulations will be adopted at the international, federal, state and local levels with respect to the Internet, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Moreover, a number of laws and regulations have been proposed and are currently being considered by federal, state and foreign legislatures with respect to such issues. The nature of any new laws and regulations and the manner in which existing and new laws and regulations may be interpreted and enforced cannot be fully determined. For example, although sections of the Communications Decency Act of 1996 (the "CDA") that, among other things, proposed to impose criminal penalties on anyone distributing "indecent" material to minors over the Internet, were held to be unconstitutional by the U.S. Supreme Court, there can be no assurance that similar laws will not be proposed and adopted. Legislation similar to the CDA could subject us and/or our customers to potential liability, which in turn could have an adverse effect on our business, operating results and financial condition. The adoption of any future laws or regulations might decrease the growth of the Internet, decrease demand for our services, impose taxes or other costly technical requirements or otherwise increase the cost of doing business or in some other manner have a significant adverse effect on us or our customers, which, in turn, could have a significant adverse effect on our business and operating results. In addition, applying existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy to the Internet is uncertain. The vast majority of these laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to these laws intended to address these issues, including some recently proposed changes, could create uncertainty in the marketplace which could reduce demand for our services or increase the cost of doing business as a result of costs of litigation or increased service delivery costs, or could in some other manner have a significant adverse effect on our business and operating results. In addition, as our services are available over the Internet in multiple states and foreign countries, and as we facilitate sales by our customers to end users located in these states and foreign countries, these jurisdictions may claim that we are required to qualify to do business as a foreign corporation in each of these states or foreign countries. Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws may not currently apply to our business, could have a significant adverse effect on our business and operating results. EMPLOYEES As of March 31, 1999, we had 130 employees, including 46 people in sales and marketing, 62 people in customer service, network and backbone engineering and product development and 22 people in general and administration. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. The competition for these personnel is intense, and we might not be able to hire or retain these personnel. See "Risk Factors -- We may not be able to manage our growth effectively," and "We may not be able to hire or retain the key employees we need." FACILITIES Our principal executive and administrative offices are located in San Jose, California and consist of approximately 20,000 square feet that are leased until 2008, with an option by us to expand to 2018. We 49 50 lease our ISX facilities in San Jose, California and Vienna, Virginia (in the Washington, D.C. area). The San Jose, California facility consists of approximately 10,000 square feet, including 6,800 square feet of co-location space and is leased until 2008, with an option for us to extend to 2018. The Vienna, Virginia facility, which consists of approximately 17,000 square feet, including 12,000 square feet of co-location space is leased until 2007, with an option for us to extend to 2012. We are establishing a West Coast campus by developing a second ISX facility of approximately 124,000 square feet, including approximately 61,000 square feet of co-location space, near our San Jose, California facility. We opened this facility with an initial build-out of 4,200 square feet of co-location space in March 1999 and we intend to build out an additional 6,800 square feet of co-location space by the fall of 1999. Afterwards, we intend to build out approximately 13,000 additional square feet of co-location space by the spring of 2000. The build-out of additional co-location space will occur incrementally over time based on customer demand. The lease for this planned facility is a twenty year lease commencing on the earlier of such time when any portion of the facility can be occupied or one year following the earlier of the date on which construction on the planned facility commences or should have commenced. In addition, we are establishing an East Coast campus with plans to develop another Internet service exchange in New York, New York which will be connected by fiber optic cable to our Vienna, Virginia facility. This facility is expected to be about 27,000 square feet, including approximately 11,000 square feet of co-location space. We intend to initially complete the build-out of approximately 5,500 square feet of co-location space and continue to add co-location space over time based on customer demand. The lease for this planned facility has a fifteen year term. We are also planning to develop an additional Internet service exchange in the Washington D.C. area to be a part of our East Coast campus. The target date for opening the facility is in the second half of calendar 2000. However, we have not entered into a lease for this planned facility. Any of the ISXs planned for development might not be completed in a timely manner, or at all. See "Risk Factors -- We may face problems in connection with out expansion plans." LEGAL PROCEEDINGS We have a dispute with one of our customers, Pathway Communications, Inc., involving one of Pathway's consultants. The consultant misrepresented his identity to us to gain access to Pathway's servers in order to delete files. On September 3, 1998, Pathway Communications filed a complaint against us for negligence, breach of contract, conversion, and intentional and negligent interference with prospective economic advantage in the Superior Court of the State of California, County of Santa Clara. The lawsuit seeks general, special and punitive damages upon proof, as well as costs and reasonable attorneys' fees. We obtained an order requiring that the dispute be submitted to arbitration. We intend to vigorously defend against such action. However, we might not prevail in this litigation and this litigation might have a significant adverse effect on our business or operating results. We disagree with one of our network providers over currently invoiced amounts and credits available to apply against amounts invoiced in the future. We believe we are entitled to net credits under our agreements with them. We are discussing a settlement of our disagreement, but we may be unable to reach a mutually agreeable settlement. If a settlement is not reached, this dispute might result in litigation. Litigation could be costly and could have an adverse effect on our operating results, regardless of the outcome. 50 51 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The executive officers, directors and key employees of AboveNet are as follows:
NAME AGE POSITION ---- --- -------- Sherman Tuan............................... 45 Chairman of the Board and Chief Executive Officer Peter C. Chen, Ph.D.(2).................... 59 Vice Chairman of the Board Warren J. Kaplan........................... 56 President, Chief Operating Officer and Director David Rand................................. 36 Chief Technology Officer Stephen P. Belomy.......................... 40 Executive Vice President and Secretary David Dembitz.............................. 45 Senior Vice President of Sales and Marketing David F. Larson............................ 51 Senior Vice President and Chief Financial Officer Jerry Chen................................. 34 Vice President of International -- Asia Avi Freedman............................... 29 Vice President of Engineering Kevin Hourigan............................. 34 Vice President of Finance and Controller Van D. Jepson.............................. 45 Vice President of Marketing Mark Kaleem................................ 52 Vice President of Sales Jeffrey Monroe............................. 32 Vice President of Construction and Real Estate Wayne Sanders.............................. 56 Vice President of Corporate Development Paul Steiner, Ph.D......................... 42 Vice President of International -- Europe Robert A. Burgelman, Ph.D.(1).............. 53 Director Frank R. Kline(2).......................... 48 Director James Sha(1)............................... 48 Director Tom Shao, Ph.D.(2)......................... 64 Director Kimball W. Small(2)........................ 63 Director Fred A. Vierra(1).......................... 67 Director
- ------------------------- (1) Member of Compensation Committee (2) Member of Audit Committee Mr. Tuan, the founder of AboveNet, has served as Chief Executive Officer and a Director since 1996, and President until January 1998. Mr. Tuan has served as Chairman of the Board since August 1998. Mr. Tuan was President of InterNex Information Services, Inc., an Internet infrastructure provider, from November 1994 to October 1995 and from February 1994 to November 1995 was President of Tiara Computer, Inc., a network equipment manufacturer, which merged with InterNex Information Services, Inc. in November 1994. From January 1992 to June 1993, Mr. Tuan was Vice President of Worldwide Sales and Marketing of Primus Technologies, Inc., a provider of problem resolution and knowledge management software, and President of Celerite Graphics, Inc., a manufacturer of video chips. Mr. Tuan received an Electrical Engineering degree from Feng-Chia University in Taiwan. Dr. Chen has served as Vice Chairman of the Board since August 1998. Dr. Chen served as Chairman from December 1996 to August 1998, and has been our Director since March 1996. Dr. Chen is the Founder and Chairman of Crosslink Technology Partners, an investment firm specializing in funding and developing early stage semiconductor, healthcare and Internet related technology ventures, where he has been employed since August 1992. From September 1983 to May 1992, Dr. Chen was Founder, General 51 52 Manager and Chief Executive Officer of Mosel Corporation, a semiconductor manufacturer in Taiwan. Dr. Chen received a B.S. in Engineering from National Taiwan University and a Ph.D. in Engineering from Cornell University. Mr. Kaplan has served as President, Chief Operating Officer and a Director since January 1998, and as Acting President and Chief Operating Officer from November 1997 to January 1998. From March 1996 to November 1997, Mr. Kaplan was an investor and consultant to various Internet software start-up companies. Mr. Kaplan served as Chief Executive Officer and a director of Simply Interactive, Inc., a software company, from June 1996 to December 1996, and was President from April 1996 to June 1996. Until February 1996, Mr. Kaplan served (i) as a Managing Director -- International at NETCOM On-Line Communication Services, Inc., an ISP and Web hosting company, from August 1995, (ii) as Executive Vice President from February 1994, (iii) as Secretary from October 1994, and (iv) as a Director since April 1994. Mr. Kaplan also served as NETCOM's Chief Financial Officer from February 1994 through September 1995. From September 1989 to December 1993, Mr. Kaplan was Vice President of Operations of Gefinor (USA) Inc., a merchant banking business, and also served as Senior Vice President and Chief Financial Officer and Interim Chief Executive Officer of its majority-owned subsidiary, Sheaffer Pen Company, from September 1989 to August 1991 and September 1989 to August 1990, respectively. Mr. Kaplan received a B.S. in Accounting from New York University and an M.B.A. in Taxation from Long Island University. Mr. Rand has served as Chief Technology Officer since March 1996, initially as a consultant, and since May 1998 as an employee. Mr. Rand has served as a member of the Internet Engineering Task Force for the past seven years. Mr. Rand authored rfc 1962 and rfc 1663, developed the EtherValve technology and developed ASAP and APS, as well as co-developed MRTG. From September 1995 to May 1998, Mr. Rand was an engineer at Cisco Systems, Inc., a router manufacturer. From February 1994 to August 1995, Mr. Rand was an engineer at Innovative Systems and Technologies, a video compression company. From October 1993 to February 1994, Mr. Rand was a software engineer at Novell, Inc., a network server company. Mr. Belomy has served as Executive Vice President since January 1998. Mr. Belomy also served as AboveNet's Chief Financial Officer from January 1998 to November 1998, and as AboveNet's Director of Operations from January 1997 to January 1998. From August 1985 to December 1996, Mr. Belomy served as Vice President of Kimball Small Properties, a commercial real estate developer in San Jose, California. Mr. Belomy has a B.S. in Engineering from the University of California at Los Angeles. Mr. Dembitz has served as Senior Vice President of Sales and Marketing since April 1998. From February 1996 to April 1997, Mr. Dembitz was Vice President of Sales and Marketing of ISDNet, a start-up company that provided remote access solutions, which was acquired in 1997. From June 1993 to December 1995, Mr. Dembitz was an independent consultant providing networking consulting services. From January 1990 to June 1993, Mr. Dembitz held various sales positions, including Senior Manager of Major Account Programs and Channel Programs, as well as the Senior Manager of Sales Operations for SynOptics Communications, which was acquired by Bay Networks, a provider of routers, switches and hubs. Mr. Dembitz received a B.S. in Management and a B.S. in Economics, as well as an M.B.A. with a minor in Marketing, from the University of Utah. Mr. Larson has served as Senior Vice President and Chief Financial Officer since November 1998. From December 1997 to November 1998, Mr. Larson served as Vice President and Treasurer of Silicon Valley Group, Inc., which designs, manufactures and markets semiconductor processing equipment. From August 1993 to December 1997, Mr. Larson served as Silicon Valley Group's Director of Planning and from July 1991 to August 1993, Mr. Larson served as Silicon Valley Group's Corporate Controller. Mr. Larson received a B.S. with honors (with a concentration in Accounting) from California Polytechnic State University, San Luis Obispo. Mr. Larson is a Certified Public Accountant. Mr. Chen has served as Vice President of International -- Asia since October 1998. Previously, Mr. Chen served as Sales and Marketing Manager from January to December 1996, as Senior Customer Service Manager from January to December 1997, as San Jose Operations Director from January 1998 to June 52 53 1998 and as a Director of Asia Pacific from July 1998 to October 1998. Prior to joining AboveNet, Mr. Chen was a Director of Postable Systems for Everex Systems, Inc., a computer manufacturer, from January 1995 to January 1996 and the Co-founder and Vice President of Intelligent Notebook Systems, a computer reseller, from May 1994 to January 1996. From July 1991 to May 1994, Mr. Chen was a sales manager for Santron Inc., a computer reseller. Mr. Chen received a B.S. in Electrical Engineering from Feng-Chia University in Taiwan, and an M.B.A. from the University of Hartford. Mr. Freedman has served as Vice President of Engineering since February 1999. From August 1992 until he joined AboveNet, Mr. Freedman was the founder and served as the Chief Executive Officer, Chief Financial Officer and Chief Technology Officer of Net Access, an Internet service provider. Mr. Freedman has served as a board member of the Internet Service Provider Consortium since 1996. Mr. Freedman has completed studies towards a B.S. in Computer Science at Temple University in Philadelphia, Pennsylvania, as well as Ph.D. courses at the State University of New York in Stony Brook, New York. Mr. Hourigan was promoted to Vice President of Finance in August 1998, and has served as Controller since February 1998. Mr. Hourigan served as a consulting associate with Deloitte & Touche LLP from October 1997 to February 1998. From August 1993 to April 1997, Mr. Hourigan worked for NETCOM, serving in the positions of Controller and Director of Internal Audit, Budgeting and Analysis. From August 1991 to August 1993, Mr. Hourigan served as Financial Analyst for Hewlett-Packard Company, a computer manufacturer. Mr. Hourigan received a B.A. in Business Economics and a B.A. in Law & Society from University of California, Santa Barbara and an M.B.A. from Santa Clara University. Mr. Jepson has served as Vice President of Marketing since December 1998. From 1997 until he joined AboveNet, Mr. Jepson served as the Director of Worldwide Field Marketing and, prior to that, the Business Development Manager for Marimba, Inc. From 1990 to 1997, Mr. Jepson worked for Sun Microsystems, Inc., serving in the positions of Director of Worldwide Industry Marketing, Director of Worldwide Manufacturing Industry Marketing and Director of Worldwide Higher Education Marketing. Mr. Jepson received his B.S. in Electrical Engineering from the University of California at Davis. Mr. Kaleem has served as Vice President of Sales since January 1999. From September 1998 to December 1998, Mr. Kaleem served as Managing Director of National Accounts. From December 1997 to August 1998, Mr. Kaleem was the proprietor of Unetix International. From June 1996 to October 1997, Mr. Kaleem was the Vice President, Corporate Development and Strategic Planning of InfoSpace, Inc. and, from 1992 to November 1995, he was the President of ComTrade, Inc. Mr. Monroe has served as Vice President of Construction and Real Estate since August 1998. Mr. Monroe was a Project Manager for Cupertino Electric, an electrical contractor, from February 1998 to August 1998. Prior to that, Mr. Monroe was a Project Manager from April 1992 to January 1998, an Assistant Manager from 1990 to 1992 and an Estimator from 1989 to 1990 for Truland Systems Corporation, an electrical engineering and contracting company. Mr. Monroe completed a four year IBEN Electrical apprenticeship program and is a licensed electrician in the State of Virginia and Washington, D.C. Mr. Sanders has served as Vice President of Corporate Development since August 1998. Mr. Sanders served as AboveNet's Director of Sales from May 1996 to August 1998. From April 1994 to April 1996, Mr. Sanders was the Director of Sales for InterNex Communications, Inc., an Internet infrastructure provider. Prior thereto, Mr. Sanders was the Founder of InterSell, a computer peripheral manufacturer and distribution company, which subsequently was split into three companies, from July 1976 to January 1993. The three companies were: Integrated Marketing, a manufacturing representative firm where he held the position of Chief Executive Officer and President; Paragon Sales, a distributor of computer peripherals where he held the position of Chief Executive Officer; and Intek Manufacturing, a manufacturer of intelligent printers and smart switch boxes where he held the position of Chief Executive Officer. Mr. Sanders attended Olympic College in Bremerton, Washington. Dr. Steiner has served as Vice President of International -- Europe since August 1998. From August 1995 until August 1998, Dr. Steiner was the Managing Director of Europe, Africa, Middle East and India, and from February 1995 until August 1995, Dr. Steiner was a consultant for NETCOM. From January 1994 to 53 54 January 1995, Dr. Steiner was an independent consultant in Palo Alto, California. From April 1986 to December 1993, Dr. Steiner served as a Managing Director and Partner for HOT Engineering Ltd., a petroleum engineering software and consulting company in Leoben, Austria. Dr. Steiner received a B.S. and M.S. in Petroleum Engineering, and a Ph.D. in Reservoir Engineering from Leoben Mining University in Leoben, Austria, and an M.B.A. from the University of Michigan. Dr. Burgelman has served as a Director since November 1998. Dr. Burgelman is currently the Edmond W. Littlefield Professor of Management and Director of the Stanford Executive Program at Stanford Business School and has been a professor at Stanford Business School since August 1981. From 1991 to 1992, Dr. Burgelman also served as Chair of the Division of Business Policy and Strategy of the Academy of Management and was a Marvin Bower Fellow at Harvard Business School. From 1996 to 1997 and 1988 to 1989, Dr. Burgelman was a GSB Trust Faculty Fellow and a BP America Faculty Fellow at Stanford Business School. Dr. Burgelman earned a Licenciate degree in Applied Economics from Antwerp University in Belgium, an M.A. in Sociology and a Ph.D. in Management of Organizations from Columbia University. Mr. Kline has served as a Director since August 1998. Mr. Kline has served as a Managing Partner of Kline Hawkes California, L.P./Kline Hawkes California SBIC, L.P., a private equity firm, since 1994. From June 1984 to June 1994, Mr. Kline served as a private equity manager of Lambda Fund Management, Inc., a venture capital firm. Mr. Kline currently serves as a director of four companies: CampusLink Communications Systems, Inc., EOS Corporation, SuperShuttle International, Inc. and TranSoft Networks, Inc. Mr. Kline also serves on the Board of Governors of the National Association of Small Business Investment Companies. Mr. Kline received a B.S. in Commerce from Rider College and an M.S. from the University of Massachusetts at Amherst. Mr. Sha has served as a Director since August 1998. Since January 1998, Mr. Sha has served as Senior Vice President, Commerce Solutions at Netscape Communications, a provider of software and Internet services for businesses. From April 1996 to December 1997, Mr. Sha was the President and Chief Executive Officer of Actra Business Systems, a developer of high-end Internet commerce applications. Actra, a joint venture between Netscape and GE Information Services, was acquired by Netscape in December 1997. Mr. Sha served as Vice President and General Manager of integrated application at Netscape from August 1994 to April 1996. From June 1990 to August 1994, Mr. Sha was the Vice President of the Unix Product Division at Oracle Corporation, a software company. Mr. Sha received an M.S. Electrical Engineering from the University of California at Berkeley, an M.B.A. from Santa Clara University and a B.S. in Electrical Engineering from Taiwan University. Dr. Shao has served as Director since January 1998. Since September 1997, Dr. Shao has served as Managing Director of Technology Associates Management Co., Ltd., a venture fund manager. Dr. Shao served as a senior consultant for Technology Associates Corporation of Taiwan, a venture investment firm, from September 1995 to September 1997. From September 1985 to September 1995, Dr. Shao served as Senior Vice President of DynaTech Development Corporation, a management consulting and venture investment firm. Since August 1992, Dr. Shao has served as President of TSS Enterprises, a privately held high technology management consulting, investing and trading company. Dr. Shao received a Ph.D. in Applied Mathematics/Computer Science, a M.S. in Engineering from the University of Illinois, and a B.S. in Engineering from National Taiwan University. Mr. Small has served as Director since March 1997. Mr. Small is the Founder and President of Kimball Small Properties, a San Jose, California commercial real estate development company incorporated in 1978. Mr. Small received a B.S. from the University of California at Los Angeles. Mr. Vierra has served as Director since October 1998. Mr. Vierra is the Vice Chairman of the Board of Directors and a consultant to Tele-Communications International, Inc. (TINTA), a cable television and telecommunications company. Prior to his current position with TINTA, Mr. Vierra served as the Chief Executive Officer from June 1995 to January 1998 and as Executive Vice President from December 1991 to June 1995. Prior to joining TINTA, Mr. Vierra was President and Chief Operating Officer of the 54 55 United Artists Entertainment Company, a cable television and motion picture theatre company, from 1989 to 1991. Mr. Vierra received a B.S. in Business Administration from the University of Tulsa. Classified Board Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors is elected each year. To implement the classified structure, prior to the consummation of the offering, two of the nominees to the board of directors were elected to one-year terms, two were elected to two-year terms, and three were elected to three-year terms. Thereafter, directors will be elected for three-year terms. Robert A. Burgelman, Frank R. Kline and Tom Shao have been designated Class I directors whose term expires at the 1999 annual meeting of stockholders. Peter C. Chen, Warren J. Kaplan and Fred A. Vierra have been designated Class II directors whose term expires at the 2000 annual meeting of stockholders. James Sha, Kimball W. Small and Sherman Tuan have been designated Class III directors whose term expires at the 2001 annual meeting of stockholders. See "Description of Capital Stock -- Antitakeover Effects of Provisions of Certificate of Incorporation, Bylaws and Delaware Law." Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. BOARD COMMITTEES Our board of directors has a compensation committee and an audit committee. Compensation Committee The compensation committee of the board reviews and makes recommendations to our board regarding all forms of compensation provided to our executive officers and directors including stock compensation and loans. In addition, the compensation committee reviews and makes recommendations on bonus and stock compensation arrangements for all our employees. The compensation committee also administers our 1996 and 1997 Stock Option Plans, 1998 Stock Incentive Plan and 1998 Employee Stock Purchase Plan. The current members of the compensation committee are Messrs. Burgelman, Sha and Vierra. Audit Committee The audit committee reviews and monitors the corporate financial reporting and our internal and external audits, including, among other things, our internal audit and control functions, the results and scope of the annual audit and other services provided by our independent auditors and our compliance with legal matters that have a significant impact on our financial reports. The audit committee also consults with our management and our independent auditors prior to the presentation of financial statements to stockholders and, as appropriate, initiates inquiries into aspects of our financial affairs. In addition, the audit committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, our independent auditors. The current members of the audit committee are Messrs. Chen, Kline, Shao and Small. DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS Our directors who are not employees receive cash payments of $2,000 per board meeting and committee meeting. From time to time, certain directors who are non-employees have received grants of options to purchase shares of our common stock. Directors receive automatic option grants under our 1998 Stock Incentive Plan. See "-- Stock Incentive Plan." 55 56 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The compensation committee currently consists of Messrs. Burgelman, Sha and Vierra. No interlocking relationship exists between any member of our board or our compensation committee and any member of the board of directors or compensation committee of any other company, and no such interlocking relationship has existed in the past. ADVISORY BOARD We have an advisory board whose members advise our management with respect to strategic issues and other business matters. Our advisory board currently consists of the following persons: Robert Berger is President of Internet Bandwidth Development, an Internet infrastructure and service consultancy. Mr. Berger founded InterNex Information Services, Inc. in 1993 and held various executive management positions through 1996 and served as a board member until the company was sold to Concentric Network in March 1997. Dr. Gregg Carse is the founder and Chief Executive Officer of CWA Communications Products Inc., a designer of systems for telecommunications products both domestically and internationally for over 20 years. Michael Conley is General Manager of Perspecta, Inc. Prior to that, he served as a Managing Director of Spyglass Incorporated. Mr. Conley has had various positions with NetFrame Systems Incorporated from 1989 to 1996 with the most recent being Vice President and General Manager, Asia Pacific. Daniel Gatti has been President and Chief Executive Officer of Mayan Networks, a multiservice carrier class access switch company, since June 1998. Prior to joining Mayan Networks, Mr. Gatti served as Vice President and General Manager of 3Com Corporation's Network Service Provider Division. Glenn Kohner is President of ISO-Online Inc. Prior to 1996, Mr. Kohner was a consultant and business owner. James Lee is Director of Strategy at the Singapore National Information Technology Research Institute, Kent Ridge Digital Labs. Frank McGrath retired on March 1, 1999. Prior to that time he served as Vice President of MCI WorldCom, Inc. since 1988. From 1980 to 1988, Mr. McGrath was Vice President of ITT World Communications. Richard Steranka has held several positions at Cisco Systems, Inc. since 1992. Mr. Steranka is presently Director, Small-Medium Business Channel Marketing. Bruce Weber has been President of QMS Quality Management Systems, Inc. since 1995 and a Managing Director of Boca Corporate Resources, a successor of Martin, Randolph and Barnes since 1992, a firm specializing in corporate acquisitions, restructuring and leveraged buyouts. 56 57 EXECUTIVE COMPENSATION The following table sets forth the compensation earned during the fiscal year ended June 30, 1998, by our Chief Executive Officer and our three other most highly compensated executive officers for services rendered in all capacities for that fiscal year. SUMMARY COMPENSATION TABLE FOR LAST FISCAL YEAR
LONG TERM COMPENSATION AWARDS ------------------- ANNUAL COMPENSATION SECURITIES ----------------------- UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) --------------------------- --------- -------- ------------------- Sherman Tuan Chief Executive Officer.................. 132,500(1) --(2) 67,500(3) Warren J. Kaplan President, Chief Operating Officer....... 71,635(4) --(5) 202,500(6) Stephen P. Belomy Executive Vice President................. 112,500(7) -- 42,500(8) David Rand Chief Technology Officer................. 103,333(9)(10) -- 30,000(11)
- ------------------------- (1) Mr. Tuan's annual base salary is currently $225,000 with a minimum annual increase of 10% each year. See "-- Employment Agreements." (2) Mr. Tuan will receive a minimum annual bonus of $50,000 per year with a minimum bonus increase of 10% each year. However, this bonus will not exceed the amount of Mr. Tuan's then current salary. See "-- Employment Agreements." (3) On August 18, 1998, Mr. Tuan received an option to purchase 131,500 shares of common stock at an exercise price of $12.00 per share. This option will vest in equal installments over 48 months. On December 1, 1998, our board of directors approved an amendment to reduce the exercise price of the option to $10.00 per share. On April 6, our board of directors approved a correction to change the vesting schedule as follows: 20% of the option shares are fully vested and the balance becomes vested over the next 36 months of service measured from August 18, 1998. See "Certain Transactions." On December 18, 1998 Mr. Tuan received an option to purchase 2,500 shares at an exercise price of $12.125 per share. The option shares were fully vested on the date of grant. (4) Mr. Kaplan's annual base salary is currently $225,000 with a minimum annual increase of 10% each year. See "-- Employment Agreements." (5) Mr. Kaplan will receive a minimum annual bonus of $50,000 per year with a minimum annual bonus increase of 10% each year. However, this bonus will not exceed the amount of Mr. Kaplan's then current salary. See "-- Employment Agreements." (6) On December 18, 1998 Mr. Kaplan received an option to purchase 2,500 shares at an exercise price of $12.125 per share. The option shares were fully vested on the date of grant. (7) Mr. Belomy's annual base salary is currently $160,000. (8) On December 18, 1998 Mr. Belomy received an option to purchase 2,500 shares at an exercise price of $12.125 per share. The option shares were fully vested on the date of grant. (9) Mr. Rand's employment started on May 1, 1998 at an annual salary of $140,000. Mr. Rand's annual base salary is currently $190,000. (10) Includes $80,000 earned as a consultant. (11) On August 18, 1998, Mr. Rand received an option to purchase 101,250 shares of common stock at an exercise price of $12.00 per share. On December 1, 1998, our board of directors approved an amendment to reduce the exercise price of the option to $10.00 per share. On April 6, our board of directors approved a correction to change the vesting schedule as follows: 20% of the option shares are fully vested and the balance becomes vested over the next 36 months of service measured from August 18, 1998. See "Certain Transactions." On December 18, 1998 Mr. Rand received an option to purchase 2,500 shares at an exercise price of $12.125 per share. The option shares were fully vested on the date of grant. On March 21, 1999, Mr. Rand received an option to purchase an additional 25,000 shares of common stock. The option shares were fully vested on the date of grant. On March 21, 1999 Mr. Rand received an option to purchase 25,000 shares of common stock. This option will vest in equal installments over 36 months. 57 58 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth each grant of stock options during the fiscal year ended June 30, 1998 to our Chief Executive Officer and our three other most highly compensated executive officers. No stock appreciation rights were granted during the last fiscal year. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with rules of the Securities and Exchange Commission and do not represent our estimate or projection of our common stock price. Actual gains, if any, on stock option exercises are dependent on the future performance of our common stock, overall market conditions and the option holders' continued employment through the vesting period. Unless the market price of our common stock appreciates over the option term, no value will be realized from the option grants made to these executive officers. The potential realizable values shown in the table are calculated by assuming that the estimated fair market value of our common stock on the date of grant increases by 5% and 10%, respectively, during each year of the option term. See footnote 7 for information on how the fair market value was estimated.
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ----------------------------------------------------------- ASSUMED ANNUAL NUMBER OF PERCENT OF RATES OF STOCK PRICE SECURITIES TOTAL APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM($) OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED(#) FISCAL YEAR(6) ($/SHARE)(7) DATE(8) 5% 10% ---- ---------- --------------- ------------ ---------- -------- --------- Sherman Tuan......... 62,500(1) 11.18 0.40 12/09/07 15,722 39,844 5,000(2) * 1.20 1/26/08 3,773 9,562 Warren J. Kaplan..... 27,500(3) 4.92 0.20 11/09/07 3,459 8,766 175,000(4) 31.30 0.40 11/09/07 44,023 111,562 Stephen P. Belomy.... 37,500(5) 6.71 0.40 12/09/07 9,433 23,906 5,000(2) * 1.20 1/26/08 3,773 9,562 David Rand........... 25,000(5) 4.47 0.40 12/09/07 6,289 15,937 5,000(2) * 1.20 1/26/08 3,773 9,562
- ------------------------- * Less than one percent. (1) 6.25% of the shares vest every 3 months after the vesting commencement date until the first anniversary of the vesting commencement date. 1/36 of the remaining shares vest each month thereafter. Under the terms of Mr. Tuan's employment agreement, all of the shares subject to this option will accelerate and become fully vested if either Mr. Tuan's employment with us is terminated without cause or there is a material breach by us of his employment agreement. See "-- Employment Agreements." (2) Each of the options granted to Messrs. Tuan, Belomy and Rand on January 27, 1998 were fully vested at the time of grant. (3) 1/3 of the shares vested on December 10, 1997, 1/3 of the shares vested on January 10, 1998 and 1/3 of the shares vested on February 9, 1998. 9,166 of the option shares were cancelled when Mr. Kaplan joined us as President and Chief Operating Officer. (4) 1/5 of the shares were immediately exercisable on the date of grant and 1/36 of the remaining shares become exercisable each month thereafter. All unvested options accelerated upon the closing of our initial public offering on December 10, 1998. (5) 6.25% of the shares vest every 3 months after the vesting commencement date until the first anniversary of the vesting commencement date. 1/36 of the remaining shares vest each month thereafter. (6) Based on an aggregate of 559,125 options granted to our employees under our 1997 Stock Option Plan and the option granted to Mr. Kaplan on November 10, 1997 with an exercise price of $0.40 per share. See "-- Employment Agreements." (7) The exercise price is equal to the deemed fair market value of our common stock as estimated by our board of directors on the date of grant. However, the exercise price of the option granted to Mr. Kaplan on November 10, 1997 to purchase 175,000 shares of common stock at an exercise price of $0.40 per share was deemed to be above the fair market value on the date of grant. The fair market value of our common stock was estimated by our board of directors on the basis of the purchase price paid by investors for shares of our preferred stock, taking into account the liquidation preferences and other rights, privileges and preferences associated with such preferred stock, and an evaluation by our board of directors of our revenues, operating history and prospects. 58 59 (8) Each of the options has a ten-year term. However, the options will terminate earlier if the optionee ceases service with us. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information concerning the options exercised by our Chief Executive Officer and our three other most highly compensated executive officers in fiscal year 1998 and the year-end number and value of unexercised options with respect to each of these executive officers. No stock appreciation rights were exercised by these executive officers in fiscal year 1998 or were outstanding at the end of that year.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(3) ACQUIRED ON VALUE ------------------------------ --------------------------- NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------------- -------------- ------------- ----------- ------------- Sherman Tuan........... -- -- 155,000 87,500 771,500 451,500 Warren J. Kaplan....... 65,833 64,833 14,721 112,777 70,661 541,330 Stephen P. Belomy...... 7,551 37,708 55,781 -- 268,124 -- David Rand............. -- -- 86,250 62,500 427,250 317,500
- ------------------------- (1) Based on the fair market value of our common stock on the date of exercise, less the exercise price payable for such shares. (2) Certain of the options are then immediately exercisable for all the option shares as of the date of grant but any shares purchased are subject to repurchase by us at the original exercise price paid per share if the optionee ceases service with us before vesting in such shares. (3) Based on the fair market value of our common stock at fiscal year end of $5.20 per share less the exercise price payable for such shares. The fair market value of our common stock at the end of fiscal year 1998 was estimated by our board of directors on the basis of the purchase price paid by investors for shares of our preferred stock, taking into account the liquidation preferences and other rights, privileges and preferences associated with such preferred stock, and an evaluation by our board of directors of our revenues, operating history and prospects. STOCK INCENTIVE PLAN In August 1998, our board of directors adopted our 1998 Stock Incentive Plan. It replaces our 1996 Stock Option Plan and our 1997 Stock Plan. The 1996 Stock Option Plan and 1997 Stock Plan terminated when we adopted the 1998 Stock Incentive Plan. No further grants will be made under the 1996 Stock Option Plan and 1997 Stock Plan, although they will continue to govern all outstanding awards made under their terms. All awards will be made under the 1998 Stock Incentive Plan. We reserved 1,562,500 shares of common stock for issuance under the 1998 Stock Incentive Plan. If we forfeit or terminate any options granted under the 1998 Stock Incentive Plan for any reason without the grants having been exercised in full, then the unpurchased shares subject to those options will become available for additional grants of stock options or shares under the 1998 Stock Incentive Plan. If we forfeit any shares granted or purchased under the 1998 Stock Incentive Plan, then those shares will also become available for additional grants under the 1998 Stock Incentive Plan. The number of shares reserved for issuance under the 1998 Stock Incentive Plan will increase automatically on July 1 of each year by a number equal to the lesser of (1) 312,500 shares or (2) 4% of the shares of common stock outstanding at that time. Options granted to any optionee in a single fiscal year shall not cover more than 312,500 shares. However, options granted to a new employee in the fiscal year in which his or her service as an employee first commences shall not cover more than 625,000 shares. Under the 1998 Stock Incentive Plan, directors, employees, and consultants and advisors to us, or a subsidiary or affiliate of us, are eligible to purchase shares of common stock and to receive awards of shares or grants of nonstatutory options. Employees are also eligible to receive grants of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended. Collectively, these grants are known as awards. Our compensation committee of our board of directors administers the 1998 Stock Incentive Plan and selects the persons to whom shares will be sold or awarded or options will be granted, determines the type, number, vesting requirements and other features and conditions of each sale, award or grant, interprets this plan and makes all other decisions relating to the operation of the plan. 59 60 The exercise price under any nonstatutory stock options generally must be at least 85% of the fair market value of the common stock on the date of grant, and the exercise price may vary in accordance with a predetermined formula while the nonstatutory stock option is outstanding. The exercise price under incentive stock options cannot be lower than 100% of fair market value of the common stock on the date of grant and, in the case of incentive stock options granted to holders of more than 10% of our voting power, not less than 110% of such fair market value. The term of an incentive stock option cannot exceed 10 years, and the term of an incentive stock option granted to a holder of more than 10% of our voting power cannot exceed five years. The exercise price of common stock issued upon exercise of options is payable in cash equivalents at the time when such shares are purchased. However, the stock option agreement for an incentive stock option, and with respect to nonstatutory stock option, the compensation committee at any time, may specify that payment may be made in any of the following forms: (1) by surrendering, or attesting to the ownership of, shares of common stock that are already owned by the optionee; (2) by delivering an irrevocable direction to a securities broker approved by us to sell all or part of the shares being purchased under the 1998 Stock Incentive Plan and to deliver all or part of the sales proceeds to us; (3) by delivering an irrevocable direction to pledge all or part of the shares being purchased under the 1998 Stock Incentive Plan to a securities broker or lender approved by us, as security for a loan, and to deliver all or part of the loan proceeds to us; (4) by delivering a full-recourse promissory note; or (5) any other form that is consistent with applicable laws, regulations and rules. The par value of the shares being purchased under the 1998 Stock Incentive Plan, if newly issued, must be paid in cash or cash equivalents. Each new non-employee director who is elected to our board of directors will automatically be granted as of the date of election a nonstatutory stock option to purchase 9,375 shares of common stock at an exercise price equal to the fair market value of the common stock on the date of grant. The shares subject to these options will vest in 36 equal installments at monthly intervals over the three-year period commencing on the date of grant. In addition, each non-employee director who will continue to serve following any annual meeting of stockholders will automatically be granted an option as of the date of such meeting to purchase 3,125 shares of common stock at an exercise price equal to the fair market value of the common stock on the date of grant. These options will vest on the first anniversary of grant. These options will expire on the earliest of (1) the 10th anniversary of grant, (2) 3 months after termination of service for any reason other than death or total and permanent disability or (3) 12 months after termination of service due to death or disability. No director will receive the 9,375-share grant and a 3,125-share grant in the same fiscal year. Our compensation committee may permit or require an optionee to have shares that otherwise would be delivered to such optionee as a result of the exercise of an option converted into amounts credited to a deferred compensation account established for such optionee as an entry on our books. In addition to options, shares may be sold or awarded under the 1998 Stock Incentive Plan for such consideration as the compensation committee may determine, including, without limitation, cash, cash equivalents, full-recourse promissory notes, past services and future services. To the extent that an award consists of newly issued shares, the recipient must furnish consideration with a value not less than the par value of such shares in the form of cash, cash equivalents or past services rendered to us or a parent or subsidiary, as the compensation committee may determine. The holders of shares awarded under the 1998 Stock Incentive Plan shall have the same voting, dividend and other rights as our other stockholders except that the award agreement may require that the holders of shares invest any cash dividends received in additional shares. These additional shares are subject to the same conditions and restrictions as the award with respect to which the dividends were paid. Immediately before the effective date of a change in control, an award will become fully exercisable as to all shares subject to this award, except that (1) in the case of an incentive stock plan, the acceleration of exercisability shall not occur without the optionee's written consent; and (2) if we and the other party to the transaction constituting a change in control agree that such transaction is to be treated as a "pooling of interest" for financial reporting purposes, and if such transaction in fact is so treated, then the acceleration of exercisability shall not occur to the extent that our independent accountants and the other party's independent accountants separately determine in good faith that such acceleration would preclude the use of "pooling of 60 61 interest" accounting. In addition, all options granted to non-employee directors will become fully exercisable if the director's service terminates because of death, total and permanent disability or retirement at or after age 70. Our board of directors may amend or terminate the 1998 Stock Incentive Plan at any time. The 1998 Stock Incentive Plan shall remain in effect until it is terminated except that no incentive stock options shall be granted on or after the 10th anniversary of the later of (1) the date when our board of directors adopted the 1998 Stock Incentive Plan or (2) the date when the board adopted the most recent increase in the number of shares of common stock available under the 1998 Stock Incentive Plan which was approved by our stockholders. Amendments may be subject to stockholder approval to the extent required by applicable laws. EMPLOYEE STOCK PURCHASE PLAN In August 1998, our board of directors adopted our Employee Stock Purchase Plan to provide our employees with an opportunity to purchase common stock through payroll deductions. Under the Employee Stock Purchase Plan, 156,250 shares of common stock have been reserved for issuance. As of July 1 of each year, the number of shares reserved for issuance under the Employee Stock Purchase Plan will increase automatically by the number of shares necessary to cause the number of shares then available for purchase to be restored to 156,250. The Employee Stock Purchase Plan became effective at the time of our initial public offering. All employees whose customary employment is for more than five months per calendar year and for more than 20 hours per week are eligible to participate in the Employee Stock Purchase Plan. Eligible employees may contribute up to 15% of their total cash compensation to the Employee Stock Purchase Plan. Amounts withheld are applied at the end of every six-month accumulation period to purchase shares of common stock, but not more than 3,125 shares per accumulation period. The value of the common stock (determined as of the beginning of the offering period) that may be purchased by any participant in a calendar year is limited to $25,000. Participants may withdraw their contributions at any time before stock is purchased. The purchase price is equal to 85% of the lower of (1) the market price of common stock immediately before the beginning of the applicable offering period or (2) the market price of common stock at the time of the purchase. In general, each offering period is 24 months long, but a new offering period begins every six months. Thus, up to four overlapping offering periods may be in effect at the same time. An offering period continues to apply to a participant for the full 24 months, unless the market price of common stock is lower when a subsequent offering period begins. In that event, the subsequent offering period automatically becomes the applicable period for purposes of determining the purchase price. The first accumulation and offering periods commenced on December 10, 1998 and will end on April 30, 1999, and October 31, 2000, respectively. EMPLOYMENT AGREEMENTS We entered into an employment agreement with Sherman Tuan dated as of February 1, 1998. Under this employment agreement, Mr. Tuan receives certain compensation and benefits including, but not limited to, an annual base salary of $225,000, bonus, and stock options. Mr. Tuan's current bonus amount is at a minimum $50,000. The bonus cannot exceed the amount of Mr. Tuan's then current salary. In addition, Mr. Tuan is guaranteed a minimum annual salary and bonus increase of 10% each year. Mr. Tuan receives his base salary for twelve months and fully vests in his option shares following either a termination without cause or a material breach of his employment agreement by us before December 31, 1999. For the purposes of this agreement, "cause" means (1) Mr. Tuan's conviction of, guilty or "no contest" plea to or confession of guilt of a felony, (2) a willful act by Mr. Tuan which constitutes gross misconduct and which is materially injurious to us or (3) violation by Mr. Tuan of our proprietary information and inventions agreement without our prior written consent. "Material Breach" means (a) the failure of us to 61 62 pay base salary or additional compensation in accordance with his employment agreement, (b) the assignment to Mr. Tuan without Mr. Tuan's consent of duties substantially inconsistent with his duties as set forth in his employment agreement, (c) the relocation of our principal offices to a geographic location other than Northern California, or (d) a failure to reelect Mr. Tuan as a member of the board. We have entered into an employment agreement with Warren J. Kaplan dated as of November 10, 1997. Under his employment agreement, Mr. Kaplan receives certain compensation and benefits including, but not limited to an annual base salary of $225,000, a bonus of at least $50,000 which does not exceed his then current salary, and stock options. We shall continue to pay Mr. Kaplan his base salary for twelve months following a termination without cause during the term of his employment agreement. In addition, Mr. Kaplan is guaranteed a minimum annual salary and bonus increase of 10% each year. Under the terms of his employment agreement, Mr. Kaplan received an option to purchase shares of our common stock. This option was initially for 175,000 shares. However, the option contained an anti-dilution clause which guaranteed that, prior to any underwritten initial public offering of our securities, the number of option shares granted to Mr. Kaplan would always be equal to 5% of our outstanding common stock less 18,333 option shares. Under the terms of this anti-dilution clause, Mr. Kaplan received an additional 264,862 option shares on July 31, 1998, an additional 30,110 option shares on September 4, 1998 and an additional 22,240 option shares on December 1, 1998. This option is immediately exercisable with respect to 20% of the option shares and the balance becomes exercisable in equal monthly installments over the next 36 months of employment with us measured from November 10, 1997, the date of Mr. Kaplan's employment agreement. The exercise price is $0.40 per share which was above the fair market value of our common stock on November 10, 1997. All outstanding options are fully vested. We have entered into an employment agreement with David Rand effective as of May 1, 1998. Under his employment agreement, Mr. Rand was appointed our Chief Technology Officer. Mr. Rand's base salary is currently $190,000. Mr. Rand receives six months' severance if he is terminated without cause. See "Risk Factors -- We may not be able to hire or retain the key employees we need." LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our Restated Certificate of Incorporation limits the liability of directors to the maximum extent not prohibited by Delaware law. Delaware law provides that a corporation's certificate of incorporation may contain a provision eliminating or limiting the personal liability of a director for monetary damages for breach of their fiduciary duties as directors, except for liability for any of the following: - for any breach of their duty of loyalty to the corporation or our stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or - for any transaction from which the director derived an improper personal benefit. Our bylaws provide that we shall indemnify our directors, officers and employee benefit plan fiduciaries, and may indemnify our employees and agents to the fullest extent permitted by law. We believe that indemnification under our bylaws covers at least negligence and gross negligence on the part of indemnified parties. Our bylaws also permit us to advance expenses incurred by an indemnified director or officer in connection with the defense of any action or proceeding arising out of the director's or officer's status or service as our director or officer upon any undertaking by the director or officer to repay any advances if it is ultimately determined that such director or officer is not entitled to such indemnification. We have also entered into agreements to indemnify our directors and officers. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys' fees and associated legal expenses), judgments, fines and amounts paid in settlement amounts if this settlement is approved in advance 62 63 by us, which approval shall not be unreasonably withheld, actually and reasonably incurred by any person in any action, suit, proceeding or alternative dispute resolution mechanism arising out of that person's services as our director or officer, any subsidiary of us or any other company or enterprise to which the person provides services at our request. We believe that those provisions and agreements are necessary to attract and retain qualified directors and officers. 63 64 CERTAIN TRANSACTIONS Since our inception in March 1996, there has not been any transaction or series of similar transactions to which we were or are a party in which the amount involved exceeded or exceeds $60,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than the transactions described below. EQUITY FINANCINGS From inception to our initial public offering in December, 1998, we financed our growth primarily through the sale of preferred stock, resulting in the issuance of an aggregate of 1,025,000 shares of series A preferred stock at purchase price of $0.40 per share; 1,631,896 shares of series B preferred stock at a weighted-average purchase price of $1.35 per share; 2,003,000 shares of series C preferred stock at a weighted-average purchase price of $1.93 per share; and 2,115,378 shares of series D preferred stock at a purchase price of $5.20 per share; and 408,775 shares of series E preferred stock at a purchase price of $10.00 per share. The purchasers of our series A preferred stock, series B preferred stock, series C preferred stock, series D preferred stock and series E preferred stock include the following directors, executive officers and 5% or greater stockholders:
NUMBER OF SHARES OF PREFERRED STOCK ---------------------------------------------------- NAME SERIES A SERIES B SERIES C SERIES D SERIES E ---- -------- -------- -------- -------- -------- Hui-Tzu Hu(1)............................ -- 150,013 500,000 192,307 -- Kline Hawkes California SBIC, L.P.(1)(2)............................. -- -- -- 769,230 40,000 Techgains Corp. and Technology Associates Management Co., Ltd.(1)(3)............. -- -- 552,500 192,307 -- Primus Technology Fund(1)................ -- -- -- 384,615 112,000 Peter C. Chen(1)(4)...................... 275,000 171,078 -- -- -- Warren J. Kaplan(5)...................... -- -- 12,500 -- 2,500 Kimball Small(6)......................... -- 325,000 -- -- -- Spring Creek Investments(7).............. -- -- -- 96,153 -- Jerry Chen(8)............................ -- 33,750 -- -- --
- ------------------------- (1) Holds 5% or more of our outstanding capital stock. Includes all shares held by affiliated entities. (2) Frank R. Kline, a director, is a private equity manager of Kline Hawkes California SBIC, L.P. (3) Tom Shao, a director, is a Managing Director of Technology Associates Management Co., Ltd. (4) Peter C. Chen is a director. (5) Includes shares held by Mr. Kaplan and his wife. Warren J. Kaplan is President, Chief Operating Officer and a director. (6) Kimball Small is a director. (7) James Sha, a director, is a principal of Spring Creek Investments. (8) Jerry Chen is an executive officer. CONSULTING WARRANTS We issued a warrant to Primus Technology Fund, a holder of more than 5% of our capital stock, to purchase 8,750 shares of our common stock at a per share exercise price of $5.20 in connection with services provided by Primus in assisting us in establishing operations in Asia. In December 1996, we granted options to purchase an aggregate of 104,166 shares of our common stock at an exercise price of $0.12 per share to Stephen Belomy, our Executive Vice President and Secretary, and Kimball Small, a member of our board of directors, in consideration of their real estate consulting services. In June 1998, our Board fully accelerated the vesting of these options. 64 65 REAL PROPERTY AGREEMENTS Kimball Small Properties co-manages the building in which our San Jose, California office and Internet service exchange facility is located, and has an ownership interest in the building. Kimball Small, President of Kimball Small Properties, holds more than 5% of our capital stock and is a director. We recently entered into a lease for an approximately 110,000 square foot Internet service exchange facility in San Jose, California. Kimball Small Properties co-manages the building in which the new facility is being developed and has an ownership interest in the building. See "Risk Factors -- Risks Associated with Recent and Planned Business Expansion." WARRANTS In connection with the exchange of outstanding notes and warrants for our series B preferred stock, the Company issued a warrant to the Peter and Pat Chen Living Trust, owned as community property by Peter C. Chen, a holder of more than 5% of our capital stock and Vice Chairman of the Board of Directors, to purchase 26,972 shares of our common stock at a per share exercise price of $2.00. In connection with the exchange of outstanding notes and warrants for our series B preferred stock, we issued a warrant to Hui-Tzu Hu, a holder of more than 5% of our capital stock, to purchase 29,375 shares of our common stock at a per share exercise price of $2.00. TECHNOLOGY AGREEMENT David Rand, our Chief Technology Officer, has granted to us perpetual, non-royalty bearing worldwide licenses to the EtherValve and MRTG technologies and assigned the APS and ASAP technology to us pursuant to a technology agreement dated August 18, 1998. In consideration for entering into the agreement, Mr. Rand received options to purchase 101,250 shares of our common stock at an exercise price of $12.00 per share. On December 1, 1998, the Board approved an amendment to reduce the exercise price of the option to $10.00 per share. See "-- Option Repricing." The options vest over four years. SERVICE OPTIONS On March 27, 1999, the board of directors granted options to each of Kimball Small and Frank R. Kline, both of whom are our directors, for 12,500 and 15,000 shares of our common stock. The options have an exercise price of $85.06 per share and vest in three equal annual installments and terminate in 3 years. OPTION REPRICING On December 1, 1998, the Board approved the amendment of all outstanding stock options under our 1997 Stock Plan with an exercise price in excess of $10.00 per share. As a result, all options granted in August 1998, September 1998 and October 1998 were repriced at $10.00 per share, including the options granted to Sherman Tuan, our Chief Executive Officer and Chairman of our Board of Directors, on August 18, 1998 for 131,500 shares, the option granted to David Rand, our Chief Technology Officer, on August 18, 1998 for 101,250 shares and options granted to each of Fred A. Vierra and Robert A. Burgelman, both of whom are directors, on October 14, 1998 and October 28, 1998, respectively, for 9,375 shares. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. All future transactions, including loans between us and our officers, directors, principal stockholders and their affiliates, will be approved by a majority of our board, including a majority of the independent and disinterested outside directors on the Board, and will continue to be on terms no less favorable to us than could be obtained from unaffiliated third parties. 65 66 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of common stock as of March 31, 1999, and as adjusted to reflect the sale by us of 1,300,000 shares of common stock by the following individuals or groups: - each person or entity who is known by us to own beneficially more than 5% of our common stock; - each director; - each of the Named Executive Officers; - all of our executive officers and directors as a group; and - all other selling stockholders. Unless otherwise indicated, the address for each stockholder listed in the following table is c/o AboveNet Communications, Inc, 50 W. San Fernando Street, Suite #1010, San Jose, California 95113. 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. Applicable percentage ownership in the following table is based on 13,622,599 shares of common stock outstanding as of March 31, 1999. To the extent that any shares are issued upon exercise of options, warrants or other rights to acquire capital stock that are presently outstanding or granted in the future or reserved for future issuance under stock plans, there will be further dilution to new public investors. The numbers shown in the table below assume no exercise by the underwriters of their over-allotment option. AboveNet has granted the underwriters an option to purchase up to 600,000 shares, to cover over-allotments, if any.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING AFTER OFFERING -------------------- SHARES -------------------- DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT OFFERED NUMBER PERCENT - -------------------------------- --------- ------- ------- --------- ------- Robert A. Burgelman, Ph.D.(1).... 9,375 * * 9,375 * Peter C. Chen, Ph.D.(2).......... 468,900 3.4 93,780 375,120 2.3 Warren J. Kaplan(3).............. 509,006 3.6 77,000 432,006 2.6 Frank R. Kline(4)................ 910,063 7.0 * 910,063 6.0 James Sha(5)..................... 96,153 0.7 9,615 86,538 0.5 Tom Shao, Ph.D.(6)............... 744,807 5.5 148,961 595,846 3.7 Kimball Small(7)................. 409,027 3.0 70,000 339,027 2.1 Sherman Tuan(8).................. 427,125 3.1 20,000 407,125 2.5 Fred A. Vierra(9)................ 9,375 * * 9,375 * Stephen P. Belomy(10)............ 140,833 1.0 20,000 120,833 0.7 David Rand(11)................... 228,888 1.7 40,000 188,888 1.1 All directors and officers as a group (21 persons)(12)......... 4,213,486 28.4 508,003 3,705,483 21.1
66 67
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED OWNED PRIOR TO OFFERING AFTER OFFERING -------------------- SHARES -------------------- DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT OFFERED NUMBER PERCENT - -------------------------------- --------- ------- ------- --------- ------- GREATER THAN 1% STOCKHOLDERS Ching-Jung Chen.................. 208,000 1.5 48,000 160,000 1.0 En-Lei Tuan...................... 375,000 2.8 200,000 175,000 1.1 Hui-Tzu Hu....................... 867,175 6.4 150,000 717,175 4.4 c/o D-Link Corporation 2F No. 233-2 Pro-Chino Road Tsin-Tren Taipei, Taiwan R.O.C Jerry Chen(13)................... 157,185 1.2 20,000 137,185 0.8 Kline Hawkes California SBIC, L.P.(14)....................... 910,063 7.0 * 910,063 6.0 11726 San Vicente Blvd Suite 300 Los Angeles, California 90049 North American Venture Fund L.P............... 242,307 1.8 121,153 121,154 0.7 CDC North America Venture Management, L.D.C. 3945 Freedom Circle Suite 270 Santa Clara, California 95054 Ta-Hui Shyu...................... 200,000 1.5 * 200,000 1.2 Synergy (formerly Prosperity..... 250,000 1.8 50,000 200,000 1.2 Capital) c/o TC Kuo Sun Shining Investment Corp., 16th Floor 2 Tun Hwa S. Road, Sec. 2 Taipei, Taiwan ROC Techgains Corp. and Technology Associates..................... 744,807 5.5 148,961 595,846 3.7 Management Co., Ltd.(15) 2378 W. 239th Street Torrance, California 90501 Primus Technology Fund(16)....... 505,365 3.7 * 505,365 3.1 16th Floor, 35 Sec. 3 Min Chuan E. Road Taipei, Taiwan R.O.C
- ------------------------- * Represents less than 1 percent. (1) Includes 9,375 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Mr. Burgelman is a director of AboveNet. (2) Includes all shares owned as community property with Pat Chen and all shares owned by the Peter Cheng-Yu and Pat Te-Hui Living Trust. Mr. Chen is a director of AboveNet. (3) Includes 424,424 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Includes 12,500 shares of common stock owned by Judith A. Kaplan, Mr. Kaplan's wife. Excludes shares of common stock owned by 67 68 Mr. Kaplan's adult children. Mr. Kaplan is a director and an officer of AboveNet. In December 1998, Mr. Kaplan bought 2,000 shares of our common stock on the open market. In connection with this offering, Mr. Kaplan will disgorge his profits on the sale of 2,000 shares of common stock to us pursuant to Section 16(b) of the Exchange Act of 1934, as amended. (4) Includes 909,230 shares held by Kline Hawkes California SBIC, L.P. and our affiliates. Includes 833 shares of common stock issuable to Mr. Kline pursuant to options exercisable within 60 days of March 31, 1999. Mr. Kline, a director of AboveNet and a private equity manager of Kline Hawkes California L.P./Kline Hawkes California SBIC, L.P., disclaims beneficial ownership of such shares except to the extent of his pecuniary interest. (5) Includes 96,153 shares held by Spring Creek Investments. Mr. Sha, a director of AboveNet, is a principal of Spring Creek Investments. (6) Includes 744,807 shares held by Techgains Corp. and Technology Associates Management Co., Ltd. (collectively, "TAMC"). Mr. Shao is a Managing Director of TAMC. Mr. Shao, a director of AboveNet, disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (7) Includes 84,027 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Includes all shares held in community property with Martha Small. Mr. Small is a director of AboveNet. (8) Includes 245,250 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Mr. Tuan is a director and an officer of AboveNet. (9) Includes 9,375 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Mr. Vierra is a director of AboveNet. (10) Includes 65,781 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Mr. Belomy is an officer of AboveNet. (11) Includes 210,138 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Mr. Rand is an officer of AboveNet. (12) Includes 1,231,798 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. See also footnotes 4, 6 and 8. (13) Includes 27,499 shares of common stock issuable pursuant to options exercisable within 60 days of March 31, 1999. Mr. Chen is an officer of AboveNet. (14) The General Partner of Kline Hawkes California SBIC, a California limited partnership, is Kline Hawkes California SBIC GP, a limited partnership. The General Partner of Kline Hawkes California SBIC GPLP is Kline Hawkes Management SBIC, Inc. The controlling shareholder of Kline Hawkes Management SBIC, Inc. is Frank R. Kline, Jr. (15) Includes all shares held by TAMC. Mr. Shao is a Managing Director of TAMC. Mr. Shao, a director of AboveNet, disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (16) Includes 8,750 shares issuable pursuant to a warrant to purchase common stock of AboveNet. In addition, includes all shares owned by Primus Holdings (BVI) Inc., an affiliated fund. The members of the Board of Directors of Primus Technology Fund are Kuo Yang Construction Co. Inc., Thomas Chen, The Fubon Group and Tung Ho Steel Enterprise Corp. 68 69 DESCRIPTION OF CAPITAL STOCK GENERAL We are authorized to issue 60,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001 par value. The following description of our capital stock and certain provisions of our certificate of incorporation and bylaws is not complete and is subject to and qualified in its entirety by our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by applicable provisions of Delaware law. COMMON STOCK As of March 31, 1999, there were 13,622,599 shares of common stock outstanding that were held of record by 147 stockholders. There will be 16,322,599 shares of common stock outstanding (assuming no exercise of options and warrants outstanding as of March 31, 1999 or granted thereafter) after giving effect to the sale of common stock offered to the public hereby. The holders of common stock are entitled to one vote per share held of record in all matters submitted to a vote of stockholders. Holders of common stock do not have cumulative voting rights, and, therefore, holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. Holders of the common stock are entitled to receive such dividends as may be declared from time to time by the board of directors out of funds legally available therefor, subject to the terms of any existing or future agreements between us and our debtholders. We have never declared or paid cash dividends on our capital stock, expect to retain future earnings, if any, for use in the operation and expansion of our business, and do not anticipate paying cash dividends in the foreseeable future. In the event of our liquidation, dissolution or winding up, the holders of common stock are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities and subject to the prior rights of holders of preferred stock then outstanding, if any. See -- "Dividend Policy." PREFERRED STOCK Our board of directors has the authority to issue the preferred stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by our stockholders. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders and may adversely affect the market price of, and the voting and other rights of, the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. We have no current plans to issue any shares of preferred stock. ANTITAKEOVER EFFECTS OF PROVISIONS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW Our Certificate of Incorporation provides that all stockholder actions must be effected at a duly called annual or special meeting and may not be effected by written consent. In addition, we have a classified board of directors such that approximately one-third of the members of our board of directors are elected at each annual meeting of the stockholders. Our bylaws provide that, except as otherwise required by law, special meetings of the stockholders can only be called pursuant to a resolution adopted by a majority of 69 70 the board of directors, or by our president, or by the chairman of the board or at the request of stockholders holding at least a majority of our outstanding stock. In addition, the bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the board. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our Secretary of the stockholder's intention to bring such business before the meeting. Our certificate of incorporation provides that the affirmative vote of holders of at least a majority of the total votes eligible to be cast in the election of directors is required to amend, alter, change or appeal certain of its provisions. Our bylaws provide that the affirmative vote of the holders of at least 80 percent of the Voting Stock is required to amend, alter or repeal any of its provisions. The foregoing provisions of our certificate of incorporation and bylaws are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions which may involve an actual or threatened change of control of us. These provisions are designed to reduce the vulnerability of us to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control of us. These provisions are also intended to discourage certain tactics that may be used in proxy fights but could, however, have the effect of discouraging others from making tender offers for our shares and, consequently, may also inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in our management. We are currently considering other anti-takeover measures, including the adoption of a stockholder rights plan. See "Risk Factors -- Antitakeover Effects of Certain Charter Provisions, Bylaws and Delaware Law." EFFECT OF DELAWARE ANTITAKEOVER STATUTE We are subject to Section 203 of the Delaware General Corporation Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: - prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (1) by persons who are directors and also officers and (2) by the 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 - on or subsequent to such date, the business combination is approved by the board of directors 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 which is not owned by the interested stockholder. Section 203 defines a business combination to include: - any merger or consolidation involving the corporation and an interested stockholder; - any sale, lease, exchange, mortgage, transfer, pledge or other disposition of 10% or more of the assets or stock of the corporation involving an interested stockholder; 70 71 - subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to an interested stockholder; - any transaction involving the corporation which has the effect of increasing the proportionate share of the stock of any class or series, or convertible into the stock of any class or series, of the corporation which is owned by an interested stockholder; or - the receipt by an interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation or any entity or person affiliated with or controlling or controlled by such entity or person. See "Risk Factors -- Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law." REGISTRATION RIGHTS OF CERTAIN HOLDERS The holders of approximately 6,261,267 shares of common stock are entitled to certain rights with respect to the registration of those shares under the Securities Act. Under the terms of the agreement between us and the holders of these registrable securities, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other securities holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include their shares therein. Holders of registration 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 such registration. Further, holders may require us to file registration statements on Form S-3 at our expense when that form becomes available for use by us. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. In addition, Warren J. Kaplan, our President and Chief Operating Officer, has the right to require us to register any shares issued or issuable pursuant to options granted to him on Form S-8. WARRANTS As of March 31, 1999, warrants to purchase 170,158 shares of our common stock. TRANSFER AGENT The transfer agent and registrar for our common stock is Boston EquiServe L.P. Its address is 150 Royall Street, Canton, Massachusetts, and its telephone number at this location is (781) 575-3010. 71 72 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, based on shares outstanding as of March 31, 1999, we will have 16,322,597 shares of common stock outstanding, assuming no exercise of the underwriters' over-allotment option. Of this amount, the 4,000,000 shares sold in this offering, assuming no exercise of the underwriters' over-allotment option, will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended, unless the shares are purchased by our "affiliates" as that term in Rule 144 under the Securities Act. In addition, the 5,750,000 shares sold in our December 1998 initial public offering are currently eligible to be resold immediately in the public market without restriction unless the shares were purchased by affiliates. Of the remaining shares, approximately (1) 8,556,182 shares will be available for immediate sale in the public market as of the date of this prospectus, (2) 2,712,539 shares will be available for sale on June 10, 1999, the expiration date of the contractual lock-up agreements entered into in connection with our initial public offering, (3) 683,694 shares will be available for sale at various times during the period beginning June 10, 1999 and ending 90 days after the date of this prospectus and (4) 4,315,265 shares will be eligible 90 days after the date of this prospectus following the expiration of 90-day lockup agreements entered into with the underwriters, in some cases subject to the volume limitations described below. Shares issuable upon exercise of outstanding options after March 31, 1999 are not included in this analysis.
