AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTERPACKET NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 4899 95-4542908
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Industrial Identification Number)
incorporation or organization) Classification Code Number)
1901 MAIN STREET, 2ND FLOOR
SANTA MONICA, CALIFORNIA 90405
(310) 382-3300
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JONATHAN GANS
INTERPACKET NETWORKS, INC.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
1901 MAIN STREET, 2ND FLOOR
SANTA MONICA, CALIFORNIA 90405
(310) 382-3300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
CYNTHIA M. DUNNETT, ESQ. KENNETH R. LAMB, ESQ.
Riordan & McKinzie LISA A. FONTENOT, ESQ.
300 South Grand Avenue, Suite 2900 MEG L. FITZPATRICK, ESQ.
Los Angeles, California 90071 Gibson, Dunn & Crutcher LLP
(213) 629-4824 1 Montgomery Street, 26th Floor
San Francisco, California 94104
(415) 393-8200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE(2)
Common Stock, $.001 par value............................... $86,250,000 $22,770
(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(o).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY 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 PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED FEBRUARY 18, 2000.
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
This is an initial public offering of shares of common stock of InterPacket
Networks, Inc. All of the shares of common stock are being sold by us.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price per share is estimated to be between $ and
$ . We intend to list the common stock on the Nasdaq National Market under
the symbol IPKT.
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PER SHARE TOTAL
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Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to InterPacket Networks, Inc., before expenses..... $ $
InterPacket has granted the underwriters a 30-day option to purchase up to
an additional shares of common stock to cover over-allotments.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
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.
JOINT LEAD MANAGERS AND BOOKRUNNERS
CHASE H&Q LEHMAN BROTHERS
CIBC WORLD MARKETS
, 2000
[INSIDE FRONT COVER]
[POWERED BY ESPRESSO-REGISTERED TRADEMARK-
GRAPHIC AND DESIGN]
[INSIDE COVER GATEFOLD]
[MAP OF THE WORLD WITH SATELLITE COVERAGE AND
COUNTRIES WHERE WE HAVE CUSTOMERS]
TABLE OF CONTENTS
PAGE
--------
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Information................. 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 20
Business.................................................... 28
Management.................................................. 42
Certain Transactions........................................ 51
Principal Stockholders...................................... 54
Description of Capital Stock................................ 56
Shares Eligible for Future Sale............................. 57
Underwriting................................................ 59
Legal Matters............................................... 61
Experts..................................................... 61
Additional Information...................................... 61
Index to Consolidated Financial Statements.................. F-1
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ESPRESSO-REGISTERED TRADEMARK-, POWERED BY ESPRESSO-REGISTERED TRADEMARK-
and INTERPACKET-REGISTERED TRADEMARK- are registered trademarks of InterPacket
Networks, Inc. We have a trademark application pending for ESPRESSO BIZKIT-TM-.
This prospectus contains other trade names, trademarks and service marks of
InterPacket and of other companies.
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i
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE
FINANCIAL STATEMENTS, CAREFULLY BEFORE MAKING AN INVESTMENT DECISION. UNLESS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS REFLECTS OUR FOR STOCK
SPLIT WHICH WILL OCCUR PRIOR TO THE COMPLETION OF THIS OFFERING AND THE
CONVERSION OF OUR PREFERRED STOCK INTO COMMON STOCK UPON COMPLETION OF THE
OFFERING AND ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED.
INTERPACKET NETWORKS, INC.
OVERVIEW
We operate a satellite-based broadband Internet network that delivers
high-speed Internet services to international Internet service providers and
other businesses in more than 80 countries. Our proprietary network design
integrates the broadcast capabilities of satellites with Internet networking
technologies to offer our international customers a scalable solution to the
constraints of the public Internet infrastructure. Our global network's open
technical architecture enables us to provide three categories of Internet
services: global high-speed broadband connectivity to the Internet backbone,
enhanced Internet services, such as Internet telephony, and Internet content
distribution, such as newsfeeds and streaming media. From December 31, 1998 to
December 31, 1999, we increased the number of our customers from 69 to 343 and
as of February 15, 2000 we had 468 customers worldwide.
Strain on the worldwide Internet infrastructure is increasing, especially
outside the U.S., as the number of Internet users grows and as their bandwidth
needs expand. eStats, a tracking service for the global Internet marketplace,
estimates that the number of active Internet users worldwide will grow from
approximately 95 million in 1998, of which approximately 50% resided outside of
the U.S., to approximately 282 million by the end of 2002, of which
approximately 69% will reside outside of the U.S. Despite an anticipated
expansion in the number of Internet users worldwide, advances in the global
telecommunications infrastructure and the public Internet have failed to keep
pace with user demand. When connecting to and navigating the Internet,
international Internet service providers, or ISPs, and their subscribers suffer
numerous problems caused by limited access to the Internet backbone, poor
telecommunications infrastructure and low bandwidth availability. These
difficulties are likely to increase as demand grows for rich Internet content,
such as streaming audio and video.
THE INTERPACKET SOLUTION
Our broadband satellite-based Internet network overlays the public Internet
around the world and offers solutions to many of the current global Internet
infrastructure limitations. Our network currently incorporates nine
geostationary satellites, uplinked from six strategically located teleports, or
earth-based satellite transmission stations, and allows for the rapid delivery
of broadband Internet connectivity worldwide. ESPRESSO and ESPRESSO BIZKIT, our
branded satellite-based Internet connectivity services, supplement or bypass
local and international telecommunications connections, enabling our ISP
customers to deliver a more reliable, higher quality of Internet service to
their subscribers. Our enhanced Internet services, including ESPRESSO VOICE, our
Internet telephony service, are complementary to the broadband access we provide
to our international ISP customers and create additional revenue opportunities.
The broadcast capabilities of our satellite network create an efficient,
reliable means for Internet content aggregators to multicast, or transmit,
bandwidth-intensive forms of rich, Web-based content simultaneously to multiple
locations around the world. We currently broadcast ESPRESSO NEWS, our aggregated
newsfeed, and we recently entered into an agreement with iBEAM Broadcasting
Corporation, a leading Internet broadcast network, to deliver streaming content
around the world.
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Our satellite-based Internet network and services feature:
- Scalable, proprietary and global network design
- High quality, branded service
- Rapid provisioning
- Enhanced Internet services
- Multicasting content delivery
- Customer-focused network management and support
OUR STRATEGY
Our goal is to become the leading provider of global satellite Internet
connectivity and services by building the world's largest, premier quality and
cost-efficient satellite network. We also intend to capitalize on our
proprietary network design, our network's broadband capabilities and the global
reach of our satellite coverage to offer content delivery to Internet content
aggregators. To achieve this goal we intend to:
- Increase our global customer base
- Capitalize on our early entrant status
- Broaden our Internet service offerings
- Provide turnkey solutions to the emerging Internet content industry
- Expand our network infrastructure
- Develop our strategic and business relationships
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Our headquarters are located at 1901 Main Street, 2nd Floor, Santa Monica, CA
90405, and our telephone number is (310) 382-3300.
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THE OFFERING
Common stock offered by InterPacket Networks,
Inc........................................ shares
Common stock to be outstanding after the
offering................................... shares
Use of proceeds.............................. Primarily to acquire satellite and fiber
optic capacity, increase sales and marketing
personnel and activities, increase working
capital and for other general corporate
purposes.
Proposed Nasdaq National Market symbol....... IPKT
The number of shares outstanding is based on shares outstanding as of
February 15, 2000. This number reflects the conversion of our 3,000,000 shares
of preferred stock into common stock upon completion of the offering and takes
into account our for stock split but excludes 2,817,584 shares of
common stock issuable upon exercise of options outstanding, at a weighted
average exercise price of $3.52, and 3,022,666 shares of common stock reserved
for future option grants under our stock option plans.
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Please see Note 2 of notes to our consolidated financial statements
appearing at the end of this prospectus for an explanation of the determination
of the number of shares used in computing per share data. The Actual column
reflects balance sheet data on a historical basis, without any adjustments to
reflect subsequent events or anticipated events and gives effect to our for
stock split. The Pro Forma column reflects the issuance of 3,000,000 shares
of common stock upon conversion of our outstanding preferred stock on completion
of the offering. The Pro Forma As Adjusted column reflects the issuance of
3,000,000 shares upon this conversion and the receipt of the estimated proceeds
from our sale of shares of common stock at an assumed initial public
offering price of $ per share, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by us. From inception
until December 31, 1996, we generated an insignificant amount of revenues, as
operations were limited and consisted primarily of start-up activities.
YEAR ENDED DECEMBER 31,
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1997 1998 1999
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Network services.......................................... $ 583 $ 4,115 $ 10,789
Traditional telecom services.............................. 1,176 7,295 2,685
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Total revenue........................................... 1,759 11,410 13,474
Income (loss) from operations............................... 158 (1,416) (10,057)
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Net income (loss)........................................... $ 89 $(1,328) $(10,890)
====== ======= ========
Basic and diluted income (loss) per common share............ $ 0.01 $ (0.16) $ (1.05)
====== ======= ========
Weighted average number of common shares (basic and
diluted).................................................. 7,250 8,412 10,392
====== ======= ========
Pro forma basic and diluted loss per common share
(unaudited)............................................... $ (1.01)
========
Weighted average number of common shares used to compute pro
forma loss per common share (unaudited)................... 10,803
========
DECEMBER 31, 1999
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $15,948 $15,948 $
Total assets................................................ 64,291 64,291
Capital leases, net of current portion...................... 38,669 38,669
Mandatorily redeemable preferred stock...................... 14,824 --
Deficit..................................................... (12,126) (12,126)
Stockholders' equity........................................ 2,392 17,216
3
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW MAY NOT BE THE ONLY ONES WE FACE. IF ANY
OF THE FOLLOWING RISKS AND UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE HARMED. IN THIS EVENT, THE TRADING
PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE SOME OR ALL OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, OUR BUSINESS IS DIFFICULT TO
EVALUATE AND YOU MAY INACCURATELY ASSESS OUR PROSPECTS FOR SUCCESS.
In January 1997 we began revenue-generating operations. Due to our limited
operating history, our past results may not be meaningful and you should not
rely on them as indicators of our future performance. We confront all of the
challenges and uncertainties encountered by growing, early-stage companies,
particularly companies in the new and rapidly evolving international market for
Internet connectivity and services. These challenges and uncertainties include
our ability to:
- expand our international ISP customer base;
- increase the services purchased from us by our customers and the amount of
revenue we receive from each of our customers;
- satisfy the changing needs of our existing and future international ISP
customers;
- acquire, develop and market new Internet services;
- respond to the changing needs of the Internet content delivery market;
- upgrade and expand our network infrastructure;
- develop our strategic and business relationships;
- capitalize on our early entrant status; and
- recruit and retain key personnel.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING LOSSES FOR THE
FORESEEABLE FUTURE.
Since our inception we have incurred substantial losses. We expect our
losses to increase as we expand our operations. While we had net income of
approximately $89,000 in 1997, we experienced net losses of approximately
$1.3 million in 1998 and $10.9 million in 1999. We experienced negative cash
flows from operations of approximately $13,000 in 1997 and $6.9 million in 1999,
though, in 1998 cash flow provided by operations was approximately
$0.4 million. As of December 31, 1999, we had a deficit of $12.1 million. Based
on our current plan of operations, we do not believe that we will achieve
profitability in the foreseeable future. We expect our losses and negative cash
flow to continue and to increase as we intend to:
- expand our global network through leases and purchases of additional
rights to use capacity on geostationary satellites and fiber optic cable
systems;
- build out our points of presence;
- substantially increase our staff, especially in the areas of operations,
sales and marketing;
- develop and maintain relationships with Internet content aggregators,
Internet backbone operators and regional satellite owners;
- expand sales of ESPRESSO VOICE, which increases our collection risk;
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- expand into other countries in which we are not currently conducting
business;
- develop or acquire, introduce and market new Internet services;
- market our ESPRESSO brand name; and
- respond to competitive and technological developments.
We expect that our expenses, particularly costs relating to acquiring
additional satellite transponder space and our selling, general and
administrative expenses, will increase both in absolute dollars and as a
percentage of our revenues as we grow. If our revenue fails to grow at
anticipated rates or if our operating expenses increase without a commensurate
increase in our revenue, our losses will significantly increase and our business
and financial results could be harmed. Additionally, if we are not successful in
raising funds in this offering, we will have to take certain steps, such as
delaying the acceptance of services under our fixed fee contracts or renegotiate
certain long-term contracted obligations, to reduce our regular capital needs.
OUR BUSINESS WILL SUFFER AND OUR FINANCIAL RESULTS WILL DETERIORATE IF WE DO NOT
CONTINUE TO EXPAND OUR CUSTOMER BASE.
Our success depends primarily on the continued growth of our customer base,
the retention of our current customers and our ability to expand the number of
Internet services we offer to our customers so that revenue per customer and
overall revenue increase. Our customer contracts may be terminated without
penalty at any time. If we are unable to maintain and expand our customer base
our business and financial results will suffer. Our ability to attract new
customers and, to a lesser degree, maintain current customers, as well as our
ability to increase the amount of revenue we receive from each customer, depends
on a variety of factors, including:
- continued growth in demand by international ISPs for Internet backbone
connectivity;
- our ability to provide adequate bandwidth to all of our customers;
- our ability to provide additional services across our network;
- our ability to broadcast content around the world;
- the success in our development of our strategic and business
relationships;
- our success in establishing and maintaining business relationships with
content aggregators, Internet backbone operators and regional satellite
owners; and
- the reliability and cost-effectiveness of our services.
IF WE ARE UNABLE TO MAINTAIN, EXPAND AND ADAPT OUR NETWORK INFRASTRUCTURE, THE
DEMAND FOR OUR SERVICES MAY DECREASE.
We must continue to expand and adapt our network as the number of our
international ISP customers grows, as users place increasing demands on our
network, and as other requirements change. As we grow our customer base, 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 transmission speeds and the lack of
additional network availability from third-party suppliers of satellite and
fiber optic cable transmission capacity. Our failure to achieve or maintain high
capacity transmissions could significantly reduce demand for our services,
decreasing our revenue and harming our business and financial results.
5
IF WE FAIL TO ACCURATELY PREDICT OUR SATELLITE BANDWIDTH REQUIREMENTS AND
EFFECTIVELY MANAGE OUR FIXED COSTS, OUR OPERATING RESULTS WILL SUFFER.
If we do not obtain adequate satellite bandwidth capacity on acceptable
terms and realize corresponding customer volume for this bandwidth, it is
unlikely that we will achieve positive gross profit. We purchase this bandwidth
capacity based on our projected future needs on a fixed-price basis far in
advance of the sale of our services that utilize the bandwidth. Substantially
all of this bandwidth capacity can be purchased only on a long-term basis. We
sell our services on the basis of actual usage and total bandwidth capacity used
by our customers changes from month to month and is difficult to predict. If our
sales fail to match our projections, we could be subject to periods of excess
satellite capacity, which could seriously harm our business. As a result, we
must obtain enough bandwidth to meet our projected customer needs, and we must
realize adequate volume from our customers to support and justify the bandwidth
capacity and expense. If demand from existing or potential customers exceeds our
capacity, the quality of our service may suffer or we may be unable to
capitalize on potential business opportunities. If that happens, we may lose
existing or potential customers and our operating results would suffer.
THE QUALITY OF OUR SERVICES AND OUR ABILITY TO PROVIDE THEM DEPENDS LARGELY ON
THIRD PARTIES, INCLUDING SATELLITE OPERATORS, AND IF THEY DO NOT PERFORM AS
EXPECTED THE QUALITY OF OUR SERVICES AND OUR BUSINESS WILL SUFFER.
We depend on third parties to provide us satellite transmission capabilities
that are essential to our network infrastructure. Our business will suffer if
our satellite availability or security is materially interrupted, the cost of
transponder space increases materially, one of our key satellite providers
terminates its contract with us or additional transponder space is not available
on acceptable terms or at all. For example, we rely heavily on Satmex 5 for
satellite coverage of Latin America. Any temporary or permanent loss of capacity
on this satellite could negatively affect our operations. We are subject to
similar challenges for our terrestrial fiber optic cable services and major
Internet access providers that we use to access the Internet backbone. 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 will
cease purchasing services from us. Our satellite and fiber optic cable network
is subject to interruption from numerous forces, including:
- satellite or other telecommunications failure;
- human error;
- natural disasters, such as fire, earthquakes and floods;
- power loss; or
- sabotage or vandalism.
