<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-73065
[LOGO OF NORTHPOINT] 15,000,000 Shares
NorthPoint Communications Group, Inc.
Common Stock
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This is an initial public offering of shares of common stock of NorthPoint
Communications Group, Inc. Our common stock has been approved for quotation on
the Nasdaq National Market under the symbol "NPNT".
At our request, the underwriters have reserved at the initial public offering
price up to 2,083,333 shares of our common stock for sale to Microsoft
Corporation and Tandy Corporation.
See "Risk Factors" on page 7 to read about certain factors you should
consider before buying shares of the common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Initial public offering price........................ $24.00 $360,000,000
Underwriting discount................................ $ 1.68 $ 25,200,000
Proceeds, before expenses, to NorthPoint............. $22.32 $334,800,000
</TABLE>
If Microsoft and Tandy purchase the shares reserved for them, the
underwriting discount will be reduced and the proceeds to NorthPoint will
increase by an amount equal to $1.68 per share with respect to the shares
purchased by them, or an aggregate of approximately $3,500,000. See
"Underwriting" on page U-1.
The underwriters may, under certain circumstances, purchase up to an
additional 2,250,000 shares from NorthPoint at the initial public offering
price less the underwriting discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on May 10, 1999.
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Credit Suisse First Boston
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Prospectus dated May 5, 1999.
<PAGE>
[MAP OF UNITED STATES SHOWING NORTHPOINT DSL NATIONAL COVERAGE]
. Currently in 17 Markets.
. Expanding to 28 Markets by the end of 1999.
Our planned coverage will allow us to reach approximately four million
businesses and 30 million households, including more than 80% of the small- and
medium-sized businesses in our 28 markets.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus, including "Risk Factors" beginning on
page 7, carefully.
Overview of Our Business
We are a national provider of high speed, local data network services. Our
networks use digital subscriber line, or DSL, technology to enable data
transport over telephone company copper lines at guaranteed speeds up to 25
times faster than common dial-up modems. We market our network and data
transport services to Internet service providers, long-distance and local
telephone companies and data service providers, whom we call network service
providers. Our customers can use our fast, secure and reliable data networks to
provide continuously connected, economical Internet access and other data-
intensive applications to end users. These end users are typically small- and
medium-sized businesses with up to 500 employees, people who work in home
offices, and telecommuters.
We are currently providing services in 17 metropolitan areas in the United
States and intend to offer service in a total of 28 metropolitan areas by the
end of this year. We have been and expect to be the first, or one of the first,
to offer DSL services in these markets. Our networks consist principally of
digital communications equipment that we own and install in telephone company
offices known as "central offices" and existing copper telephone lines that we
lease to connect our equipment with end users' premises. We will initially
install our equipment in the central offices with the highest density of small-
and medium-sized businesses in our 28 markets. We have already secured and
purchased space in over 745 of those central offices and intend to expand the
coverage of our networks in these markets over time by installing equipment in
additional central offices.
Upon completion of our planned expansion, our networks will be able to reach
approximately four million businesses and 30 million households, including more
than 80% of the small- and medium-sized businesses in our 28 markets. We have
already obtained required regulatory approvals, including competitive local
exchange carrier authorizations, to offer services in each of those markets.
We are currently providing or have entered into agreements to provide our
services to more than 110 network service providers and have connected over
3,600 of their end users to our networks.
We have entered into strategic and commercial relationships with Microsoft,
Tandy, @Home, Intel, Verio, Cable & Wireless, Frontier Corporation, Concentric
Network, ICG Communications and Enron Communications, among others. Microsoft
and Tandy have expressed to us their intention to purchase up to $30 million
and $20 million of our common stock in this offering, although they are not
bound to do so. Other strategic partners have invested $48.4 million in our
company.
NorthPoint was founded in May 1997 by six former MFS/WorldCom executives who
developed and implemented the first commercial DSL service.
Our Solutions Meet The Growing Demand For Data Transport
Data-intensive computing applications such as Internet access are becoming
increasingly commonplace. Forrester Research projects that the total market for
data networking services and Internet access will grow from $6.2 billion in
1997 to approximately $49.7 billion by 2002, of which approximately $27.9
billion will be generated from services to businesses. We believe that local
data transport solutions commonly used today by our target end users to connect
to the Internet and for other data applications are inadequate because they are
either too slow or too expensive, or both.
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Our local networks provide end users with:
. a range of fast data transport options, each of which has a combination
of price and performance characteristics superior to traditional options;
. the ability to upgrade data transmission speed without adding hardware;
. dedicated and continuous connections to the Internet or other data
services;
. reliable performance over our continuously monitored network; and
. secure transport of sensitive business data.
Our networks and services offer a number of advantages to network service
providers:
. access to end users in a wide geographic area through a single point of
interconnection in each market, enabling accelerated market entry with
minimal capital expenditures;
. an electronic interface to our national pre-qualification, order entry,
customer support, provisioning, accounting and billing systems;
. assured data transport speeds and service level guarantees; and
. monitoring of our entire network from our control center.
Our Competitive Strengths
. We Are Rapidly Expanding to 28 Markets. We have initially targeted those
central offices in our 28 metropolitan areas with the highest density of
small- and medium-sized businesses. By focusing on these dense business
districts, we believe we can secure scarce central office space, launch
services in new markets more rapidly, maximize the economic return from
our capital expenditures and enable our customers to address a
significant portion of their target end users in each geographic market
quickly. We are currently operational in more than 300 central offices.
. Our Networks Are Designed for Business Needs. Our DSL equipment is well-
suited for business applications because it provides fast data
transmission at symmetrical speeds to and from the end user. As an end
user's needs evolve, we can remotely upgrade the speed of the connection
with no additional capital cost. Business end users expect their
connections to be reliable and their data to be secure. Our networks
provide these features.
. Our Network Architecture Uses Capital Efficiently. In deploying our
networks, we do not rebuild elements such as the copper wire
infrastructure that we can lease inexpensively. Instead, we purchase only
the equipment that converts these elements into sophisticated data
networks. We are also able to achieve substantial cost savings because
our networks in each metropolitan area are based upon a common blueprint.
A significant portion of our capital expenditures are also "success-
based" because we incur them only as we add customers or end users. We
can extend the coverage of our network within our markets as demand
warrants by adding central offices with relatively modest incremental
capital.
. Selling to Network Service Providers Enables Rapid Utilization of Our
Network and Growth. There are thousands of network service providers who
are potential NorthPoint customers. Many of these network service
providers have substantial sales and marketing organizations. We expect
that our customers will be able to sell our services to more end users
than we could on our own, helping us to defray our fixed costs more
rapidly.
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The Offering
<TABLE>
<C> <S>
Common stock offered............. 15,000,000 shares
Common stock to be outstanding
after the offering.............. 121,041,144 shares
Use of proceeds.................. We will use the net proceeds from the
offering to continue building our networks
and for working capital and general
corporate purposes. See "Use of Proceeds."
Dividend Policy.................. We intend to retain all future earnings to
fund the development and growth of our
business. Therefore, at this time we do not
anticipate paying cash dividends. See
"Dividend Policy."
Nasdaq National Market symbol.... NPNT
</TABLE>
The shares of common stock to be outstanding after the offering are stated as
of April 19, 1999 and include shares of common stock and Class B common stock
to be issued upon automatic conversion of preferred stock and convertible debt
upon completion of this offering. The shares of common stock outstanding
exclude:
. 28,125,000 shares of common stock reserved for issuance under our stock
option plans, of which 19,082,107 shares at a weighted average exercise
price of $3.19 per share were subject to outstanding options;
. 2,250,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 5,399,542 shares of common stock and Class B common stock issuable upon
exercise of outstanding and contingent warrants at a weighted average
exercise price of $7.24 per share.
Unless we indicate otherwise, the information in this prospectus assumes the
underwriters will not exercise their over-allotment option. Unless we indicate
otherwise, we have adjusted all information in this prospectus to reflect the
completion of stock splits.
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NorthPoint is a Delaware corporation. The address of our principal executive
office is 222 Sutter Street, San Francisco, California, 94108, and our
telephone number is (415) 403-4003. NorthPoint maintains a corporate website at
http://www.northpointcom.com. The contents of our website are not part of this
prospectus.
NorthPoint Communications is our servicemark. This prospectus contains other
product names, trade names, trademarks and servicemarks of NorthPoint and of
other organizations.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(dollars in thousands, except share and per share data)
You should read the following consolidated summary financial data together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and the related notes
included elsewhere in this prospectus.
Our revenues consist entirely of service revenues because we do not currently
sell end-user modems. EBITDA consists of net loss excluding net interest,
taxes, depreciation and amortization. We have provided EBITDA because it is a
measure of financial performance commonly used in the telecommunications
industry, but other companies may calculate it differently from us. We have
presented EBITDA to enhance your understanding of our operating results. You
should not construe it as an alternative to operating income as an indicator of
our operating performance or as an alternative to cash flows from operating
activities as a measure of liquidity.
<TABLE>
<CAPTION>
Inception to Year Ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues.............................................. $ -- $ 931
Income (loss) from operations......................... (1,630) (25,362)
Net income (loss)..................................... (1,440) (28,847)
Other Data:
EBITDA................................................ $(1,430) $(21,379)
Capital expenditures.................................. 701 41,550
Consolidated Cash Flow Data:
Provided by (used in) operating activities............ $(1,094) $(11,363)
Provided by (used in) investing activities............ (701) (41,550)
Provided by (used in) financing activities............ 11,243 54,420
</TABLE>
The pro forma balance sheet information below reflects:
. the issuance of convertible debt and equity securities in 1999; and
. the closing of our secured credit facility in April 1999, our initial
drawdown of $55,000,000 under the facility, and the repayment of certain
other debt.
The pro forma as adjusted balance sheet information reflects all of these
adjustments and:
. the receipt of estimated net proceeds of $336,950,000 from this offering;
. the conversion upon the completion of this offering of all outstanding
preferred stock and convertible debt; and
. our anticipated issuance to Microsoft of a warrant to purchase Class B
common stock.
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------
Pro Pro Forma
Actual Forma as Adjusted
------- -------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $10,956 $118,844 $455,794
Property and equipment, net..................... 46,078 46,078 46,078
Total assets.................................... 60,502 168,390 505,340
Long-term obligations, including current
portion........................................ 3,565 64,165 58,565
Total stockholders' equity (deficit)............ (6,534) 89,176 431,726
</TABLE>
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider the following factors carefully before deciding to purchase shares of
common stock.
Because We Have a Limited Operating History, It Is Difficult to Evaluate Our
Business
We were formed in May 1997 and began offering commercial services in the San
Francisco Bay Area in March 1998. Because of our limited operating history, you
have limited operating and financial data about our company upon which to base
an evaluation of our performance and an investment in our common stock.
You should consider the risks, expenses and difficulties we may encounter,
including those frequently encountered by early stage companies in new and
rapidly evolving markets. As a result, we may be unable to:
. develop our operational support systems and other information technology
systems;
. obtain central office space and suitable copper wire loops;
. expand our customer base;
. raise additional capital;
. maintain adequate control of our expenses;
. attract and retain qualified personnel;
. enter into and implement interconnection agreements with traditional
telephone companies, some of which are our competitors or potential
competitors;
. expand the geographic coverage of our network;
. obtain governmental authorizations to operate as a competitive
telecommunications company in new markets;
. continue to upgrade our technologies and enhance our product features;
and
. respond to technological changes and competitive market conditions.
We Expect Our Losses and Negative Cash Flow to Continue
To date, we have incurred substantial operating losses, net losses and
negative cash flow on both an annual and quarterly basis. For the year ended
December 31, 1998, we had operating losses of approximately $25,361,680, net
losses of $28,846,706, and negative cash flow from operating and investing
activities of $52,913,000. We cannot assure you that we will ever achieve
profitability or generate positive cash flow.
We expect our operating expenses will increase significantly, especially in
the areas of operations, sales and marketing, as we develop and expand our
business and, as a result, we will need to increase our revenue to become
profitable. If our revenue does not grow as expected or increases in our
expenses are not in line with our plans, there could be a material adverse
effect on our business, prospects, financial condition and results of
operations.
We Cannot Predict Whether We Will be Successful Because Our Business Model is
Unproven and Our Market Is Developing
Our business strategy is unproven. To be successful, we must, among other
things, develop and market data networks and services that are widely accepted
by our customers and their end users at
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<PAGE>
prices that will yield a profit. Because our business and the overall market
for high speed data communications services are in the early stages of
development, we are unsure whether or when our DSL services will achieve
commercial acceptance.
Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing Levels
Could Impair Our Ability to Achieve Profitability or Positive Cash Flow
Prices for digital communication services have fallen historically, a trend
we expect will continue. Accordingly, we cannot predict to what extent we may
need to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our Quarterly Operating Results Are Likely to Fluctuate Significantly, Causing
Our Stock Price to be Volatile or to Decline
We cannot accurately forecast our revenue because of our limited operating
history and the emerging nature of the data communications industry in our
markets. Our revenue could fall short of our expectations if we experience
delays or cancellations by even a small number of our customers. A number of
factors are likely to cause fluctuations in our operating results, including:
. the rate at which we are able to attract and retain customers, and
whether larger customers fulfill their volume commitments to us;
. the ability of our customers to generate significant end user demand;
. the timing and willingness of traditional telephone companies to provide
and construct the required central office facilities;
. the timing and willingness of traditional telephone companies to provide
suitable copper wire loops at favorable prices;
. the prices our customers and, in turn, their end users pay for our
services;
. availability of financing to continue to fund our expansion;
. our ability to deploy our services on a timely basis to satisfy end user
demand;
. the mix of line orders between lower priced and higher priced lines;
. the amount and timing of capital expenditures and operating costs as we
expand our network;
. the announcement or introduction of new or enhanced services by our
competitors; and
. technical difficulties or network downtime.
As a result, it is likely that in some future quarters our operating results
will be below the expectations of securities analysts and investors. If this
happens, the trading price of our common stock would likely be materially
adversely affected.
A Limited Number of Customers Account for a High Percentage of Our Revenue and
the Loss of a Significant Customer Could Harm Our Business
We currently provide or have agreements to provide data transport solutions
to more than 110 network service providers. We believe that for the quarter
ended March 31, 1999, our two largest customers will account for approximately
40% of our revenue. We anticipate that, as we expand our
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business, we will continue to rely upon a limited number of customers for a
high percentage of our revenue and end-user lines. As a result of this
concentration of our customer base, a loss of or decrease in business from one
or more of our customers could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Similarly, if our customers are unsuccessful in competing for end users in
their own intensely competitive markets or experience other financial or
operating difficulties, our business, prospects, financial condition and
results of operations would be materially adversely affected.
Many of our agreements with our customers are non-exclusive, and many of our
customers are also customers of, or have invested in, our competitors. To the
extent our significant customers strengthen their commercial relationships with
our competitors, our business would be materially adversely affected.
We May Not Be Able to Continue to Grow Our Business If We Do Not Obtain
Significant Additional Funds By the Middle of 2000
We believe our current capital resources, together with the proceeds of this
offering, investments from our strategic partners and our $110,000,000 secured
credit facility, will be sufficient for our funding and working capital
requirements and for the deployment and operation of our networks in targeted
markets through the middle of 2000. We will need significant additional funds
beyond then. We expect that the actual amount and timing of our future capital
requirements will depend upon the demand for our services and regulatory,
technological and competitive developments, including additional market
developments and new opportunities, in our industry. We may seek additional
financing earlier than the middle of 2000 if:
. we alter the schedule, targets or scope of our network rollout plan;
. our plans or projections change or prove to be inaccurate;
. we acquire other companies or businesses; or
. market conditions allow us to raise public or privately financed capital
on attractive terms.
We may be unsuccessful in raising sufficient additional capital at all or on
terms that we consider acceptable. If we are unable to obtain adequate funds on
acceptable terms, our ability to deploy and operate our networks, fund our
expansion or respond to competitive pressures would be significantly impaired.
Such limitation could have a material adverse effect on our business,
prospects, financial condition or results of operations.
Our Business Activities and Our Ability to Raise Additional Funds Are Limited
by Covenants Contained in Our Financing Agreements
Our debt agreements and other financing agreements contain and will contain
restrictions on our activities and financial covenants with which we will be
required to comply. If we fail to comply with these requirements, we would be
in default and our obligations could be declared immediately due and payable.
We may be unable to make such required payments, or to raise sufficient funds
from other sources.
In addition, the terms of proposed new indebtedness or other funding may not
be permitted by the terms of our current financing agreements. This may impair
our ability to develop our business. If we fail to raise sufficient funds, we
may be required to modify, delay or abandon some of our expansion plans, which
could have a material adverse effect on our business, prospects, financial
condition and results of operations.
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We Need to Make Capital Expenditures, and the Amounts, Timing and Returns are
Uncertain
In 1999, we will have to make significant capital expenditures estimated at
$130,000,000 to $160,000,000 to develop our business and deploy our services
and systems. The amount and timing of these expenditures are uncertain and will
depend upon our ability to execute our plans in a timely and cost-effective
manner. We will need to increase our revenue in order to earn a return from our
capital expenditures. If our revenue does not grow as expected, or capital
expenditures exceed our estimates, there could be a material adverse effect on
our business, prospects, financial condition and results of operations.