DAYS AFTER DATE APPROXIMATE SHARES OF THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT ------------------ ------------------------ ------- Upon Effectiveness................... 8,556,182 Freely tradable shares sold in our initial public offering or this offering and shares saleable under Rule 144(k) that are not subject to contractual lockup restrictions June 10, 1999........................ 2,712,539 Initial public offering lockup released; shares saleable under Rule 144, 144(k) or 701 Period between June 10, 1999 and 90 683,694 Initial public offering lockup days after prospectus.............. released; shares saleable under Rule 144, 144(k) or 701 90 days after prospectus............. 4,315,265 90-day lockup in connection with this offering released; shares saleable under Rule 144 or 701.
In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) 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) 1% of the then outstanding shares of common stock (approximately 163,225 shares immediately after this offering) or (2) the average weekly trading volume during the four calendar weeks preceding such sale, subject to the filing of a Form 144 with respect to such sale. A person (or persons whose shares are aggregated) who is not deemed to have been our affiliate at any time during the 90 days immediately preceding the sale who has beneficially owned his or her shares for at least two years is entitled to sell those shares pursuant to Rule 144(k) without regard to the limitations described above. Persons deemed to be affiliates must always sell pursuant to Rule 144, even after the applicable holding periods have been satisfied. AboveNet, our directors, executive officers, the selling stockholders and certain other stockholders have agreed pursuant to the underwriting agreement and other agreements that they will not sell any common stock without the prior consent of CIBC Oppenheimer Corp. for a period of 90 days from the date of this prospectus, except that we may, without such consent, grant options and sell shares pursuant to our stock plans. We have agreed with the underwriters that we will not release any shares subject to lock-up agreements with us without the prior consent of CIBC Oppenheimer Corp. 72 73 We are unable to estimate the number of shares that will be sold under Rule 144, since this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Any sale of substantial amounts of the common stock in the open market may adversely affect the price of the common stock offered hereby. In addition, the holders of approximately 6,261,267 shares of common stock entitled to certain rights with respect to registration of those shares under the Securities Act. Registration of those shares under the Securities Act would result in those shares becoming freely tradable without restriction under the Securities Act (except for shares purchased by our affiliates) immediately upon the effectiveness of that registration. See "Description of Capital Stock -- Registration Rights." 73 74 UNDERWRITING AboveNet and the selling stockholders have entered into an underwriting agreement with the underwriters named below. CIBC Oppenheimer Corp., Lehman Brothers Inc., PaineWebber Incorporated and Volpe Brown Whelan & Company, LLC are acting as representatives of the underwriters. The underwriting agreement provides for the purchase of a specific number of shares of common stock by each of the underwriters. The underwriters' obligations are several, which means that each underwriter is required to purchase a specified number of shares, but is not responsible for the commitment of any other underwriter to purchase shares. Subject to the terms and conditions of the underwriting agreement, each underwriter has severally agreed to purchase the number of common stock set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES ------------ --------- CIBC Oppenheimer Corp. ..................................... Lehman Brothers Inc. ....................................... PaineWebber Incorporated.................................... Volpe Brown Whelan & Company, LLC........................... -------- Total............................................. 4,000,000 ========
This is a firm commitment underwriting. This means that the underwriters have agreed to purchase all of the shares offered by this prospectus (other than those covered by the over-allotment option described below) if any are purchased. Under the underwriting agreement, if an underwriter defaults in its commitment to purchase shares, the commitments of non-defaulting underwriters may be increased or the underwriting agreement may be terminated, depending on the circumstances. The representatives have advised AboveNet and the selling stockholders that the underwriters propose to offer the shares directly to the public at the public offering price that appears on the cover page of this prospectus. In addition, the representatives may offer some of the shares to certain securities dealers at such price less a concession of $ per share. The underwriters may also allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the shares are released for sale to the public, the representatives may change the offering price and other selling terms at various times. AboveNet has granted the underwriters an over-allotment option. This option, which is exercisable for up to 30 days after the date of this prospectus, permits the underwriters to purchase a maximum of additional shares from AboveNet to cover over-allotments. If the underwriters exercise all or part of this option, they will purchase shares covered by the option at the public offering price that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total price to public will be $ million, and the total proceeds to AboveNet will be $ . The underwriters have severally agreed that, to the extent the over-allotment option is exercised, they will each purchase a number of additional shares proportionate to the underwriter's initial amount reflected in the foregoing table. 74 75 The following table provides information regarding the amount of the discount to be given to the underwriters by AboveNet and the selling stockholders.
TOTAL WITH FULL TOTAL WITHOUT EXERCISE EXERCISE OF PER SHARE OF OVER-ALLOTMENT OVER-ALLOTMENT --------- ---------------------- --------------- AboveNet.......................................... $ $ Selling stockholders.............................. Total.............................................
AboveNet estimates that its total expenses of the offering, excluding the underwriting discount, will be approximately $ and $ , respectively. AboveNet and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933. AboveNet, its officers and directors, the selling stockholders and certain other stockholders have agreed to a 90-day "lock up" with respect to approximately shares of common stock and certain other AboveNet securities that they beneficially own, including securities that are convertible into shares of common stock and securities that are exchangeable or exercisable for shares of common stock. This means that, subject to certain exceptions, for a period of 90 days following the date of this prospectus, AboveNet and such persons may not offer, sell, pledge or otherwise dispose of the AboveNet securities without the prior written consent of CIBC Oppenheimer Corp. Rules of the Securities and Exchange Commission may limit the ability of the underwriters to bid for or purchase shares before the distribution of the shares is completed. However, the underwriters may engage in the following activities in accordance with the rules: - Stabilizing transactions -- The representatives may make bids or purchases for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum. - Over-allotments and syndicate covering transactions -- The underwriters may create a short position in the shares by selling more shares than are set forth on the cover page of this prospectus. If a short position is created in connection with the offering, the representatives may engage in syndicate covering transactions by purchasing shares in the open market. The representatives may also elect to reduce any short position by exercising all or part of the over-allotment option. - Penalty bids -- If the representatives purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. - Passive market making -- Market makers in the shares who are underwriters or prospective underwriters may make bids for or purchases of shares, subject to certain limitations, until the time, if ever, at which a stabilizing bid is made. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of such transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages resales of the shares. Neither AboveNet nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. These transactions may occur on the Nasdaq National Market or otherwise. If these transactions are commenced, they may be discontinued without notice at any time. 75 76 LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for AboveNet by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. An investment partnership comprised of members of that firm beneficially owns a warrant to purchase 2,500 shares of our common stock at an exercise price of $5.20 per share. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Pillsbury Madison & Sutro LLP, Palo Alto, California. Pillsbury Madison & Sutro LLP has acted and continues to act as counsel to us in connection with certain legal matters. EXPERTS Our financial statements as of June 30, 1997 and 1998 and for the period from March 8, 1996 (inception) to June 30, 1996 and each of the years in the two-year period ended June 30, 1998 included in this Prospectus and the related financial statement schedule included elsewhere in the Registration Statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the Registration Statement, and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. CHANGE IN ACCOUNTANTS In April 1998, we appointed Deloitte & Touche LLP to replace our former accountants as our principal accountants. There were no disagreements with our former accountants during the period from inception to April 30, 1998 or during any subsequent interim period preceding their replacement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the former accountants' satisfaction, would have caused them to make reference to the subject matter of the disagreement in connection with their reports. Our former accountants issued an unqualified opinion on the financial statements as of and for the year ended June 30, 1997 and the period from inception to June 30, 1997. We did not consult with Deloitte & Touche LLP on any accounting or financial reporting matters in the periods prior to their appointment. The change in accountants was approved by our board of directors. ADDITIONAL INFORMATION AboveNet has filed a registration statement on Form S-1 with the Securities and Exchange Commission in connection with this offering. We are subject to the informational requirements of the Exchange Act and file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy the registration statement and any other documents we filed at the SEC's Public Reference Room at the principal office of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the Regional Offices of the SEC: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and Seven World Trade Center, New York, New York 10048. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC's Internet site at "http://www.sec.gov." This prospectus is a part of the registration statement and does not contain all of the information included in the registration statement. Whenever a reference is made in this prospectus to any contract or other document, the reference may not be complete and you should refer to the exhibits that are part of the registration statement for a copy of the contract or document. 76 77 ABOVENET COMMUNICATIONS INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Balance Sheets as of June 30, 1997 and 1998 and December 31, 1998 (Unaudited).......................................... F-3 Statements of Operations for the Period from December 31, 1996 (Inception) to June 30, 1996, the Years Ended June 30, 1997 and 1998 and the Six Months Ended December 31, 1997 and 1998 (Unaudited)................................. F-4 Statements of Stockholders' Equity (Deficiency) for the Period from March 8, 1996 (Inception) to June 30, 1996, the Years Ended June 30, 1997 and 1998 and the Six Months Ended December 31, 1998 (Unaudited)....................... F-5 Statements of Cash Flows for the Period from March 8, 1996 (Inception) to June 30, 1996, the Years Ended June 30, 1997 and 1998 and the Six Months Ended December 31, 1997 and 1998 (Unaudited)...................................... F-6 Notes to Financial Statements............................... F-7
F-1 78 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of AboveNet Communications Inc.: We have audited the accompanying balance sheets of AboveNet Communications Inc. as of June 30, 1997 and 1998, and the related statements of operations, stockholders' equity (deficiency) and cash flows for the period from March 8, 1996 (inception) to June 30, 1996 and for each of the two years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of AboveNet Communications Inc. as of June 30, 1997 and 1998, and the results of their operations and their cash flows for the period from March 8, 1996 (inception) to June 30, 1996 and for each of the two years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California August 7, 1998 (December 4, 1998 as to the first eight paragraphs of Note 12 and March 31, 1999 as to the last seven paragraphs of Note 12) F-2 79 ABOVENET COMMUNICATIONS INC. BALANCE SHEETS
JUNE 30, -------------------------- DECEMBER 31, 1997 1998 1998 ----------- ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and equivalents...................................... $ 331,100 $ 8,141,200 $ 67,903,500 Short-term investments.................................... -- -- 974,900 Accounts receivable, net of reserve for doubtful accounts of $15,000, $60,000 and $257,100, respectively.......... 41,100 357,000 1,471,000 Prepaid expenses and other current assets................. -- 269,600 737,100 ----------- ----------- ------------ Total current assets............................... 372,200 8,767,800 71,086,500 Property and equipment, net................................. 766,400 4,436,100 15,007,600 Restricted cash............................................. -- 300,000 -- Right to use fiber optic capacity........................... -- -- 8,300,000 Deposits and other assets................................... 32,700 189,400 1,337,700 ----------- ----------- ------------ Total.............................................. $ 1,171,300 $13,693,300 $ 95,731,800 =========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable.......................................... $ 312,000 $ 2,301,300 $ 2,329,600 Remaining obligation for right to use fiber optic capacity................................................ -- -- 6,425,000 Accrued liabilities....................................... 109,700 619,900 1,016,500 Customer deposits......................................... 85,000 309,400 653,800 Advances.................................................. 739,900 -- -- Current portion of long-term obligations.................. 71,500 476,000 1,937,700 ----------- ----------- ------------ Total current liabilities.......................... 1,318,100 3,706,600 12,362,600 ----------- ----------- ------------ Convertible notes payable and advances...................... -- 8,000,000 -- ----------- ----------- ------------ Other long-term obligations................................. 115,500 1,325,300 6,500,100 ----------- ----------- ------------ Commitments and contingencies (Note 9) Stockholders' equity (deficiency): Preferred stock, $0.001 par value, 14,000,000 shares authorized: Series A convertible preferred stock; 1,025,000 shares designated, 1,025,000, 1,025,000 and none issued and outstanding, respectively............................. 410,000 410,000 -- Series B convertible preferred stock; 1,775,000 shares designated; 1,000,000, 1,631,896 and none issued and outstanding, respectively............................. 1,200,000 2,323,100 -- Series C convertible preferred stock; 2,025,000 shares designated; none, 2,003,000 and none issued and outstanding, respectively............................. -- 3,873,400 -- Series D convertible preferred stock; 2,125,000 shares designated; none issued and outstanding............... -- -- -- Series E convertible preferred stock; 1,750,000 shares designated; none issued and outstanding............... -- -- -- Common stock, $0.001 par value, 20,000,000 shares authorized; 203,125, 364,348 and 13,593,942 shares issued and outstanding, respectively.................... 8,100 38,900 89,327,100 Common stock options...................................... -- 1,861,500 3,467,400 Deferred stock compensation............................... -- (540,100) (76,900) Accumulated deficit....................................... (1,880,400) (7,305,400) (15,848,500) ----------- ----------- ------------ Total stockholders' equity (deficiency)............ (262,300) 661,400 76,869,100 ----------- ----------- ------------ Total.............................................. $ 1,171,300 $13,693,300 $ 95,731,800 =========== =========== ============
See notes to financial statements. F-3 80 ABOVENET COMMUNICATIONS INC. STATEMENTS OF OPERATIONS
MARCH 8, 1996 SIX MONTHS ENDED (INCEPTION) YEAR ENDED JUNE 30, DECEMBER 31, TO ------------------------- ------------------------- JUNE 30, 1996 1997 1998 1997 1998 ------------- ----------- ----------- ----------- ----------- (UNAUDITED) Revenues..................... $ 78,600 $ 551,600 $ 3,436,400 $ 1,105,500 $ 4,446,200 -------- ----------- ----------- ----------- ----------- Costs and expenses: Data communications and telecommunications...... -- 558,600 2,199,800 628,800 2,829,700 Network operations......... 19,400 416,700 1,571,800 444,600 2,022,800 Sales and marketing........ 19,100 382,600 1,618,700 475,000 3,492,800 General and administrative.......... 66,100 433,700 1,621,500 475,800 2,060,800 Depreciation and amortization............ 51,600 132,700 475,500 181,800 1,203,300 Stock-based compensation expense................. -- -- 1,276,400 49,400 1,169,600 Joint venture termination fee..................... -- 431,100 -- -- -- -------- ----------- ----------- ----------- ----------- Total costs and expenses......... 156,200 2,355,400 8,763,700 2,255,400 12,779,000 -------- ----------- ----------- ----------- ----------- Loss from operations......... (77,600) (1,803,800) (5,327,300) (1,149,900) (8,332,800) Interest expense............. -- (7,400) (160,800) (125,800) (493,500) Interest and other income.... -- 8,400 63,100 9,300 283,200 -------- ----------- ----------- ----------- ----------- Net loss..................... $(77,600) $(1,802,800) $(5,425,000) $(1,266,400) $(8,543,100) ======== =========== =========== =========== =========== Basic and diluted loss per share...................... $ (0.62) $ (9.17) $ (20.68) $ (5.91) $ (4.50) ======== =========== =========== =========== =========== Shares used in basic and diluted loss per share..... 125,000 196,618 262,304 214,400 1,897,000 ======== =========== =========== =========== ===========
See notes to financial statements. F-4 81 ABOVENET COMMUNICATIONS INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
CONVERTIBLE PREFERRED STOCK COMMON STOCK COMMON DEFERRED ------------------------- ------------------------ STOCK STOCK SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION ---------- ------------ ---------- ----------- ---------- ------------ Balances, March 8, 1996 (inception)...................... -- $ -- -- $ -- $ -- $ -- Issuance of common stock........... -- -- 125,000 5,000 -- -- Net loss........................... -- -- -- -- -- -- ---------- ------------ ---------- ----------- ---------- ----------- Balances, June 30, 1996............ -- -- 125,000 5,000 -- -- Issuance of common stock........... -- -- 62,500 2,500 -- -- Issuance of Series A convertible preferred stock.................. 1,025,000 410,000 -- -- -- -- Exercise of common stock options... -- -- 15,625 600 -- -- Issuance of Series B convertible preferred stock.................. 500,000 600,000 -- -- -- -- Issuance of Series B convertible preferred stock in conjunction with acquisition of DSK, Inc. (Note 8)......................... 500,000 600,000 -- -- -- -- Net loss........................... -- -- -- -- -- -- ---------- ------------ ---------- ----------- ---------- ----------- Balances, June 30, 1997............ 2,025,000 1,610,000 203,125 8,100 -- -- Exercise of common stock options... -- -- 161,223 30,800 -- -- Issuance of warrants in connection with issuance of debt............ -- 112,000 -- -- 45,000 -- Issuance of Series B convertible preferred stock.................. 631,896 1,011,100 -- -- -- -- Issuance of Series C convertible preferred stock.................. 2,003,000 3,873,400 -- -- -- -- Compensatory stock arrangements.... -- -- -- -- 1,816,500 (1,816,500) Amortization of deferred stock compensation..................... -- -- -- -- -- 1,276,400 Net loss........................... -- -- -- -- -- -- ---------- ------------ ---------- ----------- ---------- ----------- Balances, June 30, 1998............ 4,659,896 6,606,500 364,348 38,900 1,861,500 (540,100) Issuance of Series D convertible preferred stock*................. 2,115,378 10,771,000 -- -- -- -- Issuance of Series E convertible preferred stock*................. 408,775 3,846,400 -- -- -- -- Exercise of Series B warrants*..... 104,700 -- -- -- -- -- Conversion of convertible preferred stock to common stock*........... (7,288,749) (21,223,900) 7,288,749 21,223,900 -- -- Issuance of common stock upon initial public offering*......... -- -- 5,750,000 67,986,900 -- -- Exercise of common stock options and warrants*.................... -- -- 190,845 77,400 -- -- Issuance of warrants in connection with issuance of debt*........... -- -- -- -- 899,500 -- Compensatory stock arrangements*... -- -- -- -- 706,400 (706,400) Amortization of deferred stock compensation*.................... -- -- -- -- -- 1,169,600 Net loss*.......................... -- -- -- -- -- -- ---------- ------------ ---------- ----------- ---------- ----------- Balances, December 31, 1998*....... -- $ -- 13,593,942 $89,327,100 $3,467,400 $ (76,900) ========== ============ ========== =========== ========== =========== TOTAL STOCKHOLDERS' ACCUMULATED EQUITY DEFICIT (DEFICIENCY) ------------ ------------- Balances, March 8, 1996 (inception)...................... $ -- $ -- Issuance of common stock........... -- 5,000 Net loss........................... (77,600) (77,600) ------------ ----------- Balances, June 30, 1996............ (77,600) (72,600) Issuance of common stock........... -- 2,500 Issuance of Series A convertible preferred stock.................. -- 410,000 Exercise of common stock options... -- 600 Issuance of Series B convertible preferred stock.................. -- 600,000 Issuance of Series B convertible preferred stock in conjunction with acquisition of DSK, Inc. (Note 8)......................... -- 600,000 Net loss........................... (1,802,800) (1,802,800) ------------ ----------- Balances, June 30, 1997............ (1,880,400) (262,300) Exercise of common stock options... -- 30,800 Issuance of warrants in connection with issuance of debt............ -- 157,000 Issuance of Series B convertible preferred stock.................. -- 1,011,100 Issuance of Series C convertible preferred stock.................. -- 3,873,400 Compensatory stock arrangements.... -- -- Amortization of deferred stock compensation..................... -- 1,276,400 Net loss........................... (5,425,000) (5,425,000) ------------ ----------- Balances, June 30, 1998............ (7,305,400) 661,400 Issuance of Series D convertible preferred stock*................. -- 10,771,000 Issuance of Series E convertible preferred stock*................. -- 3,846,400 Exercise of Series B warrants*..... -- -- Conversion of convertible preferred stock to common stock*........... -- -- Issuance of common stock upon initial public offering*......... -- 67,986,900 Exercise of common stock options and warrants*.................... -- 77,400 Issuance of warrants in connection with issuance of debt*........... -- 899,500 Compensatory stock arrangements*... -- -- Amortization of deferred stock compensation*.................... -- 1,169,600 Net loss*.......................... (8,543,100) (8,543,100) ------------ ----------- Balances, December 31, 1998*....... $(15,848,500) $76,869,100 ============ ===========
- --------------- * Unaudited See notes to financial statements. F-5 82 ABOVENET COMMUNICATIONS INC. STATEMENTS OF CASH FLOWS
MARCH 8, 1996 SIX MONTHS ENDED (INCEPTION) YEAR ENDED JUNE 30, DECEMBER 31, TO ------------------------- ------------------------- JUNE 30, 1996 1997 1998 1997 1998 ------------- ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss............................................ $ (77,600) $(1,802,800) $(5,425,000) $(1,266,400) $(8,543,100) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 51,600 132,700 475,500 181,800 1,203,300 Stock-based compensation expense.................. -- -- 1,276,400 49,400 1,169,600 Noncash interest expense.......................... -- -- 133,200 112,000 22,900 Joint venture termination fee..................... -- 431,100 -- -- -- Changes in assets and liabilities: Accounts receivable............................. (12,000) (29,100) (315,900) (112,600) (1,114,000) Prepaid expenses and other current assets....... -- -- (269,600) (21,600) (467,500) Restricted cash................................. -- -- (300,000) (300,000) 300,000 Deposits and other assets....................... -- (32,700) (111,700) (21,000) (271,700) Accounts payable................................ 13,100 298,900 1,989,300 73,100 28,300 Accrued liabilities............................. -- 109,700 510,200 92,700 396,600 Customer deposits............................... -- 85,000 224,400 82,200 344,400 Deferred rent................................... -- 30,400 18,200 -- 78,900 --------- ----------- ----------- ----------- ----------- Net cash used in operating activities......... (24,900) (776,800) (1,795,000) (1,130,400) (6,852,300) --------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Cash paid for right to use fiber optic capacity..... -- -- -- -- (1,875,000) Purchase of property and equipment.................. (101,100) (474,500) (3,666,000) (297,900) (11,774,800) Purchase of short-term investments.................. -- -- -- -- (974,900) --------- ----------- ----------- ----------- ----------- Net cash used in investing activities......... (101,100) (474,500) (3,666,000) (297,900) (14,624,700) --------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Proceeds from notes payable and advances............ 210,000 739,900 13,395,000 2,402,700 7,676,800 Payments on debt.................................... -- -- (70,000) -- (976,600) Principal payments on capital leases................ -- (49,600) (84,700) (27,800) (142,600) Proceeds from issuance of common stock.............. 5,000 3,100 30,800 3,600 68,064,300 Proceeds from issuance of convertible preferred stock............................................. -- 800,000 -- -- 6,617,400 --------- ----------- ----------- ----------- ----------- Net cash provided by financing activities..... 215,000 1,493,400 13,271,100 2,378,500 81,239,300 --------- ----------- ----------- ----------- ----------- Net increase in cash and equivalents.................. 89,000 242,100 7,810,100 950,200 59,762,300 Cash and equivalents, beginning of period............. -- 89,000 331,100 331,100 8,141,200 --------- ----------- ----------- ----------- ----------- Cash and equivalents, end of period................... $ 89,000 $ 331,100 $ 8,141,200 $ 1,281,300 $67,903,500 ========= =========== =========== =========== =========== Supplemental cash flow information -- Cash paid for interest............................................ $ -- $ 7,400 $ 27,600 $ 5,200 $ 493,500 ========= =========== =========== =========== =========== Noncash investing and financing activities: Remaining obligation for right to use fiber optic capacity.......................................... $ -- $ -- $ -- $ -- $ 6,425,000 ========= =========== =========== =========== =========== Acquisition of equipment under capital lease........ $ -- $ 206,200 $ 479,200 $ -- $ -- ========= =========== =========== =========== =========== Acquisition of leasehold improvements in conjunction with DSK, Inc. acquisition........................ $ -- $ 168,900 $ -- $ -- $ -- ========= =========== =========== =========== =========== Exchange of notes, advances, accrued interest and warrants for convertible preferred stock.......... $ -- $ 210,000 $ 4,884,500 $ 1,011,100 $ 8,000,000 ========= =========== =========== =========== =========== Conversion of preferred stock into common stock..... $ -- $ -- $ -- $ -- $21,223,900 ========= =========== =========== =========== =========== Issuance of warrants in connection with issuance of debt.............................................. $ -- $ -- $ 45,000 $ -- $ 899,500 ========= =========== =========== =========== ===========
See notes to financial statements. F-6 83 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION -- AboveNet Communications Inc. (the "Company"), a California corporation, was formed on March 8, 1996 (inception). The Company provides managed co-location and Internet connectivity solutions for mission critical Internet operations. 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 and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK -- Financial instruments that potentially subject the Company to concentration of credit risk consist of trade receivables. However, the Company's credit risk is mitigated by its credit evaluation process and the reasonably short collection terms. The Company does not require collateral or other security to support accounts receivable and maintains reserves for potential credit losses. To date, such losses have not been significant. CASH AND EQUIVALENTS -- The Company considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of three to five years. Leasehold improvements and assets acquired under capital lease are amortized over the shorter of the lease term or the useful lives of the improvement. DEPOSITS AND OTHER ASSETS -- Deposits and other assets at December 31, 1998 include deferred financing costs of approximately $921,300. RESTRICTED CASH -- Restricted cash consists of certificates of deposit which are restricted from use pursuant to certain capital lease agreements. REVENUE RECOGNITION -- Revenue consists primarily of service revenue for which revenue is recognized in the period in which the services are provided. The services primarily include bandwidth and space requirement charges which are recognized monthly as well as installation fees which are recognized as revenue in the period of installation. Advance customer deposits received are deferred until the period in which the services are rendered. INCOME TAXES -- Deferred tax liabilities are recognized for future taxable amounts, and deferred tax assets are recognized for future deductions, net of a valuation allowance to reduce net deferred tax assets to amounts that are more likely than not to be realized. STOCK-BASED COMPENSATION -- The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF -- The Company evaluates its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be F-7 84 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. NET INCOME (LOSS) PER SHARE -- Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common shares outstanding, less shares subject to repurchase by the Company, for the period. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Common shares equivalents are excluded from the computation in loss periods as their effect would be antidilutive. UNAUDITED INTERIM FINANCIAL INFORMATION -- The interim financial information as of December 31, 1998 and for the six months ended December 31, 1997 and 1998 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the six months ended December 31, 1998 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications had no effect on stockholders equity (deficiency) or net loss. RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which requires an enterprise to report, by major components and as a single total, the change in the Company's net assets during the period from nonowner sources; and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about the Company's products, services, geographic areas and major customers. The Company will adopt both statements in fiscal 1999. The Company has not yet identified its SFAS No. 131 reporting segments. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance for an enterprise on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 is effective for the Company in fiscal 2000. The Company anticipates that accounting for transactions under SOP 98-1 will not have a material impact on its financial position or results of operations. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedge accounting when certain conditions are met. SFAS No. 133 is effective for the Company in fiscal 2000. Although the Company has not fully assessed the implications of SFAS No. 133, the Company does not believe adoption of this statement will have a material impact on its financial position or results of operations. F-8 85 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 2. PROPERTY AND EQUIPMENT, NET Property and equipment are comprised of the following:
JUNE 30, ----------------------- DECEMBER 31, 1997 1998 1998 --------- ---------- ------------ Property and equipment, at cost: Telecommunication equipment................. $ 774,300 $2,295,300 $ 3,406,800 Leasehold improvements (primarily co-location facilities).................. 168,900 224,700 11,605,400 Office equipment............................ 7,500 186,500 695,700 Construction in progress.................... -- 2,389,400 830,800 --------- ---------- ----------- Total............................... 950,700 5,095,900 16,538,700 Less accumulated depreciation and amortization................................ (184,300) (659,800) (1,531,100) --------- ---------- ----------- Property and equipment, net................... $ 766,400 $4,436,100 $15,007,600 ========= ========== ===========
Construction in progress primarily relates to costs incurred during the expansion of our facilities. 3. CONVERTIBLE NOTES PAYABLE AND ADVANCES In June 1997, the Company received $739,900 in cash advances from certain individuals, including stockholders and employees. In July and August 1997, the Company received an additional $250,000 in cash advances. In August 1997, the advances were converted into notes payable of $989,900 and warrants to acquire 494,953 shares of Series B convertible preferred stock at $2.00 per share. The notes generally bore an annual interest rate of 10%. The related warrants were valued at $112,000, or $0.23 per share, and were recorded as a noncash interest charge in 1998. On December 31, 1997, the Company entered into exchange agreements with the note holders. Pursuant to the exchange agreements, the above notes, accrued interest of $21,200 and the related warrants were exchanged for (i) 631,896 shares of Series B convertible preferred stock and (ii) warrants to acquire 123,736 shares of Series B convertible preferred stock at $2.00 per share. During fiscal 1998, the Company received $3,873,400 of cash advances from certain potential investors. In May 1998, these advances were converted into 2,003,000 shares of Series C convertible preferred stock. On June 30, 1998, in anticipation of the Company's pending sale of preferred stock, the Company received $8 million in cash, of which $1 million represented a noninterest bearing cash advance and $7 million represented convertible notes payable. The notes bore interest at 6%, were due on July 15, 1998 and were convertible into Series D convertible preferred stock at $5.20 per share. On July 15, 1998, the convertible notes and advance were converted into Series D convertible preferred stock (see Note 6). F-9 86 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 4. OTHER LONG-TERM OBLIGATIONS Long-term obligations consist of:
JUNE 30, ---------------------- DECEMBER 31, 1997 1998 1998 -------- ---------- ------------ Credit facility........................................ $ -- $1,201,600 $ 7,901,700 Capital lease facility................................. 156,600 551,100 408,600 Deferred rent.......................................... 30,400 48,600 127,500 -------- ---------- ----------- Total obligations............................ 187,000 1,801,300 8,437,800 Current portion of long-term obligations............... (71,500) (476,000) (1,937,700) -------- ---------- ----------- Long-term obligations.................................. $115,500 $1,325,300 $ 6,500,100 ======== ========== ===========
Credit Facility At June 30, 1998, the Company had a $6 million credit facility (the "Credit Facility"), $1,271,600 of which had been drawn as of June 30, 1998. Proceeds from borrowings on the Credit Facility may be used solely for the purpose of acquiring network operating center equipment, office equipment and leasehold improvements. Borrowings outstanding under the Credit Facility are payable in 42 monthly installments, bear interest at 14.7% and are collateralized by the equipment and improvements purchased with the proceeds of the borrowing. The ability to borrow on the Credit Facility expires June 30, 1999. At June 30, 1998, the outstanding borrowings on the Credit Facility are due as follows: fiscal 1999, $252,000; fiscal 2000, $301,800; fiscal 2001, $349,300 and fiscal 2002, $298,500. During the six months ended December 31, 1998, the Company and the financing company amended the Credit Facility to increase the total facility to $15.0 million. At December 31, 1998, approximately $9.0 million had been drawn on the Credit Facility. Capital Lease Facility At June 30, 1998, the Company had $1.45 million available on a $2 million capital lease facility for which the Company leases certain equipment under noncancelable capital leases. Leases outstanding at June 30, 1998 expire on various dates through 2001 (see Note 9). In August 1998, the Company increased its capital lease facility to $2.5 million. At December 31, 1998, the Company had approximately $1.95 million available under this facility. Line of Credit The Company has a revolving line of credit from a bank which provides for borrowings up to $750,000 through May 1999. Borrowings under the line bear interest at the bank's prime rate plus 1% per annum (9.5% at June 30, 1998) and are collateralized by substantially all of the Company's assets. As of June 30, 1998, the Company had no borrowings outstanding on the line of credit. The line of credit agreement limits the Company's ability to pay cash dividends without the bank's consent and requires, among other things, that the Company satisfy certain financial covenants. As of June 30, 1998, the Company was not in compliance with the profitability covenant of its revolving line of credit agreement. The Company has obtained a waiver with respect to this covenant from the bank as of June 30, 1998, and has renegotiated the covenant terms with the bank. In connection with the line of credit agreement, in June 1998, the F-10 87 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 4. OTHER LONG-TERM OBLIGATIONS (CONTINUED) Company issued to the bank a warrant to purchase 1,250 shares of its Series D preferred stock at $4.00 per share. The warrant had an estimated fair value of $1,900 or $1.52 per share. 5. INCOME TAXES The Company's deferred income tax assets are comprised of the following:
JUNE 30, ------------------------ 1997 1998 --------- ----------- Net deferred tax assets: Net operating loss carryforwards......................... $ 516,900 $ 1,975,900 Stock compensation expense on nonqualified stock options............................................... -- 512,300 Accruals deductible in different periods................. 57,000 121,100 Depreciation and amortization............................ (14,800) (68,800) --------- ----------- 559,100 2,540,500 Valuation allowance........................................ (559,100) (2,540,500) --------- ----------- Total............................................ $ -- $ -- ========= ===========
The Company's effective rate differs from the federal statutory tax rate as follows:
MARCH 8, 1996 YEAR ENDED (INCEPTION) JUNE 30, TO JUNE 30, -------------- 1996 1997 1998 ------------- ----- ----- Federal statutory tax rate............................. 35.0% 35.0% 35.0% State taxes, net of federal benefit.................... 6.0 6.0 6.0 Joint venture termination fee.......................... -- (9.8) -- Other.................................................. (8.8) (1.8) (1.2) Valuation allowance.................................... (32.2) (29.4) (39.8) ----- ----- ----- Effective tax rate................................... --% --% --% ===== ===== =====
The Company has no income tax provision due to its history of operating losses. Due to the uncertainty surrounding the realization of the benefits of its favorable tax attributes in future tax returns, the Company has fully reserved its net deferred tax assets as of June 30, 1997 and 1998. At June 30, 1998, the Company had net operating loss carryforwards of approximately $4.9 million for federal and state income tax purposes. These carryforwards begin to expire in 2003 for state and 2010 for federal purposes. Additionally, Section 382 of the Internal Revenue Code and the applicable California law impose annual limitations on the use of net operating loss carryforwards if there is a change in ownership, as defined, within any three-year period. The utilization of certain net operating loss carryforwards may be limited due to the Company's capital stock transactions. F-11 88 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 6. STOCKHOLDERS' EQUITY (DEFICIENCY) Common Stock Reserved for Future Issuance At June 30, 1998 and December 31, 1998, the Company has reserved the following shares of common stock for issuance in connection with:
JUNE 30, 1998 DECEMBER 31, 1998 ------------- ----------------- Conversion of Series A preferred stock...................... 1,025,000 -- Conversion of Series B preferred stock...................... 1,631,896 -- Conversion of Series C preferred stock...................... 2,003,000 -- Warrants issued and outstanding............................. 157,330 172,658 Options issued and outstanding.............................. 978,916 1,897,124 Options available under stock option plans.................. 744,283 1,459,250 Shares available under 1998 Purchase Plan................... -- 156,250 --------- --------- Total............................................. 6,540,425 3,685,282 ========= =========
Convertible Preferred Stock Significant terms of the Series A, B, C, D and E convertible preferred stock are as follows (see Note 12): - At the option of the holder, each share of preferred stock is convertible at any time into one share of common stock, subject to adjustment for certain dilutive issuances. Shares automatically convert into common stock upon the completion of a public offering with aggregate proceeds greater than $20,000,000 and at a price per share of not less than $12.00 (see Note 12). - Series A, B, C, D and E convertible preferred stock have no preference as to dividends but have a noncumulative right to participate in and receive the same dividends as may be declared for common stockholders. - In the event of a liquidation, dissolution or winding up of the Company (which includes the acquisition of the Company by another entity), the holders of Series A, B, C, D and E convertible preferred stock have a liquidation preference over common stock of $0.40, $1.20, $2.00, $5.20 and $12.00 per share, respectively. Upon payment of the preferred stock liquidation preference (aggregating $6,374,300 at June 30, 1998), the remaining proceeds will be allocated to the preferred and common stockholders on an as converted basis. - Each share of preferred stock has voting rights equivalent to the number of shares of common stock into which it is convertible. In fiscal 1997, the Company issued 1,025,000 shares of Series A convertible preferred stock for cash of $200,000 and the conversion of advances of $210,000. Also in fiscal 1997, the Company issued 500,000 shares of Series B convertible preferred stock in connection with the acquisition of DSK, Inc. (see Note 8) and issued 500,000 shares of Series B convertible preferred stock for cash of $600,000. In fiscal 1998, the Company issued 631,896 shares of Series B convertible preferred stock and 2,003,000 shares of Series C convertible preferred stock upon conversions of notes, advances and accrued interest of $1,011,100 and $3,873,400, respectively (see Note 3). During the six months ended December 31, 1998, the Company issued 2,115,378 shares of Series D convertible preferred stock for cash of $2,771,000 (net F-12 89 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 6. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED) of costs of $229,000) and the conversion of notes and advances of $8,000,000. During the same period, the Company issued 408,775 shares of Series E convertible preferred stock for cash of $3,846,400 (net of costs of $223,600). See Note 12 related to the conversion of all outstanding preferred stock into common stock upon completion of the Company's initial public offering in December 1998. Convertible Preferred Stock Warrants As discussed in Note 3, pursuant to certain exchange agreements entered into on December 31, 1997, the Company issued warrants to acquire 123,736 shares of Series B convertible preferred stock at $2.00 per share. These warrants expire on the earlier of (i) January 1, 2002, (ii) an underwritten public offering or (iii) a change in control (See Note 12). Also, as discussed in Note 4, warrants to purchase 1,250 shares of Series D convertible preferred stock at $4.00 per share were outstanding at June 30, 1998. Common Stock Subject to Repurchase In fiscal 1998, upon the exercise of an option the Company sold 12,500 shares of common stock at $0.40 per share to an employee subject to repurchase whereby the Company has the right to repurchase such shares at their original purchase price. This right lapses over four years. At June 30, 1998, 12,500 shares were subject to such repurchase rights. 1996 Stock Option Plan In March 1996, the Company adopted the 1996 Stock Option Plan (the "1996 Plan"). As of June 30, 1998, there were 505,885 options authorized for issuance under the 1996 Plan. The 1996 Plan is administered by the Board of Directors and encompasses nonstatutory and incentive stock options. Nonstatutory stock options may be granted to employees and consultants, whereas incentive stock options may only be granted to employees. The 1996 Plan provides for the granting of incentive stock options at not less than 100% of the fair market value of the underlying stock at the grant date. Nonstatutory options may be granted at not less than 85% of the fair market value of the underlying stock at the date of grant. Options under the 1996 Plan generally vest over four years and expire ten years from the date of grant. 1997 Stock Option Plan In fiscal 1998, the Company adopted the 1997 Stock Option Plan (the "1997 Plan"), authorizing 1,124,423 shares of common stock to be issued as options. Upon a change in control, all shares granted under the 1997 Plan shall immediately vest. Other provisions of the 1997 Plan are generally the same as the 1996 Plan. Nonplan Option Grant In connection with its hiring of the Company's President and Chief Operating Officer in November 1997, the Company granted to this officer options to purchase 175,000 shares of common stock with an exercise price of $0.40 per share. The option is immediately exercisable with respect to 20% of the option shares and the balance becomes exercisable in equal monthly installments over the next 36 months of employment with the Company measured from November 1997. However, vesting accelerates upon the F-13 90 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 6. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED) closing of an underwritten public offering. In addition, the option grant contains an antidilution clause which guarantees that, prior to any underwritten initial public offering of the Company's common stock, the number of shares under the option grant will always be equal to 5% of its outstanding common stock on a fully diluted basis less 18,333 shares. As a result of various sales of equity securities and option grants since the initial grant in November 1997, the officer was issued options to acquire an additional 319,425 shares of common stock at an exercise price of $0.40 per share during the six months ended December 31, 1998. In connection with this award, the Company recognized $362,100 and $1,087,200 in stock-based compensation expense during fiscal 1998 and the six months ended December 31, 1998, respectively. Options and Warrants Granted to Nonemployees The Company has granted options and warrants to nonemployees for services performed and to be performed after the date of grant. In connection with these awards, the Company recognized $310,100 in stock-based compensation expense during fiscal 1998 ($33,300 during the six months ended December 31, 1998). At June 30, 1998 and December 31, 1998, all services relating to these awards has been rendered and the options and warrants were fully exercisable. In connection with the Credit Facility (see Note 4), in fiscal 1998, the Company issued warrants to acquire 22,500 shares of common stock at a weighted-average exercise price of $4.61 per share. The fair value of these warrants are being recognized as interest expense through June 30, 1999. During the six months ended December 31, 1998, in connection with the amendment to the Credit Facility (see Note 4), the Company issued warrants to acquire 25,000 shares of common stock, 25,000 of which have a weighted-average exercise price of $10.20 per share and have a term of five years. The estimated fair value of these warrants of $290,300 is included in Deposits and other assets at December 31, 1998 and will be amortized to interest expense over the repayment period. At June 30, 1998, warrants to acquire 32,344 shares of common stock at a weighted-average exercise price of $4.19 per share were outstanding; such warrants expire in 2003. All of these warrants were issued during the year ended June 30, 1998 (none issued in fiscal 1996 or 1997) and had an estimated weighted-average fair value of $2.46 per share at the date of grant. At December 31, 1998, warrants to acquire 172,658 shares of common stock at a weighted-average exercise price of $8.76 per share were outstanding. Deferred Stock Compensation At June 30, 1998 and December 31, 1998, the Company had $540,100 and $76,900, respectively, in deferred stock compensation related to options granted to employees. This amount will be amortized to stock-based compensation expense through fiscal 2000. See Note 12. Option Repricing On December 1, 1998, the Company repriced 473,800 options previously granted at $12.00 per share to fair value at that date of $10.00 per share. F-14 91 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 6. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED) Stock option activity under the Plans and the Nonplan Option Grant are summarized as follows:
OUTSTANDING OPTIONS ---------------------------- NUMBER WEIGHTED AVERAGE OF SHARES EXERCISE PRICE --------- ---------------- Balance, March 8, 1996 (inception)......................... -- $ -- Granted.................................................... 570,000 0.04 --------- Balance, June 30, 1996 (68,750 shares vested at a weighted average exercise price of $0.04 per share)............... 570,000 0.04 Granted.................................................... 225,000 0.13 Exercised.................................................. (15,625) 0.04 Canceled................................................... (194,375) 0.04 --------- Balance, June 30, 1997 (109,687 shares vested at a weighted average exercise price of $0.04 per share)............... 585,000 0.06 Granted.................................................... 571,306 1.17 Exercised.................................................. (161,223) 0.19 Canceled................................................... (16,167) 0.62 --------- Balance, June 30, 1998..................................... 978,916 0.67 Granted.................................................... 1,626,775 8.57 Exercised.................................................. (187,100) 0.36 Canceled................................................... (521,467) 11.47 --------- Balance, December 31, 1998................................. 1,897,124 $ 4.50 =========
The following table summarizes information as of June 30, 1998 concerning currently outstanding and vested options:
OPTIONS OUTSTANDING ------------------------------------ OPTIONS VESTED WEIGHTED -------------------- AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE AVERAGE EXERCISE OF CONTRACTUAL EXERCISE NUMBER EXERCISE PRICES SHARES LIFE (YEARS) PRICE OF SHARES PRICE -------- --------- ------------- -------- --------- -------- $0.04 - $0.20 524,386 8.0 $0.08 283,229 $0.08 0.40 271,250 9.4 0.40 25,000 0.40 1.20 79,655 9.6 1.20 47,656 1.20 4.00 103,625 9.9 4.00 11,250 4.00 ------- ------- $0.04 - $4.00 978,916 8.7 0.67 367,135 0.37 ======= =======
At June 30, 1998, none and 744,283 shares were available for future grant under the 1996 and 1997 Plans, respectively. At December 31, 1998, 1,459,250 shares remained available for future grant under the 1998 Plan (none under the 1996 and 1997 Plans). F-15 92 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 6. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED) Additional Stock Plan Information As discussed in Note 1, the Company accounts for its stock-based awards to employees using the intrinsic value method in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income (loss) and earnings (loss) per share had the Company adopted the fair value method since the Company's inception. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations for employee grants were made using the minimum value method with the following weighted average assumptions: expected life, one year following vest; no stock volatility; risk free interest rate of 6%; and no dividends during the expected term. The Company's calculations are based on a multiple award valuation approach, and forfeitures are recognized as they occur. If the computed minimum values of the Company's stock-based awards to employees had been amortized to expense over the vesting period of the awards as specified under SFAS No. 123, net loss would have been $78,000 ($0.62 per basic and diluted share), $1,803,800 ($9.17 per basic and diluted share), and $5,111,000 ($19.49 per basic and diluted share) for the period from inception to June 30, 1996 and for the years ended June 30, 1997 and 1998, respectively. The number and estimated weighted-average minimum and fair value per option for employee and nonemployee awards, respectively, granted are as follows:
YEAR ENDED JUNE 30, INCEPTION TO JUNE 30, -------------------- 1996 1997 1998 --------------------- -------- -------- Employee Options: Number of shares.......................... 551,250 -- 501,625 Estimate weighted-average minimum value... $ 0.01 $ -- $ 0.20 Nonemployee Options: Number of shares.......................... 18,750 225,000 69,681 Estimated weighted-average fair value..... $ 0.01 $ 0.03 $ 0.15
F-16 93 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 7. NET LOSS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share.
SIX MONTHS ENDED INCEPTION YEAR ENDED JUNE 30, DECEMBER 31, TO JUNE 30, ------------------------- ------------------------- 1996 1997 1998 1997 1998 ----------- ----------- ----------- ----------- ----------- Net loss (numerator), basic and diluted......................... $(77,600) $(1,802,800) $(5,425,000) $(1,266,400) $(8,543,100) ======== =========== =========== =========== =========== Shares (denominator): Weighted average common shares outstanding.................. 125,000 196,618 265,112 214,400 1,911,100 Weighted average common shares outstanding subject to repurchase................... -- -- (2,808) -- (14,100) -------- ----------- ----------- ----------- ----------- Shares used in computation, basic and diluted..................... 125,000 196,618 262,304 214,400 1,897,000 -------- ----------- ----------- ----------- ----------- Net loss per share, basic and diluted......................... $ (0.62) $ (9.17) $ (20.68) $ (5.91) $ (4.50) ======== =========== =========== =========== ===========
For the above mentioned periods, the Company had securities outstanding which could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted net loss per share in the periods presented, as their effect would have been antidilutive. Such outstanding securities consist of the following at June 30, 1998 (at December 31, 1998 in parenthesis): 4,659,896 (none) shares of convertible preferred stock, warrants to purchase 124,986 (none) shares of convertible preferred stock, 12,500 (14,750) outstanding shares of common stock subject to repurchase, and options and warrants to purchase 1,011,260 (2,069,782) shares of common stock. 8. JOINT VENTURE TERMINATION FEE In fiscal 1996, the Company entered into a joint venture agreement (the "Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the Company's services. The Company paid $33,700 to DSK during the year ended June 30, 1997 related to the Agreement. In April 1997, the Company terminated the Agreement and hired the majority stockholders of DSK as either employees or consultants by issuing 500,000 fully vested shares of the Series B preferred stock with a fair value of $1.20 per share, or $600,000, for the outstanding shares of common stock of DSK. The Company recorded the transaction by allocating the value of the shares issued to property and equipment (at DSK's net book value of $168,900, which approximated fair market value), with the balance of $431,100 reflected as a joint venture termination fee. Additionally, in April 1997, the Company granted to certain of the former owners of DSK options to acquire a total of 125,000 shares of its common stock at $0.12 per share for real estate consulting services to be performed. In June 1998, the Company accelerated the vesting of all the DSK options awarded. In conjunction with this award, the Company recognized $604,200 of stock-based compensation expense during fiscal 1998. F-17 94 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 9. COMMITMENTS AND CONTINGENCIES Leases The Company leases its facilities under noncancelable operating leases. These leases expire on various dates through 2002. Minimum future lease payments under noncancelable operating and capital leases as of June 30, 1998 are summarized as follows:
CAPITAL OPERATING FISCAL YEAR LEASES LEASES ----------- -------- ----------- 1999................................................ $248,300 $ 968,800 2000................................................ 196,900 1,055,000 2001................................................ 180,400 1,099,700 2002................................................ -- 1,132,500 2003................................................ -- 1,185,700 Thereafter.......................................... -- 5,002,900 -------- ----------- Total minimum lease payments........................ 625,600 $10,444,600 =========== Less amount representing interest................... (74,500) -------- Present value of minimum lease payments............. 551,100 Less current portion................................ (224,000) -------- Long term portion................................... $327,100 ========
Rent expense under the operating leases for the period from March 8, 1996 (inception) to June 30, 1996 and for the years ended June 30, 1997 and 1998 was approximately none, $61,500, and $444,905, respectively. During the six months ended December 31, 1998, the Company entered into agreements to lease optical fiber. These leases are expected to commence in early calendar 1999 upon the installation and acceptance of the connected fiber. The lease will require annual payments of $630,000 for 20 years from installation. This arrangement will be accounted for as a capital lease upon initiation of the lease term. Purchase Commitments In fiscal 1998, the Company entered into noncancelable commitments to purchase property and equipment related to the expansion of its operations facilities. As of June 30, 1998, approximately $1.7 million was committed for fiscal 1999 purchases under these agreements. Telecommunications and Peering Arrangements The Company has guaranteed to pay certain monthly usage levels or fees with various communications or interconnect providers. Minimum payments under these agreements at June 30, 1998 are as follows: $3.9 million in fiscal 1999 and $1.3 million in fiscal 2000. The Company is a party to numerous peering agreements with other internet providers to allow for the exchange of internet traffic. These agreements do not have fee commitments and generally have a one year term with automatic renewals. The Company does not record any revenue or expense associated with these F-18 95 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) non-cash transactions as such transactions do not represent the culmination of the earnings process and the fair value of such transactions are not reasonably determinable. Legal Matters The Company is involved in various claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these cases will have a material effect on the Company's financial position or results of operations. 10. RELATED PARTY TRANSACTIONS A member of the Board of Directors is the President of an entity which is the co-manager of our primary facilities. Rent expense in fiscal 1996, 1997 and 1998 and for the six months ended December 31, 1998 for these facilities was none, $16,400, $265,200, and $397,300 respectively. The Company believes that its lease arrangements were at an arm's length basis. 11. MAJOR CUSTOMERS Two customers accounted for 32% and 25% of revenues in fiscal 1996, while another customer accounted for 12% and 14% of revenues in fiscal 1997 and 1998, respectively. At June 30, 1998, two customers accounted for approximately 22% and 13% of trade receivables, while four other customers accounted for 13%, 13%, 11% and 10% of trade receivables at June 30, 1997. 12. SUBSEQUENT EVENTS Subsequent to June 30, 1998, the Company changed the authorized number of shares of the common and preferred stock to 20,000,000 and 14,000,000 respectively. Additionally, the Company designated 2,125,000 and 1,750,000 shares of preferred stock as Series D and E, respectively. In July 1998, the Company issued 2,115,378 shares of Series D convertible preferred stock in exchange for the conversion of the $8,000,000 notes payable and advances outstanding at June 30, 1998 and additional cash of $2,771,000 (net of costs of $229,000). On September 4, 1998, we sold 408,775 shares of Series E convertible preferred stock at $10.00 per share for proceeds of $3,846,400 (net of costs of $223,600). On August 27, 1998, the Board of Directors adopted the 1998 Stock Incentive Plan (the "1998 Stock Plan"). The 1998 Stock Plan will serve as the successor equity incentive program to our existing 1997 Plan effective upon the execution of an underwriting agreement to sell shares in an initial public offering. A total of 1,562,500 shares of common stock have been reserved for issuance under the 1998 Stock Plan. Additionally, on August 27, 1998, the Board of Directors adopted the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible employees are allowed to have salary withholdings of up to 10% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock at the beginning or end of defined purchase periods. The initial purchase period commenced on December 10, 1998. The Company has reserved 156,250 shares of common stock for issuance under this plan. F-19 96 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 12. SUBSEQUENT EVENTS (CONTINUED) On August 27, 1998, the Board of Directors approved a change in the authorized number of shares of the common and preferred stock upon the closing of the initial public offering to 60,000,000 and 5,000,000, respectively. On September 3, 1998, the Board of Directors approved the Company's reincorporation in the State of Delaware and the associated exchange of one share of common stock and preferred stock of the Company for every two and one-half shares of common stock and preferred stock, respectively, of its California predecessor entity. Such reincorporation and stock exchange became effective on November 5, 1998. On November 11, 1998, the Board of Directors adopted a 1-for-1.6 reverse split of the outstanding shares of common and preferred stock. Additionally, on November 11, 1998, the Board of Directors approved, subject to stockholder approval, an amendment to the Certificate of Incorporation to require the automatic conversion of preferred stock into common stock in connection with any public offering occurring prior to March 31, 1999 regardless of the offering price. All share and per share amounts in these financial statements have been adjusted to give effect to the reincorporation, the associated 1-for-2.5 exchange and the subsequent 1-for-1.6 reverse stock split. On December 4, 1998, the Company entered into a new facility lease agreement. The agreement is for a minimum of 20 years with annual rent payments increasing from approximately $3 million to $5 million over the lease term. In connection with the lease, the Company issued the lessor a warrant to buy 100,000 shares of its common stock at $10.00 per share. On December 10, 1998, the Company sold 5,000,000 shares of common stock in an underwritten public offering and on December 30, 1998 sold an additional 750,000 shares through the exercise of the underwriters' over-allotment option for net proceeds of approximately $67,986,900. Simultaneously with the closing of the public offering, all 7,184,049 shares of the Company's preferred stock were converted to common stock on a share for share basis. Additionally, all of the holders of warrants to purchase 123,736 shares of Series B convertible preferred stock exercised such warrants through a net issuance provision and were issued 104,700 shares of common stock. As discussed in Note 6, the vesting of the options related to the Nonplan Option Grant accelerated upon the closing of the offering. Accordingly, all remaining unamortized compensation relating to this grant was recognized. On December 29, 1998, the Company entered into a series of agreements with affiliates of Global Crossing Ltd. providing for the acquisition of an indefeasible right to use ("IRU") capacity on a fiber optic cable system between the U.S. and the United Kingdom. The agreements, which have 25 year terms, provide for the Company to pay affiliates of Global Crossing Ltd. up to approximately $8.3 million for the capacity in installments during December 1998 and the first calendar quarter of 1999. On March 24, 1999, the Company entered into a series of agreements with affiliates of Global Crossing Ltd. providing for the acquisition of a 25 year indefeasible right to use ("IRU") capacity on a fiber optic cable system between the U.S. and the Netherlands. The agreements, provide for the Company to pay affiliates of Global Crossing Ltd. up to approximately $7.5 million for the capacity, in installments through December 30, 1999 and bear an annual interest rate of 10.5%. F-20 97 ABOVENET COMMUNICATIONS INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) FOR THE PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996, THE YEARS ENDED JUNE 30, 1997 AND 1998, AND THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) 12. SUBSEQUENT EVENTS (CONTINUED) On March 27, 1999, the Company granted options to purchase 42,500 shares of common stock to certain nonemployees, two of whom are members of the Board of Directors, for services. These options vest over three years, have an exercise price of $ 85.06 and have a term of three years. The Company will begin to recognize compensation expense for these options in the quarter ended June 30, 1999. On March 30, 1999, the Company announced a 2-for-1 stock split to be effected as a stock dividend. The dividend for each outstanding share of common stock will be payable to stockholders of record as of April 14, 1999 and is expected to be distributed on May 7, 1999. No share or per share amounts in the financial statements have been adjusted to give effect of this stock split. In March 1999, the Company, as part of its international expansion strategy, entered into agreements to form joint ventures in Austria, Germany and the United Kingdom to provide managed co-location and Internet connectivity solutions for mission critical Internet operations. The Company has invested a total of $.6 million in March 1999 and is required to invest an additional $1.9 million in the quarter ending June 30, 1999, for up to a 50% ownership in each of these joint ventures. In addition, the Company has agreed to provide up to $2 million of additional financing to certain of these joint ventures, if required, and to arrange or provide for an additional $4.5 million contingent upon the joint ventures raising an equivalent amount from third parties. These joint ventures will be accounted for under the equity method of accounting. In addition, the Company has also agreed to grant options to purchase up to 300,000 shares of common stock to employees of the joint ventures upon meeting certain annual performance criteria over the next four years. F-21 98 Narrative Description of Inside Front Cover Inside Front Cover Top Center -- [AboveNet logo -- depicting the Company's name inserted through a spherical circle] Caption beneath logo and centered to page: "Global Internet Service Exchange Strategy" A world map with North and South America in the center. The United States is clearly defined by being shaded in blue. To the left is the Asian continent and Australia. To the right is the European continent. Across the United States map are two curved lines connecting two ISX facilities, one located on the East and one located on the West coast of the United States. From the facility on the West Coast is a series of lines connected to locations in the Asian continent and Australia. From the facility on the East Coast are three lines connected to locations in three European countries. Below the world map is a box captioned "Existing Customer Connections In:" and listed below the caption are: Australia, France, Hong Kong, Japan, Korea, Philippines, Singapore, Taiwan and United Kingdom. To the right of the boxes is the following text: "Our objective is to become the leading global Internet Service Exchange network for Internet content providers, Web hosting companies and Internet Service Providers that require reliable and scalable Internet connectivity and co-location services to support their business critical Internet operations." 99 Narrative Description of Inside Back Cover The Inside of the Back Cover shows a series of photographs. The top photograph is of a room with a series of monitors and computers with a person standing behind a counter talking to another person in front of the counter. Underneath the picture is the caption "Internet Service Exchange facility professionally staffed 24 hours a day, 7 days a week." To the right is a picture that shows network switching and router units housed in racks. That picture is captioned "Telecom and Datacom Connectivity." Below is a series of three pictures captioned "Co-Location Offerings." The left picture shows a person working on a computer server which is housed in one of the Company's cabinets. The picture is captioned "Cabriolet Cabinet." The middle picture shows a series of network servers placed on racks with a person typing on a keyboard housed on one of the racks. The picture is captioned "Open Rack." To the right is a picture showing a corridor with cages along the right side. The picture is captioned "Cage." Below the three pictures is a picture showing a series of power generators with an individual standing in front of the generators. The picture is captioned "Redundant Power Systems." To the right of the bottom picture is the following text: "AboveNet has developed a network architecture based upon two strategically located, campuses that combine content co-location services for Internet Content Providers with direct access to Internet Service Providers to create Internet Service Exchanges." 2 100 - -------------------------------------------------------------------------------- LOGO ABOVENET COMMUNICATIONS INC. 4,000,000 SHARES COMMON STOCK --------------------------- PROSPECTUS --------------------------- , 1999 CIBC WORLD MARKETS LEHMAN BROTHERS PAINEWEBBER INCORPORATED VOLPE BROWN WHELAN & COMPANY - -------------------------------------------------------------------------------- YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. 101 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ---------- SEC registration fee........................................ $158,000 NASD filing fee............................................. 30,500 Nasdaq National Market listing fee.......................... 50,000 Printing and shipping fees.................................. 150,000 Legal fees and expenses..................................... 250,000 Accounting fees and expenses................................ 125,000 Blue Sky qualification fees and expenses.................... 5,000 Transfer agent and registrar fees........................... 10,000 Miscellaneous fees.......................................... 21,500 -------- Total............................................. $800,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's Board of Directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's Bylaws provides for mandatory indemnification of our directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. The Registrant's Certificate of Incorporation provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to us and our stockholders. This provision in the Certificate of Incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to us for acts of omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Registrant has entered into Indemnification Agreements with our officers and directors, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The Indemnification Agreements provide the Registrant's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is made to Section 7 of the Underwriting Agreement filed as Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant against certain liabilities. II-1 102 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since March 8, 1996, the Registrant's predecessor company has issued and sold the following securities (which numbers do not reflect either the one for two and one-half exchange effected in connection with our reincorporation into Delaware the 1-for-1.6 reverse stock split effected in December 1998 or the 2-for-1 stock split to be effected May 7, 1999). (1) On August 28, 1996, Registrant sold and issued an aggregate of 4,100,000 shares of Series A preferred stock, at a purchase price of $0.10 per share, for cash in the aggregate amount of $410,000 to a group of investors pursuant to a Series A preferred stock Purchase Agreement. (2) On March 14, 1997, Registrant sold and issued an aggregate of 2,000,000 shares of Series B preferred stock, at a purchase price of $0.30 per share, for cash in the aggregate of $600,000 to a group of investors pursuant to a Series B preferred stock Purchase Agreement. (3) On April 30, 1997, Registrant terminated a joint venture agreement with DSK, Inc. by issuing 2,000,000 shares of Series B preferred stock. (4) On August 7, 1997, Registrant issued promissory notes in the principal amount of $989,000 and warrants to acquire 1,979,804 shares of Series B preferred stock at $0.50 per share. On December 31, 1997, Registrant entered into exchange agreements with the noteholders. Pursuant to the exchange agreements, the above notes, accrued interest of $21,200 and the related warrants were exchanged for (i) 2,527,640 shares of Series B preferred stock and (ii) warrants to acquire 494,951 shares of Series B preferred stock at $0.50 per share. (5) On May 11, 1998, Registrant sold and issued an aggregate of 8,012,000 shares of Series C preferred stock, at a weighted-average purchase price of $0.48 per share, for cash in the aggregate amount of $3,882,400 to a group of investors pursuant to a Series C preferred stock Purchase Agreement. (6) On June 30, 1998, Registrant issued promissory notes, in the principal amount of $7,000,000, convertible into Series D preferred stock (the "Series D Notes") to a group of investors pursuant to a Note Purchase Agreement. On July 15, 1998, Registrant sold and issued an aggregate of 8,461,538 shares of Series D preferred stock, at a purchase price of $1.30 per share, for cash and cancellation of indebtedness in the aggregate amount of $10,999,999.40 to a group of investors pursuant to a Series D preferred stock Purchase Agreement. All of the Series D Notes were converted into shares of Series D preferred stock on July 15, 1998. (7) On September 4, 1998, Registrant sold and issued an aggregate of 1,628,000 shares of Series E preferred stock, at a purchase price of $2.50 per share, for cash in the aggregate amount of $4,070,000 to a group of investors pursuant to a Series E preferred stock Purchase Agreement. In addition, the Registrant issued 7,100 shares of Series E Preferred in consideration for placement agent services. (8) As of October 31, 1998, Registrant has sold and issued 2,086,482 shares of our common stock for an aggregate purchase price of $68,288 to employees, directors and consultants pursuant to direct issuances and to exercises of options under our 1996 and 1997 Stock Option Plans and non-plan options. (9) During May 1998, Registrant issued warrants for 15,000 shares of common stock, with an exercise price of $.50 per share, to Jerry Weissman at Power Presentations for services to the Company. During the same time period, Registrant issued warrants for 24,375 shares of common stock, with an exercise price of $1.00 per share, to DEF Public Relations, Heidrich & Struggles and Greg Moyer at Flying Beyond for services to us. (10) During May 1998, Registrant issued warrants, in connection with various financing arrangements, to purchase 90,000 shares of common stock, with a weighted-average exercise price of $1.15 per share to Transamerica and 5,000 warrants of Series D preferred stock, with an exercise price of $1.00 per share to Silicon Valley Bank. II-2 103 (11) In July 1998, Registrant sold and issued warrants for 35,000 shares of our common stock, at an exercise price of $1.30 per share, to Primus Technology for services in connection with developing Registrant's Asian business opportunities. During the same time period, Registrant issued warrants for 10,000 shares of common stock, at a purchase price of $1.30 per share, for cash in the aggregate amount of $500 to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. (12) In September 1998, Registrant issued warrants to purchase 100,000 shares of common stock in connection with a financing arrangement, to TransAmerica Business Credit Corporation. The exercise price for 50,000 shares is equal to $2.50 per share and the exercise price for the remaining 50,000 shares is equal to 80% of the price of this offering or, if this offering is not completed, 80% of the price of the next equity financing. (13) In October 1998, we issued warrants with an exercise price equal to $4.00 per share to purchase 26,250 shares to various consultants in connection with the construction of our new Internet service exchange. (14) In December 1998, we issued a warrant to purchase 100,000 shares of common stock in connection with a real estate lease to Forest City Enterprises, L.L.C. at an exercise price of $10.00 per share (the share numbers and exercise price reflect the exchange and reverse stock split). (15) In November 1998, David K. Small exercised options to purchase 15,625 shares of our common stock for an aggregate purchase price of $1,875 (the share numbers and exercise price reflect the exchange and reverse stock split). The sale of the above securities was deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or transactions pursuant to compensation benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and now with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access, through their relationships with the Registrant, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1(5) Form of Underwriting Agreement. 3.1(1) Third Amended and Restated Certificate of Incorporation. 3.5(1) Bylaws of Registrant. 4.2(1) Form of Registrant's Common Stock Certificate. 4.3(1) Amended and Restated Investors' Rights Agreement dated September 4, 1998. 4.4(a)(1) Stock Subscription Warrant No. 1 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation. 4.4(b)(1) Stock Subscription Warrant No. 2 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation. 4.4(c)(1) Stock Subscription Warrant No. 3 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation (see Exhibit No. 10.28). 4.4(d)(1) Stock Subscription Warrant No. 4 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation (see Exhibit No. 10.28). 4.5(1) Warrants to purchase shares of Series D Preferred Stock of Registrant issued to Silicon Valley Bank. 4.6(1) Form of Warrant to purchase shares of Common Stock of Registrant.