FAILURE TO MANAGE OUR EXPANSION AND EXPECTED GROWTH EFFICIENTLY WILL STRAIN OUR
RESOURCES AND COULD IMPAIR THE EXPANSION OF OUR BUSINESS.
We intend to grow and increase our business by expanding our global network
through, among other things, additional leases of satellite and fiber optic
cable capacity and related equipment. If we are unable to manage growth
effectively, we may lose customers or fail to attract new customers and our
business and financial results will suffer. The successful implementation of our
expansion plans will involve significant planning and resources. We may face
problems with our expansion plans and, as a result, these plans may be delayed
or never completed. To successfully carry out our expansion plans, we must:
- enter into additional leases with favorable terms for capacity on
satellite systems and fiber optic cables;
6
- successfully implement, market and sell connectivity, enhanced Internet
services and content distribution and other services that we develop;
- negotiate competitive arrangements with Internet backbone providers; and
- develop relationships with strategic and other business partners.
Problems associated with our expansion plans could severely harm us, such
as:
- shortage of transponder space on geostationary satellites;
- disruptions to operations arising from relocation of our facilities;
- failure to retain or to timely hire necessary employees, including sales
and technical personnel; and
- failure to accurately predict customer demand for existing and future
services and applications.
In addition, our costs will increase as we expand. These increased costs
include:
- implementing multiple and redundant satellite and telecommunications
connections;
- expenses associated with hiring, training and managing new employees;
- increasing marketing and sales efforts; and
- purchasing new equipment.
Many of these costs are fixed in the long-term and if our expansion plans
are not successful, our future operating results could be seriously harmed. We
may not be able to keep pace with any growth, successfully implement and
maintain our operational and financial systems, or successfully obtain,
integrate and utilize the employees, facilities, third-party vendors and
equipment, or management, operational and financial resources necessary to
manage a developing and expanding business in our rapidly evolving and
increasingly competitive industry.
OUR SERVICES MAY BE SUBJECT TO DOWNWARD PRICING PRESSURES AND THIS WOULD
NEGATIVELY IMPACT OUR FINANCIAL RESULTS.
The market for Internet access in the U.S. is subject to downward pricing
pressure caused by a number of factors, including increased competition and
technological advances. Pricing pressures outside of the U.S. in the markets we
serve may develop as international Internet access and services becomes more
available. Our Internet access service, ESPRESSO, is our primary Internet-based
service. To operate ESPRESSO, we must lease substantial satellite transmission
capacity, which is relatively fixed in cost and is generally not susceptible to
downward pricing pressure. As a result, we have little flexibility in lowering
the price for our ESPRESSO service. If we are affected by downward pricing
pressure, we cannot assure you that we will be able to offer our ESPRESSO
service at prices that are competitive or profitable.
Our other Internet-based services and applications may also be subject to
varying degrees of downward pricing pressure. This problem is particularly acute
with our ESPRESSO VOICE service. For example, due to increased competition and
global deregulation of telecommunications services, prices for international
long distance calls have been decreasing. If this downward pricing pressure
continues, we cannot assure you that we will be able to offer ESPRESSO VOICE
services at costs lower than, or competitive with, the traditional voice network
services that compete with our telephony services. To lower our prices for
ESPRESSO VOICE, we may have to renegotiate rates with our local service
providers who complete calls for us. We may not be able to renegotiate these
terms favorably enough, or fast enough, to allow us to profitably offer Internet
telephony services.
OUR OPERATING RESULTS MAY FLUCTUATE AND THIS MAY NEGATIVELY IMPACT OUR STOCK
PRICE.
As we have grown, we have experienced significant fluctuations in our
operating results. Thus, a period to period comparison of our operating results
is not necessarily meaningful and should not be relied
7
upon as an indicator of future performance. Our future operating results may
continue to fluctuate. Factors that are likely to cause these fluctuations
include:
- the rate of growth of the Internet, especially outside of the U.S.;
- demand for and market acceptance of our services;
- the level of utilization of our network and our Internet services;
- fluctuations in satellite transponder and telecommunications costs and
availability;
- costs relating to the expansion of operations;
- fluctuations in bandwidth and the amount of our services used by
customers;
- introductions of new Internet services by us and our competitors;
- 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;
and
- the length and variability of our sales cycle.
In addition, a relatively large portion of our expenses are fixed in the
short-term, particularly with respect to satellite transponder capacity and
personnel. Our future operating results will be particularly sensitive to
fluctuations in revenue 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.
PROBLEMS ASSOCIATED WITH OPERATING IN INTERNATIONAL MARKETS COULD PREVENT US
FROM ACHIEVING OR SUSTAINING OUR INTENDED GROWTH.
The majority of our business is derived from ISPs and other businesses
located in foreign countries. Our failure to manage our international operations
effectively would limit the future growth of our business. We face certain
inherent challenges in conducting international operations, such as:
- changes in telecommunications regulatory requirements or trade barriers
restricting our ability to deliver Internet services to our customers;
- the imposition of unanticipated fees, taxes and costs by foreign
governments, which could significantly increase our costs;
- political and economic instability disrupting the operations of our ISP
customers;
- protectionist laws and business practices favoring local competition
potentially giving unequal bargaining leverage to competitors; and
- currency fluctuations increasing the cost of our services to our
international customers.
Our failure to adequately respond to any of these challenges could seriously
harm our operations.
OUR OPERATIONS ARE VULNERABLE TO SECURITY BREACHES THAT COULD HARM THE QUALITY
OF OUR PRODUCTS AND SERVICES.
Despite our design and implementation of a variety of network security
measures, unauthorized access, computer viruses, accidental or intentional
action and other disruptions to our network and those of our providers 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 adversely affect the quality of our products and services and could
result in liability to us or the loss of existing customers. This could harm our
ability to attract future customers.
8
WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY EMPLOYEES, WHICH COULD PREVENT US FROM
EFFICIENTLY GROWING AND OPERATING OUR BUSINESS.
The market for highly qualified personnel is intensely competitive. We are
particularly dependent on our ability to increase significantly the size of our
technical staff and sales and marketing organization with qualified candidates
who speak at least one foreign language. If we are unable to hire and retain the
key personnel we need, we may provide poor service and have difficulty signing
up new customers and maintaining current customers, which would cause our
business to suffer. We are dependent on the continued efforts of our senior
management team. If, for any reason, our senior executives do not continue to be
active in management, our operations would suffer. We may lose some of our key
personnel and any loss may seriously harm our business. We do not carry key
person life insurance on any of our personnel.
CERTAIN MEMBERS OF OUR MANAGEMENT TEAM HAVE ONLY WORKED WITH US FOR A SHORT TIME
AND FAILURE TO EFFECTIVELY INTEGRATE THEM COULD IMPAIR OUR ABILITY TO IMPLEMENT
OUR STRATEGIES.
We depend on the ability of our management team to effectively execute our
strategies. We recently hired several of our key employees. In July 1999 we
hired our Chief Financial Officer and Senior Vice President--Operations, in
November 1999 we hired our Chairman of the Board, in December 1999 we hired our
Vice President--Marketing, and in February 2000 we hired our Executive Vice
President--Business and Legal Affairs. Because certain members of our management
team have worked together only for a short period of time, we need to integrate
these officers into our operations. To integrate into our operations, these
individuals must spend a significant amount of time learning our business model
and management system, in addition to performing their regular duties.
Accordingly, the integration of new personnel has resulted and will continue to
result in some disruption to our ongoing operations. If we fail to complete this
integration in an efficient manner, our business and financial results will
suffer.
FAILURE TO OBTAIN ADDITIONAL FUNDING COULD IMPAIR OUR GROWTH.
Our business may suffer if we require additional funding and we are not able
to obtain it. We expect to incur significant expenditures as part of our
expansion plans. We intend to enter into arrangements to secure additional
satellite transponder space and substantial fiber optic capacity. These
arrangements may require us to make substantial initial payments for long-term
capacity that could require us to seek debt or additional equity financing. We
believe that, following this offering, our cash reserves, available borrowings
and funds generated by operations 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. Future financing may not be available to us or
may only be available on terms that are not favorable to us. Our failure to
generate sufficient cash flows from sales of Internet connectivity and services
or to raise sufficient funds may require us to delay or abandon some or all of
our expansion plans or otherwise forego market opportunities. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of our stockholders could be significantly diluted.
IF WE DO NOT SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO OUR OPERATIONS, OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE HARMED.
The costs and challenges of our potential future acquisitions of key
technologies, applications, operations or companies may harm 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. We face a number of challenges
that could harm us in any acquisition including:
- difficulties and unanticipated costs arising from the assimilation of the
acquired operations, technologies, products, policies and personnel;
- the diversion of management's attention from other business concerns;
9
- risks related to entering markets or managing operations in which we have
no or limited direct prior experience;
- our inability to maintain uniform standards and controls; and
- the potential loss of key employees of the acquired company.
WE MAY BE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, OR MAY HAVE TO DEFEND CLAIMS
OF THIRD PARTIES RELATING TO THEIR PROPRIETARY RIGHTS, WHICH COULD PREVENT US
FROM COMPETING EFFECTIVELY.
While the design and configuration of our Internet network is proprietary to
us, we have not patented any of our intellectual property rights and generally
rely on the protections offered by trade secret law. We generally enter into
confidentiality or licensing agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
software, documentation and other proprietary information. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our technology or proprietary information. Policing
unauthorized use is difficult, and we cannot be sure that the steps we have
taken will prevent misappropriation of our technology or proprietary
information, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the U.S.
In addition, third parties may claim in the future that we violate their
proprietary rights. Any successful claim by others that we violate their
intellectual property rights could seriously harm our business by forcing us to
cease using important intellectual property or requiring us to pay monetary
damages. Even if unsuccessful, these claims could harm our business by damaging
our reputation, requiring us to incur legal costs and diverting the attention of
our management personnel away from their normal business activities.
WE MAY FACE LIABILITY AND OTHER RISKS AS A RESULT OF INFORMATION DISSEMINATED
THROUGH OUR NETWORK, WHICH COULD NEGATIVELY IMPACT OUR FINANCIAL CONDITION.
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 and
content 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 U.S. and foreign law for defamation, negligence, copyright
or trademark infringement or under other legal theories. Content distributed by
us and by our future customers may be regulated or banned. 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. 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 network.
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION FROM MANY OTHER COMPANIES AND IF WE DO NOT RESPOND
TO THIS COMPETITION EFFECTIVELY, OUR FINANCIAL RESULTS MAY SUFFER.
Our business of delivering Internet access to international ISPs via our
network of leased satellite transponder space and fiber optic cable systems is
intensely competitive. If we do not respond to this competition effectively, our
financial results may suffer. We expect to face additional competition from
existing and new competitors. Our most common competitor is the Post, Telephone
and Telegraph, or PTT, of the country where each of our customers is located. We
also face competition from our satellite providers, Loral SpaceCom Corporation
and PanAmSat International Systems, Inc., which offer some services to the
international ISP community that are similar to our service offerings. We must
distinguish ourselves in the international ISP marketplace through our pricing
policies, the quality and distinctiveness
10
of our service and the other Internet applications that we offer. As we sell our
ESPRESSO VOICE services we will compete with the PTTs of the countries where we
offer such services. As a result of our recent acquisition of certain assets and
technology in the United Kingdom and our agreement with iBEAM, we will be
delivering streaming content through our network. Although we intend to partner
with content aggregators, the services we provide may also make us a competitor
in this industry. We may be unsuccessful in doing this. Some of our competitors
have certain advantages over us, including:
- substantially greater financial, technical and marketing resources;
- lower cost basis arising from satellite, cable or other facility
ownership;
- longer operating histories;
- larger, more established customer bases;
- greater name recognition; and
- more established customer and vendor relationships.
We cannot be certain that we will have the resources or expertise to compete
successfully in the Internet-based services market.
THE MARKETS FOR INTERNET CONNECTIVITY AND CONTENT DISTRIBUTION, ESPECIALLY
OUTSIDE OF THE U.S., ARE NEW AND MAY NOT GROW AS WE BELIEVE, WHICH COULD LIMIT
OUR POTENTIAL GROWTH.
Our success is largely a function of the growth in the use of the Internet,
particularly outside of the U.S., and that growth is uncertain and depends on a
variety of factors. The market for Internet connectivity, especially outside of
the U.S., is new and evolving. As a result, our financial condition may be
harmed if the market fails to develop, or develops more slowly than we expect.
The growth of the market depends on several uncertain events or occurrences,
including:
- the growth of the Internet as a global communications and commerce medium;
- the availability of personal computers in remote locations;
- the use by international ISPs and businesses of the Internet connectivity
solutions we offer; and
- general worldwide economic conditions.
The Internet content delivery market is new and our business will suffer if
these markets do not continue to develop. We cannot be certain that a
sustainable market for content will emerge around the world. If it does not, an
essential aspect of our business strategy, to expand the delivery of Internet
content around the world, may fail.
WE MAY BE UNABLE TO MAINTAIN THE QUALITY OF OUR SERVICES AND MAY LOSE CUSTOMERS
IF THE INTERNET INFRASTRUCTURE PROVES UNRELIABLE.
Our future success depends, in part, upon the reliability of the Internet
infrastructure. To the extent that the number of Internet users increases, the
Internet may be unable to support the demands placed on it, which may cause its
performance or reliability may decline. The Internet has experienced a variety
of outages and other delays as a result of portions of its infrastructure. Any
future outages or delays could harm our ability to provide connectivity to our
customers. Moreover, critical issues concerning the commercial use of the
Internet, including security, cost, ease of use and access, intellectual
property ownership and other legal liability issues, remain unresolved and could
inhibit the growth of Internet usage and harm our business.
THE LEGAL ENVIRONMENT IN WHICH WE OPERATE IS UNCERTAIN AND CLAIMS AGAINST US AND
OTHER LEGAL UNCERTAINTIES COULD CAUSE OUR BUSINESS TO SUFFER.
Because almost all of our business is conducted outside the U.S., we are
susceptible to the governmental regulations and legal uncertainties of foreign
countries. We currently sell our services in over
11
80 countries, each of which has a unique legal environment. In general, the laws
of countries outside the U.S. governing the Internet and Internet services, to
the extent they exist at all, vary widely, are unclear and in flux and have
failed to keep pace with the rapid advancements in Internet technology and the
expanding range of Internet-based services being offered. Partly because of
these problems, and our view that local regulatory compliance is a greater issue
of concern for our ISP customers, we have not, and currently do not intend to,
determine conclusively whether we comply with the requirements of any particular
foreign country. Any one or more of the countries where we conduct business may
require us to qualify to do business in that particular country, that we are
liable for certain taxes or tariffs, that we are otherwise subject to regulation
or that we are prohibited from conducting our business in that foreign country.
Thus, we cannot assure you that we are currently in compliance with the legal
requirements of any particular country or all of the countries outside the U.S.
in which we conduct business, that we will be able to comply with any such
requirements or that the requirements will not change in a way that would render
the receipt of our services in a particular country illegal. Our failure to
comply with foreign laws and regulations could cause us to lose customers,
restrict us from entering profitable markets and seriously harm our business.
Our customers also face many of the governmental and legal uncertainties
that we face and currently are, or in the future may become, subject to many of
the same requirements to which we may be subject. We make no effort to determine
whether our customers comply with applicable regulations. For example, a PTT in
one country threatened several of our ISP customers with the claim that the
receipt of our ESPRESSO satellite broadcast was illegal. While these threats
have not seriously harmed our business to date, they may in the future. The
failure of our customers to comply with applicable laws and regulations could
cause us to lose customers or otherwise seriously harm our business.
THE INTERNET INDUSTRY OPERATES IN AN UNCERTAIN LEGAL LANDSCAPE AND THE ADOPTION
OR INTERPRETATION OF FUTURE OR EXISTING REGULATIONS COULD HARM OUR BUSINESS.