Our Failure to Manage Our Growth Effectively Could Impair Our Business
If we are successful in implementing our business plan, our operations will
expand rapidly. This rapid expansion could place a significant strain on our
management, financial and other resources. Our ability to manage future growth,
if it occurs, will depend upon our ability to:
. control costs;
. maintain regulatory compliance;
. implement and significantly expand our financial and operating systems;
. maintain our operations support systems; and
. expand, train and manage our employee base.
We may be unable to do these things successfully. In addition, we may not
successfully obtain, integrate and use our employees and management, operating
and financial resources. Our business, prospects, financial condition and
results of operations will be materially adversely affected if we are unable to
manage our growth effectively.
The Data Communications Industry is Undergoing Rapid Technological Changes and
New Technologies May Be Superior to the Technology We Use
The data communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology,
which does not presently have widely accepted standards, and alternative
technologies for providing high speed data communications such as cable modem
technology. As a consequence:
. we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology;
. our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
. we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our products and
technologies.
If we fail to adapt successfully to technological changes or obsolescence or
fail to obtain access to important technologies, our business, prospects,
financial condition and results of operations could be materially adversely
affected.
Our Success in Attracting and Retaining Customers Significantly Depends on Our
Ability to Obtain Central Office Space From Traditional Telephone Companies
We believe the growth and success of our business will depend upon securing
physical central office space for our equipment in the central offices of
traditional telephone companies in our target markets. We have experienced
initial rejections of our applications to obtain space in some central
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offices. We believe we will continue to receive rejections of requested
physical central office space as we expand our existing and planned networks.
Although to date a majority of our applications to obtain physical central
office space that were initially rejected have subsequently been accepted, we
cannot assure you that we will be successful in reversing the pending
rejections or any other rejected applications for space in desired central
offices. Nor can we predict the extent of these rejections or their impact on
our ability to provide service in our target markets. The rejection of our
applications for central office space has in the past and could in the future
result in delays and increased costs as we expand our services in our target
markets. This may materially adversely affect our business, prospects,
financial condition and results of operations.
As we grow, we may be unable to secure central office space on a timely basis
or at all. In some cases, although physical central office space is available,
traditional telephone companies have claimed that they must refurbish space to
make it suitable for our equipment--for example, by adding separate entrances,
removing asbestos or obsolete machinery, or increasing power supply and air
conditioning--which in some cases has made the cost to obtain that physical
central office space prohibitively expensive. The FCC recently adopted new
rules designed to make it easier and less expensive for competitive
telecommunications companies to obtain central office space and to require
traditional telephone companies to provide them with alternative arrangements
for obtaining central office space. We cannot be certain of how effective these
rules will be or whether our competitors will benefit to a greater extent from
these rules than we will. We expect physical central office space to become
increasingly scarce due to increasing demand from a growing number of
competitive telecommunications companies.
Even when space is available, we may face delays ranging from four months to
more than a year after we place an order before space for our equipment is made
available. If our applications for physical central office space are rejected,
or the costs or delays associated with obtaining central office space become
too expensive, our expansion plans could be adversely affected, which could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
Broad service availability is also important to our customers and potential
customers that want to provide Internet access or other data services on a
national or regional basis. Our inability to obtain physical central office
space in a timely manner could have a material adverse effect on our ability to
attract and retain customers.
Any disputes with traditional telephone companies over the types of equipment
we seek to install in the central office space could also delay our
installation and even impair our ability to provide service in the manner we
deem appropriate. These delays or refusals could have a material adverse effect
on our business, prospects, financial condition and results of operations.
Our Success Depends on Interconnection Agreements with Traditional Telephone
Companies in Each of Our Markets
The success of our strategy depends on our ability to enter into and renew
interconnection agreements with traditional telephone companies in each of our
target markets on a timely basis. Delays in obtaining additional
interconnection agreements would postpone our entry into a market, which could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
Interconnection agreements have limited terms of two to three years and we
cannot assure you that existing or new agreements will be extended or
negotiated on terms favorable to us. Interconnection agreements are also
subject to state commission, FCC and judicial oversight. These government
bodies may modify the terms or prices of our interconnection agreements in ways
that adversely affect our business, prospects, financial condition and results
of operations.
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Our Business Could Suffer if High Quality Copper Lines Are Not Available or
Cost Us More Than We Expect
We significantly depend on the quality of the copper lines and the
traditional telephone companies' maintenance of such lines. We cannot assure
you that we will be able to obtain the copper lines and the services we require
from the traditional telephone companies at quality levels, prices, terms and
conditions satisfactory to us. Our failure to do so would have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Under federal law, traditional telephone companies have an obligation to
negotiate with us in good faith to enter into interconnection agreements,
including agreements on the price at which we can obtain suitable lines from
these telephone companies. If no agreement can be reached, either side may
petition the applicable state commission to arbitrate remaining disagreements.
These arbitration proceedings can last up to nine months. Moreover, the state
commission must approve any interconnection agreement resulting from
negotiation or arbitration, and any party may appeal an adverse decision by the
state commission to federal district court. The potential cost in resources and
delay from this process could harm our ability to compete in certain markets,
and there is no guarantee that a state commission would resolve disputes,
including pricing disputes, regarding our access to suitable lines in our
favor. Moreover, the FCC rules governing pricing standards for access to the
networks of the traditional telephone companies are currently being challenged
in federal court. If the courts overturn the FCC's pricing rules, the FCC may
adopt a new pricing methodology that would require us to pay a higher price to
traditional telephone companies for access to suitable lines. This could have a
detrimental effect on our business.
We have not yet established a history of ordering and obtaining the
provisioning and repair of very large volumes of lines from any traditional
telephone company. We also depend on cooperation from traditional telephone
companies for repair of transmission facilities. The traditional telephone
companies in turn rely significantly on unionized labor. Labor-related issues
and actions on the part of the traditional telephone companies have in the
past, and may in the future, adversely affect traditional telephone companies'
provision of services and network components that we order.
Our dependence on the traditional telephone companies has caused and could
continue to cause us to encounter delays in establishing our networks,
provisioning lines and upgrading our services. These delays could adversely
affect our relationships with our customers, harm our reputation or could
otherwise have a material adverse effect on our business, prospects, financial
condition and results of operations.
We Depend on Market Acceptance for DSL-Based Services
The market for small- and medium-sized business, telecommuter and residential
Internet access is in the early stages of development. Because we offer
services to a new and evolving market and because current and future
competitors are likely to introduce competing services, it is difficult for us
to predict the rate at which these markets will grow. Various providers of
high-speed digital communications services are testing products from various
suppliers for various applications, and it is unclear if DSL will offer the
same or more attractive price-performance characteristics. If the markets for
our services fail to develop, grow more slowly than anticipated or become
saturated with competitors, our business, prospects, financial condition and
results of operations could be materially adversely affected.
We Depend on Our Billing, Customer Service and Information Support Systems,
Which Need Further Development
Sophisticated information and processing systems are vital to our growth and
ability to monitor costs, bill customers, process customer orders and achieve
operating efficiencies. Our plans for the
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development and implementation of our operations support systems rely, for the
most part, on acquiring products and services offered by third-party vendors
and integrating those products and services in-house to produce efficient
operational solutions. However, we may not successfully identify all of our
information and processing needs or implement these systems on a timely basis
or at all, and these systems may not perform as expected.
In addition, our right to use these systems is dependent upon license
agreements with third-party vendors. Some of those agreements may be cancelable
by the vendor and the cancellation or nonrenewal of these agreements may have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Similar issues are applicable to the operations support systems and other
systems of our customers, and to the interface between our systems and those of
our customers. Therefore, failures at our customers could also have a material
adverse effect on our business, prospects, financial condition and results of
operations.
If We Do Not Adequately Address Year 2000 Issues, We May Incur Significant
Costs and Our Business Could Suffer
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result, our
computer programs that have date-sensitive software and software of companies
into which our network is interconnected may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities. If the systems of other companies on
whose services we depend or with whom our systems interconnect are not year
2000 compliant, it could have a material adverse effect on our business,
prospects, financial condition and results of operations. The year 2000 issue
is discussed at greater length in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of Year 2000 Issue" at
page 34.
We May Be Unable to Expand Our Network Services Effectively and Provide High
Performance to a Substantial Number of End Users
Due to the limited deployment of our services, the ability of our DSL network
to connect and manage a substantial number of end users at high transmission
speeds is still unknown. While peak digital data transmission speeds across our
DSL network to and from the central office and the end user can exceed 1.5
megabits per second, the actual data transmission speeds over our network could
be significantly slower due to:
. the type of DSL technology deployed;
. the distance an end user is located from a central office;
. the configuration of the telecommunications line being used;
. the existence of and number of data transmission impediments on the
telephone company copper lines;
. the gauge of the copper lines; and
. the presence and severity of interfering transmissions on nearby lines.
For example, we are not certain whether we can successfully deploy higher DSL
speeds through digital loop carrier systems which, because they connect copper
lines to a fiber link, currently limit DSL service to a maximum speed of 144
kilobits per second.
Because we rely on traditional telephone companies to overcome technical
limitations associated with loop carrier systems, we cannot assure you that we
will be able to successfully deploy high
13
<PAGE>
speed DSL service to all areas in our markets. As a result, our network may not
be able to achieve and maintain the highest possible digital transmission
speed. Our failure to achieve or maintain high speed digital transmissions
would have a material adverse effect on our business, prospects, financial
condition and results of operations.
Our Success Depends on Our Retention of Executive Officers and Other Key
Personnel and Our Ability to Hire Additional Key Personnel
We are managed by a small number of executive officers. Competition for
qualified executives in the data communications services industry is intense,
and there are a limited number of persons with comparable experience. We depend
upon our executive officers because we believe there are few managerial
personnel with qualifications to swiftly implement a business plan integrating
DSL technology with the existing telephone infrastructure. We do not have
employment agreements with any of our executive officers, so any of these
individuals may terminate his or her employment with us at any time. We do not
have "key person" life insurance policies on any of our executive officers. The
loss of these key individuals could have a material adverse effect on our
business, prospects, financial condition and results of operations. See
"Management" on page 53.
We believe that our success will depend in large part on our ability to
retain and attract qualified technical, marketing, managerial and other
personnel. Additionally, we believe an effective sales force is critical to our
success. The industry in which we compete is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. We may be
unable to hire or retain necessary personnel in the future. Our inability to
attract and retain key personnel would have a material adverse effect on our
business, prospects, financial condition and results of operations.
The Market in Which We Operate is Highly Competitive, and We May Not Be Able to
Compete Effectively, Especially Against Established Industry Competitors with
Significantly Greater Financial Resources
We face competition from many competitors with significantly greater
financial resources, well-established brand names and larger customer bases. We
also expect competition to intensify in the future. We expect significant
competition from traditional and new telephone and telecommunications
companies, including national long distance carriers, cable modem service
providers, Internet service providers, on-line service providers, and wireless
and satellite data service providers.
Other Competitive Telecommunications Companies, Some with Greater Financial
Resources, Compete in the Same Markets for the Same Customers. Other
competitive telecommunications companies have entered and may continue to enter
the market and offer high speed data services using a business strategy similar
to ours. Some competitors, including those focusing on data transport such as
Rhythms NetConnections Inc., Covad Communications Group, Inc., HarvardNet Inc.,
Dakota Services Limited, Prism Solutions, Inc. and Network Access Solutions
Corporation, have begun to offer DSL-based access services, and others are
likely to do so in the future. Certain of our customers have made investments
in our competitors, which may enhance their relationships with these
competitors at our expense. The Telecommunications Act of 1996 specifically
grants any competitive local exchange carrier, or competitive
telecommunications company, the right to negotiate interconnection agreements
with traditional telephone companies, or incumbent local exchange carriers. The
Telecommunications Act also allows competitive telecommunications companies to
enter into interconnection agreements which are identical in all respects to
ours. In addition, some competitive telecommunications companies have extensive
fiber networks in many metropolitan areas primarily providing high speed
digital and voice circuits to large corporations, and have interconnection
agreements with traditional telephone companies pursuant to which they have
acquired space in traditional telephone companies' central offices in many of
our markets. As a result, our customers may contract with other competitive
telecommunications companies, which may decrease our customers' demand for our
services.
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<PAGE>
Traditional Telephone Companies With Greater Resources Than Ours May Directly
Compete in Our Markets. The traditional telephone companies have an established
brand name and reputation for high quality in their service areas, possess
significant capital to deploy DSL equipment rapidly, have their own copper
lines and can bundle digital data services with their existing analog voice
services to achieve economies of scale in serving customers. In addition, most
traditional telephone companies have established or are establishing their own
Internet service provider businesses, and all of the largest traditional
telephone companies that are present in our target markets are conducting
market trials of or have commenced offering DSL-based access services. For
example, Pacific Bell and Southwestern Bell are offering commercial services in
some territories in which we offer services, U S WEST is offering commercial
DSL services and Ameritech has announced commercial DSL services in some areas
of Michigan and Illinois. We recognize that the traditional telephone companies
have the potential to quickly deploy DSL services and are in a position to
offer service from central offices where we may be unable to secure space in
traditional telephone companies' central offices. In addition, the FCC is
considering establishing requirements for separate subsidiaries through which
the traditional telephone companies could provide DSL service on a largely
deregulated basis. As a result, we expect traditional telephone companies to be
strong competitors in each of our target markets.
National Long Distance Carriers May Begin to Compete for Our Small- and
Medium-Sized Business Customers. Many of the leading traditional national long
distance carriers, including MCI WorldCom, Inc., AT&T Corp. and Sprint
Corporation, are expanding their capabilities to support high speed, end-to-end
data networking services. They also have interconnection agreements with many
of the traditional telephone companies and a number of spaces in traditional
telephone companies' central offices from which they could begin to offer
competitive DSL services. The newer national long distance carriers, such as
Level 3 Communications, Inc., The Williams Companies, Inc., IXC Communications,
Inc. and Qwest Communications International, Inc. are building and managing
high speed fiber-based national data networks and partnering with Internet
service providers to offer services directly to the public. These companies
could modify their current business focus to include small- and medium-sized
business customers using DSL or other technologies in combination with their
current fiber networks.
Cable Modem Service Providers May Offer High Speed Internet Access at More
Competitive Rates Than Ours, Forcing Us to Lower Our Prices. Cable modem
service providers, such as At Home Corporation and Road Runner, Inc. (with
their cable partners), are deploying high speed internet access services over
hybrid fiber coaxial cable networks. Where deployed, these networks provide
similar and in some cases higher speed Internet access than we provide. They
also offer these services at lower price points than our services. Actual or
prospective cable modem service provider competition may have a significant
negative effect on our ability to secure customers and may create downward
pressure on the prices we can charge for our services.
Internet Service Providers, Our Targeted Customers, May Begin to Provide DSL
Services Directly. Internet service providers, such as GTE Internetworking,
UUNET (a subsidiary of MCI WorldCom, Inc.), Sprint, Concentric Network
Corporation, MindSpring Enterprises, Inc. and PSINet, Inc., provide Internet
access to residential and business customers, generally using the existing
telephone system. Some regional Internet service providers, such as HarvardNet
Inc., InterAccess Co., Vitts Networks Inc. and Prism Solutions, Inc., have
begun offering DSL-based services. Internet service providers could become
competing DSL service providers if they attain certification as competitive
telecommunications companies in the states in which they planned to operate.
On-line Service Providers, Our Targeted Customers, May Begin to Provide DSL
Services Directly. On-line service providers, such as America Online, Inc.,
Compuserve (a subsidiary of America Online), Microsoft Network, Prodigy, Inc.,
and WebTV Networks, Inc. (a subsidiary of Microsoft), provide, over the
Internet and on proprietary on-line services, content and applications
15
<PAGE>
ranging from news and sports to consumer video conferencing. These services are
designed for broad consumer access over telecommunications-based transmission
media, which enable digital services to be provided to the significant number
of consumers who have personal computers with modems. In addition, on-line
service providers provide Internet connectivity, ease-of-use and consistency of
environment. Many of these on-line service providers have developed their own
access networks for modem connections. AOL has announced that it will purchase
DSL services from Bell Atlantic and SBC Communications. If these on-line
service providers were to extend their owned access networks to DSL, they would
be our competitors.
Wireless and Satellite Data Service Providers May Begin to Offer Wireless and
Satellite-Based Internet Connectivity, Also Competing Against Us. Wireless and
satellite data service providers are developing wireless and satellite-based
Internet connectivity. We may face competition from terrestrial wireless
services, including multi-channel multipoint distribution system, local
multipoint distribution system, wireless communication service and point-to-
point microwave systems. The FCC recently adopted new rules to permit multi-
channel multipoint distribution system licensees to use their systems to offer
two-way services, including high speed data, rather than solely to provide one-
way video services. The FCC also has auctioned local multipoint distribution
system licenses in all markets for wireless systems, which can be used for high
speed data services. In addition, companies such as Teligent, Inc., Advanced
Radio Telecom Corp., WNP (which recently agreed to be acquired by NEXTLINK) and
WinStar Communications, Inc. hold point-to-point and/or point-to-multipoint
microwave licenses to provide fixed wireless services such as voice, data and
video conferencing.
We also may face competition from satellite-based systems. Motorola Satellite
Systems, Inc., Hughes Communications, Inc. (a subsidiary of General Motors
Corporation), Teledesic LLC and others have filed applications with the FCC for
global satellite networks which can be used to provide broadband voice and data
services.