II-3 104
EXHIBIT NO. DESCRIPTION ----------- ----------- 5.1(5) Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP ("Gunderson Dettmer"). 10.1(1) Form of Indemnification Agreement entered into by Registrant with each of our directors and executive officers. 10.2(1) 1996 Stock Option Plan. 10.3(1) 1997 Stock Option Plan. 10.4(1) 1998 Stock Incentive Plan. 10.5(1) 1998 Employee Stock Purchase Plan. 10.6(1) Employment Agreement between Registrant and Warren J. Kaplan. 10.7(1) Employment Agreement between Registrant and Sherman Tuan. 10.8(1) Employment Agreement between Registrant and David Rand. 10.9(1) Stock Option Agreement between Registrant and Warren J. Kaplan. 10.10(1) Technology Agreement between Registrant and David Rand. 10.11(1) Lease Equipment Agreement between Registrant and Cisco Systems Capital Corporation. 10.12(1) Loan and Security Agreement between Registrant and Silicon Valley Bank. 10.13(1) Master Loan and Security Agreements between Registrant and Transamerica Business Credit Corporation. 10.14(1) Promissory Note by Registrant to Transamerica Business Credit Corporation. 10.15(1) Office Lease between 50 West San Fernando Associates and Registrant dated May 15, 1996 (San Jose Office, 10th Floor). 10.16(1) First Amendment to Lease Agreement between 50 West San Fernando Associates and Registrant, dated December 12, 1996 (San Jose Office, 10th Floor). 10.17(1) Second Amendment to Lease between 50 West San Fernando Associates and Registrant, dated February 23, 1998 (San Jose Office, 10th Floor). 10.18(1) Office Lease between 50 West San Fernando Associates and Registrant, dated May 15, 1996 (San Jose Office, 18th Floor). 10.19(1) First Amendment to Lease Agreement between 50 West San Fernando Associates and Registrant, dated December 12, 1996 (San Jose Office, 18th Floor). 10.20(1) Second Amendment to Lease between 50 West San Fernando Associates and Registrant, dated February 24, 1998 (San Jose Office, 18th Floor). 10.21(1) Consent of Landlord between Registrant and Halcyon Software California Inc., dated March 31, 1998 (San Jose Office, Suite 1012). 10.22(1) Consent of Landlord between 50 West San Fernando Associates and KPMG Peat Marwick LLP, dated April 6, 1998 and April 12, 1998 (Registrant sublease from KPMG Peat Marwick LLP, San Jose Office, 10th Floor). 10.23(1) Sublease between KPMG Peat Marwick (USA) LLP and Registrant, dated March 13, 1998 (Registrant sublease from KPMG Peat Marwick LLP (USA), San Jose Office, 10th Floor). 10.24(1) Deed of Lease between Gosnell Properties, Inc. and Registrant dated September 3, 1997 (Suite B-290, Vienna, VA/"D.C."). 10.25(1) Deed of Lease between Gosnell Properties, Inc. and Registrant dated January 30, 1998 (Suite 110, Vienna, VA/"D.C."). 10.26(1) [New York lease] 10.27(1)(3) Fiber Optic Private Network Agreement Product Order between Metromedia Fiber Network Services, Inc. and Registrant, dated September 1, 1998. 10.28(1) Amended and Restated Master Loan and Security Agreement between Registrant and Transamerica Business Credit Corporation. 10.29(1) Loan Modification Agreement between Registrant and Silicon Valley Bank dated as of October 26, 1998. 10.30(1) Lease by and between F.C. Pavilion, L.L.C. and Registrant dated as of December 4, 1998.
II-4 105
EXHIBIT NO. DESCRIPTION ----------- ----------- 10.31(2)(3) Atlantic Crossing/AC-1 Submarine Cable System Capacity Purchase Agreement, dated December 23, 1998, by and between Atlantic Crossing LTD, a Bermuda corporation, and AboveNet. 10.32(2)(3) Atlantic Crossing/AC-1 Submarine Cable System Capacity Indefeasible Right of Use Agreement in Inland Capacity (United Kingdom), dated December 23, 1998, by and between GT U.K. LTD and AboveNet. 10.33(2)(3) Atlantic Crossing/AC-1 Submarine Cable System Indefeasible Right of Use 1.1 Agreement in Inland Capacity (United States), dated December 23, 1998, by and between GT U.K. LTD and AboveNet. 10.34 Letter Agreement by and between Global Crossing Ltd. and Registrant, dated March 23, 1999.(4) 10.35 Agreement of Lease between 111 Eighth Avenue LLC and Registrant, dated January, 1999 (Registrant lease from 111 Eighth Avenue LLC portion of 2nd Floor, 111 Eighth Ave., New York, NY). 10.36 Shareholders Agreement by and between Raiffeisen Rechenzentrum Ges. m.b.H and Registrant, dated March 8, 1999.(4) 10.37 Cooperation Agreement, by and between Registrant and AboveNet Deutschland GmbH, dated March 25, 1999.(4) 10.38 Shareholder Agreement relating to AboveNet UK Limited, by and between Registrant, Mr. W. Dobbie and Mr. A. MacSween and AboveNet UK Limited, dated March, 1999.(4) 16.1(1) Letter Regarding Change in Certifying Accountants. 23.1(5) Consent of Gunderson Dettmer (included in Exhibit 5.1). 23.2 Consent of Deloitte & Touche LLP, Independent Accountants. 23.3 Independent Auditors' Report on Schedule. 27.1(5) Financial data schedule. 99.1(1) Consent of Forrester Research, Inc. 99.2(1) Consent of International Data Corporation.
- ------------------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 333-63141) originally filed with the Securities and Exchange Commission on September 10, 1998. (2) Incorporated by reference to the Company's filing on Form 10-Q filed with the Securities and Exchange Commission on February 11, 1999 (3) Confidential treatment granted as to certain portions of exhibit. (4) Confidential treatment requested as to certain portions of exhibit. (5) To be filed by amendment. (b) Financial Statement Schedule (i) Schedule II. Valuation and Qualifying Accounts. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Registrant's Restated Certificate of Incorporation, the Registrant's Bylaws, and Registrant's indemnification II-5 106 agreements or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 107 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement on Form S-1 to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on this 7th day of April 1999. ABOVENET COMMUNICATIONS INC. By: /s/ SHERMAN TUAN ------------------------------------ Sherman Tuan Chairman of the Board and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Warren J. Kaplan, Sherman Tuan and David F. Larson, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all others documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirement of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
NAME AND SIGNATURE TITLE DATE ------------------ ----- ---- /s/ SHERMAN TUAN Chairman of the Board and Chief April 7, 1999 - ------------------------------------------------ Executive Officer (Principal Sherman Tuan Executive Officer) and Director /s/ DAVID F. LARSON Senior Vice President and Chief April 7, 1999 - ------------------------------------------------ Financial Officer (Principal David F. Larson Financial Officer) /s/ KEVIN HOURIGAN Vice President Finance (Principal April 7, 1999 - ------------------------------------------------ Accounting Officer) Kevin Hourigan /s/ PETER C. CHEN, PH.D. Vice Chairman of the Board April 7, 1999 - ------------------------------------------------ Peter C. Chen, Ph.D. /s/ WARREN J. KAPLAN President, Chief Operating Officer April 7, 1999 - ------------------------------------------------ and Director Warren J. Kaplan /s/ ROBERT A. BURGELMAN Director April 7, 1999 - ------------------------------------------------ Robert A. Burgelman /s/ FRANK R. KLINE Director April 7, 1999 - ------------------------------------------------ Frank R. Kline
II-7 108
NAME AND SIGNATURE TITLE DATE ------------------ ----- ---- /s/ JAMES SHA Director April 7, 1999 - ------------------------------------------------ James Sha /s/ TOM SHAO, PH.D. Director April 7, 1999 - ------------------------------------------------ Tom Shao, Ph.D. /s/ KIMBALL W. SMALL Director April 7, 1999 - ------------------------------------------------ Kimball W. Small /s/ FRED A. VIERRA Director April 7, 1999 - ------------------------------------------------ Fred A. Vierra
II-8 109 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COST AND DEDUCTIONS/ END OF PERIOD EXPENSES WRITE-OFF PERIOD ------------ ---------- ----------- ---------- PERIOD FROM MARCH 8, 1996 (INCEPTION) TO JUNE 30, 1996 Accounts receivable allowance............... $ -- $ -- $ -- $ -- YEAR ENDED JUNE 30, 1997 Accounts receivable allowance............... $ -- $15,000 $ -- $15,000 YEAR ENDED JUNE 30, 1998 Accounts receivable allowance............... $15,000 $58,787 $13,787 $60,000
110 EXHIBIT INDEX
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE - ----------- ----------------------- ------------- 1.1(5) Form of Underwriting Agreement. 3.1(1) Third Amended and Restated Certificate of Incorporation. 3.5(1) Bylaws of Registrant. 4.2(1) Form of Registrant's Common Stock Certificate. 4.3(1) Amended and Restated Investors' Rights Agreement dated September 4, 1998. 4.4(a)(1) Stock Subscription Warrant No. 1 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation. 4.4(b)(1) Stock Subscription Warrant No. 2 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation. 4.4(c)(1) Stock Subscription Warrant No. 3 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation (see Exhibit No. 10.28). 4.4(d)(1) Stock Subscription Warrant No. 4 to purchase shares of Common Stock of Registrant issued to Transamerica Business Credit Corporation (see Exhibit No. 10.28). 4.5(1) Warrants to purchase shares of Series D Preferred Stock of the Registrant issued to Silicon Valley Bank. 4.6(1) Form of Warrant to purchase shares of Common Stock of the Registrant. 5.1(5) Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP ("Gunderson Dettmer"). 10.1(1) Form of Indemnification Agreement entered into by Registrant with each of our directors and executive officers. 10.2(1) 1996 Stock Option Plan. 10.3(1) 1997 Stock Option Plan. 10.4(1) 1998 Stock Incentive Plan. 10.5(1) 1998 Employee Stock Purchase Plan. 10.6(1) Employment Agreement between the Registrant and Warren J. Kaplan. 10.7(1) Employment Agreement between the Registrant and Sherman Tuan. 10.8(1) Employment Agreement between the Registrant and David Rand. 10.9(1) Stock Option Agreement between the Registrant and Warren J. Kaplan. 10.10(1) Technology Agreement between the Registrant and David Rand. 10.11(1) Lease Equipment Agreement between Registrant and Cisco Systems Capital Corporation. 10.12(1) Loan and Security Agreement between the Registrant and Silicon Valley Bank. 10.13(1) Loan and Security Agreements between the Registrant and Transamerica Business Credit Corporation. 10.14(1) Promissory Note by Registrant to Transamerica Business Credit Corporation. 10.15(1) Office Lease between 50 West San Fernando Associates and Registrant dated May 15, 1996 (San Jose Office, 10th Floor). 10.16(1) First Amendment to Lease Agreement between 50 West San Fernando Associates and Registrant, dated December 12, 1996 (San Jose Office, 10th Floor). 10.17(1) Second Amendment to Lease between 50 West San Fernando Associates and Registrant, dated February 23, 1998 (San Jose Office, 10th Floor). 10.18(1) Office Lease between 50 West San Fernando Associates and Registrant, dated May 15, 1996 (San Jose Office, 18th Floor).
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EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE - ----------- ----------------------- ------------- 10.19(1) First Amendment to Lease Agreement between 50 West San Fernando Associates and Registrant, dated December 12, 1996 (San Jose Office, 18th Floor). 10.20(1) Second Amendment to Lease between 50 West San Fernando Associates and Registrant, dated February 24, 1998 (San Jose Office, 18th Floor). 10.21(1) Consent of Landlord between Registrant and Halcyon Software California Inc., dated March 31, 1998 (San Jose Office, Suite 1012). 10.22(1) Consent of Landlord between 50 West San Fernando Associates and KPMG Peat Marwick LLP, dated April 6, 1998 and April 12, 1998 (Registrant sublease from KPMG Peat Marwick LLP, San Jose Office, 10th Floor). 10.23(1) Sublease between KPMG Peat Marwick (USA) LLP and Registrant, dated March 13, 1998 (Registrant sublease from KPMG Peat Marwick LLP (USA), San Jose Office, 10th Floor). 10.24(1) Deed of Lease between Gosnell Properties, Inc. and Registrant dated September 3, 1997 (Suite B-290, Vienna, VA/"D.C."). 10.25(1) Deed of Lease between Gosnell Properties, Inc. and Registrant dated January 30, 1998 (Suite 110, Vienna, VA/"D.C."). 10.26(1) Network Access Agreement between Goodnet and Registrant dated June 11, 1996. 10.27(1)(3) Fiber Optic Private Network Agreement Product Order between Metromedia Fiber Network Services, Inc. and Registrant, dated September 1, 1998. 10.28(1) Amended and Restated Master Loan and Security Agreement between Registrant and Transamerica Business Credit Corporation. 10.29(1) Loan Modification Agreement between Registrant and Silicon Valley Bank dated as of October 26, 1998. 10.30(1) Lease by and between F.C. Pavilion, L.L.C. and Registrant dated December 4, 1998. 10.31(2)(3) Atlantic Crossing/AC-1 Submarine Cable System Capacity Purchase Agreement, dated December 23, 1998, by and between Atlantic Crossing LTD, a Bermuda corporation, and AboveNet. 10.32(2)(3) Atlantic Crossing/AC-1 Submarine Cable System Capacity Indefeasible Right of Use Agreement in Inland Capacity (United Kingdom), dated December 23, 1998, by and between GT U.K. LTD and AboveNet. 10.33(2)(3) Atlantic Crossing/AC-1 Submarine Cable System Indefeasible Right of Use 1.1 Agreement in Inland Capacity (United States), dated December 23, 1998, by and between GT U.K. LTD and AboveNet. 10.34 Letter Agreement by and between Global Crossing Ltd. and Registrant, dated March 23, 1999.(4) 10.35 Agreement of Lease between 111 Eighth Avenue LLC and Registrant, dated January, 1999 (Registrant lease from 111 Eighth Avenue LLC portion of 2nd Floor, 111 Eighth Ave., New York, NY). 10.36 Shareholders Agreement by and between Raiffeisen Rechenzentrum Ges. m.b.H and Registrant, dated March 8, 1999.(4) 10.37 Cooperation Agreement, by and between Registrant and AboveNet Deutschland GmbH, dated March 25, 1999.(4) 10.38 Shareholder Agreement relating to AboveNet UK Limited, by and between Registrant, Mr. W. Dobbie and Mr. A. MacSween and AboveNet UK Limited, dated March, 1999.(4) 16.1(1) Letter Regarding Change in Certifying Accountants. 23.1(5) Consent of Gunderson Dettmer (included in Exhibit 5.1).
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EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE - ----------- ----------------------- ------------- 23.2 Consent of Deloitte & Touche LLP, Independent Accountants. 23.3 Independent Auditors' Report on Schedule. 27.1(5) Financial data schedule. 99.1(1) Consent of Forrester Research, Inc. 99.2(1) Consent of International Data Corporation.
- --------------- (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 333-63141) originally filed with the Securities and Exchange Commission on September 10, 1998. (2) Incorporated by reference to the Company's filing on Form 10-Q filed with the Securities and Exchange Commission on November , 1998. (3) Confidential treatment granted as to certain portions of exhibit. (4) Confidential treatment requested as to certain portions of exhibit. (5) To be filed by amendment. EX-10.34 2 LETTER AGREEMENT 1 EXHIBIT 10.34 [LOGO GLOBAL CROSSING] March 23, 1999 Mr. Dave Rand CTO AboveNet Communications 50 W. San Fernando St. #1010 San Jose, CA 95113 USA Dear Mr. Rand: This letter confirms our understanding with respect to the sale by Global Crossing International Ltd. and/or its affiliates ("GCI") to AboveNet Communications, Inc. ("AboveNet") of capacity on GCI's Pan European network ("PEC"). Purchased Capacity. GCI hereby agrees to sell (or cause its affiliates to sell) and ABOVENET hereby agrees to purchase on the RFS Date (to be defined) for PEC [*] (the "Purchased Capacity") consisting of indefeasible rights of use ("IRUs") for point-to-point capacity on the following PEC city-to- city segments (GCI PoP to GCI PoP) as follows: (1) [*] (2) [*] (3) [*] The aggregate purchase price (the "Purchase Price") for the Purchase Capacity shall be [*] provided however, if ABOVENET does not enter into a global network offer within [*] days of the date hereof with Global Crossing Holdings Ltd. for an [*] the aggregate purchase price for the Purchased Capacity shall be increased to [*]. The Purchase Price shall be paid as follows (i) [*] of the Purchase Price shall be payable on the date this letter agreement is executed by ABOVENET and (ii) [*] million shall be payable just prior to activation of the circuit but no later than April 30, 1999 (iii) the balance of the Purchase Price shall be financed over a [*] period at the rate of [*] with net payable on or before December 30, 1999. Interest payments shall be made on the 5th of every month. If tail circuits are required to connect the Purchased Capacity to ABOVENET's local PoP, GCI agrees to assist ABOVENET in obtaining such connectivity, all at ABOVENET's expense. Maintenance payments shall be payable in accordance with the [*] Capacity Purchase Agreement. Documentation. ABOVENET and GCI and/or its affiliates shall enter into capacity purchase agreements with respect to the Purchased Capacity promptly after the execution of this letter agreement, but not later than April 30, 1999. - -------------- *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 2 Miscellaneous. This letter agreement shall be governed by and construed in accordance with the laws of the State of New York. This letter agreement may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. This letter agreement may not be amended or waived except in an instrument in writing and signed by each of the parties hereto. This letter agreement shall be binding upon each of the parties hereto and their respective successors and permitted assigns. Neither party hereto shall be permitted to assign any of their rights or obligations hereunder without the other party's prior written consent, provided, however, (i) GCI may assign and delegate any and all of its rights and obligations hereunder to its affiliates and (ii) ABOVENET may, without relieving it of its obligations hereunder, assign its rights hereunder to its wholly-owned subsidiaries. ABOVENET shall keep the provisions of this letter agreement and any non-public information, written or oral, with respect to this Agreement ("Confidential Information") confidential and shall not disclose Confidential Information, in whole or in part, to any person other than affiliates, officers, directors, employees, agents or representatives of ABOVENET (collectively, "Representatives") who need to know such Confidential Information for the purpose of negotiating, executing and implementing this letter agreement. ABOVENET agrees to inform each of its Representatives of the non-public nature of the Confidential Information and to direct such persons to treat such Confidential Information in accordance with this paragraph. Nothing herein shall prevent ABOVENET from disclosing Confidential Information (i) upon the order of any court or administrative agency, (ii) upon the request or demand of, or pursuant to any regulation of, any regulatory agency or authority or (iii) to a party's legal counsel or independent auditors. ABOVENET shall not make any public announcement regarding this letter agreement or the terms hereof, without the prior written consent of GCI. If the foregoing correctly sets forth our understanding, please indicate your agreement to be bound by the terms hereof by signing in the space indicated below. GLOBAL CROSSING HOLDINGS LTD. By: /s/ K. Eugene Shutler ------------------------------------- Name: K. Eugene Shutler Title: President AGREED AND ACCEPTED: ABOVENET COMMUNICATIONS, INC. By: /s/ Dave Rand -------------------------------------- Name: Dave Rand Title: CTO Agreement subject to satisfactory completion of the European ring agreement before April 2, 1999. Timeframe may be extended by mutual consent. Terms are to be no less favorable on future orders. [initials] EX-10.35 3 AGREEMENT OF LEASE 1 EXHIBIT 10.35 AGREEMENT OF LEASE, made as of January ___, 1999, between 111 EIGHTH AVENUE LLC, a Delaware limited liability company with an address c/o Taconic Investment Partners LLC, 1500 Broadway, New York, New York 10036 ("Landlord"), and ABOVENET COMMUNICATIONS, INC., a Delaware corporation, having an address at 50 West San Fernando Street, Tenth (10th) Floor, San Jose, California 95113 ("Tenant"). W I T N E S S E T H: The parties hereto, for themselves, their legal representatives, successors and assigns, hereby covenant as follows. DEFINITIONS "Additional Rent" means Tenant's Tax Payment, Tenant's Labor Rate Payment, and any and all other sums, other than Fixed Rent, payable by Tenant to Landlord under this Lease. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person. "Alterations" means alterations, installations, improvements, additions or other physical changes (other than decorations, movable fixtures and equipment) in or about the Premises. "Base Rate" means the annual rate of interest publicly announced from time to time by Citibank, N.A., New York, New York (or any successor thereto) as its "base rate", or such other term as may be used by Citibank, N.A. from time to time for the rate presently referred to as its base rate. "Building" means all the buildings, equipment and other improvements and appurtenances of every kind and description now located or hereafter erected, constructed or placed upon the land and any and all alterations, renewals, replacements, additions and substitutions thereto, presently known by the address of 111 Eighth Avenue, New York, New York. "Building Systems" means the mechanical, electrical, heating, ventilating, air conditioning, elevator, plumbing, fuel, sanitary, life-safety and other service systems of the Building, but shall not include the portions of such systems installed in the Premises by Tenant. "Business Days" means all days, excluding Saturdays, Sundays, and all days observed by either the State of New York, the Federal Government or by the labor unions servicing the Building as legal holidays. "Commencement Date" means the date upon which Landlord delivers possession of the Premises with Landlord's Work Substantially Completed as provided in Section 4.2. 2 "Control" means: (i) the ownership, directly or indirectly, of more than fifty per cent (50%) of the voting stock of a corporation, or (ii) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person. "Default Rate" means a rate at all times four (4) percentage points above the Base Rate. "Environmental Laws" means any Legal Requirements now or hereafter in effect relating to the environment, health, safety or Hazardous Materials. "Expiration Date" means the last day of the third (3rd) month immediately following the fifteenth (15th) anniversary of the Commencement Date. "Governmental Authority" means any of the United States of America, the State of New York, the City of New York, any political subdivision thereof and any agency, department, commission, board, bureau or instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction over the Real Property or any portion thereof or the curbs, sidewalks, and areas adjacent thereto. "Hazardous Materials" means any substances, materials or wastes regulated by any Governmental Authority or deemed or defined as a "hazardous substance", "hazardous material", "toxic substance", "toxic pollutant", "contaminant", "pollutant", "solid waste", "hazardous waste" or words of similar import under applicable Legal Requirements, including oil and petroleum products, natural or synthetic gas, polychlorinated biphenyls, asbestos in any form, urea formaldehyde, radon gas, or the emission of non-ionizing radiation, microwave radiation or electromagnetic fields at levels in excess of those (if any) specified by any Governmental Authority or which may cause a health hazard or danger to property, or the emission of any form of ionizing radiation. "HVAC" means heat, ventilation and air conditioning. "Initial Alterations" are defined in Section 4.3. "Landlord's Work" is defined in Section 4.2(a). "Legal Requirements" means all present and future laws, rules, orders, ordinances, regulations, statutes, requirements, codes, executive orders, rules of common law, and any judicial interpretations thereof, extraordinary as well as ordinary, of all Governmental Authorities, including the Americans with Disabilities Act (42 U.S.C. Section 12,101 et seq.), New York City Local Law 58 of 1987, and any law of like import, and all rules, regulations and government orders with respect thereto, and any of the foregoing relating to environmental matters, Hazardous Materials, public health and safety matters, and of any applicable fire rating bureau, or other body exercising similar functions, affecting the Real Property or the maintenance, use or occupation thereof, or any street or sidewalk comprising a part of or in front thereof or any vault in or under the same. "Mortgage" means any mortgage or trust indenture which may now or hereafter affect the Real Property, the Building or any Superior Lease and the leasehold interest created -2- 3 thereby, and all renewals, extensions, supplements, amendments, modifications, consolidations and replacements thereof or thereto, substitutions therefor, and advances made thereunder; "Mortgagee" means any mortgagee, trustee or other holder of a Mortgage. "Permitted Use" means the use of the Premises by Tenant as an internet service exchange center and other uses related thereto, including the operation of incidental technical equipment, and office and support facilities in connection therewith, and for no other purpose. "Person" means any individual, corporation, partnership, limited liability company, limited liability partnership, joint venture, estate, trust, unincorporated association, business trust, tenancy-in-common or other entity, or any Governmental Authority. "Premises" means a portion of the second (2nd) floor of the Building, as shown on the floor plan(s) attached to this Lease as Exhibit A and made a part hereof. "Premises Area" means the Rentable Square Foot area of the Premises, consisting of a total of 26,846 Rentable Square Feet, as such Premises Area may be increased or decreased from time to time pursuant to this Lease. "Real Property" means the Building, together with the plot of land upon which it stands. "Rent Commencement Date" means the date which is one day prior to the date which is three (3) calendar months following the Commencement Date. "Rentable Square Feet" means the deemed rentable area of the Building or any portion thereof, computed on the basis of the current standard employed by Landlord on the date hereof with respect to the calculation of the deemed Rentable Square Foot area of the Building; provided, however, that in no event shall such deemed Rentable Square Footage constitute or imply any representation or warranty by Landlord as to the actual size of any floor or other portion of the Building, including the Premises. "Roof Space" is defined in Section 9.9. "Rules and Regulations" means the rules and regulations annexed hereto and made a part hereof as Exhibit B, and such other and further rules and regulations as Landlord may from time to time reasonably adopt. "Substantial Completion" means, as to any construction performed by any party in the Premises, including the Initial Alterations, any other Alterations, or Landlord's Work, that such work has been completed substantially in accordance with (i) the provisions of this Lease applicable thereto, (ii) the plans and specifications for such work, and (iii) all applicable Legal Requirements and Insurance Requirements, except for minor details of construction, decoration and mechanical adjustments, if any, the noncompletion of which does not materially interfere with Tenant's use of the Premises, or which, in accordance with good construction practice, should be completed after the completion of other work to be performed in the Premises. -3- 4 "Superior Lease(s)" means any ground or underlying lease of the Real Property or any part thereof heretofore or hereafter made by Landlord and all renewals, extensions, supplements, amendments and modifications thereof; "Lessor" means a lessor under a Superior Lease. "Tenant Delay" means any delay which results from any act, negligence, failure to act or omission of any Tenant Party, including delays due to changes in or additions to, or interference with, any work to be done by Landlord, or delays by Tenant in submission of information, approving working drawings or estimates or giving authorizations or approvals. "Tenant Party" means any of Tenant, any Affiliate of Tenant, any subtenant or any other occupant of the Premises, or any of their respective direct or indirect partners, officers, shareholders, directors, members, trustees, beneficiaries, employees, principals, contractors, licensees, invitees, servants, agents or representatives. "Tenant's Alterations" means all Alterations, including the Initial Alterations, in and to the Premises or the Roof Space which may be made by or on behalf of Tenant prior to and during the Term, or any renewal thereof, including Tenant's Generators and the switch gear and conduit associated therewith, distributing equipment, Tenant's HVAC System and related equipment, and batteries and other uninterruptable power sources ("UPS"). "Tenant's Property" means Tenant's movable fixtures and movable partitions, telephone and other communications, electrical components and equipment, computer systems, furniture, trade fixtures, furnishings and other items of personal property which are removable without material damage to the Premises or Building. "Term" means the term of this Lease, which shall commence on the Commencement Date and shall expire on the Expiration Date. ARTICLE 1. DEMISE, PREMISES, TERM, RENT SECTION 1.1 Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Premises, for the Term to commence on the Commencement Date and to end on the Expiration Date, at an annual rent ("Fixed Rent") as follows: (a) Eight Hundred Seventy-Two Thousand Four Hundred Ninety-Five and 00/100 Dollars ($872,495.00) per annum ($72,707.92 per month) for the period commencing on the Rent Commencement Date and ending one day prior to the third (3rd) anniversary of the Rent Commencement Date; (b) Nine Hundred Thirty-Nine Thousand Six Hundred Ten and 00/100 Dollars ($939,610.00) per annum ($78,300.83 per month) for the period commencing on the third (3rd) anniversary of the Rent Commencement Date and ending one day prior to the sixth (6th) anniversary of the Rent Commencement Date; (c) Nine Hundred Ninety-Three Thousand Three Hundred Two and 00/100 Dollars ($993,302.00) per annum ($82,775.17 per month) for the period commencing on the -4- 5 sixth (6th) the Rent Commencement Date and ending one day prior to the tenth (10th) anniversary of the Rent Commencement Date; and (d) One Million One Hundred Thousand Six Hundred Eight-Six and 00/100 Dollars ($1,100,686.00) per annum ($91,723.83 per month) for the period commencing on the tenth (10th) anniversary of the Rent Commencement Date and ending on the Expiration Date; which Tenant agrees to pay to Landlord, without notice or demand, in lawful money of the United States, in monthly installments in advance on the first (1st) day of each calendar month during the Term, at the office of Landlord or such other place as Landlord may designate, without any set-off, offset, abatement or deduction whatsoever. Fixed Rent and Additional Rent shall be payable by check drawn upon a bank which is a member of the New York Clearinghouse Association or by wire transfer of immediately available funds. SECTION 1.2 Notwithstanding anything to the contrary contained herein, upon execution and delivery of this lease, Tenant shall pay to Landlord the sum of Seventy-Two Thousand Seven Hundred Seven and 92/100 Dollars ($72,707.92) representing the installment of Fixed Rent for the first (1st) full calendar month of the Term after the Rent Commencement Date. If the Rent Commencement Date shall occur on a date other than the first (1st) day of any calendar month, Tenant shall also pay to Landlord, on the Rent Commencement Date, a sum equal to Two Thousand Four Hundred Twenty-Three and 60/100 Dollars ($2,423.60), multiplied by the number of calendar days in the period from the Rent Commencement Date to the last day of the month in which the Rent Commencement Date shall occur, both inclusive. ARTICLE 2. USE AND OCCUPANCY SECTION 2.1 Tenant shall use and occupy the Premises for the Permitted Use and for no other purpose. Tenant shall not use or occupy or permit the use or occupancy of any part of the Premises in any manner not permitted hereunder, or which in Landlord's reasonable judgment would adversely affect (a) the proper and economical rendition of any service required to be furnished to any tenant or other occupant of the Building, (b) the use or enjoyment of any part of the Building by any other tenant or other occupant, or (c) the appearance, character or reputation of the Building. SECTION 2.2 Tenant shall not use or permit the Premises or any part thereof to be used: (a) for the business of printing or other manufacturing of any kind, (b) as a retail branch of a bank or savings and loan association, or as a retail loan company, as a retail stock broker's or dealer's office, (c) for the storage of merchandise, (d) for the distribution, by mail-order or otherwise, of merchandise, (e) as a restaurant or bar or for the sale of food or beverages, (f) as a news or cigar stand, (g) as an employment agency, labor union office, school, physician's or dentist's office, dance or music studio, (h) as a barber shop or beauty salon, (i) for the sale, at retail or otherwise, of any goods or products, (j) by the United States Government, the City or State of New York, any Governmental Authority, any foreign government, the United Nations or any agency or department of any of the foregoing or any Person having sovereign or diplomatic immunity, (k) for the rendition of medical, dental or other therapeutic or diagnostic services, or (l) for the conduct of an auction. -5- 6 SECTION 2.3 (a) Landlord shall not be subject to any liability for failure to give possession of the Premises on a particular date and the validity of this Lease shall not be impaired under such circumstances, nor shall the same be construed to extend the term of this Lease; provided, however, that Landlord agrees to use commercially reasonable efforts to deliver possession of the Premises with Landlord's Work Substantially Completed as provided in Section 4.2(a) within ninety (90) days after the date on which this Lease is executed and delivered to Tenant by Landlord. Notwithstanding the foregoing, if Landlord fails to deliver possession of the Premises to Tenant with Landlord's Work Substantially Completed within one hundred eighty (180) days after the date on which this Lease is executed and delivered to Tenant by Landlord, and such failure is not due to Unavoidable Delays or Tenant Delays, then as Tenant's sole and exclusive remedy for such failure to deliver possession of the Premises, Tenant shall have the right to terminate this Lease by notice to Landlord given within ten (10) days of such one hundred eighty (180) day period, such termination to be effective on the date which is ten (10) days after the date such notice is given, upon which date this Lease shall come to an end and terminate, subject to the provisions of Section 2.3(b). Landlord shall return the Security Deposit (as defined in Section 29.1) to Tenant, together with all prepaid Fixed Rent and Additional Rent, if any, and thereafter neither party shall have any liability to the other hereunder. (b) Notwithstanding anything to the contrary contained herein, if Tenant shall give Landlord a notice of termination of this Lease pursuant to Section 2.3(a), and Landlord shall deliver possession of the Premises with Landlord's Work Substantially Completed to Tenant at any time within ten (10) days following Landlord's receipt of such notice by Tenant, such termination shall be void and of no force and effect, and Tenant shall have no further right to terminate this Lease pursuant to this Section 2.3. (c) The foregoing shall constitute an express negation of Section 223-a of the New York Real Property Law or any successor law or ordinance, which shall be inapplicable hereto, and Tenant hereby waives any right to rescind this Lease which Tenant might otherwise have thereunder. ARTICLE 3. ALTERATIONS SECTION 3.1 Tenant shall not make any Alterations without Landlord's prior written consent in each instance, provided that Tenant's changing of wall coverings, carpeting or paint shall not be deemed to be Alterations requiring such consent. Landlord's consent shall be granted or denied in Landlord's sole discretion; provided, however, that Landlord shall not unreasonably withhold its consent to Alterations proposed to be made by Tenant to adapt the Premises for the Permitted Use provided that such Alterations (a) are non-structural and do not affect the Building Systems or services, (b) are performed only by contractors approved in writing by Landlord, (c) do not affect any part of the Building other than the Premises, (d) do not adversely affect any service required to be furnished by Landlord to Tenant or to any other tenant or occupant of the Building, and (e) do not reduce the value or utility of the Building. Landlord hereby agrees that Tenant shall have the right to perform the Alterations described on Exhibit F annexed hereto and made a part hereof, all in accordance with the provisions of this Article 3. -6- 7 SECTION 3.2 (a) Prior to making any Alterations, Tenant shall (i) submit to Landlord, for Landlord's written approval, detailed plans and specifications therefor in form satisfactory to Landlord, (ii) if such Alterations require a filing with Governmental Authority or require the consent of such authority, then such plans and specifications shall (A) be prepared and certified by a registered architect or licensed engineer, and (B) comply with all Legal Requirements to the extent necessary for such governmental filing or consent, (iii) at its expense, obtain all required permits, approvals and certificates, (iv) furnish to Landlord duplicate original policies or certificates of worker's compensation (covering all persons to be employed by Tenant, and all contractors and subcontractors supplying materials or performing work in connection with such Alterations) and comprehensive public liability (including property damage coverage) insurance and Builder's Risk coverage (issued on a completed value basis) all in such form, with such companies, for such periods and in such amounts as Landlord may require, naming Landlord and its employees and agents, and any Lessor and any Mortgagee as additional insureds, and (v) with respect to any Alteration costing more than $250,000.00 to complete, furnish to Landlord such evidence of Tenant's ability to complete and to fully and completely pay for such Alteration as is satisfactory to Landlord. All Alterations shall be performed by Tenant at Tenant's sole cost and expense (A) in a good and workmanlike manner using new materials of first class quality, (B) in compliance with all Legal Requirements, and (C) in accordance with the plans and specifications previously approved by Landlord. Tenant shall at its cost and expense obtain all approvals, consents and permits from every Governmental Authority having or claiming jurisdiction prior to, during and upon completion of such Alterations. Tenant shall promptly reimburse Landlord, as Additional Rent and upon demand, for any and all actual out-of-pocket costs and expenses incurred by Landlord in connection with Landlord's review of Tenant's plans and specifications for any such Alteration. (b) Landlord shall not unreasonably withhold, condition or delay its approval of the contractors proposed to be used by Tenant for Tenant's Alterations, provided that in the case of the mechanical, electrical, plumbing and fire safety trades, Tenant shall select its contractors and sub-contractors from Landlord's list of approved contractors. Attached hereto as Exhibit C is a list of contractors currently approved by Landlord for the performance of work in the Building, which list may be modified by Landlord from time to time. (c) Landlord agrees to respond to any written request for approval of plans and specifications for Alterations proposed to be made by Tenant within ten (10) Business Days after receipt by Landlord of complete and detailed architectural, structural, mechanical and engineering plans and specifications as required for such Alterations (collectively, "Tenant's Plans"). If Landlord fails to approve or disapprove Tenant's Plans on or before the end of the applicable review period set forth herein, Tenant shall have the right to provide Landlord with a second written request for approval (a "Second Request"), which shall specifically identify Tenant's Plans to which such request relates, and set forth in bold capital letters the following statement: IF LANDLORD FAILS TO RESPOND WITHIN FIVE (5) BUSINESS DAYS AFTER RECEIPT OF THIS NOTICE, THEN TENANT SHALL BE ENTITLED TO COMMENCE CONSTRUCTION IN ACCORDANCE WITH THE PLANS AND SPECIFICATIONS PREVIOUSLY SUBMITTED TO LANDLORD AND TO WHICH LANDLORD HAS FAILED TO TIMELY RESPOND. In the event that Landlord fails to respond to a Second Request within five (5) Business Days after receipt by Landlord, Tenant's Plans or revisions thereto for which the Second Request is submitted shall be deemed to be -7- 8 approved by Landlord, and Tenant shall be entitled to commence construction of the Alteration or portion thereof to which Tenant's Plans relate, provided that Tenant's Plans have been appropriately filed in accordance with applicable Legal Requirements, all permits and approvals required to be issued by any Governmental Authority shall have been duly issued, and Tenant shall otherwise have complied with all provisions of this Lease applicable to Alterations. (d) Notwithstanding the foregoing provisions of this Article 3, Tenant shall be permitted to make minor, non-structural alterations to the Premises ("Minor Alterations") upon prior notice to Landlord, but without the necessity of procuring Landlord's consent thereto, provided that the estimated cost of each such Minor Alteration does not exceed $100,000.00 in any one instance. The provisions of Sections 3.2(a) and (b) shall be applicable to Minor Alterations. Prior to commencing any Minor Alteration, Tenant shall furnish Landlord with (i) working drawings or plans for such Minor Alteration in sufficient detail to permit Landlord to determine that such Alteration complies with the requirements hereof, and (ii) the names of the contractors proposed to be used by Tenant for such Minor Alteration. (e) Upon completion of any Alterations, Tenant, at its expense, shall promptly obtain certificates of final approval of such Alterations as may be required by any Governmental Authority, and shall furnish Landlord with copies thereof, together with "as-built" plans and specifications for such Alterations prepared on an Autocad Computer Assisted Drafting and Design System (or such other system or medium as Landlord may accept) using naming conventions issued by the American Institute of Architects in June, 1990 (or such other naming convention as Landlord may accept) and magnetic computer media of such record drawings and specifications, translated into DXF format or another format acceptable to Landlord. SECTION 3.3 All Alterations in and to the Premises or the Roof Space which may be made by or on behalf of Tenant, prior to and during the Term or any renewal thereof, shall become the property of Landlord upon the Expiration Date or sooner termination of this Lease, and upon the Expiration Date or earlier termination of the Term or any renewal thereof (a) Tenant shall remove Tenant's Property from the Premises (but in no event shall Tenant have the right or obligation to remove Tenant's Generators and the switch gear and conduit associated therewith), and (b) unless Landlord notifies Tenant no later than twenty (20) days prior to the Expiration Date that any or all items of Tenant's Alterations shall not be removed from the Premises, Tenant shall remove Tenant's Alterations from the Premises, at Tenant's sole cost and expense; provided, however, that Tenant shall have no obligation to remove those portions of Tenant's Alterations consisting of only ordinary and standard office installations. Tenant shall repair and restore in a good and workmanlike manner (reasonable wear and tear excepted) any damage to the Premises and the Building caused by such removal of Tenant's Property and/or Tenant's Alterations. Any of Tenant's Alterations or Tenant's Property not so removed by Tenant at or prior to the Expiration Date or earlier termination of the Term shall be deemed abandoned and may, at the election of Landlord, either be retained as Landlord's property or be removed from the Premises by Landlord at Tenant's expense. The covenants and agreements set forth in this Section 3.3 shall survive the expiration or earlier termination of this Lease. SECTION 3.4 If, because of any act or omission of Tenant, its employees, agents, contractors, or subcontractors, any mechanic's lien, U.C.C. financing statement or other lien, charge or order for the payment of money shall be filed against Landlord, or against all or any -8- 9 portion of the Premises, the Building or the Real Property, Tenant shall, at its own cost and expense, cause the same to be discharged of record, by bonding or otherwise, within thirty (30) days after the filing thereof, and Tenant shall indemnify, defend and save Landlord harmless against and from all costs, expenses, liabilities, suits, penalties, claims and demands (including reasonable attorneys' fees and disbursements) resulting therefrom. SECTION 3.5 Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the Premises, whether in connection with any Alteration or otherwise, if in Landlord's sole judgment such employment will materially interfere or cause any conflict with other contractors, mechanics, or laborers engaged in the construction, maintenance or operation of the Building by Landlord, Tenant or others, or materially and adversely affect the use and enjoyment of other tenants or occupants of the Building. ARTICLE 4. CONDITION OF THE PREMISES; LANDLORD'S WORK SECTION 4.1 Tenant has examined the Premises and, subject to the completion of Landlord's Work as set forth herein, agrees to accept possession of the Premises in their "as is" condition on the Commencement Date, and further agrees that, except for the performance of Landlord's Work as expressly set forth in this Article 4, Landlord shall have no obligation to perform any work, supply any materials, incur any expenses or make any installations in order to prepare the Premises for Tenant's occupancy. The taking of possession of the Premises by Tenant shall be conclusive evidence as against Tenant that at the time such possession was so taken, the Premises were in good and satisfactory condition, subject to the provisions of Section 4.2. SECTION 4.2 Prior to the Commencement Date, Landlord shall perform the following work at the Premises, at Landlord's sole cost and in accordance with all Legal Requirements ("Landlord's Work"): (i) demolish all existing improvements, including piping and electrical conduit, which are then permanently out of service, (ii) abate or encapsulate any asbestos or asbestos-containing materials ("ACM") within the Premises in accordance with all Legal Requirements, and provide Tenant with a New York City Department of Environmental Protection Form ACP-5 in connection therewith, and (iii) demise in a Building standard manner and deliver the Premises in broom clean condition. SECTION 4.3 Landlord acknowledges that Tenant intends to perform certain Alterations in order to prepare the Premises for its occupancy, which alterations shall include (i) the installation of a sprinkler system or other fire suppression system satisfactory to Landlord, and (ii) the installation of noise suppression materials and/or equipment with respect to Tenant's telecommunications equipment and any Roof Equipment and Tenant's HVAC Equipment, satisfactory to Landlord, all in compliance with Legal Requirements (the "Initial Alterations"). SECTION 4.4 Upon the request of Tenant, Landlord, at Tenant's cost and expense, shall join in any applications for any permits, approvals or certificates from any Governmental Authority required to be obtained by Tenant, and shall sign such applications reasonably promptly after request by Tenant (provided that (i) the provisions of the applicable Legal Requirement shall require that Landlord join in such application, and (ii) such application -9- 10 is reasonably acceptable to Landlord) and shall otherwise cooperate with Tenant in connection therewith, provided that Landlord shall not be obligated to incur any cost or expense, including attorneys' fees and disbursements, or suffer or incur any liability, in connection therewith. ARTICLE 5. REPAIRS; FLOOR LOAD SECTION 5.1 (a) Landlord shall maintain in working order and shall repair the Building Systems and the public portions of the Building, both exterior and interior, and the structural elements thereof, including the roof, foundation and curtain wall. Tenant, at Tenant's expense, shall take good care of the Premises and the fixtures, systems, equipment and appurtenances therein, and make all non-structural repairs thereto as and when needed to preserve them in good working order and condition, except for reasonable wear and tear, obsolescence and damage for which Tenant is not responsible pursuant to the provisions of Articles 10 and 11. Notwithstanding the foregoing, but subject to the provisions of Section 10.2(b), all damage or injury to the Premises or to any other part of the Building, or to its fixtures, equipment and appurtenances, caused by or resulting from carelessness, omission, neglect or improper conduct of, or Alterations made by Tenant, Tenant's agents, employees or licensees, shall be repaired at Tenant's expense, (i) by Tenant to the satisfaction of Landlord (if the required repairs are non-structural and do not affect any Building System), or (ii) by Landlord (if the required repairs are structural or affect any Building System). Tenant also shall repair all damage to the Building and the Premises caused by the making of any Alterations by Tenant or by the moving of Tenant's Property. All of such repairs shall be of quality or class equal to the original work or construction. If Tenant fails after fifteen (15) days notice to proceed with due diligence to make repairs required to be made by Tenant, Landlord may make such repairs at the expense of Tenant, and Tenant shall pay the costs and expenses thereof incurred by Landlord, with interest at the Default Rate, as Additional Rent within ten (10) days after rendition of a bill or statement therefor. (b) Landlord represents to Tenant that, to the best of Landlord's knowledge, all Building Systems for which Landlord is responsible under this Lease, including elevators, heating systems and life safety systems, will remain fully functional and perform their normal operations on and after January 1, 2000, without interruption or malfunction as a result of the passage from the year 1999 to the year 2000. Landlord shall make all repairs, alterations or replacements to any Building Systems in order to prevent or eliminate any such interruptions or malfunctions resulting from the passage from the year 1999 to the year 2000. SECTION 5.2 Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot which such floor was designed to carry and which is allowed by law, which floor load is stated in the certificate of occupancy for the Building in effect on the date of this Lease to be 200 pounds per square foot. Tenant shall not move any safe, heavy equipment, business machines, freight, bulky matter or fixtures into or out of the Building without Landlord's prior consent. If such safe, equipment, freight, bulky matter or fixtures requires special handling, Tenant shall employ only persons holding a Master Rigger's license to do such work. SECTION 5.3 Except as expressly set forth herein, there shall be no allowance to Tenant for a diminution of rental value, no constructive eviction of Tenant and no liability on the -10- 11 part of Landlord by reason of inconvenience, annoyance or injury to business arising from Landlord making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Building or the Premises, or in or to fixtures, appurtenances or equipment thereof. Landlord shall use reasonable efforts to minimize interference with Tenant's access to and use and occupancy of the Premises in making any repairs, alterations, additions or improvements; provided, however, that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever, unless Tenant requests the use of such overtime labor and agrees to pay the additional costs for such overtime labor to Landlord upon demand. SECTION 5.4 Notwithstanding anything to the contrary contained in any other provision of this Lease, in the event that (a) Tenant is unable to use the Premises for the ordinary conduct of Tenant's business due to Landlord's breach of its obligations under this Lease to provide services, perform repairs, or comply with Legal Requirements, in each case other than as a result of Unavoidable Delays or Tenant Delays, and such condition continues for a period in excess of ten (10) consecutive days (or, if Tenant's inability to use the Premises or portion thereof results, in whole or in part, from Unavoidable Delays and such condition continues for a period in excess of thirty (30) consecutive days) after Tenant gives a notice to Landlord (the "Abatement Notice") stating that Tenant's inability to use the Premises is solely due to such condition, (b) Tenant does not actually use or occupy the Premises or such portion thereof during such period, and (c) such condition has not resulted from the negligence or misconduct of Tenant or any Tenant Party, then Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment shall be abated as to the Premises on a per diem basis for the period commencing on the tenth (10th) day (or thirtieth (30th) day, if such condition results, in whole or in part, from Unavoidable Delays, as the case may be) after Tenant gives the Abatement Notice, and ending on the earlier of (i) the date Tenant reoccupies the Premises for the ordinary conduct of its business, or (ii) the date on which such condition is substantially remedied and Landlord has notified Tenant thereof. SECTION 5.5 Tenant shall not require, permit, suffer or allow the cleaning of any window in the Premises from the outside in violation of Section 202 of the New York Labor Law or any successor statute thereto, or of any other Legal Requirement. ARTICLE 6. REAL ESTATE TAXES AND LABOR RATE INCREASES SECTION 6.1 The following terms shall have the meanings set forth below: (a) "Taxes" shall include the aggregate amount of (i) all real estate taxes, assessments (special or otherwise), sewer and water rents, rates and charges and any other governmental levies, impositions or charges, whether general, special, ordinary, extraordinary, foreseen or unforeseen, which may be assessed, levied or imposed upon all or any part of the Real Property, and (ii) any expenses (including reasonable attorneys' fees and disbursements and experts' and other witness' fees) incurred in contesting any of the foregoing or the Assessed Valuation (as defined in Section 6.1(d)) of all or any part of the Real Property. If at any time after the date hereof the methods of taxation prevailing at the date hereof shall be altered so that in lieu of or as an addition to or as a substitute for the whole or any part of the taxes, assessments, rents, rates, charges, levies or impositions now assessed, levied or imposed upon all -11- 12 or any part of the Real Property, there shall be assessed, levied or imposed (A) a tax, assessment, levy, imposition or charge based on the rents received therefrom whether or not wholly or partially as a capital levy or otherwise, (B) a tax, assessment, levy, imposition or charge measured by or based in whole or in part upon all or any part of the Real Property and imposed upon Landlord, (C) a license fee measured by the rents or (D) any other tax, assessment, levy, imposition, charges or license fee however described or imposed, then all such taxes, assessments, levies, impositions, charges or license fees or the part thereof so measured or based shall be deemed to be Taxes; provided, however, that any such taxes, fees or charges which are in addition to taxes otherwise payable under this Section 6.1 shall only be deemed Taxes if such taxes shall generally be treated in other commercial buildings in New York City as constituting real estate taxes for the purpose of calculating similar lease tax escalation provisions. Taxes shall not include franchise, gift, inheritance, estate, sales, income or profit taxes or any late charges or penalties imposed upon Landlord, any Lessor or any Mortgagee by any Governmental Authority. (b) "Tenant's Share" means one and 17/100 percent (1.17%). (c) "Base Tax Year" means the Tax Year commencing on July 1, 1999 and ending June 30, 2000. (d) "Assessed Valuation" means the amount for which the Real Property is assessed pursuant to applicable provisions of the New York City Charter and of the Administrative Code of the City of New York for the purpose of imposition of Taxes. (e) "Tax Year" means the period July 1 through June 30 (or such other period as may be duly adopted by the City of New York as its fiscal year for real estate tax purposes). (f) "Base Taxes" means an amount equal to the Taxes payable on account of the Base Tax Year. (g) "Comparison Year" means (i) with respect to Taxes, any Tax Year commencing subsequent to the Base Tax Year, and (ii) with respect to Labor Rates, any calendar year commencing subsequent to the Base Labor Year. (h) "Landlord's Statement" means an instrument or instruments containing a comparison of either (i) the Base Taxes and the Taxes payable for any Comparison Year, or (ii) the Base Labor Rates and the Labor Rates applicable to any Comparison Year. (i) "Tenant's Projected Share of Taxes" means Tenant's Tax Payment (as defined in Section 6.1(j)), if any, made by Tenant for the prior Comparison Year, plus an amount equal to Landlord's reasonable estimate of the amount of increase in Tenant's Tax Payment for the then current Comparison Year, divided by twelve (12) and payable monthly by Tenant to Landlord as Additional Rent. (j) "Tenant's Tax Payment" means Tenant's Share of the excess of the Taxes payable for any Comparison Year over the Base Taxes. SECTION 6.2 (a) If the Taxes payable for any Comparison Year (any part or all of which falls within the Term) shall exceed the Base Taxes, Tenant shall pay Tenant's Tax -12- 13 Payment to Landlord, as Additional Rent, within ten (10) Business Days after demand from Landlord therefor, which demand shall be accompanied by Landlord's Statement. Before or after the start of each Comparison Year, Landlord shall furnish to Tenant a Landlord's Statement in respect of Taxes. If there shall be any increase in Taxes payable for any Comparison Year, whether during or after such Comparison Year or if there shall be any decrease in the Taxes payable for any Comparison Year during such Comparison Year, Landlord may furnish a revised Landlord's Statement for such Comparison Year, and Tenant's Tax Payment for such Comparison Year shall be adjusted and, within ten (10) Business Days after Tenant's receipt of such revised Landlord's Statement, Tenant shall (i) with respect to any increase in Taxes payable for such Comparison Year, pay such increase in Tenant's Tax Payment to Landlord, or (ii) with respect to any decrease in Taxes payable for such Comparison Year, Landlord shall credit such decrease in Tenant's Tax Payment against the next installment of Tenant's Share of Taxes payable by Tenant pursuant to this Section 6.2(a), provided that if such decrease in Taxes is attributable to the final Comparison Year of the Term, Landlord shall pay the amount of such decrease in Tenant's Tax Payment to Tenant. If, during the Term, Landlord shall elect to collect Tenant's Tax Payments in full or in quarterly or bi-annual or other installments on any other date or dates than as presently required, then following Landlord's notice to Tenant, Tenant's Tax Payments shall be correspondingly revised. The benefit of any discount for any early payment or prepayment of Taxes relating to all or any part of the Real Property shall accrue solely to the benefit of Landlord and Taxes shall be computed without subtracting such discount. (b) With respect to each Comparison Year, on account of which Landlord shall (or anticipates that it may) be entitled to receive Tenant's Tax Payment, Tenant shall pay to Landlord, as Additional Rent for the then current Tax Year, Tenant's Projected Share of Taxes. Upon each date that a Tax Payment or an installment on account thereof shall be due from Tenant pursuant to the terms of this Section 6.2, Landlord shall apply the aggregate of the installments of Tenant's Projected Share of Taxes then on account with Landlord against Tenant's Tax Payment or installment thereof then due from Tenant. In the event that such aggregate amount shall not be sufficient to discharge such Tax Payment or installment, Landlord shall so notify Tenant, and the amount of Tenant's payment obligation with respect to such Tax Payment or installment pursuant to this Section 6.2, shall be equal to the amount of the insufficiency and shall be payable within ten (10) Business Days of demand by Landlord. If, however, such aggregate amount shall be greater than the Tax Payment or installment, Landlord shall credit the amount of such excess against the next payment of Tenant's Projected Share of Taxes due hereunder. (c) Only Landlord shall be eligible to institute Tax reduction or other proceedings to reduce the Assessed Valuation of the Real Property, and the filings of any such proceeding by Tenant without Landlord's prior written consent shall constitute a default hereunder. If the Taxes payable for the Base Tax Year are reduced by final determination of legal proceedings, settlement or otherwise, then Base Taxes shall be correspondingly revised, the Additional Rent theretofore paid or payable on account of Tenant's Tax Payment hereunder for all Comparison Years shall be recomputed on the basis of such reduction, and Tenant shall pay to Landlord, as Additional Rent within ten (10) Business Days after receipt of a bill therefor, any deficiency between the amount of such Additional Rent theretofore computed and paid by Tenant to Landlord and the amount thereof due as a result of such recomputations. If the Taxes payable for the Base Tax Year are increased by such final determination of legal proceedings, settlement -13- 14 or otherwise, then, Landlord shall either pay to Tenant, or at Landlord's election, credit against subsequent payments due under this Section 6.2, an amount equal to the excess of the amounts of such Additional Rent theretofore paid by Tenant over the amount thereof actually due as a result of such recomputations. If Landlord shall receive a refund or reduction of Taxes for any Comparison Year, Landlord shall, within a reasonable time after such refund is actually received or such credit is actually applied against Taxes then due and payable, either pay to Tenant, or, at Landlord's election, credit against subsequent payments under this Section 6.2, an amount equal to Tenant's Share of the refund or reduction, provided that such amount shall not exceed Tenant's Tax Payment paid for such Comparison Year. Nothing herein contained shall obligate Landlord to file any application or institute any proceeding seeking a reduction in Taxes or Assessed Valuation. (d) Tenant's Tax Payment shall be made as provided in this Section 6.2 regardless of the fact that Tenant may be exempt, in whole or in part, from the payment of any taxes by reason of Tenant's diplomatic or other tax exempt status or for any other reason whatsoever. (e) Without duplication of any amounts payable on account of Taxes, Tenant shall pay to Landlord, as Additional Rent upon demand, any Commercial Rent or Occupancy Tax imposed pursuant to Title 11, Chapter 7 of the New York City Administrative Code or any successor statute hereafter enacted, if payable by Landlord in the first instance or hereafter required to be paid by Landlord. (f) If the Commencement Date or the Expiration Date shall occur on a date other than July 1 or June 30, respectively, any Additional Rent payable by Tenant to Landlord under this Section 6.2 for the Comparison Year in which such Commencement Date or Expiration Date shall occur, shall be apportioned in that percentage which the number of days in the period from the Commencement Date to June 30 or from July 1 to the Expiration Date, as the case may be, both inclusive, shall bear to the total number of days in such Comparison Year. In the event of a termination of this Lease, any Additional Rent under this Section 6.2 shall be paid or adjusted within thirty (30) days after submission of Landlord's Statement. In no event shall Fixed Rent ever be reduced by operation of this Section 6.2 and the rights and obligations of Landlord and Tenant under the provisions of this Section 6.2 with respect to any Additional Rent shall survive the expiration or earlier termination of this Lease. SECTION 6.3 The following terms shall have the meanings set forth below: (a) "Comparison Year" shall mean any calendar year subsequent to the Base Labor Year. (b) "R.A.B." shall mean the Realty Advisory Board on Labor Relations, Incorporated, or its successor. (c) "Local 32B-32J" shall mean Local 32B-32J of the Building Service Employees International Union, AFL-CIO, or its successor. -14- 15 (d) "Class A Office Buildings" shall mean office buildings so categorized under any agreement between R.A.B. and Local 32B-32J, regardless of the designation given to such office buildings in any such agreement. (e) "Labor Rates" shall mean a sum equal to the regular hourly wage rate required to be paid to Others (hereinafter defined) employed in Class A Office Buildings pursuant to an agreement between R.A.B. and Local 32B-32J; provided, however, that: (i) if, as of October 1st of any Comparison Year, any such agreement shall require Others in Class A Office Buildings to be regularly employed on days or during hours when overtime or other premium pay rates are in effect pursuant to such agreement, then the term "regular hourly wage rate", as used in this Section 6.3 shall mean the average hourly wage rate for the hours in a calendar week during which Others are required to be regularly employed; (ii) if no such agreement is in effect as of October 1st of any Comparison Year with respect to Others, then the term "regular hourly wage rate", as used in this Section 6.3 shall mean the regular hourly wage rate actually paid to Others employed in the Building by Landlord or by an independent contractor engaged by Landlord; and (iii) the term "regular hourly wage rate" in all events shall exclude payments and benefits directly to taxing authorities or others on account of the employment and all welfare, pension and fringe employee benefits and payments of any kind paid or given pursuant to such agreement. (f) "Others" shall mean that classification of employee engaged in the general maintenance and operation of Class A Office Buildings most nearly comparable to the classification now applicable to "others" in the current agreement between R.A.B. and Local 32B-32J. (g) "Base Labor Year" shall mean the calendar year 1999. (h) "Base Labor Rates" shall mean the Labor Rates in effect for the Base Labor Year. (i) "Tenant's Labor Rate Payment" is defined in Section 6.4(a). SECTION 6.4 (a) If the Labor Rates in effect for any Comparison Year (any part or all of which falls within the Term) shall be greater than the Base Labor Rates, then Tenant shall pay, as Additional Rent for such Comparison Year and continuing thereafter until a new Landlord's Statement is rendered to Tenant, an amount ("Tenant's Labor Rate Payment") equal to (i) 26,846 multiplied by (ii) the number of cents (inclusive of any fractions of a cent) by which the Labor Rates in effect for such Comparison Year exceed the Base Labor Rates, multiplied by (iii) eighty percent (80%). (b) At any time prior to, during or after any Comparison Year Landlord shall render to Tenant a Landlord's Statement showing (i) a comparison of the Labor Rates for the -15- 16 Comparison Year with the Base Labor Rates, and (ii) the amount of Tenant's Labor Rate Payment resulting from such comparison. Landlord's failure to render a Landlord's Statement during or with respect to any Comparison Year shall not prejudice Landlord's right to render a Landlord's Statement during or with respect to any subsequent Comparison Year and shall not eliminate or reduce Tenant's obligation to pay Tenant's Labor Rate Payment pursuant to this Article 6 for such Comparison Year. (c) Tenant's Labor Rate Payment shall be payable by Tenant on the first day of the month following the furnishing to Tenant of a Landlord's Statement, in equal monthly installments, each such installment to be equal to 1/12th of Tenant's Labor Rate Payment for such Comparison Year multiplied by the number of months (and any fraction thereof) of the Term then elapsed since the commencement of such Comparison Year, continuing monthly thereafter until rendition of the next succeeding Landlord's Statement. (d) The provisions of this Section 6.4 shall be effective irrespective of whether or not (i) the Building is classified as a Class A office building from time to time, or (ii) any Building employees are members of Local 32B-32J. Tenant acknowledges and agrees that the computation of Labor Rates hereunder is intended to serve solely as a formula for an agreed rental adjustment, rather than an actual operating expense calculation, and is not intended to reflect the actual cost to Landlord of wages at the Building or any increases or decreases in such cost. SECTION 6.5 (a) If the Commencement Date or the Expiration Date shall occur on a date other than January 1 or December 31, respectively, any Additional Rent under this Article 6 for the Comparison Year in which such Commencement Date or Expiration Date shall occur shall be apportioned in that percentage which the number of days in the period from the Commencement Date to December 31 or from January 1 to the Expiration Date, as the case may be, both inclusive, shall bear to the total number of days in such Comparison Year. In the event of a termination of this Lease, any Additional Rent under this Article shall be paid or adjusted within thirty (30) days after submission of a Landlord's Statement. In no event shall Fixed Rent ever be reduced by operation of this Section 6.5 and the rights and obligations of Landlord and Tenant under the provisions of this Article 6 with respect to any Additional Rent shall survive the expiration or earlier termination of this Lease. (b) The computations of Additional Rent under this Article 6 are intended to constitute a formula for an agreed rental adjustment and may or may not constitute an actual reimbursement to Landlord for costs and expenses paid by Landlord with respect to the Building. SECTION 6.6 Landlord's failure to render a Landlord's Statement with respect to any Comparison Year shall not prejudice Landlord's right to thereafter render a Landlord's Statement with respect thereto or with respect to any subsequent Comparison Year, nor shall the rendering of a Landlord's Statement prejudice Landlord's right to thereafter render a corrected Landlord's Statement for that Comparison Year. Nothing herein contained shall restrict Landlord from issuing a Landlord's Statement at any time there is an increase in Taxes or Labor Rates during any Comparison Year or any time thereafter. -16- 17 SECTION 6.7 If any capital improvement is made to the Real Property during any calendar year during the Term in compliance with any Legal Requirements enacted or imposed subsequent to the date of this Lease (including reinterpretations or new rules or regulations applicable to existing Legal Requirements), then Tenant shall pay to Landlord, immediately upon demand therefor, Tenant's Proportionate Share of the reasonable annual amortization, with interest, of the cost of such improvement in each calendar year during the Term during which such amortization occurs. ARTICLE 7. LEGAL REQUIREMENTS SECTION 7.1 Tenant, at its sole expense, shall comply with all Legal Requirements applicable to the Premises or the use and occupancy thereof by Tenant, and make all repairs or Alterations required thereby, whether structural or nonstructural, ordinary or extraordinary; provided, however, that Tenant shall not be obligated to comply with any Legal Requirement requiring any structural Alteration to the Premises unless the application of such Legal Requirement arises from (i) Tenant's manner of use or occupancy of the Premises (as distinguished from the use or occupancy of the Premises as executive and general offices), (ii) any cause or condition created by or on behalf of Tenant or any Tenant Party (including any Alterations), (iii) the breach of any of Tenant's obligations under this Lease, (iv) any Hazardous Materials having been brought into the Building by any Tenant Party, or (v) the enforcement, by any Governmental Authority or as a consequence of private action, of the Americans With Disabilities Act, 42 U.S.C. Section 12101 (et seq.) or New York City Local Law 58 of 1987. Tenant shall not do or permit to be done any act or thing upon the Premises which will invalidate or be in conflict with Landlord's insurance policies, and shall not do or permit anything to be