The Internet and the markets in which we offer our Internet services are
relatively new. Many of the laws and regulations that govern us and the Internet
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 the markets in which
we operate. The applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation and tariffs, libel, consumer protection, obscenity, pricing and
personal privacy is uncertain. Current and future laws and regulations may:
- decrease the growth of the Internet;
- regulate our customers in ways that harm our ability to sell our services
to them;
- decrease demand for our services; and
- impose taxes or other costly requirements or otherwise increase the cost
of doing business.
Thus, the adoption and interpretation of any future or existing regulations
could seriously harm our business.
WE MAY NOT BE ABLE TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES OR EMERGING
INDUSTRY STANDARDS WHICH COULD MAKE OUR SERVICES OBSOLETE AND UNMARKETABLE.
Our services may become less useful to our customers if we are unable to
respond to technological advances that shape the Internet or alternative
technologies or services become available to them. Keeping pace with
technological advances in our industry may require substantial expenditures and
lead time. In addition, future advances in technology or fundamental changes in
the way Internet access or other Internet services can be delivered may render
our services obsolete or less cost competitive. We may not be able to adequately
respond to or incorporate technological advances on a cost-effective or timely
basis into our business.
12
RISKS RELATED TO OUR OFFERING
OUR COMMON STOCK PRICE MAY BE VOLATILE AND CAUSE US TO BECOME SUBJECT TO
SECURITIES LITIGATION.
The market price of our common stock may experience fluctuations in response
to a number of factors, including:
- actual or anticipated variations in our results of operations;
- new services introduced by us or our competitors;
- the entry of new competitors into one or more of our lines of business;
- changes in financial estimates by security analysts;
- conditions and trends in the Internet industry;
- potential acquisitions;
- 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. Similar market fluctuations have
affected the market prices of equity securities of many Internet and technology
companies. The effects on the stock prices of these companies have often been
unrelated or disproportionate to their operating performance. These broader
market movements 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 recession, 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.
If such litigation were brought against us, it could distract our management and
may require us to incur significant expenses and possibly pay substantial
damages.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE STOCK YOU PURCHASE.
The initial public offering price of our common stock 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
$ per share in the net tangible book value of our common stock from the
initial public offering price of $ . Additional dilution will occur upon the
exercise of outstanding options.
THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN BECAUSE IT HAS NOT BEEN PUBLICLY
TRADED AND MAY HAVE A LIMITED MARKET WHICH COULD DEPRESS OUR STOCK PRICE.
There has been no public market for our common stock. We cannot predict the
extent to which investor interest in our company will lead to the development of
an active, liquid trading market. In this offering, we intend to sell our common
stock primarily to a limited number of institutional investors, which could
limit the development of an active trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price will be
determined by negotiations between InterPacket and the representatives of the
underwriters and may bear no relationship to the price at which our common stock
will trade upon completion of this offering.
13
THE SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK AFTER THIS
OFFERING MAY HARM OUR STOCK PRICE.
Sales of a large number of shares of our common stock in the market after
the offering or the perception that sales may occur could cause the market price
of our common stock to drop. A substantial number of shares of common stock will
be available for sale in the public market following this offering, which could
harm the market price for our common stock. See "Shares Eligible for Future
Sale" for a more detailed description of the eligibility of shares of our common
stock for future sale.
WE HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING, AND WE MAY NOT
EFFECTIVELY UTILIZE THE PROCEEDS.
Our management will have considerable discretion in the application of the
net proceeds of this offering. The net proceeds may be used for corporate
purposes that do not increase our profitability or market value.
AFTER THE OFFERING, OUR SIGNIFICANT STOCKHOLDERS WILL RETAIN SUBSTANTIAL VOTING
CONTROL WHICH WILL ALLOW THEM TO INFLUENCE THE OUTCOME OF MATTERS SUBMITTED TO
STOCKHOLDERS FOR APPROVAL IN A MANNER THAT MAY BE ADVERSE TO YOUR INTERESTS.
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 % 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 which could discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, or
control the outcome of any other matter submitted to the stockholders for a
vote. As a result, this concentration of ownership may have a negative effect on
our value and the price of our common stock.
ANTITAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL OF OUR COMPANY, WHICH COULD HARM OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation contain
provisions that could delay, defer or prevent a change in control of our company
or our management. These provisions could also discourage proxy contests and
make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. Our certificate of incorporation authorizes the board of directors to
issue preferred stock with rights senior to the common stock without obtaining
prior stockholder approval.
14
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking statements. These
factors include, among other things, those listed under "Risk Factors" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology, including "may," "will," "should," "expect," "plan,"
"anticipate," "intend," "believe," "estimate," "predict," "potential" or
"continue" or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially.
In evaluating these statements, you should specifically consider various
factors, including the risks outlined under "Risk Factors." Although we believe
that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results.
15
USE OF PROCEEDS
The net proceeds to us from the sale of the shares being offered at an
assumed initial public offering price of $ per share are estimated to be
$ million, after deducting the underwriting discount and estimated offering
expenses payable by us, or $ million if the underwriters' over-allotment
option is exercised in full.
We primarily intend to use the net proceeds of this offering to increase the
capacity of our existing network through leases for additional satellite
transponder space and fiber optic capacity, increase our sales and marketing
personnel and activities, increase our working capital and for other general
corporate purposes.
We may use a portion of the net proceeds of this offering to acquire or
invest in businesses, products, services or technologies complementary to our
current business, through mergers, acquisitions, joint ventures or otherwise.
However, we have no specific agreements or commitments with respect to these
transactions. Accordingly, our management will retain broad discretion as to the
allocation of the net proceeds of this offering. We intend to invest the net
proceeds of this offering in short-term, interest-bearing investment grade
securities pending the above uses.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
16
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual, pro forma and pro forma as adjusted basis. All share numbers give
effect to our for stock split which will occur prior to completion of
the offering.
The Actual column reflects our capitalization as of December 31, 1999 on a
historical basis, without any adjustments to reflect subsequent events or
anticipated events.
The Pro Forma column reflects conversion of our outstanding shares of
preferred stock into 3,000,000 shares of our common stock upon completion of the
offering.
The Pro Forma As Adjusted column reflects our capitalization as of
December 31, 1999 with the receipt of the estimated net proceeds from our sale
of shares of common stock at an assumed initial public offering price of
$ per share and the conversion of our outstanding shares of preferred stock
into 3,000,000 shares of our common stock upon completion of the offering.
None of the columns set forth below reflects the 3,022,666 shares reserved
for issuance under our stock option plans, of which 2,817,584 shares were
subject to outstanding options as of December 31, 1999.
The table below should be read in conjunction with our balance sheet as of
December 31, 1999 and the related notes, which are included at the end of this
prospectus.
DECEMBER 31, 1999
-------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
ACTUAL (UNAUDITED) (UNAUDITED)
--------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Capital leases(1)........................... $40,807 $40,807 $40,807
Mandatorily redeemable preferred stock,
$.001 par value:
Authorized--3,000,000 shares
Issued and outstanding
3,000,000 shares, actual
no shares, as adjusted................ 14,824 -- --
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized--50,000,000 shares
Issued and outstanding
12,193,897 shares, actual
15,193,897 shares, pro forma.......... 12 15
shares, pro forma as adjusted
Additional paid-in capital................ 45,124 59,945
Stockholder receivables................... (35) (35)
Deferred compensation..................... (30,585) (30,585)
Other comprehensive income................ 2 2
Deficit................................... (12,126) (12,126)
------- ------- -------
Stockholders' equity.................... 2,392 17,216
------- ------- -------
Total capitalization.................. $58,023 $58,023
======= ======= =======
- -------------------
(1) Includes current maturities.
17
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
approximately $16.8 million or $1.11 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets reduced by
the amount of our total liabilities and divided by the total number of shares of
common stock outstanding, assuming conversion of our outstanding preferred
stock. Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of common stock in
this offering and the pro forma net tangible book value per share of common
stock immediately after the completion of this offering. After giving effect to
the sale of shares of common stock offered by us at an assumed
initial public offering price of $ per share, and after deducting the
underwriting discount and estimated offering expenses payable by us, our pro
forma net tangible book value at December 31, 1999 would have been approximately
$ million or $ per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors
purchasing common stock in this offering. The following table illustrates this
dilution on a per share basis:
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering.................................................. $ 1.11
Increase per share attributable to new investors............
--------
Pro forma net tangible book value per share after the
offering..................................................
--------
Pro forma net tangible book value dilution per share to new
investors................................................. $
========
The following table summarizes on a pro forma basis, after giving effect to
this offering, as of December 31, 1999, the differences between the existing
stockholders and new investors with respect to the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid (based upon an assumed initial public offering price of
$ per share and before deducting the underwriting discounts and commissions
and our estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
Existing stockholders................... 15,193,897 % $27,062,946 % $ 1.78
New investors...........................
---------- -----------
Totals.................................. % $ %
========== ====== =========== ======
The preceding tables assume conversion of the preferred stock and no
exercise of the underwriters' over-allotment option and exclude 3,022,666 shares
of common stock reserved for issuance under our stock option plans, of which
2,817,584 were subject to outstanding options as of December 31, 1999 at a
weighted average exercise price of $3.52 per share. To the extent these options
are exercised, there will be further dilution to new investors. See
"Management--Option Plans" and Notes 7 and 12 of the Notes to Consolidated
Financial Statements.
18
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the selected consolidated financial information set forth
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes appearing at the end of this prospectus. The consolidated
statement of operations data set forth below for the fiscal years ended
December 31, 1997, 1998 and 1999 and the selected consolidated balance sheet
data as of December 31, 1999 have been derived from our audited consolidated
financial statements appearing at the end of this prospectus. From inception
until December 31, 1996, we generated an insignificant amount of revenue, as
operations were limited and consisted primarily of start-up activities. The
historical results are not necessarily indicative of results to be expected for
any future period.
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Network services................................. $ 583 $ 4,115 $ 10,789
Traditional telecom services..................... 1,176 7,295 2,685
------------ ------------ ------------
Total revenue.................................. 1,759 11,410 13,474
------------ ------------ ------------
Operating expenses:
Cost of network services......................... 458 5,789 11,285
Cost of traditional telecom services............. 548 5,023 1,329
Selling and marketing expenses................... 132 828 2,397
General and administrative expenses.............. 454 1,098 4,686
Non-cash compensation charges.................... -- -- 2,488
Depreciation and amortization.................... 9 88 1,346
------------ ------------ ------------
Total operating expenses....................... 1,601 12,826 23,531
------------ ------------ ------------
Income (loss) from operations...................... 158 (1,416) (10,057)
Other income (expense)............................. 1 20 (832)
------------ ------------ ------------
Income (loss) before provision for income taxes.... 159 (1,396) (10,889)
Provision (benefit) for income taxes............... 70 (68) 1
------------ ------------ ------------
Net income (loss).................................. 89 (1,328) (10,890)
============ ============ ============
Basic and diluted income (loss) per common share... $ 0.01 $ (0.16) $ (1.05)
============ ============ ============
Weighted average number of common shares........... 7,250 8,412 10,392
============ ============ ============
Pro forma basic and diluted loss per common share
(unaudited)...................................... $ (1.01)
============
Weighted average number of common shares used to
compute pro forma loss per common share
(unaudited)...................................... 10,803
============
DECEMBER 31,
1999
-------------
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................ $ 15,948
Total assets................................................ 64,291
Capital leases, net of current portion...................... 38,669
Mandatorily redeemable preferred stock...................... 14,824
Deficit..................................................... (12,126)
Stockholders' equity........................................ 2,392
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES APPEARING AT THE END OF THIS PROSPECTUS. OUR
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS
THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. ACTUAL RESULTS AND THE TIMING OF EVENTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS
A RESULT OF A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH UNDER "RISK FACTORS,"
"BUSINESS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We operate a satellite-based broadband Internet network that delivers
high-speed Internet services to international ISPs and other businesses in more
than 80 countries. Our proprietary network design integrates the broadcast
capabilities of satellites with Internet networking technologies to offer our
international customers a scalable solution to the constraints of the public
Internet infrastructure. Our global network's open technical architecture
enables us to provide three categories of Internet services: global high-speed
broadband connectivity to the Internet backbone, enhanced Internet services,
such as Internet telephony, and Internet content distribution, such as newsfeeds
and streaming media. From December 31, 1998 to December 31, 1999, we increased
the number of our customers from 69 to 343 and as of February 15, 2000 we had
468 customers worldwide.
We were incorporated in California in August 1995 under the name
"Territorial Media, Inc." and we changed our name to "InterPacket Group, Inc."
in June 1996. In November 1999, we reincorporated in the State of Delaware under
the name "InterPacket Group, Inc." and changed our name to "InterPacket
Networks, Inc." in February 2000. In 1997 and most of 1998, we generated most of
our revenues through the sale of traditional telecom services, consisting of
traditional switch-based telephony. At that time our primary customer was STAR
Telecommunications, Inc., an international long distance company. In the third
quarter of 1998, we began to focus our sales and marketing efforts on the
delivery of broadband Internet services and began to offer our ESPRESSO
connectivity product worldwide. While we continued to provide traditional
telecom services in 1999, we have stopped actively soliciting customers for this
area of our business and, over time, we have allowed that particular customer
base to gradually decline. For the year ending December 31, 2000 and beyond, we
do not anticipate generating any meaningful revenue from traditional telecom
services.
REVENUE
We have derived revenue from two sources, the sale of high performance
Internet-based network services, including connectivity and multi-point
newsfeeds, and the sale of traditional telecom services. Revenue from network
services is derived from monthly fees payable by international ISPs for the
delivery of services. The amount of these fees varies, depending on the level of
bandwidth contracted for our customers and the nature of the other Internet
services that we deliver to them. Our international ISP customers are billed for
connectivity services and those fees are generally collected on a monthly basis,
in advance. Revenue is recognized in the month that our network services are
provided. Our ESPRESSO VOICE services will be billed to the customer monthly,
based on minutes of use, after the month of usage with revenue recognized at the
time of usage. To date, we have not been subject to any material currency or
collection risk from our network services business, as most of our customers are
billed in U.S. dollars prior to the delivery of services. Our risk of collection
will increase in future periods to the extent we increase revenue from
international telephony services, as these services are billed after delivery
based on minutes of use. We also believe that our currency risk will increase if
we begin to accept payment for our network services in foreign currencies. In
1999, we derived a significant majority of our revenue through the sale of
20
network services and in 2000, we anticipate that substantially all of our
revenue will be derived from this business area.
In 1997 and 1998, we derived a majority of our revenue from the sale of
traditional telecom services transmitted over a traditional switched-based
network. Traditional telecom services are billed on a monthly basis after the
month of usage based on minutes carried over our network. Revenue is recognized
at the time of customer usage. In current periods, we have greatly reduced the
delivery of traditional telecom services and expect revenue from such services
to decline significantly in future periods. We also intend to provide all of our
future telephony services over our network and the Internet, via our ESPRESSO
VOICE service.
COST OF NETWORK SERVICES
Our cost of network services consists primarily of leasing costs
attributable to satellite transponder space, teleports, equipment, expenses
attributable to leased fiber optic cable lines and Internet backbone
interconnection costs. The life of our satellite transponder space leases
accounted for in cost of network services ranges from one to five years and is
typically less than one year for our fiber optic cable lines. We anticipate an
increase in network services expenses in future periods as we expand our
Internet services.
COST OF TRADITIONAL TELECOM SERVICES
Cost of traditional telecom services consists primarily of the
rate-per-minute charges of the telecommunications vendors that terminate our
switch-based telephone traffic for us. We do not anticipate incurring any
meaningful traditional telecom services expenses for the year ending
December 31, 2000 and beyond, as we convert our remaining switch-based telecom
business to ESPRESSO VOICE.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist of salaries, commissions and related
expenses for personnel engaged primarily in sales, marketing, customer service,
professional service expenses and travel and trade show expenses. We anticipate
that selling and marketing expenses will increase in future periods, both in
absolute dollars and as a percentage of revenues, as we add sales staff and
increase our presence internationally through, among other things, the
establishment of sales offices abroad.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist of salaries and related expenses
for executive, administrative and operational personnel and other general
corporate expenses. We expect general and administrative expenses to increase,
both in absolute dollars and as a percentage of revenues, in future periods as
we expand our executive and support staff and incur additional costs relative to
the growth of our business.