In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band for
unlicensed devices to provide short-range, high speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless local area networks, it is too early to predict what
kind of equipment might ultimately be manufactured and for what purposes it
might be used.
The telecommunications industry is subject to rapid and significant changes
in technology, and we cannot predict the effect of technological changes on our
business, such as continuing developments in DSL technology and alternative
technologies for providing high speed data communications. These technological
developments in the telecommunications industry could have a material adverse
effect on our competitive position and therefore on our business, prospects,
financial condition and results of operations.
Industry Consolidation Could Make Competing More Difficult
Consolidation of companies offering high speed local data transport is
occurring through acquisitions, joint ventures and licensing arrangements
involving our competitors and our customers' competitors. As a company with
limited operating history, we cannot assure that we will be able to compete
successfully in an increasingly consolidated industry. Any heightened
competitive pressures that we may face may have a material adverse effect on
our business, prospects, financial condition and results of operations.
Additionally, because we rely on our customers' marketing channels to provide
our services to business and residential end users, if our customers are
adversely affected by consolidation and integration in the market, our
business, prospects, financial condition and results of operations could be
materially adversely affected.
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<PAGE>
Our Services are Subject to Uncertain Government Regulation, and Changes in
Current or Future Laws or Regulations Could Restrict the Way We Operate Our
Business
We are subject to federal, state and local regulation of our
telecommunications business. With the passage of the Telecommunications Act in
1996, Congress sought to foster competition in the telecommunications industry
and to promote the deployment of advanced telecommunications technology.
Implementation of the Telecommunications Act is the subject of ongoing
administrative proceedings at the federal and state levels, litigation in
federal and state courts, and legislation in federal and state legislatures. We
cannot predict the outcome of the various proceedings, litigation and
legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business and operations.
As a competitive telecommunications company, we are subject to FCC regulation
for our contractual, or interconnection, arrangements with the traditional
telephone companies, or incumbent local exchange carriers, in our markets, but
the scope of this regulation is uncertain because it is the subject of ongoing
court and administrative proceedings. Several parties have brought court
challenges to the FCC's interconnection rules, including the rules that
establish the terms under which a competitive telecommunications company may
use portions of a traditional telephone company's network. Although the Supreme
Court recently held that the FCC has the authority to adopt interconnection
rules and specifically upheld several of these rules, other rules are still
being considered by the courts. If a rule that is beneficial to our business is
struck down, it could harm our ability to compete. In particular, the courts
have not yet resolved the lawfulness of the methodology that the FCC
established to determine the price that competitive telecommunications
companies would have to pay traditional telephone companies for use of the
traditional telephone companies' networks. The courts may determine that the
FCC's pricing rules are unlawful, which would require the FCC to establish a
new pricing methodology. If this occurs, the new pricing methodology that the
FCC adopts may result in our having to pay a higher price to traditional
telephone companies if we were to use a portion of their networks in providing
our services, and this could have a detrimental effect on our business.
Although the Supreme Court upheld most of the FCC's rules that the Court
reviewed, it struck down the rule specifying the various portions of the
traditional telephone companies' networks that the traditional telephone
companies were required to make available to competitive telecommunications
companies. As a result, the FCC will have to develop a new standard for
determining which portions of the traditional telephone companies' networks
must be made available to competitive telecommunications companies. This new
standard may reduce the number of network components to which competitive
telecommunications companies will have access. If this occurs, this may harm
our ability to compete.
Recently, various traditional telephone companies have requested the FCC
grant them regulatory relief in the provision of data transmission services,
including DSL services, which would allow the traditional telephone companies
to compete more directly with DSL providers such as NorthPoint. In response,
the FCC issued a decision that data services generally are telecommunications
services that, when provided by traditional telephone companies, are subject to
the FCC's interconnection rules, including the rule requiring that a
traditional telephone company's data services be subject to unbundling and
resale requirements. This issue is still pending before the FCC, and we cannot
be certain that the FCC will not reconsider its decision. Moreover, although
the FCC recently adopted new rules designed to provide greater access to
central office space at less cost, these new rules may benefit our competitors
to a greater extent than they benefit us, which could harm our competitiveness.
Additionally, since the FCC issued its decision, various traditional telephone
companies have again asked the FCC for regulatory relief with respect to their
provision of data transmission services. The FCC has not yet resolved these
later requests. We would expect that an FCC decision in favor of the
traditional telephone companies could have a material adverse effect on our
business, prospects, financial condition and results of operations.
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<PAGE>
Our Debt Creates Financial and Operating Risk That Could Limit the Growth of
Our Business
As of December 31, 1998, we had approximately $55,153,000 of indebtedness. We
entered into a $110,000,000 secured credit facility in April 1999, and used an
initial drawdown of $55,000,000 to repay our then-existing debt. We anticipate
incurring additional indebtedness in the future. See "Capitalization" at page
23. After this offering and assuming we draw the entire $110,000,000 available
to us under our secured credit facility, we will have approximately
$431,726,000 in stockholders' equity and will have approximately $116,731,000
of debt outstanding.
The degree to which we are leveraged could have important consequences to
holders of our common stock, including, but not limited to, the following:
. our ability to obtain additional financing or refinancing in the future
for capital expenditures, repayment of outstanding indebtedness, working
capital, acquisitions, general corporate or other purposes may be
materially limited or impaired;
. our cash flow, if any, may be unavailable for building our business, as a
substantial portion of our cash flow may be dedicated to the payment of
principal and interest on our indebtedness or other indebtedness that we
may incur in the future, and our failure to generate sufficient cash flow
to service such indebtedness could result in a default;
. our debt agreements will contain restrictions and financial covenants
which, if we fail to meet them, could result in our indebtedness being
declared due prematurely, at a time when we could not make the required
payments;
. our leverage may make us more vulnerable to economic downturns, may limit
our ability to withstand competitive pressures and may reduce our
flexibility in responding to changing business and economic conditions;
and
. we may from time to time be more highly leveraged than many of our
competitors, which may place us at a competitive disadvantage.
We Rely on Our Intellectual Property Which We May Be Unable to Protect, or We
May Be Found to Infringe the Rights of Others
Our success depends in part on our ability to protect our proprietary
intellectual property. In addition, we may be sued over intellectual property
rights. These lawsuits, or our inability to protect our intellectual property
rights, could have a material adverse effect on our business, prospects,
financial condition and results of operations.
In April 1999 we received a letter from one of our competitors, Covad
Communications Group, Inc., indicating that it has been informed of allowance
of a United States patent application. This means that Covad can expect a
United States patent will issue in the near future. According to Covad's
letter, their patent application relates to digital subscriber loop
implementations supporting (a) a bandwidth of 128 kbps or 144 kbps combined
with (b) a bandwidth greater than 128 or 144 kbps. Although the Covad letter
quoted an allegedly allowed patent claim, the allowed patent application
remains secret until issuance of the patent, and we have no other pertinent
information about this patent application. As a result, we are unable to
evaluate fully the validity or relevance of this patent application. If the
patent application results in an issued patent that is valid, and if we
infringe this patent, we could be required to obtain a license under the
patent. While Covad has indicated that we may be interested in obtaining a
license from them at the appropriate time, we cannot be certain that such a
license, if needed, would be available on commercially acceptable terms if at
all. If our services or portions of our services infringe a valid patent, and
if we are unwilling or unable to obtain a license, then we will be unable to
offer the infringing services. This could have a material adverse effect on our
business, prospects, financial condition and results of operations.
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<PAGE>
A System Failure or Breach of Network Security Could Delay or Interrupt Service
to Our Customers
The reliability of our transmission services in our markets would be impaired
by a natural disaster or other unanticipated interruption of service or damage
at any of our facilities. Additionally, failure of a traditional telephone
company or other service provider to provide communications capacity required
by us, as a result of a natural disaster, operational disruption or for any
other reason, could cause interruptions in our services. Damage or failure that
causes interruptions in our services could have a material adverse effect on
our business, prospects, financial condition and results of operations.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Unauthorized access could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which might result in liability to our customers, and
also might deter potential customers. Although we intend to implement security
measures that are standard within the telecommunications industry, we may be
unable to implement such measures in a timely manner or, if and when
implemented, our security measures may be circumvented. Eliminating computer
viruses and alleviating other security problems may require interruptions,
delays or cessation of service to our customers and these customers' end users.
Any of the foregoing factors relating to network security could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
Our Business Could Suffer From a Reduction or Interruption From Our Equipment
Suppliers or Other Third Parties On Whom We Rely for Installation and Provision
of Field Service
We plan to purchase all of our equipment from various vendors and outsource
the installation and field service of our networks to third parties. We also
depend on the availability of fiber optic transmission facilities from third
parties to connect our equipment within and between metropolitan areas. Any
reduction of or interruption from our equipment suppliers, such as Copper
Mountain Network, Inc., from which we purchase most of our digital subscriber
line access equipment, or interruption in service from any significant
installer or field service provider, such as Lucent Technologies, Inc., which
has installed and maintained our equipment in all of our markets, could have a
disruptive effect on our business, prospects, financial condition and results
of operations.
In addition, the pricing of the equipment we purchase may substantially
increase over time, increasing the costs we pay in the future, or decrease over
time, providing later market entrants with a cost advantage over us. The
availability and pricing of the equipment we purchase would be adversely
affected if our suppliers were to compete with us, or if our competitors enter
into exclusive or restrictive arrangements with our suppliers. It could take a
significant period of time to establish relationships with alternative
suppliers for each of our technologies and substitute their technologies into
our network.
Uncertain Federal and State Tax and Other Surcharges on Our Services May
Increase Our Payment Obligations
Telecommunications providers are subject to a variety of complex federal and
state surcharges and fees on their gross revenues from interstate and
intrastate services, including regulatory fees, and surcharges related to the
support of universal service. A finding that we misjudged the applicability of
the surcharges and fees could increase our payment obligations and have a
material adverse effect on our business, prospects, financial condition and
results of operations.
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<PAGE>
Claims of Interference Could Harm Our Ability to Deploy Our Services
Certain technical laboratory tests and field experience indicate that some
types of DSL, in particular, asymmetrical DSL--in which data transport to the
end user is faster than transport from the end user--may cause interference
with and be interfered with by other signals present in a traditional telephone
company copper plant. Citing this potential interference, some traditional
telephone companies have imposed restrictions on the use of asymmetrical DSL
technology over their copper lines. However, we do not believe that our
symmetrical DSL technology equipment, which permits the same speed of data
transport to and from the end user, poses interference risks.
If traditional telephone companies were to restrict our use of our technology
or equipment in the future, our business, prospects, financial condition and
results of operations could be materially adversely affected.
Our Stock Price May Be Volatile
An active trading market for our common stock may not develop or be sustained
after this offering. The price at which our common stock will trade after this
offering is likely to be volatile and may fluctuate substantially due to
factors such as:
. our historical and anticipated quarterly and annual operating results;
. variations between our actual results and analyst and investor
expectations;
. announcements by us or others and developments affecting our business;
. investor perceptions of our company and comparable public companies; and
. conditions and trends in the data communications and Internet-related
industries.
In particular, the stock market has from time to time experienced significant
price and volume fluctuations affecting the common stocks of technology
companies, which may include data communications and Internet-related
companies. These fluctuations may result in a material decline in the market
price of our common stock.
The Sale of Shares Eligible for Future Sale or Perception of Future Sales Could
Depress Our Stock Price
Sales of a large number of shares of 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.
We will have 121,041,144 shares of common stock outstanding immediately after
the offering. Shares sold in this offering, except for shares sold to Microsoft
and Tandy, will be freely tradeable, except for any such shares held at any
time by an "affiliate" of NorthPoint, as defined under Rule 144 under the
Securities Act. Of the remaining shares, approximately 97% are subject to lock-
up agreements in which the holders of the shares have agreed not to sell any
shares, subject to limited exceptions, for a period of 180 days (or in some
cases longer) after the date of this prospectus. The shares not subject to
lock-up agreements are "restricted securities" as defined in Rule 144 under the
Securities Act. These shares may be sold in the future without registration
under the Securities Act to the extent permitted by Rule 144 or an exemption
under the Securities Act. See "Shares Eligible for Future Sale" beginning on
page 66.
You Will Incur Immediate and Substantial Dilution
The initial public offering price is substantially higher than the net
tangible book value per share of the common stock. Therefore, you will incur
immediate dilution in net tangible book value of $20.43 per share. You may
incur additional dilution if holders of stock options, whether currently
outstanding or subsequently granted, exercise their options or if
warrantholders exercise their warrants to purchase common stock. See "Dilution"
on page 25 for more information.
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<PAGE>
Our Principal Stockholders and Management Own a Significant Percentage of
NorthPoint, and Will Be Able to Exercise Significant Influence
Our executive officers and directors and principal stockholders together will
beneficially own approximately 81% of our common stock after completion of this
offering. These stockholders, if they vote together, will be able to exercise
significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also delay or prevent a
change in control of NorthPoint. See "Principal Stockholders" on page 62 for
information about the ownership of common stock by our executive officers,
directors and principal stockholders.
Our Certificate of Incorporation and Bylaws Contain Provisions That Could Delay
or Prevent a Change In Control of NorthPoint
Certain provisions of our certificate of incorporation and bylaws could make
it more difficult for a third party to acquire control of NorthPoint, even if a
change in control would be beneficial to stockholders. Our certificate of
incorporation allows our board of directors to issue, without stockholder
approval, preferred stock with terms set by the board of directors. The
preferred stock could be issued quickly with terms that delay or prevent a
change in control of NorthPoint or make removal of management more difficult.
Also, the issuance of preferred stock may cause the market price of the common
stock to decrease. See "Description of Capital Stock" on page 68 for more
information.
Forward-Looking Statements are Inherently Uncertain
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations,
intentions and assumptions and other statements contained in the prospectus
that are not historical facts. When used in this prospectus, the words "expect"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties,
including those described in this "Risk Factors" section, actual results may
differ materially from those expressed or implied by these forward-looking
statements. We do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $336,950,000 ($387,170,000 if the underwriters
exercise their over-allotment option in full) after deducting estimated
underwriting discounts and commissions and estimated offering expenses. These
amounts include the increase in the net proceeds of approximately $3,500,000 if
Microsoft and Tandy purchase the shares reserved for them.
We intend to use more than $200,000,000 of the net proceeds from this
offering to continue building our networks, and the remainder for working
capital and general corporate purposes.
Prior to the application of the net proceeds from the offering as described
above, the net proceeds from the offering will be invested in marketable,
investment-grade securities.
DIVIDEND POLICY
We have never paid any dividends and do not anticipate declaring or paying
cash dividends in the foreseeable future. We intend to retain future earnings,
if any, to reinvest in our business and repay indebtedness. Certain covenants
in our financing agreements will prohibit or limit our ability to declare or
pay cash dividends.
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CAPITALIZATION
The following table sets forth:
(A) Our capitalization as of December 31, 1998.
(B) Our pro forma capitalization after giving effect to:
. the issuance to strategic investors of subordinated debt and
convertible preferred stock, all of which will convert into
convertible common stock upon this offering;
. a stock split of certain shares of preferred stock;
. the closing of our secured credit facility in April 1999 and our
initial drawdown of $55,000,000 thereunder; and
. the repayment of our line of credit borrowings in April 1999.
(C) Our as adjusted capitalization to reflect, in addition:
. the automatic conversion of the outstanding convertible subordinated
debt and convertible preferred stock upon the closing of this
offering;
. the receipt of the estimated net proceeds from the sale of common
stock in this offering, after deducting estimated underwriting
discounts and estimated offering expenses payable by NorthPoint; and
. our anticipated issuance to Microsoft Corporation of a warrant to
purchase 833,333 shares of our Class B common stock, with an
exercise price of $36.00 per share.
You should read this table in conjunction with our consolidated financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1998
--------------------------------
(A) (B) (C)
Actual Pro Forma As Adjusted
-------- --------- -----------
(dollars in thousands,
except per share amounts)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 10,956 $118,844 $455,794
Short term debt:
Current portion of capital lease
obligations, net of unamortized debt
discount.................................. 925 925 925
Line of credit borrowings, net of
unamortized debt discount ................ 48,422 -- --
-------- -------- --------
Total short term debt..................... 49,347 925 925
-------- -------- --------
Long term debt:
Capital lease obligations, net of
unamortized debt discount................. 2,640 2,640 2,640
Secured credit facility.................... -- 55,000 55,000
Convertible subordinated debt.............. -- 5,600 --
-------- -------- --------
Total long term debt...................... 2,640 63,240 57,640
-------- -------- --------
Stockholders' equity (deficit):
Convertible preferred stock, $.001 par value;
49,060,250 shares authorized, 38,499,054
shares issued and outstanding (A) actual;
80,993,145 shares issued or outstanding (B)
pro forma; no shares issued and outstanding
(C) as adjusted(1).......................... 39 81 --
Common stock, $.001 par value; 281,250,000
shares authorized and 24,592,950 shares
issued and outstanding (A) actual and (B)
pro forma; 119,594,899 shares issued and
outstanding (C) as adjusted(2).............. 25 25 120
Common stock warrants(3)..................... 5,232 5,232 7,851
Additional paid-in capital(4)................ 31,480 129,451 469,368
Deferred compensation........................ (13,023) (13,023) (13,023)
Accumulated deficit.......................... (30,287) (32,590) (32,590)
-------- -------- --------
Total stockholders' equity (deficit)....... (6,534) 89,176 431,726
-------- -------- --------
Total capitalization...................... $ 45,453 $153,341 $490,291
======== ======== ========
</TABLE>
23
<PAGE>
- --------
(1) Excludes 917,780 shares of Series B preferred stock issuable upon exercise
of outstanding warrants as of December 31, 1998, assuming full vesting.