done in or upon the Premises, or use the Premises in a manner, or bring or keep anything therein, which shall increase the rates for casualty or liability insurance applicable to the Building. If, as a result of any act or omission by Tenant or by reason of Tenant's failure to comply with the provisions of this Article, the insurance rates for the Building shall be increased, then Tenant shall desist from doing or permitting to be done any such act or thing and shall reimburse Landlord, as Additional Rent hereunder, for that part of all insurance premiums thereafter paid by Landlord which shall have been charged because of such act, omission or failure by Tenant, and shall make such reimbursement upon demand by Landlord. SECTION 7.2 Tenant, at its expense, shall comply with all Environmental Laws and with any directive of any Governmental Authority which shall impose any violation, order or duty upon Landlord or Tenant under any Environmental Laws with respect to the Premises or the use or occupation thereof. Tenant's obligations hereunder with respect to Hazardous Materials shall extend only to those matters directly or indirectly based on, or arising or resulting from (a) the actual or alleged presence of Hazardous Materials on the Premises or in the Building which is caused or permitted by Tenant, and (b) any Environmental Claim (defined below) relating in any way to Tenant's operation or use of the Premises or the Building. SECTION 7.3 Tenant shall provide Landlord with copies of all communications and related materials regarding the Premises which Tenant shall receive from or send to (a) any Governmental Authority relating in any way to any Environmental Laws, or (b) any Person with respect to any claim based upon any Environmental Laws or relating in any way to Hazardous Materials (any such claim, an "Environmental Claim"). Landlord or its agents may perform an -17- 18 environmental inspection of the Premises at any time during the Term, upon prior notice to Tenant except in an emergency. SECTION 7.4 Landlord, at its expense, shall comply with all Legal Requirements with respect to the Building in the event that the failure to so comply prevents Tenant's use of the Premises for the Permitted Use. ARTICLE 8. SUBORDINATION AND NON-DISTURBANCE; ESTOPPEL CERTIFICATES SECTION 8.1 Subject to the provisions of Section 8.5, this Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate in all respects to all Mortgages and Superior Leases. This Section 8.1 shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver any instrument that Landlord or any Lessor or Mortgagee may reasonably request to evidence such subordination. SECTION 8.2 In the event of any act or omission of Landlord which would give Tenant the right, immediately or after lapse of a period of time, to cancel or terminate this lease, or to claim a partial or total eviction, Tenant shall not exercise such right (a) until it has given written notice of such act or omission to each Mortgagee and Lessor whose name and address shall previously have been furnished to Tenant in writing, and (b) unless such act or omission shall be one which is not capable of being remedied by Landlord or such Mortgagee or Lessor within a reasonable period of time, until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notice and following the time when such Mortgagee or Lessor shall have become entitled under such Mortgage or Superior Lease, as the case may be, to remedy the same (which reasonable period shall in no event be less than the period to which Landlord would be entitled under this Lease or otherwise, after similar notice, to effect such remedy), provided such Mortgagee or Lessor shall with due diligence give Tenant written notice of its intention to remedy such act or omission, and such Mortgagee or Lessor shall commence and thereafter continue with reasonable diligence to remedy such act or omission. If more than one Mortgagee or Superior Lessor shall become entitled to any additional cure period under this Section 8.2, such cure periods shall run concurrently, not consecutively. SECTION 8.3 Subject to the provisions of Section 8.5, if a Mortgagee or Lessor shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed, then at the request of such party so succeeding to Landlord's rights ("Successor Landlord") and upon Successor Landlord's written agreement to accept Tenant's attornment, Tenant shall attorn to and recognize Successor Landlord as Tenant's landlord under this Lease, and shall promptly execute and deliver any instrument that Successor Landlord may reasonably request to evidence such attornment. Upon such attornment this Lease shall continue in full force and effect as, or as if it were, a direct lease between Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease and shall be applicable after such attornment except that Successor Landlord shall not: (a) be liable for any previous act or omission of Landlord under this Lease; -18- 19 (b) be subject to any offset, not expressly provided for in this Lease, which shall have theretofore accrued to Tenant against Landlord; or (c) be bound by any previous modification of this Lease, not expressly provided for in this Lease, or by any previous prepayment of more than one month's fixed rent, unless such modification or prepayment shall have been expressly approved in writing by such Mortgagee or Lessor. SECTION 8.4 Each party agrees, at any time and from time to time, as requested by the other party, upon not less than ten (10) days' prior notice, to execute and deliver to the other a written statement executed and acknowledged by such party (a) stating that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications), (b) setting forth the then annual Fixed Rent, (c) setting forth the date to which the Fixed Rent and Additional Rent have been paid, (d) stating whether or not, to the best knowledge of the signatory, the other party is in default under this Lease, and if so, setting forth the specific nature of all such defaults, (e) stating the amount of the Security Deposit, (f) stating whether there are any subleases affecting the Premises, (g) stating the address of the signatory to which all notices and communication under the Lease shall be sent, the Commencement Date and the Expiration Date, and (i) as to any other matters reasonably requested by the party requesting such certificate. The parties acknowledge that any statement delivered pursuant to this Section 8.4 may be relied upon by others with whom the party requesting such certificate may be dealing, including any purchaser or owner of the Real Property or the Building, or of Landlord's interest in the Real Property or the Building or any Superior Lease, or by any Mortgagee or Lessor, or by any prospective or actual sublessee of the Premises or assignee of this Lease, or permitted transferee of or successor to Tenant. SECTION 8.5 Notwithstanding the foregoing provisions of this Article 8, Landlord agrees to (a) obtain from the Mortgagee under the existing Mortgage, and (b) to use commercially reasonable efforts (which shall not include the payment of any sums or the prosecution of any legal actions) to obtain from each of the Mortgagees or Lessors under any Mortgages or Superior Leases entered into after the date hereof, a Non-Disturbance Agreement; provided, however, that if Landlord shall be unsuccessful in so obtaining any such Non-Disturbance Agreement from any Mortgagee or Lessor under any Mortgage or Superior Lease entered into after the date hereof, then Landlord shall have no liability to Tenant therefor, and this Lease shall remain in full force and effect. Tenant shall reimburse Landlord, within ten (10) days after demand therefor, for Landlord's actual out-of-pocket costs and expenses, including reasonable attorney's fees and disbursements, incurred in connection with such efforts. A "Non-Disturbance Agreement" shall mean a subordination, attornment and non-disturbance agreement duly executed and acknowledged by the holder of a Mortgage or a Superior Lease, as the case may be, and by Tenant, and in recordable form, and (i) with respect to the existing Mortgage, in the form attached to this Lease as Exhibit E, and (ii) with respect to any Mortgages or Superior Leases entered into after the date hereof, in the form customarily employed by such Mortgagee or Lessor. Landlord represents to Tenant that (i) LaSalle National Bank, as Trustee for GS Mortgage Securities Corporation II Commercial Mortgage Pass-Through Certificates, Series 1998-GSFL1 ("Lender") is the sole Mortgagee of the Building and the Real Property, and (ii) there are no Superior Leases affecting the Building or the Real Property. If Landlord fails to deliver to Tenant a Non-Disturbance Agreement executed by Lender within sixty (60) days -19- 20 following the execution and delivery of this Lease, then Tenant shall have the right to terminate this Lease by notice to Landlord, such termination to be effective on the date which shall be thirty (30) days after the date such notice is given, upon which date this Lease shall come to an end and terminate, and neither party shall have any liability to the other hereunder, and Landlord shall return the Security Deposit to Tenant, together with all prepaid Fixed Rent and Additional Rent, if any, deposited by Tenant hereunder. Notwithstanding anything to the contrary contained herein, if Landlord shall deliver such Non-Disturbance Agreement executed by Lender, to Tenant at any time within thirty (30) days following Landlord's receipt of such notice by Tenant, such termination shall be void and of no force and effect, and Tenant shall have no further right to terminate this Lease pursuant to this Section 8.5. ARTICLE 9. SERVICES SECTION 9.1 Landlord shall provide, at Landlord's expense, except as otherwise set forth herein, the following services: SECTION 9.2 ELECTRICITY. (a) Landlord, subject to the provisions of this Article 9, shall make available to Tenant, at a location in the basement of the Building to be designated by Landlord, AC electric capacity at a level not less than 2800 amperes, 480 volt, 3-phase, 4-wire, dedicated to Tenant. Tenant shall be solely responsible, at Tenant's sole cost and expense, for the installation of all risers and other electrical facilities and equipment required in order to deliver such electric power to the Premises and to distribute it therein. Tenant shall pay to Landlord for making such electric power available to Tenant a one-time fee of $838,600.00 on the date on which Landlord makes such additional electric power available to Tenant. Tenant covenants that Tenant's use and consumption of electric current shall not at any time exceed the electrical capacity supplied to the Premises from time to time pursuant to this Section 9.2, nor exceed the capacity of any of the electrical facilities and installations in or otherwise serving or being used in the Premises. Tenant shall pay Landlord, as Additional Rent, at any time and from time to time, but no more frequently than monthly, for its consumption of electric power at the Premises, as provided herein. (b) In the event that Tenant's total power requirements at the Premises, based on an annual review of Tenant's consumption following the first (1st) anniversary of the Commencement Date, shall be less than the 2800 ampere, 480 volt service described above, Tenant shall pay to Landlord an annual sum equal to the fee, if any, which Landlord is obligated to pay to the Electricity Provider (as hereinafter defined), commonly known as a "use it or lose it" fee, for the availability of such capacity, presently payable by Landlord to the Electricity Provider at the rate of $12.50 per unused ampere per annum. Further, if as of the third (3rd) anniversary of the Commencement Date, Tenant shall continue to require less than the 2800 ampere, 480 volt service described above, then Landlord shall have the right to reduce the level of electric power supplied to the Premises to not less than one hundred twenty-five percent (125%) of Tenant's actual power requirements as measured at the peak demand level occurring during the immediately preceding calendar quarter. (c) The calculations and determinations of the charges for electric power consumed by Tenant shall be based on the readings of one or more submeters to be installed by Landlord at Tenant's sole expense, applied to Landlord's Electricity Cost, as defined in Section -20- 21 9.2(d). Tenant shall pay for electricity consumed as determined thereunder as measured and calculated from time to time by such submeter or submeters, plus Landlord's charge for overhead and supervision, which charge shall not exceed five percent (5%) of such payment by Tenant. In addition, Tenant shall pay to Landlord, as Additional Rent (i) the fees and expenses of Landlord's electrical contractor for services rendered by such contractor in the maintenance and repair of such submeter(s), and (ii) the amount of any taxes imposed by any Governmental Authority on Landlord's receipts from the sale of electricity to Tenant. In the event that more that one submeter is used to measure Tenant's consumption of electricity in the Premises, Tenant shall be billed only on the basis of the "totalized" demand, i.e., as though a single meter were measuring such usage. (d) "Landlord's Electricity Cost" means the cost per kilowatt hour and cost per kilowatt demand, adjusted by time of day factors, fuel adjustment charges and other applicable rate adjustments, to Landlord for the purchase of electricity from the public utility or other electricity provider furnishing electricity service to the Building from time to time (the "Electricity Provider"), including sales and other taxes imposed by any Governmental Authority on Landlord's purchase of electricity. If at any time during the Term the cost elements comprising Landlord's Electricity Cost shall be increased by the Electricity Provider, or Landlord's Electricity Cost shall be increased for any other reason, then effective as of the date of such increase, Tenant's payment for submetered electricity under this Section 9.2 shall be proportionately increased. Landlord reserves the right to contract with different Electricity Providers from time to time in its sole judgment, and without reference to whether any Electricity Provider selected by Landlord provides lower rates than any other electricity supplier. Currently, Landlord's Electricity Cost is based upon Consolidated Edison Company's Service Classification rate schedule S.C. #4 Rate II as in effect on the Commencement Date. (e) During the period beginning on the Commencement Date and ending on the date upon which the submeters to be installed by Landlord in the Premises become operational, Tenant shall pay to Landlord a fixed fee for electric energy supplied to the Premises of (i) during the period prior to the date upon which Tenant first occupies all or any portion of the Premises for the conduct of its business, an amount per annum equal to One and 00/100 Dollar ($1.00) multiplied by the number of Rentable Square Feet in the Premises, in equal monthly installments on the first (1st) day of each month during such period, and (ii) from and after the date upon which Tenant first occupies all or any portion of the Premises for the conduct of its business, an amount per annum equal to Four and 00/100 Dollars ($4.00) multiplied by the number of Rentable Square Feet in the Premises, in equal monthly installments on the first (1st) day of each month during such sentence, through the date upon which such submeters become operational. (f) Tenant covenants that Tenant's use and consumption of electric current shall not at any time exceed the capacity of any of the electrical facilities and installations in or otherwise serving or being used in the Premises and Tenant shall, upon the submission by Landlord to Tenant of written notice, promptly cease the use of any of Tenant's electrical equipment which Landlord believes will cause Tenant to exceed such capacity. Any additional feeders, risers, electrical facilities and other such installations required for electric service to the Premises will be supplied by Landlord, at Tenant's expense, upon Landlord's prior consent in each instance, provided that, in Landlord's judgment, such additional electrical facilities and -21- 22 installations, feeders or risers are necessary and are permissible under Legal Requirements (including the New York State Energy Conservation Construction Code) and insurance regulations and the installation of such feeders or risers will not cause permanent damage or injury to the Building or the Premises or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations or repairs or interfere with, or disturb, other tenants or occupants of the Building. In addition, Landlord shall have no obligation to consent to such additional feeders, risers, electrical facilities and installations if in Landlord's judgment, the same would give Tenant a disproportionate amount of the electrical current supplied to the Building at the expense of, or in derogation of the needs of other tenants or occupants of the Building. (g) Landlord shall not in any way be liable or responsible to Tenant for any loss, damage or expense which Tenant may sustain or incur as a result of the unavailability of or interruption in the supply of electric current to the Premises or a change in the quantity or character or nature of such current and such change, interruption or unavailability shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent (except that Tenant's liability to pay Landlord for electricity under this Section 9.2 shall cease as of the date of such disturbance), or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord, or its agents, by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. (h) Landlord reserves the right to discontinue furnishing electricity to Tenant in the Premises on not less than one hundred twenty (120) days' notice to Tenant. If Landlord exercises such right to discontinue, or is compelled to discontinue furnishing electricity to Tenant, this Lease shall continue in full force and effect and shall be unaffected thereby, except only that from and after the effective date of such discontinuance, Landlord shall not be obligated to furnish electricity to Tenant, and Tenant shall have no further obligation to pay Landlord for electricity supplied to the Premises. If Landlord so discontinues furnishing electricity to Tenant, Tenant shall arrange to obtain electricity directly from the Electricity Provider. Such electricity may be furnished to Tenant by means of the then existing electrical facilities serving the Premises to the extent that the same are available, suitable and safe for such purposes. All equipment which may be required for Tenant to obtain electricity shall be installed by Landlord at the sole cost and expense of (i) Landlord, if Landlord voluntarily discontinues such service, (ii) Landlord and Tenant equally, if Landlord is compelled to discontinue such service by the Electricity Provider or pursuant to applicable Legal Requirements, or (iii) Tenant, if such discontinuance arises out of the acts or omissions of Tenant. Landlord will not voluntarily discontinue furnishing electricity to Tenant until Tenant is able to receive electricity directly from the Electricity Provider. (i) If submetering of electricity in the Building is hereafter prohibited by any Legal Requirement, or by any order or ruling of the Public Service Commission of the State of New York, then Tenant shall apply, within ten (10) days of Tenant's receiving notice thereof, to the Electricity Provider in order to obtain direct electric service, and Tenant shall bear all costs and expenses, as set forth in Section 9.2(g), necessary to comply with all rules and regulations of the Electricity Provider pertinent thereto, and from and after the date upon which Tenant procures direct electric service, Landlord shall be relieved of any further obligation to furnish electricity to Tenant pursuant to this Section 9.2. Such electricity may be furnished to Tenant by -22- 23 means of the then existing electrical facilities serving the Premises, including Building feeders and risers, to the extent that the same are suitable and safe for such purposes. SECTION 9.3 HEAT. (a) Landlord shall provide heat to the Premises on Business Days from 8:00 A.M. to 6:00 P.M., when required in Landlord's judgment for the comfortable use and occupancy of the Premises, through use of the Building standard heating system (the "Building Heating System). (b) Anything in this Section 9.3 to the contrary notwithstanding, Landlord shall not be responsible if the normal operation of the Building Heating System shall fail to provide heat at reasonable temperatures. Tenant at all times shall cooperate fully with Landlord and shall abide by the regulations and requirements which Landlord may prescribe for the proper functioning and protection of the Building Heating System. (c) Landlord shall not be required to furnish heat during periods other than the hours and days set forth in this Section 9.3 for the furnishing and distributing of such services ("Overtime Periods"), unless Landlord has received advance notice from Tenant requesting such service not less than twenty-four (24) hours prior to the time when such service shall be required. Accordingly, if Landlord shall furnish heat to the Premises at the request of Tenant during Overtime Periods, Tenant shall pay Landlord, as Additional Rent within ten (10) days after demand, for such services at the standard rate then fixed by Landlord for the Building, which rate as of the date of this Lease is $250.00 per hour, subject to increase during the Term due to increases in Landlord's costs. Failure by Landlord to furnish or distribute heat or any other services during Overtime Periods shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of Fixed Rent or Additional Rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business or otherwise. (d) Landlord shall have no obligation to provide air-conditioning or ventilation services to the Premises. Landlord agrees that Tenant shall have the right, subject to the provisions of Article 3, to install a self-contained package HVAC unit, at Tenant's sole cost and expense, as part of the Initial Alterations ("Tenant's HVAC System") at a location on the roof of the Building ("Roof") as provided in Section 9.9 below or in a location otherwise designated by Landlord. Tenant shall repair and maintain Tenant's HVAC System in good working order at Tenant's sole cost and expense. Upon the expiration or sooner termination of the Term of this Lease, at Landlord's request, Tenant shall remove Tenant's HVAC System and restore any damage to the Building and the Premises resulting from such removal. SECTION 9.4 ELEVATORS. (a) Landlord shall provide passenger elevator service to the Premises on Business Days from 8:00 A.M. to 6:00 P.M. and freight elevator facilities on a non-exclusive basis, on Business Days from 8:00 A.M. to 4:45 P.M. ("Freight Business Hours"), and shall have one passenger elevator available at all other times. Tenant shall have access to the Building and the Premises twenty-four (24) hours a day, seven (7) days per week. Such elevator service shall be subject to such rules and regulations as Landlord may promulgate from time to time with respect thereto. Landlord shall have the right to change the operation or manner of operation of any of the elevators in the Building and/or to discontinue, temporarily or -23- 24 permanently, the use of any one or more cars in any of the passenger, freight or truck elevator banks. Tenant shall have the non-exclusive right to use the Building's loading platform in common with Landlord and the other tenants of the Building during regular business hours, in accordance with rules and regulations therefore promulgated by Landlord, and on a "first come first served" basis. (b) Tenant shall not use the freight elevator during Freight Business Hours for the delivery of construction materials or for moving into or out of the Premises. Landlord will make the freight elevator available to Tenant during other than Freight Business Hours, upon not less than 48 hours prior request by Tenant, and Tenant shall pay as Additional Rent the charge therefor established by Landlord from time to time, payable within ten (10) days of rendition of a bill therefor. As of the date hereof, Landlord' s current charge for freight elevator service during other than Freight Business Hours is $99.00/hour, which charge is subject to increase to reflect increases in Landlord's costs of providing such service (including the charges for a hoisting engineer). SECTION 9.5 CLEANING. Tenant shall, at Tenant's sole cost, provide cleaning services at the Premises pursuant to reasonable rules and regulations established by Landlord from time to time, and use a cleaning contractor approved by Landlord. Tenant shall cause all refuse and rubbish removed from the Premises by Tenant's contractor to be brought to an area of the Building designated from time to time by Landlord, and Landlord shall cause such refuse and rubbish to be removed from such designated area. Tenant shall reimburse Landlord, as Additional Rent, within twenty (20) days of delivery of Landlord's statement therefor, for Landlord's out-of-pocket costs in removing Tenant's refuse and rubbish from the Building. SECTION 9.6 WATER. Landlord shall furnish hot and cold water in such quantities as Landlord deems sufficient for ordinary drinking, lavatory and cleaning purposes to the Premises. If Tenant requires, uses or consumes water for any purpose in addition to ordinary lavatory, cleaning and drinking purposes, Landlord may install a hot water meter and a cold water meter and thereby measure Tenant's consumption of water for all purposes. Tenant shall (a) pay to Landlord the cost of any such meters and their installation, (b) at Tenant's sole cost and expense, keep any such meters and any such installation equipment in good working order and repair, and (c) pay to Landlord, as Additional Rent, as and when billed therefor for water consumed, together with a charge for any required pumping or heating thereof, all sewer rents, charges or any other taxes, rents, levies or charges which now or hereafter are assessed, imposed or shall become a lien upon the Premises or the Real Property pursuant to law, order or regulation made or issued in connection with any such metered use, consumption, maintenance or supply of water, water system, or sewage or sewage connection or system, and in default in making such payment Landlord may pay such charges and collect the same from Tenant. SECTION 9.7 RUBBISH AND REMOVAL. Tenant shall, at Tenant's sole cost, provide refuse and rubbish removal service at the Premises at times, and pursuant to regulations, established by Landlord from time to time. SECTION 9.8 NO WARRANTY OF LANDLORD. Landlord does not warrant that any of the services to be provided by Landlord to Tenant hereunder, or any other services which Landlord may supply (a) will be adequate for Tenant's particular purposes or as to any other -24- 25 particular need of Tenant or (b) will be free from interruption, and Tenant acknowledges that any one or more such services may be interrupted or suspended by reason of Unavoidable Delays. In addition, Landlord reserves the right to stop, interrupt or reduce service of the Building Systems by reason of Unavoidable Delays, or for repairs, additions, alterations, replacements, decorations or improvements which are, in the judgment of Landlord, necessary to be made, until said repairs, alterations, replacements or improvements shall have been completed. Any such interruption or discontinuance of service, or the exercise of such right by Landlord to suspend or interrupt such service shall not (i) constitute an actual or constructive eviction, or disturbance of Tenant's use and possession of the Premises, in whole or in part, (ii) entitle Tenant to any compensation or to any abatement or diminution of Fixed Rent or Additional Rent, except as provided in Section 5.4, (iii) relieve Tenant from any of its obligations under this Lease, or (iv) impose any responsibility or liability upon Landlord or its agents by reason of inconvenience or annoyance to Tenant, or injury to or interruption of Tenant's business, or otherwise. Landlord shall use reasonable efforts to minimize interference with Tenant's access to and use and occupancy of the Premises in making any repairs, alterations, additions, replacements, decorations or improvements; provided, however, that Landlord shall have no obligation to employ contractors or labor at "overtime" or other premium pay rates or to incur any other "overtime" costs or additional expenses whatsoever. Landlord shall not be required to furnish any services except as expressly provided in this Article 9. SECTION 9.9 ROOF EQUIPMENT. (a) Landlord hereby grants to Tenant, for Tenant's own use and not for resale purposes, a non-exclusive license of sufficient space on the roof of the Building, at a location designated by Landlord in its sole discretion (the "Roof Space") for the installation by Tenant of (i) the Antenna Equipment (as defined in Section 9.10), (ii) Tenant's HVAC System (together with any dry coolant condensers, chillers and related HVAC equipment), and (iii) Tenant's Generators (as defined in Section 9.11) (together with related cabling, pumps, mountings and supports for all of the foregoing, collectively, the "Roof Equipment"), at a location or locations designated by Landlord. In connection therewith, and subject to the rights of any tenant leasing space in the Building as of the date of this Lease, Landlord shall make available to Tenant reasonable access to the roof for the construction, installation, upgrade, maintenance, repair, operation and use of the Roof Equipment. If any of the Roof Equipment generates noise which is likely, in Landlord's reasonable judgment, to disturb other tenants or occupants of the Building or the surrounding buildings, then Tenant shall install sound attenuated acoustic enclosures reasonably satisfactory to Landlord designed to eliminate such noise or reduce such noise to acceptable levels. If Tenant requires riser space for conduit connecting the Premises to the Roof Equipment, Landlord shall make available to Tenant, for Tenant's use solely in connection with the Roof Equipment, at a location or locations determined by Landlord in its sole judgment, riser space sufficient for the installation of telecommunications lines, cabling and supply and return lines reasonably required for the operation of the Roof Equipment. Tenant shall pay Landlord's annual charge for such conduit as provided in Section 9.12, and all work in connection with the installation of such conduit shall be performed as provided in Section 9.12. References herein to the Roof Equipment shall be deemed to include such riser and any conduit therein. (b) The installation of the Roof Equipment shall be performed by Tenant at Tenant's sole cost and expense (including any actual costs and expenses in connection with -25- 26 reinforcing the roof of the Building, if required, subject to Section 9.12) in accordance with and subject to the provisions of Article 3. Tenant shall pay a license fee to Landlord for the Roof Space, as Additional Rent in advance on the first day of each month during the Term, as follows (i) during the period from the Rent Commencement Date through the day before the fifth (5th) anniversary of the Rent Commencement Date, one-twelfth (1/12) of the product of the usable square foot area of the Roof Space, multiplied by Fifteen and 00/100 Dollars ($15.00) per annum, (ii) during the period from the fifth (5th) anniversary of the Rent Commencement Date through the day before the tenth (10th) anniversary of the Rent Commencement Date, one-twelfth (1/12) of the product of the usable square foot area of the Roof Space, multiplied by Eighteen and 00/100 Dollars ($18.00) per annum, and (iii) during the period from the tenth (10th) anniversary of the Rent Commencement Date through the Expiration Date, one-twelfth (1/12) of the product of the usable square foot area of the Roof Space, multiplied by Twenty-One and 00/100 Dollars ($21.00) per annum. All of the provisions of this Lease shall apply to the installation, use and maintenance of the Roof Equipment, including all provisions relating to compliance with Legal Requirements, insurance, indemnity, repairs and maintenance. The license granted to Tenant in this Section 9.9 shall not be assignable by Tenant separately from this Lease. (c) Landlord retains the right to use the portion of the roof on which the Roof Equipment is located for any purpose whatsoever, provided such use shall not materially interfere with the functioning of the Roof Equipment. Tenant shall have reasonable access to the Roof Equipment at all times, and Landlord shall not interfere with, the use of the Roof Equipment so as to cause the operation thereof to be materially interrupted or impaired. Tenant shall use the Roof Equipment so as not to cause any material interference to Landlord's use of the roof, including the use by Landlord or other tenants or occupants of the Building of other equipment thereon (including data transmission or other similar or dissimilar equipment), or materially damage to or interference with the operation of the Building or the Building Systems. If any of Tenant's Roof Equipment materially interferes with any equipment installed by Landlord or any tenant leasing space in the Building as of the date of this Lease, or materially interferes with the operation of the Building or the Building Systems, then Tenant, at its sole cost and expense, shall take all steps necessary to eliminate such interference, and if Tenant shall fail to eliminate such interference, Tenant shall relocate the Roof Equipment to another area on the roof designated by Landlord. In the event Tenant fails, within thirty (30) days after notice, to relocate or remove the Roof Equipment, Landlord may do so, and Tenant shall promptly reimburse Landlord for any costs and expenses incurred by Landlord in connection therewith. If following any relocation, such interference continues to occur, then Tenant, at its sole cost and expense, shall immediately, upon notice from Landlord discontinue its use of the Roof Equipment and remove the Roof Equipment from the Roof. In the event Tenant fails, within five (5) days' after notice from Landlord, to relocate or remove the Roof Equipment or otherwise fails to comply with any of the conditions set forth in this Section 9.9 or if Landlord shall determine, in its reasonable judgment, that the Roof Equipment (i) may cause a health hazard or danger to property, (ii) may violate or otherwise fail to comply with any governmental or quasi-governmental standards for non-ionizing radiation for occupational and/or general public levels, without limiting the rights and remedies landlord may otherwise have under this Lease, Landlord may relocate or remove the Roof Equipment, and Tenant shall promptly reimburse Landlord for any costs incurred by Landlord in connection therewith. -26- 27 (d) Landlord may at its option, at any time during the Term upon not less than sixty (60) days prior notice to Tenant (except in the event of an emergency) relocate the Roof Equipment to another area on the roof designated by Landlord, provided that such relocation of the Roof Equipment does not cause the operation thereof to be interrupted or impaired, other than temporarily, and except as set forth in Section 9.9(c), such relocation is performed at Landlord's sole cost and expense. Landlord shall use reasonable efforts to minimize the duration of such interruption, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever, unless Tenant shall first pay to Landlord Landlord's reasonable estimate of all incremental cost increases to do so. In such event Tenant shall pay, as Additional Rent upon presentation of appropriate invoices, all additional costs incurred by Landlord in connection therewith. (e) Landlord shall not have any obligations with respect to the Roof Equipment or compliance with any Legal Requirements (including the obtaining of any required permits or licenses, or the maintenance thereof) relating thereto, nor shall Landlord be responsible for any damage that may be caused to Tenant or the Roof Equipment by any other tenant or occupant of the Building. (f) Tenant shall (i) be solely responsible for any damage caused as a result of the use of the Roof Equipment, (ii) promptly pay any tax, license, permit or other fees or charges imposed pursuant to any Legal Requirements relating to the installation, maintenance or use of the Roof Equipment, (iii) promptly comply with all precautions and safeguards recommended by Landlord's insurance company and all Governmental Authorities, and (iv) promptly and diligently perform all necessary repairs or replacements to, or maintenance of, the Roof Equipment, provided, however, that if Tenant's failure after thirty (30) days' notice from Landlord to so repair, replace or maintain the Roof Equipment materially jeopardizes in any way Landlord's or any other tenant's property located on the roof or within the Building, Landlord may, at Landlord's option, elect to perform such repairs, replacements or maintenance at Tenant's sole cost and expense. Landlord shall give Tenant thirty (30) days' prior notice of its election to perform such repairs, except in an emergency. (g) The privileges granted Tenant under this Section 9.9 merely constitute a license and shall not, now or at any time after the installation of the Roof Equipment, be deemed to grant Tenant a leasehold or other real property interest in the Building or any portion thereof, including the Building's roof. The license granted to Tenant in this Section 9.9 shall continue until and automatically terminate and expire upon the expiration or earlier termination of this Lease and the termination of such license shall be self-operative and no further instrument shall be required to effect such termination. For so long as this Lease shall be in full force and effect, Landlord will not terminate the license granted to Tenant hereby. Notwithstanding the foregoing, upon request by Landlord, Tenant, at Tenant's sole cost and expense, shall promptly execute and deliver to Landlord, in recordable form, any certificate or other document reasonably required by Landlord confirming the termination of Tenant's right to use the roof of the Building. (h) The Roof Equipment shall be treated for all purposes of this Lease as Tenant's Alterations. If requested by Landlord, Tenant shall cause Roof Equipment and all equipment and installations appurtenant thereto to be designated as one or more separate tax lots -27- 28 by the City of New York for all purposes of assessment and payment of Taxes, and Tenant shall pay all Taxes imposed thereon directly to the taxing authorities, without deduction or offset against Rent under this Lease. If for any reason Tenant fails (with or without Landlord's consent thereto) to so cause Roof Equipment to be designated as one or more separate tax lots, Tenant shall pay to Landlord monthly, as Additional Rent upon demand, the amount, determined by Landlord in its reasonable discretion, by which Taxes imposed upon the Building have been increased on account of Tenant's installation of the Roof Equipment. SECTION 9.10 ANTENNA EQUIPMENT. (a) Subject to the provisions of Section 9.9, Landlord hereby grants to Tenant, for use by Tenant and Tenant's colocation customers and not for resale purposes, a non-exclusive license of five hundred (500) square feet of space on the roof of the Building, at a location designated by Landlord in its sole discretion, for the construction, installation, operation and use by Tenant of antennas, not to exceed ten feet (10') in height, for use in conjunction with Tenant's equipment and facilities in the Premises together with related cabling, mountings and supports for the foregoing (collectively, the "Antenna Equipment"), at a location designated by Landlord, taking into account any reasonable "line of sight" requirements of Tenant. (b) Supplementing the provisions of Section 9.9(c), if the Antenna Equipment materially interferes with any equipment installed by Landlord or any tenant leasing space in the building as of the date of this Lease, or materially interferes with the operation of the Building or the Building Systems, or if Landlord shall determine that the operation thereof (i) may cause a health hazard or danger to property, (ii) may not be in accordance with governmental or quasi-governmental standards for non-ionizing radiation for occupational or general public health levels, then Tenant, at its sole cost and expense, shall take all steps necessary to eliminate such interference, and if Tenant shall fail to eliminate such interference, Tenant shall relocate the Antenna Equipment to another area on the roof of the Building designated by Landlord, as provided in Section 9.9(c). (c) Supplementing the provisions of Section 9.9(e), Landlord makes no representation that the Antenna Equipment will be able to receive or transmit communication signals without interference or disturbance (whether or not by reason of the installation or use of similar equipment by others on the roof) and Tenant agrees that Landlord shall not be liable to Tenant therefor. SECTION 9.11 TENANT'S EMERGENCY GENERATORS. (a) Subject to the provisions of Section 9.9, Landlord hereby grants to Tenant, for Tenant's own use and not for resale purposes, a non-exclusive license of sufficient space on the roof of the Building, at a location designated by Landlord in its sole discretion, for the construction, installation, operation and use by Tenant of two diesel-powered electric generators, each having a capacity of up to 2000 kW at 480 volts, and other related equipment, including mountings and supports (collectively, "Tenant's Generators"). Tenant shall have the right, subject to Article 3, to connect Tenant's Generators to one of the Building's diesel fuel tanks as designated by Landlord and Landlord shall make available to Tenant up to four hundred (400) gallons of diesel fuel to Tenant's Generators from such fuel tank. Tenant shall reimburse -28- 29 Landlord for Landlord's actual cost for such diesel fuel used by Tenant, as indicated on a meter to be installed by Landlord, at Tenant's expense, at a point designed by Landlord along the fuel line to be installed by Tenant (at Tenant's cost and expense) connecting such fuel tank to Tenant's Generators. Tenant shall pay to Landlord for making such diesel fuel available to Tenant a one-time fee of $200,000.00 on the date on which Landlord makes such diesel fuel available to Tenant. Tenant shall be solely responsible, at Tenant's sole cost and expense, for the installation of all fuel lines, pumps, piping, meters and other equipment or installations necessary for the operation of Tenant's Generators as provided in this Section 9.11. Tenant shall pay Landlord, as Additional Rent, at any time and from time to time, but no more frequently than monthly, for its consumption of diesel fuel as provided herein. Subject to the rights of other tenants leasing space in the Building as of the date of this Lease, Landlord shall make available to Tenant reasonable access to the roof for the construction, installation, maintenance, repair, operation and use of Tenant's Generators. Tenant shall be responsible for all reinforcement and bracing necessary to enable the roof of the Building to support Tenant's Generators; provided, however, that Landlord shall have the right, by notice to Tenant within ten (10) days of delivery to Landlord of Tenant's plans and specifications for Tenant's Generators, to require Tenant to install Tenant's Generators in a vertically contiguous arrangement (i.e., one generator on top of the other), and if Landlord shall require Tenant's Generators to be installed in such vertically contiguous arrangement, then Landlord shall reimburse Tenant for fifty percent (50%) of any costs and expenses reasonably incurred by Tenant to reinforce or brace the roof of the Building, if necessary, to allow Tenant's Generators to be installed in such vertically contiguous arrangement. If Tenant requires riser space for electrical conduits connecting Tenant's Generators to the Premises, or for fuel lines connecting Tenant's Generators to the Building fuel tank designated by Landlord, then, subject to availability of riser space in the Building, Landlord shall make such riser space available to Tenant, and Tenant shall pay for such riser space, all as provided in Section 9.12. References herein to Tenant's Generators shall be deemed to include such riser and the electrical conduits and fuel lines appurtenant thereto. (b) Tenant's Generators shall be treated for all purposes of this Lease as Tenant's Alterations. Landlord shall have no right to require Tenant and Tenant shall have no right to remove Tenant's Generators on the Expiration Date or sooner termination of this Lease. If requested by Landlord, Tenant shall cause Tenant's Generators and all equipment and installations appurtenant thereto to be designated as a separate tax lot by the City of New York for all purposes of assessment and payment of Taxes, and Tenant shall pay all Taxes imposed thereon directly to the taxing authorities, without deduction or offset against Rent under this Lease. If for any reason Tenant fails (with or without Landlord's consent thereto) to so cause Tenant's Generators to be designated as a separate tax lot, Tenant shall pay to Landlord monthly, as Additional Rent upon demand, the amount, determined by Landlord in its reasonable discretion, by which Taxes imposed upon the Building have been increased on account of Tenant's installation of Tenant's Generators. (c) Landlord acknowledges that Tenant requires the temporary use of a portable emergency generator (the "Temporary Generator") until such time as Tenant's Generators are installed. Provided that Tenant shall obtain all necessary permits and approvals from all requisite Governmental Authorities, Landlord shall permit Tenant to place the Temporary Generator, at a location determined by Landlord in its sole judgment, on a street or sidewalk adjacent to the Building. If Tenant is unable to obtain the necessary permits and -29- 30 approvals required to enable Tenant to place the Temporary Generator outside of and adjacent to the Building or if Landlord, in its sole discretion, prohibits Tenant from placing the Temporary Generator outside of the Building, Landlord will make space available to Tenant for the installation of the Temporary Generator, at a location determined by Landlord in its sole judgment, in the truck loading area of the Building. Tenant, if necessary and only in connection with Tenant's installation and use of the Temporary Generator, shall have the right to install (i) an emergency generator plug on the outside of the Building adjacent to the loading dock area, through a pathway to be designated by Landlord, for the purpose of connecting the Premises to the Temporary Generator, and (ii) an electrical grounding system as required for the Temporary Generator, subject to Landlord's review and approval of plans, which approval shall not be unreasonably withheld or delayed. Upon the earlier to occur of (i) the installation of Tenant's Generators, and (ii) the date which is six (6) months from the Commencement Date, Tenant shall cease using and at its sole cost and expense remove the Temporary Generator and all related equipment from the Building, and shall restore any damage to the Building resulting therefrom. Tenant's installation of the Temporary Generator shall constitute an Alteration and shall be performed by Tenant at Tenant's sole cost and expense in accordance with and subject to the provisions of Article 3. All of the provisions of this Lease shall apply to the installation, use and maintenance of the Temporary Generator, including all provisions relating to compliance with Legal Requirements, insurance, indemnity, repairs and maintenance. Tenant acknowledges and agrees that the privileges granted Tenant under this Section 9.11(c) shall merely constitute a license and shall not, now or at any time after the installation of the Temporary Generator, be deemed to grant Tenant a leasehold or other real property interest in the Building or any portion thereof, including the Building loading dock. Tenant further acknowledges and agrees that the license granted to Tenant under this Section 9.11(c) shall automatically terminate and expire in accordance with the terms of this Section 9.11(c) and the termination of such license shall be self-operative and no further instrument shall be required to effect such termination. SECTION 9.12 CONDUIT. Landlord will make available to Tenant, without additional charge, riser space sufficient to accommodate (a) the electrical conduits required in order to deliver electric power from the basement of the Building to the Premises and (b) the electrical conduits required in order to connect Tenant's Generator to the Premises. If Tenant requires additional riser space for electrical conduits, telecommunications and fiber optic lines or for use in connection with the Roof Equipment, then upon request by Tenant, subject to availability of riser space in the Building, Landlord will make available riser space at Landlord's then-current rates for riser space in the Building, which rates are currently as follows: (i) for riser space not exceeding two inches (2") in diameter, an annual charge of $5.00 per lineal foot, and (ii) for riser space in excess of two inches (2") in diameter but not exceeding four inches (4") in diameter, an annual charge of $7.50 per lineal foot. All work in connection with the installation of such conduit, including core drilling, if required, shall be performed by Tenant at Tenant's sole cost and expense, including the cost of a fire watch and related supervisory costs relating to any core drilling, which shall be performed in such a manner and at such times as Landlord shall prescribe. Landlord shall make available to Tenant reasonable access within the Building core for purposes of such installation work. -30- 31 ARTICLE 10. INSURANCE SECTION 10.1 Tenant, at its expense, shall obtain and keep in full force and effect a policy of commercial general liability insurance under which Tenant is named as the insured and Landlord, Landlord's managing agent for the Building, and any Lessors and any Mortgagees (whose names shall have been furnished to Tenant) are named as additional insureds, which insurance shall provide primary coverage without contribution from any other insurance carried by or for the benefit of Landlord, Landlord's managing agent or any Lessors or Mortgagees named as additional insureds. Tenant's primary commercial general liability policy shall contain a provision that the policy shall be noncancelable unless twenty (20) days' written notice shall have been given to Landlord and Landlord shall similarly receive twenty (20) days' notice of any material change in coverage. The minimum limits of liability shall be a combined single limit with respect to each occurrence in an amount of not less than $5,000,000 per location general aggregate limit; provided, however, that Landlord shall retain the right to require Tenant to increase said coverage to that amount of insurance which in Landlord's reasonable judgment is then being customarily required by prudent landlords of comparable buildings in the City of New York, and provided further that Landlord shall require similar increases of other tenants of space in the Building comparable to the Premises, to the extent Landlord shall then have the right to do so under applicable leases. Tenant shall also obtain and keep in full force and effect during the Term, (a) insurance against loss or damage by fire, and such other risks and hazards as are insurable under then available standard forms of "all risk" insurance policies with extended coverage, to Tenant's Property and Tenant's Alterations for the full insurable value thereof or on a replacement cost basis; (b) Workers' Compensation Insurance, as required by law; (c) New York Disability Benefits Law Policy; and (d) such other insurance in such amounts as Landlord, any Mortgagee or Lessor may reasonably require from time to time. All insurance required to be carried by Tenant pursuant to the terms of this Lease shall be effected under valid and enforceable policies issued by reputable and independent insurers permitted to do business in the State of New York, and rated in Best's Insurance Guide, or any successor thereto (or if there be none, an organization having a national reputation) as having a Best's Rating" of "A-" and a "Financial Size Category" of at least "XI" or if such ratings are not then in effect, the equivalent thereof. SECTION 10.2 (a) The parties hereto do hereby waive, any and all rights of recovery against the other, or against the officers, employees, partners, agents and representatives of the other, for loss of or damage to the property of the waiving party to the extent such loss or damage is insured against under any insurance policy carried by Landlord or Tenant hereunder. In addition, the parties hereto shall procure an appropriate clause in, or endorsement on, any fire or extended coverage insurance covering the Premises, the Building and personal property, fixtures and equipment located thereon or therein, pursuant to which the insurance companies waive subrogation or consent to a waiver of right of recovery and subject to obtaining such clauses or endorsements of waiver of subrogation or consent to a waiver of right of recovery, hereby agree not to make any claim against or seek to recover from the other for any loss or damage to its property or the property of others resulting from fire or other hazards covered by such fire and extended coverage insurance; provided, however, that the release, discharge, exoneration and covenant not to sue herein contained shall be limited by and coextensive with the terms and provisions of the waiver of subrogation clause or endorsements or clauses or endorsements consenting to a waiver of right of recovery. If the payment of an additional -31- 32 premium is required for the inclusion of such waiver of subrogation or consent to waiver provision, each party shall advise the other of the amount of any such additional premiums and the other party at its own election may, but shall not be obligated to, pay the same. If such other party shall not elect to pay such additional premium, the first party shall not be required to obtain such waiver of subrogation or consent to waiver provision. Tenant acknowledges that Landlord shall not carry insurance on and shall not be responsible for damage to, Tenant's Alterations (if any) or Tenant's Property, and that Landlord shall not carry insurance against, or be responsible for any loss suffered by Tenant due to, interruption of Tenant's business. (b) As to each party hereto, provided such party's right of full recovery under the applicable insurance policy is not adversely affected, such party hereby releases the other (its servants, agents, contractors, employees and invitees) with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damages or destruction of the type covered by such insurance with respect to its property by fire or other casualty i.e. in the case of Landlord, as to the Building, and, in the case of Tenant, as to Tenant's Property and Tenant's Alterations (including rental value or business interruption, as the case may be) occurring during the Term of this Lease. SECTION 10.3 On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate certificates of insurance required to be carried by Tenant pursuant to this Article 10, including evidence of waivers of subrogation required pursuant to Section 10.2. Evidence of each renewal or replacement of a policy shall be delivered by Tenant to Landlord at least twenty (20) days prior to the expiration of such policy. SECTION 10.4 Landlord agrees to maintain (a) insurance against loss or damage to the Building by fire and such other risks and hazards as are insurable under then available forms of "all risk" insurance policies with extended coverage, and (b) a policy of commercial general liability insurance with minimum limits of liability in amounts comparable to insurance maintained by other prudent landlords of comparable office buildings in the City of New York. ARTICLE 11. DESTRUCTION OF THE PREMISES; PROPERTY LOSS OR DAMAGE SECTION 11.1 If the Premises shall be damaged by fire or other casualty, or if the Building shall be so damaged that Tenant shall be deprived of reasonable access to the Premises, Tenant shall give prompt notice thereof to Landlord, and the damage shall be repaired (i) by and at the expense of Landlord as to the core, shell, floors, roof, curtain wall and other structural elements of the Building located in the Premises and Building Systems servicing the Premises (the "Base Building Restoration"), and (ii) by and at the expense of Tenant as to all other elements of the Premises, including Tenant's Alterations and Tenant's Property. Commencing on the date of such fire or other casualty, and until the Base Building Restoration shall be Substantially Completed, Fixed Rent and Additional Rent shall be reduced in the proportion which the area of the part of the Premises which is neither usable nor used by Tenant bears to the total Premises Area. Landlord shall have no obligation to repair any damage to, or to replace, any of Tenant's Alterations or Tenant's Property. SECTION 11.2 Anything contained in Section 11.1 to the contrary notwithstanding, if the Premises are totally damaged or are rendered wholly untenantable, and if -32- 33 Landlord shall decide not to restore the Premises, or if the Building shall be so damaged by fire or other casualty that, in Landlord's opinion, substantial alteration, demolition, or reconstruction of the Building shall be required (whether or not the Premises shall have been damaged or rendered untenantable), then in any of such events, Landlord may, not later than sixty (60) days following the date of the damage, give Tenant a notice in writing terminating this Lease, provided Landlord similarly terminates the leases of other tenants in the Building covering at least twenty-five percent (25%) of the Rentable Square Footage of the then-leased portions of the Building. If this Lease is so terminated, the Term shall expire upon the tenth (10th) day after such notice is given, and Tenant shall vacate the Premises and surrender the same to Landlord. Upon the termination of this Lease under the conditions provided for in this Section 11.2, Tenant's liability for Fixed Rent and Additional Rent shall cease as of the date of such fire or other casualty, and any prepaid portion of Fixed Rent or Additional Rent for any period after such date shall be refunded by Landlord to Tenant. SECTION 11.3 If the Premises are damaged by fire or other casualty and are rendered wholly untenantable thereby, or if the Building shall be so damaged that Tenant shall be deprived of reasonable access to the Premises, and if Landlord shall elect to restore the Premises, Landlord shall, within sixty (60) days following the date of the damage, cause a contractor or architect selected by Landlord to give notice (the "Restoration Notice") to Tenant of the date by which such contractor or architect believes the Base Building Restoration shall be Substantially Completed. If the Restoration Notice shall indicate that the Base Building Restoration shall not be Substantially Completed on or before the date which shall be six (6) months following the date of such damage or destruction, Tenant shall have the right to terminate this Lease by giving written notice (the "Termination Notice") to Landlord not later than thirty (30) days following receipt of the Restoration Notice. If Tenant gives a Termination Notice, this Lease shall be deemed canceled and terminated as of the date of the giving of the Termination Notice as if such date were the Expiration Date, and Fixed Rent and Additional Rent shall be apportioned and shall be paid or refunded, as the case may be up to and including the date of such damage or destruction. If Tenant shall have had the right to give a Termination Notice pursuant to this Section 11.3, but Tenant nonetheless shall have failed to give a Termination Notice hereunder, and thereafter Landlord fails to Substantially Complete the Base Building Restoration on or before the date which is thirty (30) days following the date set forth in the Restoration Notice, then Tenant shall again have the right to terminate this Lease by giving a Termination Notice (a "Second Termination Notice"), and, unless Landlord Substantially Completes the Base Building Restoration within thirty (30) days following the giving of such Second Termination Notice, this Lease shall be deemed canceled and terminated as set forth in this Section 11.3. Notwithstanding anything set forth to the contrary in this Article 11, in the event that a fire or other casualty rendering the Premises wholly untenantable shall occur during the final year of the Term, either Landlord or Tenant may terminate this Lease by giving the other party a Termination Notice as set forth herein. SECTION 11.4 This Article 11 constitutes an express agreement governing any case of damage or destruction of the Premises or the Building by fire or other casualty, and Section 227 of the Real Property Law of the State of New York, which provides for such contingency in the absence of an express agreement, and any other law of like nature and purpose now or hereafter in force shall have no application in any such case. -33- 34 ARTICLE 12. EMINENT DOMAIN SECTION 12.1 If (a) all of the floor area of the Premises, or so much thereof as shall render the Premises wholly untenantable, shall be acquired or condemned for any public or quasi-public use or purpose, or (b) a portion of the Real Property, not including the Premises, shall be so acquired or condemned, but by reason of such acquisition or condemnation, Tenant no longer has means of access to the Premises, then this Lease and the Term shall end as of the date of the vesting of title with the same effect as if that date were the Expiration Date. In the event of any termination of this Lease and the Term pursuant to the provisions of this Article 12, Fixed Rent and Additional Rent shall be apportioned as of the date of sooner termination and any prepaid portion of Fixed Rent or Additional Rent for any period after such date shall be refunded by Landlord to Tenant. SECTION 12.2 In the event of any such acquisition or condemnation of all or any part of the Real Property, Landlord shall be entitled to receive the entire award for any such acquisition or condemnation. Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term or Tenant's Alterations, and Tenant hereby expressly assigns to Landlord all of its right in and to any such award. Nothing contained in this Section 12.2 shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the then value of any Tenant's Property included in such taking and for any moving expenses, provided such award shall be made by the condemning authority in addition to, and shall not result in a reduction of, the award made by it to Landlord. SECTION 12.3 If only a part of the Real Property shall be so acquired or condemned then, subject to Section 12.1, this Lease and the Term shall continue in force and effect. If a part of the Premises shall be so acquired or condemned and this Lease and the Term shall not be terminated, Landlord, at Landlord's expense, shall restore that part of the Premises not so acquired or condemned so as to constitute tenantable Premises. From and after the date of the vesting of title, Fixed Rent and Additional Rent shall be reduced in the proportion which the area of the part of the Premises so acquired or condemned bears to the total area of the Premises immediately prior to such acquisition or condemnation. ARTICLE 13. ASSIGNMENT AND SUBLETTING SECTION 13.1 Except as otherwise expressly provided herein, Tenant, for itself, its heirs, distributees, executors, administrators, legal representatives, successors and assigns, expressly covenants that it shall not assign, mortgage, pledge, encumber, or otherwise transfer this Lease, nor sublet (nor underlet), nor suffer, nor permit the Premises or any part thereof to be used or occupied by others (whether for desk space, mailing privileges or otherwise), without the prior written consent of Landlord in each instance. If this Lease is assigned, or if the Premises or any part thereof are sublet or occupied by anybody other than Tenant, or if this Lease or the Premises or Tenant's personal property are encumbered (whether by operation of law or otherwise) without Landlord's consent, then Landlord may, after default by Tenant, collect rent from the assignee, subtenant or occupant, and apply the net amount collected to Fixed Rent and Additional Rent, but no assignment, subletting, occupancy or collection shall be deemed a waiver by Landlord of the provisions hereof, the acceptance by Landlord of the assignee, subtenant or occupant as a tenant, or a release by Landlord of Tenant from the further performance by Tenant -34- 35 its obligations under this Lease, and Tenant shall remain fully liable therefor. Notwithstanding the foregoing sentence, Landlord acknowledges that Tenant shall have the right, from time to time, to grant security interests in and to Tenant's personal property located in the Premises, provided that no such security interest shall ever attach to any part of the Real Property. The consent by Landlord to any assignment or subletting shall not in any way be construed to relieve Tenant from obtaining the express consent in writing of Landlord to any further assignment or subletting. In no event shall any permitted subtenant assign or encumber its sublease or further sublet all or any portion of its sublet space, or otherwise suffer or permit the sublet space or any part thereof to be used or occupied by others, without Landlord's prior written consent in each instance. Any assignment, sublease, mortgage, pledge, encumbrance or transfer in contravention of the provisions of this Article 13 shall be void. SECTION 13.2 If Tenant shall, at any time or from time to time, during the Term desire to assign this Lease or sublet all or part of the Premises, Tenant shall give notice (a "Tenant's Notice") thereof to Landlord, which Tenant's Notice shall set forth: (a) with respect to an assignment of this Lease, the date Tenant desires the assignment to be effective and any consideration Tenant would receive under such assignment, (b) with respect to a sublet of all or a part of the Premises (i) the dates upon which Tenant desires the sublease term to commence and expire, (ii) the rental rate and other material business terms upon which Tenant would sublet such premises, and (iii) a description of the Premises showing the portion to be sublet, the effective or commencement date of which shall be not less than thirty (30) nor more than one hundred and eighty (180) days after the giving of such notice, (c) a statement setting forth in reasonable detail the identity of the proposed assignee or subtenant, the nature of its business and its proposed use of the Premises, (d) current financial information with respect to the proposed assignee or subtenant, including its most recent financial report, (e) a true and complete copy of the proposed assignment or sublease and any other agreements relating thereto, and (f) an agreement by Tenant to indemnify Landlord against liability resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other Persons claiming a commission or similar compensation in connection with the proposed assignment or sublease. Tenant's Notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) may, at its option, (I) sublease such space (the "Leaseback Space") from Tenant upon the terms and conditions set forth in Section 13.4, or terminate the Lease with respect to only the Leaseback Space, or (II) if the proposed transaction is (1) an assignment of this Lease, or (2) a subletting of fifty percent (50%) or more of the rentable area of the Premises, terminate this Lease. Said options may be exercised by Landlord by notice given to Tenant at any time within sixty (60) days after Tenant's Notice has been given by Tenant to Landlord, and during such sixty-day period, Tenant shall not assign this Lease nor sublet such space to any Person other than Landlord. Notwithstanding the foregoing, Tenant shall not be required to obtain Landlord's consent as described in Section 13.1 and Landlord shall not have the right to exercise the option described in this Section 13.2 with respect to a sublease demising not more than twenty percent (20%) of the Premises Area (an "Excepted Sublease"), provided that the area so subleased shall not be separately demised nor have an entrance or reception area separate from the remainder of the Premises; provided, further, that any Excepted Sublease shall be subject to all of the other terms and conditions of this Article 13. SECTION 13.3 If Landlord exercises its option to terminate this Lease with respect to all or a portion of the Premises pursuant to Section 13.2, then this Lease shall end and expire -35- 36 on the date that such assignment or sublease was to be effective or commence, as the case may be, and the Fixed Rent and Additional Rent due hereunder shall be paid and apportioned to such date. In such event, Landlord and Tenant, upon request of either party, shall enter into an amendment of this Lease ratifying and confirming such total or partial termination, and setting forth appropriate modifications, if any, to the terms and provisions hereof. Following such termination, Landlord shall be free to and shall have no liability to Tenant if Landlord should lease the Premises (or any part thereof) to Tenant's prospective assignee or subtenant. SECTION 13.4 If Landlord exercises its option to sublet the Leaseback Space, such sublease to Landlord or its designee (as subtenant) shall be at a rental rate equal to the product of (i) the lesser of (A) the rental rate per rentable square foot of Fixed Rent and Additional Rent then payable pursuant to this Lease, or (B) the rental rate per rentable square foot of rent and additional rent set forth in Tenant's Notice, multiplied by (ii) the number of rentable square feet of the Leaseback Space, and shall be for the same term as that of the proposed subletting, and such sublease shall: (a) be upon such other terms and conditions as are contained in Tenant's Notice, and be expressly subject to all of the covenants, agreements, terms, provisions and conditions of this Lease, except such as are irrelevant or inapplicable, and except as expressly set forth in this Article 13 to the contrary; (b) give the subtenant the unqualified and unrestricted right, without Tenant's permission, to assign such sublease or any interest therein and/or to sublet the space covered by such sublease or any part or parts of such space and to make any and all changes, alterations and improvements in the space covered by such sublease, and if the proposed sublease will result in all or substantially all of the Premises being sublet, grant Landlord or its designee the option to extend the term of such sublease for the balance of the Term of this Lease less one day; (c) provide that any assignee or further subtenant of Landlord or its designee, may, at Landlord's option, be permitted to make alterations, decorations and installations in such space or any part thereof and shall also provide in substance that any such alterations, decorations and installations in such space therein made by any assignee or subtenant of Landlord or its designee may be removed, in whole or in part, by such assignee or subtenant, at its option, prior to or upon the expiration or other termination of such sublease; provided, however, that such assignee or subtenant shall, at its sole cost and expense, repair any damage and injury caused by such removal; and (d) provide that (i) the parties to such sublease expressly negate any intention that any estate created under such sublease be merged with any other estate held by either of said parties, (ii) any assignment or sublease by Landlord or its designee (as the subtenant) may be for any purpose or purposes that Landlord, in Landlord's uncontrolled discretion, shall deem suitable or appropriate, (iii) Tenant shall, at Tenant's sole cost and expense, at all times provide and permit reasonably appropriate means of ingress to and egress from such space so sublet by Tenant to Landlord or its designee, (iv) Landlord may, at Tenant's sole cost and expense, make such alterations as may be required or deemed necessary by Landlord to physically separate the subleased space -36- 37 from the balance of the Premises and to comply with any legal or insurance requirements relating to such separation, and (v) that at the expiration of the term of such sublease, Tenant will accept the space covered by such sublease in its then existing condition, subject to the obligations of the subtenant to make such repairs thereto as may be necessary to preserve the premises demised by such sublease in good order and condition. SECTION 13.5 (a) If Landlord exercises its option to sublet the Leaseback Space, Landlord shall indemnify and save Tenant harmless from all obligations under this Lease as to the Leaseback Space during the period of time it is so sublet to Landlord, except as to any obligation which arises out of or results from the negligence or willful misconduct of Tenant, or any of its agents, servants or employees. (b) Performance by Landlord, or its designee, under a sublease of the Leaseback Space shall be deemed performance by Tenant of any similar obligation under this Lease and any default under any such sublease shall not give rise to a default under a similar obligation contained in this Lease nor shall Tenant be liable for any default under this Lease or deemed to be in default hereunder if such default is occasioned by or arises from any act or omission of the tenant under such sublease or is occasioned by or arises from any act or omission of any occupant holding under or pursuant to any such sublease. (c) Tenant shall have no obligation, at the expiration or earlier termination of the Term, to remove any alteration, installation or improvement made in the Leaseback Space by Landlord (or Landlord's designee). (d) Any consent required of Tenant, as Landlord under the sublease, shall be deemed granted if consent with respect thereto is granted by Landlord under this Lease, and any failure of Landlord (or its designee) to comply with the provisions of the sublease other than with respect to the payment of Fixed Rent and Additional Rent to Tenant, shall not constitute a default thereunder or hereunder if Landlord shall have consented to such non-compliance. (e) Tenant shall have no obligation to provide to Landlord or Landlord's designee any services other than those services provided by Landlord to Tenant under this Lease. Tenant shall have the right to contract directly with Landlord or Landlord's designee to purchase additional services which Tenant provides to itself at the Premises. SECTION 13.6 In the event Landlord does not exercise either option provided to it pursuant to Section 13.2, or if Tenant shall request consent to enter into an Excepted Sublease, and provided that no Event of Default shall have occurred and be continuing under this Lease as of the time Landlord's consent is requested by Tenant, Landlord's consent (which must be in writing and in form and substance satisfactory to Landlord) to the proposed assignment or sublease shall not be unreasonably withheld or delayed; provided, however, that: (a) Tenant shall have complied with the provisions of Section 13.2 hereof and Landlord shall not have exercised any of its options thereunder within the time permitted therefor; -37- 38 (b) In Landlord's judgment, the proposed assignee or subtenant is engaged in a business or activity, and the Premises, or the relevant part thereof, will be used in a manner, which (i) is in keeping with the then standards of the Building, and (ii) does not violate the restrictions set forth in Article 2; (c) The proposed assignee or subtenant is a reputable Person with sufficient financial worth considering the responsibility involved, and Landlord has been furnished with evidence thereof; (d) In the event Landlord has reasonably comparable space in the Building available for lease, then (i) neither the proposed assignee or subtenant nor any Person which, directly or indirectly, controls, is controlled by, or is under common control with, the proposed assignee or subtenant, is then an occupant of any part of the Building, and (ii) the proposed assignee or subtenant is not a Person (or Affiliate of a Person) with whom Landlord or Landlord's agent is then, or has been within the previous six (6) month period, negotiating in connection with rental of space in the Building; (e) The form of the proposed sublease or instrument of assignment shall be reasonably satisfactory to Landlord and shall comply with the applicable provisions of this Article 13, and Tenant shall deliver a true and complete original, fully executed counterpart of such sublease or other instrument to Landlord promptly upon the execution and delivery thereof; (f) Tenant and its proposed subtenant or assignee, as the case may be, shall execute and deliver to Landlord an agreement, in form and substance satisfactory to Landlord, setting forth the terms and conditions upon which Landlord shall have granted its consent to such assignment or subletting, and the agreement of Tenant and such subtenant or assignee, as the case may be, to be bound by the provisions of this Article 13; (g) There shall not be more than three (3) subtenants of the Premises; (h) The amount of the aggregate rent to be paid by the proposed subtenant shall not be less than the then current market rent per rentable square foot for the Premises, determined as though the Premises were vacant, and the rental and other terms and conditions of the sublease shall be substantially the same as those contained in Tenant's Notice; (i) Tenant shall reimburse Landlord, as Additional Rent upon demand, for (A) the reasonable costs and expenses incurred by Landlord in connection with the assignment or sublease, including the costs of making investigations as to the acceptability of the proposed assignee or subtenant and the cost of reviewing plans and specifications proposed to be made in connection therewith, and (B) Landlord's reasonable out-of-pocket legal fees and disbursements incurred in connection with the granting of any requested consent and the preparation of Landlord's written consent to the sublease or assignment; -38- 39 (j) Tenant shall not have (i) advertised or publicized in any way the availability of the Premises without prior notice of and approval by Landlord, or (ii) listed the Premises for sublease or assignment with a broker, agent or otherwise at a rental rate less than the fixed rent and additional rent at which Landlord is then offering to lease comparable space in the Building; and (k) The proposed subtenant or assignee shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to the service of process in, and the jurisdiction of the courts of New York State. Except for any sublease by Tenant to Landlord or its designee pursuant to this Article 13, each sublease pursuant to this Section 13.6 shall be subject to all of the covenants, agreements, terms, provisions and conditions contained in this Lease. Notwithstanding any such sublease to Landlord or any such sublease to any other subtenant, or any acceptance of Fixed Rent or Additional Rent by Landlord from any subtenant, Tenant will remain fully liable for the payment of the Fixed Rent and Additional Rent due and to become due hereunder and for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on Tenant's part to be observed and performed, and for all acts and omissions of any licensee or subtenant or anyone claiming under or through any subtenant which shall be in violation of any of the obligations of this Lease, and any such violation shall be deemed to be a violation by Tenant. If Landlord shall decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise either of its options under Section 13.2, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all losses, liabilities, damages, costs, and expenses (including attorneys' fees and disbursements) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant arising from or in connection with such proposed assignment or subletting, or by any brokers or other Persons (with whom Tenant or its proposed assignee or subtenant may have dealt) claiming a commission or similar compensation in connection with the proposed assignment or sublease. SECTION 13.7 In the event that (a) Landlord fails to exercise either of its options under Section 13.2 and consents to a proposed assignment or sublease, and (b) Tenant fails to execute and deliver the assignment or sublease to which Landlord consented within one hundred twenty (120) days after the giving of such consent, then, Tenant shall again comply with all of the provisions and conditions of Section 13.2 before assigning this Lease or subletting all or part of the Premises. SECTION 13.8 With respect to each and every sublease authorized by Landlord under the provisions of this Lease, it is further agreed that: (a) No sublease shall be for a term ending later than one day prior to the Expiration Date of this Lease; (b) No sublease shall be delivered, and no subtenant shall take possession of the Premises or any part thereof, until an executed counterpart of such sublease has been delivered to Landlord and approved in writing by Landlord; and -39- 40 (c) Each sublease shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, and each subtenant by entering into a sublease is deemed to have agreed that in the event of termination, re-entry or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublandlord, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (i) be liable for any previous act or omission of Tenant under such sublease, (ii) be subject to any counterclaim, offset or defense, not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification of such sublease or by any previous prepayment of more than one month's Fixed Rent or of any Additional Rent, or (iv) be obligated to perform any work in the subleased space or to prepare it for occupancy, and in connection with such attornment, the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such attornment. Each subtenant or licensee of Tenant shall be deemed, automatically upon and as a condition of its occupying or using the Premises or any part thereof, to have agreed to be bound by the terms and conditions set forth in this Article 13. The provisions of this Article 13 shall be self-operative and no further instrument shall be required to give effect to this provision. SECTION 13.9 If Landlord shall consent to any assignment of this Lease or to any sublease, or if Tenant shall enter into any other assignment or sublease permitted hereunder, Tenant shall, in consideration therefor, pay to Landlord, as Additional Rent: (a) In the case of an assignment, on the effective date of the assignment, an amount equal to fifty percent (50%) of (i) all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including sums paid for Tenant's Property, less, in the case of a sale of Tenant's Property, the then net unamortized or undepreciated cost thereof, determined on the basis of Tenant's federal income tax returns) less (ii)(A) all expenses reasonably and actually incurred by Tenant on account of brokerage commissions and attorneys' fees in connection with such assignment, (B) the costs of improvements or Alterations made by Tenant solely for the purpose of preparing the Premises or a portion thereof for such assignment, and (C) any amounts attributable to rent concessions, free rent periods or rent abatements; or (b) In the case of a sublease, an amount equal to fifty percent (50%) of (i) all rents, additional charges or other consideration payable to Tenant under the sublease in excess of the Fixed Rent and Additional Rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof (including sums paid for the sale or rental of Tenant's Property, less, in the case of the sale of Tenant's Property, the net unamortized or undepreciated cost thereof, determined on the basis of Tenant's federal income tax returns) less (ii)(A) all expenses reasonably and actually incurred by Tenant on account of brokerage commissions and attorneys' fees in connection with such sublease, (B) the costs of improvements or Alterations made by Tenant solely for the purpose of preparing the Premises or a portion thereof for such sublease, and (C) any amounts attributable to rent concessions, free rent periods or rent abatements, which amounts shall, for purposes -40- 41 of calculating amounts payable by tenant hereunder, be amortized over the term of such sublease. The sums payable under this clause shall be paid by Tenant to Landlord as Additional Rent as and when payable by the subtenant to Tenant. SECTION 13.10 (a) If Tenant is a corporation (but not a public corporation), the provisions of Section 13.1 shall apply to a transfer (by one or more transfer(s)), of a majority of the stock of Tenant as if such transfer of a majority of the stock of Tenant were an assignment of this Lease. It is expressly understood that the term "transfer(s)" shall be deemed to include the issuance of new stock which results in a majority of the stock of Tenant being held by Persons which do not hold a majority of the stock of Tenant on the date hereof. The provisions of this Article 13 shall not apply to transactions with a corporation into or with which Tenant is merged or consolidated or to which substantially all of Tenant's assets are transferred; provided, however, that (i) such transfer shall have been made for a legitimate independent business purpose and not for the principal purpose of transferring this Lease, (ii) the successor to Tenant shall have a net worth, computed in accordance with generally accepted accounting principles, at least equal to the greater of (A) the net worth of Tenant immediately prior to such merger, consolidation or transfer, or (B) the net worth of Tenant herein named on the date of this Lease, and (iii) proof satisfactory to Landlord of such net worth shall have been delivered to Landlord at least ten (10) days prior to the effective date of any such transaction. (b) If Tenant is a partnership, the provisions of Section 13.1 shall apply to a transfer (by one or more transfers) of a majority interest in the partnership, as if such transfer were an assignment of this Lease. (c) The limitations set forth in this Section 13.10 shall be deemed to apply to subtenant(s), assignee(s) and guarantor(s) of this Lease, if any, and any transfer by any such Person in violation of this Section 13.10 shall be deemed to be a transfer in violation of Section 13.1. (d) A modification, amendment or extension of a sublease shall be deemed a sublease for the purposes of Section 13.1, and a takeover agreement shall be deemed a transfer of this Lease for the purposes of Section 13.1. SECTION 13.11 Tenant may, without Landlord's consent, but upon not less than ten (10) days' prior notice to Landlord, permit any Affiliate of Tenant to sublet all or part of the Premises for any Permitted Use, or assign this Lease to any Affiliate, subject however to compliance with Tenant's obligations under this Lease. No such sublease shall be deemed to vest in any such Affiliate any right or interest in this Lease or the Premises nor shall it relieve, release, impair or discharge any of Tenant's obligations hereunder. SECTION 13.12 (a) Any assignment or transfer, whether made with Landlord's consent pursuant to Section 13.1 or without Landlord's consent to the extent permitted under Sections 13.10 and 13.11, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord an agreement in form and substance satisfactory to Landlord whereby the assignee shall assume the obligations of this Lease on the part of Tenant to be performed or observed from and after the effective date of such assignment or transfer, and whereby the assignee shall agree that the provisions in Section 13.1 shall, -41- 42 notwithstanding such assignment or transfer, continue to be binding upon it in respect of all future assignments and transfers. (b) The joint and several liability of Tenant and any immediate or remote successor in interest of Tenant and the due performance of the obligations of this Lease on Tenant's part to be performed or observed shall not be discharged, released or impaired in any respect by any agreement or stipulation made by Landlord, or any grantee or assignee of Landlord by way of mortgage or otherwise, extending the time, or modifying any of the obligations of this Lease, or by any waiver or failure of Landlord, or any grantee or assignee of Landlord by way of mortgage or otherwise, to enforce any of the obligations of this Lease. (c) The listing of any name other than that of Tenant, whether on the doors of the Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of Premises or to the use or occupancy thereof by others. Any such listing shall constitute a privilege extended by Landlord, revocable at Landlord's will by notice to Tenant, provided that Landlord shall not unreasonably revoke such privilege as to any Affiliate of Tenant, or any subtenant of Tenant or assignee of this Lease approved by Landlord pursuant to this Article 13. SECTION 13.13 Landlord acknowledges that the collocation of communications equipment not owned by Tenant at the Premises shall not constitute an assignment or sublease requiring the consent of Landlord hereunder. For purposes of this Lease, "collocation" means the installation by Tenant's customers of telecommunications equipment in Tenant's facilities therefor, in the ordinary course of Tenant's business, for which such customers pay fees based upon access to such facilities. In no event shall any collocation arrangement entered into by Tenant entail the construction of a separate entrance to the Premises from the Building common corridor for any party thereto other than Tenant. ARTICLE 14. ACCESS TO PREMISES SECTION 14.1 Tenant shall permit Landlord, Landlord's agents and public utilities servicing the Building to erect, use and maintain concealed ducts, pipes and conduits in and through the Premises, provided such work is performed by Landlord in a manner so as to minimize any interference that might be occasioned to Tenant's business operations and to minimize any damage that might result to the Premises, Tenant's Alterations or Tenant's Property. Landlord shall promptly repair any damage to the Premises, Tenant's Alterations or Tenant's Property caused by any work performed by Landlord pursuant to this Article 14; provided, however, that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever, unless Tenant shall first pay to Landlord as Additional Rent Landlord's reasonable estimate of any excess costs and expenses incurred by Landlord in employing such overtime or premium rate labor, and shall thereafter reimburse Landlord for any additional costs and expenses incurred by Landlord in excess of such estimated amount. Landlord or Landlord's agents shall have the right to enter the Premises at all reasonable times upon reasonable prior notice (except no such prior notice shall be required in case of emergency), which notice may be oral, to examine the same, to show them to prospective purchasers, Mortgagees, Lessors or -42- 43 lessees of the Building and their respective agents and representatives or prospective tenants of the Premises, and to make such repairs, alterations, improvements or additions (a) as Landlord may deem necessary or desirable to the Premises or to any other portion of the Building, or (b) which Landlord may elect to perform following Tenant's failure to make repairs or perform any work which Tenant is obligated to make or perform under this Lease, or (c) for the purpose of complying with Legal Requirements, and Landlord shall be allowed to take all material into and upon the Premises that may be required therefor without the same constituting an eviction or constructive eviction of Tenant in whole or in part and, except as and to the extent provided in Section 5.4, Fixed Rent and Additional Rent will not be abated while said repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant, or otherwise. SECTION 14.2 If Tenant shall not be present when for any reason entry into the Premises shall be necessary or permissible, Landlord or Landlord's agents may enter the same without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property), and without in any manner affecting this Lease. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever for the care, supervision or repair of the Building or any part thereof, other than as herein provided. SECTION 14.3 Landlord shall have the right from time to time to alter the Building and, without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building and to change the name, number or designation by which the Building is commonly known. All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises (including exterior Building walls, exterior core corridor walls, exterior doors and entrances other than doors and entrances solely servicing the Premises), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, stairways, chutes, pipes, conduits, ducts, fan rooms, heating, air cooling, plumbing and other mechanical facilities, service closets and other Building facilities are not part of the Premises, and Landlord shall have the use thereof, as well as access thereto through the Premises for the purposes of operation, maintenance, alteration and repair. ARTICLE 15. CERTIFICATE OF OCCUPANCY Tenant shall not at any time use or occupy the Premises in violation of the certificate of occupancy (a true and correct copy of which has been delivered to Tenant) at such time issued for the Premises or for the Building and in the event that any department of the City or State of New York shall hereafter contend or declare by notice, violation, order or in any other manner whatsoever that the Premises are used for a purpose which is a violation of such certificate of occupancy, Tenant shall, upon five (5) days' written notice from Landlord or any Governmental Authority, immediately discontinue such use of the Premises. Failure by Tenant to discontinue such use after such notice shall be considered a default in the fulfillment of a material covenant of this Lease and Landlord shall have the right to terminate this Lease immediately, and in addition thereto shall have the right to exercise any and all rights and -43- 44 privileges and remedies given to Landlord by and pursuant to the provisions of Articles 16 and 17. ARTICLE 16. DEFAULT SECTION 16.1 Each of the following events shall be an "Event of Default" hereunder: (a) if Tenant defaults in the payment when due of any installment of Fixed Rent or Additional Rent, and such default shall continue for a period of seven (7) days after notice thereof from Landlord; provided, however, that if Tenant shall default in the timely payment of Fixed Rent or Additional Rent, and any such default shall occur more than two (2) times in any period of twelve (12) consecutive months, then, notwithstanding that such defaults shall have each been cured within the applicable period provided above, upon any further similar default, Landlord may serve a three days' notice of termination upon Tenant without affording to Tenant an opportunity to cure such further default; or (b) if Tenant's interest in this Lease is transferred in violation of Article 13; or (c) if the Premises or a substantial portion thereof becomes abandoned; or (d) (i) if Tenant admits in writing its inability to pay its debts as they become due; or (ii) if Tenant commences or institutes any case, proceeding or other action (A) seeking relief as a debtor, or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property; or (iii) if Tenant makes a general assignment for the benefit of creditors; or (iv) if any case, proceeding or other action is commenced or instituted against Tenant (A) seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, which either (1) results in any such entry of an order for relief, adjudication of bankruptcy or -44- 45 insolvency or such an appointment or the issuance or entry of any other order having a similar effect, or (2) remains undismissed for a period of ninety (90) days; or (v) if any case, proceeding or other action is commenced or instituted against Tenant seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its property which results in the entry of an order for any such relief which has not been vacated, discharged, or stayed or bonded pending appeal within ninety (90) days from the entry thereof; or (vi) if Tenant takes any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clauses (ii), (iii), (iv) or (v) of Section 16.1(d); or (vii) if a trustee, receiver or other custodian is appointed for any substantial part of the assets of Tenant, which appointment is not vacated or effectively stayed within seven (7) Business Days, or if any such vacating or stay does not thereafter remain in effect; or (e) if Tenant defaults in the observance or performance of any other term, covenant or condition of this Lease on Tenant's part to be observed or performed and Tenant fails to remedy such default within thirty (30) days after notice by Landlord to Tenant of such default, or, if such default is of such a nature that it cannot be completely remedied within said period of thirty (30) days, if Tenant fails to commence to remedy such default within such thirty-day period, or fails thereafter to diligently prosecute to completion all steps necessary to remedy such default; or (f) if Tenant or any Affiliate of Tenant defaults beyond applicable grace and notice periods in the payment of any fixed rent or additional rent under any other lease of space in the Building, or if any such lease is terminated by Landlord as a result of a default by the tenant thereunder. SECTION 16.2 (a) If an Event of Default occurs, Landlord may at any time thereafter give written notice to Tenant stating that this Lease and the Term shall expire and terminate on the date specified in such notice, which date shall not be less than seven (7) days after the giving of such notice. If Landlord gives such notice, this Lease and the Term and all rights of Tenant under this Lease shall expire and terminate as if the date set forth in such notice were the Fixed Expiration Date and Tenant immediately shall quit and surrender the Premises, but Tenant shall remain liable as hereinafter provided. Anything contained herein to the contrary notwithstanding, if such termination shall be stayed by order of any court having jurisdiction over any proceeding described in Section 16.1(d), or by federal or state statute, then, following the expiration of any such stay, or if the trustee appointed in any such proceeding, Tenant or Tenant as debtor-in-possession shall fail to assume Tenant's obligations under this Lease within the period prescribed therefor by law or within one hundred twenty (120) days after entry of the order for relief or as may be allowed by the court, or if said trustee, Tenant or Tenant as debtor-in-possession shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future -45- 46 performance of Tenant's obligations under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on seven (7) days' notice to Tenant, Tenant as debtor-in-possession or said trustee and upon the expiration of said seven (7) day period this Lease shall cease and expire as set forth above and Tenant, Tenant as debtor-in-possession or said trustee shall immediately quit and surrender the Premises as aforesaid. SECTION 16.3 If, at any time, (a) Tenant shall comprise two (2) or more Persons, (b) Tenant's obligations under this Lease shall have been guaranteed by any Person other than Tenant, or (c) Tenant's interest in this Lease shall have been assigned, the word "Tenant," as used in Section 16.1(d), shall be deemed to mean any one or more of the Persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in Section 16.1(d) shall be deemed paid as compensation for the use and occupation of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Fixed Rent and/or Additional Rent or a waiver on the part of Landlord of any rights under this Lease. ARTICLE 17. REMEDIES AND DAMAGES SECTION 17.1 (a) If an Event of Default shall occur, and this Lease and the Term shall expire and come to an end as provided in Article 16: (i) Tenant shall quit and peacefully surrender the Premises to Landlord, and Landlord and its agents may immediately, or at any time after such Event of Default or after the date upon which this Lease and the Term shall expire and come to an end, re-enter the Premises or any part thereof, without notice, either by summary proceedings, or by any other applicable action or proceeding, or by legal force or other legal means (without being liable to indictment, prosecution or damages therefor), and may repossess the Premises and dispossess Tenant and any other Persons from the Premises and remove any and all of their property and effects from the Premises; and (ii) Landlord, at Landlord's option, may relet the whole or any part or parts of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Expiration Date, at such rental or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in its sole discretion, may determine; provided, however, that Landlord shall have no obligation to relet the Premises or any part thereof and shall in no event be liable for refusal or failure to relet the Premises or any part thereof, or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting, and no such refusal or failure shall operate to relieve Tenant of any liability under this Lease or otherwise affect any such liability, and Landlord, at Landlord's option, may make such repairs, replacements, alterations, additions, improvements, decorations and other physical changes in and to the Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. -46- 47 (b) Tenant hereby waives the service of any notice of intention to re-enter or to institute legal proceedings to that end which may otherwise be required to be given under any present or future law. Tenant, on its own behalf and on behalf of all Persons claiming through or under Tenant, including all creditors, does further hereby waive any and all rights which Tenant and all such Persons might otherwise have under any present or future law to redeem the Premises, or to re-enter or repossess the Premises, or to restore the operation of this Lease, after (i) Tenant shall have been dispossessed by a judgment or by warrant of any court or judge, (ii) any re-entry by Landlord, or (iii) any expiration or termination of this Lease and the Term, whether such dispossess, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words "re-enter," re-entry" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. In the event of a breach or threatened breach by Tenant, or any Persons claiming through or under Tenant, of any term, covenant or condition of this Lease, Landlord shall have the right to enjoin such breach and the right to invoke any other remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies were not provided in this Lease for such breach. The rights to invoke the remedies hereinbefore set forth are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity. SECTION 17.2 (a) If this Lease and the Term shall expire and come to an end as provided in Article 16, or by or under any summary proceeding or any other action or proceeding, or if Landlord shall re-enter the Premises pursuant to legal process as provided in Section 17.1, or by or under any summary proceeding or any other action or proceeding, then, in any of such events: (i) Tenant shall pay to Landlord all Fixed Rent and Additional Rent payable under this Lease by Tenant to Landlord to the date upon which this Lease and the Term shall have expired and come to an end or to the date of re-entry upon the Premises by Landlord, as the case may be; (ii) Tenant also shall be liable for and shall pay to Landlord, as damages, any deficiency (the "Deficiency") between (A) Fixed Rent and Additional Rent for the period which otherwise would have constituted the unexpired portion of the Term (conclusively presuming the Additional Rent for each year thereof to be the same as was payable for the year immediately preceding such termination or re-entry), and (B) the net amount, if any, of rents collected under any reletting effected pursuant to the provisions of Section 17.1(a)(ii) for any part of such period (first deducting from the rents collected under any such reletting all of Landlord's expenses in connection with the termination of this Lease, Landlord's re-entry upon the Premises and with such reletting including all repossession costs, brokerage commissions, legal expenses, attorneys' fees and disbursements, alteration costs and other expenses of preparing the Premises for such reletting). Tenant shall pay the Deficiency in monthly installments on the days specified in this Lease for payment of installments of Fixed Rent, and Landlord shall be entitled to recover from Tenant each monthly Deficiency as the same shall arise. No suit to collect the amount of the Deficiency for any month shall prejudice Landlord's right to collect the Deficiency for any subsequent month by a similar proceeding; and -47- 48 (iii) whether or not Landlord shall have collected any monthly Deficiency as aforesaid, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on demand, in lieu of any further Deficiency as and for liquidated and agreed final damages, a sum equal (A) to the amount by which the Fixed Rent and Additional Rent for the period which otherwise would have constituted the unexpired portion of the Term (conclusively presuming the Additional Rent for each year thereof to be the same as was payable for the year immediately preceding such termination or re-entry) exceeds (B) the then fair and reasonable rental value of the Premises, including Additional Rent for the same period, both discounted to present value at the rate of four percent (4%) per annum less (C) the aggregate amount of Deficiencies previously collected by Landlord pursuant to the provisions of Section 17.2(a)(ii) for the same period. If, before presentation of proof of such liquidated damages to any court, commission or tribunal, Landlord shall have relet the Premises or any part thereof for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of net rents collected in connection with such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. (b) If Landlord shall relet the Premises, or any part thereof, together with other space in the Building, the net rents collected under any such reletting and the expenses of any such reletting shall be equitably apportioned for the purposes of this Section 17.2. Tenant shall in no event be entitled to any rents collected or payable under any reletting, whether or not such rents shall exceed the Fixed Rent reserved in this Lease. Nothing contained in Article 16 or this Article 17 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages by any statute or rule of law, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in this Section 17.2. ARTICLE 18. FEES AND EXPENSES SECTION 18.1 If an Event of Default shall occur under this Lease or if Tenant shall do or permit to be done any act or thing upon the Premises which would cause Landlord to be in default under any Superior Lease or Mortgage, or if Tenant shall fail to comply with its obligations under this Lease and the preservation of property or the safety of any tenant, occupant or other person is threatened, Landlord may, after reasonable prior notice to Tenant except in an emergency, perform the same for the account of Tenant or make any expenditure or incur any obligation for the payment of money for the account of Tenant. All amounts expended by Landlord in connection with the foregoing, including reasonable attorneys' fees and disbursements in instituting, prosecuting or defending any action or proceeding or recovering possession, and the cost thereof, with interest thereon at the Default Rate, shall be deemed to be Additional Rent hereunder and shall be paid by Tenant to Landlord within ten (10) days of rendition of any bill or statement to Tenant therefor. SECTION 18.2 If Tenant shall fail to pay any installment of Fixed Rent and/or Additional Rent when due, Tenant shall pay to Landlord, in addition to such installment of Fixed Rent and/or Additional Rent, as the case may be, as a late charge and as Additional Rent, a sum -48- 49 equal to interest at the Default Rate on the amount unpaid, computed from the date such payment was due to and including the date of payment. ARTICLE 19. NO REPRESENTATIONS BY LANDLORD Landlord and Landlord's agents have made no warranties, representations, statements or promises with respect to (a) the rentable and usable areas of the Premises or the Building, (b) the amount of any current or future Labor Rates or Taxes, (c) the compliance with applicable Requirements of the Premises or the Building, or (d) the suitability of the Premises for any particular use or purpose. No rights, easements or licenses are acquired by Tenant under this Lease, by implication or otherwise, except as expressly set forth herein. This Lease (including any Exhibits referred to herein and all supplementary agreements provided for herein) contains the entire agreement between the parties and all understandings and agreements previously made between Landlord and Tenant are merged in this Lease, which alone fully and completely expresses their agreement. Tenant is entering into this Lease after full investigation, and is not relying upon any statement or representation made by Landlord not embodied in this Lease. ARTICLE 20. END OF TERM SECTION 20.1 Upon the Expiration Date or other termination of this Lease, Tenant shall quit and surrender to Landlord the Premises, vacant, broom clean, in good order and condition, ordinary wear and tear and damage for which Tenant is not responsible under the terms of this Lease excepted, and Tenant shall remove all of Tenant's Property in accordance with the provisions of Section 3.3, and this obligation shall survive the expiration or sooner termination of the Term. If the last day of the Term or any renewal thereof falls on Saturday or Sunday, this Lease shall expire on the Business Day immediately preceding. Tenant expressly waives, for itself and for any Person claiming through or under Tenant, any rights which Tenant or any such Person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules and of any successor law of like import then in force in connection with any holdover summary proceedings which Landlord may institute to enforce the foregoing provisions of this Article 20. SECTION 20.2 Tenant acknowledges that Tenant or any subtenant of Tenant remaining in possession of the Premises after the expiration or earlier termination of this Lease would create an unusual hardship for Landlord and for any prospective tenant. Tenant, therefore, covenants that if for any reason Tenant or any subtenant of Tenant shall fail to vacate and surrender possession of the Premises or any part thereof on or before the expiration or earlier termination of this Lease and the Term, then Tenant's continued possession of the Premises shall be as a "month-to-month" tenant, during which time, without prejudice and in addition to any other rights and remedies Landlord may have hereunder or at law, Tenant shall pay to Landlord for each month and for each portion of any month during which Tenant holds over, an amount equal to: (a) one hundred twenty-five percent (125%) of the total monthly amount of Fixed Rent and Additional Rent payable hereunder immediately prior to such termination (the "Existing Rent") for the first thirty (30) days during which Tenant holds over, (b) one hundred fifty percent (150%) of the Existing Rent for the next thirty (30) days during which Tenant holds over, and (c) two hundred percent (200%) of the Existing Rent thereafter. The provisions of this Section 20.2 shall not in any way be deemed to (a) permit Tenant to remain in possession of the Premises after -49- 50 the Expiration Date or sooner termination of this Lease or (b) imply any right of Tenant to use or occupy the Premises upon expiration or termination of this Lease and the Term, and no acceptance by Landlord of payments from Tenant after the Expiration Date or sooner termination of the Term shall be deemed to be other than on account of the amount to be paid by Tenant in accordance with the provisions of this Article 20. Tenant's obligations under this Article shall survive the expiration or earlier termination of this Lease. ARTICLE 21. QUIET ENJOYMENT Provided no Event of Default has occurred and is continuing, Tenant may peaceably and quietly enjoy the Premises without hindrance by Landlord or any Person lawfully claiming through or under Landlord, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE 22. NO WAIVER; NON-LIABILITY SECTION 22.1 No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the Premises prior to the termination of this Lease. The delivery of keys to any employee of Landlord or of Landlord's agents shall not operate as a termination of this Lease or a surrender of the Premises. Any Building employee to whom any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord nor its agents shall be liable for any damage to property of Tenant or of others entrusted to employees of the Building, nor for the loss of or damage to any property of Tenant by theft or otherwise. SECTION 22.2 The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations set forth or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all of the force and effect of an original violation. The receipt by Landlord of Fixed Rent and/or Additional Rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations set forth, or hereafter adopted, against Tenant or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations. Landlord shall not enforce the Rules and Regulations against Tenant in a discriminatory manner. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Fixed Rent or any Additional Rent shall be deemed to be other than on account of the next installment of Fixed Rent or Additional Rent, as the case may be, or as Landlord may elect to apply same, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Fixed Rent or Additional Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Fixed Rent or Additional Rent or pursue any other remedy in this Lease provided. Any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of this Lease in whole or in part unless such executory agreement is in writing and -50- 51 signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. All references in this Lease to the consent or approval of Landlord shall be deemed to mean the written consent or approval of Landlord and no consent or approval of Landlord shall be effective for any purpose unless such consent or approval is set forth in a written instrument executed by Landlord. SECTION 22.3 (a) Neither Landlord nor its agents shall be liable for any injury or damage to persons or property or interruption of Tenant's business resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature; nor shall Landlord or its agents be liable for any such damage caused by other tenants or persons in the Building or caused by construction of any private, public or quasi-public work; nor shall Landlord be liable for any latent defect in the Premises or in the Building (except that Landlord shall be required to repair the same to the extent provided in Article 5). Nothing in the foregoing shall affect any right of Landlord to the indemnity from Tenant to which Landlord may be entitled under Article 28 in order to recoup for payments made to compensate for losses of third parties. (b) If, at any time or from time to time, any windows of the Premises are temporarily closed, darkened or bricked-up for any reason whatsoever, or any of such windows are permanently closed, darkened or bricked-up if required by any Legal Requirement or related to any construction upon property adjacent to the Real Property by parties other than Landlord, Landlord shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement of Fixed Rent or Additional Rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction or constructive eviction of Tenant from the Premises. ARTICLE 23. WAIVER OF TRIAL BY JURY The respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or for the enforcement of any remedy under any statute, emergency or otherwise. If Landlord commences any summary proceeding against Tenant, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding (unless failure to impose such counterclaim would preclude Tenant from asserting in a separate action the claim which is the subject of such counterclaim), and will not seek to consolidate such proceeding with any other action which may have been or will be brought in any other court by Tenant. ARTICLE 24. INABILITY TO PERFORM This Lease and the obligation of Tenant to pay Fixed Rent and Additional Rent hereunder and perform all of the other covenants and agreements hereunder on the part of Tenant to be performed will not be affected, impaired or excused because Landlord is unable to fulfill any of its obligations under this Lease expressly or impliedly to be performed by Landlord -51- 52 or because Landlord is unable to make, or is delayed in making any repairs, additions, alterations, improvements or decorations or is unable to supply or is delayed in supplying any equipment or fixtures, if Landlord is prevented or delayed from so doing by reason of strikes or labor troubles or by accident, or by any cause whatsoever reasonably beyond Landlord's control, including laws, governmental preemption in connection with a national emergency or by reason of any Legal Requirements or by reason of the conditions of supply and demand which have been or are affected by war or other emergency ("Unavoidable Delays"). ARTICLE 25. BILLS AND NOTICES Except as otherwise expressly provided in this Lease, any bills, statements, consents, notices, demands, requests or other communications given or required to be given under this Lease shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand (against a signed receipt), sent by a nationally recognized overnight courier service, or sent by registered or certified mail (return receipt requested) and addressed: if to Tenant, (a) at Tenant's address set forth on page 1 of this Lease, or (b) at any place where Tenant or any agent or employee or Tenant may be found if mailed subsequent to Tenant's abandoning or surrendering the Premises, with a copies to (i) Tenant at the Premises, and (ii) McPharlin, Sprinkles & Thomas LLP, Ten Almaden Boulevard, Suite 1460 San Jose, California 95113, Attention: N. Dave Thomas, Esq.; or if to Landlord, as follows: 111 Eighth Avenue LLC, c/o Taconic Investment Partners LLC, 1500 Broadway, New York, New York 10036, Attention: Mr. Paul Pariser, with a copy to: Schulte Roth & Zabel LLP, 900 Third Avenue, New York, New York 10022, Attention: Robert S. Nash, Esq. Any such bill, statement, consent, notice, demand, request or other communication given as provided in this Article 25 shall be deemed to have been rendered or given (i) on the date when it shall have been hand delivered, (ii) three (3) Business Days from the date when it shall have been mailed, or (iii) one (1) Business Day from the date when it shall have been sent by overnight courier service. ARTICLE 26. RULES AND REGULATIONS Landlord reserves the right, from time to time, to adopt additional reasonable and non-discriminatory Rules and Regulations and to amend the Rules and Regulations then in effect. Tenant and Tenant's contractors, employees, agents, and licensees shall comply with the Rules and Regulations, as so supplemented or amended. Nothing contained in this Lease shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease against any other tenant, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its employees, agents, visitors or licensees. If there shall be any inconsistencies between this Lease and the Rules and Regulations, the provisions of this Lease shall prevail. ARTICLE 27. BROKER -52- 53 SECTION 27.1 Each of Landlord and Tenant represents and warrants to the other that it has not dealt with any broker in connection with this Lease other than Insignia/Edward S. Gordon Company, Inc., as Landlord's agent, and Markley Stearns Partners, as Tenant's broker (collectively, "Broker") and that to the best of its knowledge and belief, no other broker, finder or similar Person procured or negotiated this Lease or is entitled to any fee or commission in connection herewith. SECTION 27.2 Each of Landlord and Tenant shall indemnify, defend, protect and hold the other party harmless from and against any and all losses, liabilities, damages, claims, judgments, fines, suits, demands, costs, interest and expenses of any kind or nature (including reasonable attorneys' fees and disbursements) which the indemnified party may incur by reason of any claim of or liability to any broker, finder or like agent (other than Broker) arising out of any dealings claimed to have occurred between the indemnifying party and the claimant in connection with this Lease, or the above representation being false. The provisions of this Article 27 shall survive the expiration or earlier termination of the Term of this Lease. ARTICLE 28. INDEMNITY SECTION 28.1 (a) Tenant shall not do or permit any act or thing to be done upon the Premises which may subject Landlord to any liability or responsibility for injury, damages to persons or property or to any liability by reason of any violation of law or of any Legal Requirement, but shall exercise such control over the Premises as to fully protect Landlord against any such liability. Tenant shall defend, indemnify and save harmless Landlord from and against (i) all claims of whatever nature against Landlord arising from any act, omission or negligence of Tenant, its contractors, licensees, agents, servants, employees, invitees or visitors, (ii) all claims against Landlord arising from any accident, injury or damage whatsoever caused to any person or to the property of any person and occurring during the Term in the Premises, (iii) all claims against Landlord arising from any accident, injury or damage occurring outside of the Premises but anywhere within or about the Real Property, where such accident, injury or damage results or is claimed to have resulted from an act, omission or negligence of Tenant or Tenant's agents, employees, and (iv) any breach, violation or nonperformance of any covenant, condition or agreement in this Lease set forth and contained on the part of Tenant to be fulfilled, kept, observed and performed. This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. (b) Subject to Section 10.2, Landlord shall indemnify, defend and hold harmless Tenant and all Tenant Parties from and against all claims against Tenant or any Tenant Party arising from any accident, injury or damage whatsoever caused to any person or the property of any person in or about the common or public areas of the Building for which Tenant shall not be liable in accordance with Section 28.1(a) above (specifically excluding the Premises). This indemnity and hold harmless agreement shall include indemnity from and against any and all liability, fines, suits, demands, costs and expenses of any kind or nature (including attorneys' fees and disbursements) incurred in or in connection with any such claim or proceeding brought thereon, and the defense thereof. -53- 54 SECTION 28.2 Tenant agrees to defend, indemnify and hold harmless Landlord and any partner, shareholder, director, officer, principal, employee or agent, directly and indirectly, of Landlord, from and against all obligations (including removal and remedial actions), losses, claims, suits, judgments, liabilities, penalties, damages (including consequential and punitive damages), costs and expenses (including attorneys' and consultants' fees and expenses) of any kind or nature whatsoever that may at any time be incurred by, imposed on or asserted against Landlord or any such party directly or indirectly based on, or arising or resulting from (a) the actual or alleged presence of Hazardous Materials on the Premises or in the Building which is caused or permitted by Tenant, and (b) any Environmental Claim arising from Tenant's operation or use of the Premises or the Building. The provisions of this Section 28.2 shall survive the expiration or sooner termination of this Lease. ARTICLE 29. SECURITY DEPOSIT SECTION 29.1 Tenant has deposited with Landlord the sum of One Million and 00/100 Dollars ($1,000,000.00) as security for the full and faithful performance of every provision of this Lease to be performed by Tenant (all or any part of such amount, the "Security Deposit"). If an Event of Default shall have occurred with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Fixed Rent and Additional Rent, Landlord may use, apply or retain all or any part of this Security Deposit for the payment of any Fixed or Additional Rent or any other sum in default or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of such Event of Default, or to compensate Landlord for any other loss, cost or damage which Landlord may suffer by reason of such Event of Default. Landlord shall give Tenant notice contemporaneously with such use or application of any portion of the Security Deposit. Tenant shall, within five (5) days after the giving of such notice, deposit with Landlord cash in an amount sufficient to restore the Security Deposit to the amount then required pursuant to the terms of this Article 29 (Tenant's obligation to make such payment shall be deemed a requirement that Tenant pay an item of Additional Rent) and Tenant's failure to do so shall be a breach of this Lease. Landlord shall not, unless otherwise required by Legal Requirements, pay interest to Tenant on the Security Deposit, and if Landlord is required to maintain the Security Deposit in an interest bearing account, Landlord will retain the maximum amount permitted under Legal Requirements as a bookkeeping and administrative charge. Tenant shall not assign or encumber any part of the Security Deposit, and no assignment or encumbrance by Tenant of all of any part of the Security Deposit shall be binding upon Landlord, whether made prior to, during, or after the Term. Landlord shall not be required to exhaust its remedies against Tenant or against the Security Deposit before having recourse to any other form of security held by Landlord and recourse by Landlord to any Security Deposit shall not affect any remedies of Landlord which are provided in this Lease or which are available to Landlord in law or in equity. If Tenant shall fully and faithfully perform every covenant and provision of this Lease to be performed and observed by Tenant, the Security Deposit or any balance thereof shall be returned to Tenant reasonably promptly after the expiration or sooner termination (other than a termination pursuant to Article 16) of the Term and Tenant's surrender to Landlord of the Premises. In the event the Building is sold, Landlord shall transfer the Security Deposit to the new owner and Landlord shall thereupon be released by Tenant from all liability for the return of said Security Deposit; and Tenant agrees to look to the new owner solely for the return of the Security Deposit. A lease of the entire Building shall be -54- 55 deemed a transfer within the meaning of the foregoing sentence. Landlord shall use reasonable efforts to notify or cause Tenant to be notified in the event of any transfer of the Building. SECTION 29.2 In lieu of a cash deposit, Tenant may deliver to Landlord a clean, irrevocable, non-documentary and unconditional Letter of Credit issued by and drawn upon any commercial bank, trust company, national banking association or savings and loan association having offices for banking purposes in the City of New York and which is a member of the New York Clearinghouse Association (the "Issuing Bank") and which (or the parent company of which) shall have outstanding unsecured, uninsured and unguaranteed indebtedness, or shall have issued a letter of credit or other credit facility that constitutes the primary security for any outstanding indebtedness (which is otherwise uninsured and unguaranteed), that is then rated, without regard to qualification of such rating by symbols such as "+" or "-" or numerical notation, "Aa" or better by Moody's Investors Service and "AA" or better by Standard & Poor's Corporation, and has combined capital, surplus and undivided profits of not less than $500,000,000.00, which Letter of Credit shall have a term of not less than one year, be in form and content satisfactory to Landlord (and substantially as shown on Exhibit D attached hereto and made a part hereof), be for the account of Landlord, be in the amount of the Security Deposit then required to be deposited hereunder, and be fully transferable by Landlord to successor owners of the Building without the payment of any fees or charges, it being agreed that if any such fees or charges shall be so imposed, then such fees or charges, shall be paid by Tenant. The Letter of Credit shall provide that it shall be deemed automatically renewed, without amendment, for consecutive periods of one year each thereafter during the term of this Lease, unless the Issuing Bank sends notice (the "Non-Renewal Notice") to Landlord by certified mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of the Letter of Credit that it elects not to have such Letter of Credit renewed. Additionally, the Letter of Credit shall provide that Landlord shall have the right, exercisable within twenty (20) days of its receipt of the Non-Renewal Notice, by sight draft on the Issuing Bank, to receive the monies represented by the existing Letter of Credit and to hold such proceeds pursuant to the terms of this Section 29.2 as a cash security pending the replacement of such Letter of Credit. If an Event of Default shall have occurred and be continuing with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Fixed Rent and Additional Rent, Landlord may apply or retain the whole or any part of the cash security so deposited or may notify the Issuing Bank and thereupon receive all the monies represented by the Letter of Credit and use, apply, or retain the whole or any part of such proceeds, as provided in this Section 29.2. Any portion of the cash proceeds of the Letter of Credit not so used or applied by Landlord in satisfaction of the obligations of Tenant as to which such Event of Default shall have occurred shall be deposited by Landlord and retained in an interest-bearing account as provided in Section 29.1. If Landlord applies or retains any part of the cash security or proceeds of the Letter of Credit, as the case may be, Tenant shall, within five (5) days after written demand therefor, deposit with Landlord the amount so applied or retained so that Landlord shall have the full Security Deposit required pursuant to Section 29.1 on hand at all times during the Term. If Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the Letter of Credit shall be returned to Tenant after the Expiration Date and after delivery of possession of the Premises to Landlord. In the event of a sale of Landlord's interest in the Premises, within thirty (30) days of notice of such sale or leasing, Tenant, at Tenant's sole cost and expense, shall arrange for the transfer of the Letter of Credit to the new -55- 56 landlord, as designated by Landlord, or have the Letter of Credit reissued in the name of the new landlord and Landlord shall thereupon be released by Tenant from all liability for the return of the Letter of Credit; provided, however, that if the Letter of Credit is reissued, Landlord shall return the original Letter of Credit issued in Landlord's name to Tenant. SECTION 29.3 Notwithstanding anything set forth in this Article 29 to the contrary, if at any time during the Term Tenant shall provide reasonable evidence to Landlord that Tenant's audited net worth, computed in accordance with generally accepted accounting principles, shall then exceed (and shall have exceeded, for a period of twelve (12) consecutive months prior to such date) Fifty Million Dollars ($50,000,000), then Landlord shall refund the Security Deposit or return the Letter of Credit to Tenant, as applicable. ARTICLE 30. RENEWAL OPTION SECTION 30.1 Tenant shall have the right, at its option (the "Renewal Option"), to renew the initial term of this Lease, for the entire Premises, for a renewal term (the "Renewal Term") commencing on the day following the Expiration Date (the "Renewal Term Commencement Date") and expiring on the fifth (5th) anniversary of the Expiration Date (the "Extended Expiration Date"). Tenant shall have no right to exercise the Renewal Option unless all of the following conditions have been satisfied on the date of the Renewal Notice (as defined below) and on the Renewal Term Commencement Date: (a) No Event of Default shall have occurred and be continuing under this Lease; and (b) The named Tenant hereunder (or a permitted assignee, sublessee, successor or transferee pursuant to Section 13.11, but not any other assignee or successor tenant), its subsidiaries or affiliates shall occupy not less than seventy-five percent (75%) of the then-existing Premises Area. SECTION 30.2 If Tenant elects to renew this Lease for the Renewal Term, Tenant shall exercise such option by sending to Landlord written notice thereof (the "Renewal Notice"), by certified mail, return receipt requested, not less than twelve (12) months prior to the Expiration Date, and time shall be of the essence with respect to the giving of the Renewal Notice. If Tenant shall send the Renewal Notice within the time and in the manner herein provided, this Lease shall be deemed renewed for the Renewal Term upon the terms, covenants and conditions contained in this Lease, with the exception of Fixed Rent. SECTION 30.3 Fixed Rent for the Renewal Term shall be determined as of the date of the Renewal Notice and shall be ninety-five percent (95%) of the annual fair market value of the Premises for the Renewal Term (the "FMV"), determined in accordance with Section 30.4 of this Lease. During the Renewal Term, Tenant shall pay Tenant's Tax Payment and Tenant's Labor Rate Payment in accordance with the provisions of Article 6, except that (i) the Base Tax Year shall be the Tax Year commencing on the July 1st immediately preceding the Renewal Term Commencement Date, (ii) the Base Labor Year shall be the Comparison Year commencing on the January 1st immediately preceding the Renewal Term Commencement Date. -56- 57 SECTION 30.4 Within twenty (20) days after the giving by Tenant of a Renewal Notice, Landlord will notify Tenant of the amount of the Fixed Rent for the Renewal Term (the "Rental Notice"), which Rental Notice shall set forth Landlord's calculation of 95% of the FMV for the Premises. SECTION 30.5 (a) If Tenant shall dispute Landlord's calculation of the FMV as set forth in the Rental Notice, such dispute shall be submitted to arbitration and shall be determined by a single arbitrator appointed in accordance with the American Arbitration Association Real Estate Valuation Arbitration Proceeding Rules. Such arbitrator shall be impartial and shall have not less than ten (10) years' experience in the New York metropolitan area in a calling related to the leasing of commercial space in buildings comparable to the Building, and the fees of such arbitrator shall be shared by Landlord and Tenant. (b) Within fifteen (15) days following the appointment of such arbitrator, each party shall attend a hearing before such arbitrator wherein each party shall submit a report setting forth its determination of the FMV, together with such information on comparable rentals, or such other evidence, as such party shall deem relevant. (c) The arbitrator shall, within fifteen (15) days following such hearing and submission of evidence, render his or her decision by selecting the determination of FMV submitted by either Landlord or Tenant which, in the judgment of the arbitrator, most nearly reflects the FMV of the Premises for the Renewal Term. It is expressly understood that the decision of such arbitrator shall be final and binding upon the parties hereto. (d) For purposes of the determination of the FMV, the Premises shall be considered in their "as is" condition, but Landlord or the arbitrator shall take into account the availability of all Building services then serving or available to serve the Premises. Additionally, Landlord or such arbitrator shall take into account the then current rentals or occupancy fees which Landlord shall then be receiving for the renting of or granting of use or occupancy rights for comparable office space in the Building for the Permitted Use, taking into account rent concessions, abatement periods and construction allowances then being granted for comparable space. The determination of the FMV for the Renewal Term shall be based on the assumptions and criteria stated in this Article 30, and the arbitrator shall not have the power to add to, modify or change any of the provisions of this Lease. (e) After a determination has been made of the FMV for the Renewal Term, the parties shall execute and deliver to each other an agreement setting forth the Fixed Rent therefor as hereinabove determined. (f) If the final determination of Fixed Rent for the Renewal Term shall not be made on or before the Renewal Term Commencement Date in accordance with the provisions of this Article 30, then pending such final determination, Tenant shall pay as the Fixed Rent for the Premises the amount of Fixed Rent as set forth by Landlord in the Rental Notice. If, based upon the final determination of Fixed Rent as provided herein, the payments made by Tenant on account of Fixed Rent were (i) less than the Fixed Rent as finally determined in accordance with the provisions hereof, Tenant shall pay to Landlord the amount of such deficiency within ten (10) days after demand therefor, or (ii) greater than the Fixed Rent as finally determined in accordance -57- 58 with the provisions hereof, Landlord shall, at Landlord's option, either credit the amount of such excess against the next installments of Fixed Rent due under this Lease, or refund the amount of such excess to Tenant. ARTICLE 31. [INTENTIONALLY OMITTED]. ARTICLE 32. MISCELLANEOUS SECTION 32.1 (a) The obligations of Landlord under this Lease shall not be binding upon Landlord named herein after the sale, conveyance, assignment or transfer by such Landlord (or upon any subsequent landlord after the sale, conveyance, assignment or transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such sale, conveyance, assignment or transfer, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and the transferee of Landlord's interest in the Building or the Real Property, as the case may be, shall be deemed to have assumed all obligations under this Lease, including claims accrued prior to such sale, conveyance, assignment or transfer. Prior to any such sale, conveyance, assignment or transfer, the liability of Landlord for Landlord's obligations under this Lease shall be limited to Landlord's interest in the Real Property and Tenant shall not look to any other property or assets of Landlord or the property or assets of any of the Exculpated Parties (defined below) in seeking either to enforce Landlord's obligations under this Lease or to satisfy a judgment for Landlord's failure to perform such obligations. (b) Notwithstanding anything contained herein to the contrary, Tenant shall look solely to Landlord to enforce Landlord's obligations hereunder and no partner, shareholder, director, officer, principal, employee or agent, directly and indirectly, of Landlord (collectively, the "Exculpated Parties") shall be personally liable for the performance of Landlord's obligations under this Lease. Tenant shall not seek any damages against any of the Exculpated Parties. SECTION 32.2 Tenant may, upon notice to, without the prior written consent of Landlord, subject Tenant's Property and all of Tenant's other personal property, equipment and trade fixtures, to a security agreement (but not a leasehold mortgage) to secure financing or other obligations which Tenant may obtain or incur. Following an Event of Default hereunder, Landlord shall exercise its remedies under this Lease, and shall provide Tenant's lender(s) with a reasonable opportunity to enter upon the Premises for the purpose of removing any property of Tenant which has been pledged as collateral to Tenant's lender(s) or which has been subjected to any such security agreement, provided, however that such lender shall be subject to the terms and provisions of this Lease and the Rules and Regulations which apply to Tenant with respect to the removal of Tenant's Property. SECTION 32.3 Wherever in this Lease Landlord's consent or approval is required, if Landlord shall refuse such consent or approval, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce any such provision, for specific performance, injunction or declaratory judgment. -58- 59 SECTION 32.4 (a) All of the Exhibits attached to this Lease are incorporated in and made a part of this Lease, but, in the event of any inconsistency between the terms and provisions of this Lease and the terms and provisions of the Exhibits hereto, the terms and provisions of this Lease shall control. This Lease may not be changed, modified, terminated or discharged, in whole or in part, except by a writing, executed by the party against whom enforcement of the change, modification, termination or discharge is to be sought. Wherever appropriate in this Lease, personal pronouns shall be deemed to include the other genders and the singular to include the plural. The captions hereof are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. All Article and Section references set forth herein shall, unless the context otherwise specifically requires, be deemed references to the Articles and Sections of this Lease. Whenever the words "include", "includes", or "including" are used in this Lease, they shall be deemed to be followed by the words "without limitation". (b) This Lease shall be governed in all respects by the laws of the State of New York applicable to agreements executed in and to be performed wholly within said State. (c) If any term, covenant, condition or provision of this Lease, or the application thereof to any person or circumstance, shall ever be held to be invalid or unenforceable, then in each such event the remainder of this Lease or the application of such term, covenant, condition or provision to any other person or any other circumstance (other than those as to which it shall be invalid or unenforceable) shall not be thereby affected, and each term, covenant, condition and provision hereof shall remain valid and enforceable to the fullest extent permitted by law. (d) If at the commencement of, or at any time or times during the Term of this Lease, the Fixed Rent and Additional Rent reserved in this Lease shall not be fully collectible by reason of any Legal Requirement, Tenant shall enter into such agreements and take such other steps (without additional expense to Tenant) as Landlord may request and as may be legally permissible to permit Landlord to collect the maximum rents which may from time to time during the continuance of such legal rent restriction be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction prior to the expiration of the Term, (i) Fixed Rent and Additional Rent shall become and thereafter be payable hereunder in accordance with the amounts reserved in this Lease for the periods following such termination, and (ii) Tenant shall pay to Landlord, if legally permissible, an amount equal to (A) the items of Fixed Rent and Additional Rent which would have been paid pursuant to this Lease but for such legal rent restriction less (B) the rents paid by Tenant to Landlord during the period or periods such legal rent restriction was in effect. (e) The covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and their respective legal representatives, successors, and, except as otherwise provided in this Lease, their assigns. SECTION 32.5 Except as expressly provided to the contrary in this Lease, Tenant agrees that all disputes arising, directly or indirectly, out of or relating to this Lease, and all actions to enforce this Lease, shall be dealt with and adjudicated in the state courts of New York or the Federal courts sitting in New York City; and for that purpose hereby expressly and -59- 60 irrevocably submits itself to the jurisdiction of such courts. Tenant hereby irrevocably appoints the Secretary of the State of New York as its authorized agent upon which process may be served in any such action or proceeding. [Remainder of Page Intentionally Left Blank] -60- 61 IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease as of the day and year first above written. 111 EIGHTH AVENUE LLC, Landlord By: Taconic Investment Partners LLC, Authorized Signatory By: ________________________________ Name: Title: ABOVENET COMMUNICATIONS, INC., Tenant By: ________________________________ Name: Title: Tenant's Federal Tax Identification Number: - -------------------------- 62 EXHIBIT A FLOOR PLANS OF THE PREMISES The floor plans which follow are intended solely to identify the general outline of the Premises, and should not be used for any other purpose. All areas, dimensions and locations are approximate, and any physical conditions indicated may not exist as shown. 63 EXHIBIT B RULES AND REGULATIONS 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors, or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than ingress and egress to and from the Premises. 2. No awnings, air-conditioning units, fans or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades, or screens shall be attached to or hung in, or used in connection with, any exterior window or entry door of the Premises, without the prior written consent of Landlord. Such awnings, projections, curtains, blinds, shades, screens or other fixtures must be of a quality, type, design and color, and attached in the manner approved by Landlord. All electrical fixtures hung in offices or spaces along the perimeter of the demised premises must be fluorescent, of a quality, type, design and bulb color approved by Landlord. 3. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the Building without the prior written consent of Landlord except that the name of Tenant may appear on the entrance door of the Premises. In the event of the violation of the foregoing by Tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to the Tenant or Tenants violating this rule. Interior signs on doors and directory tablets shall be inscribed, painted or affixed for each Tenant by Landlord at the expense of such Tenant, and shall be of a size, color and style acceptable to Landlord. Landlord will provide directory listings in the directory maintained by Landlord in the lobby of the Building for Tenant and each partner and professional employee of Tenant, not to exceed six (6) such listings. 4. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building, shall not be covered or obstructed by any Tenant, nor shall any bottles, parcels, or other articles be placed on the windowsills. 5. No show cases or other articles shall be put in front of or affixed to any part of the exterior of the Building, nor placed in the halls, corridors or vestibules without the prior written consent of Landlord. 6. The water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags, acids or other substances shall be deposited therein. All damages resulting from any misuse of the fixtures shall be borne by the Tenant who, or whose servants, employees, agents, visitors or licensees, shall have caused the same. 7. No space in the Building shall be used for manufacturing, for the storage of merchandise, or for the storage of merchandise, or for the sale of merchandise, goods or property of any kind at auction or otherwise. 8. No Tenant shall make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them whether by the use of any musical instrument, radio, television, stereo system, unmusical noise, whistling, singing, or in any other way. No Tenant shall throw anything out of the doors, windows or skylights or down the passageways. 9. No Tenant, or any of Tenant's servants, employees, agents, visitors or licensees, shall at any time bring or keep upon the Premises any inflammable, combustible or explosive fluid, chemical or substance. 10. Each Tenant must, upon the termination of its tenancy, return to Landlord all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost thereof. 11. All removals, or the carrying in or out of any safes, freight, furniture or bulky matter of any description must take place in the manner and during the hours which Landlord or its agent may determine from 64 time to time. Landlord reserves the right to inspect all safes, freight or other bulky articles to be brought into the Building and to exclude from the Building all safes, freight or other bulky articles which violate any of these Rules and Regulations or the lease of which these Rules and Regulations are a part. Landlord shall have the exclusive right to prescribe the hours of operation of the freight elevator and Tenant shall pay, as Additional Rent Landlord's standard fee for operating the freight elevator after normal hours. No bicycles, vehicles, animals, birds or fish of any kind shall be brought into or kept by any Tenant in or about the Premises or the Building. 12. No Tenant shall occupy or permit any portion of the Premises demised to it to be occupied as an office for a public stenographer or public typist, or for the possession, storage, manufacture, or sale of narcotics, dope, tobacco in any form, or as a barber or manicure shop, or as an employment bureau. No Tenant shall engage or pay any employees on the Premises, except those actually working for such Tenant on the Premises, nor advertise for labor giving an address at the Premises. 13. No Tenant shall purchase spring water, ice, towels or other like service from any company or persons not approved by Landlord. 14. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 15. Landlord reserves the right to exclude from the Building between the hours of 6 P.M. and 8 A.M. and at all hours on Sundays and legal holidays all persons who do not present a pass to the Building signed by Landlord. Landlord will furnish passes to persons for whom any Tenant requests the same in writing. Each Tenant shall be responsible for all persons for whom it requests such pass and shall be liable to Landlord for all acts of such persons. 16. Each Tenant shall, at its expense, provide artificial light for the employees of Landlord while doing janitor service or other cleaning, and in making repairs or alterations in the Premises. 17. The requirements of Tenants will be attended to only upon written application at the office of the Building. Employees shall not perform any work or do anything outside of the regular duties, unless under special instructions from the office of Landlord. 18. Canvassing, soliciting and peddling in the Building is prohibited and each Tenant shall co-operate to prevent the same. 19. There shall not be used in any space, or in the public halls of the Building, either by any Tenant or by jobbers or others, in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and side guards. 20. Tenant shall not do any cooking, conduct any restaurant, luncheonette or cafeteria for the sale or service of food or beverages to its employees or to others, or cause or permit any orders of cooking or other processes or any unusual or objectionable odors to emanate from the demised premises. Tenant shall not install or permit the installation or use of any food, beverage, cigarette, cigar or stamp dispensing machine; or permit the delivery of any food or beverage to the Premises, except by such persons delivering the same as shall be approved by Landlord. 21. If there shall be any inconsistencies between the text of this Lease and these Rules and Regulations, the provisions of the Lease shall prevail. 65 EXHIBIT C APPROVED CONTRACTORS - ------------------------------------------------------------------------------- CONSTRUCTION VENDOR LIST - ------------------------------------------------------------------------------- Mr. Frank Sciame Mr. Al Hot President President F.J. SCIAME CONSTRUCTION CO., INC. FAST TRACK CONSTRUCTION 80 South Street 450 West 33rd Street New York, N.Y. 10038 New York, N.Y. 10001 Tel: (212) 232-2200 Tel: (212) 279-0110 Fax: (212) 248-5299 Fax: (212) 279-9239 Mr. Anthony Genovese Christopher H. Gallin Executive Vice President JOHN GALLIN & SONS, INC. HRH CONSTRUCTION INTERIORS, INC. 40 Gold Street One Park Avenue New York, N.Y. 10018 New York, N.Y. 10016 Tel: (212) 267-8624 Tel: (212) 616-3100 Fax: (212) 962-7201 Fax: (212) 696-4091 Mr. Irving Koven Mr. Peter Dove AMBASSADOR CONSTRUCTION CO., INC. DOMINANT CONSTRUCTION 41 East 42nd Street 523 Rout 33 New York, N.Y. 10017 Orangeburg, N.Y. 10962 Tel: (212) 922-1020 Tel: (914) 398-3900 Fax: (212) 949-9762 Fax: (914) 398-3106 Mr. Chris Philips Mr. Stephen S. Thomsen Vice President THOMSEN CONSTRUCTION CO., INC. TISHMAN CONSTRUCTION CORP. 180 Varick Street 666 Fifth Avenue 12th Floor New York, N.Y. 10103 New York, N.Y. 10014 Tel: (212) 708-6824 Tel: (212) 647-1412 Fax: (212) 399-3643 Fax: (212) 647-1249 LEHER MCGOVERN BOVIS Mr. George J. Figliolia 200 Park Avenue NEW YORK CITY BUILDERS GROUP New York, N.Y. 10166 One Wall Street, 4th Floor Tel: (212) 592-6700 New York, N.Y. 10005 Fax: (212) 592-6988 Tel: (212) 635-0760 Fax: (212) 635-0767 66 John Berry WESTSIDE INTERIORS 462 Beattie Road Rock Tavern, N.Y. 12575 Tel: (914) 496-8005 Fax: (914) 496-2912 Alfred J. Tosto Regional Manager GNOME GROUP, INC. 111 8th Avenue New York, N.Y. 10011 Tel: (212) 807-1991 Fax: (212) 807-6266 STRUCTURE TONE Tel: Fax: 67 EXHIBIT D FORM OF LETTER OF CREDIT [LETTERHEAD OF ISSUING BANK] LETTER OF CREDIT DEPARTMENT Issue Date: _________ ___, 199_ Our Number: ________________ No.________________________________________ Irrevocable Commercial Letter of Credit APPLICANT: Beneficiary: ____________________________ Amount (U.S.): $______________ Expiry: ____________ ___, 19__ Gentlemen: For the account of Applicant we hereby establish this Irrevocable Letter of Credit No. _____________________ in your favor for an amount of up to $_______________ effective immediately, available by your drafts at sight when accompanied by this Irrevocable Letter of Credit and the following document: Beneficiary's statement purportedly signed by an officer of Beneficiary or Beneficiary's authorized managing agent, reading: "The amount of this drawing under Irrevocable Letter of Credit No._____________ is being drawn pursuant to Lease dated __________________ ____ 199_, by and between ______________________, as Landlord, and _________________, as Tenant. All drafts must be marked "Drawn under ____________________ Bank, Irrevocable Letter of Credit No. ____________ dated _____________, 19___." It is a condition of this Irrevocable Letter of Credit that it shall be fully transferable by Beneficiary without any fees or charges payable by Beneficiary in connection therewith. It is a condition of this Irrevocable Letter of Credit that it shall be automatically extended for additional periods of one year from the present or future expiration date, unless at least 30 days prior to such expiration date we notify you in writing by certified or registered mail, return receipt requested, at the above address, that we elect not to renew this Irrevocable Letter of 68 Credit for such additional period. Upon receipt by you of such notice you may draw drafts on us at sight for an amount not to exceed the balance remaining in this Irrevocable Letter of Credit within the then applicable expiry date. We hereby agree with you that drafts drawn under and in accordance with the terms of this Irrevocable Letter of Credit will be duly honored by us on delivery of this Irrevocable Letter of Credit and the document so specified, when presented at this office. This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500; provided, however, that in the event the expiration date occurs during an interruption of our business of the type described in Article 17 of such publication, then the expiration date shall be deemed to be automatically extended until the date which shall be five (5) days after the resumption of our business. ------------------------------ Authorized Signature 69 EXHIBIT E FORM OF EXISTING MORTGAGEE NON-DISTURBANCE AGREEMENT SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT is made and entered into as of January __, 1999, by and among LASALLE NATIONAL BANK, AS TRUSTEE FOR GS MORTGAGE SECURITIES CORPORATION II COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-GSFL1 ("Lender"), 111 EIGHTH AVENUE LLC ("Landlord"), and ABOVENET COMMUNICATIONS, INC. ("Tenant"). 1. RECITALS. 1.1 Mortgage. Lender is the holder of a Promissory Note dated as of January 14, 1998, in the original principal amount of $218,000,000.00, of Landlord, which is secured, inter alia, by a Mortgage and Security Agreement (the "Mortgage") and Assignment of Lease and Rents (the "Lease Assignment") of even date therewith, covering premises more particularly described in the Mortgage and in Exhibit A attached hereto and made a part hereof (the "Premises"). 1.2 Lease. Landlord and Tenant entered into a Lease dated as of January __, 1999 (the "Lease"), whereby Landlord demised to Tenant a portion of the Premises (the "Demised Premises"). 2. CONSIDERATION. The terms of the Lease constitute a material inducement to Lender's consent thereto and entering into and performing this Agreement. 3. SUBORDINATION OF THE LEASE. The Lease shall be and is hereby made subject and subordinate to the Mortgage. 4. NON-DISTURBANCE. Lender shall not, in the exercise of any right, remedy, or privilege granted by the Mortgage or the Lease Assignment, or otherwise available to Lender at law or in equity, disturb Tenant's possession under the Lease so long as: (a) Tenant is not in default under any provision of the Lease or this Agreement at the time Lender exercises any such right, remedy or privilege; and (b) The Lease at that time is in force and effect according to its original terms, or with such amendments or modifications as Lender shall have approved, if such approval is required by the terms of the Mortgage or the Lease Assignment; and (c) Tenant thereafter continues to fully and punctually perform all of its obligations under the Lease without default thereunder beyond any applicable cure period; and (d) Tenant attorns to or at the direction of Lender, as provided in Paragraph 5. 70 Without limiting the foregoing, and so long as the foregoing conditions are met, Lender agrees that (i) Tenant will not be named as a party to any foreclosure or other proceeding instituted by Lender to enforce the terms of the Mortgage or the Lease Assignment; (ii) any sale or other transfer of the Demised Premises or of Landlord's interest in the Lease, pursuant to foreclosure or any voluntary conveyance or other proceeding in lieu of foreclosure, will be subject and subordinate to Tenant's possession under the Lease; and (iii) the Lease will continue in force and effect according to its original terms, or with such amendments as Lender shall have approved, if such approval is required by the terms and conditions of the Mortgage or the Lease Assignment. 5. ATTORNMENT. (a) Tenant shall attorn to Lender, to any receiver or similar official for the Demised Premises appointed at the instance and request, or with the consent, of Lender and to any person who acquires the Demised Premises, or the Landlord's interest in the Lease, or both, pursuant to Lender's exercise of any right, remedy or privilege granted by the Mortgage, or otherwise at law or in equity. Without limitation, Tenant shall attorn to any person or entity that acquired the Demised Premises pursuant to foreclosure of the Mortgage, or by any proceeding or voluntary conveyance in lieu of such foreclosure, or from Lender, whether by sale, exchange or otherwise. Any attornment to anyone other than Lender shall be conditioned upon Tenant receiving a non-disturbance from such entity. (b) Upon any attornment under this Paragraph 5, the Lease shall continue in full force and effect as a direct lease between Tenant and the person or entity to whom Tenant attorns, except that such person or entity shall not be: (i) liable for any breach, act or omission of any prior landlord; or (ii) subject to any offsets, claims or defenses which Tenant might have against any prior landlord; or (iii) bound by any rent or additional rent or other payment in lieu of rent which Tenant might have paid to any prior landlord more than 30 days in advance of its due date under the Lease or which such person or entity has physical possession of; or (iv) bound by any amendment or modification of the Lease made without Lender's written consent, where such consent is required by the Mortgage; or (v) bound by any notice given by Tenant to Landlord, whether or not such notice is given pursuant to the terms of the Lease, unless a copy thereof was then also given to Lender; or (vi) be liable for any security deposit or other sums held by any prior landlord, unless actually received. The person or entity to whom Tenant attorns shall be liable to Tenant under the Lease only during such person or entity's period of ownership, and such liability shall not continue or survive as to the transferor after a transfer by such person or entity of its interest in the Lease and the Demised Premises. 71 6. REPRESENTATIONS AND WARRANTIES. 6.1 Joint and Several. Landlord and Tenant hereby jointly and severally represent and warrant to Lender as follows regarding the Lease: (a) A true and correct copy of the Lease (inclusive of all riders and exhibits thereto) is attached to the counterpart of this Agreement being delivered to Lender. There are no other oral or written agreements, understandings or the like between Landlord and Tenant relating to the Demised Premises or the Lease transaction. (b) The Lease has not been modified, altered or amended in any respect. (c) The addresses for notices to be sent to Tenant and Landlord are as set forth in Paragraph 11. (d) To Tenant's knowledge, Tenant has no right of first refusal, option or other right to purchase the Premises or any part thereof, including, without limitation, the Demised Premises. 6.2 Several. Landlord and Tenant severally represent and warrant to Lender with respect to themselves, but not with respect to the other: (a) The execution of the Lease was duly authorized, the Lease was properly executed and is in full force and effect and is valid, binding and enforceable against Tenant and Landlord and there exists no default, nor state of facts which with notice, the passage of time, or both, could ripen into a default, on the part of either Tenant or Landlord. (b) There has not been filed by or against nor, to the best of the knowledge and belief of the representing party, is there threatened against or contemplated by, Landlord or Tenant, a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States or of any state thereof, or any other action brought under said bankruptcy laws. (c) There has not been any assignment, hypothecation or pledge of the Lease or rents accruing under the Lease, other than pursuant to the Mortgage and the Lease Assignment. Tenant makes the representation set forth in this subparagraph only to its best knowledge and belief. 7. RENTS. Landlord and Tenant jointly and severally acknowledge that the Lease Assignment provides for the direct payment to Lender of all rents and other monies due and to become due to Landlord under the Lease upon the occurrence of certain conditions as set forth in the Lease Assignment without Lender's taking possession of the Demised Premises or otherwise assuming Landlord's position or any of Landlord's obligations under the Lease. Upon receipt from Lender of written notice to pay all such rents and other monies to or at the direction of Lender, Landlord authorizes and directs Tenant thereafter to make all such payments to or at the direction of Lender, releases Tenant of any and all liability to Landlord for any and all 72 payment so made, and shall defend, indemnify and hold Tenant harmless from and against any and all claims, demands, losses, or liabilities asserted by, through or under Landlord (except by Lender) for any and all payments so made. Upon receipt of such notice, Tenant thereafter shall pay all monies then due and becoming due from Tenant under the Lease to or at the direction of Lender, notwithstanding any provision of the Lease to the contrary. Tenant agrees that neither Lender's demanding or receiving any such payments, nor Lender's exercising any other right, remedy, privilege, power or immunity granted by the Mortgage or the Lease Assignment, will operate to impose any liability upon Lender for performance of any obligation of Landlord under the Lease unless and until Lender elects otherwise in writing. Such payments shall continue until Lender directs Tenant otherwise in writing. Tenant agrees not to pay any rent under the Lease more than 30 days in advance without Lender's consent. The provisions of this Paragraph 7 will apply from time to time throughout the term of the Lease. 8. CURE. If Tenant becomes entitled to terminate the Lease or offset, withhold or abate rents because of any default by Landlord, then Tenant shall give Lender written notice specifying Landlord's default. Lender then shall have the right, but not the obligation, to cure the specified default within the following time periods: (a) Fifteen days after receipt of such notice with respect to defaults that can be cured by the payment of money; or (b) Thirty days after receipt of such notice with respect to any other default; unless the cure requires Lender to obtain possession of the Demised Premises, in which case such thirty day period shall not commence until Lender acquires possession, so long as Lender proceeds promptly to acquire possession of the Demised Premises with due diligence, by foreclosure of the Mortgage or otherwise. Nothing contained in this Paragraph 8 shall require Lender to commence or continue any foreclosure or other proceedings, or, if Lender acquires possession of the Demised Premises, to continue such possession, if all defaults specified by Tenant in its notice are cured. Possession by a receiver, or other similar official appointed at the instance, or with the consent, of Lender shall constitute possession by Lender for all purposes under this Paragraph 8. 9. ESTOPPEL LETTERS. Whenever reasonably requested by Lender, Landlord and Tenant from time to time shall severally execute and deliver to or at the direction of Lender, and without charge to Lender, one or more written certifications of all of the matters as set forth in Paragraph 6, whether Tenant has exercised any renewal option or options and any other information the Lender may reasonably require to confirm the current status of the Lease, including, without limitation, a confirmation that the Lease is and remains subordinated as provided in this Agreement. 10. CASUALTY AND EMINENT DOMAIN. Landlord and Tenant jointly and severally agree that the Mortgage permits Lender, at its option, to apply to the indebtedness from time to time secured by the Mortgage any and all insurance proceeds payable with respect to any casualty loss at the Demised Premises and any and all awards or other compensation that 73 may be payable for the condemnation of all or any portion of the Demised Premises, or any interest therein, or by way of negotiated settlement or conveyance in lieu of condemnation; and Landlord and Tenant jointly and severally consent to any such application by Lender. Notwithstanding the foregoing, Landlord and Lender agree that any and all insurance or condemnation proceeds payable with respect to Tenant's property or the interruption or relocation of Tenant's business (except for rental loss insurance proceeds) will be paid to Tenant, so long as they do not reduce the proceeds otherwise payable to Lender. 11. NOTICES. All notices, demands, and other communications that must or may be given or made in connection with this Agreement must be in writing and, unless receipt is expressly required, will be deemed delivered or made 5 days after having been mailed by registered or certified mail, return receipt requested, or by express mail, in any event with sufficient postage affixed, and addressed to the parties as follows: To Lender: c/o AMRESCO Services, L.P. 235 Peachtree Street, N.E. Suite 900 Atlanta, Georgia 30303 Attn.: Private Sector Servicing To Landlord: 111 Eighth Avenue LLC c/o Taconic Investment Partners LLC 1500 Broadway New York, New York 10036 Attention: Mr. Paul Pariser with a copy to: Schulte Roth & Zabel LLP 900 Third Avenue New York, New York 10022 Attention: Robert S. Nash, Esq. To Tenant: AboveNet Communications, Inc. 50 West San Fernando Street 10th Floor San Jose, California 95113 Attention: Stephen Belomy with a copy to McPharlin, Sprinkles & Thomas LLP Ten Almaden Boulevard Suite 1460 San Jose, California 95113 Attention: N. Dave Thomas, Esq. 74 Such addresses may be changed by notice pursuant to this Paragraph 11; but notice of change of address is effective only upon receipt. Landlord and Tenant jointly and severally agree that they will furnish Lender with copies of all notices relating to the Lease. All communications to Lender shall reference "AMRESCO Loan No.: 400030645." 12. SUCCESSORS AND ASSIGNS. As used in this Agreement, the word "Tenant" shall mean Tenant and any subsequent holder or holders of an interest under the Lease, as the text may require, provided that the interest of such holder is acquired in accordance with the terms and provisions of the Lease and the word "Lender" shall mean Lender or any other subsequent holder or holders of the Mortgage or any party acquiring title to the Demised Premises by purchase at a foreclosure sale, by deed of the Lender, or otherwise. Subject to the foregoing, this Agreement shall bind and inure to the benefit of Landlord, Tenant and Lender, their legal representatives, successors and assigns. The terms Lease, Mortgage and Lease Assignment shall include any and all amendments, modifications, replacements, substitutions, extensions, renewals and supplements thereto. 13. FURTHER ASSURANCES. Landlord and Tenant from time to time shall execute and deliver at Lender's request all instruments that may be necessary or appropriate to evidence their agreement hereunder provided such instrument neither increases Tenant's obligations or decreases its rights under the Lease. 14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all such counterparts shall constitute one and the same instrument. 15. SEVERABILITY. A determination that any provision of this Agreement is unenforceable or invalid shall not affect the enforceability or validity of any other provision, and any determination that the application of any provision of this Agreement to any person or to any person or to particular circumstances is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. 75 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LENDER: LASALLE NATIONAL BANK, AS TRUSTEE FOR GS MORTGAGE SECURITIES CORPORATION II COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-GSFL1 By: AMRESCO Services, L.P., its authorized agent By: AMRESCO Mortgage Capital, Inc., its general partner By: ____________________________ Name: Title: Servicing Officer LANDLORD: 111 EIGHTH AVENUE LLC By: Taconic Investment Partners LLC, Authorized Signatory By: ____________________________ Name: Title: TENANT: ABOVENET COMMUNICATIONS INC. By: ______________________________ Name: Title: 76 STATE OF ________________ ) ) ss.: COUNTY OF ______________ ) On this ____ day of ________________, 199__, before me personally came __________________________ to me known, who, being by me duly sworn, did depose and say that _he resides at ______________________, _________________, _______________, that _he is the _______________ of Amresco Mortgage Capital, Inc., the corporation described in and which executed the above instrument as a general partner of Amresco Services, L.P., the limited partnership which executed the foregoing instrument as the authorized agent of LaSalle National Bank, as Trustee for GS Mortgage Securities Corporation II Commercial Mortgage Pass-Through Certificates, Series 1998-GSFL1; that _he had authority to sign the same in such capacity; and that _he executed the same by order of the board of directors of said corporation as the act and deed of said partnerships and trust for the uses and purposes therein mentioned. _________________________________ Notary Public STATE OF ________________ ) ) ss.: COUNTY OF ______________ ) On this ____ day of _______________, 199__, before me personally came ______ _________________, to me known, who, being by me duly sworn, did depose and say: that she resides at ________________ __________ _______; that she is a senior vice president of AboveNet Communications Inc., the corporation described in and which executed the foregoing instrument; that she had authority to sign the same in such capacity; and that she executed the same by authority of the board of directors of said corporation. _________________________________ Notary Public 77 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On this ____ day of _______________, 199__, before me personally came _______________________ to me known, who, being by me duly sworn, did depose and say that he resides at ______________________, ___________, New York _____, that he is an Authorized Signatory of Taconic Investment Partners LLC, a Delaware limited liability company, the limited liability company described in and which executed the above instrument as a member of 111 Eighth Avenue LLC, the limited liability company which executed the foregoing instrument; that he had authority to sign the same in such capacity; and that he executed the same as the act and deed of said limited liability company for the uses and purposes therein mentioned. _________________________________ Notary Public 78 EXHIBIT A PLOT DESCRIPTION ALL that certain plot, piece or parcel of land, situate, lying and being in the Borough of Manhattan, City, County and State of New York, bounded and described as follows: BEGINNING at the corner formed by the intersection of the northerly side of West 15th Street and the westerly side of Eighth Avenue; RUNNING THENCE westerly along the northerly side of West 15th Street, 800 feet to the easterly side of Ninth Avenue; THENCE northerly along the easterly side of Ninth Avenue, 206 feet 6 inches to the southerly side of West 16th Street; THENCE easterly along the southerly side of West 16th Street, 800 feet to the westerly side of Eighth Avenue; and THENCE southerly along the westerly side of Eighth Avenue, 206 feet 6 inches to the northerly side of West 15th Street, the point of place of BEGINNING. 79 EXHIBIT F ALTERATIONS 80 STATE OF ______________ ) ) ss.: COUNTY OF ____________ ) On this ____ day of January, 1999, before me personally came ___________, to me known, who, being by me duly sworn, did depose and say: that __he resides at _____________ ________________________ _______; that __he is the _________________ of ABOVENET COMMUNICATIONS, INC., the corporation described in the foregoing instrument; and that __he signed his/her name thereto by order of the board of directors of said corporation as the act and deed of said corporation for the uses and purposes therein mentioned. _________________________________ Notary Public 81 ================================================================================ --------------- AGREEMENT OF LEASE --------------- 111 EIGHTH AVENUE LLC LANDLORD AND ABOVENET COMMUNICATIONS, INC. TENANT --------------- PREMISES: Portion of Second (2nd) Floor 111 Eighth Avenue New York, New York 10011 DATED: January ___, 1999 ================================================================================ 82 TABLE OF CONTENTS DEFINITIONS....................................................................1 Article 1. Demise, Premises, Term, Rent......................................4 Article 2. Use And Occupancy.................................................5 Article 3. Alterations.......................................................6 Article 4. Condition of the Premises; Landlord's Work........................9 Article 5. Repairs; Floor Load..............................................10 Article 6. Real Estate Taxes and Labor Rate Increases.......................11 Article 7. Legal Requirements...............................................17 Article 8. Subordination and Non-Disturbance; Estoppel Certificates.........18 Article 9. Services ........................................................20 Article 10. Insurance.......................................................31 Article 11. Destruction of the Premises; Property Loss or Damage............32 Article 12. Eminent Domain..................................................34 Article 13. Assignment and Subletting.......................................34 Article 14. Access to Premises..............................................42 Article 15. Certificate of Occupancy........................................43 Article 16. Default ........................................................44 Article 17. Remedies and Damages............................................46 Article 18. Fees and Expenses...............................................48 Article 19. No Representations By Landlord..................................49 Article 20. End Of Term.....................................................49 Article 21. Quiet Enjoyment.................................................50 Article 22. No Waiver; Non-Liability........................................50 Article 23. Waiver Of Trial By Jury.........................................51 Article 24. Inability To Perform............................................51 Article 25. Bills And Notices...............................................52 Article 26. Rules And Regulations...........................................52 Article 27. Broker ........................................................52 Article 28. Indemnity.......................................................53 Article 29. Security Deposit................................................54 Article 30. Renewal Option..................................................56 Article 31. [Intentionally Omitted].........................................58 Article 32. Miscellaneous...................................................58 Exhibit A:.....Floor Plan of the Premises Exhibit B:.....Rules and Regulations Exhibit C:.....Approved Contractors Exhibit D:.....Form of Letter of Credit Exhibit E:.....Form of Existing Mortgagee Non-Disturbance Agreement Exhibit F:.....Alterations EX-10.36 4 SHAREHOLDERS AGREEMENT 1 EXHIBIT 10.36 SHAREHOLDERS AGREEMENT entered into by and between Raiffeisen Rechenzentrum Ges.m.b.H having its registered offices at 1020 Vienna, Hollandstrasse 11-13 (hereinafter referred to as "RRZ") and AboveNet Communications, Inc. having its registered office at 50 W. San Fernando Street, #1010, San Jose, CA 95113 (hereinafter referred to as "AboveNet") (hereinafter collectively also referred to as "Parties") as follows: 2 TABLE OF CONTENTS I. FORMATION OF THE COMPANY Section 1 Shareholder Structure of the Company Section 2 Subscription Right Section 3 Non-Equity Contributions II. RELATIONSHIP BETWEEN THE PARTIES Section 4 Scope Section 5 Articles of Association, By-Laws, Company Business Policy Section 6 Transformation to Aktiengesellschaft; Option Pool Section 7 Management Board Section 8 Shareholders Committee Section 9 Right of First Refusal Section 10 Put Options Section 11 Transfer, Redemption and Encumbrance of Shares Section 12 Competition Clause Section 13 Inspection of Books Section 14 Above Net Stock Option Plan III. General Terms Section 15 Term of the Shareholders Agreement Section 16 Confidentiality Section 17 Costs Section 18 General Section 19 Applicable Law, Arbitration 3 EXHIBITS Exhibit ./1 RRZ Service Agreement Exhibit ./2 License, Connectivity and Marketing Agreement with AboveNet Exhibit ./3 Articles of Association of AboveNet Austria GmbH Exhibit ./4 By-laws for the Managing Director Exhibit ./5 By-Laws for the Shareholders Committee Exhibit ./6 List of Affiliates Exhibit ./7 Business Plan PREAMBLE (1) RRZ and AboveNet will form AboveNet Communications GmbH (in the following referred to as "the Company" or "AboveNet Austria GmbH"), a joint venture for the purpose of establishing a co-branded Internet Service Exchange. (2) This Shareholders Agreement shall govern the formation of the Company (I.) and the relationship between the Parties (II.). Therefore, it is agreed as follows: I. FORMATION OF THE COMPANY SECTION 1 SHAREHOLDER STRUCTURE OF THE COMPANY (1) ESTABLISHMENT OF THE COMPANY: RRZ and AboveNet shall establish AboveNet Communications GmbH with a nominal share capital of [*] that will be fully paid in cash by all Parties upon formation of the Company. Each Party will hold a 50% share [*] in the Company. (2) PARTICIPATION AND OWNERSHIP STRUCTURE: The Parties have informed each other of their current group structure and the intended structure of their respective shareholding in the * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 Company and undertake to keep each other informed in writing of any future ownership changes thereof at all times. SECTION 2 SUBSCRIPTION RIGHT (1) SUBSCRIPTION RIGHT: The Parties shall have the right (but not an obligation) to participate in any increase of the Company's share capital and/or other future financing, if any, in proportion to their respective shareholding in order to maintain their original ownership rights, respectively (hereinafter referred to as "Subscription Right"). (2) WAIVER OF SUBSCRIPTION RIGHT: If a Party fails to participate in any particular capital increase, it waives its subscription right with respect to that capital increase irrevocably and without consideration for the benefit of the other Party. SECTION 3 NON-EQUITY CONTRIBUTIONS CONTRIBUTIONS: In addition to the equity contributions described in Clause 1 para 1 hereunder, the Parties will provide the following non-equity contributions to the Company: (a) RRZ: RRZ will make the non-equity contributions and provide the services specified in and in accordance with the provisions of the RRZ Service Agreement (Exhibit ./1). (b) AboveNet: AboveNet will provide to the Company a license in the form of the License, Connectivity and Marketing Agreement (hereinafter "Licence Agreement") attached hereto as Exhibit ./2. The License Agreement will inter alia provide for termination clauses; the Company's rights under the License Agreement shall inter alia terminate (i) in the case of termination of this Agreement by AboveNet other than for cause, effective 12 (twelve) months after the termination date or (ii) in the case of termination of this Agreement by RRZ or termination of this Agreement by AboveNet for cause, within 60 (sixty) days following termination. In each case the Company shall pay royalties pursuant to License Agreement from the day the 5 termination notice is received until the effective date of termination. The Licence Agreement will furthermore provide for termination clauses for the event that a competitor of AboveNet acquires influence on RRZ or any of its Affiliates directly or indirectly. The Company's rights under the RRZ Service Agreement (Exhibit ./1) shall terminate (i) in the case of termination by RRZ, effective 12 (twelve) months after the termination date within one year or (ii) in the case of termination by AboveNet within 60 (sixty) days following termination. In each case the Company shall have the right to use the facility under the same terms and conditions as applicable immediately prior to such termination once termination is declared from the day the termination notice is received until the effective date of termination. II. RELATIONSHIP BETWEEN THE PARTIES SECTION 4 SCOPE Part II of this Shareholder Agreement shall become effective as soon as the notarial deed establishing AboveNet Austria GmbH is duly executed by the Parties or their duly empowered representatives. SECTION 5 ARTICLES OF ASSOCIATION, BY-LAWS, COMPANY BUSINESS POLICY (1) ARTICLES OF ASSOCIATION: The Company shall have Articles of Association in accordance with Exhibit ./3. The shareholder meeting shall issue by-laws for the Managing Director in accordance with Exhibit ./4 and for the Shareholders Committee in accordance with Exhibit ./5. (2) ARM'S LENGTH TRANSACTIONS: All of the Company's transactions, in particular with companies that are affiliated with or related to the parties AboveNet and RRZ must be made at arm's length. The Company will also solicit and conclude transactions with companies that are not related to AboveNet and RRZ. (3) AFFILIATES: The term affiliated company shall be defined as any Company or person which is controlled by, controls or is under common control with the entities of AboveNet or RRZ (hereinafter referred to as "Affiliate"). A list of current AboveNet and RRZ Affiliates is attached hereto as Exhibit ./6. Exhibit ./6 will be updated at least quarterly and a copy thereof provided to the other Party, respectively without delay. 6 SECTION 6 TRANSFORMATION TO AKTIENGESELLSCHAFT; OPTION POOL (1) AboveNet shall have the right to request the transformation of the Company from a Gesellschaft mit beschrankter Haftung (GmbH) into an Aktiengesellschaft (AG) at any time after 24 months after the registration of the Company in the Commercial Register. Upon receipt of such request the Parties shall take all necessary - corporate - measures to execute the transformation, including but not limited to shareholders' resolutions, adaptation of corporate agreements like the Articles of Association and this Shareholders Agreement. (2) After the transformation of the Gesellschaft mit beschrankter Haftung (GmbH) to an Aktiengesellschaft (AG), an Option Pool (which will not be less than 5% or more than 10% of the total equity based upon the initial valuation) will be reserved for future issuances of options to employees. The number of shares reserved under the Option Pool may not be increased until the Company's initial public offering unless such increase is unanimously approved by the Shareholders Committee. Options will be granted at fair market value on date of grant, which cannot be before the date of employment. (3) At the time AboveNet exercises its right to request the transformation to an AG, the terms and conditions of a future IPO shall be discussed. Provided the Parties agree to such stock exchange listing, the Parties shall undertake to cooperate in the preparation and completion of an initial public offering as necessary, such as cooperate in the preparation and disclosure of information; disclosure of relevant provisions of this agreement; the disclosure of key data and analyses and other relevant information as necessary; the timing of the public offering; and a coordination of time frames and procedures among the Parties. In the event of an IPO, Parties shall also discuss in good faith appropriate amendments to the Articles of Association and this Agreement to conform with the requirements for a Company with public shareholders. SECTION 7 MANAGEMENT BOARD (1) APPOINTMENT RIGHT: The Company's Management shall consist of one Managing Director, who shall be appointed for an initial term of two years; appointments for 7 consecutive terms of up to three years are possible. Moreover, each of the Parties may request premature termination/recall of the Managing Director due to failure by the Managing Director to achieve annual business targets set forth in the business plan agreed to by the parties in connection with the formation of the Company, for the first three business years and later from time to time, at least three months before the end of a business year for the following business year. (2) REPORTING: The Managing Director shall submit (i) to the Shareholders Committee and (ii) to AboveNet and RRZ respectively, monthly, quarterly and annual written financial statements and reports on the business development of the Company and the status in achieving monthly, quarterly and annual business targets, respectively in a format and on recurring due dates notified to the Managing Director by the Shareholders Committee from time to time. Such (financial) statements and reports will inter alia be integrated into the consolidated reports of the Parties to the authorities, including in the case of AboveNet, the SEC. Therefore AboveNet and RRZ shall inter alia receive (i) quarterly financial statements done in accordance with US GAAP within 15 days after quarters end and (ii) audited annual financial statements within 30 days after year end in accordance with US GAAP. SECTION 8 SHAREHOLDERS COMMITTEE (1) ESTABLISHMENT: The Company has a Shareholders Committee, established pursuant to Clause 8 hereof. (2) COMPOSITION: The Shareholders Committee shall consist of five members, four of which are nominated by the Parties pursuant to Clause 8.3 hereof and elected by the Shareholders Meeting pursuant to Clause 8.4, and one of which is elected by the Shareholders Meeting. After the transformation into an AG, the Shareholders Committee shall consist of seven members, four of which are nominated by the Parties pursuant to Clause 8.3 hereof and elected by the Shareholders Meeting pursuant to Clause 8.4, and three of which are elected by the Shareholders Meeting. (3) NOMINATION: The Parties agree that AboveNet shall have the right to nominate two members, and RRZ shall have the right to nominate two members of the Shareholders Committee. The Parties shall exercise this right pursuant to Clause 8.6 hereof. 8 (4) ELECTION: The Shareholders Meeting elects the members of the Shareholders Committee. Each Party shall vote for the election of candidates nominated pursuant to Clause 8.3 hereof. The members of the Shareholders Committee nominated pursuant to Clause 8.3 shall be elected by three quarters of the votes cast. The other members shall be elected by unanimous vote. (5) REPLACEMENT AND REMOVAL: If one Party should wish to replace a member of the Shareholders Committee nominated by it, then the other Party shall vote for the removal of such member and the election of the new member to be nominated by the Party that nominated the removed member, regardless of whether the removal is for or without cause. Each Party may also remove members of the Shareholders Committee nominated by it without immediately replacing them. If the Chairman is removed as Shareholders Committee member, such person shall be replaced immediately. (6) NOMINATION AND REMOVAL NOTICES: The nomination and removal rights pursuant to this Clause shall be exercised by notice to the other Party, sent by registered mail with a notice period of four weeks before the Shareholders Meeting, in which such appointment or removal is to be resolved. The Company shall be timely notified to ensure that the agenda can be set accordingly. (7) TERM: Election shall be for two year periods. Shareholders Committee members may be re-elected. If a member of the Shareholders Committee resigns from the Shareholders Committee prior to the expiry of the term and should an election take place to replace this member, the term of the newly elected Shareholders Committee member shall coincide with the expiry of term of the Shareholders Committee member who has prematurely resigned. (8) MATTERS TO BE DECIDED BY SHAREHOLDERS COMMITTEE: The Shareholders Committee shall pass resolutions on all matters to be decided by shareholders resolution or voted on by the Shareholders Meeting or provided for in the by-laws for the Managing Director from time to time and any other matters set forth in this Agreement. (9) MATTERS REQUIRING SHAREHOLDERS COMMITTEE'S APPROVAL: The following management measures and matters to be resolved by Shareholders Resolution/Shareholders Meeting shall require the approval of the Shareholders Committee: 1. any merger or acquisition transaction; 2. any sale, transfer, pledge or other disposition of any assets of the Company; 9 3. after transformation into an AG: redemption or repurchase of any outstanding shares of the Company; 4. entering into any transaction, agreement, or arrangement (or modify any existing arrangement) with any shareholder of the Company, except for ordinary course of business transactions between the affiliates of the shareholders which have a value of less than USD 20,000 (twenty thousand), and except for transactions under the Service and License Agreements; 5. making any Capital expenditures other than approved as part of the Business Plan attached hereto; 6. in case of transformation into an AG: issuing any stock or other securities with rights equal to or senior to AboveNet's and/or the Parties' securities, other than in a public offering which (i) raises at least USD 10,000,000 (Dollars ten million) for the Company at a pre-money valuation of at least USD 60,000,000 (Dollars sixty million) if such offering is on an Austrian exchange or EASDAQ or (ii) raises at least USD 20,000,000 (Dollars twenty million) for the Company at a pre-money valuation of at least USD 125,000,000 (Dollars one hundred twenty five million) if the offering is on the NASDAQ National Market; 7. entering into any compensation arrangements with senior management; 8. settling any claims or litigation (other than monetary settlements under USD 5,000); 9. incurring or guaranteeing debt; 10. after transformation into an AG: issuing more than an agreed upon number of options to employees; 11. paying dividends or making other distributions to shareholders; 12. amending any of Company's Articles of Association; 13. appointing and recalling a managing director or making any material change in the management or the nature of the business of the Company; 14. modifying the 4-year Business Plan, including any changes in the pricing that would negatively affect the average price per megabit of bandwidth; 15. deciding on arbitration experts; 16. selection and appointment of auditors, which shall be from among the leading international accountancy firms; 17. after transformation into an AG: deciding on terms for the initial public offering of the Company's shares 18. the transformation of the Gesellschaft mit beschrankter Haftung (GmbH) into an Aktiengesellschaft (AG); 19. after transformation into an AG: the increase of the number of shares reserved under the Option Pool before the Company's initial public offering pursuant to Clause 6.2 hereof; 10 20. consenting to the pledge or other encumbrance of shares in the Company. (10) MAJORITY REQUIREMENTS AND PARTIES VETO RIGHT. Resolutions of the Shareholders Committee are (in principle) adopted by four fifths of the votes cast, if the Shareholders Committee has five members. After an increase of the number of Shareholders Committee members to seven members, resolutions are adopted by five sevenths of the votes cast. In the case of written vote pursuant to Clause 8.15 hereof, the members of the Shareholders Committee shall notify the Company as to whether they will vote in favor of or against any item on the agenda within ten business days after receipt of a written summary of all of the material terms of the proposed action. If a member of the Shareholders Committee votes against the resolution of a proposed action, the issue shall be subject to an additional voting. In case of Clause 8.9.16 AboveNet shall have the right to nominate the auditor; the other Parties shall consent to such auditor and may exercise their veto right only if the nominated auditor (i) is not affiliated with AboveNet's US auditors and/or (ii) is not from among the leading international accountancy firms. The auditor for the first business year shall be Deloitte & Touche Vienna. In case of Clause 8.9.14, resolutions are adapted unanimously. RRZ shall have the right to request revisions of the Business Plan if market conditions have materially changed, or if the growth rate of the market is materially different to the anticipated growth rate of the market. Such request may be made no more than once in a business year for the following business year. In this case AboveNet agrees to negotiate in good faith revisions to the targets set forth in the business plan for a particular business year and to vote to approve such negotiated revisions. (11) INFLUENCE ON CORPORATE BODIES OF THE COMPANY: The Parties agree that they will (i) instruct the Shareholders' representatives and their proxies to exercise their voting rights in Shareholders Resolutions/Shareholders Meetings pursuant to the resolutions of the Shareholders Committee and (ii) exercise their influence on the Managing Director of the Company that the business of the Company be conducted pursuant to the resolutions of the Shareholders Committee. In case shareholders' representatives and their proxies do not exercise their voting rights in shareholders resolutions/shareholders' meetings in accordance with the resolutions of the Shareholders Committee, shareholders resolutions passed contrary to resolutions of the Shareholders Committee shall be reversed in resolutions/shareholders' meeting to be passed/called as soon as possible. (12) QUORUM: The Shareholders Committee constitutes a quorum if four Shareholders Committee members are present in the case of a Shareholders Committee constituted with five members, and if six members are present in the case of a Shareholders 11 Committee constituted with seven members. Members of Shareholders Committee may issue written voting proxies (fax sufficient) to other Members. (13) CALLING OF MEETINGS: The Shareholders Committee meetings shall be convened by the Chairman, which Chairman shall be one of the AboveNet appointees to the Shareholders Committee, to be determined by AboveNet, or, failing him, by any other member of the Shareholders Committee to the address last made known. The minimum advance notice shall be 30 (thirty) business days. A meeting may be called by registered letter, telegram, telefax, or via electronic means. (14) MINUTES: The Chairman of the Shareholders Committee shall procure that minutes of the Shareholders Committee shall be taken, in which at least the agenda, the members present and the result of any voting shall be reflected. Such minutes shall be signed by the Chairman of the Shareholders Committee and shall be made available to the Parties without undue delay. (15) WRITTEN RESOLUTIONS: Unless one of the Parties objects in writing to this manner of passing the resolution within one week from receipt of a proposed resolution, all resolutions of the Shareholders Committee may be adopted by written consent. The Chairman of the Shareholders Committee shall coordinate the voting by written consent and shall provide the Members of the Shareholders Committee with the result of the written vote without undue delay. (16) REMUNERATION FOR EXTERNAL SHAREHOLDER COMMITTEE MEMBERS: Members of the Shareholders Committee nominated by the Shareholders pursuant to Clause 8.3 hereof shall have no claim to remuneration or reimbursement for expenses for Shareholder Committee meetings. External members of the Shareholders Committee shall be entitled to reimbursement of expenses and an attendance fee to be determined by the Shareholders' Meeting from time to time. SECTION 9 RIGHT OF FIRST REFUSAL (1) RIGHT OF FIRST REFUSAL: All current and future (see Clause 18.2) shareholders in the Company grant the Parties a right of first refusal and subscription right (hereinafter referred to as the "Right of First Refusal") to the shares in the Company. 12 (2) CASE OF RIGHT OF FIRST REFUSAL: If one or more of the shareholders intend to sell his (their) share(s) in the Company or parts thereof (hereinafter referred to as the "Share" or the "Shares") to third parties against payment or gratuitously or sell them in another manner or assign them to third party(ies) against payment or gratuitously (e.g. by way of in-kind contribution), the other shareholders shall be entitled to of a Right of First Refusal with respect to such Shares. The shareholder proposing the sale shall immediately offer the Shares to the (other) Party(ies) in proportion to their respective shareholdings for exercise of the Right of First Refusal. Transfers by the shareholders to Affiliates (other than a third party that acquirers AboveNet) shall be subject to the other Parties' consent, which shall not be unreasonably withheld, and shall, in the case of consent, not constitute transfer to third parties. (3) PRESENTATION OF OFFER: If a shareholder proposes a transfer that is subject to the Right of First Refusal , the shareholder(s) proposing to sell its (their) share(s) shall be obligated to present to the other Party(ies) the purchase or sale offer, alienation or acquisition offer or the corresponding legal transaction concluded as condition precedent by transmitting a certified copy of the document which must contain the entire conditions of the legal transaction (in particular however not limited to the identity of the proposed acquirer, the nominal value of the share(s) to be transferred, remuneration and conditions of payment). (4) EXERCISE OF RIGHT OF FIRST REFUSAL: The Party(ies) have the right to exercise the Right of First Refusal within a deadline of 20 (twenty) business days as of notification pursuant to para 3 by offering to take over the share(s) to be transferred at the same price and on substantially the same terms (other than the form of consideration) as offered by the proposed acquiror. (5) CASH OR MARKETABLE SECURITIES CONSIDERATION: If the proposed acquiror has offered cash consideration or marketable securities, the Parties shall have the right to pay as consideration cash, or in the case of AboveNet, cash and/or AboveNet stock valued at the current stock market rate (valuation) or a combination of cash and stock, at its own election. The shareholders shall not be entitled to transfer their shares for any consideration other than cash or marketable securities without the unanimous consent of the other shareholders. In the event that AboveNet chooses stock as the form of consideration, the stock shall, at the sole option of AboveNet, be either (i) tradable on NASDAQ at the time of the closing of the acquisition or (ii) AboveNet shall agree to use its all reasonable efforts to register the shares with the U.S. Securities and Exchange Commission (the "SEC") for resale 13 within 90 (ninety) days of the closing, subject to AboveNet's right to extend such 90 (ninety) day period if it has material non-public information, the disclosure of which would have an adverse effect on AboveNet or its stockholders. If the shares are registered prior to the closing, the number of shares to be issued shall be determined by dividing the valuation of the Company by the value of one AboveNet share (based upon the average closing price of AboveNet stock over the ten trading days ending three trading days prior to the closing). If the closing price of the AboveNet stock on the day prior to the day it becomes tradable on NASDAQ is less than the value of one share of AboveNet stock (based upon the average closing price of the AboveNet stock over the ten trading days ending three trading days prior to the closing), AboveNet will provide the shareholders at AboveNet's option, cash or additional shares AboveNet stock with a value sufficient to compensate them for such decrease. (6) Registration of Shares: (a) Registration of Shares. If the shares of AboveNet common stock (the "Common Shares") are not registered with the U.S. Securities and Exchange Commission (the "SEC") prior to the Closing, AboveNet shall, within 30 days after the Closing Date, file with the SEC a registration statement under the Securities Act covering the resale to the public by the shareholders of the Common Shares (the "Registration Statement"). AboveNet shall use reasonable efforts to cause the Registration Statement to be declared effective by the SEC as soon as practicable. AboveNet shall use its reasonable efforts, subject to subsection (b) below, to cause the Registration Statement to remain effective for until the earlier of (i) 120 days from the effective date of the Registration Statement (the "Selling Period") or (ii) such time as all of the Common Shares covered by the Registration Statement have been sold pursuant thereto. (b) Limitations on Registration Rights. (i) AboveNet may, at any time, delay the filing or effectiveness of the Registration Statement or suspend the Registration Statement after effectiveness and may further, by written notice to the shareholders, require that shareholders immediately cease sales of the Common Shares during the Selling Period in the event that, and for so long as, AboveNet determines that the existence of any fact or the happening of any event (including without limitation pending negotiations relating to, or the consummation of, a transaction or the occurrence of any other event) would require additional 14 disclosure of material information by AboveNet in the Registration Statement the confidentiality of which AboveNet has a business purpose to preserve or which fact or event would render AboveNet unable to comply with SEC requirements (in either case, a "Suspension Event"). (ii) If AboveNet delays or suspends the Registration Statement or requires Investor to cease sales of shares pursuant to Section b.i above, AboveNet shall, as promptly as practicable following the termination of the circumstance which entitled AboveNet to do so, take such actions as may be necessary to file or reinstate the effectiveness of the Registration Statement and/or give written notice to Investor authorizing Investor to resume sales pursuant to the Registration Statement. If as a result thereof the prospectus included in the Registration Statement has been amended to comply with the requirements of the Securities Act, AboveNet shall enclose such revised prospectus with the notice to shareholder given pursuant to this Section b.ii, and shareholders shall make no offers or sales of shares pursuant to the Registration Statement other than by means of such revised prospectus. (iii) In the case of any Suspension Event occurring prior to and delaying the filing of the Registration Statement, AboveNet shall file the Registration Statement in accordance with Section b.ii above and shall be required to keep the Registration Statement effective until the earlier of (i) such time as all of the shares offered thereby have been disposed of in accordance with the intended methods of distribution set forth in the Registration Statement or (ii) 120 days plus an extended period equal to the number of days during which any such suspension was in effect. (c) Registration Procedures. (i) In connection with the filing by AboveNet of the Registration Statement, AboveNet shall furnish to the shareholders copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act and such additional copies as are reasonably requested by the shareholders. (ii) AboveNet shall use its best efforts to register or qualify the Common Shares covered by the Registration Statement under the securities laws of such states as the shareholders shall reasonably request; provided, however, that AboveNet shall not be required in connection with this Section c.ii to 15 qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction. (iii) If AboveNet has delivered final prospectuses to the shareholders and after having done so the prospectus is amended to comply with the requirements of the US Securities Act of 1933, as amended, AboveNet shall promptly notify the shareholders and, if requested by AboveNet, the shareholders shall immediately cease making offers or sales of shares under the Registration Statement and return all prospectuses to AboveNet. AboveNet shall promptly provide the shareholders with revised prospectuses and, following receipt of the revised prospectuses, the shareholders shall be free to resume making offers and sales under the Registration Statement. (iv) AboveNet shall pay the expenses incurred by it in complying with its obligations under this Section -, including all registration and filing fees, exchange listing fees, fees and expenses of counsel for AboveNet, and fees and expenses of accountants for AboveNet, but excluding (i) any brokerage fees, selling commissions or underwriting discounts incurred by Investor in connection with sales under the Registration Statement and (ii) the fees and expenses of any counsel retained by the shareholders. (d) Requirements of Shareholders. AboveNet shall not be required to include any Common Shares in the Registration Statement unless each shareholder furnishes to AboveNet in writing such information regarding the shareholder and the proposed sale of Common Shares by the shareholder as AboveNet may reasonably request in writing in connection with the Registration Statement or as shall be required in connection therewith by the SEC or any state securities law authorities. (7) DUE DATE OF REMUNERATION: The remuneration shall be due within 30 (thirty) days following the conclusion of the proceeding pursuant to para 2 through 4, the remuneration pursuant to para 5 shall be due within 30 (thirty) days as of determination of the remuneration under subpara 5 hereof. In case of default in payment, default interests in the amount of 4 (four) percent over the discount rate (Basiszinssatz) as fixed by decree from time to time shall be paid. (8) NON-EXERCISE OF RIGHT OF FIRST REFUSAL: If the Party(ies) choose(s) not to exercise the Right of First Refusal in a particular case, the shareholder(s) obligated to the preemptive sale may sell, alienate, or transfer the Shares as to which the right of first refusal 16 within 6 (six) months following notification of the Right of First Refusal, however - in case of a sale or a transfer to a third party - only to the disclosed third party and in all cases of Right of First Refusals only subject to the provisions and conditions exactly as disclosed pursuant to para 3. If the shareholder(s) obligated to the preemptive sale does not alienate or transfer the Shares subject to the Right of First Refusal within this deadline, the Right of First Refusal shall cease to exist for the case in question yet shall in general continue to exist. (9) STATEMENTS AND NOTIFICATIONS: All statements and notifications according to the above provisions shall be made by certified airmail letter or courier mail or personally delivered. Unless expressly provided otherwise, all of the deadlines mentioned in the above provisions shall be counted as of five business days after dispatch (date of the postal stamp). SECTION 10 PUT OPTIONS (1) PUT OPTION 1: RRZ hereby irrevocably offers to buy and accept from AboveNet the shares in the Company ("Put Option 1"). This option may only be exercised with respect to all shares, and may not be exercised partially. (2) EXERCISE OF PUT OPTION: Put Option 1 may be exercised by AboveNet (i) if, without AboveNet's prior written approval, nominal capital of the Company is sold by RRZ to a third party or parties in a single transaction or a series of related transactions, and such third party(ies) does (do) not offer to purchase all of AboveNet's shares in the Company on the same terms as shares are being purchased from other shareholders or (ii) a direct or indirect competitor of Above Net acquires direct or indirect ownership of RRZ. In case of (i) AboveNet may demand as its purchase price the higher of the price per share being offered by the third party and the remuneration determined under Clause 10 subpara 3 below and in case of (ii) the remuneration shall be determined under Clause 10 subpara 3 below. AboveNet shall exercise its Put Option within 20 (twenty) business days after written notification by RRZ or the Company, respectively, from the closing of the transaction or transactions. (3) DETERMINATION OF REMUNERATION: If no agreement on the amount of consideration for the Shares can be reached within 14 (fourteen) days following the Effective Date, the price shall be the fair market value as determined by a certified Austrian auditing and tax consultancy company or by a certified Austrian auditor and tax consultant mutually 17 agreed upon by AboveNet and RRZ (hereinafter referred to as "the Arbitration Expert"). If AboveNet and RRZ cannot agree to an arbitration expert within 14 (fourteen) days, each shall select an expert and have the price evaluated. If the two evaluations are more than 20 (twenty) % apart, an Arbitration Expert shall be appointed upon application by one of the shareholders by the President of the Vienna Chamber of Certified Accountants. The arbitration opinion by this expert shall be binding upon the respective Parties. The costs for the Arbitration Expert shall be borne by both Parties, whereby AboveNet shall pay one half, and RRZ the other half. (4) DECLARATION OF ACCEPTANCE: The declaration of acceptance of the offer under the Put Option shall be timely and properly made provided AboveNet exercises the Put Option and thereby accepts the offer hereunder in the form of a the written, duly signed acceptance declaration to RRZ. The sale and assignment of the Shares shall be deemed concluded upon service of an original copy of the Notarial Acceptance Deed to RRZ. (5) EFFECTIVE DATE: The effective date for the sale and transfer shall be the day on which the respective written acceptance declarations are delivered to RRZ (hereinafter referred to as "Effective Date"). (6) PAYMENT DUE DATE: Purchase Price shall be due and payable to AboveNet within thirty (30) business days from (i) the Effective Date and (ii) in case of Art 10.3 the service of the arbitrator's opinion (10.3), respectively. (7) PUT OPTION 2: AboveNet hereby irrevocably offers to buy and accept from RRZ the shares in the Company ("Put Option 2"). This option may only be exercised with respect to all shares, and may not be exercised partially (8) EXERCISE OF PUT OPTION 2: Put Option 2 may be exercised by RRZ if, without RRZ's prior written approval, nominal capital of the Company is sold by AboveNet to a third party or parties in a single transaction or a series of related transactions, and such third party(ies) does (do) not offer to purchase all of RRZ's shares in the Company on the same terms as shares are being purchased from other shareholders. In such case RRZ may demand as the purchase price for their shares the higher of the the price per share being offered by the third party and the remuneration shall be determined under Clause 10 subpara 9 below. RRZ shall exercise its Put Option within 20 (twenty) business days after written notification by AboveNet or the Company, respectively, from the closing of the transaction or transactions. 18 (9) DETERMINATION OF REMUNERATION: If no agreement on the amount of consideration for the Shares can be reached within 4 (four) weeks following receipt of the termination notice by the remaining shareholder(s), the fair market value of the shares shall be determined by a certified Austrian auditing and tax consultancy company or by a certified Austrian auditor and tax consultant mutually agreed upon by AboveNet and RRZ (hereinafter referred to as "the Arbitration Expert"). If AboveNet and RRZ cannot agree to an arbitration expert within 14 (fourteen) days, each shall select an expert and have the price evaluated. If the two evaluations are more than 20 (twenty) % apart, an Arbitration Expert shall be appointed upon application by one of the shareholders by the President of the Vienna Chamber of Certified Accountants. The arbitration opinion by this expert shall be binding upon the respective Parties. The costs for the Arbitration Expert shall be shared by the Parties, whereby AboveNet shall pay 50% and RRZ shall pay 50%. (10) DECLARATION OF ACCEPTANCE: The declaration of acceptance of the offer under the Put Option shall be timely and properly made provided RRZ exercises the Put Option and thereby accepts the offer hereunder in the form of a the written, duly signed acceptance declaration to AboveNet. The sale and assignment of the Shares shall be deemed concluded upon service of an original copy of the Notarial Acceptance Deed to AboveNet. (11) EFFECTIVE DATE: The effective date for the sale and transfer shall be the day on which the respective written acceptance declarations are delivered to AboveNet (hereinafter referred to as "Effective Date"). (12) FORM OF CONSIDERATION. AboveNet shall be entitled to pay the Purchase Price in either cash or shares of AboveNet stock. In the event that AboveNet chooses stock as the form of consideration, the stock shall, at the sole option of AboveNet, be either (i) tradable on NASDAQ at the time of the closing of the acquisition or (ii) AboveNet shall agree to use its all reasonable efforts to register the shares with the U.S. Securities and Exchange Commission (the "SEC") for resale within 90 (ninety) days of the closing, subject to AboveNet's right to extend such 90 (ninety) day period if it has material non-public information, the disclosure of which would have an adverse effect on AboveNet or its stockholders. If the shares are registered prior to the closing, the number of shares to be issued shall be determined by dividing the valuation of the Company by the value of one AboveNet share (based upon the average closing price of AboveNet stock over the ten trading days ending three trading days prior to the closing). If the closing price of the AboveNet stock on the day prior to the day it becomes tradable on NASDAQ is less than 19 the closing value of one share of AboveNet stock (based upon the average closing price of the AboveNet stock over the ten trading days ending three trading days prior to the closing), AboveNet will provide the shareholders at AboveNet's option, cash or additional shares AboveNet stock with a value sufficient to compensate them for such decrease. (13) REGISTRATION OF SHARES. If AboveNet chooses stock as the form of consideration the provisions of Clause 9 subpara 6 shall apply. (14) PAYMENT DUE DATE: Purchase Price shall be due and payable to RRZ within thirty (30) business days from (i) the Effective Date and (ii) in case of Art 10.9 the service of the arbitrator's opinion (10.9), respectively. SECTION 11 TRANSFER, REDEMPTION AND ENCUMBRANCE OF SHARES (1) TRANSFER OF SHARES: No shares of the company may be transferred without the approval of the Shareholders Meeting where an approval by 90 % of the outstanding shares is required, which approval shall not be unreasonably withheld, especially since the Parties are protected under the Right of First Refusal and the Call Options. Transfers of shares in the Company by the shareholders to Affiliates shall be subject to the other Parties' consent, which shall not be unreasonably withheld, and shall, in the case of consent, not constitute transfer to third parties. (2) REDEMPTION OF SHARES: After the transformation of the Company into an AG, the Company shall not have the right to redeem the Company's shares under any circumstances, except that if the holders of 90 % of the outstanding shares (including the shares held by AboveNet) agree to such redemption. (3) RESTRICTIONS ON ENCUMBRANCE: Shares may only be pledged or otherwise encumbered with the consent of the Shareholders Committee. If such consent is given, it is only valid if the pledgee concluded an agreement with the other Shareholders which grants such other Shareholders the rights provided for in this Agreement, particularly the right of first refusal. 