NON-CASH COMPENSATION CHARGES
Non-cash compensation charges consist of the amortization of deferred stock
compensation resulting from the grant of stock options or purchase of shares of
stock at exercise or sale prices subsequently deemed to be less than the fair
value of the common stock on the grant date as well as charges relating to the
accelerated vesting of stock options. This amount is included as a reduction of
stockholders' equity and is amortized ratably over the vesting period of the
individual options, generally three years. In 1999, the non-cash compensation
charge was $2.5 million and we expect it to be $10.4 million in each of 2000 and
2001 and $9.8 million in 2002, based on options issued prior to December 31,
1999.
21
DEPRECIATION AND AMORTIZATION
Depreciation and amortization is generated primarily from our leased
satellite transponders, high speed routers and other equipment and peripherals
necessary to provide our customers with our network services. With a portion of
the proceeds of this offering we intend to purchase indefeasible rights of use
on transoceanic fiber optic cable systems. We also intend to enter into
additional long-term leases for satellite transponder space and we will account
for these leases as capital items. Thus, we expect depreciation to increase
significantly, both in absolute dollars and as a percentage of revenue, in
future periods.
OTHER INCOME (EXPENSE)
Other income consists of earnings on our cash and cash equivalents. Other
expense consists primarily of interest expense on our capitalized satellite
transponder space leases. We anticipate that our interest expense will continue
to increase as we lease additional satellite transponder space.
We intend to continue investment in our network and personnel to support the
growth and expansion of our business, and we do not expect to be profitable in
the foreseeable future.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data as a
percentage of revenue for the periods indicated. This information should be read
in conjunction with the consolidated financial statements and notes included
elsewhere in this prospectus.
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Revenue:
Network services.................................... 33% 36% 80%
Traditional telecom services........................ 67 64 20
---- ----- -----
Total revenue..................................... 100% 100% 100%
Operating expenses:
Cost of network services............................ 26 51 84
Cost of traditional telecom services................ 31 44 10
Selling and marketing expenses...................... 8 7 18
General and administrative expenses................. 26 10 35
Non-cash compensation charges....................... -- -- 18
Depreciation and amortization....................... 1 1 10
Total operating expenses.......................... 91 112 175
Income (loss) from operations....................... 9 (12) (75)
Other income (expense)................................ -- -- (6)
Income (loss) before provision for income taxes....... 9 (12) (81)
Provision (benefit) for income taxes.................. 4 1 --
Net income (loss)..................................... 5% (12)% (81)%
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Network services revenue increased 162% from $4.1 million in 1998 to
$10.8 million in 1999. Revenue from traditional telecom services decreased 63%
from $7.3 million in 1998 to $2.7 million in 1999. Our network services revenue
increased due to growth in the number of new ISP customers, as well as an
increase in sales to existing ISP customers as a result of bandwith upgrades.
Revenue from the sale of traditional telecom services declined as we began to
de-emphasize traditional switch-based telephone
22
services and focus our sales efforts almost entirely on network services. In
2000 and beyond, we do not anticipate the generation of meaningful revenue from
traditional telecom services.
OPERATING EXPENSES
COST OF NETWORK SERVICES. Cost of network services increased 95% from
$5.8 million in 1998 to $11.3 million in 1999 but decreased as a percentage
network services revenue from 141% in 1998 to 105% in 1999. This absolute
increase was due to investments in our network infrastructure, particularly
increased satellite transponder space and fiber optic capacity, to support
current and anticipated future growth in revenue. We expect our cost of network
services to continue to grow, as we plan to aggressively pursue the expansion of
our Internet services to new customers and markets.
COST OF TRADITIONAL TELECOM SERVICES. Cost of traditional telecom services
decreased 74% from $5.0 million in 1998 to $1.3 million in 1999 and decreased as
a percentage of traditional telecom services revenue from 69% in 1998 to 49% in
1999. The absolute reduction in expenses was a result of deemphasizing
traditional telecom services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
189% from $828,000 in 1998 to $2.4 million in 1999. As a percentage of revenues,
selling and marketing expenses increased from 7% to 18% period to period. These
expenses increased primarily as a result of increased staffing levels in all
areas of the company, and increased sales and marketing efforts to grow our
network services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 327% from $1.1 million in 1998 to $4.7 million in 1999. As a
percentage of revenues, general and administrative expenses increased from 10%
to 35% period to period, primarily due to our increase in staff and additional
facility costs.
NON-CASH COMPENSATION CHARGE. Non-cash compensation charge was
$2.5 million in 1999. We did not have a non-cash compensation charge in 1998.
The remaining deferred compensation of $30.6 million will be amortized ratably
over the vesting period of the individual options generally three years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
1,438% from $88,000 in 1998 to $1.3 million in 1999. This increase was primarily
due to the depreciation of equipment needed to accommodate our growing customer
base including capital leases for satellite transponder space. We expect
depreciation to increase in absolute dollars and as a percentage of revenues as
we further develop and expand our network by acquiring transoceanic fiber optic
cable lines and enter into long term leases for satellite transponder space that
we intend to account for as capital items.
OTHER INCOME (EXPENSE). Other income (expense) decreased from net other
income of $20,000 in 1998 to a net other expense of $832,000 in 1999. This
increase in net expense was primarily due to an increase in interest expense of
$943,000 relating to increased acquisitions of capital assets, partially offset
by an increase in interest income of $183,000.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE
Revenue from network services increased 606% from $583,000 in 1997 to
$4.1 million in 1998. Revenue from traditional telecom services increased 520%
from $1.2 million in 1997 to $7.3 million in 1998. Revenue from network services
increased primarily due to growth in the number of new international ISP
customers. Revenue from traditional telecom services grew due to the addition of
new international destinations during the latter part of 1997 and throughout
1998.
23
OPERATING EXPENSES
COST OF NETWORK SERVICES. Cost of network services increased 1,164% from
$458,000 in 1997, to $5.8 million in 1998. This increase was due to investments
in our network infrastructure to support current and anticipated future growth
in network services revenue.
COST OF TRADITIONAL TELECOM SERVICES. Cost of traditional telecom services
increased 817% from $548,000 in 1997 to $5.0 million in 1998. This increase was
due primarily to our purchasing telecom services from third parties to enable us
to offer telecom services to specific high volume international destinations
through the latter part of 1997 and through the first three quarters of 1998.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
529% from $132,000 in 1997 to $828,000 in 1998. As a percentage of revenue,
selling and marketing expenses remained relatively constant at approximately 7%
of revenue from period to period. These expenses increased primarily as a result
of increased staffing levels in all areas and increased sales and marketing
efforts coinciding with the growth of our network services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 142% from $454,000 in 1997 to $1.1 million in 1998, primarily as a
result of increased staffing levels in all areas of the company coinciding with
the growth in revenues. As a percentage of revenue, general and administrative
expenses decreased from 26% in 1997 to 10% in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 833%
from $9,000 in 1997 to $88,000 in 1998. This increase is primarily due to the
depreciation of equipment needed to accommodate the increase in our growing
customer base for network services.
OTHER INCOME (EXPENSE). Net other income increased $19,000 from a net other
income of approximately $1,000 in 1997 to $20,000 in 1998. The increase is
primarily due to a $22,000 increase in interest income from investing funds
raised from private placements of common stock.
24
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statement of operations
data for the eight quarters ended December 31, 1999. This unaudited quarterly
information has been derived from our unaudited financial statements and, in the
opinion of our management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods covered. The quarterly data should be read in conjunction with our
consolidated financial statements and related notes. The operating results for
any quarter are not necessarily indicative of the operating results for any
future period.
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(UNAUDITED, IN THOUSANDS)
Revenue:
Network services................. $ 508 $ 690 $1,404 $ 1,513 $ 1,916 $ 2,149 $ 2,997 $ 3,727
Traditional telecom services..... 484 1,288 3,479 2,044 1,160 752 513 260
------ ------ ------ ------- ------- ------- ------- -------
Total revenue.................. 992 1,978 4,883 3,557 3,076 2,901 3,510 3,987
------ ------ ------ ------- ------- ------- ------- -------
Operating expenses:
Cost of network services......... 564 1,005 1,803 2,417 2,456 2,800 2,792 3,237
Cost of traditional telecom
services....................... 341 833 2,138 1,711 900 204 72 153
Selling and marketing expenses... 93 149 305 281 357 486 606 948
General and administrative
expenses....................... 143 235 255 465 511 641 1,535 1,999
Non-cash compensation charges.... -- -- -- -- -- 145 171 2,172
Depreciation and amortization.... 6 16 27 39 44 68 351 883
------ ------ ------ ------- ------- ------- ------- -------
Total operating expenses....... 1,147 2,238 4,528 4,913 4,268 4,344 5,527 9,392
------ ------ ------ ------- ------- ------- ------- -------
Income (loss) from operations...... (155) (260) 355 (1,356) (1,192) (1,443) (2,017) (5,405)
Other income (expense)............. 5 5 3 7 8 26 (250) (617)
Provision (benefit) for income
taxes............................ (60) (8) 51 (51) -- -- -- --
------ ------ ------ ------- ------- ------- ------- -------
Net income (loss).................. $ (90) $ (247) $ 307 $(1,298) $(1,184) $(1,417) $(2,267) $(6,022)
====== ====== ====== ======= ======= ======= ======= =======
25
The following table sets forth certain selected items from our unaudited
quarterly statements of operations as a percentage of revenue for the quarters
indicated:
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(UNAUDITED)
Revenue:
Network services.................. 51% 35% 29% 43% 62% 74% 85% 93%
Traditional telecom services...... 49 65 71 57 38 26 15 7
--- --- --- --- ---- ---- ---- ----
Total revenue................... 100% 100% 100% 100% 100% 100% 100% 100%
Operating expenses:
Cost of network services.......... 57 51 37 68 80 97 80 81
Cost of traditional telecom
services........................ 34 42 44 48 29 7 2 4
Selling and marketing expenses.... 9 8 6 8 12 17 17 24
General and administrative
expenses........................ 14 12 5 13 17 22 44 50
Non-cash compensation charge...... -- -- -- -- -- 5 5 54
Depreciation and amortization..... 1 1 1 1 1 2 10 22
Total operating expenses........ 116 113 93 138 139 150 157 236
Income (loss) from operations....... (16) (13) 7 (38) (39) (50) (57) (136)
Other income (expense).............. 1 0 0 0 0 1 (7) (15)
Provision (benefit) for income
taxes............................. (6) 0 1 (1) 0 0 0 0
Net income (loss)................... (9)% (12)% 6% (36)% (38)% (49)% (65)% (151)%
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of common stock and preferred stock, which through December 31, 1999,
totaled approximately $26.8 million. Net cash provided by financing activities
was $25.4 million in 1999, and $255,000 in 1998. Net cash provided by financing
activities in 1999 resulted primarily from the sale of $4.5 million of our
common stock through our private placements in April and $6.7 million in
September and from the sale of $14.8 million of our preferred stock through our
private placement in November. Net cash provided by financing activities in 1998
consisted primarily of proceeds from the sale of common stock to individual
investors of $250,000.
Net cash used in operating activities was approximately $6.9 million in
1999, compared to cash provided by operations of $438,000 in 1998. Net cash used
in operating activities in 1999 resulted primarily from the net operating loss.
Net cash used in investing activities was $2.6 million in 1999, and $691,000
in 1998. Net cash used in investing activities for each of these periods
resulted primarily from purchases of property and equipment.
As of December 31, 1999 we had $15.9 million of cash. As of that date, our
principal commitments consisted of obligations outstanding under capital and
operating leases for satellite transponder space and related facilities, for
which we have contractual commitments of $18.0 million for the next 12 months.
We anticipate a substantial increase in our lease commitments and our cash
needs, consistent with the anticipated growth in operations and infrastructure,
including additional satellite transponder space and the acquisition of fiber
optic cable capacity.
We also entered into additional capital leases, consistent with the planned
expansion of our network infrastructure requiring $569,000 over the next year
and approximately $56.5 million through 2013. We anticipate that we will
continue to experience significant growth in our operating expenses for the
foreseeable future and that our operating expenses will be a material use of our
cash resources. Also, we
26
anticipate substantial expenditures and use of cash resources in our efforts to
expand our international ISP customer base.
We currently anticipate that the net proceeds of this offering, together
with funds on hand, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 12 months.
Alternatively, if we are delayed or are not successful in raising funds in the
offering, we may have to take certain steps, such as delaying the acceptance of
services under our fixed fee contracts or renegotiating certain long-term
contracted obligations, to reduce our regular capital needs. We will also have
to seek capital in the private marketplace, which, if available at all, may be
at lower valuations than would be available in the public market. We may also
need to raise additional funds prior to the expiration of such period if, for
example, we pursue acquisitions or experience operating losses that exceed our
current expectations. In any event, we cannot be certain that additional
financing will be available to use on favorable terms when required, or at all.
YEAR 2000 READINESS DISCLOSURE
We have designed our network and our services for use in the year 2000 and
beyond. As of February 15, 2000, we had not experienced any significant issues
as a result of year 2000 problems and do not anticipate incurring material
incremental costs in future periods due to such issues. Many of our customers
are relatively small and located in lesser-developed countries, rely on aging
telecommunications infrastructures for a link to the Internet backbone and may
not have conducted a year 2000 compliance review. Although most year 2000
problems should have become evident on January 1, 2000, additional
year 2000-related problems may become evident only after that date. For example,
some software programs may have difficulty resolving the so-called "century leap
year" algorithm which will also occur during the year 2000. We do not have any
specific contingency plans for any year 2000 problems that may arise in the
future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide services primarily to customers located outside of the U.S. Thus,
our financial results could be impacted by foreign currency exchange rates and
market conditions abroad. As all of our services are paid for in U.S. dollars, a
strong dollar could make the cost of our services more expensive than the
services of non-U.S. based providers in foreign markets. We have not used
derivative instruments to hedge our foreign exchange risks though we may choose
to do so in the future. Our interest income is sensitive to changes in U.S.
interest rates but we do not believe that we are subject to any material market
risk exposure.
27
BUSINESS
OVERVIEW
We operate a satellite-based broadband Internet network that delivers
high-speed Internet services to international ISPs and other businesses in more
than 80 countries. Our proprietary network design integrates the broadcast
capabilities of satellites with Internet networking technologies to offer our
international customers a scalable solution to the constraints of the public
Internet infrastructure. Our global network's open technical architecture
enables us to provide three categories of Internet services: global high-speed
broadband connectivity to the Internet backbone, enhanced Internet services,
such as Internet telephony, and Internet content distribution, such as newsfeeds
and streaming media. From December 31, 1998 to December 31, 1999, we increased
the number of our customers from 69 to 343 and as of February 15, 2000 we had
468 customers worldwide.
INDUSTRY BACKGROUND
THE EXPANSION OF THE INTERNET
Strain on the worldwide Internet infrastructure is increasing, especially
outside the U.S., as the number of Internet users grows and as their bandwidth
needs expand. Connectivity provides access to the Internet and, once
established, avails Internet users of a variety of services, including Web site
browsing, content downloading, personal and business messaging, e-commerce, VoIP
and streaming audio and video broadcasting. eStats estimates that the number of
active Internet users worldwide will grow from approximately 95 million in 1998,
of which approximately 50% resided outside of the U.S., to approximately
282 million by the end of 2002, of which approximately 69% will reside outside
of the U.S. Once online, users quickly become more selective, demanding faster,
more reliable access, a broad choice of Internet-based services from their ISPs
and richer, more interactive Web sites. Despite an anticipated expansion in the
number of Internet users worldwide, advances in the global telecommunications
infrastructure and the public Internet have failed to keep pace with user
demand. When connecting to and navigating the Internet, international ISPs and
their subscribers suffer numerous problems caused by limited access to the
Internet backbone, poor telecommunications infrastructure and low bandwidth
availability. These difficulties are likely to increase as demand grows for rich
Internet content, such as streaming audio and video.