(2) Excludes 19,082,107 shares of common stock issuable upon exercise of
outstanding options under our stock option plans as of April 19, 1999;
2,250,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and 5,399,542 shares of common stock issuable upon
exercise of outstanding and contingent warrants.
(3) Reflects the attribution of value to certain warrants issued in conjunction
with our bridge loan and lease agreements, and upon completion of this
offering, the warrant we anticipate issuing to Microsoft.
(4) Reflects the value of the warrant we anticipate issuing to Microsoft upon
completion of the offering as a contra equity account in additional paid-in
capital.
24
<PAGE>
DILUTION
The pro forma net tangible book value of NorthPoint as of December 31, 1998
was $89,176,000 or $0.84 per share of outstanding common stock, after giving
effect to the adjustments shown in column (B) under "Capitalization." The pro
forma net tangible book value per share represents our total tangible assets
less total liabilities, divided by 106,041,144 shares of common stock
outstanding on a pro forma basis before the offering. Dilution per share
represents the difference between the amount per share paid by investors in
this offering and the pro forma net tangible book value per share after the
offering. After giving effect to this offering, the as adjusted pro forma net
tangible book value at December 31, 1998 would have been $431,726,000 or $3.57
per share. This represents an immediate increase in the net tangible book value
of $2.73 per share to existing stockholders and an immediate dilution in net
tangible book value of $20.43 per share to new investors purchasing shares at
the initial public offering price. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $24.00
Pro forma net tangible book value per share as of
December 31, 1998.......................................... $0.84
Increase per share attributable to new investors............ 2.73
-----
As adjusted pro forma net tangible book value per share after
the offering................................................. 3.57
------
Dilution per share to new investors........................... $20.43
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31, 1998,
the difference between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from NorthPoint, the total
consideration paid and the average price per share paid at the initial public
offering price of $24.00 per share (before deducting estimated underwriting
discounts and commissions and offering expenses payable by NorthPoint):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- -------------------- Average Price
Number Percent Amount Percent per Share
----------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 106,041,144 87.6% $119,289,606 24.9% $ 1.12
New investors........... 15,000,000 12.4 360,000,000 75.1 24.00
----------- ----- ------------ -----
Total................. 121,041,144 100.0% $479,289,606 100.0%
=========== ===== ============ =====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
April 19, 1999, there were options and warrants (including the warrant expected
to be issued to Microsoft Corporation) outstanding to purchase 23,758,220
shares of common stock and Class B common stock at a weighted average exercise
price of $4.13 per share. To the extent outstanding options and warrants are
exercised, there will be further dilution to new investors.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the period from May
16, 1997 (inception) to December 31, 1997 and for the year ended December 31,
1998 have been derived from our audited financial statements and the related
notes, which are included elsewhere in this prospectus. You should read the
following consolidated summary financial data together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes included elsewhere
in this prospectus.
Our revenues consist entirely of service revenues because we do not currently
sell end-user modems or other electronic equipment. EBITDA consists of net loss
excluding net interest, taxes, depreciation and amortization. We have provided
EBITDA because it is a measure of financial performance commonly used in the
telecommunications industry, but other companies may calculate it differently
from us. We have presented EBITDA to enhance your understanding of our
operating results. You should not construe it as an alternative to operating
income as an indicator of our operating performance or as an alternative to
cash flows from operating activities as a measure of liquidity. The pro forma
net loss per share reflects the conversion of the preferred stock outstanding
as of December 31, 1998 into common stock.
<TABLE>
<CAPTION>
Inception to Year Ended
December 31, December 31,
1997 1998
------------ ------------
($ in thousands, except
share
and per share data)
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues........................................... $ -- $ 931
Operating expenses:
Network expenses................................. 56 3,970
Selling, marketing, general and administrative... 1,374 18,340
Amortization of deferred compensation............ 173 2,664
Depreciation and amortization.................... 27 1,319
----------- -----------
Total operating expenses....................... 1,630 26,293
----------- -----------
Income (loss) from operations...................... (1,630) (25,362)
Interest income (expense).......................... 190 (3,485)
----------- -----------
Net income (loss).................................. $ (1,440) $ (28,847)
=========== ===========
Net income (loss) per common share................. $ (.07) $ (1.18)
Shares used in computing net income (loss) per
share............................................. 21,733,560 24,379,445
Pro forma net income (loss) per common share....... $ (.02) $ (.46)
Shares used in computing pro forma net income
(loss) per share.................................. 58,747,682 62,878,499
Other Data:
EBITDA............................................. $ (1,430) $ (21,379)
Capital expenditures............................... 701 41,550
Consolidated Cash Flow Data:
Provided by (used in) operating activities......... $ (1,094) $ (11,363)
Provided by (used in) investing activities......... (701) (41,550)
Provided by (used in) financing activities......... 11,243 54,420
</TABLE>
26
<PAGE>
The pro forma balance sheet information reflects:
. the issuance of convertible debt and equity securities in 1999; and
. the closing of our secured credit facility in April 1999 and our initial
drawdown of $55,000,000 under the facility, and the repayment of certain
other debt.
In addition to the foregoing, the pro forma as adjusted balance sheet
information reflects:
. the receipt of estimated net proceeds of $336,950,000 from this offering,
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by NorthPoint.
. the conversion upon the completion of this offering of all outstanding
preferred stock and convertible debt; and
. our anticipated issuance to Microsoft of a warrant to purchase Class B
common stock.
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------
Pro Pro Forma
Actual Forma as Adjusted
------- -------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $10,956 $118,844 $455,794
Property and equipment, net..................... 46,078 46,078 46,078
Total assets.................................... 60,502 168,390 505,340
Long-term obligations, including current
portion........................................ 3,565 64,165 58,565
Total stockholders' equity (deficit)............ (6,534) 89,176 431,726
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of NorthPoint's financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and our financial statements and related notes included
elsewhere in this prospectus. In the discussion below, we refer to the period
from inception to December 31, 1997 as "1997".
Overview
Since inception on May 16, 1997, our principal activities have included:
. developing our business plans;
. procuring governmental authorizations and space in central offices;
. raising capital, hiring management and other key personnel;
. working on the design and development of our network architecture and
operations support systems;
. acquiring equipment and facilities; and
. negotiating interconnection agreements.
As a result of our development activities, we have experienced operating
losses. We expect to experience increasing operating losses as we expand our
operations.
We introduced our commercial services in March 1998 in the San Francisco Bay
Area. We subsequently launched service in 16 additional markets, including the
greater Los Angeles area, Boston, New York, Chicago, San Diego, Washington,
D.C., Dallas, Detroit, Houston, Cleveland, Austin, Atlanta, Baltimore,
Philadelphia, Pittsburgh and Miami/Fort Lauderdale. We intend to offer our
services in 11 additional metropolitan areas by year-end. Deployment of our
networks will require significant upfront capital expenditures. We have
targeted for this year an initial 900 central offices necessary to roll out
services in our 28 targeted markets and, subsequently, an additional 350
central offices that will allow us to achieve blanket coverage in these
markets. We have already secured and purchased space in over 745 of the initial
central offices.
The principal capital expenditures we incur when we enter any market include:
. the establishment of a metropolitan node -- a facility at which we
aggregate and disseminate data traffic in each metropolitan area -- and
the purchase and installation of electronic switching equipment for that
node;
. the procurement, design and construction of the collocation cage in each
central office;
. the purchase and installation of the network management and network test
equipment in those cages; and
. the capitalized cost of the installation of such equipment.
In addition, we will incur operations, sales and market development expenses in
order to enter a new market. Once we have deployed our network in a market, the
majority of our additional capital expenditures will be dependent upon orders
to connect new end users. These success-based capital expenditures include DSL
line cards, incremental digital subscriber line access multiplexer and network
test equipment, and line cards for our electronic switches in our metropolitan
node. In addition to the capital expenditures required to enter a market, we
will be required to fund each market's cash flow deficit as we build our
customer base.
28
<PAGE>
Financial performance will vary from market to market, and the time when we
will achieve positive EBITDA, if at all, will depend on factors such as:
. the size of the addressable market;
. the level of upfront sales and marketing expenses;
. the number and sequencing of central offices built out;
. the cost of the necessary infrastructure;
. the timing of market entry; and
. the commercial acceptance of our services.
Factors Affecting Future Operations
Revenues. We will derive our revenues from monthly recurring and nonrecurring
charges to our wholesale customers. Monthly recurring revenues consist of end
user line fees for the network service providers' end users connected to our
networks and interconnection fees for each connection to our metropolitan node
in each market. Nonrecurring revenues include charges for the installation and
activation of new end users. Our revenues consist exclusively of service
revenues. We do not currently sell end-user modems or other electronic
equipment.
We seek to price our services competitively in relation to those of the
traditional telephone companies and other competitive telecommunications
companies in each market. Current standard end user line prices that we charge
to our network service providers for our services generally range from $75 per
month for 160 kilobits per second service to $250 per month for 1.5 megabits
per second service, before volume discounts. Although pricing will be an
important part of our strategy, we believe that customer relationships,
customer care and consistent quality will be the key to generating customer
loyalty. During the past several years, market prices for many
telecommunications services have been declining, which is a trend that we
believe will likely continue. As prices decline for any given speed of service,
we expect that the total number of end users and the proportion of our end
users purchasing our higher-speed, higher-priced services will increase. The
cost to upgrade an end user's speed is generally minimal.
Network Expenses. Our network expenses consist of nonrecurring and monthly
recurring charges for the commodity transport elements we choose to lease
rather than own. Nonrecurring network expenses include transport and loop
installation fees. We expect these costs will be largely related to the
activation of new central offices and new end users. Monthly recurring network
expenses include loop fees, rent, power and other fees charged by traditional
telephone companies, competitive telecommunications companies and other
providers. As our customer and end user base grows, we expect the largest
element of network expenses to be traditional telephone company charges for
leased copper lines, which have historically been $3 to $40 per line per month,
depending on the identity of the traditional telephone company and the location
of the lines.
Selling, Marketing, General and Administrative Expenses. Our selling,
marketing, general and administrative expenses primarily consist of costs
related to selling, marketing, customer care, provisioning, billing,
regulatory, corporate administration, network engineering and maintenance.
Additionally, we incur other costs associated with administrative overhead,
office leases and bad debt. We expect that our selling, marketing, general and
administrative costs will grow significantly as we expand our operations and
that administrative overhead will be a large portion of these expenses during
the start-up phase of our business. However, we expect these expenses to
decline as a percentage of our revenue as we build our customer base and the
number of end users connected to our networks increases.
29
<PAGE>
We plan to employ a regional sales team in each market we enter. To attract
and retain a highly qualified sales force, we plan to offer our sales and
customer care personnel a compensation package consisting of commissions and
stock options. We expect to incur significant selling and marketing costs as we
continue to expand our operations. In addition, we plan to offer sales
promotions, especially in the first few years as we establish our market
presence.
Amortization of Deferred Compensation. Deferred compensation arose as a
result of the granting of stock options to employees with exercise prices per
share subsequently determined to be below the fair values per share for
financial reporting purposes of our common stock at dates of grant. The
deferred compensation is being amortized over the vesting period of the
applicable options.
Depreciation and Amortization. We expect depreciation and amortization
expense to increase significantly as more of our network becomes operational
and as we increase capital expenditures to expand our network. Depreciation and
amortization expense includes:
. depreciation of network infrastructure equipment;
. depreciation of information systems, furniture and fixtures;
. amortization of improvements to central offices, network control center
facilities and corporate facilities;
. amortization of central office space and improvements; and
. amortization of software.
Taxation. We have not generated any taxable income to date and therefore have
not paid any federal income taxes since inception. Use of our net operating
loss carryforwards, which begin to expire in 2003, may be subject to
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
We have recorded a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its recoverability.
Results of Operations
Revenues. We commercially introduced our services in March 1998. Accordingly,
we recognized no revenues in 1997. Revenues for the year ended December 31,
1998 were approximately $931,000, 75% of which consisted of recurring revenues
and did not include sales of end user modems or other electronic equipment.
Network Expenses. Network expenses were approximately $56,000 in 1997 and
$3,970,000 in the year ended December 31, 1998. These costs consisted primarily
of monthly rental costs for lines between end users and central offices,
between central offices and our metropolitan nodes, between our metropolitan
nodes and our network service providers, and end user line installation and
costs charged to us by the traditional telephone companies.
Selling, Marketing, General and Administrative Expenses. Selling, marketing,
general and administrative expenses were approximately $1,374,000 for 1997 and
$18,340,000 for the year ended December 31, 1998. These expenses consisted
primarily of salaries and related expenses for the development of our business,
network architecture and software, the establishment of our management team and
the development of corporate identification, promotional and advertising
materials.
Amortization of Deferred Compensation. Amortization of deferred compensation
was $173,000 in 1997 and $2,664,000 for the year ended December 31, 1998. The
unamortized balance of $13,023,000 at December 31, 1998 will be amortized over
the vesting period of each grant.
30
<PAGE>
Depreciation and Amortization. Depreciation and amortization expenses were
approximately $27,000 for 1997 and $1,319,000 for the year ended December 31,
1998. Such expenses consisted primarily of depreciation of network equipment,
information systems, office equipment, furniture and fixtures and amortization
of leasehold improvements.
Interest Income and Expense. We incurred minimal interest expense in 1997.
Interest expense in 1998 was approximately $3,694,000. Interest expense for the
year ended December 31, 1998 includes amortization of $1,868,000 and $198,000
related to debt discount recorded in conjunction with the issuance of bridge
loan warrants and equipment lease warrants, respectively (see notes 6 and 10 to
our consolidated financial statements). Interest income was approximately
$190,000 for 1997 and $209,000 for the year ended December 31, 1998. This
interest income was earned primarily from the proceeds raised in the Series B
preferred stock financing in August 1997.
Quarterly Financial Information
The following table sets forth certain consolidated statements of operations
data for our most recent six quarters. This information has been derived from
our unaudited consolidated financial statements. In our management's opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with our consolidated financial statements and the related notes
included elsewhere in this prospectus. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended (dollars in 000's)
---------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1998 1998 1998 1998
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ 35 $ 128 $ 237 $ 531
----- ------ ------- ------- ------- --------
Operating expenses:
Network expenses........ 5 51 145 263 851 2,711
Selling, marketing,
general and
administrative......... 511 863 1,542 2,565 4,505 9,728
Amortization of deferred
compensation........... 40 134 200 334 1,038 1,092
Depreciation and
amortization........... 6 21 77 195 321 726
----- ------ ------- ------- ------- --------
Total operating
expenses............... 562 1,069 1,964 3,357 6,715 14,257
----- ------ ------- ------- ------- --------
Loss from operations.... (562) (1,069) (1,929) (3,229) (6,478) (13,726)
Interest income......... 64 126 106 50 19 34
Interest expense........ -- -- (47) (75) (1,323) (2,249)
----- ------ ------- ------- ------- --------
Net loss................ $(498) $ (943) $(1,870) $(3,254) $(7,782) $(15,941)
===== ====== ======= ======= ======= ========
</TABLE>
We have generated greater revenues in each successive quarter in the last
four quarters, reflecting increases in the number of customers and end users.
Our network expenses have increased in every quarter, reflecting costs
associated with customer and end user growth and the deployment of our networks
in existing and new markets. Our selling, marketing, general and administrative
expenses have increased in every quarter and include operations, sales and
marketing costs associated with the acquisition of customers and end users,
including sales commissions, and the development of regional and corporate
infrastructure. Depreciation and amortization has increased in each quarter,
primarily reflecting the purchase of equipment associated with the deployment
of our networks. We have experienced increasing net losses on a quarterly basis
as we increased our capital expenditures and operating expenses. See "Risk
Factors--We Expect Our Losses and Negative Cash Flow to Continue."
31
<PAGE>
Liquidity and Capital Resources. Our operations have required substantial
capital investment for the procurement, design and construction of our central
office collocation cages, the purchase of telecommunications equipment and the
design and development of our networks. Capital expenditures were approximately
$41,550,000 for the year ended December 31, 1998. Although we have no material
commitments for capital expenditures during 1999, we expect that our capital
expenditures will be substantially higher in future periods in connection with
the purchase of infrastructure equipment necessary for the development and
expansion of our networks and the development of new markets.
We will make additional capital expenditures in 1999 estimated at
$130,000,000 to $160,000,000 to develop our networks. In each market, we will
initially target the central offices with the highest density of small- and
medium-sized businesses. We will expand into other central offices when we
obtain adequate demand or volume commitments from our customers. We will also
incur capital expenditures for building a metropolitan node in each market and
for expanding our network control center in San Francisco.