20 SECTION 12 COMPETITION CLAUSE (1) NON-COMPETITION: Without the consent of the Company to be given by unanimous resolution of the Shareholders, the Parties may neither engage in the Company's line of business (co-location and connectivity services) nor acquire participations in companies that provide such services (such as Frontier, Exodus, Concentric, EUNet, PSI, AtHome, or Telekabel) in Austria. The members of the corporate bodies of the Company may not engage in any activities, self-employed or employed, including but not limited to accepting a position as managing or supervising body (e.g. shareholder committee, supervisory board), doing business for their own or for another persons account, or acquiring direct or indirect (e.g. through trustees) participations in a company that engages in the same line of business in Austria, as personally liable shareholders or through a capital interest of any kind. (2) TERM: The competition clause shall be valid for the term of this Agreement and a period of one year thereafter and shall be limited to the territory of Austria. The one year post-termination prohibition shall not apply in case of termination for cause, to the Party terminating for cause or in the event of a termination under Clause 15.3 hereunder. (3) SUSPENSION/TERMINATION: AboveNet and Affiliates shall not be bound (i) during suspension or following expiration of the exclusivity under the License Agreement (Exhibit./3) or following termination of the License Agreement itself and/or (ii) if any Affiliate of RRZ breaches this Clause 12. (4) AFFILIATES: The competition clause applies to the Parties and to all Affiliates. It will not qualify as a violation of this non-compete provision if affiliates from Raiffeisen Upper Austria, Salzburg, Carinthia or Tyrol engage in competitive activities. In such case, AboveNet (and Affiliates) shall not be bound by the non-compete clause in the named area. (5) EXEMPTION WITH REGARD TO NETWAY: RRZ shall transfer all existing outsourcing businesses provided to Netway to the Company on a best price guarantee (i.e. the Company will charge the lowest price it charges other customers with comparable space and bandwidth requirements), and will not provide co-location services and (i.e. in combination with) Internet Connectivity services in this area to Netway or any other company. RRZ shall procure that Netway will not expand its co-location services and not competete with the Company unless all those services are outsourced to the Company and all related connectivity is purchased exclusively from the Company. Additionally, RRZ will procure that Netway will purchase a minimum of 75% of its entire connectivity 21 needs from the Company, provided that the Company offers competitive prices at comparable quality and purchase volume levels. A transition period of one year will apply to allow the completion of existing supplier agreements, provided however, that upon termination of any such agreement, it will not be renewed and be replaced with services from the Company until the condition of this paragraph is fulfilled. If this clause 12.5 is violated, AboveNet shall have the right to terminate the exclusivity of the license agreement, and shall no longer be bound by the competition provisions in this section 12 . (6) EMPLOYEES: The Company shall procure that each of the key employees of the Company shall enter into agreement not to compete with the Company during their employment by the Company and for one year thereafter, subject to continuation of salary payment for that one-year period. This provision shall not apply if the Company is sold and the individuals are employed with the acquirer. (7) SOLICITATION OF EMPLOYEES: AboveNet and RRZ shall not solicit or employ any employees of the Company without written consent of the Company, except for employees who have been dismissed for other than cause (Entlassung). SECTION 13 INSPECTION OF BOOKS All shareholders shall have the right to inspect upon appropriate notice through their (authorized) representatives the Company's general books and records and to obtain photocopies of such books and records at all times. SECTION 14 ABOVENET STOCK OPTION PLAN AboveNet intends to grant options to purchase AboveNet stock to employees of the Company subject to applicable accounting and legal issues from time to time and subject to separate option agreements to be concluded between AboveNet and the beneficiary.. The aggregate number of options to be granted shall be for up to 100,000 shares over four years (up to 15,000 shares in year 1, up to 20,000 in year 2, up to 25,000 shares in year 3, and up to 40,000 shares in year 4), unless the Company is acquired by a third party prior to such time, upon achievement of the revenue, net income and EBITDA targets in the Business Plan attached 22 hereto as Exhibit ./7 for the prior year. If the Company fails to meet such targets in any year, no options will be issued. Within 60 days from the end of the business year, the Company's auditors (currently Deloitte & Touche) shall determine whether the Company succeeded or failed to meet the targets in the Business Plan. The exercise price for the options shall be the fair market value of the AboveNet stock on the date the options are issued. III. GENERAL TERMS SECTION 15 TERM OF THE SHAREHOLDERS AGREEMENT (1) TERM: This Shareholders Agreement is concluded for an indefinite term. (2) DISSOLUTION: This Agreement shall be binding upon the Parties thereto until both Parties agree to dissolve the Agreement by unanimous written resolution, or if in case of (a) and (b) one of the Parties and in case (d) the non-breaching Party gives written notice of termination in case of (a) dissolution or liquidation of the Company; (b) initiation of insolvency proceedings over the assets of the Company, Above Net, or RRZ; (c) an exercise of the Put Option under Clause 10; or (d) a material breach by one of the Parties of any material obligation of the License Agreement or the Agreement hereunder; whereupon all rights and obligations under this Agreement shall immediately expire, unless a term of this Agreement expressly provides for a survival period. (3) EXIT AND EXIT PENALTY: The Parties may furthermore terminate this Agreement as of the end of any calendar quarter by providing the Company with at least three months prior written notice pursuant to Art 11 of the Articles of Association. Such termination notice must be sent by registered letter accompanied by telefax sent the same day to the Company and the other Party (i) If the effective date of termination is within the first 24 (twenty four) months following registration of the Company, 23 however, the exiting Party shall be subject to payment of a penalty of USD 5,000,000 (five million) to the other Party. Additionally, the Party terminating shall lose its equity capital provided and all investments made. The remaining Party shall have the right to request from the exiting Party the assignment of the exiting Party's shares for a nominal transfer price of ATS 1 (one Austrian Shilling) within a notice period of four weeks following receipt of termination notice; such request must be by registered letter accompanied by telefax sent the same day to the exiting Party. Should the remaining Party choose not to exercise such right, the Company shall be liquidated as of the effective date of termination of the Agreement . The Parties undertake to vote for the liquidation of the Company requiring unanimous vote of the shareholders' meeting. (ii) If the effective date if termination is after the first 24 (twenty-four) months following the registration of the Company in the Companies' Register, no Termination Penalty shall apply. The remaining Party shall have the right to request from the exiting Party the assignment of the exiting Party's shares within a notice period of four weeks following receipt of termination notice; such request must be by registered letter accompanied by telefax sent the same day to the exiting Party. The transfer price shall be the fair market value of the shares as agreed between the Parties and failing such agreement on the amount of consideration for the Shares, it shall be determined by an Arbitration Expert who shall be appointed pursuant to the Rules described under Clause 10 above. (4) "ABOVENET" NAME: The parties acknowledge that neither RRZ nor the Company has any rights to the use of the name "AboveNet" or to any goodwill associated therewith save to the extent provided in the Licence Agreement. Thus, leaving further rights under the Licence Agreement unaffected, in case of loss of exclusivity under the Licence Agreement and/or if at any time AboveNet and/or its Affiliates cease to hold any shares in the Company, RRZ and the Company shall procure that the Company shall cease to use the name AboveNet for any purpose and shall take such steps as are necessary to remove such name from the registered corporate name of the Company and RRZ and its Affiliates shall not thereafter use or suffer to be used the name of AboveNet in connection with the operation of the Business. (5) EFFECTS: The validity of this Agreement shall also be applicable to all Shares acquired by the Parties in the future by way of purchase, in the course of capital increases or in any other manner. 24 SECTION 16 CONFIDENTIALITY (1) CONFIDENTIAL INFORMATION: Each Party hereto undertakes for itself and for its Affiliates the fulfillment by which of this obligation it guarantees, to keep confidential the following information regarding the business operations of the Company or any of its subsidiaries and to prevent the passing on of this confidential information to third parties: (a) any information that is specifically marked as "Confidential"; (b) information which the management of the Company or either of the Parties has requested in writing to be kept confidential; (c) information which by its nature must be kept confidential in order to prevent adverse consequences to the business of the Company; (d) information relating to the contents of this Agreement and its Exhibits. (2) LIMITATION ON THE FLOW OF INFORMATION: The Parties shall endeavor to give access to said confidential information only to such persons who are either bound by professional duty of confidentiality or who require knowledge of the information as employees, representatives, authorized persons, advisors, officers or directors of the respective Party or one of their Affiliated Companies for orderly conduct of business of the Party concerned. The Party shall also require the recipients of the information to undertake to keep the confidential information secret. (3) DURATION OF OBLIGATION: The obligation of this Clause shall continue to be in force even after a Party shall have ceased to be a partner to this Agreement or a Shareholder of the Company. (4) INFORMATION NOT TO BE KEPT SECRET: For the purpose of this Clause the following information shall not be considered to be confidential: (a) information already the public domain; (b) information which becomes known through no fault of the disclosee; (c) information which becomes known independently of the disclosure; 25 (d) information which is necessary to be disclosed in the course of a stock exchange listing of the Company or under the rules of the SEC or the Nasdaq National Market; (e) information the disclosure of which is in the justified interest of one of the Parties in the course of the sale of his participation in the Company; the Party shall require the recipients of the information to undertake to keep the confidential information secret. Nothing herein shall be construed as preventing a Party from disclosing confidential information where it is under a duty, under applicable law, regulation, court or administrative decision to make such disclosure, such as, in case of AboveNet, in public filings with the SEC. (5) WAIVER: The Company hereby waives for itself any right to keep confidential any matters which are to be disclosed under this Agreement by members of the Management Board of the Company to the Parties. SECTION 17 COSTS (1) All costs resulting from negotiating and drafting this Agreement, including, but not limited to, legal, accountancy and financial advisors fees, shall be borne by such Party where they occurred and shall not be reimbursable by the other Party or the Company. (2) No stamp duties and transfer taxes should arise in connection with the conclusion of this Agreement. SECTION 18 GENERAL (1) ENTIRE AGREEMENT: This Agreement and the documents referred to in this Agreement contain the entire agreement between the Parties relating to the transactions contemplated by this Agreement and supersede any previous agreements between the Parties (if any) relating to these transactions. 26 (2) EFFECTS ON THIRD PARTIES: This agreement shall be binding upon each of the parties and their respective successors and assignees. The validity of this Agreement shall also be applicable to all Shares acquired in the future by way of purchase or in any other manner. Any acquirers of shares in the future shall be obliged to enter into this agreement. The Parties intend to seek a third shareholder for AboveNet Austria GmbH to increase the market potential for named Company. Following accession of such third Shareholder, the participation quotas is expected to be one third for each shareholder. Parties agree to amend this Shareholders Agreement in case of (i) the accession of parties different from the Parties to the Shareholders Agreement and/or (ii) transformation of AboveNet Austria GmbH into an AG and/or (iii) the establishment of a supervisory board and/or (iv) an IPO of AboveNet Austria GmbH being in preparation. (3) INTERPRETATION: Clause and subsection headings in this Agreement are for ease of reference only and do not affect the substance of any provision. Words denoting the singular include the plural and vice versa, words denoting any one gender include all genders. All references to a statutory provision shall be construed as including references to any statutory modification or re-enactment thereof (whether before or after the date of this Agreement) for the time being in force. (4) MODIFICATIONS TO AGREEMENT: This Agreement and its Exhibits shall not be amended orally and shall not be modified or discharged, in whole or in part, otherwise than by an instrument in writing signed by all Parties hereto or their successors or assignees. (5) NO THIRD PARTY BENEFICIARIES: This Agreement shall inure to the benefit of, and be binding upon, each of the Parties and their respective successors and assignees, subject to the provision of this Agreement, but shall not inure to the benefit of any third party. Except as expressly provided for under this Agreement, none of the rights and obligations under this Agreement may be assigned or transferred to third parties without the prior written consent of the other Party. (6) SEVERABILITY AND INVALIDITY: Should any provisions of this Agreement be or become wholly or partly invalid or unenforceable, this will not affect the validity or enforceability of the remaining provisions. The invalid or unenforceable provisions shall be substituted by a valid or enforceable provision which in its essential purpose comes as close as possible to the invalid or unenforceable provision; the same applies mutatis mutandis to any gaps in this Agreement. 27 (7) WAIVERS: The failure of any Party to enforce or to exercise, at any time or for any period of time any right or remedy arising pursuant to or under this Agreement does not constitute, and shall not be construed as, a waiver of such right or remedy and shall in no way affect that Party's right to enforce or exercise it later, provided that such right is not time barred or precluded. Any waiver to this effect must be in writing. (8) EXHIBITS: All exhibits to this Agreement are an integral part of this Agreement as if fully set forth herein. All references herein to an exhibit shall be deemed to be references to a clause of this Agreement unless the context shall otherwise require. (9) NOTICES: All notices required or permitted by this Agreement shall be in writing, be given by an authorized representative of the relevant Party and shall be sent to the recipient via registered mail and telefax to the address set forth below or an address to be provided by the relevant Party in writing and via registered mail under reference to this Clause to the other Party: If to RRZ: Raiffeisen Rechenzentrum Ges.m.b.H attn: Mr. Martin Hell Mr. Wilfried Pruschak 1020 Vienna, Hollandstrasse 11-13 If to AboveNet: AboveNet Communications, Inc. attn: Mr. Warren J. Kaplan Dr. Paul Steiner 50 W. San Fernando Street, #1010, San Jose, CA 95113 (10) COUNTERPARTS: This Agreement is executed in two counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument. (11) LANGUAGE: This Agreement has been produced in the English language and the negotiations relating to this Agreement were conducted in English; any translations are for working purposes only and have no influence on the interpretation of this Agreement. 28 (12) ANNOUNCEMENTS: No announcement concerning this Agreement or its subject matter or any ancillary matter shall be made by any Party except as permitted herein or as required by law without the prior written approval of the other Parties such approval not to be unreasonably withheld or delayed. SECTION 19 APPLICABLE LAW, ARBITRATION (1) APPLICABLE LAW: The validity, interpretation and performance of this Agreement shall be governed by the laws of the Republic of Austria, excluding the rules regarding choice of law and excluding the United Nations Convention on Contracts for the international sale of goods. (2) ARBITRATION CLAUSE: Any disputes arising out of or in connection with this Agreement, including disputes on its conclusion, binding effect, amendment and termination shall be finally settled by a three-person Arbitration Tribunal under the Rules of Arbitration of the International Chamber of Commerce (ICC). AboveNet and RRZ shall each nominate one arbitrator, who shall be confirmed by the Court of Arbitration of the International Chamber of Commerce. If one Party fails to nominate an arbitrator within four weeks after the institution of the arbitration proceedings, the Court of Arbitration shall appoint such arbitrator. The third arbitrator shall be appointed jointly by the arbitrators and confirmed by the Court of Arbitration. If the two arbitrators fail to agree on the appointment of the chairman within four weeks of confirmation, the chairman shall be appointed by the Court of Arbitration. (3) PLACE, LANGUAGE: The place of the arbitration shall be Vienna, the language of the arbitration proceedings shall be English without translation. The Arbitral Tribunal has to decide in the award which party has to bear the costs of the arbitration (or in what proportions the costs shall be borne by the Parties) including the fees of counsel having assisted the Parties. (4) INJUNCTIVE RELIEF:: The Parties hereto agree that, in addition to any and all other remedies that may be available under this Agreement and its Exhibits, each Party shall be entitled for the enforcement of its claims to injunctive relief as may be granted by a court of competent jurisdiction. 29 Vienna, this - ----------------------------------------- For Raiffeisen Rechenzentrum Ges.m.b.H - ----------------------------------------- For AboveNet Communications, Inc. - ----------------------------------------- For AboveNet Communications GmbH, joining the Agreement and signing with respect to Clauses which shall bind the Company, e.g. Arts 5/2, 12/6. EX-10.37 5 COOPERATION AGREEMENT 1 EXHIBIT 10.37 CONFORMED COPY Register of Deeds No. 297 for 1999 NEGOTIATED In FRANKFURT AM MAIN on 25 March 1999 appeared before me DR. GERHARD HESS notary (Notar) in Frankfurt am Main, with offices in Taunusanlage 11, 60325 Frankfurt am Main the following persons who appeared at the request of the following Appearants at the offices of Oppenhoff & Radler Linklaters & Alliance at Mainzer Landstrasse 16, 60325 Frankfurt am Main: 1. Dr. Paul Steiner, born 19.05.56 with offices at AboveNet Communications, Inc., 50 W. San Fernando Street, No. 1010, San Jose, CA 95113, USA acting not in his own name, rather in the name of: AboveNet Communications, Inc., 50 W. San Fernando Street, No. 1010, San Jose, CA 95113, USA as its Vice President, International, 2. Mr Albrecht Wilhelm Kraas, born 07.07.1965 in Ludenscheid, residing at Pommernstr. 11, 53119 Bonn, 3. Mr Andreas Friedrich Schachtner, born 08.05.1962 in Essen, residing at Dessauer Str. 12, 44263 Dortmund, 4. Mr Michael Schneider, attorney, born 13.06.1962 in Bergneustadt, residing at Auf der Draveler Wiese 23, 53639 Konigswinter-Ittenbach, acting both in his own name and in the name of a. Ms. Petra Schreck, Haussdorffstrasse, 189, 53129 Bonn on the basis of a power of attorney dated 24 March 1999, a copy of which is certified and attached to this notarial document as ATTACHMENT 1, and b. Ms. Elke Schneider, Auf der Draveler Wiese 23, 53639 Konigswinter on the basis of a power of attorney dated 23 March 1999, a copy of which is certified and attached to this notarial document as ATTACHMENT 2. 2 Appearant No. 1 identified himself by presenting his Austrian passport. Appearants Nos. 2, 3 and 4 identified themselves by presenting their German personal identity cards (Personalausweise). Appearant No. 1, acting as stated, and Appearant No. 4, acting solely on behalf of Ms. Petra Schreck and Ms. Elke Schneider first requested notarization of the Purchase Agreement attached hereto as ATTACHMENT 3. The Appearants 1, 2 and 3, acting as stated, and Appearant No. 4 acting solely in his own name, then requested the notarization in English of the Cooperation Agreement and Exhibits attached to this notarial document as ATTACHMENT 4 and the related shareholders resolutions. The notary informed the Appearants about their right to have translations of the English documents, and the Appearants stated that this was not desired. The notary if fluent in the English language and has convinced himself that the Appearants are also fluent in English and German. The notary explained the prohibition on acting as a notary under Section 3 para. 1 No. 7 "Beurkundungsgesetz" (Statute on Executing Deeds). The Appearants answered the notary's question about whether his firm had acted for the parties in the past on this matter in the negative. The notarial document, including Attachments, was read to the Appearants, approved by them and signed by the notary and the Appearants in their own hands as follows: [SIG ILLEGIBLE] [SIG ILLEGIBLE] [SIG ILLEGIBLE] [SIG ILLEGIBLE] [SIG ILLEGIBLE] 3 Attachment 1 V O L L M A C H T HIERMIT WIRD IN SACHEN InternetTreuhand GmbH WEGEN Verausserung und Ubertragung meiner Geschafgtsanteile an der InternetTreuhand GmbH HERRN RECHTSANWALT MICHAEL SCHNEIDER VOLLMACHT ERTEILT. Die Vollmacht erstreckt sich auf die Verausserung und Ubertragung aller Geschaftsanteile, die ich, Dr. Petra Schreck, Dipl. Geographin, geboren am 09.10.1967 in Langerwehe, wohnhaft Haussdorffstrasse 189, 53129 Bonn, an der InternetTreuhand GmbH (AG Bonn, HRB 7642) halte. Hierbei handelt es sich um einen Geschaftsanteil in Hohe von 45.000,00 DM, bei einem Stammkapital der Gesellschaft von insgesamt 50.000,00 DM also um 90% der Geschaftsanteile. Diese sollen an die Firma AboveNet Communications, Inc., 50 W. San Fernando St., #1010, San Jose, CA 95113 veraussert und ubertragen werden. Die Vollmacht erstreckt sich weiterhin auf alle mit der Verausserung und Ubertragung zusammenhangenden Rechtsgeschafte, insbesondere den Abschluss einer Schiedsvereinbarung. Bonn 24.3.99 /s/ Petra Schreck - ----------------------- ----------------------- ----------------------- Ort Datum Unterschrift Vorstehande Ablichtung ist ein vollsstendiges Lichthild der Urschrift. Frankfurt am Main, den 24.3.99 [signature] [SEAL] ------------- ----------------------- Notar 4 Attachment 2 VOLLMACHT HIERMIT WIRD IN SACHEN Internet Treuhand GmbH WEGEN VerauBerung und Ubertragung meiner Geschaftsanteile an der Internet Treuhand GmbH HERRN RECHTSANWALT MICHAEL SCHNEIDER VOLLMACHT ERTEILT. Die Vollmacht erstreckt sich auf die VerauBerung und Ubertragung aller Geschaftsanteile, die ich, Elke Schneider geborene RoB, Dipl. Oecotrophologin, geboren am 04 June 1961, wohnhaft in 53639 Konigswinter-Ittenbach, Auf der Draveler Wiese 23, an der InternetTreuhand GmbH (AG Bonn, HRB 7642) halte. Hierbei handelt es sich um einen Geschaftsanteil in Hohe von 5.000,00 DM, bei einem Stammkapital der Gesellschaft von insgesamt 50.000,00 DM also um 10% der Geschaftsanteile. Diese sollen an die Firma AboveNet Communications, Inc., 50 W. San Fernando St., #1010, San Jose, CA 95113 verauBert und ubertragen werden. Die Vollmacht erstreckt sich weiterhin auf alle mit der VerauBerung und Ubertragung zusammenhangenden Rechtsgeschafte, insbesondere den AbschluB einer Schiedsvereinbarung. [Illegible] 23.03.99 /s/ [Signature Illegible] - --------------- ---------- ------------------------- Ort Datum Unterschrift Verstehende Ablichtung ist ein voilstandiges Lichtbild der Urschrift. Frankfurt am Main, den [DR. GERHARD HESS NOTARY IN FRANKFURT AM MAIH] 24.3.99 /s/ [Signature Illegible] ----------- ------------------------- 5 ATTACHMENT 3 PURCHASE AND TRANSFER AGREEMENT between 1. Ms. Petra Schreck, Haussdorffstrasse 189, 53129 Bonn, and 2. Ms. Elke Schneider, Auf der Draveler Wiese 23, 53639 Konigswinter (also referred to as the "Sellers") and AboveNet Communications, Inc., 50 W. San Fernando Street, No. 1010, San Jose, CA 95113, USA, ("AboveNet") SECTION 1 Ms. Schreck holds one share with the nominal value of DM 45,000 and Ms. Schneider holds one share in the nominal value of DM 5,000 in the limited liability company (Gesellschaft mit beschrankter Haftung) InternetTreuhand Gesellschaft fur Registrierungsdienste mbH, registered under No. HRB 7042 in the commercial register maintained at the Municipal Court (Amtsgericht) in Bonn. The capital contributions for the shares have been fully paid in cash. No other shares exist. SECTION 2 Each of the Sellers hereby sells and transfers all of her respective share to AboveNet which accepts the sale and transfer. The transfer is effective with economic effect as of notarization. SECTION 3 The purchase price for the shares is DM 49,000 which is immediately due for payment upon execution of this agreement. AboveNet is rendering payment by wire transfer of the purchase price today to the following account: ACCOUNT HOLDER: SCHNEIDER & SCHOLLMEYER TRUST ACCOUNT NO.: 3766593029 BANK: VOLKSBANK BONN-RHEIN-SIEG, HENNEF GERMAN BANK CODE: 38060186 SWIFT CODE: GENO DE DD REFERENCE: PURCHASE PRICE GERMANY 6 Attachment 4 COOPERATION AGREEMENT between AboveNet Communications, Inc., 50 W. San Fernando Street, No. 1010, San Jose, CA 95113, USA (hereinafter, "AboveNet"), and 1. Mr. Albrecht Wilhelm Kraas, residing at Pommernstr. 11, 53119 Bonn, 2. Mr. Andreas Friedrich Schachtner, residing at Dessauer Str. 12, 44263 Dortmund, 3. Mr. Michael Schneider, residing at Auf der Draveler Wiese 23, 53639 Konigswinter-Ittenbach (hereinafter, the "NRW Principals") INTRODUCTION A. AboveNet and the NRW Principals wish to establish a jointly held German company which will provide carrier class facilities, including co-location and internet connectivity services ("Internet Service Exchange"). B. AboveNet and the NRW Principals control certain software and intellectual property which will enable the German company to establish the Internet Service Exchange, and AboveNet and the NRW Principals intend to make this software and intellectual property available to the German company. C. AboveNet is today acquiring all shares in a German limited liability company (the "GmbH") which is currently only a shelf company. This GmbH will become the jointly held German company. The parties wish to increase the capital of the GmbH and redraft the articles of association accordingly. The parties, acting in their capacities as shareholders, will then conduct a first shareholders meeting and resolve further steps to be taken by the GmbH, including the conclusion of employment agreements with the NRW Principals, conclusion of a License, Connectivity and Marketing Agreement between AboveNet and the GmbH and adopting a business plan. D. In order to provide general rules for the course of the cooperation and implement the first stages of the cooperation, the parties are entering into this Cooperation Agreement. 7 Each of the Sellers warrants (steht dafur ein) as follows: 4.1 Each of the statements contained in Section 1 is correct. 4.2 The shares do not represent more than 70% of each Seller's net worth (Vermogen). 4.3 Each Seller can dispose freely of her share. 4.4 The company's Articles of Association in the version on record at the commercial register have not been amended. 4.5 Ms. Elke Schneider is registered as a Managing Director (Geschaftsfuhrer) of the company. No other Managing Directors or "Prokuristen" have been appointed. No applications for the company are pending at the commercial register. 4.6 The sole asset of the Company is a bank account with a current balance today of at least DM 49,000. The Company has no liabilities (Verbindlichkeiten). --------- --------- -------- 8 -2- SECTION 1 CAPITAL INCREASE IN THE GMBH, NEW ARTICLES OF ASSOCIATION 1.1 AboveNet is the sole shareholder in InternetTreuhand Gesellschaft fur Registrierungsdienste mbH, registered in the commercial register maintained at the municipal court (Amtsgericht) in Bonn. AboveNet hereby waives all requirements of notice and form for calling a shareholders meeting and conducts a shareholders meeting in InternetTreuhand Gesellschaft fur Registrierungsdienste mbH and resolves as follows: a. The existing two shares in the nominal value of [*] and [*] are hereby combined to form a single share in the nominal value of [*]. b. The stated capital of the company is hereby increased to a total of E 192,000. The nominal value of the above share is increased to E 96,000 and three additional shares in the nominal values of E 32,000 each are issued. c. The increase in the existing share capital can be subscribed to by AboveNet Communications, Inc. The three shares of E 32,000 each can be subscribed to by each of Mr. Albrecht Wilhelm Kraas, Mr. Andreas Friedrich Schachtner and Mr. Michael Schneider. d. The capital contributions to be paid by each of Mr. Kraas, Mr. Schachtner and Mr. Schneider are [*] each. AboveNet will make its contribution by paying the difference between [*] and [*], thus [*]. All contributions are immediately due for payment in cash. e. In addition to the capital contributions, AboveNet will also pay a premium to the capital reserve (Kapitalrucklage) in the amount of [*] at the same time as it pays its capital contribution. 1.2 Mr. Kraas, Mr. Schachtner and Mr. Schneider each hereby subscribes to a share in the company in the nominal value of [*] in accordance with para. 1.1 c and d. AboveNet hereby subscribes to the increase in its share in accordance with para. 1.1 c and d. 1.3 The parties hereby waive all requirements of form and notice for conducting a shareholders meeting and hereby conduct a shareholders meeting in which they adopt new articles of association for the company as set forth in ANNEX 1a in German and ANNEX 1b in English. THE SHAREHOLDERS CONTINUE THE MEETING AND RESOLVE THE FOLLOWING ITEMS IN SECTIONS 2, 3 AND 4. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 -3- SECTION 2 NON-MONETARY CONTRIBUTIONS, FUTURE FUNDING 2.1 AboveNet Deutschland GmbH will conclude the royalty free "License, Connectivity and Marketing Agreement" with AboveNet Communications, Inc. attached as ANNEX 2. 2.2 AboveNet Deutschland GmbH will obtain from IntraNet Gesellschaft fur Telekommunikation und Consulting GmbH a perpetual, royalty free, non-exclusive license to AboveNet Deutschland GmbH to use the software and related intellectual property listed in ANNEX 3 for the purpose of operating its own business. Nrs. 4 and 11 of the License, Connectivity and Marketing Agreement will apply mutatis mutandis (entsprechend). 2.3 The shareholders anticipate that they will obtain one or more additional investors who agrees to invest additional capital in an amount equal to [*] in AboveNet Deutschland GmbH. At that time AboveNet Communications, Inc. will also invest at least the same amount. The form of the AboveNet investment will be (at AboveNet's option) either the same securities as are sold to the third party investors or a note convertible, at any time at the option of the holder, into equity securities with a five year term with interest payments only during such term. The valuation of AboveNet Deutschland GmbH at which AboveNet's investment is made will be the same valuation as the third party investment. The convertible debt would be convertible into the same security as sold to the third party and the note would bear interest at a market interest rate. Both these investments will change the relative percentage ownership of the Company, increasing the percentage ownership of AboveNet and decreasing the ownership of the NRW Principals. The exact form of the third party's investment and AboveNet's investment will be determined at the time the investments are resolved. The parties understand that there are certain restrictions under German law on the extent to which debt can be converted to voting shares and the extent to which debt to a shareholder can be repaid. SECTION 3 EMPLOYMENT AGREEMENTS Each of Messrs. Schneider, Kraas and Schachtner will enter into an employment agreement as managing directors (Geschaftsfuhrer) with AboveNet Deutschland GmbH in accordance with the terms set forth in ANNEX 4a, 4b and 4c. SECTION 4 APPOINTMENT OF MANAGING DIRECTORS, RULES OF BUSINESS The contract partners hereby appoint Mr. Michael Schneider, Mr. Kraas and Mr. Schachtner as managing directors (Geschaftsfuhrer) of AboveNet Deutschland GmbH. Each of them is granted sole signing authority. Frau Elke Schneider is removed as managing director (Geschaftsfuhrerin). Her past conduct of the business is ratified (Entlastung wird erteilt). THE SHAREHOLDERS MEETING IS NOW CONCLUDED. NO FURTHER RESOLUTIONS ARE PASSED. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 -4- SECTION 5 LICENSE TO ABOVENET 5.1 Messrs. Kraas, Schachtner and Schneider will cause IntraNet Gesellschaft fur Telekommunikation und Consulting GmbH to grant a perpetual, royalty free, non-exclusive license to AboveNet Communications, Inc. to use the software and related intellectual property listed in ANNEX 5 for its own purposes and the purposes of its affiliates (Section 15 Stock Companies Act) until AboveNet becomes a shareholder in another German company providing services under the "AboveNet" name. Further development and support will be provided at standard commercial rates (marktublichen Preisen). Nrs. 4 and 11 of the License, Connectivity and Marketing Agreement will apply mutatis mutandis (entsprechend). 5.1 Messrs. Kraas, Schachtner and Schneider will cause IntraNet Gesellschaft fur Telekommunikation und Consulting GmbH to transfer the domain names "AboveNet.de", "Above.de" to the GmbH. SECTION 6 TRANSFORMATION INTO A STOCK COMPANY 6.1 The contract partners anticipate transforming the GmbH into a stock company which will have stated capital (Grundkapital) of at least E1,000,000 of which between 5% and 10% will be made available for employee stock options which will entitle employees to purchase stock on the date the options vest (4 year vesting period) at the fair market value of the shares on the date the options were granted. The number of shares reserved for the options cannot be increased before an initial public offering without the unanimous consent of the members on the Supervisory Board. This anticipation of the contract partners to transform the GmbH into a stock company does not create an obligation on the part of the contract partners to themselves invest further capital. 6.3 When the GmbH is transformed into a stock company, the contract partners will adapt as many of the provisions in the GmbH articles of association as possible into the articles of association of the stock company. To the extent that this is not possible, the contract partners will enter into a shareholders agreement which includes such provisions. In particular, if the contract partners establish the stock company with bearer shares, the restrictions on dispositions of shares and cancellation of shares set forth in Section VII of Annex 1 will apply mutatis mutandis among the previous shareholders in the GmbH. If the contract partners establish the stock company with registered shares (vinkulierte Namensaktien), they will include corresponding provisions in the articles of association of the stock company. SECTION 6a ABOVENET STOCK OPTIONS AboveNet intends to grant options to purchase AboveNet stock to employees of the GmbH subject to applicable accounting and legal issues from time to time and subject to separate option agreements to be concluded between AboveNet and the beneficiary. The aggregate number of options to be granted 11 shall be for up to 100,000 shares over four years (up to 15,000 shares in year 1, up to 20,000 in year 2, up to 25,000 shares in year 3, and up to 40,000 shares in year 4), unless the Company is acquired by a third party prior to such time, upon achievement of the revenue, net income and EBITDA targets in the Business Plan for the prior year. If the Company fails to meet such targets in any year, no options will be issued. Within 60 days from the end of the business year, the Company's auditors (currently Deloitte & Touche) shall determine whether the Company succeeded or failed to meet the targets in the Business Plan. The exercise price for the options shall be the fair market value of the AboveNet stock on the date the options are issued. SECTION 7 CHOICE OF LAW, DISPUTE RESOLUTION 7.1 This Cooperation Agreement and all other agreements referred to herein are governed by German law, except for the "License, Connectivity and Marketing Agreement" with AboveNet Communications, Inc. which will be governed by California law. 7.2 If any provision in this Cooperation Agreement or any of the other agreements referred to herein is invalid, the remaining provisions and agreements will remain valid. The invalid provision will be deemed to have been replaced by a valid provision which comes as close as legally permissible to achieving the commercial effect of the invalid provision. 7.3 All disputes between the parties will be resolved in accordance with the separate arbitration agreement attached as ANNEX 6. This Arbitration Agreement does not, however, apply to the "License, Connectivity and Marketing Agreement" which contains its own arbitration clause. EX-10.38 6 SHAREHOLDER AGREEMENT RELATING TO ABOVENET UK LTD. 1 EXHIBIT 10.38 C1. DATED MARCH 1999 - ------------------------------------------------------------------------------- ABOVENET COMMUNICATIONS INC MR. W. DOBBIE AND MR. A. MACSWEEN - and - ABOVENET UK LIMITED -------------------------------------------------- SHAREHOLDERS AGREEMENT RELATING TO ABOVENET UK LIMITED -------------------------------------------------- TARLO LYONS Watchmaker Court 33 St. John's Lane London EC1M 4DB Tel: 0171-405 2000 Fax: 0171-814 9423 Ref: RLH/RAC/334107 2 CONTENTS
Clause No. Page - ---------- ---- 1. INTERPRETATION.......................................................................1 2. ESTABLISHMENT OF THE COMPANY.........................................................6 3. WARRANTIES BY FOUNDERS...............................................................7 4. OBJECTIVES OF THE COMPANY............................................................7 5. DIRECTORS AND CHAIRMAN...............................................................8 6. BOARD MEETINGS.......................................................................9 7. SECRETARY...........................................................................10 8. REGISTERED OFFICE...................................................................10 9. AUDITORS............................................................................10 10. ACCOUNTING REFERENCE DATE...........................................................10 11. BANKERS.............................................................................10 12. COMPANY BOOKS RECORDS AND ACCOUNTS..................................................11 13. OPERATION OF THE COMPANY............................................................12 14. KEY EMPLOYEES.......................................................................16 15. INSURANCE OBLIGATIONS...............................................................16 16. EMPLOYEE SHARE OPTION SCHEME(S).....................................................17 17. DUE ADMINISTRATION OF THE COMPANY...................................................18 18. GLOBAL TECHNICAL COMMITTEE..........................................................19 19. TRANSFER OF SHARES..................................................................19 20. CHARGING OF SHARES..................................................................27 21. FINANCE.............................................................................28 22. DIVIDEND POLICY.....................................................................30 23. PURCHASE OPTION.....................................................................31 24. DEFAULT.............................................................................35 25. LEGEND ON SHARE CERTIFICATES........................................................42 26. CONFIDENTIALITY AND DISCLOSURE......................................................42 27. NON-COMPETITION.....................................................................43 28. NON-SOLICITATION....................................................................43 29. ASSIGNMENT..........................................................................44 30. PROPRIETARY KNOW-HOW................................................................45 31. NAMES...............................................................................45 32. TERM................................................................................45 33. INTEREST............................................................................46 34. SEVERABILITY........................................................................46
3 35. CONFLICT WITH ARTICLES..............................................................46 36. NO PARTNERSHIP......................................................................47 37. FURTHER ASSURANCE...................................................................47 38. COSTS...............................................................................47 39. ENTIRE AGREEMENT....................................................................47 40. VARIATION...........................................................................48 41. WAIVER/FORBEARANCE..................................................................48 42. EXECUTION IN COUNTERPARTS...........................................................48 43. NOTICES.............................................................................48 44. GOVERNING LAW AND JURISDICTION......................................................50 THE SCHEDULE (FORM OF SUPPLEMENTAL DEED).................................................51 AGREED TERM DOCUMENTS: A. Articles of Association B. Draft Business Plan C. Dobbie Service Agreement D. MacSween Service Agreement E. Key Employee Agreements F. Licence Agreement G. Stock Purchase Agreement H. Loan Note Instrument
4 SHAREHOLDERS AGREEMENT DATE: March 1999 PARTIES: (1) ABOVENET COMMUNICATIONS, INC a corporation incorporated in the State of California USA on 8 March 1996 and reincorporated in the State of Delaware, USA in November 1998 whose business address is 50, W. San Fernando Street SE1010, San Jose, California, 95113, USA (together with its successors in title and permitted assigns `Inc'); and (2) WILLIAM DOBBIE of 1 Belgrave Crescent, Edinburgh EH4 3AQ and ANGUS MACSWEEN of 5 Ellergreen Road, Bearsden, Glasgow GG1 2AJ (together with their respective successors in title "the Founders", which expression shall include either or both of them); and (3) ABOVENET UK LIMITED a company incorporated in England (CR No. 3740487) whose registered office is situate at 63 Queen Victoria Street, London EC4 (together with its successors in title and permitted assigns `the Company'). RECITALS: (A) The Company is a private company incorporated in England on 22 March 1999 under the Companies Acts 1985 and 1989 and has at the date hereof an authorised share capital of Pound Sterling1,111,000 divided into 1,111,000 Ordinary Shares of Pound Sterling1.00 each, 600,000 of which shares have been issued fully paid to the Founders (B) The parties have agreed to procure that the business of the Company is conducted in accordance with the provisions of this Agreement. OPERATIVE PROVISIONS: 1. INTERPRETATION In this Deed and its Recitals and Schedules: `Affiliate' means with respect to any person (a) any entity of which the ownership interests conferring a majority of votes at meetings of interest owners of such entity are owned directly or indirectly by such person or (b) any entity which owns, directly Page 1 5 or indirectly, ownership interests of such person conferring a majority of votes at meetings of interest owners of such person or (c) any entity of which the ownership interests conferring a majority of votes at meetings of interest owners of such person are owned directly or indirectly, by an entity which also owns ownership interests conferring a majority of votes at meetings of interest owners of such person or (d) any participator in relation to any such entity or a director of any such entity or any associate or relative of either thereof (if an individual) (all as such terms are defined in Section 417 of the Taxes Act) `in the Agreed Terms' means in the form of an annexed draft agreed between the parties and initialed by way of identification by the parties or their respective legal advisers `the Articles' means the Articles of Association of the Company to be adopted pursuant to Clause 2.1.1 as amended from time to time `an `A' Director' means a director appointed by the holder or holders of the `A' Shares in accordance with Article 16 of the Articles and unless otherwise stated, includes his duly appointed alternate ``A' Shares' means the `A' Ordinary Shares of Pound Sterling1.00 each more particularly referred to in Clause 2.1.5 and any other shares so designated or, where the context so admits, so many thereof as may from time to time be in issue `a `B' Director' means a director appointed by the holder or holders of 75% in nominal value of the `B' Shares in accordance with Article 16 of the Articles and unless otherwise stated, includes his duly appointed alternate ``B' Shares' means the `B' Ordinary Shares of Pound Sterling1.00 each more particularly referred to in Clause 2.1.5 and any other shares so designated, or where the context so admits, so many thereof as may from time to time be in issue `the Board' means the board of directors of the Company for the time being or from time to time `the Business' means the business of establishing and operating an Internet Co-location Centre and Internet Service Exchange, including occupying and maintaining a property for an Internet Co-location Centre, operating related local network infrastructure in cooperation with Inc, and marketing and sales activities relating to the sale of services and products detailed in the Licence Agreement Page 2 6 `the Business Plan' means the four year business plan in the form to be agreed by the Original Shareholders pursuant to Clause 2.2 but pending such agreement shall mean the Draft Business Plan ``C' Shares' means the `C' Ordinary Shares of Pound Sterling1.00 each more particularly referred to in Clause 2.1.5 and any other shares so designated, or where the context so admits, so many thereof as may from time to time be in issue `Controlling Interest' means in relation to any company the holding (directly or indirectly) of more than 50 per cent of the Equity Share Capital of that company or the ability to direct the casting of more than 50 per cent of the votes normally entitled to be cast at a shareholders' meeting of that company and for the purposes of ascertaining whether any Person shall have a Controlling Interest (as defined) account shall also be taken of the shareholding or voting rights held by any Affiliate of that Person `Convertible Loan Notes' means convertible loan notes of the Company constituted by the Loan Note Instrument `Director' means any director for the time being of the Company including where applicable any alternate director `Draft Business Plan' means the draft four year business plan in the Agreed Terms `the Effective Date' means the date on which the various matters referred to in Clause 2.1 are completed `Equity Share Capital' shall have the meaning ascribed to such expression by Section 744 of the UK Companies Act 1985 `Financial Year' means the financial year (as defined in the UK Companies Act 1985) of the Company, being the year from 22 March 1999 to 30 June 2000 and thereafter the year ending on 30 June in each year `Group Company' means, in relation to any company, any Holding Company of that company and any Subsidiary of that company or of any of its Holding Companies `Inc's Original Holding' means the 133,334 `A' Shares subscribed by Inc pursuant to Clause 2.1.6, any further `A' Shares subscribed by it pursuant to Clause 2.2 and any Page 3 7 `A' Shares acquired by it as a consequence of exercising its conversion rights under any Convertible Loan Note(s) `ISP' means an internet service provider `Key Employees' means such senior employees of the Company as the Board shall from time to time determine `Key Employee Agreement' means an agreement to be entered into between the Company and each of the Key Employees, each such agreement being in or substantially in the Agreed Terms `Licence Agreement' means the License, Connectivity and Marketing Agreement between Inc (1) and the Company (2) in the Agreed Terms `Loan Note Instrument' means the instrument constituting Pound Sterling1,200,000 5 per cent Convertible Loan Notes of the Company in the Agreed Terms `Mr. Dobbie' means Mr. William Dobbie, one of the Founders `the Dobbie Service Agreement' means the service agreement between the Company (1) and Mr. Dobbie (2) in the Agreed Terms "Mr. MacSween" means Mr. Angus MacSween, one of the Founders `the MacSween Service Agreement' means the service agreement between the Company (1) and Mr. MacSween (2) in the Agreed Terms `Ordinary Shares' means the `A' Shares and/or (as the context requires) the `B' Shares and/or (as the context requires) the `C' Shares in the capital of the Company `the Original Shareholders' means Inc and the Founders `Person' includes and individual, corporation, unincorporated association or partnership `Retention Account' shall have the meaning ascribed to such expression by Clause 2.3 `Share' means a share in the capital of the Company of whatever class Page 4 8 `the Shareholders' means the Original Shareholders or any Person or Persons to whom they lawfully transfer their Shares or who is or are allotted Shares in the Company pursuant to the provisions of this Agreement `Subsidiary' and 'Holding Company' shall bear the meanings ascribed to such expressions by Section 736 of the UK Companies Act 1985 `Supplemental Agreement' means an agreement entered into pursuant to Clause29.2. `Taxes Act' means the UK Income and Corporation Taxes Act 1988. 1.2 In this Agreement, references to any statutory provision shall include such provision as from time to time amended, whether before on or (in the case of re-enactment or consolidation only) after the date hereof, and shall be deemed to include provisions of earlier legislation (as from time to time amended) which have been re-enacted (with or without modification) or replaced (directly or indirectly) by such provision and shall further include all statutory instruments or orders from time to time made pursuant thereto. 1.3 In this Agreement and its Schedules: 1.3.1 the neuter gender shall include the masculine and the feminine; 1.3.2 the singular number shall include the plural and vice versa; 1.3.3 the headings are inserted for convenience only and shall not affect the construction or interpretation of this Agreement; and 1.3.4 references to Recitals, Clauses and Schedules and sub-divisions thereof, unless a contrary intention appears, are to the Recitals and Clauses of and Schedules to this Agreement and sub-divisions thereof respectively. 1.4 The Schedules form part of this Agreement and shall be construed and shall have the same full force and effect as if expressly set out in the body of this Agreement. Page 5 9 ESTABLISHMENT OF THE COMPANY 2.1 Forthwith upon the execution of this Agreement each of the Original Shareholders shall itself take or (as appropriate) shall cause to be taken at directors' meetings and shareholders meetings of the Company the following steps in the following order:- 2.1.1 the increase of the authorised share capital of the Company to Pound Sterling2,311,000 by the creation of 1,200,000 Ordinary Shares of Pound Sterling1 each 2.1.2 the adoption by the Company of new Articles of Association in the Agreed Terms; 2.1.3 the appointment of David Rand and (on a temporary basis) Paul Steiner, each as an `A' Director of the Company who shall be deemed so appointed pursuant to the Articles; 2.1.4 the redesignation of Mr. Dobbie and Mr. MacSween as `B' Directors of the Company who shall be deemed so appointed pursuant to the Articles; 2.1.5 the redesignation of the existing issued Ordinary Shares in the capital of the Company registered in the name of Mr Dobbie as `B' Shares and the redesignation of the existing issued Ordinary Shares in the capital of the Company registered in the name of Mr MacSween as `B' Shares and the conversion and redesignation of 1,600,000 of the remaining unissued shares as `A' Shares and the balance of 111,000 of the unissued Shares as `C' Shares in each case having the rights set out in the Articles; 2.1.6 Inc shall deliver to the Board an application for the allotment and issue to it at a subscription price of Pound Sterling [*] per share of 133,334 `A' Shares accompanied by payment in full in cash of the subscription moneys of Pound Sterling [*]; 2.1.7 the parties shall procure that a Board Meeting of the Company is held at which the application referred to in Clause 2.1.6 shall be approved and the shares applied for shall be allotted and issued to Inc in accordance with its application; 2.1.8 Inc and the Company shall enter into the Licence Agreement; 2.1.9 Mr. Dobbie and the Company shall enter into the Dobbie Service Agreement; and *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 6 10 2.1.10 Mr. MacSween and the Company shall enter into the MacSween Service Agreement. 2.2 The Original Shareholders shall in good faith seek to refine and finalise the Draft Business Plan and to agree the form of the Business Plan as soon as practicable following the Effective Date and in any event by 30 April 1999. Within 30 days of such agreement, (subject to each of the Founders having complied with Clause 15.1 and provided that (i) neither the Company nor the Founders are in material breach of this Agreement and (ii) the Company is not in material breach of the Licence Agreement) Inc shall apply or procure applications from third parties for an additional 266,666 `A' Shares at a subscription price of Pound Sterling4.50 per share payable in full in cash on subscription. The parties shall procure that a Board Meeting of the Company is held within seven days of such application(s) at which such application(s) are approved and the shares applied for shall be allotted and issued to the applicant(s) in accordance with their respective applications. 2.3 The subscription moneys in respect of the application(s) referred to in Clause 2.2 (namely Pound Sterling1,199,997) shall be credited to a separate interest bearing bank account in the name of the Company ("the Retention Account"), which account shall be opened by the Company as soon as practicable following the Effective Date. No cheques may be drawn on or amounts withdrawn from the Retention Account except in accordance with Clause 11.3 3. WARRANTIES BY FOUNDERS 3.1 The Founders jointly and severally warrant and represent to Inc that no charge, lien or other encumbrance exists or will be created over any interest in all or any of the Shares held by them or either of them (without the prior written consent of Inc acting reasonably provided that such consent may be withheld or given or given subject to reasonable conditions, as Inc may acting reasonably deem fit); 4. OBJECTIVES OF THE COMPANY 4.1 Each of the Shareholders undertakes with the others to use all reasonable endeavours to procure (so far as it is able to do) that the activities of the Company shall be limited to the Business. Page 7 11 4.2 Each of the Shareholders undertakes with the others that it will use all reasonable endeavours to procure that the Company shall conduct the Business on sound commercial profit making principles so as to generate the maximum achievable revenues. 4.3 Each of the Shareholders further undertakes that it will use its best endeavours to promote the Business and the interests of the Company Provided that this Clause 4.3 shall not apply to Inc or any Affiliate of Inc at any time after the Licence Agreement has terminated or any of the rights granted thereunder to the Company have ceased to be exclusive. 5. DIRECTORS AND CHAIRMAN 5.1 The maximum number of Directors holding office at any time shall be seven. 5.2 Unless and until otherwise agreed between the Shareholders, Inc shall have the right (but not the obligation) to appoint and maintain in office from time to time up to two `A' Directors (or if and for so long as there are more `A' Shares in issue than `B' Shares in issue, up to three `A' Directors) and the persons holding not less than 75% in nominal value of the `B' Shares shall have the right to appoint and maintain in office from time to time up to three `B' Directors (or if and for so long as there are more `A' Shares in issue than `B' Shares in issue, up to two `B' Directors) and each shall have the right to remove any director so appointed by it and to appoint another in his place (such appointment and removal to be effected by notice in writing to the Company). 5.3 In addition, the `A' Directors (if any) and the `B' Directors may by notice to the Company together appoint up to two more persons with relevant industry experience (and who are approved by all of them or if there is no `A' Director, by the `B' Directors and Inc) as additional directors. Any person so appointed may be removed and another appointed in his place (such appointment and removal to be effected by notice in writing to the Company signed by the `A' Directors and the `B' Directors or, if there is no `A' Director, by the `B' Directors and someone duly authorised on behalf of Inc). 5.4 The Chairman at any meeting of the Board shall not be entitled to a second or casting vote nor shall the Chairman have a second or casting vote in the case of an equality of votes at any general meeting of the Company. Page 8 12 5.5 If Inc does not exercise its right to maintain an `A' Director in office, it shall nonetheless be entitled from time to time to appoint a person to attend at meetings of the Directors as an observer and any person so appointed ("an Observer") shall be given (at the same time as the Directors) notice of all meetings of the Directors and all agendas, minutes and other papers relating to such meetings. 5.6 An Observer shall be entitled to attend any and all meetings of the Directors and to speak and place items on the agenda for discussion provided that an Observer shall not be entitled in any circumstances to vote. Inc may remove an Observer appointed by it and appoint another person in his place. Any such appointment and removal shall be effected by notice in writing to the Company signed by someone duly authorised on behalf of Inc. 6. BOARD MEETINGS 6.1 The Shareholders shall procure that at all times during the continuance of this Agreement meetings of the Board of the Company shall unless otherwise agreed between the Shareholders be held at regular intervals (and in any event not less frequently than once every quarter) and shall be convened on not less than 30 days notice in writing to the Directors and (if at any time there is no `A' Director) Inc accompanied by an agenda specifying the business to be transacted. 6.2 With effect from 1 April 1999 the quorum necessary for the transaction of the business of the Directors shall be two if no `A' Director is appointed and three if an `A' Director has been appointed of whom throughout the meeting one shall be an "A" Director (if any is appointed) and one a "B" Director (a "Board Quorum"). A person who holds office only as an alternate director shall, if his appointor is not present, be counted in the quorum. Prior to 1 April 1999 a Board Quorum shall comprise any two Directors. 6.3 If a Board Quorum is not present within half an hour from the time appointed for the meeting, or if during the meeting a Board Quorum ceases to be present, the meeting shall stand adjourned to the day 30 days following the date appointed for the meeting at the same time and place or to such other time and place as the Directors may determine (such adjourned meeting being called the "First Adjourned Meeting"). 6.4 If a Board Quorum is not present within half an hour from the time appointed for the First Adjourned Meeting, or if during the First Adjourned Meeting a Board Quorum Page 9 13 ceases to be present, the First Adjourned Meeting shall stand adjourned to the same day in the next week at the same time and place or to such other time and place as the Directors may determine (such further adjourned meeting being called the "Second Adjourned Meeting") 6.5 If a Board Quorum is not present within half an hour from the time appointed for the Second Adjourned Meeting, or if during the Second Adjourned Meeting a Board Quorum ceases to be present the Directors present shall be a quorum. 7. SECRETARY 7.1 Mr MacSween (or such other person as may from time to time be determined by the Board) shall act as the Secretary of the Company. 8. REGISTERED OFFICE 8.1 The registered office of the Company shall be 63 Queen Victoria Street, London EC4 or such other place in England as may from time to time be determined by the Board and approved in writing by Inc. 9. AUDITORS 9.1 The auditors of the Company shall be Deliotte & Touche or such other firm of Chartered Accountants of international standing and reputation as may from time to time be the auditors of (or the United Kingdom associate of the auditors of) Inc. 10. ACCOUNTING REFERENCE DATE 10.1 The accounting reference date of the Company for the purpose of Section 224 of the UK Companies Act 1985 shall be 30 June or such other date as may from time to time be determined by the Board and approved in writing by Inc. 11. BANKERS 11.1 The Company shall maintain bank accounts with Clydesdale Bank plc and/or such other bank or banks as may from time to time be determined by the Board and approved in writing by Inc. Page 10 14 11.2 The Shareholders shall procure that all cheques drawn by the Company and other withdrawals from the said accounts shall be signed or otherwise authorised in accordance with the bank mandate from time to time approved by Inc and the Board. 11.3 The Shareholders shall procure that save as Inc may otherwise agree in writing from time to time, no cheques shall be drawn by the Company on or other withdrawal made from the Retention Account: 11.3.1 save for expenditure and investments as envisaged in the Business Plan; and 11.3.2 unless the same shall be signed or otherwise authorised by Mr. Dave Larsen (or such other person as Inc may from time to time nominate for the purpose by notice in writing to the Company). 12. COMPANY BOOKS RECORDS AND ACCOUNTS 12.1 The Shareholders shall procure that the Company shall keep such books records and accounts in connection with its business and shall provide such financial trading or other information regarding the affairs of the Company as the Shareholders shall from time to time require and without prejudice to the foregoing shall procure that the Company shall at all times comply with the provisions of the UK Companies Acts 1985 and 1989 (or any statutory modification or re-enactment thereof) provided that each of the Shareholders shall have the right at its own cost to call for examine and inspect at all reasonable times the books records and accounts of the Company and may appoint or authorise any Person to make such examination and inspection on their behalf. 12.2 Notwithstanding the generality of Clause 12.1 the Shareholders shall procure that the Company prepares and makes available to each of them: 12.2.1 quarterly financial statements within 15 days of the end of the relevant quarter prepared in accordance with US GAAP; 12.2.2 profit forecasts cashflow forecasts and budgets for each Financial Year prior to the commencement of each such Financial Year. 12.2.3 audited annual financial statements within 30 days of the end of the relevant Financial Year prepared in accordance with US GAAP Page 11 15 Provided that Inc shall reimburse to the Company the reasonable additional cost to the Company of having any quarterly or annual financial statements, initially prepared for the purposes of this Clause 12.2 in accordance with UK accounting principles and practices, brought into compliance with US GAAP. 12.3 The Shareholders shall use all reasonable endeavours to procure that within six (6) months of the end of each Financial Year of the Company: 12.3.1 the auditors of the Company shall prepare and deliver proper audited accounts in accordance with statutory requirements together with the auditors statutory report in respect of such Financial Year; and 12.3.2 that such audited accounts and auditors' report shall be laid before the Company together with the directors' report thereon for approval by the members of the Company in general meeting. 13. OPERATION OF THE COMPANY 13.1 Each of the Shareholders covenants with the others that it shall exercise all voting rights and other powers of control available to it in relation to the Company so as to procure (insofar as it is able by the exercise of such voting rights and powers) and the Company, to the extent permitted by law, covenants with the Shareholders that the Company shall not without the prior written consent of both Inc and both of the Founders (such consent not to be unreasonably withheld or delayed by any of them):- 13.1.1 make any alteration or variation whatsoever to its Memorandum or Articles of Association; or 13.1.2 cease or threaten to cease to carry on its business; or 13.1.3 make any material change in the nature of its business or commence any new type of business; or 13.1.4 borrow any monies in excess of the amounts provided for in the Business Plan in respect of the first Financial Year ending 30 June 2000 and thereafter in the annual budget produced under Clause 12.2 and approved by both Inc and the Founders; or Page 12 16 13.1.5 create any mortgage charge or lien (other than a lien arising by operation of law) over or otherwise use as security its undertaking property or assets or any part thereof or any interest therein (including goodwill and uncalled capital); or 13.1.6 enter into any guarantee or indemnity or stand surety for the obligations of any third party or enter into any agreement for the same for an aggregate amount in excess of the amounts provided for in the Business Plan in respect of the first Financial Year ending 30 June 2000 and thereafter in the annual budget produced under Clause 12.2 and approved by both Inc and the Founders; or 13.1.7 make any loan or advance or (except in the ordinary course of business) grant any credit to any person; or 13.1.8 sell transfer lease assign or otherwise dispose of any real property, whether freehold or leasehold, or of the whole or a material part of its undertaking property or assets (or interest therein) or contract so to do; 13.1.9 enter into any contract arrangement or commitment involving expenditure on capital account (in excess of the amounts provided for in the Business Plan in respect of the first Financial Year of the Company ending 30 June 2000 and thereafter in the annual budget produced under Clause 12.2 and approved by both Inc and the Founders) or the realisation of capital assets; or 13.1.10 engage any senior employee on a compensation package in excess of that provided for in the Business Plan in respect of the first Financial Year ending 30 June 2000 and thereafter in the annual budget produced under Clause 12.2 and approved by both Inc and the Founders; or 13.1.11 take or agree to take any freehold or leasehold interest in or licence over any land; or 13.1.12 (without prejudice to the generality of Clause 13.1.27) enter into any transaction arrangement or agreement with or for the benefit of any Director (except for the Dobbie Service Agreement and MacSween Service Agreement); or Page 13 17 13.1.13 acquire any material asset (or receive any material service) at more than market value or dispose of any material asset (or give any material service) at less than market value; or 13.1.14 acquire or create or dispose of any interest in any Subsidiary or acquire the undertaking or assets or any substantial part of the business of any Person; or 13.1.15 appoint or remove any Director or the chairman of the Company (except as provided for hereunder or as permitted under the Articles); or 13.1.16 initiate any litigation or arbitration other than in the ordinary course of business or settle or compromise any claims, litigation or arbitration (other than monetary settlements or compromises involving payments to or by the Company of less than US $50,000 in aggregate in any one Financial Year); or 13.1.17 permit any transfer of Shares in the Company except in accordance with this Agreement and the Articles of Association for the time being; or 13.1.18 pay any fees or make any other payments (other than emoluments due by reason of their employment) to any Directors; or 13.1.19 allot or issue any unissued shares for the time being or create or issue any new shares; or 13.1.20 alter any rights attaching to any class of share in the capital of the Company; or 13.1.21 consolidate, sub-divide or convert the Company's share capital or in any way alter the rights attaching thereto; or 13.1.22 enter into any partnership or (other than in the ordinary course of business) profit sharing agreement with any Person; or 13.1.23 do or permit or suffer to be done any act or thing whereby the Company may be wound up (whether voluntarily or compulsorily), save as otherwise expressly provided for in this Agreement; or Page 14 18 13.1.24 issue any debentures or debenture stock or other securities convertible into shares or debentures or any share warrants or any options in respect of shares; or 13.1.25 enter into any contract or transaction except in the ordinary and proper course of the Business and on arm's length terms; or 13.1.26 acquire, purchase or subscribe for any shares, debentures, mortgages or securities (or any interest therein) in any company, trust or other body; or 13.1.27 save as specifically provided in the Licence Agreement, the Dobbie Service Agreement and/or the MacSween Service Agreement or in the Business Plan in respect of the first Financial Year ending 30 June 2000 and thereafter in the annual budget produced under Clause 12.2 and approved by both the Founders and Inc create any contract with or obligation to pay money or money's worth in excess of US $20,000 in any one Financial Year to any Founder or to any Shareholder or to any Affiliate of such Founder or Shareholder or to any Person as a nominee or associate of any such Founder or Shareholder or Affiliate (including any renewal thereof or any variation in the terms of any existing contract or obligation); or 13.1.28 appoint any committee of the Board or any local board or delegate any of the powers of the Directors to such committee or local board; or 13.1.29 merge or amalgamate with any other company or undertaking; or 13.1.30 enter into any compromise or arrangement to which Section 425 of the UK Companies Act 1985 applies; or 13.1.31 change the accounting policies of the Company save as required to comply with UK GAAP; or 13.1.32 capitalise or repay any amount standing to the credit of any reserve of the Company or redeem or purchase any shares of the Company or otherwise reorganise the share capital of the Company; or 13.1.33 surrender to any Founder or Shareholder or to any Affiliate of such Founder or Shareholder any loss, relief, allowance, exemption, set-off, Page 15 19 deduction or credit in computing or against income, profits, gains or taxation or any right to a repayment of taxation. 13.2 Notwithstanding anything contained in this Agreement Inc hereby consents to the issue and allotment of new shares in the Company at the time of and in connection with a Flotation (as defined in Clause 23.10) to which Clause 23.9 applies. 13.3 The Founders undertakes with Inc that, notwithstanding any voting rights or powers or control otherwise available to them, they will permit Inc to conduct negotiations in connection with and enforce in each case on behalf of or in the name of the Company all and any rights arising or enforceable against: 13.3.1 Mr. Dobbie under the Dobbie Service Agreement and/or Mr. MacSween under the MacSween Service Agreement and in particular but without limitation to the generality of the foregoing Inc shall be solely responsible for reviewing the Founders' salaries and approving any increases thereof; and/or 13.3.2 Iomart Limited under the letter of today's date from Iomart Limited to the Company. 13.4 Inc undertakes with the Founders that, notwithstanding any voting rights or powers or control otherwise available to it, it will permit the Founders to conduct negotiations in connection with and enforce on behalf of or in the name of the Company all and any rights arising or enforceable against Inc under the Licence Agreement. 14. KEY EMPLOYEES Each of the Founders and the Shareholders covenants with the others that it shall exercise all voting rights and other powers of control available to it in relation to the Company so as to procure (insofar as it is able by the exercise of such voting rights and powers) and the Company covenants with the Shareholders that the Company and each Key Employee shall enter into a Key Employee Agreement at the same time as or before that Key Employee commences employment with the Company. 15. INSURANCE OBLIGATIONS 15.1 As soon as practicable after Completion and in any event no later than 30 April 1999 the Founders will obtain up to date medical reports the scope of each of which is satisfactory to Inc in all material respects (including findings, range of report and Page 16 20 qualification of reporter). If both the Founders shall have failed to comply with this Clause 15.1 by 30 April 1999 (or such later date as Inc may in writing agree) then the Company shall be wound up as soon as practicable. 15.2 Each of the Founders and the Shareholders covenants with the others that it shall exercise all voting rights and other powers of control available to it in relation to the Company so as to procure (insofar as it is able by the exercise of such voting rights and powers) and the Company covenants with the Shareholders that the Company shall at its own expense within one month of the Effective Date: 15.2.1 effect and maintain for its own benefit, key man five year term and disability insurance with an insurance company of good repute on the lives of each of the Founders (who will co-operate fully in all respects in relation thereto) in the sum of not less than US $1 million each; and 15.2.2 effect and maintain for the benefit of each Director, other officer or auditor of the Company in respect of any liability which may attach to him or loss or expenditure which he may incur in relation to anything done or alleged to have been done or omitted to be done as a Director, officer or auditor in such amount as the Board considers reasonable. 16. EMPLOYEE SHARE OPTION SCHEME(S) 16.1 Notwithstanding anything else in this Agreement the Shareholders hereby consent to the creation and implementation of one or more Employee Share Option Schemes whereby senior employees of the Company may be granted options to acquire in aggregate not more than 111,000 `C' Shares (or such greater number as Inc and the Founders may agree in writing from time to time) (being part of the authorised but unissued share capital of the Company at the date hereof) on terms that the exercise price per Share in respect of any such option shall be the fair market value of a share on the date of grant of the option and otherwise on such terms as the Original Shareholders may approve Provided that no option may be granted to an employee or consultant before his engagement with the Company begins. The grant of any such option shall require the unanimous approval of the Board (such approval not to be unreasonably withheld). 16.2 It is the intention of the Shareholders that (subject to the Shareholders being satisfied with relevant accounting, tax and legal requirements and until such time as any Page 17 21 Person acquires a Controlling Interest in Inc) Inc will grant options to purchase Inc Common Stock to senior employees of the Company during the Financial Year of the Company ending on the dates referred to in column (A) below in respect of up to the aggregate numbers of shares of Inc set opposite those dates in column (B) below:
(A) (B) Financial Year ending: Nos. of Inc. shares* --------------------- -------------------- 30.06.00 15,000 30.06.01 20,000 30.06.02 25,000 30.06.03 40,000
*The numbers of shares and/or subscription price therefor shall be adjusted in such manner as Inc's auditors confirm to be fair and reasonable in the event of any stock splits, stock dividends, combinations, recapitalisations or like changes in the outstanding capital stock of Inc. The grant of options shall be dependent upon the audited financial statement of the Company demonstrating the Company's achievement of revenue, net income and EBITDA targets specified in the Business Plan, as modified from time to time with the written approval of Inc. The price per share at which an option may be exercised will be the fair market value of an Inc share at the date when the option is issued. Each option granted will be subject to such terms as the Original Shareholders approve. It shall be a term of any option that if any Person acquires a Controlling Interest in Inc in a transaction in which employee options are assumed or options of the acquiror are substituted for outstanding employee options, Inc shall have the right to require the optionholder to release his option in Inc ("the Old Option") on the grant to him of an option in the acquiring company which is equivalent to the Old Option. 17. DUE ADMINISTRATION OF THE COMPANY 17.1 Each of the Shareholders undertakes with the others and the Company undertakes with each Shareholder that (except as the Shareholders may otherwise agree in writing) it will at all times exercise all voting rights and powers of control available to it in relation to the Company so as to give full effect to the terms and conditions of this Agreement including, where appropriate, the carrying into effect of such terms as if they were embodied in the Company's Memorandum and Articles of Association. Page 18 22 18. GLOBAL TECHNICAL COMMITTEE 18.1 Inc shall establish a global technical committee ("the Technical Committee") comprising one suitably qualified and experienced delegate nominated by each of Inc, the Company and the other companies in which Inc directly or indirectly shall have an interest and which shall be formed in territories outside the Territory (as defined in the Licence Agreement), whose respective businesses shall be the establishment of Internet Co-location Centres and Internet Service Exchanges in those other territories (the Business and such other businesses being herein called the "Relevant Businesses"). 18.2 The role of the Technical Committee shall be to consider all technical matters pertaining to the smooth running and efficient operation of the Relevant Businesses and to recommend to Inc ways in which the same might be improved. 18.3 Inc shall consider the proper and reasonable recommendations of the Technical Committee in good faith. 18.4 The Technical Committee shall meet quarterly at such locations as Inc shall from time to time decide. Inc shall meet the reasonable travel and accommodation expenses of the delegates in travelling to and from and attending at such meetings. 19. TRANSFER OF SHARES 19.1 Each of the Shareholders agrees with the others that the transfer of any of its Shares shall be restricted in accordance with the provisions of the Articles and (where applicable) in accordance with the terms of this Agreement. 19.2 A Share may be transferred otherwise than in accordance with this Agreement and/or the Articles only where and insofar as the holders (including the proposing transferor) for the time being holding not less than 90 per cent of the Shares then in issue consent in writing to the transfer of that Share. 19.3 Provided that Inc's shareholding does not drop below 13% of the Equity Share Capital in the case of one or more transfers pursuant to Clauses 19.3.2 or 19.3.3 (save for the avoidance of doubt the immediately foregoing proviso shall not apply to any transfer(s) made pursuant to Clause 19.3.1) Inc may transfer: Page 19 23 19.3.1 subject to the provisions of Clause 29.2 any Share held by it to any Person who acquires a Controlling Interest in or purchases all or substantially all of the assets of Inc or to an Affiliate of such Person; provided that simultaneously therewith such Person (or an Affiliate of such Person) accepts an assignment of the benefit and burden of the Licence Agreement; or 19.3.2 at any time on or before 31 December 1999 any Share comprised in Inc's Original Holding at a price no greater than the price at which the Share was originally subscribed without restriction to any venture capital fund or financial institution which, in either case, is a shareholder in Inc; or 19.3.3 at any time on or before 31 December 1999 any Share comprised in Inc's Original Holding at a price no greater than the price at which the Share was originally subscribed to any other venture capital fund or financial institution with the prior written approval of the Founders (such approval not to be unreasonably withheld or delayed in the case of a venture capital fund or financial institution of good standing and repute). 19.4 The provisions of Clauses 19.5, 19.6, 19.7 and 19.8 shall apply if at any time a Person ("the Offeror") shall make a bona fide offer which if accepted would result in the Offeror (and/or an Affiliate of the Offeror) acquiring a Controlling Interest in the Company. 19.5 The parties to whom the offer is addressed (herein "the Proposing Transferors") severally covenant with Inc that they will not at any time accept the offer from the Offeror in respect of any of their shares in the Company unless the offer extends to all the Proposing Transferors' shares in the Company and unless the Proposing Transferors shall first have procured in favour of Inc a bona fide offer (herein an "Exit Offer") from the Offeror to acquire all of the shares held by Inc in the Company at a price per Ordinary Share no less (and otherwise on terms no less favourable) than that payable for each Ordinary Share being sold by the Proposing Transferors and at a price per share other than an Ordinary Share of no less than par value and the Proposing Transferors shall not dispose of any interest in any share in the Company held by them (other than as aforesaid) unless:- 19.5.1 an Exit Offer shall first have been made and communicated to Inc, which Exit Offer shall be irrevocable for a period of not less than twenty-eight Page 20 24 (28) days from the date it is made ("the Offer Period") and shall state the identity of the Offeror and the terms upon which and the price at which the Offeror is prepared to acquire the shares in the Company held by Inc; and 19.5.2 either:- (i) Inc shall within the Offer Period have accepted the Exit Offer or negotiated alternative terms mutually acceptable to it and the Offeror; or (ii) Inc shall within the Offer Period have offered to purchase all the shares of the Proposing Transferors in the Company at a price per share no less (and otherwise on terms no less favourable save as provided in Clause 19.10) than that offered by the Offeror under the terms of the Exit Offer; or (iii) Inc shall have rejected the Exit Offer and for this purpose the Exit Offer shall be deemed to have been rejected if (aa) Inc has not accepted it within the Offer Period as provided in Clause 19.5.2 (i) or (bb) Inc has not offered to purchase all the shares of the Proposing Transferors as provided in Clause 19.5.2 (ii) within the Offer Period. 19.6 If an Exit Offer, having been made on the basis prescribed by Clause 19.5, is accepted pursuant to Clause 19.5.2 (i) the Proposing Transferors and Inc shall be at liberty for a period of up to sixty (60) days from the date of acceptance to sell all (but not part only) of their shares in the Company to the Offeror conditionally upon the Offeror also buying at the same time all of the shares of Inc in the Company, such sales in each case to be on the terms of the Exit Offer or such other terms as may be mutually acceptable to all of the Offeror, the Proposing Transferors and Inc. So far as is practicable, it shall be a term of the Exit Offer that completion of the sale of the shares of the Proposing Transferors in the Company shall take place contemporaneously with completion of the sale of the shares of Inc in the Company and that the consideration payable in respect of both such sales shall be satisfied in the same manner and paid at the same time or times. 19.7 If, an Exit Offer having been made on the basis prescribed by Clause 19.5, subject to Clause 19.10, Inc in accordance with Clause 19.5.2 (ii) shall within the Offer Period Page 21 25 offer to purchase all the shares of the Proposing Transferors in the Company at a price per share no less (and otherwise on terms no less favourable) than that offered by the Offeror under the terms of the Exit Offer, then within 45 days after the expiry of the Offer Period o if the consideration offered by Inc consists wholly or partly of Common Shares of Inc, Inc and the proposing transferor shall enter into a Purchase Agreement in the Agreed Terms and o in any event (subject to the said Purchase Agreement being entered into, if required) Inc shall (subject as provided in Clause 19.15.1.2 and 19.15.2) complete the purchase and the Proposing Transferors shall complete the sale of all (but not some only) of the Proposing Transferors' shares in the Company at such price and on such terms (such completion being herein called "Completion"). Such Shares shall be sold with full title guarantee and free from all liens, charges and encumbrances and with all rights attaching to them with effect from the date of Completion. 19.8 If an Exit Offer, having been made on the basis prescribed by Clause 19.5, is rejected or is deemed to have been rejected by Inc pursuant to Clause 19.5.2 (iii), the Proposing Transferors shall be at liberty for a period of up to sixty (60) days from the date of rejection of the Exit Offer or expiry of the Offer Period (as appropriate) to sell all (but not part only) of their shares in the Company to the Offeror on the terms of the Exit Offer (but not otherwise). 19.9 If the consideration payable by the Offeror shall consist in whole or part of something other than cash and/or marketable securities whose value on a given day is readily ascertainable, then the value of such other consideration ("the Other Consideration") shall be such value as Inc and the Company shall agree. In the event of disagreement, the determination of the value of the Other Consideration shall be referred to an umpire (acting as expert and not as arbitrator) nominated by and acting at the joint expense of the parties concerned (or, in the event of disagreement as to nomination, appointed by the President for the time being of the Institute of Chartered Accountants in England and Wales at the request of either Inc or the Company) whose decision shall be final and binding. 19.10 The consideration offered by Inc pursuant to Clause 19.5.2 (ii) may (at Inc's election) consist wholly of cash or wholly of Common Shares of Inc or partly of one and partly Page 22 26 of the other Provided that Inc's Common Stock is then traded on the NASDAQ National Market or listed on a major US Securities Exchange. If Inc's Common Stock is not then traded on the NASDAQ National Market or listed on a major US Securities Exchange the consideration shall be cash. 19.11 If the Common Shares offered by way of consideration (the "Consideration Shares") are not registered with the SEC prior to the Completion, Inc shall within 30 days after the date of Completion, file with the SEC a registration statement under the Securities Act of 1933, as amended, of the United States (the "Securities Act") covering the resale to the public by the shareholders of the Consideration Shares (the "Registration Statement"). Inc shall use reasonable efforts to cause the Registration Statement to be declared effective by the SEC as soon as practicable. Inc shall use its best efforts to cause the Registration Statement to remain effective until the earlier of (i) 120 days from the effective date of the Registration Statement (the "Selling Period") or (ii) such time as all of the Consideration Shares covered by the Registration Statement have been sold pursuant thereto. 19.12 Notwithstanding the foregoing: 19.12.1 Inc may, at any time, delay the filing or effectiveness of the Registration Statement or suspend the Registration Statement after effectiveness and may further, by written notice to the Shareholders, require the Shareholders immediately to cease sales of the Consideration Shares during the Selling Period if, and for so long as, Inc determines acting reasonably that the existence of any fact or the happening of any event (including without limitation pending negotiations relating to, or the consummation of, a transaction or the occurrence of any other event) would require additional disclosure of material information by Inc in the Registration Statement the confidentiality of which it has a valid business purpose to preserve or which fact or event would render Inc unable to comply with SEC requirements (in either case, a "Suspension Event"). 19.12.2 If Inc delays or suspends the Registration Statement or requires any Shareholder to cease sales of shares pursuant to Clause 19.12.1, Inc shall, as promptly as practicable following the termination of the circumstance which entitled Inc to do so ("the Reinstatement Period"), take such actions as may be necessary to file or reinstate the Page 23 27 effectiveness of the Registration Statement and/or give written notice to the Shareholder concerned authorising that Shareholder to resume sales pursuant to the Registration Statement. If as a result thereof the prospectus included in the Registration Statement has been amended to comply with the requirements of the Securities Act Inc shall enclose such revised prospectus with the notice to Shareholders given pursuant to this Clause 19.12.2, and Shareholders shall make no offers or sales of shares pursuant to the Registration Statement other than by means of such revised prospectus. 19.12.3 In the case of any Suspension Event occurring to and delaying the filing of the Registration Statement, Inc shall file the Registration Statement in accordance with Clause 19.12.2 and shall be required to keep the Registration Statement effective until the earlier of (i) such time as all the Common Shares offered thereby have been disposed of in accordance with the intended methods of distribution set forth in the Registration Statement or (ii) 120 days plus an extended period equal to the number of days during which any such suspension was in effect. 19.13 Where Clause 19.11 applies: 19.13.1 In connection with the filing by Inc of the Registration Statement, Inc shall furnish to the Shareholders copies of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act and such additional copies as are reasonably required by the Shareholders. 19.13.2 Inc shall use its best efforts to register or qualify the Consideration Shares covered by the Registration Statement under the securities laws of such states as the Shareholders shall reasonably request; provided, however, that Inc shall not be required in connection with this Clause 19.13.2 to qualify as a foreign corporation or execute a general consent to service of process in any jurisdiction. 19.13.3 If Inc has delivered final prospectuses to the Shareholders and after having done so the prospectus is amended to comply with the requirements of the Securities Act, Inc shall promptly notify the Page 24 28 Shareholders and, if requested by Inc the Shareholders shall immediately cease making offers or sales of shares under the Registration Statement and return all prospectuses to Inc. Inc shall promptly provide the Shareholders with revised prospectuses and, following receipt of the revised prospectuses, the Shareholders shall be free to resume making offers and sales under the Registration Statement. 19.13.4 Inc shall pay the expenses incurred by it in complying with its obligations under Clauses 19.11 to 19.14 inclusive, including all registration and filing fees, exchange listing fees, fees and expenses of counsel for Inc and fees and expenses of accountants for Inc but excluding (i) any brokerage fees, selling commissions or underwriting discounts incurred by the Shareholders in connection with sales under the Registration Statement and (ii) the fees and expenses of any counsel retained by the Shareholders. 19.14 Inc shall not be required to include any Consideration Shares in the Registration Statement unless each Shareholder furnishes to Inc in writing such information regarding the Shareholder and the proposed sale of Common Shares by the Shareholder as Inc may reasonably request in writing in connection with the Registration Statement or as shall be required in connection therewith by the SEC or any state securities law authorities. 19.15.1 If Inc elects to offer a consideration consisting wholly or partly of Common Shares in Inc then: 19.15.1.1 if the Consideration Shares are registered with the SEC prior to Completion, the number of Consideration Shares to be issued to satisfy the relevant element of the consideration ("the Relevant Consideration") shall be determined by dividing the amount of the Relevant Consideration by the value of one Common Share (based upon the average closing price on NASDAQ or a major US Securities Exchange of one Common Share over the 10 trading days ending three trading days prior to Completion) 19.15.1.2 if the Consideration Shares are not registered with the SEC prior to Completion then: Page 25 29 (i) the number of Consideration Shares to be issued to satisfy the Relevant Consideration shall be calculated as provided in Clause 19.15.1.1, save that (ii) if the closing price on NASDAQ or a major US Securities Exchange of a Common Share on the day prior to the registration statement becoming effective is less than the average closing price on NASDAQ or a major US Securities Exchange of one Common Share over the 10 trading days ending three trading days prior to Completion, then Inc will provide the transferring Shareholders with (at Inc's option) cash or additional Common Shares sufficient to compensate them for such decrease. 19.15.2 If a Suspension Event occurs within the first 45 days after the Registration Statement becomes effective which delays the sale of the Consideration Shares and the value of a Consideration Share at the end of the Reinstatement Period (based upon the average closing price on NASDAQ or a major US Securities Exchange of one Common Share over the 10 trading days immediately prior to the end of the Reinstatement Period) is less than the value of a Consideration Share immediately prior to the Suspension Event (based upon the average closing price on NASDAQ or a major US Securities Exchange of one Common Share over the 10 trading days prior to the Suspension Event) then Inc will provide the transferring shareholders with (at Inc's option) cash or additional Common Shares sufficient to compensate them for such decrease. 19.16 At completion of the sale the transferring Party shall procure that the director(s) of the Company who are nominees of the transferring Party shall forthwith resign (without any claims for loss of office or otherwise). 19.17 The provisions of Clause 19.18 shall apply if: 19.17.1 at any time the Founders and/or the Affiliates of either or both of them (the "Intending Transferors") receive from Inc a bona fide offer (the "Offer") in respect of any of their Shares in the Company; and 19.17.2 the Intending Transferors together hold 50% or more of the Shares for the time being in issue and wish to accept such Offer; and Page 26 30 19.17.3 Inc also wishes to purchase the Shares in the Company other than those of the Intending Transferors (the "Other Shares" and the holders thereof are herein called the "Other Shareholders") at a price per Share no less (and otherwise on terms no less favourable) than that payable for each Share being sold by the Intending Transferors. 19.18 Where this Clause 19.18 applies the Other Shareholders shall be deemed to have accepted the Offer on the day after such Offer is made. 19.19 If an Offer having been made on the basis prescribed by Clause 19.17 is deemed to be accepted pursuant to Clause 19.18 then the Intending Transferors and the Other Shareholders shall be at liberty for a period of up to 90 days from the date of the Offer to sell all (but not part only) of their shares in the Company to Inc conditionally upon Inc buying all of the shares in the Company, such sales to be on the terms of the Offer. So far as practicable, it shall be a term of the offer that completion of the sale of the shares of the Intending Transferors in the Company shall take place contemporaneously with the completion of the sale of the shares of the Other Shareholders. All such Shares shall be sold with full title guarantee and free from all liens, charges and encumbrances and with all rights attaching to them with effect from the date of completion of the sales. 19.20 If after becoming bound to transfer any of its Shares the transferring party makes default in transferring such Shares (or any of them) the Company may receive the purchase monies or other consideration and the transferring Party shall be deemed to have appointed one Director or the Secretary of the Company his or its agent to execute a transfer of the relevant Shares to the purchaser and upon execution of such transfer the Company shall hold the purchase monies or other consideration in trust for the transferring Party. The receipt of the Company for the purchase monies or other consideration shall be a good discharge for the purchaser and after his, its or their names has been entered in the register of members of the Company, the validity of the proceedings shall not be questioned by any Person. 20. CHARGING OF SHARES 20.1 None of the Shareholders shall (except with the prior written consent of both of the Original Shareholders acting reasonably, provided that such consent may be withheld or given or given subject to such reasonable conditions, as either or both of the Original Shareholders may acting reasonably deem fit) create or permit to subsist Page 27 31 any charge, lien or other encumbrance over any interest in all or any of the Shares held by it. It is agreed that either or both of the Original Shareholders may reasonably withhold consent if the proposed chargee, lien holder or other encumbrancer does not agree to be bound by this Agreement. 21. FINANCE 21.1 The Founders jointly and severally undertake to use their best commercial endeavours to procure that plant and equipment required by the Company to carry on the Business having a list price of not less than Pound Sterling1,200,000 shall be leased by the Company from one or more independent third parties on commercial arms length terms. 22.2 The Company may from time to time prior to 31 December 1999 by notice in writing to Inc require Inc (subject only to Inc and the Founders agreeing the Conversion Basis, as defined in the Loan Note Instrument, in accordance with Clause 21.3 below) to subscribe for the nominal amount of Convertible Loan Notes specified in such notice. Any such notice shall be accompanied by a copy of the minute of the meeting of the Board at which the issue of the notice was approved. The total nominal amount of Convertible Loan Notes required by all such notices to be subscribed shall in no event exceed Pound Sterling1,200,000. 21.3 Within 21 days of the issue of a notice pursuant to Clause 21.2 Inc and the Founders shall seek in good faith to agree the Conversion Basis. For these purposes only, the value of the entire issued Equity Share Capital of the Company shall be treated as three times the expected revenues of the Company for the 12 months following the issue of the said notice, as agreed between Inc and the Founders. In the absence of agreement as to the applicable Conversion Basis, Inc shall not be obliged to subscribe for any Convertible Loan Notes. 21.4 Within 21 days of the Conversion Basis having been agreed (and provided always that (i) neither the Company, nor the Founders or any or all of the foregoing, are in material breach of this Agreement and (ii) the Company is not in material breach of the Licence Agreement and (iii) the Founders have procured that plant and equipment required by the Company to carry on the Business to a list price of not less than Pound Sterling1,200,000 has been leased by the Company from one or more third parties on commercial arms length terms and (iv) each of the Founders has complied with Clause 15.1) the Company shall duly execute the Loan Stock Instrument and Inc Page 28 32 shall subscribe or procure that Permitted Third Parties subscribe in cash at par the nominal amount of the Convertible Loan Notes specified in the relevant notice. The minimum subscription by any single Permitted Third Party shall not be less than Pound Sterling300,000. For the purposes of this Clause 21.4, "Permitted Third Parties" means: (a) any venture capital funds or financial institutions which, in either case, are Shareholders in Inc; (b) any other venture capital funds or financial institutions which are approved in writing in advance by the Founders (such approval not to be unreasonably withheld or delayed in the case of a venture capital fund or financial institution of good standing and repute). 21.5 The Parties shall procure that the Company forthwith allots the Convertible Loan Notes subscribed in accordance with the previous provisions of this Clause and issues a certificate in respect thereof to the subscribers therefor forthwith upon receipt by the Company of payment in full for the Convertible Loan Notes subscribed by Inc. 21.6 In addition to or instead of issuing Convertible Loan Notes to Inc, the Company may by 31 December 1999 (or such later date as the Original Shareholders may agree in writing) raise capital from venture capitalists and/or financial institutions in any case of good standing and reputation who is/are acceptable to the Original Shareholders and on terms which are acceptable to the Original Shareholders. The Shareholders shall co-operate with such capital raising. Each of the Original Shareholders will have the right (but not the obligation) to subscribe part of such additional capital so as to ensure that the Ordinary Shares held by it immediately after such capital raising represents the same percentage of the issued Equity Share Capital that its Ordinary Shares represented immediately prior to such capital raising. 21.7 The Shareholders hereby agree for the avoidance of doubt that (save as expressly provided in Clause 21.4 in relation to Inc's obligation to subscribe or procure subscribers for Convertible Loan Notes) nothing in this Clause 21 shall be construed so as to require any of them to provide any further finance for the Company. Page 29 33 2. DIVIDEND POLICY 22.1 Unless Inc otherwise agrees in writing, the Company shall not make any distribution of profits in respect of the Financial Years ending 30 June 2000, 30 June 2001 and 30 June 2002. 22.2 If in respect of any Financial Year ending on or after 30 June 2003 the Company shall have profits available for distribution (within the meaning of Part VIII of the Companies Act) then (unless the Shareholders otherwise agree in writing in respect of a particular Financial Year) the Shareholders shall procure that such profits shall be applied in the following manner and order of priority: (a) the provision of working and fixed capital to finance the continuing operations and growth of the Business and the Company and transfers to reserves consistent with the normal commercial requirements of businesses similar to those carried on by the Company all in the amounts provided for in the annual budget for the next succeeding Financial Year produced under Clause 12.2 and approved by at least four Directors; (b) the payment (provided that all Convertible Loan Notes then outstanding (i) have been repaid in full or (ii) have been converted into `A' Shares or (iii) in the absence of such repayment or conversion, Inc has given its prior written consent to the same): o in respect of the Financial Years ending 30 June 2003 and 30 June 2004 of cash dividends of up to 25 per cent of post-tax profits (or, if less up to 25 per cent of accumulated distributable profits) o in respect of Financial Years ending on and after 30 June 2005 of cash dividends of up to 75 per cent of the post-tax profits (or, if less, up to 75 per cent of accumulated distributable profits). After (in each case) adequate cash has been reserved to provide for the items referred to in (a) above for the succeeding Financial Year, all as determined and agreed by a majority of the Directors and within seven (7) months after the end of the Financial Year concerned. 22.3 In deciding whether in respect of any Financial Year the Company had or has profits available for distribution the Parties shall procure that the auditors of the Company Page 30 34 shall certify whether such profits are available or not and the amount thereof (if any). In giving such certificate the auditors shall act as experts and not arbitrators and their determination shall be final and binding on the Parties. 23. PURCHASE OPTION 23.1 In consideration of the sum of Pound Sterling1 now paid by Inc to the Founders (receipt of which is hereby acknowledged) it is hereby agreed that (subject as provided in Clause 23.9) at any time between 1 July 2002 and 30 June 2004 (both dates inclusive), Inc may serve notice ("Option Notice") on the Founders and the other Shareholders requiring the Founders and such other Shareholders to sell all their Shares in the Company ("the Option Shares") at the Option Price (as defined in Clause 23.2). 23.2 "Option Price" means a fair price per Share as at the date of the Option Notice determined by an independent valuation expert from a first tier bank or firm of chartered accountants of international standing and reputation (not being the auditors for the time being or past auditors of the Company, Inc or the Founders or of any Affiliate of any of them) agreed upon by the Founders and Inc and whose costs shall be borne by Inc and the Founders equally and in default of such agreement determined in accordance with the following formula viz: "Option Price" = A + B --------------- 2 Where: "A" is a fair price per Share as at the date of the Option Notice determined by an independent valuation expert from a first tier bank or firm of chartered accountants of international standing and reputation (not being the auditors for the time being or past auditors of the Company, Inc or the Founders or any Affiliate of any of them) appointed by Inc and whose costs shall be borne by Inc ; and "B" is a fair price per Share as at the date of the Option Notice determined by an independent valuation expert from a first tier bank or firm of chartered accountants of international standing and reputation (not being the auditors for the time being or past auditors of the Company, Inc or the Founders or any Affiliate of any of them) appointed by the Founders and whose costs shall be borne by the Founders. Page 31 35 In determining a fair price pursuant to this Clause 23.2 an independent valuation expert: o shall apply US valuation principles for valuing comparable private US Internet co-location companies and shall take account of the value of the Company to Inc o shall assume a sale on a going concern basis as between a willing buyer and a willing seller contracting on arm's length terms as at the date of the Option Notice and on the basis that no account is taken of the fact that the Shares are a particular portion (and in particular whether a minority or a majority) of the total number of Ordinary Shares of the Company o shall act as an expert and not as an arbitrator o may consult with and take such advice as is in his opinion desirable from such persons as he may determine o shall, before the issue of any determination hereunder, offer the opportunity to each Shareholder to review the information on the basis of which such certificate is to be given and allow such parties to make written representations of reasonable length to him in regard thereto o shall lay down such time limits for the provision of information to him and for the making of such written representations as in his discretion he considers reasonable and o shall endeavour to issue his determination within two months of his being instructed to do so and the Shareholders shall use their reasonable endeavours to procure that the determination is issued within such period. 23.3 Provided that if A/B is greater than 1.2 or less than 0.8 then in the absence of agreement between Inc and the Founders the Option Price shall be determined by an independent valuation expert from a London firm of chartered accountants of international standing and reputation (not being (i) the auditors for the time being or past auditors of the Company, or Inc or the Founders or any Affiliate of any of them or (ii) a firm previously instructed under Clause 23.2) agreed upon by Inc and the Founders or in default of agreement nominated on the application of either such party on notice to the other by the President for the time being of the Institute of Chartered Accountants in England and Wales. The costs of such independent valuation expert shall be borne by Inc and the Founders equally. Page 32 36 In determining a fair price pursuant to this Clause 23.3, the independent valuation expert shall have regard to the matters and assumptions referred to in Clause 23.2 and to the valuations prepared by the other two independent valuation experts. 23.4 Within 45 days after the determination of the Option Price o if the consideration offered by Inc consists wholly or partly of Common Shares of Inc, Inc, the Founders and the other Shareholders shall enter into a Purchase Agreement in the Agreed Terms and o in any event (subject to the said Purchase Agreement being entered into, if required) Inc shall (subject as provided in Clause 23.8.2) complete the purchase and the Founders and the other Shareholders shall complete the sale of all (but not some only) of the Option Shares (such Completion being hereinafter called "Completion"). The Option Shares shall be sold with full title guarantee and free from all liens, charges and encumbrances and with all rights attaching to them with effect from the date of Completion. 23.5 On Completion the Founders and the Shareholders (other than Inc) shall deliver to Inc: 23.5.1 duly executed transfers of the Option Shares and the share certificates relating to those Shares; and 23.5.2 a waiver or waivers duly signed by all the members of the Company of any rights of pre-emption relative to the Option Shares and Inc shall deliver to the Founders and the other members the consideration for the Option Shares. 23.6 The Option Price may (at Inc's election) be satisfied wholly in cash or wholly in Common Shares of Inc or partly in one and partly in the other provided that Inc Common Stock is then traded on the NASDAQ National Market or listed on a major US Securities Exchange. If Inc Common Stock is not traded on the NASDAQ National Market or listed on a major US Securities Exchange the consideration shall be cash. 23.7 If Inc elects to satisfy the whole or part of the Option Price in Common Shares, the provisions of Clauses 19.11 to 19.14 inclusive shall apply mutatis mutandis. Page 33 37 23.8 If Inc elects to satisfy the Option Price wholly or partly in Common Shares then: 23.8.1 if the Common Shares to satisfy the whole or any part of the Option Price are registered with the SEC prior to Completion then the number of Shares to be issued to satisfy the relevant element of the consideration ("the Relevant Consideration") shall be determined by dividing the amount of the Relevant Consideration by the value of one Common Share (based upon the average closing price of Common Shares over the 10 trading days ending three trading days prior to such completion) 23.8.2 the provisions of Clauses 19.15.1.2 and 19.15.2 shall apply mutatis mutandis. 23.9 The option contained in Clause 23.1 shall lapse forthwith automatically on a Flotation: 23.9.1 on the London Stock Exchange or EASDAQ if the Total Capitalisation at the time of Flotation exceeds US $75,000,000 and the Amount Raised exceeds US $10,000,000 or 23.9.2 on the NASDAQ National Market if the Total Capitalisation at the time of Flotation exceeds US $100,000,000 and the Amount Raised exceeds US $20,000,000. 23.10 For the purposes of Clause 23.9: "Flotation" means the becoming effective of a listing for the share capital of the Company on the official list of the London Stock Exchange or the admission of any Shares to trading on EASDAQ or the closing of a public offering registered under the Securities Act (as defined in clause 19.11). "Amount Raised" means the gross amount of any new money raised by the Company from the subscription for new shares issued by the Company at the time of and in connection with the Flotation. "Total Capitalisation" means on a Flotation, the valuation placed upon the `A' Shares, the `B' Shares and the `C' Shares as shown in a prospectus or listing particulars or offering circular published in connection with such Flotation less the Amount Raised. Page 34 38 24. DEFAULT 24.1 For the purpose of this Clause the following expressions shall have the following meanings:- 24.1.1 `an event of default' means in relation to any Shareholder the occurrence of any of the following in relation to it:- EVENTS TRIGGERING SALE OF SHARES FOR NIL CONSIDERATION 24.1.1.1 the commission of a material breach of its obligations under Clause 3 (Warranty by Founders), Clause [13] (Operation of the Company), Clause 26 (Confidentiality and Disclosure), Clause 27 (Non-Competition) or Clause 28 (Non-Solicitation) of this Agreement and, in the case of a breach capable of remedy, failure to remedy the same within thirty (30) days after being given notice in writing so to do by any other Shareholder such notice to be headed `CURE NOTICE' and to refer to this Clause and the possibility of the Shareholder served with the notice being required to sell its Shares pursuant to this Clause; or 24.1.1.2 (in the case of Inc) Inc unlawfully terminates the Licence Agreement at any time; or 24.1.1.3 (in the case of Inc) Inc lawfully terminates the Licence Agreement on not less than 180 days notice expiring on or before 30 June 2001 pursuant to Clause 12.4.4 thereof; 24.1.1.4 (in the case of Mr. Dobbie) Mr. Dobbie prior to 30 June 2001 and provided that the Founders hold a Controlling Interest in the Company: (i) "Voluntarily Resigns" (which expression shall mean in relation to any person that he voluntarily resigns without the agreement of Inc, as a director or terminates his employment with the Company (otherwise than by reason of death or total and permanent disability as certified by a medical Page 35 39 practitioner approved by Inc, such approval not to be unreasonably withheld)) or; (ii) is properly and legally and summarily dismissed without notice or on short notice (as provided for in his service contract or particulars of employment) (herein "Summarily Dismissed"); or 24.1.1.5 (in the case of Mr MacSween) Mr. MacSween on or prior to 30 June 2001 and at a time when the Founders hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or EVENTS TRIGGERING SALE OF SHARES FOR 50% OF SUBSCRIPTION PRICE 24.1.1.6 (in the case of Mr Dobbie) Mr. Dobbie after 30 June 2001 but on or prior to 30 June 2002 and provided that the Founders hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or 24.1.1.7 (in the case of Mr MacSween) Mr. MacSween after 30 June 2001 but on or prior to 30 June 2002 and provided that the Founders hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or 24.1.1.8 (in the case of Mr Dobbie) Mr. Dobbie on or prior to 30 June 2001 and provided that the Founders do not hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or Page 36 40 24.1.1.9 (in the case of Mr MacSween) Mr. MacSween on or prior to 30 June 2001 and provided that the Founders do not hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or 24.1.1.10 (in the case of Inc) Inc lawfully terminates the Licence Agreement on not less than 180 days notice expiring after 30 June 2001 but on or before 30 June 2002 pursuant to Clause 12.4.4 thereof; or EVENTS TRIGGERING SALE OF SHARES FOR SUBSCRIPTION PRICE 24.1.1.11 (In the case of Inc) any distress, execution, sequestration or other process being levied or enforced upon or sued out against any substantial part of its property which is not contested in good faith or discharged within 28 days; or 24.1.1.12 (In the case of Inc) its inability to pay its debts as they fall due within the meaning of Section 123 of the UK Insolvency Act 1986; or 24.1.1.13 (In the case of Inc) it ceasing or threatening to cease wholly or substantially to carry on its business, otherwise than for the purpose of a reconstruction or amalgamation without insolvency previously approved by the other Shareholder (such approval not to be unreasonably withheld or delayed); or 24.1.1.14 (In the case of Inc) any encumbrancer taking possession of, or a receiver, trustee or administrator being appointed over the whole or any substantial part of its undertaking, property or assets in the case of Inc its entry into Chapter II administration; or 24.1.1.15 (In the case of Inc) the making of an order or the passing of a resolution for its winding up, otherwise than for the purpose of a reconstruction or amalgamation without insolvency Page 37 41 previously approved by the other Shareholder (such approval not to be unreasonably withheld or delayed); or 24.1.1.16 (in the case of Mr Dobbie) Mr. Dobbie after 30 June 2001 but on or prior to 30 June 2002 and provided that the Founders do not hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or 24.1.1.17 (in the case of Mr MacSween) Mr. MacSween after 30 June 2001 but on or prior to 30 June 2002 and provided that the Founders do not hold a Controlling Interest in the Company: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or 24.1.1.18 (in the case of Inc) the Company terminates the Licence Agreement by reason of Inc's material breach thereof pursuant to Clause 12.2 thereof where the notice of termination expires on or before 30 June 2002; or 24.1.1.19 (in the case of Founders and for so long only as the Founders hold a Controlling Interest in the Company) Inc terminates the Licence Agreement by reason of the Company's material breach thereof pursuant to Clause 12.2 thereof where the notice of termination expires on or before 30 June 2002; or 24.1.1.20 (in the case of the Founders) if an Inc Competitor acquires directly or indirectly any interest in any Affiliate of the Founders, where the term "Inc Competitor" means an entity whose business (or that of any Affiliate of such an entity) includes the business of providing co-location and/or Internet connectivity services; or EVENTS TRIGGERING SALE OF SHARES AT FAIR PRICE Page 38 42 24.1.1.21 in the case of Inc) Inc lawfully terminates the Licence Agreement after 30 June 2002 pursuant to Clause 12.4.4 thereof; or 24.1.1.22 (in the case of Inc) the Company terminates the Licence Agreement by reason of Inc's material breach thereof pursuant to Clause 12.2 thereof where the notice of termination expires after 30 June 2002; or 24.1.1.23 (in the case of the Founders and for so long only as the Founders hold a Controlling Interest in the Company) Inc terminates the Licence Agreement by reason of the Company's material breach thereof pursuant to Clause 12.2 thereof where the notice of termination expires after 30 June 2002; or 24.1.1.24 any governmental action prohibiting or preventing it from continuing to hold shares in the Company or to perform this Agreement; or 24.1.1.25 (in the case of Mr Dobbie) Mr. Dobbie after 30 June 2002: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed; or 24.1.1.26 (in the case of Mr MacSween) Mr. MacSween after 30 June 2002: (i) Voluntarily Resigns; or (ii) is Summarily Dismissed. 24.1.2 `the Prescribed Price' shall mean in respect of any Ordinary Shares the subject matter of the relevant option; 24.1.2.1 in the case of an event of default falling within Clause 24.1.1.1 to 24.1.1.5 inclusive nil per share; Page 39 43 24.1.2.2 in the case of an event of default falling within Clause 24.1.1.6 to 24.1.1.10 inclusive, 50 per cent of the subscription price of each share; 24.1.2.3 in the case of an event of default falling within Clause 24.1.1.11 to 24.1.1.20 inclusive the subscription price of each share; 24.1.2.4 in the case of an event of default falling within Clause 24.1.1.21 to 24.1.1.26 inclusive a fair price per share determined in the same way as the Option Price under Clause 23. 24.2 If a Shareholder commits or suffers an event of default (as defined in Clause 24.1.1), then the other Shareholders shall be entitled in its or their (as the case may be) entire discretion to require the defaulting Shareholder to sell all of the Shares held or beneficially owned by the defaulting Shareholder to (subject as provided below) the other Shareholders in proportion (as nearly as may be) to their then holdings of Shares in the Company for a sum in aggregate equal to the Prescribed Price (as defined in Clause 24.1.2) by serving written notice on the defaulting Shareholder at any time within ninety (90) days of the date of the occurrence of such event of default coming to the knowledge of the other Shareholder stating that the option hereby conferred is exercised Provided that if any other Shareholder shall not wish to take up its proportion of the Shares of the defaulting Shareholder, then such proportion may be taken up by those other Shareholders who do wish to take up their proportion pro rata as nearly as may be to the respective numbers of Shares then held by such other Shareholders and so on and so forth for so long as any other Shareholder continues to state its willingness to purchase Shares of the defaulting Shareholder. 24.3 If the option conferred by Clause 24.2 above is exercised, the defaulting Shareholder shall deliver to the other Shareholder(s) within twenty-eight (28) days after the date of service of the notice exercising such option or within twenty eight (28) days of the date the Prescribed Price is ascertained and notified to the Shareholders (whichever shall be the later) one or more duly executed transfers in respect of all its Ordinary Shares made out in such numbers and in favour of the other Shareholder(s), as determined in accordance with Clause 24.2, may in writing direct together with the Page 40 44 supporting Share Certificates therefor (or an appropriate indemnity in respect of any lost Certificates) and against such delivery the other Shareholder(s) shall make full payment in sterling in London of the Prescribed Price (as defined in Clause 24.1.2) for such Ordinary Shares. The Ordinary Shares so transferred shall be deemed to be sold by the transferor with full title guarantee with effect from the date of such transfer free from any lien, charge or encumbrance with all rights attaching thereto. 24.4 At completion of the sale the Directors who were nominees of the seller Shareholder shall forthwith resign (without any claims for loss of office or otherwise). 24.5 Completion of all relevant matters referred to in this clause shall take place simultaneously. 24.6 Inc may elect to satisfy some or all of the Prescribed Price payable by it under this Clause wholly in cash or wholly in Common Shares of Inc or partly in one and partly in the other provided that Inc Common Stock is then traded on the NASDAQ National Market or listed on a major US Securities Exchange. If Inc Common Stock is not traded on the NASDAQ National Market or listed on a major US Securities Exchange the consideration shall be cash. The provisions of Clause 19.11 to 19.14 inclusive shall apply mutatis mutandis. 24.7 If Inc elects to satisfy the Prescribed Price wholly or partly in Common Shares then: 25.7.1 if the Common Shares to satisfy the whole or any part of the Prescribed Price are registered with the SEC prior to Completion then the number of Shares to be issued to satisfy the relevant element of the consideration ("the Relevant Consideration") shall be determined by dividing the amount of the Relevant Consideration by the value of one Common Share (based upon the average closing price of Common Shares over the 10 trading days ending three trading days prior to such completion) 25.7.2 the provisions of Clauses 19.15.1.2 and 19.15.2 shall apply mutatis mutandis. 24.8 If after becoming bound to transfer its Shares the defaulting Shareholder makes default in transferring such Shares (or any of them) the Company may receive the purchase monies or other consideration and the defaulting Shareholder shall be deemed to have appointed any one Director or the Secretary of the Company its Page 41 45 agent to execute a transfer of the relevant Shares to the other Shareholder and upon execution of such transfer the Company shall hold the purchase monies or other consideration in trust for the defaulting Shareholder. The receipt of the Company for the purchase monies or other consideration shall be a good discharge for the other Shareholder and after its name has been entered in the register of members of the Company, the validity of the proceedings shall not be questioned by any Person. 25. LEGEND ON SHARE CERTIFICATES 25.1 Each certificate representing any of the Shares held by each of the Shareholders in accordance with this Agreement and hereafter acquired by any lawfully permitted transferee or successor shall bear the following legend:- `The holders of the Shares represented by this Certificate are subject to the restrictions contained in a Shareholders Agreement between the Company and its shareholders, a copy of which may be inspected at the registered office of the Company.' 26. CONFIDENTIALITY AND DISCLOSURE 26.1 Each of the Directors of the Company may communicate any information acquired by him in relation to the Company to the Shareholder appointing him, subject always to the parties' duty of confidentiality contained in Clause 26.2. 26.2 Each party will treat as confidential any information provided to it by any of the others which has not been published, or which is not already known to the receiving party, and will impose a similar duty of confidentiality on any person to whom it is permitted to transfer such information. The parties will maintain the utmost confidentiality regarding this Agreement at all times and none of the parties will make any announcement to the public or to any third party regarding the arrangements contemplated by this Agreement without the consents of the others such consent not to be unreasonably withheld or delayed save (in the absence of agreement) for any statement or disclosure which may be required by law or called for by the requirements of NASDAQ National Market and/or the US Securities and Exchange Commission and/or the London Stock Exchange and/or EASDAQ and any such statement or disclosures shall be no more extensive than is usual or necessary to meet the requirements imposed upon the party making such statement or disclosure. Page 42 46 26.3 Whilst the parties shall use their best endeavours to ensure compliance with this Clause a party in breach of its terms shall not thereby commit a material breach of its obligations under this Agreement for the purpose of Clause 24.1.1.1 if it can show that it took reasonable steps to prevent the breach and it could not reasonably have been expected to have prevented it. 27. NON-COMPETITION 27.1 Each of the Shareholders undertakes that it will not while it or any of its Affiliates is a member of the Company or for a period of one year thereafter (the `Restricted Period') (and will procure that during the Restricted Period none of its Affiliates will), either alone or jointly with others, whether as principal, agent, manager, shareholder, independent contractor or in any other capacity, directly or indirectly through any other person, for its own benefit or that of others at any time during the Restricted Period engage in or carry on or be concerned or interested in any business in the United Kingdom in competition with the Company (other than as a holder for investment of no more than 5% of any class of shares or securities dealt in on a recognised stock exchange). 27.2 The restrictions contained in Clause 27.1 shall not prevent or inhibit Inc or any Affiliate of Inc from engaging in or carrying on or being concerned or interested in any business in the United Kingdom in competition with the Company at any time after the Licence Agreement has terminated or any of the rights granted thereunder to the Company have ceased to be exclusive. 27.3 The above restrictions are considered reasonable by the parties but in the event that any such restriction shall be found to be void but would be valid if some part thereof was deleted or the period of application reduced such restriction shall apply with such modification as may be necessary to make it valid and effective. 28. NON-SOLICITATION Each Shareholder undertakes that it will not and neither will its Affiliates either during the continuance of this Agreement or for a period of one year thereafter: 28.1 solicit in competition with the Company the custom of any Person, who shall during the 12 months prior to the relevant time be a customer of the Company provided that this Clause 28.1 shall not apply to Inc and its Affiliates; or Page 43 47 28.2 endeavour to solicit or entice away from the Company or employ any Person who during the 12 months prior to the relevant time was an employee of the Company unless such person shall have been unfairly or unlawfully dismissed by the Company. 29. ASSIGNMENT 29.1 Neither of the Shareholders shall assign or transfer or purport to assign or transfer any of its rights or obligations hereunder save Inc in connection with a transfer of its shares to a Person who acquires a Controlling Interest in or purchases all or substantially all of the assets of Inc or to an Affiliate of such Person provided that simultaneously therewith, such Person or its Affiliate accepts an assignment of the benefit and burden of the Licence Agreement. If following such an assignment, the Founders would (but for such assignment) be obliged to accept Common Shares or Common Stock of Inc in whole or partial consideration for the sale of the Founders' Shares, then if the Founders so agree at the time of such sale (such agreement not to be unreasonably withheld or delayed) the Founders shall be obliged to accept Common Shares or Common Stock of the Person concerned. In the absence of such agreement at such time, the Person shall have no ability to satisfy amounts due to the Founders by the issue of Common Shares or Common Stock. Save as aforesaid, references herein to Common Shares of Inc or Common Stock of Inc or similar expressions shall be read as references to Common Shares of the Person concerned or (as the case may be) Common Stock of the Person concerned. 29.2 The parties to this Agreement shall procure that (except for (i) any allottee under Clause 2.2 or (ii) any transferee under a transfer made pursuant to Clauses 19.3.2 or 19.3.3 or any successor in title to any such allottee or transferee) any transferee or allottee of shares in the Company shall, prior to any transfer or allotment to it taking effect, have entered into an agreement with the parties to this Agreement and the other holder or holders for the time being of all the shares in the Company substantially in the form set out in the Schedule and provided that such transfer or allotment is not otherwise prohibited by this Agreement each party to this Agreement shall enter into such an agreement whenever requested to do so by any other party to this Agreement. Page 44 48 30. PROPRIETARY KNOW-HOW 30.1 Save as expressly provided herein no party shall have any right as a consequence of this Agreement to utilise any know-how or other intellectual property licensed to the Company by any other without the other's prior written consent. 31. NAMES 31.1 The parties acknowledge that the Company does not have any rights to the use of the names AboveNet, Internet Service Exchange, AboveNet One-Hop Solution, One-Hop Consortium, One-Hop Consortium Member, Global One-Hop Network, Global One-Hop Consortium, AboveNet Global One-Hop Network, ISPCondo, WebCondo, MRTG, ASAP, APS, EtherValve or any other current or future trade mark or name of Inc or to any goodwill associated therewith save to the extent provided in the Licence Agreement. 31.2 If at any time both Inc and its Affiliates cease to hold any shares in the Company the Shareholders and the Company shall procure that within one month thereafter the Company shall cease to use the name AboveNet for any purpose and shall take such steps as are necessary to remove such name from the registered corporate name of the Company and the Shareholders (other than Inc) and their respective Affiliates (other than any Affiliate of Inc) shall not thereafter use or suffer to be used the name of AboveNet in connection with the operation of the Business. 32. TERM 32.1 This Agreement shall take effect from the date hereof and shall subject as hereinbefore mentioned continue until: 32.1.1 Terminated by mutual consent in writing by the Shareholders; or 32.1.2 The date of the commencement of the Company's winding up; or 32.1.3 The date upon which any Shareholder ceases to be a holder of Ordinary Shares in the Company (other than in circumstances where Inc's Ordinary Shares are transferred to a Person who acquires a Controlling Interest in Inc or to an Affiliate of such Person as permitted herein) in which case the Agreement shall terminate as regards the Shareholder so ceasing but shall continue as regards the other Shareholders Page 45 49 Provided that termination shall be without prejudice to any rights of the Shareholders accrued at that time and the terms of this Agreement shall nevertheless continue to bind the Shareholders thereafter to such extent and for so long as may be necessary to give effect to the rights and obligations embodied herein. 33. INTEREST 33.1 If any party fails to make any payment hereunder on the due date or within the applicable period for payment, such party shall pay interest to the payee on the amount for the time being outstanding at the rate of 3% per annum above the base lending rate of Bank of Scotland for the time being in force on the basis of actual days elapsed from the due date for payment or from the date of the expiry of such period (as the case may be) until payment in full (after as well as before judgement). 34. SEVERABILITY 34.1 Each of the provisions contained in this Agreement and in each clause and sub-clause hereof shall be construed as independent of every other such provision to the effect that if any provision of this Agreement shall be determined to be illegal invalid and/or unenforceable then such determination shall not affect any other provisions of this Agreement all of which other provisions shall remain in full force and effect. 34.2 If any provision of this Agreement shall be determined to be illegal invalid and/or unenforceable but would be legal valid or enforceable if amended the parties hereto shall consult together in good faith and agree the scope and extent of any modification or amendment necessary to render the provision legal, valid and enforceable and so as to give effect to the intention of the parties as recorded in this Agreement. 35. CONFLICT WITH ARTICLES 35.1 The parties hereby agree that if and to the extent the Articles of Association of the Company conflict with the provisions of this Agreement the provisions of this Agreement shall prevail as between the Shareholders. Page 46 50 36. NO PARTNERSHIP 36.1 Nothing in this Agreement shall constitute or be deemed to constitute a partnership between any of the parties hereto and neither of the Shareholders shall have any authority to bind the other in any way. 37. FURTHER ASSURANCE 37.1 The parties hereto shall and shall use their respective reasonable endeavours to procure that any necessary third parties shall do execute and perform all such further deeds documents assurances costs and things as any of the parties may reasonably require by notice in writing to the others to carry the provisions of this Agreement into full force and effect. 38. COSTS 38.1 The Shareholders agree that they shall each pay their own costs legal fees and other expenses incurred in relation to the negotiation preparation and execution of this Agreement and all documents ancillary thereto. 39. ENTIRE AGREEMENT 39.1 This Agreement (and the Articles of Association, the Dobbie Service Agreement, the MacSween Service Agreement and the Licence Agreement, constitute the entire agreement between the parties in connection with the subject matter herein contained and shall take effect in substitution for all previous agreements and arrangements whether oral written or implied between them in relation to such subject matter. 39.2 Each of the parties hereto confirms that, in agreeing to enter into this Agreement, it has not relied on any representation, warranty or undertaking (except those contained in this Agreement and/or the Licence Agreement) and for the avoidance of doubt each party hereby irrevocably and unconditionally waives any right to any remedy of any nature for breach of any representation, warranty or undertaking (except those contained in this Agreement) which there may have been or which may hereafter occur. Page 47 51 40. VARIATION 40.1 No variation of any of the terms of this Agreement (or of any other documents referred to herein) shall be effective unless it is in writing and signed by or on behalf of each of the parties hereto or thereto. The expression `variation' shall include any variation, supplement, deletion or replacement however effected. 41. WAIVER/FORBEARANCE 41.1 The rights of any party shall not be prejudiced or restricted by any indulgence or forbearance extended to the other and no waiver by any party in respect of any breach shall operate or be deemed to operate as a waiver in respect of any subsequent breach. 42. EXECUTION IN COUNTERPARTS 42.1 This Agreement may be executed in counterparts each of which when executed and delivered shall be deemed to be an original but all of which together shall constitute one and the same instrument. 43. NOTICES 43.1 Any notice to be given by any party to this Agreement shall be in writing an shall be deemed duly served if delivered personally or sent by facsimile transmission or by prepaid registered post (airmail in the case of an address for service outside the United Kingdom) or delivered by recognised international courier (who in the latter case obtains a receipt for the notice signed by or on behalf of the addressee) to the addressee at the address or (as the case may be) the facsimile number of that party set opposite its name below:
Name of Party: Address and Facsimile Number ------------- ---------------------------- AboveNet Communication Inc 50, W. San Fernando Street SE1010, San Jose, California, 95113, USA Fax No. 001 408 367 6688 Marked for the attention of the President
Page 48 52 AboveNet UK Limited 63 Queen Victoria Street, London EC4 Fax No. 0171-329 4000 Marked for the attention of Mr R. Masters Mr. W. Dobbie 1 Belgrave Crescent, Edinburgh EH4 3AQ Mr. A. MacSween 5 Ellergreen Road, Bearsden, Glasgow GG1 2AJ
or at such other address (or facsimile number) as the party to be served may have notified (in accordance with the provisions of this clause) for the purposes of this agreement. 43.2 Any notice sent by facsimile shall be deemed served three hours after despatch, if despatched on a business day before 3.00 pm or in any other case, at midday on the business day after the date of despatch. Here `business day' means a day on which banks are open in the city or other location to which the notice is sent; and the times mentioned are those in that location. 43.3 Clause 43.2 does not apply:- 43.3.1 if before the time which the notice would otherwise be deemed to have been served, the receiving party informs the sending party that the notice has been received in a form which is unclear in a material respect; and 43.3.2 if the receiving party does that by telephone, it despatches a confirmatory telex or fax within three hours. 43.4 Any notice served by prepaid registered post shall be deemed served 48 hours after posting to an address in the United Kingdom or 5 days after posting to an address outside the United Kingdom. Page 49 53 43.5 In proving the service of any notice it will be sufficient to prove in the case of a letter that such letter was properly stamped addressed and placed in the post or delivered or left at the current address if delivered personally and in the case of a facsimile (subject as provided in clause 43.3) that such facsimile transmission was duly despatched to the facsimile number of the addressee given above or subsequently notified for the purposes of this Agreement. 44. GOVERNING LAW AND JURISDICTION 44.1 This Agreement (together with all documents referred to herein) shall be governed by and construed and take effect in accordance with English law. 44.2 Each of the parties hereto hereby submits to the jurisdiction of the High Court of England and agrees that in the event of any action being commenced the process by which it is commenced may be served on them in accordance with Clause 43. ATTESTATION: This Agreement has been executed and delivered as a Deed the day and year first above written. Page 50 54 THE SCHEDULE (FORM OF SUPPLEMENTAL DEED) DATE: PARTIES: (1) [ ] LIMITED (CR No. ) whose registered office is ------------------------------ situate at [ ] [together with its successors in title and permitted assigns `the New Party]'); and (2) [NOTE: All the parties to the principal Agreement including any person who has entered into a Supplemental Agreement pursuant to the Principal Agreement but excluding any person (other than the Transferor) who has ceased to be a Shareholder]. RECITALS: (A) Under the terms of an Agreement dated [ ] 199. (`the Principal Agreement') and entered into between [ ] [and to which [ ] (`the Transferor') is [an original party] [a party by virtue of a Supplemental Deed dated [ ]] the Transferor has sold and transferred to the New Party [[insert number and type of shares] subject to the New Party entering into this Supplemental Deed OR [the New Party has agreed to subscribe for [insert number and type of shares]] (B) The New Party wishes to accept such shares subject to such condition and to enter into this Supplemental Deed pursuant to the Principal Agreement. OPERATIVE TERMS: 1. Expressions defined in the Principal Agreement shall (unless the context otherwise requires) have the same meaning when used in this Agreement. 2. The New Party undertakes to and covenants with all the parties to the Principal Agreement (including any person who has entered into a Supplemental Agreement pursuant to the Principal Agreement) to comply with the provisions of and to perform all the obligations in the Principal Agreement so far as they become due to be Page 51 55 observed and performed on or after the date hereof as if the New Party had been an original party to the Principal Agreement [[in place of] [as well as] the Transferor]. 3. The New Party shall become a Shareholder [and the Transferor shall cease to be a Shareholder] and on and after the date hereof the New Party shall have the benefit of the provisions of the Principal Agreement as if the New Party had been an original party thereto [[in place of] [as well as] the Transferor] and the Principal Agreement shall be construed and apply accordingly. [4. For the avoidance of doubt, the New Party shall not be entitled to any amount which has fallen due for payment to the Transferor before the date hereof and shall not be liable in respect of any breach or non-performance of the obligations of the Transferor pursuant to the Principal Agreement before the date hereof and the Transferor shall remain entitled to each such amount and shall not be released from any liability of any such breach or non-performance.] Page 52 56 EXECUTION: EXECUTED and DELIVERED by ) ABOVENET COMMUNICATIONS INC ) (acting by Dr. Paul Steiner its duly ) appointed Attorney) ) as a Deed in the presence of: ) ................................................... Witness signature ................................................... Witness name in block capitals ............................................ ............................................ ............................................ Witness address ............................................ Witness occupation EXECUTED and DELIVERED by ) ABOVENET UK LIMITED ) as a Deed in the presence of:- ) ................................................... Director ................................................... Director Page 53 57 EXECUTED and DELIVERED by ) WILLIAM DOBBIE ) as a Deed in the presence of:- ) ............................................ Witness signature ............................................ Witness name in block capitals ............................................ ............................................ ............................................ Witness address ............................................ Witness occupation EXECUTED and DELIVERED by ) ANGUS MACSWEEN ) (acting by Mr. William Dobbie his duly ) appointed attorney) ) as a Deed in the presence of:- ) ............................................ Witness signature ............................................ Witness name in block capitals ............................................ ............................................ ............................................ Witness address ............................................ Witness occupation Page 54 EX-23.2 7 CONSENT OF DELOITTE & TOUCHE 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT To the Board of Directors and Stockholders of AboveNet Communications Inc.: We consent to the use in this Registration Statement of AboveNet Communications Inc. on Form S-1 of our report dated August 7, 1998 (December 4, 1998 as to the first eight paragraphs of Note 12 and March 31, 1999 as to the last seven paragraphs of Note 12) appearing in the Prospectus, which is part of this Registration Statement, and of our report dated August 7, 1998 relating to the financial statement schedule appearing elsewhere in this Registration Statement. We also consent to the references to us under the headings "Selected Financial Data", "Experts" and "Change in Accountants" in such Prospectus. DELOITTE & TOUCHE LLP San Jose, California April 6, 1999 EX-23.3 8 INDEPENDENT AUDITORS' REPORT ON SCHEDULE 1 Exhibit 23.3 INDEPENDENT AUDITOR'S REPORT ON SCHEDULE To the Board of Directors and Stockholders of AboveNet Communications Inc. Our audits of the financial statements of AboveNet Communications, Inc. for the period from March 8, 1996 (inception) to June 30, 1996 and for the years ended June 30, 1997 and 1998 also include the financial statement schedule of AboveNet Communications, Inc., listed in Item 16. (b). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California August 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----