The table below sets forth the estimated worldwide growth in active Internet
users from 1998 to 2002 on a region-by-region basis based on eStats estimates:
ESTIMATED WORLDWIDE GROWTH OF ACTIVE INTERNET USERS
1998 - 2002
(IN MILLIONS OF USERS)
1998 2002
------------------- -------------------
REGION TOTAL % TOTAL % CAGR (1)
- ------ -------- -------- ----- -------- --------
Europe................................................. 24.6 25.8% 84.3 29.9% 36.1%
Asia and Pacific Rim................................... 14.1 14.8 60.7 21.5 44.0
Latin America (includes Mexico)........................ 1.6 1.7 26.6 9.4 101.9
Africa and Middle East................................. 1.2 1.2 12.3 4.4 78.9
North America (U.S. and Canada only)................... 53.9 56.5 98.1 34.8 16.2
----- ----- ----- ----- -----
Total................................................ 95.4 100.0% 282.0 100.0% 31.1%
- -------------------
(1) Compounded Annual Growth Rate from 1998-2002
28
GLOBAL INFRASTRUCTURE CHALLENGES
The Internet relies on the global telecommunications infrastructure to
deliver an increasing variety of business applications and media. At the same
time, the swift growth of the Internet outside the U.S. and Europe is
constrained by the inadequacy of that infrastructure. In many parts of the
world, fiber-based Internet service is unavailable and other terrestrial
connections may be unreliable or in short supply due to the quality and
availability of local PTT facilities. For many of our customers, PTTs are their
sole source of telecommunications services. ISPs in many international markets
must overcome bottlenecks such as limited access to the Internet backbone, poor
network architecture and telecommunications infrastructure and a relative lack
of bandwidth provisioning from the local telecommunications provider. Network
performance may also be adversely affected by the inherent asymmetry of Web
traffic, where most of the bandwidth required is for the receipt of Web pages
from the Internet by the user. Network performance may be further diminished by
the necessity of routing data across multiple hops, or links, through multiple
networks. These shortcomings can severely impact the network performance of an
ISP and the quality of service that it provides to its subscribers.
Even in the U.S. and Europe, where broadband connectivity is more widely
available than in the rest of the world, the public Internet infrastructure
nevertheless requires multiple hops between routers to get from one point to
another reducing the quality and efficiency of the network. The Internet's
current infrastructure is poorly designed to efficiently transmit to other
countries increasingly bandwidth-intensive Internet content, such as
broadcast-style programming, streaming media, large graphics and animation. Web
site owners, traditional entertainment and media companies, Internet media
companies and creators of new online applications are making greater demands on
the public Internet infrastructure with the transmission of graphics,
high-definition images, video and audio streaming, animation and software
downloads.
Companies that aggregate Internet content and store it in servers close to
end users, or edge servers, provide only part of the solution to the public
Internet limitations. Content distributors and aggregators need a means to
deliver data to their servers in an efficient manner. Repeatedly sending
individual point-to-point transmissions to thousands of servers around the world
is a costly and inefficient use of bandwidth and has the potential to
significantly increase Internet infrastructure congestion.
FACILITATING THE CONTINUED GROWTH OF THE INTERNET
A number of Internet companies have attempted to address the international
architectural limitations of the Internet and the demand for bandwidth-intensive
Internet content. Caching, or the frequent storage of commonly accessed Internet
data and images in a server closer to the end user, offers a hardware and
software solution to reduce transmission costs and delays. Outsourced Web server
management by content hosting companies enables Web sites to increase server
reliability by establishing servers on multiple points on the Internet.
Terrestrial broadband services are being advanced by traditional
telecommunications companies and Internet backbone providers in an effort to
address the last mile limitation for Internet users.
Ultimately, none of these solutions sufficiently address the inherent
infrastructure limitations abroad. Caching requires expensive hardware and
software and does not address the need of Web site owners to continually deliver
their high performance Internet content reliably across the many interconnecting
networks that comprise the Internet. Web hosting is not designed to avoid
transmission disruption difficulties encountered as data and content traverse
the public Internet to the end user. Last mile solutions must rely on
terrestrial network connections and do not avoid congestion or degradation of
quality that arise as transmissions pass through various infrastructure
intersections across the Internet.
Conversely, satellites deliver Internet services and broadcast content in a
simultaneous point-to-multipoint manner to locations throughout the world.
Satellite-based networks overlay the public Internet around the world, reducing
hops, which avoids bottlenecks, improves broadcast quality, lowers
29
distribution costs and expands the availability of content to Internet users
worldwide. When comprehensively managed in a network that intelligently
integrates satellite and Internet protocol technologies, satellites are able to
reach remote places inadequately served by local telecommunications
infrastructures and can make broadband connectivity and the resulting flow of
e-commerce, rich content, and broadcast programming globally available.
THE INTERPACKET SOLUTION
Our broadband satellite-based Internet network overlays the public Internet
around the world and offers solutions to many of the current global Internet
infrastructure limitations. Our network currently incorporates nine
geostationary satellites, uplinked from six strategically located teleports, or
earth-based satellite transmission stations, and allows for the rapid delivery
of broadband Internet connectivity worldwide. ESPRESSO, and ESPRESSO BIZKIT, our
branded satellite-based Internet connectivity services, supplement or bypass
local and international telecommunications connections, enabling our ISP
customers to deliver a more reliable, higher quality of Internet service to
their subscribers. Our enhanced Internet services, including ESPRESSO VOICE, our
Internet telephony service, are complementary to the broadband access we provide
to our international ISP customers and create additional revenue opportunities.
The broadcast capabilities of our satellite network also create an
efficient, reliable means for Internet content aggregators to multicast, or
transmit, bandwidth-intensive forms of rich, Web-based content simultaneously to
multiple locations around the world. We currently broadcast ESPRESSO NEWS, our
aggregated newsfeed, and we recently entered into an agreement with iBEAM to
deliver streaming content around the world.
Our satellite-based Internet network and services feature:
SCALABLE, PROPRIETARY AND GLOBAL NETWORK DESIGN. Our network incorporates a
proprietary design to integrate the broadcast capabilities of satellites with
Internet networking technologies to connect our international ISP customers to
the Internet backbone. Our network currently incorporates nine geostationary
satellites, uplinked from six strategically located teleports, which enable the
transmission of data from terrestrial to satellite-based networks. The design of
our network is scalable, allowing us to rapidly and cost-effectively add
satellite and fiber optic cable capacity in response to our customers' Internet
needs.
HIGH QUALITY, BRANDED SERVICE. ESPRESSO, our primary Internet connectivity
service, provides a high quality, direct connection to the Internet backbone.
ESPRESSO supplements or bypasses the Internet connections available to
international ISPs from their local telecommunications providers. This reduces
reliance on local Internet infrastructure and enables our ISP customers to
deliver more reliable, higher quality Internet services to their subscribers. We
believe ESPRESSO is a well known brand name in the international ISP
marketplace.
RAPID PROVISIONING. The simplex, or receive only, format of ESPRESSO allows
us to activate our new customers quickly and helps our customers avoid the costs
and delays of acquiring transmission facilities and regulatory approvals. Our
network and our customer service group deliver rapid provisioning of initial
Internet connectivity and subsequent bandwidth upgrades to our customers. This
system allows our ISP customers to avoid making the significant capital
investments necessary to establish and maintain fixed levels of bandwidth. Thus,
our ISP customers are afforded a cost-effective, pay-as-they-grow means to
increase the level of access and Internet services that they offer to their
subscribers.
ENHANCED INTERNET SERVICES. The broadband capacity of our network
facilitates the delivery of complementary Internet-based services to our ISP
customers. ESPRESSO VOICE enables our customers to route phone-to-phone calls
over our network in a cost-effective manner. Our ESPRESSO BIZKIT service
provides a direct-to-business Internet service through our ISP customers and
eliminates last mile connectivity issues for their business customers. We
recently initiated a managed co-location service with
30
the introduction of ESPRESSO COLO, contracting with Exodus Communications, Inc.
and AboveNet Communications, Inc., to deliver Web-hosting services to our ISP
customers.
MULTICASTING CONTENT DELIVERY. The point-to-multipoint broadcast
capabilities of our satellite-based Internet network creates an efficient,
reliable means for Internet content aggregators to transmit streaming forms of
Web-based content simultaneously to multiple locations across the globe. Our
network is designed to enable content aggregators and distributors to deliver
streaming audio and video content distributors to Internet users worldwide. We
recently began multicasting ESPRESSO NEWS, our aggregated newsfeed, to customers
in Western Europe, including the United Kingdom.
CUSTOMER-FOCUSED NETWORK MANAGEMENT AND SUPPORT. Our experienced network
management team is able to customize sophisticated Internet solutions to meet
the needs of growing international ISPs. We are able to proactively manage
operations and solutions and can help our customers operate more efficiently in
an ever-changing Internet marketplace. Our network operations centers in Santa
Monica and London allow our technical staff to actively monitor the status and
performance of our network and customers on a 24 hour, seven day a week basis.
OUR STRATEGY
Our goal is to become the leading provider of global satellite Internet
connectivity and services by building the world's largest, premier quality and
cost-efficient satellite network. We also intend to capitalize on our
proprietary network design, our network's broadband capabilities, and the global
reach of our satellite coverage to offer content delivery to Internet content
aggregators. To achieve this goal we intend to:
INCREASE OUR GLOBAL CUSTOMER BASE. We had 468 customers worldwide as of
February 15, 2000. We intend to increase our customer base by growing our sales
force and aggressively marketing our Internet services through a variety of
marketing activities, such as direct marketing and participation at trade shows.
We believe that heightened recognition of our ESPRESSO brand and the high
quality of our Internet services among ISPs internationally will continue to
facilitate additional growth among new international ISP customers and establish
us as the leading provider of global satellite Internet connectivity, enhanced
Internet service and content multicasting.
CAPITALIZE ON OUR EARLY ENTRANT STATUS. We have aggressively deployed our
network in over 80 countries and have developed an international reputation for
providing high quality Internet connectivity and related services abroad using
our satellite overlay network. Our multilingual international sales and
marketing force of 36 individuals leverages our experience as one of the first
providers of satellite-based Internet services internationally and helps us
enter new countries and develop new business relationships. We intend to
continue to capitalize upon our reputation and experience as a leading provider
of satellite-based Internet services to the international ISP community.
BROADEN OUR INTERNET SERVICE OFFERINGS. We intend to continue to develop
additional Internet services and solutions that provide revenue-generating
opportunities. We plan to introduce caching, Internet applications delivery and
virtual private network services later this year. As the demand for additional
Internet services by our customers increases, their needs can be satisfied by
our network. We intend to continue to develop services that provide our ISP
customers with cost savings and with the Internet services they need to satisfy
the demands of their Internet users. The expansion of our Internet services also
serves to maintain the loyalty of our customers.
PROVIDE TURNKEY SOLUTIONS TO THE EMERGING INTERNET CONTENT INDUSTRY. We
intend to capitalize on the many advantages of our Internet network to become a
leading global supplier of managed satellite network services to the emerging
content aggregator industry. Our network serves as an overlay to the public
Internet around the world, offering content providers, distributors and
aggregators a turnkey solution to the many distribution difficulties caused by
the congestion and inadequate bandwidth capacities of the
31
international Internet infrastructure. We hope to exploit this advantage and
offer our current and future content aggregator customers an efficient and
cost-effective means to broadcast their Internet products to ISPs, businesses
and other users around the world.
EXPAND OUR NETWORK INFRASTRUCTURE. We believe the increasing worldwide need
for Internet connectivity, services and rich content on demand will lead to a
greater need for our network. We intend to support and continue to assure the
quality and availability of our service with the acquisition of additional
satellite and fiber optic cable capacity. We will continue to pursue a strategy
of connecting to U.S. Internet backbone operators, regional satellite owners
abroad and operators of Internet exchange points to add regional and
intraregional links and make our Internet network more globally pervasive. We
believe that the sophistication of our satellite-based Internet network will
provide us a competitive advantage as the global Internet infrastructure expands
and evolves.
DEVELOP OUR STRATEGIC AND BUSINESS RELATIONSHIPS. We have entered into a
strategic relationship with iBEAM, which will enable us to derive revenue from
the emerging content distribution industry. We intend to pursue additional
strategic and business relationships to accelerate market acceptance of our
services and increase our global brand recognition. We believe that these
relationships will facilitate our efforts to become the world's premier
satellite-based Internet network.
INTERPACKET SERVICES
CONNECTIVITY
ESPRESSO. Our ESPRESSO connectivity service allows international ISPs to
use our global network of interconnected geostationary satellites and fiber
optic cable facilities to download content from the Internet at any time at
speeds ranging from 64 kilobits per second to 45 megabits per second. ESPRESSO'S
simplex, or receive-only, format offers advantages over more traditional leased
line connections, which are typically unable to accommodate asymmetrical
bandwidth requirements of the Internet. An international ISP may link to our
network and receive ESPRESSO service with the customer's existing Internet
links, regardless of the provider of those links. While we also offer duplex
service, or two-way transmission, our customers typically choose the simplex
format of ESPRESSO as it does not require transmission equipment and may be
activated quickly. Transmission equipment is more expensive than receive-only
equipment and typically requires a local transmission license, which can often
be time-consuming and costly to obtain.
We assign every ESPRESSO customer a committed information rate, or
guaranteed transmission throughput, according to their capacity needs and
budget. The committed information rate acts as our guarantee that the customer
will be able to access the U.S. Internet backbone at that data rate on a
24 hour a day, seven day a week basis. The monthly cost of an ESPRESSO link
varies from approximately $1,000 for a low-speed simplex link, ranging from 64
to 256 Kbps, to $200,000 or more for a dedicated 45 Mbps simplex link or a
high-speed duplex link, though prices vary considerably from continent to
continent based on facility costs, the particular satellite that we use and the
competition within the local market. The customer equipment for ESPRESSO, which
primarily includes a receive-only satellite dish, costs approximately $3,500 and
can be installed and operational within several hours.
Most existing terrestrial networks normally require a number of hops to
reach the Internet backbone, which increases latency, or delay, and potential
data loss and lowers the quality of service. ESPRESSO is a direct connection to
the Internet backbone, with only a single hop between the Internet backbone and
our ISP customer. Our technical ability to provide guaranteed bandwidth and the
ability to configure the connection for any desired degree of asymmetry are
attractive features of our ESPRESSO service that are not generally available
from traditional telecommunications service providers.
32
[Graphic showing terrestrial hops to the Internet with satellite uplink and
ESPRESSO simplex downlink transmission]
ESPRESSO BIZKIT. We currently partner with over 40 of our ISP customers who
market our ESPRESSO BIZKIT application to their business customers seeking
significant download capacity. ESPRESSO BIZKIT is a high-speed receive-only
satellite service that allows the business subscriber to download data directly
from the Internet backbone via our network, eliminating connectivity and latency
issues in the last mile of terrestrial land lines. We believe that our ESPRESSO
BIZKIT application is an opportunity to expand our customer base to the
international corporate user market.