From inception to December 31, 1998, we financed our operations primarily
through private placements of $15,700,000 of equity securities, $50,700,000 of
debt securities and $5,200,000 of lease financings. As of December 31, 1998, we
had an accumulated operating deficit of $30,287,000 and cash and cash
equivalents of $10,956,000.
Net cash used in operating activities was $1,094,000 for 1997 and $11,363,000
for the year ended December 31, 1998. The net cash used in operations was
primarily due to net losses, offset in part by increases in accrued expenses.
The net cash used in investing activities was $701,000 in 1997 and $41,550,000
in the year ended December 31, 1998, primarily due to acquisitions of property
and equipment. Net cash provided by financing activities was $11,200,000 for
1997 related to the issuance of common and preferred stock. Net cash provided
by financing activities was approximately $54,420,000 for the year ended
December 31, 1998, of which $4,400,000 related to the issuance of preferred
stock and $50,700,000 related to borrowings, offset in part by the repayment of
certain capital lease obligations of approximately $745,000.
Our working capital deficiency as of December 31, 1998 was $50,267,909. Of
this amount, $47,696,566 consisted of a line of credit borrowing from Morgan
Stanley Bridge Loan Fund, L.L.C. ("MSBLF"). We repaid our borrowing under this
line of credit in full in early April 1999 with the proceeds from the initial
drawdown on our $110,000,000 senior secured credit facility. We believe that
our current capital resources, together with the proceeds from this offering,
investments from our strategic partners and our $110,000,000 senior secured
credit facility will be sufficient for our funding and working capital
requirements and for the deployment and operation of our networks in our
28 targeted markets through the middle of 2000. We do not expect our current
working capital deficiency to have any material effect on our business.
In July 1998, we entered into a bridge loan agreement with MSBLF under which
MSBLF agreed to provide up to $50,000,000 of senior increasing rate notes. The
MSBLF bridge loan allowed us to draw funds and issue notes on an as needed
basis, with interest at 10% per annum. MSBLF received fees consisting of cash
and warrants. Under the bridge loan agreement, we issued warrants to purchase
2,250,000 shares of common stock to MSBLF. In addition, we were obligated to
issue warrants to MSBLF to purchase up to an additional 1,350,000 shares from
time to time:
. as funds were drawn and notes were issued under the bridge loan; and
. if any note remained outstanding under the bridge loan for at least three
months.
As of December 31, 1998, we had drawn down all $50,000,000 under the bridge
loan and issued 2,587,500 warrants to MSBLF. Proceeds from our secured credit
facility (described below) have been used to repay principal (approximately
$51,000,000 as of December 31, 1998) and interest on all
32
<PAGE>
outstanding indebtedness under the bridge loan and other indebtedness. Upon
repayment of the bridge loan, MSBLF owned warrants to purchase 2,925,000 shares
of common stock. For more information about the terms of the bridge warrants,
see "Description of Capital Stock--Bridge Warrants. "
In July and August 1998, we completed two rounds of private financing
involving the issuance and sale of an aggregate of $4,402,000 of Series C
preferred stock. The terms of a subsequent investment were thereafter
documented and conditions precedent to the subsequent closing were fulfilled.
The subsequent round of Series C financing, which was negotiated beginning in
December 1998 and closed in February 1999, involved the issuance and sale of an
aggregate of $59,171,000 of Series C preferred stock. The proceeds of these
financings, net of expenses, totalled $61,308,000. Purchasers of our Series C
preferred stock included, among others, funds affiliated with At Home
Corporation, Intel Corporation, Carlyle Partners II, L.P. and Vulcan Ventures
Incorporated.
On April 5, 1999, we entered into a secured credit facility with Goldman
Sachs Credit Partners L.P. and Newcourt Commercial Finance Corporation
consisting of:
. a $10,000,000 senior first priority secured term loan, all of which we
drew down on the closing date;
. a $50,000,000 senior first priority secured revolving credit facility
that will convert into a senior first priority secured term loan within
six months, $5,000,000 of which we drew down on the closing date; and
. a $40,000,000 second priority secured term loan, all of which we drew
down on the closing date.
On April 27, 1999, we entered into an amendment to the secured credit
facility under which the senior first priority secured revolving credit
facility was increased by $10,000,000. The secured credit facility matures on
the fifth anniversary of its closing date.
The total amounts outstanding under the senior first priority secured loans
bear interest, in the absence of an event of default, at our option at:
. the LIBOR rate plus four and one-half percent per year; or
. the greater of the prime rate or the federal funds rate as announced by
The Wall Street Journal plus four percent per year.
The total amounts outstanding under the second priority secured term loan
bear interest, in the absence of an event of default, at our option at:
. the LIBOR rate plus eight percent per year; or
. the greater of the prime rate or the federal funds rate as announced by
The Wall Street Journal plus seven and one-half percent per year.
Borrowings under the secured credit facility are restricted based upon our
leverage ratio and the value of our telecommunications assets from time to
time. We have used and intend to use the proceeds of the secured credit
facility:
. to continue building our networks;
. to repay the MBLSF bridge loan and other indebtedness;
. to fund working capital; and
. for general corporate purposes.
We pledged to the lenders under the secured credit facility all of the capital
stock in NorthPoint Communications, Inc. held by NorthPoint Communications
Group, Inc. We and our subsidiaries also pledged as additional collateral under
the secured credit facility all of our personal property.
33
<PAGE>
In March and April 1999, we issued and sold an aggregate of $38,800,000 of
Series D-1 preferred stock. Purchasers of our Series D-1 preferred stock
included ICG Services, Inc. (an affiliate of ICG Communications, Inc.), At Home
Corporation, Verio Inc., Cable & Wireless USA, Inc., Concentric Network
Corporation, ALC Communications Corporation (an affiliate of Frontier
Corporation), Network Plus Corporation and Netopia, Inc.
We believe that proceeds from this offering, together with existing capital
resources, the investments from our strategic partners and proceeds from our
secured credit facility, will be sufficient to fund our expansion and operating
deficits through the middle of 2000. However, we may decide to seek additional
capital earlier than the middle of 2000, the timing of which will depend upon
market conditions, among other things. The actual amount and timing of our
future capital requirements may differ materially from our estimates as a
result of, among other things, the demand for our services and regulatory,
technological and competitive developments, including additional market
developments and new opportunities, in our industry. We may also need
additional financing if:
. we alter the schedule, targets or scope of our network rollout plan;
. our plans or projections change or prove to be inaccurate; or
. we acquire other companies or businesses.
We may obtain additional financing through commercial bank borrowings,
equipment financing or the private or public sale of equity or debt securities.
We may be unsuccessful in raising sufficient additional capital. In
particular, we may be unable to raise additional capital on terms that we
consider acceptable, that are within the limitations contained in our financing
agreements and that will not impair our ability to develop our business. If we
fail to raise sufficient funds, we may need to modify, delay or abandon some of
our planned future expansion or expenditures, which could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
As of December 31, 1998, we had not entered into any financial instruments
that expose us to material market risk.
Impact of Year 2000 Issue. We believe that our computer systems and software
are year 2000 compliant. However, we cannot assess the impact of potential year
2000 problems on operators of traditional telephone systems or other service
providers (such as electric and utility) in the markets in which we operate.
Because our systems will be interconnected with those of traditional telephone
companies who operate these traditional telephone systems and other service
providers, any disruption of operations in the computer programs of these
service providers would likely have an impact on our systems in our markets. We
cannot assure you that this impact will not have a material adverse effect on
our business, prospects, financial condition and results of operations.
We have inventoried and tested our enterprise application systems, including
internally-developed and vendor-developed applications and off-the-shelf
software and hardware relating to our internal information systems, and believe
that such systems are year 2000 compliant. We have not reviewed our non-
information technology systems for year 2000 issues relating to embedded
microprocessors. To the extent that year 2000 issues exist, these systems may
need to be replaced or upgraded. Because our systems were implemented within
the last two years, we do not anticipate significant year 2000 issues to arise,
although we cannot be certain about this.
In the provision of our DSL services, we use third party equipment and
software and interact with traditional telephone companies that have equipment
and software that may not be year 2000 compliant. We have requested assurances
regarding year 2000 compliance from our equipment and
34
<PAGE>
software vendors and the traditional telephone companies. We currently have
received assurances from most of our vendors and anticipate receiving
assurances soon from the remaining vendors. We have not received similar
assurances from the traditional telephone companies and do not anticipate that
we will be able to do so. We plan to test our system interfaces with at least
one traditional telephone company if we are able to obtain traditional
telephone company cooperation. However, failure of our third-party or
traditional telephone company software and equipment to be year 2000 compliant
could cause us to incur significant expense in correcting any problems that
arise, impacting our business, prospects, operating results and financial
condition.
We have requested information from our business partners regarding their year
2000 preparedness, but have not been assured that all of their systems are year
2000 compliant. We plan to test and validate our system interfaces with
partners and to develop a contingency plan prior to the end of the third
quarter of 1999. However, if our partners' systems are not year 2000 compliant,
our business, prospects, operating results and financial condition could be
adversely affected.
In the normal course of doing business with our partners and suppliers, we
establish manual back-up processes (fax, phone, e-mail, etc.) for all critical
interconnections and business functions. These manual processes are designed to
replace our automated interfaces and processes in the event of a failure. We
plan to test these contingency procedures on a frequent basis to ensure that
they work properly in support of our business. Our contingency procedures will
be available if year 2000 problems occur in any of our partner or supplier
environments. In addition, we plan to conduct back-ups of all of our mission-
critical systems in advance, with the ability to revert to previous day
transactions to ensure minimal loss of corporate data if year 2000 problems
occur in our systems.
Our aggregate historical and future costs for year 2000 analysis, planning
and remediation have not been material to date and we do not expect them to be
material in the future. However, we cannot assure that these costs will not be
greater than we currently expect. If these costs increase significantly, our
business, prospects, operating results and financial condition could be
adversely affected. Our complete internal review of and planning for year 2000
issues is anticipated to be completed by November 1, 1999.
Recently Issued Accounting Pronouncements
On January 1, 1998, we adopted SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income as defined
in SFAS No. 130 includes all changes in equity (net assets) during a period
from nonowner sources. SFAS No. 130 is effective for years beginning after
December 15, 1997. Adoption of SFAS No. 130 did not have any material impact on
our financial statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. We have not yet determined the impact
of adopting SOP 98-1, which will be effective for our year ending December 31,
1999.
On April 3, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), Reporting on the Costs of Start-Up
Activities. SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. As we
have not capitalized such costs to date, the adoption of SOP 98-5 is not
expected to have an impact on our financial statements.
35
<PAGE>
BUSINESS
History
NorthPoint was founded in May 1997 by six former MFS/WorldCom executives who
developed and implemented the first commercial DSL service. We began offering
our network services in March 1998 and have since entered into strategic and
commercial relationships with Microsoft, Tandy (the parent company of the
RadioShack stores), @Home, Intel, Verio, Cable & Wireless, Frontier
Corporation, Concentric Network, ICG Communications, Enron Communications,
Network Plus and Netopia among others. Most of these companies and The Carlyle
Group, Vulcan Ventures, Accel Partners, Benchmark Capital, Greylock and others
have invested in our company.
We have expanded our management team by adding, among others, Elizabeth
Fetter as our President and Chief Operating Officer. Ms. Fetter was previously
the Vice President and General Manager of the Consumer Services Group at U S
WEST. In addition, Reed Hundt, the former Chairman of the Federal
Communications Commission, is a member of our board of directors.
Industry Overview
Data communications is the fastest growing segment of the telecommunications
industry. Small- and medium-sized businesses, people working in home offices
and telecommuters are increasingly demanding high-speed data connections for
applications such as Internet access, intranets, extranets, telecommuting,
e-commerce, e-mail, video conferencing and multimedia.
The number of Internet users worldwide has increased substantially over the
last several years, reaching nearly 140 million in 1998. Forrester Research,
Inc. projects that the total market for data networking services and Internet
access will grow from $6.2 billion in 1997 to approximately $49.7 billion by
2002, of which approximately $27.9 billion will be from services to businesses.
Further, Forrester Research estimates that Internet commerce revenue could
reach $3.2 trillion by 2003.
Small- and Medium-Sized Businesses. We expect that a significant portion of
the growth in data communications will be generated by small- and medium-sized
businesses with up to 500 employees. Data communications, including the
Internet, allow these businesses to compete more effectively by streamlining
communications among employees, customers and suppliers. However, to take full
advantage of these productivity-enhancing applications and the Internet, small-
and medium-sized businesses need high-speed, secure and dedicated data
connectivity.
Home Offices and Telecommuters. We expect that people using computers from
their homes to connect to corporate networks or to the Internet for in-home
business purposes will also be a significant source of demand for high-speed
data connectivity. According to International Data Corporation, or IDC, there
were 26 million residences with computers in their home offices in the U.S. in
1998, growing to an estimated 39.2 million by 2002. A significant portion of
people who work in home offices and telecommuters need access to corporate
networks and/or the Internet for a variety of applications, including e-mail,
databases and corporate intranets. According to The Yankee Group, the market
for remote access services is expected to grow from $460 million in 1998 to
$2 billion by 2002.
Traditionally, small- and medium-sized businesses, people who work in home
offices and telecommuters have relied on low-speed lines for data transport.
For example, according to IDC, approximately 78% of Internet access revenues
derived from small- and medium-sized businesses in 1997 were generated through
the traditional telephone system, using relatively slow 28.8 to 56 kilobits per
second dial-up modems or integrated services digital network (ISDN) lines. For
higher speed connections, these end users have had to purchase T1 service, a
digital transmission link which is fast (1.544 megabits per second) and always-
on, but expensive (typically $300 to $1000 per month depending upon distance
and region).
36
<PAGE>
Neither the slow dial-up modems and integrated services digital network
service nor the expensive T1 option is an adequate solution for most small- and
medium-sized businesses, people who work in home offices and telecommuters. The
lack of optimal price-performance solutions has left these end users
underserved, since when using a T1 service, the cost is high, and when using a
dial-up modem or integrated-services digital network service, the speed of data
transmission is slow.
Our Solution
We believe that our DSL networks and the wide range of price-performance data
transport options we provide meet the demands of this large, underserved group
of end users. We attach high-speed digital equipment at both ends of a copper
line, allowing data transmission to bypass the components of the traditional
telephone system that are responsible for creating the local data bottleneck.
By using our services with their own Internet access and other data
applications, our network service provider customers--Internet service
providers, long-distance and local telephone companies, and data service
providers--can offer small- and medium-sized businesses, people who work in
home offices and telecommuters:
. A Range of Speed Options. We offer a wide range of data transport speeds,
each with a combination of price and performance that is superior to
traditional options.
. Scaleable Services. End users can upgrade service to higher performance
levels without adding hardware.
. Always-On Connectivity. Traditional networks require a user or system to
dial a phone number and wait while the modem connects to a data service
provider such as an Internet service provider. Our service is always on,
providing instantaneous connections and the capability to receive or
transmit information continuously.
. Reliability. We can remotely monitor and troubleshoot an end user's
connection to ensure reliable performance.
. Secure Transport of Sensitive Business Data. We offer our services over
dedicated copper telephone lines, which ensures that data is protected on
its path to and from an end user.
Our networks and services offer a number of advantages to our network service
provider customers over alternative local access solutions, including:
. A Rapid, Capital-Efficient Method for Providing Service in a Metropolitan
Area. By connecting at one point to each of our metropolitan networks, a
network service provider can immediately offer service to any end user
within the geographic boundaries served by traditional telephone company
central offices in which we have installed our equipment. Using our
networks in this way reduces the capital and operating investment a
network service provider would otherwise need to reach end users in
metropolitan areas that we serve.
. Electronic Connections to Our National Operations Support Systems. We
provide our customers an electronic connection to our national pre-
qualification, order entry, customer support, provisioning, accounting
and billing systems. This provides streamlined operations and lower
overhead costs for our customers.
. Guaranteed Data Transmission Speeds and Service Quality. We guarantee
data throughput at high speeds on our networks.
. Continuously Monitored Networks. We have remote monitoring capabilities
and continuously monitor the entire network from our network control
center. We use three methods to monitor our networks so that we can
continue to monitor the networks even if one or two methods fail.
37
<PAGE>
Strategy
Our objective is to become the leading national provider of local data
networks and transport services to network service providers serving small- and
medium-sized businesses, people who work in home offices and telecommuters. To
achieve this objective, we will:
. Focus Initially on Business District Central Offices. Before entering a
market, we prepare a detailed analysis of that market's central office
service areas using industry data and business demographic statistics. We
use this analysis to identify attractive service areas and develop a
schedule for network deployment and expansion. We have initially targeted
central offices in our 28 target markets with the highest density of
small- and medium-sized businesses. Based upon our analysis, we believe
that when complete, our networks will be able to reach approximately four
million businesses, including more than 80% of the small- and medium-
sized businesses in our 28 markets. By focusing initially on high-density
business districts, we believe we can secure scarce space in central
offices, open markets more rapidly, maximize the economic return from our
capital expenditures and enable our customers to address a significant
portion of their target end users in each geographic market quickly.
. Enter Markets Early. We seek to obtain an advantage by being the first,
or one of the first, DSL providers in our target markets to offer
optimized local data transport solutions. We believe that the first mover
advantage is valuable because after a network service provider
establishes a relationship with a local data network service provider,
there are costs associated with adding additional providers or switching
providers. We are already providing services to network service providers
in 17 metropolitan areas.
