Peer 1 Network Enterprises Inc.

Peer 1 Network Enterprises Inc. is an Internet infrastructure solutions company that provides full services to handle the needs of customers requiring 100% uptime for their online presence. Peer 1 has traditionally provided co-location and bandwidth services while recent acquisitions facilitated the company’s entry into the dedicated server segment. Since its inception in 1999, the company has grown to include data centres and network points of presence (POPs) in 16 major cities across North America and Europe, all connected by Peer 1’s Internet Protocol (IP) network. The company serves a variety of customers including hosting providers, online gaming companies, Internet phone (VoIP) organizations and many small and medium sized businesses.

Peer 1 has built a series of dedicated links between all of its facilities using multiple high speed connections. Hundreds of peering relationships and traffic exchange agreements have been established with other networks which management believes are fundamental to the company’s strategy. Peering is a relationship between two or more networks of any size in which the networks create a direct link and agree to forward each other’s information packets directly across this link instead of using the standard Internet backbone. This approach has two main advantages, namely, it reduces the latency between the two networks and it avoids additional costs associated with a third party network.

Co-location and Bandwidth Segment

The co-location service provided by Peer 1 involves the physical locating of a customer’s switching gear or servers in one of the dedicated facilities operated by the company which is designed to provide the infrastructure necessary for the functioning of that equipment. Included in the required infrastructure would be such resources as a secured cage or cabinet, regulated power, emergency backup power, dedicated Internet connection, regulated air temperature and security.

The company’s co-location business involves establishing a point of presence in a new market by colocating in facilities owned by other suppliers, in order to gauge market demand, prior to making a decision to open up a new co-location facility. When a market is deemed to be viable, the company identifies suitable space for longterm lease.

Co-location revenues increased from $1.5 million in the first quarter of fiscal 2005 to $2.3 million in the first quarter of fiscal 2006. Management attributed this improvement to the company’s customer base which rose from 689 as at September 30, 2004, to 896 by the end of September 2005. Associated with the increase was a 33% enhancement in the number of units sold each month.

Peer 1’s bandwidth service is provided by way of an expandable network which is connected to multiple globallybased providers in Canada, the U.S. and the UK and which utilizes hundreds of peering partners to ensure continuous Internet connectivity, greater route diversity and ultimately, enhanced Internet performance. Traffic generated from and received by the company’s customers is charged for on a per unit basis with the exception of those who have committed to minimum usage levels. Bandwidth revenues increased by 16% to $2.3 million for the period ended September 30, 2005, compared to the first quarter of fiscal 2005 and traffic increased by 28% over the quarter ended June 30, 2005.

Dedicated Servers

In addition to its bandwidth and co-location business, Peer 1 offers through its subsidiaries, ServerBeach Ltd. and Peer 1 Dedicated Hosting, self-managed, competitively priced dedicated server solutions to small and mid-size businesses, and technology hobbyists. ServerBeach’s assets, contracts and business including a data centre located in San Antonio, Texas and over 4,200 dedicated servers were acquired in 2004 for US$7.5 million. The net effect of this highly accretive acquisition was expected to increase Peer 1’s monthly recurring revenues by 57% to over $2 million. The company further increased its capacity in providing dedicated server solutions with the recently completed acquisition of Interland Inc., a leading provider of websites and online services for small and medium sized businesses.

The approach for Peer 1’s ServerBeach brand of unmanaged dedicated servers is to provide servers built with quality parts at the lowest possible cost. By using automated provisioning and billing processes and leveraging the existing network, the company has been able to maintain a low cost structure.

Revenues in the first quarter of fiscal 2006 attributable to the dedicated server business amounted to $6.5 million up from $2.9 million in the previous quarter. There was no revenue from dedicated servers during the first quarter of fiscal 2005. As at September 30, 2005, Peer 1 had 13,091 servers compared to 5,594 as at June 30, 2005.

Recent Developments

During the first quarter ended September 30, 2005, the company completed a debt reorganization and financing and a significant acquisition. Also during the quarter, a 25,000 square foot data centre facility was established in Los Angeles, California.

The refinancing of the company was completed on September 2, 2005, and resulted in Peer 1 raising $43.8 million from a combination of debt, issuance of preferred shares and conversion of $7 million in existing shareholder liabilities. Also during September 2005, Peer 1 completed the purchase of the dedicated server assets of Interland for US$14 million which included data centres in Atlanta, Georgia, Fremont, California and Miami, Florida, totaling over 115,000 square feet and approximately 8,300 dedicated servers. The acquisition was financed with partial proceeds from the company’s debt reorganization.

In early 2006, Peer 1 was selected by Spotbowl to host its live polling of Super Bowl commercials during and after Super Bowl XL. In addition, the company was recently chosen by the Canadian Football League as its Internet infrastructure provider.