33
INTERPACKET NETWORKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income for the years ended December 31,
1997, 1998 and 1999....................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
F-1
After the stock split discussed in Note 12 to InterPacket Networks, Inc.'s
consolidated financial statements is effective, we expect to be in a position to
render the following audit report.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 11, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To InterPacket Networks, Inc.:
We have audited the accompanying consolidated balance sheets of InterPacket
Networks, Inc. (a Delaware corporation) and subsidiary as of December 31, 1998
and 1999, and the related consolidated statements of operations, stockholders'
equity (deficit) and comprehensive income and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting 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, the financial statements referred to above present fairly,
in all material respects, the financial position of InterPacket Networks, Inc.
and subsidiary as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
F-2
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS
PRO-FORMA
(SEE NOTE 8)
1998 1999 1999
---------- ----------- ------------
(UNAUDITED)
Current Assets:
Cash.................................................. $ 1,855 $15,948,294 $15,948,294
Accounts receivable, net of allowance of
$16,600 and $140,200 at December 31, 1998
and 1999, respectively.............................. 369,742 1,333,914 1,333,914
Accounts receivable from related parties,
net of allowance of $63,400 at
December 31, 1998................................... 1,308,844 206,274 206,274
Inventory............................................. 161,047 1,063,090 1,063,090
Advances to stockholder and employees................. 42,280 68,485 68,485
Deposits.............................................. 116,778 5,000 5,000
Prepaid expenses and other assets..................... 64,263 161,396 161,396
---------- ----------- -----------
Total current assets............................ 2,064,809 18,786,453 18,786,453
---------- ----------- -----------
Property and Equipment:
Operating equipment................................... 681,462 2,319,687 2,319,687
Computer equipment.................................... 90,367 442,726 442,726
Furniture and fixtures................................ 9,124 76,836 76,836
Equipment under capital leases........................ -- 41,456,658 41,456,658
---------- ----------- -----------
780,953 44,295,907 44,295,907
Less--Accumulated depreciation........................ (98,929) (1,422,989) (1,422,989)
---------- ----------- -----------
682,024 42,872,918 42,872,918
---------- ----------- -----------
Deposits.............................................. 330,378 1,570,457 1,570,457
Deposits to related parties........................... -- 26,344 26,344
Intangible assets, net of amortization of $22,433..... -- 426,228 426,228
Other assets.......................................... -- 608,179 608,179
---------- ----------- -----------
Total assets.................................... $3,077,211 $64,290,579 $64,290,579
========== =========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
PRO-FORMA
(SEE NOTE 8)
1998 1999 1999
---------- ----------- ------------
(UNAUDITED)
Current Liabilities:
Bank overdraft............................................ $ 373,213 $ -- $ --
Accounts payable.......................................... 1,172,434 1,773,932 1,773,932
Accrued expenses.......................................... 931,807 1,804,938 1,804,938
Accounts payable and accrued expenses from related
parties................................................. 288,749 54,938 54,938
Deferred revenue.......................................... 681,671 1,831,711 1,831,711
Current portion of capital leases......................... -- 2,138,068 2,138,068
Customer deposits......................................... 352,657 751,835 751,835
Deposits from related party............................... 181,970 49,756 49,756
---------- ----------- -----------
Total current liabilities........................... 3,982,501 8,405,178 8,405,178
---------- ----------- -----------
Capital Leases, net of Current Portion...................... -- 38,669,292 38,669,292
---------- ----------- -----------
Mandatorily Redeemable Preferred Stock--$.001 par value:
Authorized--3,000,000 shares
Issued and outstanding--3,000,000 shares at December 31,
1999.................................................... -- 14,823,800 --
---------- ----------- -----------
Commitments and Contingencies (Note 4)
Stockholders' Equity (Deficit):
Common stock--$.001 par value:
Authorized--50,000,000 shares
Issued and outstanding--8,526,316 and 12,193,897
shares at December 31, 1998 and 1999 and 15,193,897
in pro forma 1999..................................... 8,526 12,193 15,193
Additional paid-in capital................................ 357,730 45,124,620 59,945,420
Stockholder receivables................................... (35,158) (35,158) (35,158)
Deferred compensation..................................... -- (30,585,462) (30,585,462)
Other comprehensive income................................ -- 2,173 2,173
Deficit................................................... (1,236,388) (12,126,057) (12,126,057)
---------- ----------- -----------
Stockholders' equity (deficit)...................... (905,290) 2,392,309 17,216,109
---------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)......................................... $3,077,211 $64,290,579 $64,290,579
========== =========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
---------- ----------- ------------
Revenue:
Network services..................................... $ 406,895 $ 2,283,701 $ 10,051,114
Revenue from related parties--network services....... 175,924 1,831,233 738,362
Revenue from related parties--traditional telecom
services........................................... 1,176,330 7,294,757 2,684,751
---------- ----------- ------------
Total revenue.................................. 1,759,149 11,409,691 13,474,227
Operating Expenses:
Cost of network services............................. 452,748 5,284,329 10,346,284
Cost of traditional telecom services................. 531,834 4,749,765 1,273,645
Cost from related parties............................ 21,246 777,724 993,292
Selling and marketing expenses....................... 131,714 828,120 2,396,857
General and administrative expenses.................. 429,435 1,017,567 4,297,178
General and administrative expenses
from related parties............................... 24,565 80,480 389,075
Non-cash compensation charges........................ -- -- 2,488,405
Depreciation and amortization........................ 9,390 87,569 1,346,493
---------- ----------- ------------
Total operating expenses....................... 1,600,932 12,825,554 23,531,229
---------- ----------- ------------
Income (Loss) from Operations.......................... 158,217 (1,415,863) (10,057,002)
Other Income (Expense):
Interest income...................................... 902 22,886 205,792
Interest expense..................................... (129) (110) (942,990)
Other................................................ -- (2,824) (94,669)
---------- ----------- ------------
773 19,952 (831,867)
---------- ----------- ------------
Income (Loss) before Provision for
Income Taxes......................................... 158,990 (1,395,911) (10,888,869)
Provision (Benefit) for Income Taxes................... 69,613 (68,013) 800
---------- ----------- ------------
Net Income (Loss)...................................... $ 89,377 $(1,327,898) $(10,889,669)
========== =========== ============
Basic and diluted income (loss) per common share....... $ 0.01 $ (0.16) $ (1.05)
========== =========== ============
Weighted average number of common shares............... 7,250,000 8,412,000 10,392,000
========== =========== ============
Pro forma basic and diluted loss per common share
(unaudited).......................................... $ (1.01)
============
Weighted average number of common shares used to
compute pro forma loss per common share
(unaudited).......................................... 10,803,000
============
The accompanying notes are an integral part of these consolidated statements.
F-5
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
COMMON STOCK OTHER RETAINED
--------------------- ADDITIONAL STOCKHOLDER DEFERRED COMPREHENSIVE EARNINGS
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLES COMPENSATION INCOME (DEFICIT)
---------- -------- --------------- ----------- ------------ ------------- ------------
Balance, at December 31,
1996...................... 6,316,000 $ 6,316 $ (3,158) $ (158) $ -- $ -- $ 2,133
Issuance of common stock.... 1,784,000 1,784 73,216 (40,000) -- -- --
Stockholder contributions... -- -- 38,098 -- -- --
Net income.................. -- -- -- -- -- -- 89,377
---------- ------- ----------- -------- ------------ ------ ------------
Balance, at December 31,
1997...................... 8,100,000 8,100 108,156 (40,158) -- -- 91,510
Issuance of common stock.... 426,316 426 249,574 -- -- -- --
Repayment of stockholder
note...................... -- -- -- 5,000 -- -- --
Net loss.................... -- -- -- -- -- -- (1,327,898)
---------- ------- ----------- -------- ------------ ------ ------------
Balance, at December 31,
1998...................... 8,526,316 8,526 357,730 (35,158) -- -- (1,236,388)
Issuance of common stock.... 3,590,247 3,590 11,556,573 -- -- --
Compensation expense
relating to issuance of
common stock.............. -- -- 1,775,954 -- -- --
Exercise of stock options... 77,334 77 136,450 -- -- -- --
Compensation expense
relating to stock
options................... -- -- 31,297,913 -- (30,585,462) -- --
Comprehensive income:
Net loss.................. -- -- -- -- -- -- (10,889,669)
Cumulative translation
adjustment.............. -- -- -- -- -- 2,173 --
Comprehensive loss.......... -- -- -- -- -- -- --
---------- ------- ----------- -------- ------------ ------ ------------
Balance, at December 31,
1999...................... 12,193,897 $12,193 $45,124,620 $(35,158) $(30,585,462) $2,173 $(12,126,057)
========== ======= =========== ======== ============ ====== ============
TOTAL
------------
Balance, at December 31,
1996...................... $ 5,133
Issuance of common stock.... 35,000
Stockholder contributions... 38,098
Net income.................. 89,377
------------
Balance, at December 31,
1997...................... 167,608
Issuance of common stock.... 250,000
Repayment of stockholder
note...................... 5,000
Net loss.................... (1,327,898)
------------
Balance, at December 31,
1998...................... (905,290)
Issuance of common stock.... 11,560,163
Compensation expense
relating to issuance of
common stock.............. 1,775,954
Exercise of stock options... 136,527
Compensation expense
relating to stock
options................... 712,451
Comprehensive income:
Net loss.................. (10,889,669)
Cumulative translation
adjustment.............. 2,173
------------
Comprehensive loss.......... (10,887,496)
------------
Balance, at December 31,
1999...................... $ 2,392,309
============
The accompanying notes are an integral part of these consolidated statements.
F-6
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1997 1998 1999
--------- ----------- ------------
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 89,377 $(1,327,898) $(10,889,669)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Compensation expense relating to stock options.......... -- -- 712,451
Compensation expense relating to issuance of common
stock................................................. -- -- 1,775,954
Depreciation and amortization expense................... 9,390 87,569 1,346,493
Bad debt expense........................................ -- 80,000 183,574
Deferred income taxes................................... 68,813 (68,813) --
Decrease (increase) in assets, net of acquisition:
Accounts receivable................................... (61,032) (325,292) (1,119,207)
Accounts receivable from related parties.............. (804,352) (563,910) 1,102,570
Inventory............................................. -- (161,047) (902,043)
Advances to stockholder and employees................. -- (42,280) (26,205)
Deposits.............................................. -- (326,568) (1,266,423)
Prepaid expenses and other assets..................... (4,110) (180,741) 19,647
Increase (decrease) in liabilities, net of acquisition:
Bank overdraft........................................ 330,424 42,789 (373,213)
Accounts payable...................................... 79,451 1,092,983 601,498
Accrued expenses...................................... 154,908 776,899 810,577
Accounts payable and accrued expenses from related
parties............................................. 17,516 271,233 (233,811)
Deferred revenue...................................... 50,560 615,621 1,128,449
Deposits.............................................. 55,800 285,357 399,178
Deposits from related party........................... -- 181,970 (132,214)
--------- ----------- ------------
Net cash provided by (used in) operating
activities........................................ (13,255) 437,872 (6,862,394)
--------- ----------- ------------
Cash Flows from Investing Activities:
Capital expenditures...................................... (55,621) (691,017) (1,956,353)
Payment for acquisition................................... -- -- (500,000)
Other assets.............................................. -- -- (125,373)
--------- ----------- ------------
Net cash used in investing activities............... (55,621) (691,017) (2,581,726)
--------- ----------- ------------
Cash Flows from Financing Activities:
Issuance of common stock.................................. 66,760 250,000 11,696,690
Issuance of preferred stock............................... -- -- 14,823,800
Repayment of stockholder note............................. -- 5,000 --
Repayment of capital lease obligations.................... -- -- (649,298)
Initial public offering costs included in other assets.... -- -- (482,806)
--------- ----------- ------------
Net cash provided by financing activities........... 66,760 255,000 25,388,386
--------- ----------- ------------
Effect of exchange rate changes on cash..................... -- -- 2,173
Increase (decrease) in cash................................. (2,116) 1,855 15,946,439
Cash, beginning of period................................... 2,116 -- 1,855
--------- ----------- ------------
Cash, end of period......................................... $ -- $ 1,855 $ 15,948,294
========= =========== ============
The accompanying notes are an integral part of these consolidated statements.
F-7
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. NATURE OF BUSINESS
InterPacket Networks, Inc. (the "Company" or "InterPacket") is a Delaware
corporation in the business of providing a satellite-based broadband Internet
network that delivers high-speed Internet services to international Internet
service providers and other businesses. The Company's proprietary network design
integrates the broadcast capabilities of satellites with Internet network
technologies to offer its international customers a scalable solution to the
contraints of the public Internet infrastructure. Effective December 1999, the
Company discontinued traditional telephony services to focus on its Internet
business.
On September 23, 1999, IPG Acquisition Inc. was incorporated in the State of
Delaware. On November 5, 1999, Interpacket Group, Inc. and IPG Acquisition Inc.
merged to become InterPacket Group, Inc., a Delaware corporation. On February
18, 2000, the Company changed its name to InterPacket Networks, Inc., which has
been retroactively reflected in the accompanying consolidated financial
statements.
In September 1998, the Company established InterPacket (UK) Limited, a
wholly owned subsidiary in the United Kingdom, to expand operations in Europe.
In November 1998, the Company entered into a joint venture with Internet
Promoters India Limited ("IPIL") to provide Internet services in India. The
Company owns 49 percent of the equity of IPIL and accounts for the investment
under the equity method.
On September 28, 1999, the Company completed the acquisition of certain
assets and technology from a subsidiary of Level 3 Communications Limited, for a
cash price of approximately $500,000. (see Note 10).
The Company faces risks normally associated with early stage enterprises
including the need to raise additional capital to fund future operations and
expansion. There can be no assurance that the Company will be successful in
raising the needed capital. Also, should the Company be successful in obtaining
capital, there can be no assurances that profitable operations can be achieved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
InterPacket and its wholly-owned subsidiary. All material intercompany
transactions have been eliminated.
REVENUE RECOGNITION
The Company records revenue for Internet service during the month of service
and for long distance telecommunications sales at the time of customer usage.
Deferred revenue consists of advance billings for the following month's services
or prepayments from new customers not yet in service. Included in accounts
receivable and deferred revenue as of December 31, 1998 and 1999 are $409,475
and $794,217, respectively, of billed but unearned revenues.
COST OF SERVICES
Cost of services represent direct charges from vendors that the Company
incurs to deliver service to its customers. These include access fees, leasing
costs for satellite facilities, teleports, Internet connectivity and the
rate-per-minute charges from other carriers that terminate traffic on behalf of
the Company.
F-8
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
Management determined that the functional currency of its foreign subsidiary
is the local currency. Balance sheets prepared in their functional currencies
are translated to the reporting currency, the United States dollar, at exchange
rates in effect at the end of the accounting period except for stockholders'
equity accounts which are translated at rates in effect when these balances were
originally recorded. Revenue and expense accounts are translated at a weighted
average of exchange rates during the period. The cumulative effect of
translation is included in other comprehensive income in the accompanying
consolidated balance sheets.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires that comprehensive income, which is the total of net income and all
other non-owner changes in equity, be displayed in the financial statements. The
adoption of SFAS No. 130 had no impact on total stockholders' equity. The
components of the Company's comprehensive income as presented in the
consolidated statements of stockholders' equity (deficit) and comprehensive
income include net income and unrealized gains and losses from currency
translation.
BASIC AND DILUTED INCOME (LOSS) PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed by dividing the net earnings available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of incremental common shares issuable
upon the exercise of stock options and the conversion of the preferred shares
are excluded from the diluted earnings per share calculation as their effect is
anti-dilutive.
A summary of the shares used to compute net income (loss) per share and pro
forma net loss per share is as follows:
Year Ended December 31,
----------------------------------
1997 1998 1999
--------- --------- ----------
Weighted average common shares used to
compute basic net loss per common share... 7,250,000 8,412,000 10,392,000
Effect of dilutive securities............... -- -- --
--------- --------- ----------
Weighted average common shares used to
compute diluted loss per common share..... 7,250,000 8,412,000 10,392,000
========= =========
Conversion of preferred stock............... 411,000
----------
Weighted average number of common shares
used to compute pro forma loss per common
share..................................... 10,803,000
==========
F-9
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Pro forma loss per common share gives effect to the conversion of 3,000,000
shares of preferred stock into common stock upon the effectiveness of the
initial public offering.
INVENTORY
Inventory represents purchased communications equipment which the Company
resells to its customers. The inventory is carried at the lower of cost or
market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation of property and
equipment is computed using the straight-line method over the following
estimated useful lives:
Operating equipment.............................. 5 years
Computer equipment............................... 3 years
Furniture and fixtures........................... 5 years
Equipment under capital leases................... 11 to 13 years
Replacements and betterments, renewals and extraordinary repairs that extend
the life of the asset are capitalized; other repairs and maintenance are
expensed. The cost and accumulated depreciation applicable to assets sold or
retired are removed from the accounts and any gain or loss on disposition is
recognized in other income or expense.
Included in the Company's balance sheets at December 31, 1998 and 1999 are
approximately $280,000 and $42.9 million, respectively, of equipment which is
located outside of the United States.
DEPOSITS
Deposits represent payments made to satellite operators and long distance
providers to secure lower rates. These deposits are refunded or applied against
future services.