. Rapidly Establish a National Presence. Our goal is to offer local data
network and transport services to our customers in 28 metropolitan areas
by year-end 1999. We expect that offering high speed local data transport
solutions in many metropolitan areas will make our services more
attractive to national and regional network service providers by enabling
them to use our single system interface and uniform provisioning
procedures in each of our markets. We are authorized to operate as a
competitive telecommunications company in all of our 28 target markets.
. Design Networks for Business End Users. Our networks are designed for
business users and business applications and have the appropriate
security, reliability and performance characteristics for those users and
applications. Currently, we are using a type of DSL technology that
permits symmetric data transmission--the same speed of data transport to
and from the end user--which we believe is the best-suited for most
business applications. We believe that business end users will not
compromise the security, reliability and performance of their data
connections and are willing to pay for those features.
. Focus On Wholesale Marketing. We market our local data transport
solutions on a wholesale basis to network service providers who, in turn,
sell to and support end users. By marketing to network service providers,
we:
. minimize sales and marketing expenses by enabling our sales force to
focus on prospective high-volume wholesale customers;
. amortize the cost of our fixed capital expenses over a large base of
end users more rapidly;
. minimize our end user support costs; and
. achieve a nationwide presence more quickly.
. Provide Excellent Customer Service. We are dedicated to providing our
customers and their end users superior customer support and service. Our
systems provide management reports and other critical, real-time data for
our network service provider customers.
38
<PAGE>
. Exploit Our Scaleable Systems. Our operations support systems have been
designed to take advantage of efficiencies in our digital networks and
can grow with our business. We believe that these systems, including our
electronic connections to traditional telephone companies, will minimize
our overhead and increase both customer and end user satisfaction. Our
systems also give us the capability to monitor usage by our network
service providers' end users and notify network service providers when an
end user's usage patterns indicate that an upgrade in speed is warranted.
These upgrades can be performed remotely and require no additional
capital expenditures.
. Enter Into Strategic Relationships. We have entered into strategic
relationships with Microsoft, Tandy, @Home, Intel, Verio, Cable &
Wireless, Frontier Corporation, Concentric Network, ICG Communications,
Enron Communications, Network Plus and Netopia. We anticipate entering
into additional relationships with others. We believe that these
relationships are valuable because they provide additional technical,
marketing and distribution expertise and, in some cases, involve capital
investment and guaranteed or targeted numbers of new end-user lines.
. Develop New Data Products and Solutions. We intend to expand our product
offerings by providing additional value-added services over our networks
and enhanced transport solutions.
Our Markets
We currently provide service in 17 metropolitan areas and intend to offer
services in a total of 28 metropolitan areas by the end of this year. We
believe that offering local data network and transport services in many areas
makes our services more attractive to national and regional network service
providers because they can use our single system interface and uniform
provisioning procedures in each of our markets. Our existing and planned
markets for 1999 are:
<TABLE>
<CAPTION>
West Central East
---- ------- ----
<S> <C> <C>
*Los Angeles(1) *Austin *Atlanta
Portland *Chicago *Baltimore
Sacramento *Cleveland *Boston
*San Diego Columbus *Miami/Fort Lauderdale
*San Francisco Bay Area(2) *Dallas *New York(3)
Seattle Denver Orlando
*Detroit *Philadelphia
*Houston Raleigh-Durham
Minneapolis Tampa-St. Petersburg
*Pittsburgh *Washington, D.C.(4)
San Antonio
St. Louis
</TABLE>
- --------
* Markets in which we currently provide services.
(1) Includes Orange County.
(2) Includes San Francisco, Oakland and San Jose.
(3) Includes northern New Jersey.
(4) Includes northern Virginia and parts of Maryland.
39
<PAGE>
Network Architecture
We establish each of our regional networks by installing digital
communications equipment in the traditional telephone company central offices
with the highest density of small- and medium-sized businesses. DSL technology
provides for high speed transmission of information over existing copper
telephone lines by encoding the information in a digital format. Our equipment
uses this technology to transmit high speed data over copper lines between the
central office and the end user. In turn, we connect our equipment in each
central office to our metropolitan node, a facility where data is collected in
each metropolitan area. Our customers in each metropolitan area are connected,
typically by leased fiber optic lines, to the metropolitan node. For our
customers, having this single point of interconnection with us in each city
reduces their capital expenditures and local network costs because we aggregate
and disseminate their traffic to and from a central place. By leasing and
reusing the existing copper wire and fiber optic infrastructure, we are able to
use our capital to purchase and develop value-added elements of the network,
including packet switches, digital communications equipment for each central
office, and operations support systems.
Set forth below is a diagram depicting the flow of data traffic in a local
metropolitan market.
[DIAGRAM OF THE FLOW OF DATA TRAFFIC IN A LOCAL METROPOLITAN MARKET]
Our Equipment. We install DSL modems at the end user's premises and lease
copper telephone wires from the traditional telephone company. These wires run
from the end user's premises to the central office of the telephone company,
where we lease space under tariff or renewable interconnection agreements.
Within this space, we maintain equipment that connects to the local copper
wires. Our central office equipment supplies the digital line code that enables
high speed data transport over copper lines, organizes that data into packets
and aggregates end-user traffic for transport to and from our metropolitan
node. Data traffic is aggregated from various central offices at the
metropolitan node and then transported to the network service providers over
leased fiber optic lines. Our systems allow data transmission to bypass the
components of the traditional telephone system that are responsible for
creating inefficient data transmission. Therefore, while using the existing
copper telephone wires from each end user to the central office, we are able to
offer high speed data transmission.
Central Office Installation. We contract with Lucent on a per-order basis to
install our equipment in all traditional telephone company central offices in
which we have space nationwide. Lucent preconfigures this equipment in
accordance with our blueprint and ships it to our central offices for
installation by Lucent's field operations personnel. We maintain our own field
operations personnel to oversee this process and for subsequent maintenance and
upgrades of the central office equipment.
40
<PAGE>
Sales and Marketing
We provide local data network and transport services on a wholesale basis to
Internet service providers, long-distance and local telephone companies, and
data service providers, whom we call network service providers. Our customers
bundle our services with Internet access or other data-intensive applications
for their customers, who are typically small- and medium-sized businesses,
people who work in home offices and telecommuters. We are providing or have
entered into agreements to provide our services to more than 110 network
service providers and have connected over 3,600 of their end users.
Our Sales Staff. We sell exclusively through wholesale channels. Our indirect
sales and support model allows us to benefit from the sales and support
organization of our customers. Our sales organization currently consists of
account executives who are responsible for securing new customers and assisting
customers in increasing the number of end users. The account executives are
supported by regional marketing managers who provide localized marketing,
competitive analysis, cooperative marketing programs, and sales support within
each of our current 17 markets. We intend to increase the size of our sales and
marketing staff as we enter an additional 11 markets by year-end.
Our Services. Our networks and data transport services have been designed to
enable our customers to meet the rapidly increasing information needs of their
end users. By using NorthPoint's networks, network service providers can offer
data services with better price and performance characteristics than dial-up
and integrated services digital network modems and 1.54 megabit per second
connections. Our current range of services and pricing (before volume
discounts) in the San Francisco Bay Area (although pricing in other markets may
vary) is as follows. Some of our higher speed services may be unavailable to
certain end users whose premises are too far from a central office.
[DIAGRAM OF NORTHPOINT SERVICE OFFERINGS]
* As represented above, 56 kbps service is dedicated.
ISDN pricing is usage-based.
ILEC T1 pricing varies by distance between the end user and the service
provider.
41
<PAGE>
Each of our services is symmetric, providing the same speed to and from the
end user. We believe that this design is well-suited for business data
applications such as Internet access, intranets, extranets, telecommuting, e-
commerce, e-mail, video conferencing and multimedia.
The table below summarizes our services and the targeted end users for each
service. Some of our higher speed services may be unavailable to certain end
users whose premises are too far from a central office. The column marked
"Maximum Range (feet)" in the following table means the estimated maximum
distance between a central office and the end user for each of our services.
<TABLE>
<CAPTION>
Speed Wholesale Maximum
Speed to From End Price Range
Service End user user $/mo. (feet) Use/Market
- ------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <S>
NorthPoint DSL 144 144 kbps 144 kbps 75 35,000 . ubiquitous flat-rate
service at speeds
comparable to
integrated services
digital network (ISDN)
- ------------------------------------------------------------------------------------
NorthPoint DSL 160 160 kbps 160 kbps 75 24,000 . always on e-mail and
web browsing solution
for individuals
- ------------------------------------------------------------------------------------
NorthPoint DSL 200 200 kbps 200 kbps 90 22,850 . small businesses of
less than four
employees with
standard
e-mail and web usage
- ------------------------------------------------------------------------------------
NorthPoint DSL 416 416 kbps 416 kbps 125 18,000 . e-mail and higher
bandwidth Internet
solution for small
businesses with less
than 10 employees
- ------------------------------------------------------------------------------------
NorthPoint DSL 784 784 kbps 784 kbps 165 13,500 . remote local area
network access, web
surfing for businesses
under 25 employees
. supports high-
bandwidth intensive e-
commerce and video-
conferencing
applications
- ------------------------------------------------------------------------------------
NorthPoint DSL 1.04 1.04 Mbps 1.04 Mbps 199 12,350 . remote local area
network access, web
surfing for businesses
. supports large file
transfers and web
hosting
- ------------------------------------------------------------------------------------
NorthPoint DSL T1 1.54 Mbps 1.54 Mbps 250 10,000 . T1 performance
. pricing not distance-
sensitive
</TABLE>
Performance Upgrades. We can remotely increase an end user's speed from 160
kilobits per second through 1.54 megabits per second without upgrading the
equipment located at the end user's premises. Remote upgrades allow an end user
to have improved performance without service interruptions or additional
equipment investment. Approximately 62% of the end users currently connected to
our networks are within 10,000 feet of the central office and can be upgraded
to our fastest service. In general, we expect that end users' needs will evolve
over time, resulting in demand for faster connections. The cost to upgrade an
end user's speed is minimal and the cost to provide faster service is not
substantial.
42
<PAGE>
The Value Proposition to Network Service Providers. In addition to providing
reliable, high quality data network services, we offer our customers:
. Immediate, Capital-Efficient Access to Markets. In the past, network
service providers would have had to make significant capital investments
to provide dedicated data services in their targeted service areas. With
a single connection to our metropolitan node, however, network service
providers can immediately provide high speed dedicated data services to
end users connected to each central office we serve in that metropolitan
area. Using our networks in this way reduces the capital investment a
network service provider would otherwise need to reach end users in our
metropolitan areas and enables network service providers to provide
services in any or all of our markets more quickly than if they built
their own network infrastructure.
. Single-Source Provider. We serve as a single-source provider to our
customers. Because we maintain the physical connection with the
traditional telephone company in each market and assume responsibility
for managing all end-user installations and for monitoring and managing
our data networks, the network service provider does not need to have
relationships with traditional telephone companies, inside wiring
companies or equipment maintenance and monitoring service providers.
. Avoidance of Regulatory Burden. To provide DSL service on its own, an
Internet service provider or other data service provider would have to be
authorized as a competitive telecommunications company in each state in
which it planned to provide service. Network service providers who
partner with us avoid the costs, delays and complexities of achieving
competitive telecommunications company status in each market.
. Transparent Service Delivery to End Users. Our automated order entry,
provisioning and maintenance systems are designed to allow network
service providers to interface directly with our support systems and
provide their end users with completely transparent service delivery. Our
systems also enable our network service providers to pre-qualify
prospective end users. The end user receives a bill from the network
service provider and is not billed by the traditional telephone companies
or NorthPoint.
. Electronic Interfaces. We have designed our national operations support
systems to interface directly with network service providers' existing
provisioning, management, accounting and billing systems. This enables
two-way trouble ticketing and secure connections for both proactive and
query-based status checking on all aspects of service delivery and
billing.
. Broad Range of Speeds and Prices. Our wide range of price and performance
options enables network service providers to match their service
offerings with an end user's specific need for data transmission
capacity. Current options available from traditional telephone companies
are more limited and often fail to address the needs of small- and
medium-sized businesses, people who work in home offices and
telecommuters.
. Identification of Service Upgrade Opportunities. As an end user's data
transmission needs evolve, our operations support systems track end user
usage and identify opportunities on a timely basis for the network
service provider to recommend service upgrades to its end users.
. Reliability and Guaranteed Data Transmission Speeds. We design our
networks for business-quality service, including 24 hours a day, 7 days a
week monitoring, network management links, guaranteed data throughput and
consistent high speed transmission.
. Secure Connections. Our network architecture enables network service
providers to offer to their end users applications that require a secure
connection for transmission of sensitive data.
. Marketing Support. We support our customers by providing sales leads, co-
marketing programs and training for network service provider sales and
service representatives.
43
<PAGE>
Operations Support Systems
Our operations support systems are designed to grow with our business and
provide us with significantly enhanced operational efficiencies.
Connections to Our Customers. Our Web-based ordering system not only allows
network service providers to place orders on-line, but assists them in
marketing the service to new and existing end users, as well as pre-qualifying
prospective end users for the maximum level of service that will be available
to them. Our systems also interface with our customers' management,
provisioning, accounting and billing systems. Our network statistics allow the
network service provider to track historical usage and suggest service upgrades
based upon customer need.
Connections to the Traditional Telephone Companies. We are currently testing
electronic connections with Pacific Bell and Ameritech and plan to have similar
interfaces to all our traditional telephone company suppliers by the end of
1999. This will provide us with a single electronic ordering interface and will
facilitate provisioning large volumes of orders.
Deployment and Operations
To provide and monitor data transport services to end users, network service
providers have traditionally been required to coordinate multiple service and
equipment suppliers. We act as a single-source provider of a network service
provider's local data networking and transport needs, eliminating both
complexity and inconvenience for our customers.
Interconnecting With New Network Service Providers. When a network service
provider decides to use our services in a metropolitan market, we arrange for
the leasing, testing and monitoring of a fiber connection between our
metropolitan node in the area and the network service provider's local point of
presence. Our customers pay a monthly fee for the connection and for our data
traffic aggregation and monitoring services.
Provisioning with the Traditional Telephone Company. We order from the
traditional telephone companies and test copper wire loops that link central
offices and end users. In most cases, if the line is not testing to our
specifications at the time of provisioning or later, our network control center
is able to help the traditional telephone company pinpoint the source of the
problem.
End User Installation. We contract with third parties for the installation of
lines to end users, including any necessary wiring inside end users' premises.
Our contractors also deliver, install and test the customer premise equipment
and test the connection over our network. Our network service provider customer
generally pays an installation charge to us and sells the modem and/or other
customer premise equipment to the end user.
Network Monitoring. We monitor all of our metropolitan networks from our
network control center on a continuous basis, enabling us to identify and
resolve network problems before they affect our customers or their end users.
The network control center maintains visibility into each element of our
networks, allowing us to provide reliable service and efficient customer
installation, as well as rapid responses to customer inquiries.
44
<PAGE>
Key Strategic and Commercial Relationships
We have entered into strategic and commercial relationships that we believe
are valuable because they provide additional technical, marketing and
distribution expertise and, in some cases, involve capital investment and
guaranteed or targeted numbers of new end-user lines. We anticipate entering
into additional strategic and commercial relationships with others.
Our strategic and commercial relationships include:
<TABLE>
<CAPTION>
Investment Description
(millions)
<C> <C> <S>
Microsoft Corporation............... $30.0* Software and services company
Tandy Corporation................... 20.0* Parent company of the
RadioShack electronics,
computing and communications
stores
Verio Inc........................... 10.0 Business Internet solutions
provider, targeting small- and
medium-sized businesses
ICG Communications, Inc. ........... 10.0 Competitive integrated
communications provider
At Home Corporation................. 8.0 Broadband data service
provider with a division,
@Work, focused on small- and
medium-sized businesses
Cable & Wireless USA, Inc. ......... 5.0 Affiliate of multinational
telecommunications company
with extensive international
data and Internet business
Concentric Network Corporation...... 5.0 Internet service provider,
targeting small- and medium-
sized businesses
Frontier Corporation ............... 4.9 Integrated communications
provider offering services in
major markets across the U.S.
through its subsidiaries
Network Plus Corporation............ 2.5 Integrated communications
provider targeting small- and
medium-sized businesses in the
Northeast and Southwest
Intel Corporation................... 2.0 Designs, develops,
manufactures and markets
computer components and
related products at various
levels of integration
Netopia, Inc. ...................... 1.0 Develops, markets and supports
products and services to
enable businesses to use the
Internet
Enron Communications, Inc........... -- Network applications provider
delivering broadband content
and applications to businesses
in the U.S.
</TABLE>
- --------
* At our request, the underwriters have reserved at the initial public offering
price 2,083,333 shares of our common stock for sale to Microsoft Corporation
and Tandy Corporation.
Microsoft. In April 1999, we entered into a strategic relationship with
Microsoft. Microsoft has expressed to us its intention to purchase $30 million
of our common stock in this offering, although it is not bound to do so. Under
our two-year commercial agreement with Microsoft, we will jointly market and
promote NorthPoint's DSL services, and Microsoft intends to use its existing
channels,
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websites and direct sales force to augment our own marketing efforts. Together,
we will also develop the specifications for an open standard to allow broadband
content and application providers to optimize the use of high-speed networks to
deliver their products and services. Microsoft will also provide software
consulting services to us. In addition, if Microsoft purchases $30 million of
our common stock in this offering, Microsoft will receive a warrant to purchase
an additional $30 million of our Class B common stock at a price that is 50%
above the initial public offering price.
Tandy. In April 1999, we entered into a strategic alliance with Tandy, parent
company of the RadioShack stores. Tandy has expressed to us its intention to
purchase $20 million of our common stock in this offering, although it is not
bound to do so. Under the terms of the five-year agreement, Tandy designated us
a preferred provider of DSL services for sale to its customers in markets we
serve. We expect our network to cover approximately 1,400 Tandy-owned
RadioShack stores nationwide by the end of 1999. In these stores, RadioShack
will demonstrate our services and sell high-speed Internet access using our
network services. We have agreed to install DSL connections and certain
hardware in RadioShack stores that will be selling our services.
Verio. In February and March 1999, we entered into a strategic relationship
with Verio. Verio has designated us as its preferred provider in 21 of our 28
markets. Verio also committed to purchase a specified number of DSL lines over
the two-year term of the agreement. As of March 31, 1999, Verio marketed
NorthPoint DSL services in 10 markets through a broadcast media campaign
including television and radio advertisements in which the NorthPoint DSL
service is "co-branded" with Verio's Internet services. In connection with
these agreements, Verio provided us with $5.6 million pursuant to a
subordinated convertible promissory note and invested $4.4 million in our
Series D-1 preferred stock. Verio's $10 million investment will convert into
Class B common stock upon this offering.
ICG. In March 1999, we entered into several strategic agreements with
subsidiaries of ICG. Pursuant to these agreements, ICG designated us as its
preferred provider of DSL services, sold us all of its DSL network equipment,
agreed to share certain of its central office space with us, committed to
purchase a specified number of DSL lines and agreed to provide us with local
transport services. In conjunction with these agreements, ICG invested $10
million in our Series D-1 preferred stock.
@Home. In June 1998, we entered into a strategic agreement with @Work (a
division of At Home Corporation) in which @Work agreed to sell our services to
its small- and medium-sized business customers. In March 1999, we entered into
an amended agreement with @Work in which @Work established targeted volume
commitment levels and agreed to jointly develop and implement marketing
programs to expand the demand for @Work DSL lines supplied by us. In addition,
we will jointly pursue additional online activities that will provide services
to small- and medium-sized businesses and promote awareness of our services. In
July 1998, At Home Corporation purchased $2 million of our Series C preferred
stock and in March 1999, it invested $6 million in our Series D-1 preferred
stock.
Cable & Wireless. In March 1999, we signed a two-year agreement with Cable &
Wireless in which we were designated as Cable & Wireless' preferred DSL
provider in the U.S. We will work with Cable & Wireless to develop new products
for the domestic and international markets, as well as to jointly market DSL
and other products. In conjunction with the agreement, Cable & Wireless
invested $5 million in our Series D-1 preferred stock.
Concentric. In April 1999, Concentric committed to purchase a specified
number of DSL lines over the two-year term of our strategic agreement.
Concentric also agreed to use our services in 20 metropolitan areas, in
addition to the seven metropolitan areas in which they currently offer our
services. In addition, Concentric and NorthPoint will undertake development and
co-marketing of new
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products. In conjunction with the agreement, Concentric invested $5 million in
our Series D-1 preferred stock.
Frontier. In April 1999, a subsidiary of Frontier signed a strategic
development and services agreement with us. In the two-year agreement, Frontier
designated us as a preferred provider of DSL services. In addition, we will
jointly undertake development of new products and systems interfaces.
NorthPoint may also purchase transport, hosting, peering and collocation
services from Frontier. In conjunction with the agreement, another affiliate of
Frontier invested $4.9 million in our Series D-1 preferred stock.
Network Plus. In March 1999, we entered into a two-year agreement with
Network Plus in which we were designated as Network Plus' preferred provider of
DSL lines. Network Plus also committed to purchase a specific number of DSL
Lines. We will also work with Network Plus to develop new products. In
conjunction with the agreement, Network Plus invested $2.5 million in our
Series D-1 preferred stock.
Intel. We have entered into a strategic relationship with Intel, a company
that designs, develops, manufactures and markets computer components and
related products at various levels of integration. Intel is also one of the
supporters of the G.lite specification for a consumer version of DSL. We are
working with Intel to enhance our service offerings. In August 1998, Intel
purchased $2 million of our Series C preferred stock and acquired contingent
warrants to purchase 212,568 shares of our common stock at the same price per
share. The contingent warrants become exercisable by Intel on or after
September 30, 1999 provided that, by that date, Intel has placed good faith
purchase orders for our DSL services in Phoenix, Arizona and Portland, Oregon,
or we have not used our best efforts to launch our services in those two
markets.
Netopia. In April 1999, Netopia designated NorthPoint as the preferred
provider for its Small Business DSL Education Center and DSL Affiliate Program
on the GeoCities Internet Portal website. This partnership allows us to receive
customer referrals as a result of Netopia's and GeoCities' promotional
activities. The approximately 3.5 million GeoCities website owners (called
Homesteaders) will have the opportunity to participate in the Netopia DSL
Affiliate Program and the approximately 19.5 million GeoCities visitors per
month will have the opportunity to visit the DSL Education Center. In
conjunction with the agreement, Netopia invested $1 million in our Series D-1
preferred stock.
Enron Communications. In April 1999, Enron Communications entered into a
strategic product distribution agreement with us. Under this agreement, we will
enable our networks to deliver Enron's advanced, broadband applications to end
users on our networks. We will receive a portion of the revenue generated by
such applications. We have agreed to cooperate in distributing future products
and applications that meet the needs of our customers and end users and will
jointly promote such services to our network service providers. Enron
Communications is the communications subsidiary of Enron Corp., one of the
world's leading integrated natural gas and electricity companies.
Alternative Data Transport Technologies
We believe that our DSL-enabled networks offer price and performance
characteristics that are attractive to network service providers for many of
their end users when compared with other options:
. Dial-up Analog Modems. Analog modems use the traditional telephone
system, and are the most commonly used data transport technology today.
Because the electronic components of the traditional telephone system
limit data transmission speeds, however, these traditional modems rarely
exceed data throughput of 56 kilobits per second. In addition, modems
generally require that the user or system dial a phone number to connect
with a data service, which creates delays in making connections and may
present security concerns.
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. Integrated Services Digital Network (ISDN). Integrated services digital
network is a technology that works with the traditional telephone system
to send voice and data over existing copper wires at speeds up to 144
kilobits per second. Integrated services digital network is equal in
speed or slower than all of our services. Integrated services digital
network is typically priced with usage charges, making an always-on
connection with an integrated services digital network modem
prohibitively expensive.
. T1 Service. T1 service provides data transmission speed of 1.544 megabits
per second. T1 pricing has traditionally been sensitive to the distance
between an end user and its service provider, creating marketing
difficulties and pricing anomalies.
. Cable Modems. Cable modem networks have penetrated certain residential
markets, but only about half of all homes nationwide are wired for high-
capacity cable. In addition, we believe that many of our target business
end users are not passed by existing cable infrastructure. Moreover,
although cable modems offer high speed services, they operate over a
shared cable infrastructure and therefore cannot offer guaranteed
bandwidth or the network security features that we believe a majority of
our targeted end users demand. In addition, cable modems do not offer
symmetric bandwidth, which we believe is important for business
applications.
. Wireless. Few of our target end users are served today by fixed wireless
infrastructure. We believe further rollout will be slowed by the need for
fixed wireless service providers to obtain roof rights and overcome
technological limitations and interference from terrain, obstructions and
weather.
. Fiber. Fiber optic lines provide high speed data transport, but today
reach only a fraction of our target end users. Local fiber optic builds
have generally targeted large corporations based in downtown office
buildings. Moreover, even where fiber passes a building, our DSL-enabled
network may be more cost effective for small- to medium-sized businesses.
For more information about the highly competitive market in which we operate,
see "Risk Factors--The Market in Which We Operate is Highly Competitive, and We
May Not Be Able to Compete Effectively, Especially Against Established Industry
Competitors with Significantly Greater Financial Resources."
Government Regulation
Overview. Our telecommunications services are subject to varying degrees of
federal, state and local regulation. The FCC and state utility commissions
regulate telecommunications common carriers. A telecommunications common
carrier is a company which offers telecommunications services to the public or
to all prospective users on standardized rates and terms. Our data transport
services are common carrier services.
The FCC exercises jurisdiction over telecommunications common carriers, and
their facilities and services, to the extent they are providing interstate or
international communications. The various state regulatory commissions retain
jurisdiction over telecommunications carriers, and their facilities and
services, to the extent they are used to provide communications that originate
and terminate within the same state. The degree of regulation varies from state
to state.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and state utility commissions have adopted many new rules to
implement these new laws and encourage competition. These changes, which are
still incomplete, have created new opportunities and challenges for us and our
competitors. The following summary of regulatory developments and legislation
does not purport to describe all
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present and proposed federal, state and local regulations and legislation
affecting the telecommunications industry. Certain of these and other existing
federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which this industry operates. Neither
the outcome of these proceedings nor their impact upon the telecommunications
industry or us can be predicted at this time.
Federal Regulation. Although we currently are not subject to price cap or
rate of return regulation at the federal level and are not currently required
to obtain FCC authorization for the installation, acquisition or operation of
our network facilities, we nevertheless must comply with the requirements of
common carriage under the Communications Act of 1934 (the "Communications
Act"), as amended, to the extent we provide interstate services. Pursuant to
the Communications Act, we are subject to the general requirement that our
charges and regulations for communications services must be "just and
reasonable" and that we may not make any "unjust or unreasonable
discrimination" in our charges or regulations. Certain other specific
regulations applicable to us are discussed below. The FCC also has jurisdiction
to act upon complaints against any common carrier for failure to comply with
its statutory obligations.
Comprehensive amendments to the Communications Act were made by the
Telecommunications Act, which was signed into law on February 8, 1996. The
Telecommunications Act effected plenary changes in regulation at both the
federal and state levels that affect virtually every segment of the
telecommunications industry. The stated purpose of the Telecommunications Act
is to promote competition in all areas of telecommunications. While it may take
years for the industry to feel the full impact of the Telecommunications Act,
it is already clear that the legislation provides us with both new
opportunities and new challenges.
The Telecommunications Act greatly expands the interconnection requirements
on the incumbent local exchange carriers, or ILECs. The Telecommunications Act
requires the ILECs to:
. provide physical collocation, which allows companies such as us and other
interconnectors to install and maintain their own network termination
equipment in ILEC central offices, and virtual collocation only if
requested or if physical collocation is demonstrated to be technically
infeasible;
. unbundle components of their local service networks so that other
providers of local service can compete for a wide range of local services
customers;
. establish "wholesale" rates for their services to promote resale by
competitive local exchange carriers, or CLECs, and other competitors;
. establish number portability, which will allow a customer to retain its
existing phone number if it switches from the ILEC to a competitive local
service provider;
. establish dialing parity, which ensures that customers will not detect a
quality difference in dialing telephone numbers or accessing operators or
emergency services; and
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way.
In addition, the Telecommunications Act requires ILECs to compensate
competitive carriers for traffic originated by ILECs and terminated on the
competitive carriers' network.
The FCC is charged with establishing national guidelines to implement certain
portions of the Telecommunications Act. The FCC issued its Interconnection
Order on August 8, 1996. On July 18, 1997, however, the United States Court of
Appeals for the Eighth Circuit issued a decision vacating the FCC's pricing
rules, as well as certain other portions of the FCC's interconnection rules, on
the grounds that the FCC had improperly intruded into matters reserved for
state jurisdiction. On January 25, 1999,
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the Supreme Court largely reversed the Eighth Circuit's order, holding that the
FCC has general jurisdiction to implement the local competition provisions of
the Telecommunications Act. In so doing, the Supreme Court stated that the FCC
has authority to set pricing guidelines for unbundled network elements, to
prevent ILECs from disaggregating existing combinations of network elements,
and to establish "pick and choose" rules regarding interconnection agreements
(which would permit a carrier seeking interconnection to "pick and choose"
among the terms of service from other interconnection agreements between the
ILECs and other CLECs). This action reestablishes the validity of many of the
FCC rules vacated by the Eighth Circuit. Although the Supreme Court affirmed
the FCC's authority to develop pricing guidelines, the Supreme Court did not
evaluate the specific pricing methodology adopted by the FCC and has remanded
the case to the Eighth Circuit for further consideration. In its decision,
however, the Supreme Court also vacated the FCC's rule that identifies the
unbundled network elements that ILECs must provide to CLECs. The Supreme Court
found that the FCC had not adequately considered certain statutory criteria for
requiring ILECs to make those network elements available to CLECs and must
reexamine the matter. Thus, while the Supreme Court resolved many issues,
including the FCC's jurisdictional authority, other issues remain subject to
further consideration by the courts and the FCC. The Eighth Circuit has not yet
reinstated the FCC's rules that were affirmed by the Supreme Court, and several
ILECs have asked the Eighth Circuit not to reinstate those rules until further
legal challenges have been resolved. We cannot predict the ultimate disposition
of those matters. The possible impact of this decision, including the portion
dealing with unbundled network elements, on existing interconnection agreements
between ILECs and CLECs or on agreements that may be negotiated in the future
also cannot be determined at this time.
As a result of the pro-competitive provisions of the Telecommunications Act,
we have been able to obtain authorizations to operate as a CLEC in California,
Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Oregon,
Pennsylvania, Texas, Virginia, Washington and Washington D.C. We have signed
interconnection agreements in all these states except Illinois and Michigan,
where we are procuring unbundled network elements out of tariff.
The FCC has established different levels of regulation for dominant and non-
dominant carriers. Of domestic common carrier service providers, only GTE, the
regional Bell operating companies and other ILECs are classified as dominant
carriers and all other providers of domestic common carrier services, including
us, are classified as non-dominant carriers. As a non-dominant carrier, we are
subject to less FCC regulation than dominant carriers.
The Telecommunications Act also directs the FCC, in cooperation with state
regulators, to establish a universal service fund that will provide subsidies
to carriers that provide service to under-served individuals and in high cost
areas. A portion of carriers' contributions to the universal service fund also
will be used to provide telecommunications-related facilities for schools,
libraries and certain rural health care providers. The FCC released its initial
order in June 1997. This order will require us to contribute to the universal
service fund, but may also allow us to receive payments from the fund if we are
deemed eligible. We also may provide service to under-served customers in lieu
of making universal service fund payments. The FCC's implementation of
universal service requirements remains subject to judicial and additional FCC
review. Additional changes to the universal service regime, which would
increase our costs, could have adverse consequences for us.
Recently, various regional Bell operating companies have filed petitions with
the FCC requesting regulatory relief in connection with the provision of data
services, including DSL services. In response to these petitions, the FCC
issued a decision that data services generally are telecommunications services
that, when provided by ILECs, are subject to the FCC's interconnection rules,
including the rule requiring that an ILEC's data services be subject to
unbundling and resale requirements under the Telecommunications Act. Petitions
have been filed with the FCC asking it to reconsider its decision in this
regard. The FCC has also initiated a proceeding to determine whether ILECs will
be
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able to avoid certain of their obligations by providing data services through
"truly" separate affiliates, whether the FCC will specifically require ILECs to
unbundle their DSL equipment and resell DSL services, and whether the FCC will
grant the regional Bell operating companies relief in local access and
transport areas for the provision of data services. A decision by the FCC on
these issues is expected shortly. In addition, various regional Bell operating
companies have requested relief from dominant carrier regulation for their data
services in certain regions. The effect that these proceedings will have on our
ability to obtain facilities and services from ILECs and on the competition
that we will face from ILECs cannot be predicted.
As part of the FCC's proceeding regarding the provision of data services, the
FCC adopted new rules designed to make it easier and less expensive for CLECs
to obtain collocation at ILEC central offices by, among other things,
restricting the ILECs' ability to prevent certain types of equipment from being
collocated and requiring ILECs to offer alternative collocation arrangements to
CLECs. The FCC also adopted rules relating to spectrum compatibility, and
initiated a new proceeding to address spectrum compatibility issues in greater
detail. In addition, this new proceeding will address line sharing, which, if
implemented, would allow CLECs to offer data services over the same line that a
consumer uses for voice services without the CLEC having to provide the voice
service. We cannot predict what effect the FCC's decisions on these issues will
have on our business.
State Regulation. To the extent that we provide telecommunications services
which originate and terminate within the same state, we are subject to the
jurisdiction of that state's public service commission. As noted above, we have
obtained authorizations to operate as a CLEC in all of our 28 target markets.
We are not subject to price cap or rate of return regulation in any state in
which we are currently certificated to provide local exchange service.
The Telecommunications Act preempts state statutes and regulations that
prohibit or have the effect of prohibiting the provision of competitive local
services. As a result of this sweeping legislation, we will be free to provide
the full range of intrastate local and long distance services in all states in
which we currently operate, and in any states into which we may wish to expand.
While this action greatly increases our addressable customer base, it also
increases the amount of competition to which we may be subject.
Although the Telecommunications Act's prohibition of state barriers to
competitive entry took effect on February 8, 1996, various legal and policy
matters still must be resolved before the Telecommunications Act's policies
promoting local competition are fully implemented.