INTANGIBLE ASSETS
Intangible assets represent the excess of cost over the fair market value of
net tangible assets acquired and are amortized using the straight-line method
over a five-year period. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life of
intangible assets might warrant revision or that the remaining balance of the
intangible assets and other long-lived assets may not be recoverable. When
factors indicate that the intangible assets and other long-lived assets should
be evaluated for possible impairment, the Company uses an estimate of
undiscounted future net cash flows over the remaining life of the assets to
determine if impairment has incurred. Assets are grouped at the lowest level for
which there are identifiable cash flows that are largely independent from other
asset groups. The Company uses discounted future expected net cash flows to
determine the amount of impairment loss.
F-10
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets include capitalized initial public offering costs of $482,806
and the investment in IPIL which is being accounted for under the equity method.
STATEMENTS OF CASH FLOWS
During the periods ended December 31, 1997 and 1998, no cash was paid for
interest. During 1999, the Company paid $784,807 in interest charges. For the
same periods, cash paid for income taxes amounted to $1,600, $800 and $5,724,
respectively.
Non-cash investing and financing activities are as follows for the years
ended December 31, 1997, 1998 and 1999:
1997 1998 1999
-------- -------- -----------
Issuance of common stock for notes............ $40,000 $ -- $ --
Conversion of debt to equity.................. $ 6,338 $ -- $ --
Assets acquired under capital leases.......... $ -- $ -- $41,456,658
These non-cash transactions are excluded from the statements of cash flows.
CONCENTRATIONS OF RISK
As of December 31, 1999, the Company had cash account balances of
approximately $15.1 million at financial institutions which were in excess of
federally-insured amounts.
The Company provided carrier grade telephony service to a single customer
who accounted for a substantial portion of the overall revenue of the Company.
The Company's largest customer accounted for 76 percent and 12 percent of gross
accounts receivable at December 31, 1998 and 1999, respectively. The Company's
largest customer represented 77 percent, 80 percent and 25 percent of revenue
during the years ended December 31, 1997, 1998 and 1999. The Company's largest
customer is a related party (see Note 3).
For the year ended December 31, 1999, 73 percent of total revenue and
91 percent of revenue from network services were generated outside the United
States.
Purchases from the four largest vendors for the years ended December 31,
1997 and 1998 amounted to 88 percent and 59 percent, respectively, and purchases
from the two largest vendors for the year ended December 31, 1999 amounted to 47
percent of total purchases.
In providing its network application services, the Company is dependent on
uninterrupted satellite service which is provided by four vendors. The Company
also relies predominantly on one vendor for uplink services. From time to time,
the Company experienced interruptions in satellite transmission service for
which they do not receive reimbursement from the provider. An extended period of
disruption could have a material adverse effect on the Company's financial
position and results of operations.
F-11
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash, receivables, payables and accrued
liabilities approximate their fair value because of the short maturities of
these instruments. The carrying value of the Company's capital leases
approximate their fair values because the interest rates are comparable to those
available to the Company on similar terms.
3. RELATED PARTY TRANSACTIONS
A significant stockholder and member of the board of directors of the
Company is an executive at STAR Telecommunications, Inc. ("STAR"). During the
years ended December 31, 1997, 1998 and 1999, the Company provided long distance
telephone service to STAR in the amount of $1,352,254, $9,119,990 and
$3,419,113, respectively. Accounts receivable for these services totaled
$1,281,003, net of the reserve, and $204,374 as of December 31, 1998 and 1999,
respectively. The Company also had an outstanding deposit from STAR as of
December 31, 1998 and 1999 in the amount of $181,970 and $49,756, respectively.
The Company has purchased services from STAR in the amount of $21,246, $640,941
and $993,292 for the years ended December 31, 1997, 1998 and 1999, respectively.
Accounts payable and accrued liabilities for these services totaled $287,801 and
$39,000 at December 31, 1998 and 1999, respectively. As of December 31, 1999,
the Company had a deposit with STAR in the amount of $4,920. During the year
ended December 31, 1998, STAR paid the Company $75,000 as a one-time payment to
obtain a lower per-minute rate for a specific circuit to a particular country.
The Company then paid this amount to another related party to buy out a royalty
interest in the revenue generated from such circuit, thereby reducing the
per-minute rate. The pricing of related party transactions was determined by
management.
During 1999, the Company expensed consulting fees from the current chairman
of the board in the amount of $43,750. At December 31, 1999, accounts payable
for these services amounted to $8,750.
During the years ended December 31, 1997 and 1998, the Company purchased
services from a company related to the former chairman of the board and
stockholder in the amount of $1,915 and $146,167, respectively. During the year
ended December 31, 1999, the Company purchased services from companies primarily
owned by this stockholder in the amount of $31,207. The Company paid rent for
its corporate headquarters in the amount of $22,650, $71,096 and $284,634 to a
company partially owned by this stockholder. Accounts payable for these services
amounted to $948 and $7,188 as of December 31, 1998 and 1999, respectively.
Accounts receivables from one of these entities is $1,900 at December 31, 1999.
The Company also has outstanding deposits from these related entities in the
amount of $21,424 at December 31, 1999. The Company provided services to one of
these related parties during the years ended December 31, 1998 and 1999 in the
amount of $6,000 and $4,000, respectively. During 1999, the
F-12
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Company also accelerated the vesting of stock options for the former chairman of
the board and recorded a related compensation expense in the amount of $145,000.
During the years ended December 31, 1998 and 1999, the Company provided
payroll services for a company owned by the former chairman of the board and
stockholder. The Company paid the payroll costs for two persons in the amount of
$54,795 and $26,736, respectively. As of December 31, 1998, the Company had been
reimbursed $26,954 and recorded a related party receivable in the amount of
$27,841. The Company has been reimbursed for the payroll costs in full as of
December 31, 1999.
During 1998, the Company advanced an executive and significant stockholder
$42,280. As of December 31, 1999, $34,733 of this amount was still outstanding
and included in advances to stockholder and employees.
During the year ended December 31, 1999, the Company purchased services from
a company owned by a director, executive officer and stockholder in the amount
of $29,484.
4. COMMITMENTS AND CONTINGENCIES
The Company has leases for satellite transponder space and related
facilities under various agreements expiring through 2011. At December 31, 1999,
the minimum aggregate payments under the capital leases and non-cancelable
operating leases are summarized as follows:
CAPITAL LEASES OPERATING LEASES TOTAL
-------------- ---------------- ------------
Year Ending December 31,
2000............................... $ 5,870,548 $12,174,662 $ 18,045,210
2001............................... 5,802,000 10,590,441 16,392,441
2002............................... 5,802,000 8,777,266 14,579,266
2003............................... 5,802,000 6,611,840 12,413,840
2004............................... 5,802,000 2,894,250 8,696,250
Thereafter......................... 37,628,000 12,669,972 50,297,972
------------ ----------- ------------
66,706,548 $53,718,431 $120,424,979
----------- ------------
Less: Amount representing
interest......................... (25,899,188)
------------
40,807,360
Less: Current portion.............. (2,138,068)
------------
$ 38,669,292
============
The Company has also committed to lease three additional transponders that
begin on August 15, 2000, May 15, 2001 and November 15, 2001. The Company has
committed to leasing these transponders through the end of their useful lives
which is expected to be October 2013. Estimated future payments under these
commitments are approximately $56.5 million.
Office space and office equipment rent expense for the years ended
December 31, 1997, 1998 and 1999 was $22,650, $71,096 and $284,634,
respectively. Rental for leased lines, satellite access and related facilities
for the years ended December 31, 1997, 1998 and 1999 amounted to $317,551,
$6,281,302 and $10,433,321, respectively.
F-13
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has employment agreements with three executives. The agreements
provide for a continuation of salary in the event of termination without cause.
Also, stock options will vest immediately upon certain events. The Company has
also committed to issue 100,000 stock options to the chief executive officer at
the initial public offering price.
5. INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," under which deferred assets and liabilities are
provided on differences between financial reporting and taxable income using
enacted tax rates. Deferred income tax expenses are based on the changes in
deferred income tax assets or liabilities from period to period.
Under SFAS No. 109, deferred tax assets may be recognized for temporary
differences that will result in deductible amounts in future periods. A
valuation allowance is recognized if based on the weight of available evidence,
it is more likely than not that some portion or all of the deferred tax asset
will not be realized. The net deferred tax asset of $3,884,019 at December 31,
1999 has been fully reserved.
The components of the net deferred taxes at December 31, 1998 and 1999 are
as follows:
1998 1999
--------- -----------
Deferred tax asset:
Net operating loss................................. $ 35,246 $ 5,830,352
Cash to accrual.................................... 480,388 2,158,807
--------- -----------
515,634 7,989,159
Deferred tax liability:
Depreciation....................................... (34,721) (3,036,996)
Cash to accrual.................................... -- (1,068,144)
--------- -----------
(34,721) (4,105,140)
--------- -----------
480,913 3,884,019
Less--valuation reserve.............................. (480,913) (3,884,019)
--------- -----------
Net deferred taxes................................... $ -- $ --
========= ===========
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999 are as follows:
1997 1998 1999
-------- -------- --------
Current:
Federal taxes................................. $ -- $ -- $ --
State taxes................................... 800 800 800
-------- -------- --------
800 800 800
-------- -------- --------
Deferred:
Federal taxes................................. 58,542 (58,542) --
State taxes................................... 10,271 (10,271) --
-------- -------- --------
68,813 (68,813) --
-------- -------- --------
Provision (benefit) for income taxes............ $ 69,613 $(68,013) $ 800
======== ======== ========
F-14
5. INCOME TAXES (CONTINUED)
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended December 31, 1997, 1998
and 1999 are as follows:
1997 1998 1999
-------- --------- -----------
Income taxes at the statutory federal rate........... $54,057 $(474,610) $(3,702,215)
State income taxes, net of federal income tax
effect............................................. 9,276 (77,390) (619,439)
Permanent differences................................ 739 5,130 924,510
Change in valuation reserve.......................... -- 480,913 3,403,106
Other................................................ 5,541 (2,056) (5,162)
------- --------- -----------
$69,613 $ (68,013) $ 800
======= ========= ===========
The Company has net operating loss carryforwards of approximately $13
million for Federal and State income tax purposes, which will expire through
2019 and 2004, respectively.
6. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consist of the following:
1998 1999
-------- ----------
Payroll and related costs.............................. $114,516 $ 383,746
Network costs.......................................... 774,291 835,453
Other.................................................. 43,000 585,739
-------- ----------
$931,807 $1,804,938
======== ==========
7. STOCK OPTIONS
On January 1, 1998, the Company adopted the 1998 Stock Option Plan (the
"Plan"). The Plan provides for the granting of stock options to purchase up to
2,900,000 shares of common stock and terminates in ten years. Options vest over
a period as determined by the Board of Directors, generally three years and
expire in ten years. The option price is determined by the Board of Directors
but may not be less than the fair market value of the stock on the date of
grant, except for participants who are 10 percent stockholders of the Company,
for which the price may not be less than 110 percent of the fair market value.
On June 14, 1999, the Company adopted the 1999 Director Stock Option Plan
(the "Directors Plan"). The Plan provides for the granting of stock options to
purchase up to 200,000 shares of common stock and terminates in ten years. Each
year all non-employee directors shall be granted options to purchase 10,000
shares of common stock. Options vest and become exercisable on the first
anniversary of the date of grant, provided that the individual has remained in
continuous service as a director of InterPacket for the preceding twelve-month
period. Options also vest and become exercisable upon a change in control, as
defined. The option price shall equal the fair market value of the stock on the
date of grant.
The Company has elected to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes only and applies Accounting Principle
Board (APB) Opinion No. 25 and related interpretations in accounting for its
employee stock options.
F-15
7. STOCK OPTIONS (CONTINUED)
The following is a summary of the Company's outstanding options and activity
for the years ended December 31, 1998 and 1999:
1998 1999
------------------- --------------------
WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE
-------- -------- --------- --------
Options outstanding, at
beginning of year.................................... -- $ -- 758,000 $ 0.88
Granted.............................................. 758,000 0.88 755,000 3.39
Granted below current market prices.................. -- -- 1,461,750 4.74
Exercised............................................ -- -- (77,334) 1.77
Canceled............................................. -- -- (79,832) 1.32
------- ----- --------- ------
Options outstanding, at
end of year.......................................... 758,000 $0.88 2,817,584 $ 3.52
======= ===== ========= ======
Options exercisable at end of year..................... -- -- 332,000 $ 0.76
======= ===== ========= ======
Weighted average fair value of options granted during
the period........................................... $0.21 $ 0.79
===== ======
Weighted average fair value of options granted during
the period below their current market prices......... $33.27
======
The following table summarizes information about the options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING
------------------------------------------------- OPTIONS EXERCISABLE
RANGE OF WEIGHTED AVERAGE ------------------------------
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- ---------------- ---------------- ----------- ----------------
$ 0.50 306,000 8.1 years $0.50 200,666 $0.50
0.585-1.25 355,334 8.7 years 1.18 131,334 1.16
2.25-4.50 1,462,250 9.8 years 4.01 -- --
5.00 694,000 9.9 years 5.00 -- --
----------- ---------- --------- ----- ------- -----
$ 0.50-5.00 2,817,584 9.5 years $3.52 332,000 $0.76
=========== ========== ========= ===== ======= =====
As permitted by SFAS No. 123, the Company continues to apply the accounting
rules of APB No. 25 governing the recognition of compensation expense from its
stock option plan. Such accounting rules measure compensation expense on the
first date at which both the number of shares and the exercise price are known.
Under the Company's plan, this would typically be the grant date. The Company
generally issues its stock options with an exercise price based on the fair
market value of the Company's stock at the date of grant as determined by the
board of directors. The Company also issued certain stock options to Company
executives and employees at exercises prices below their current market prices.
The related compensation charges of $31,297,913 are amortized over the three
year vesting periods of the related options.
Under the provisions of SFAS No. 123, equity instruments granted to
non-employees are excluded from the pro forma disclosure requirements and are
recorded as compensation expense at fair value in the accompanying statements of
operations. The Company issued no options to non-employees during the periods
presented. During 1999, the Company changed the vesting term for the former
chairman of the board and another former employee which resulted in additional
compensation expense of $240,538.
F-16
7. STOCK OPTIONS (CONTINUED)
Had the Company applied the fair value based method of accounting to all
grants of stock options, under SFAS No. 123, the Company would have recorded
additional compensation expense as follows for the years ended December 31, 1998
and 1999, respectively:
1998 1999
--------- -----------
Additional compensation expense............................. $ 25,572 $ 161,578
Net loss:
As reported............................................... 1,327,898 10,889,669
Pro forma................................................. 1,353,470 11,051,247
Net loss per share:
As reported............................................... 0.16 1.05
Pro forma................................................. 0.16 1.06
These pro forma amounts were determined by estimating the fair value of each
option on its grant date using the Black-Scholes option-pricing model.
Assumptions of 5.4 percent and 5.49 percent for the risk free interest rate, 5
years for expected life, no volatility and no expected dividends were applied to
all grants.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
On November 12, 1999, the Company entered into a Series A Convertible
Preferred Stock Purchase Agreement to issue 3 million shares of convertible
preferred stock at $5.00 per share. The preferred stockholders have certain
registration and preemptive rights; as well as preferential rights upon
dissolution of the Company. In the event of a liquidation or dissolution of the
Company (as defined), the preferred stockholders are guaranteed to receive such
funds to allow them an internal rate of return of 35 percent annually from the
original date of issuance. Each preferred share is convertible into a share of
common stock if requested by the majority of the preferred stockholders or upon
a public offering at not less than $7.00 per share and which raises a minimum of
$25 million. The conversion ratio is subject to adjustment in certain
circumstances such as upon future sale of Company shares at a price below $5.00.
The preferred stockholders may request redemption at the initial purchase price
after November 12, 2003. See Note 2 for pro forma weighted average number of
common shares used to compute pro forma loss per common share.
9. CAPITAL STOCK
On April 9, 1998, the Company sold 426,316 shares of common stock to an
investor for $250,000.
On April 14, 1999, the Company sold 2,008,864 shares of common stock through
a private placement for $4,519,928. The Company sold 594,442 of these shares to
employees and directors of the Company. In August 1999, the Company sold 33,776
additional shares for $75,997.
In September and October of 1999, the Company sold 1,480,942 shares of
common stock in a private placement for net proceeds of $6,664,242. The Company
sold 602,444 of these shares to employees and directors of the Company. In
December 1999, the Company sold 66,665 shares of common stock to an existing
stockholder for net proceeds of $299,996.
On September 3, 1997, the Board of Directors authorized an increase to the
authorized number of common shares from 10,000 to 10 million and effected a
1,000-for-1 stock split of the Company's issued and outstanding shares. This
increase became effective March 31, 1998. On June 1, 1999, the Board of
Directors approved a 2-for-1 stock split, which became effective July 7, 1999.
The stock splits have been retroactively reflected in the accompanying
consolidated financial statements for all periods presented. On February 24,
1999, the Board of Directors approved an increase in the authorized common
shares to 50 million.
F-17
10. ACQUISITION
On September 28, 1999, the Company acquired certain assets and technology
from a subsidiary of Level 3 Communications Limited for $500,000. The
acquisition has been accounted for by the purchase method of accounting and,
accordingly, the results of operations of SatinNet Limited for the period from
September 28, 1999 are included in the accompanying consolidated financial
statements. In connection with this purchase, the Company recorded approximately
$449,000 of intangible assets which are being amortized over a five-year period.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on January 1,
1998:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Revenue..................................... $11,571 $13,600
Net loss.................................... $ 1,541 $11,058
Net loss per common share................... $ 0.18 $ 1.06
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
11. BUSINESS SEGMENTS
During 1997, 1998 and 1999, the Company had two business segments, network
services and traditional telecom services. The network services segment derives
revenues from the sale of Internet-based network services, including
connectivity and multi-point newsfeeds.
The traditional telecom services segment provides traditional switched based
wholesale long distance service, primarily to STAR Telecommunications, Inc., an
international long distance company.
The accounting policies of the segments are the same as those described in
the significant accounting policies, however, the Company evaluates performance
based on gross margin before depreciation and amortization expense. The Company
does not internally analyze these segments below revenue less direct operating
expenses, therefore selling, general and administrative expenses and
depreciation expense is not allocated to any specific segment. The Company has
no intercompany sales among the network services
F-18
11. BUSINESS SEGMENTS (CONTINUED)
and the traditional telecom services segments. All capital leases relate to the
network services segment. Reportable segment information for the years ended
December 31, 1997, 1998 and 1999 is as follows:
TRADITIONAL
NETWORK TELECOM UNALLOCATED
SERVICES SERVICES CORPORATE ASSETS TOTAL
----------- ----------- ---------------- -----------
December 31, 1997:
Revenue................................... $ 582,819 $1,176,330 $ -- $ 1,759,149
Gross margin before depreciation and
amortization............................ 124,926 628,395 -- 753,321
December 31, 1998:
Revenue................................... 4,114,934 7,294,757 -- 11,409,691
Gross margin before depreciation and
amortization............................ (1,674,316) 2,272,189 -- 597,873
Segment assets............................ 1,263,428 1,762,319 51,464 3,077,211
December 31, 1999:
Revenue................................... 10,789,476 2,684,751 -- 13,474,227
Gross margin before depreciation and
amortization............................ (495,100) 1,356,106 -- 861,006
Segment assets............................ 179,772 48,094,028 16,016,779 64,290,579
Information regarding the Company's domestic and foreign revenues are as
follows:
DOMESTIC FOREIGN TOTAL
---------- ---------- -----------
Fiscal 1997.............................................. $ 867,349 $ 891,800 $ 1,759,149
Fiscal 1998.............................................. 2,886,231 8,523,460 11,409,691
Fiscal 1999.............................................. 3,688,006 9,786,221 13,474,227
No individual foreign country represented more than 10 percent of revenue or
long-lived assets for any of the periods presented.
12. SUBSEQUENT EVENTS
The Company has entered into new leases for satellite transponder space and
related facilities under various agreements expiring through February 2003
resulting in aggregate lease payments of approximately $11.5 million.
Through February 11, 2000, the Company has granted an additional 221,500
stock options at $5.00 and 9,000 stock options at $8.00 per share. The estimated
compensation charge related to the option grants will be approximately
$5.7 million over a three to four-year period.
On January 26, 2000, the Board increased the authorized number of shares
available for grant under the 1998 Stock Option Plan to 4.6 million and
increased the authorized number of shares available for grant under the 1999
Director Stock Option Plan to 550,000. The Board also amended the option terms
of several executives to accelerate vesting with an extended exercise period
under specified circumstances such as a change in control. The amended 1998
Stock Option Plan provides that upon a change in control 50 percent of the
unvested options outstanding immediately prior to such change accelerate and
become fully vested, unless the employee is provided with replacement options.
The vesting periods were extended to three years for new options issued under
the 1999 Director Stock Option Plan and to four years for new
F-19
12. SUBSEQUENT EVENTS (CONTINUED)
options issued under the 1998 Stock Option Plan. The Board also approved to
increase the authorized number of common shares to 250 million and to adopt a
401(k) plan for the benefit of the Company's employees.
Effective February 1, 2000, the Company signed an employment agreement with
a new executive. The agreement provides for the continuation of salary in the
event of termination without cause. This executive was allowed to purchase
60,000 shares of common stock at $5.00 per share. The compensation charge
related to this stock purchase is estimated at $1.5 million.
On February , 2000, the Company's Board of Directors approved a to
stock split which has been retroactively reflected for all periods
presented.
F-20
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of InterPacket Networks, Inc. and
Subsidiary:
We have audited in accordance with generally accepted auditing standards the
consolidated financial statements of InterPacket Networks, Inc. and subsidiary
as of December 31, 1998 and 1999 and for the three years in the period ended
December 31, 1999, included in this Registration Statement on Form S-1, and have
issued our report thereon dated February 11, 2000. Our audits were made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The schedule of valuation and qualifying accounts is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 11, 2000
F-21
INTERPACKET NETWORKS, INC. AND SUBSIDIARY
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE
BEGINNING AT END OF
OF PERIOD PROVISION WRITE-OFF PERIOD
---------- ----------- --------- -----------
(IN THOUSANDS)
Allowance for doubtful accounts
Year ended December 31, 1997................. $ -- $ -- $ -- $ --
Year ended December 31, 1998................. $ -- $ 16,600 $ -- $ 16,600
Year ended December 31, 1999................. $ 16,600 $ 183,600 $ (60,000) $ 140,200
Deferred tax valuation allowance
Year ended December 31, 1997................. $ -- $ -- $ -- $ --
Year ended December 31, 1998................. $ -- $ (480,913) $ -- $ (480,913)
Year ended December 31, 1999................. $(480,913) $(3,403,106) $ -- $(3,884,019)
Receivable from related party
Year ended December 31, 1997................. $ -- $ -- $ -- $ --
Year ended December 31, 1998................. $ -- $ 63,400 $ -- $ 63,400
Year ended December 31, 1999................. $ 63,400 $ -- $ (63,400) $ --
F-22
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO OF INTERPACKET APPEARS HERE]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
JOINT LEAD MANAGERS AND BOOKRUNNERS
CHASE H&Q LEHMAN BROTHERS
CIBC WORLD PARTNERS
----------------
, 2000
---------------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is current only as of
the date of this prospectus.
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade in the securities in this offering, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) we expect to incur in connection with
our sale and distribution of the securities being registered. All of the amounts
shown are estimated except the registration fee of the SEC and the NASD filing
fee.
ITEM AMOUNT
- ---- --------
SEC registration fee........................................ $ 22,770
NASD filing fee............................................. 9,125
Blue sky fees and expenses.................................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
--------
Total..................................................... *
========
- ------------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our certificate of incorporation provides that our directors shall not be
personally liable to InterPacket or our stockholders for monetary damages for
any breach of fiduciary duty as a director, to the fullest extent permitted by
law, except to the extent such exemption from liability is not permitted under
the General Corporation Law of the State of Delaware (the "GCL"). Further, our
bylaws provide that we shall, to the maximum extent permitted by law, indemnify
our directors and officers and may indemnify our employees and other agents.
Subsection (a) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding provided that such director or officer acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, provided
that such director or officer had no cause to believe his or her conduct was
unlawful.
Subsection (b) of Section 145 of the GCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that such person acted in any of the capacities set forth
above, against expenses actually and reasonably incurred in connection with the
defense or settlement of such action or suit, provided that such director or
officer acted in good faith and in a manner reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
may be made in respect of any claim, issue or matter as to which such director
or officer shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which
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such action was brought shall determine that despite the adjudication of
liability such director or officer is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 of the GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
We have also entered into indemnification agreements with each of our
directors and officers. The indemnification agreements may require us, among
other things, to indemnify our directors and officers against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors' and
officers' insurance if available on reasonable terms.
Reference is also made to our Underwriting Agreement contained in
Exhibit 1.1 hereto, which indemnifies our directors and officers against certain
liabilities.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or persons controlling InterPacket pursuant to
the foregoing provisions, we have been informed that, in the opinion of the SEC,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1997, we have granted or issued and sold the following
unregistered securities:
(a) In June 1997, we issued and sold 1,684,000 shares of our common stock
to Peter S. Zimble for an aggregate purchase price of $70,000.
(b) In September 1997, we issued and sold 100,000 shares of our common stock
to Julie M. Spira for an aggregate purchase price of $5,000.
(c) In April 1998, we issued and sold a total of 426,316 shares of our
common stock to Joseph T. Arsenio and the Delaware Charter Guarantee &
Trust Co., as trustee for Joseph T. Arsenio, for an aggregate purchase
price of $250,000.
(d) In April 1999, we issued and sold a total of 2,008,864 shares of our
common stock to certain accredited investors for an aggregate purchase
price of $4,519,928.
(e) In August 1999, we issued and sold 33,776 shares of our common stock to
Joseph T. Arsenio for an aggregate purchase price of $75,997.
(f) In September 1999, we issued and sold a total of 1,480,942 shares of
our common stock to certain accredited investors for an aggregate
purchase price of $6,664,242.
(g) In November 1999, we issued and sold a total of 3,000,000 shares of our
Series A Preferred Stock to certain accredited investors for an aggregate
purchase price of $15,000,000. The preferred stock will convert
automatically into 3,000,000 shares of common stock once this
Registration Statement is declared effective.
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(h) In December 1999, we issued and sold a total of 66,665 shares of our
shares of our common stock to Joseph T. Arsenio and Delaware Charter
Guarantee & Trust Co., as trustee for Joseph T. Arsenio, and as trustee
for Meredith M. Arsenio, for an aggregate purchase price of $299,996.
(i) In February 2000, we issued and sold a total of 60,000 shares of our
common stock to Timothy F. Sylvester for a purchase price of $300,000.
(j) Through February 15, 2000, we have granted options to purchase an
aggregate of 3,292,750 shares of our common stock, at a weighted average
exercise price of $3.65, to directors, officers and employees pursuant to
our 1998 Stock Option Plan and our 1999 Director Stock Option Plan.
The issuances of the securities in the transactions above were exempt from
registration under the Securities Act pursuant to (1) Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering, where the purchasers represented their
intention to acquire the securities for investment only and not with a view to
distribution and received or had access to adequate information about
InterPacket or (2) Rule 701 promulgated under the Securities Act as transactions
pursuant to a compensatory benefit plan or a written contract relating to
compensation. No underwriting discounts or commissions were paid in connection
with these sales, appropriate legends were affixed to the stock certificates
issued in these transactions and there was no general solicitation or
advertising.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
1.1 Form of Underwriting Agreement.+
3.1 Certificate of Incorporation, as currently in effect.
3.2 Bylaws, as currently in effect.
5.1 Opinion of Riordan & McKinzie, a Professional Law
Corporation.+
9.1 Voting Agreement and Irrevocable Proxy dated as of November
12, 1999 between InterPacket Networks, Inc. and Jeffrey
Sudikoff.
10.1 Amended and Restated 1998 Stock Option Plan of InterPacket
Networks, Inc.
10.2 Form of Incentive Stock Option Agreement under the Amended
and Restated 1998 Stock Option Plan of InterPacket Networks,
Inc.
10.3 Form of Nonqualified Stock Option Agreement under the
Amended and Restated 1998 Stock Option Plan of InterPacket
Networks, Inc.
10.4 Amended and Restated 1999 Director Stock Option Plan of
InterPacket Networks, Inc.
10.5 Form of Nonqualified Stock Option Agreement under the
Amended and Restated 1999 Director Stock Option Plan of
InterPacket Networks, Inc.
10.6 Employment Agreement dated as of July 1, 1999 by and between
Jonathan L. Gans and InterPacket Networks, Inc.
10.7 Reserved for future use.
10.8 Reserved for future use.
10.9 Reserved for future use.
10.10 Employment Agreement dated as of January 1, 1999 by and
between Julie M. Spira and InterPacket Networks, Inc.
10.11 Employment Agreement dated as of February 1, 2000 by and
between Timothy F. Sylvester and InterPacket Networks, Inc.
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EXHIBIT
NUMBER DESCRIPTION
- --------------------- -----------
10.12 Secured Promissory Note dated as of February 1, 2000 by
Timothy F. Sylvester in favor of InterPacket Networks, Inc.
10.13 Series A Convertible Preferred Stock Agreement dated as of
November 12, 1999 among InterPacket Networks, Inc. and each
of the entities listed on the Schedule of Purchasers
attached thereto as Exhibit A.
10.14 Form of Indemnification Agreement between InterPacket
Networks, Inc. and each director and executive officer.
10.15 Standard Office Lease--Gross dated as of January 1, 1999 by
and between 1901 Main Street Partners, LLC and InterPacket
Networks, Inc.
10.16 Contract dated as of September 1, 1999 by and between
Satelites Mexicanos, S.A. DE C.V. and InterPacket Networks,
Inc.++
10.17 Reserved for future use.
10.18 Investor Rights Agreement dated as of November 12, 1999
among InterPacket Networks, Inc. and certain stockholders.
21 Subsidiaries.
23.1 Consent of Riordan & McKinzie (included in Exhibit 5.1).+
23.2 Consent of Arthur Andersen LLP.
24 Powers of Attorney, incorporated by reference from the
signature pages to this registration statement.
27 Financial Data Schedule.
- ------------------------
+ To be filed by amendment.
++ Certain portions of this exhibit have been omitted from the copies filed as
part of the Registration Statement hereof and are the subject of a request
for confidential treatment with respect thereto.
(B) FINANCIAL STATEMENT SCHEDULES
The following schedule is filed as part of this Registration Statement:
Schedule II--InterPacket Networks, Inc.--Valuation and Qualifying Accounts.
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of any schedule, or because
the information required is included in the financial statements or the notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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
the registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica, State of
California, on the 18th day of February 2000.
INTERPACKET NETWORKS, INC.
By: /s/ JONATHAN L. GANS
-----------------------------------------
Jonathan L. Gans
CHIEF EXECUTIVE OFFICER AND PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jonathan L. Gans and Allen J. Sciarillo, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all such capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, as well as any
registration statement (or amendment thereto) related to this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act, and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer,
/s/ JONATHAN L. GANS President and Director
------------------------------------------- (Principal Executive February 18, 2000
Jonathan L. Gans Officer)
/s/ ALLEN J. SCIARILLO Chief Financial Officer
------------------------------------------- (Principal Financial and February 18, 2000
Allen J. Sciarillo Chief Accounting Officer)
/s/ PETER HIRSHBERG
------------------------------------------- Chairman of the Board February 18, 2000
Peter Hirshberg
/s/ JEFFREY C. BARBAKOW
------------------------------------------- Director February 18, 2000
Jeffrey C. Barbakow
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SIGNATURE TITLE DATE
--------- ----- ----
/s/ BRENT COHEN
------------------------------------------- Director February 18, 2000
Brent Cohen
/s/ JAMES E. KOLSRUD
------------------------------------------- Director February 18, 2000
James E. Kolsrud
------------------------------------------- Director February , 2000
Lawrence D. Lenihan, Jr.
/s/ NORMAN J. PATTIZ
------------------------------------------- Director February 18, 2000
Norman J. Pattiz
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