To the extent we provide intrastate services, we may be required to file
tariffs with the state public service commission setting forth the terms,
conditions and prices for services classified as intrastate. Like the FCC, most
states also consider complaints relating to a carrier's intrastate services or
rates.
As we expand our operations into other states, we may become subject to the
jurisdiction of their respective public service commissions for certain
services offered by us.
Local Government Authorizations. We may be required to obtain from municipal
authorities street opening and construction permits to install our facilities
in certain cities. In some of the areas where we provide service, we are
subject to municipal franchise requirements requiring us to pay license or
franchise fees either on a percentage of gross revenue, flat fee or other
basis. The Telecommunications Act requires municipalities to charge
nondiscriminatory fees to all telecommunications providers, but it is uncertain
how quickly this requirement will be implemented by particular municipalities
in which we operate or plan to operate or whether it will be implemented
without a legal challenge.
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Customers
In 1998, our two largest customers were Concentric Network Corporation and
Flashcom, Inc. See Note 2 to our consolidated financial statements. A loss of
or decrease in business from any major customer could have a material adverse
effect on our business, prospects, financial condition and results of
operations. For more information, see "Risk Factors--A Limited Number of
Customers Account for a High Percentage of Our Revenue and the Loss of a
Significant Customer Could Harm Our Business."
Employees
As of May 5, 1999, NorthPoint had 506 employees (including 42 temporary
personnel and consultants), employed in engineering, sales, marketing, customer
support and related activities, and general and administrative functions. None
of our employees is represented by a labor union, and we consider our relations
with our employees to be good. See "Risk Factors--Our Success Depends on Our
Retention of Executive Officers and Other Key Personnel and Our Ability to Hire
Additional Key Personnel."
Facilities
We are headquartered in facilities consisting of approximately 50,000 square
feet in the San Francisco Bay Area which we occupy under five-year leases. In
addition, we occupy 12,000 square feet in San Francisco under a two-year lease
and have short-term leases for our 25 regional offices. We consider this space
adequate for our current operations. We also lease space in a number of
traditional telephone company central offices and private facilities in which
we locate our equipment.
Legal Proceedings
We are not currently engaged in any material legal proceedings.
We are, however, subject to state commission, FCC and court decisions as they
relate to the interpretation and implementation of the Telecommunications Act,
the interpretation of CLEC interconnection agreements in general and our
interconnection agreements in particular. In some cases, we may be deemed to be
bound by the results of ongoing proceedings of these bodies or the legal
outcomes of other contested interconnection agreements that are similar to our
agreements. The results of any of these proceedings could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, and their ages as of May 5, 1999, are
as follows:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<C> <C> <S>
Michael W. Malaga................ 34 Chief Executive Officer and Chairman of the Board of
Directors
Elizabeth A. Fetter.............. 40 President and Chief Operating Officer
Herman W. Bluestein.............. 52 Chief Development Officer
William J. Euske................. 47 Chief Technical Officer
Nathan T. Gregory................ 47 Chief Network Architect
Henry P. Huff.................... 55 Chief Financial Officer and Vice President, Finance
Robert F. Flood.................. 57 Vice President, Operations
Steven J. Gorosh................. 41 Vice President, General Counsel and Secretary
Samuel M. Lamonica, Jr........... 47 Vice President, Information Technology and Application
Development
Timothy M. Monahan............... 33 Vice President, Corporate Development
Richard J. Morris................ 32 Vice President, Engineering and Program Management
John H. Stormer.................. 36 Vice President, Marketing
Ann W. Zeichner.................. 44 Vice President, Sales
Robert K. Dahl................... 58 Director
Michael J. Fitzpatrick........... 49 Director
Reed E. Hundt.................... 51 Director
Andrew S. Rachleff............... 40 Director
Dino J. Vendetti................. 37 Director
J. Peter Wagner.................. 33 Director
Frank D. Yeary................... 35 Director
</TABLE>
Michael W. Malaga is a founder and has been the Chief Executive Officer and
Chairman of NorthPoint since June 1997. Mr. Malaga was also the President of
NorthPoint from June 1997 to March 1999. From June 1995 to June 1997, Mr.
Malaga was employed at MFS Communications Company, Inc., most recently as the
Director of Strategic Development, where he led the strategic and development
efforts for xDSL and small-business Internet access. While at MFS, Mr. Malaga
played a principal role in integrating its purchase of UUNET Technologies,
Inc., a national ISP. Prior to joining MFS, Mr. Malaga worked at GenRad, Inc.'s
Structural Test Products Division from 1988 to June 1995.
Elizabeth A. Fetter has been the President and Chief Operating Officer of
NorthPoint since March 1999. From January 1998 until joining NorthPoint, Ms.
Fetter was Vice President and General Manager of the Consumer Services Group at
U S WEST where she was responsible for a $4.7 billion dollar business serving
over 11 million customers with integrated wireline, wireless and data services.
In 1997, Ms. Fetter served as Vice President and General Manager of Operator
and Directory Services for SBC Communications Inc. From March 1991 to April
1997, Ms. Fetter held various executive positions in strategy, finance, sales,
marketing and general management at Pacific
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Bell, most recently as President of the Industry Markets Group, where she was
responsible for the Company's wholesale, interconnection and resale businesses.
Ms. Fetter worked in international management consulting and at Chevron
Corporation prior to March 1991.
Herman W. Bluestein has been the Chief Development Officer of NorthPoint
since September 1998. From October 1997 until joining NorthPoint, Mr. Bluestein
was Chief Executive Officer of Pacific Communications Services. From 1995
through 1997, Mr. Bluestein was Vice President of Wireless Strategy and
Development for MCI Communications Corp. (now known as MCI WorldCom, Inc.)
where he developed and executed MCI's wireless strategy, negotiated service
agreements with cellular and PCS providers and managed strategic relationships
with service providers. From 1994 to 1995, Mr. Bluestein was Vice President,
Business Development and Alliance General Manager for MCI's alliance with
British Telecommunications, plc. From 1989 to 1994, Mr. Bluestein was Vice
President of Strategic Business Development and Geographic Expansion for Centex
Telemanagement, Inc., a San Francisco-based telecommunications company that was
acquired by MFS in 1994.
William J. Euske is a founder and has been the Chief Technical Officer of
NorthPoint since June 1997. From July 1992 to March 1997, he was the Senior
Vice President of Advanced Networks and Technology at MFS, where he led the
launch of MFS's xDSL services. As Vice President of Product Engineering for its
Data Services unit, he built one of the first commercial ATM networks, which
supported wire-speed LAN traffic, frame relay and variable bit rate voice
traffic. Prior to his employment at MFS, Mr. Euske was the Head of North
American Research and Development for British Telecom from November 1989 to
July 1992.
Nathan T. Gregory is a founder and has been the Chief Network Architect of
NorthPoint since June 1997. Mr. Gregory was with MFS beginning in September
1992, where he was responsible for the data architecture for the xDSL product
offering, including all equipment evaluation and testing, central office
configuration design, and service offering engineering specifications. Mr.
Gregory was also a principal member of the original MFS Data Services team
responsible for releasing the first commercial ATM service in the United States
as well as its worldwide frame relay product.
Henry P. Huff has been the Vice President, Finance and Chief Financial
Officer of NorthPoint since June 1998. Mr. Huff served as the Chief Financial
Officer of Fabrik Communications, Inc., a messaging service provider, from
October 1996 until June 1998 and as the Chief Financial Officer of Sierra
Ventures, a Menlo Park-based venture capital firm, from February 1992 to
September 1996. From August 1986 to February 1992, Mr. Huff was the Chief
Financial Officer of Centex.
Robert F. Flood is a founder and has been the Vice President, Operations of
NorthPoint since June 1997. Prior to joining NorthPoint, Mr. Flood was the Vice
President of Network Administration at MFS, where he was responsible for
traffic engineering, switch translations, capacity planning and network
infrastructure on both the local and long-distance portions of the network.
From 1990 until joining MFS in June 1994, Mr. Flood was Director of Engineering
and Customer Service at Centex where he was responsible for cost management,
provisioning, traffic engineering and customer service.
Steven J. Gorosh is a founder and has been the Vice President, General
Counsel and Secretary of NorthPoint since June 1997. From June 1994 to June
1997, Mr. Gorosh was the Senior Counsel for MFS Intelenet, where he helped set
regulatory strategy and obtain necessary local service regulatory authority for
the nation's largest alternative local service provider. From June 1991 to June
1994, Mr. Gorosh served as the Senior Counsel at Centex prior to its
acquisition by MFS. From April 1988 until joining Centex, Mr. Gorosh was an
attorney in the FCC Common Carrier and General Counsel Bureaus.
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Samuel M. Lamonica, Jr. has been the Vice President, Information Technology
and Application Development of NorthPoint since May 1998. From March 1995 until
joining NorthPoint, Mr. Lamonica was employed at Network Equipment
Technologies, Inc. as a Senior Manager of application development for N.E.T.'s
customer service, engineering and sales and marketing organizations. From
January 1980 to February 1995, Mr. Lamonica served in various technical
capacities for Pacific Bell, including Pacific Bell Service Manager. He was
responsible for the design, development and implementation of projects
including 411 directory assistance systems, hotel billing systems, language
assistance bureau, automated pay-by-phone, message center mass market voice
mail and business market segmentation.
Timothy M. Monahan is a founder and has been the Vice President, Corporate
Development of NorthPoint since June 1998. From June 1997 until June 1998, Mr.
Monahan served as NorthPoint's Vice President, Finance and Chief Financial
Officer. Mr. Monahan was the Director of Corporate Development at MFS from 1996
to 1997, where he led the financial and planning aspects of its commercial xDSL
product and internal ISP creation project, forming an evaluation basis for the
purchase of UUNET by MFS. From 1993 to 1996, Mr. Monahan was Assistant
Treasurer and Manager of Business Planning at MFS. Prior to joining MFS, from
June 1988 to June 1991, Mr. Monahan was a consultant with Booz, Allen &
Hamilton.
Richard J. Morris has been the Vice President, Engineering and Program
Management of NorthPoint since June 1997. From September 1994 until joining
NorthPoint, Mr. Morris was the Director of Data Product Development at MFS,
where he developed its xDSL product and led project teams in engineering
design, operations, provisioning and product rollout. He was also responsible
for the development of domestic and international data services of MFS,
including LAN extension over ATM, MAE Internet connectivity, ATM and frame
relay services. From 1990 until joining MFS, Mr. Morris was the Manager,
Broadband Networks for British Telecom, where he served as deployment project
manager and its representative on the European ATM deployment forums.
John H. Stormer has been the Vice President of Marketing of NorthPoint since
September 1998. Mr. Stormer was previously NorthPoint's Director of Business
Development since November 1997. From August 1991 to April 1996, Mr. Stormer
held several director positions at Sprint Corporation and later at Sprint
Telecommunications Venture (now known as Sprint PCS). At Sprint PCS, Mr.
Stormer led the early development of the consumer marketing strategy to launch
integrated wireless and wireline services. Prior to Sprint, Mr. Stormer held
management positions at AT&T Corporation in Business Marketing and Operator
Services, and at Marion Merrell Dow (now known as Hoechst Marion Rousell) in
Business Planning and Development.
Ann W. Zeichner has been the Vice President, Sales of NorthPoint since
September 1998. From September 1997 until September 1998, Ms. Zeichner served
as NorthPoint's Vice President, Sales and Marketing. From June 1995 to May
1997, Ms. Zeichner was President and Chief Executive Officer of Cambio
Networks, Inc., a supplier of network infrastructure documentation solutions.
From August 1993 to May 1995, Ms. Zeichner served as a Vice President of Sales
at Centrum, a remote-access startup company acquired by 3Com Corporation. After
the acquisition, she joined 3Com as Vice President of Sales for the Personal
Office Division in July 1994 and later was appointed as 3Com's Corporate
Director of Industry Marketing. Prior to that, she held Vice President Sales
positions at Ascend Communications, Inc., ADC Fibermux Corp. and Micom
Communications Corp.
Robert K. Dahl has served as a member of the board of directors since March
1998. Mr. Dahl has been a General Partner at Riviera Ventures, an Alameda-based
private investment and management firm, since February 1998, where he
specializes in investing in companies in the communications sector. From
December 1993 to July 1997, Mr. Dahl served as the Executive Vice President and
Chief Financial Officer for Ascend Communications, Inc. and from July 1997 to
January 1998, Mr. Dahl served as Ascend's Executive Vice President of Corporate
Planning.
55
<PAGE>
Mr. Dahl also serves as a director of Ascend, Momentum Business Applications,
Inc., the Bank of Alameda and several privately held companies.
Michael J. Fitzpatrick has served as a member of the board of directors since
May 1999. Mr. Fitzpatrick has been President and Chief Executive Officer and a
director of E-Tek Dynamics, Inc. since October 1997 and Chairman of the Board
of E-Tek since April 1999. From July 1994 to October 1997, Mr. Fitzpatrick
served as President and Chief Executive Officer of Pacific Telesis Enterprises,
a telecommunication service provider. While at Pacific Telesis, Mr. Fitzpatrick
also served as Executive Vice President of Marketing and Sales from January
1994 to July 1994 and Executive Vice President of Statewide Markets with
Pacific Bell, an affiliate of Pacific Telesis, from September 1993 to January
1994. From October 1991 to August 1993, Mr. Fitzpatrick was President and Chief
Executive Officer of Network Systems Corporation, an internetworking company.
Reed E. Hundt has served as a member of the board of directors since May
1998. Mr. Hundt served as Chairman of the FCC from 1993 to 1997. He currently
serves as senior advisor at McKinsey & Company, Inc., an international
consulting firm. Prior to joining the FCC, Mr. Hundt was a partner at Latham &
Watkins, an international law firm. Mr. Hundt also serves on the board of
directors of Allegiance Telecom, Inc., Ascend Communications and Novell, Inc.
Andrew S. Rachleff has served as a member of the board of directors since
August 1997. Since 1995, Mr. Rachleff has been a General Partner at Benchmark
Capital, a Menlo Park-based venture capital firm, where he specializes in
investing in companies in the communications industry. Prior to co-founding
Benchmark Capital, Mr. Rachleff spent ten years as a general partner with
Merrill, Pickard, Anderson & Eyre, a Menlo Park-based venture capital firm. Mr.
Rachleff serves on the boards of directors of several privately held companies.
Dino J. Vendetti has served as a member of the board of directors since
February 1999. Mr. Vendetti has managed investments in the telecommunications,
cable and data networking industries for Vulcan Ventures, Inc. since May 1998.
From August 1997 until joining Vulcan Ventures, Mr. Vendetti was Vice President
and Research Analyst at Dain Rauscher covering the telecommunications industry.
From July 1996 to April 1997, Mr. Vendetti was Vice President of Product
Management at Metawave Communications Corporation. From October 1994 to July
1996, Mr. Vendetti served as Director of Business Development and Product
Management for Qualcomm, Inc., where he was responsible for the global
infrastructure product line.
J. Peter Wagner has served as a member of the board of directors since August
1997. Mr. Wagner joined Accel Partners, a San Francisco-based private equity
investing firm, in July 1996, and has been a General Partner since January
1998, where he specializes in investing in companies in the communications
sector, including networking, telecommunications and wireless technology. From
September 1992 to July 1996, Mr. Wagner was a Product Line Manager for Silicon
Graphics, Inc. Mr. Wagner also serves on the boards of directors of several
privately held companies.
Frank D. Yeary has served as a member of the board of directors since
February 1999. Mr. Yeary joined The Carlyle Group in 1998 as a Managing
Director and is in charge of Carlyle's domestic and global telecommunications
and media investments. From January 1995 to June 1998, Mr. Yeary was Managing
Director, Global Head of Telecommunications & Media and was a member of the
Investment Banking Management Committee at Salomon Smith Barney.
Board of Directors
Our certificate of incorporation divides our directors into three classes.
Three Class I Directors hold office initially for a term expiring at the annual
meeting of stockholders in 2000. Two Class II Directors hold office initially
for a term expiring at the annual meeting of stockholders in 2001. Two
56
<PAGE>
Class III Directors hold office initially for a term expiring at the annual
meeting of stockholders in 2002. The members of each class hold office until
their successors are duly elected and qualified. At each annual meeting of
NorthPoint stockholders, the successors to the class of directors whose term
expires at the meeting will be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election.
Committees of the Board of Directors
In March 1999, the board of directors established an audit committee and a
compensation committee. The audit committee consists of Messrs. Dahl, Rachleff
and Yeary, all of whom are outside directors. The audit committee recommends
engagement of NorthPoint's independent auditors, approves the services
performed by such auditors and reviews and evaluates NorthPoint's accounting
policies and its systems of internal accounting controls. The compensation
committee consists of Messrs. Hundt, Wagner and Vendetti, all of whom are
outside directors of NorthPoint. The compensation committee makes
recommendations to the board of directors in connection with matters of
compensation, including determining the compensation of NorthPoint's executive
officers.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the board of directors or the
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. Messrs. Hundt, Wagner and Vendetti are affiliated with Charles Ross
Partners, Accel Partners and Vulcan Ventures, respectively, which are holders
of our preferred stock. See "Certain Transactions."
Executive Compensation
The following table sets forth information concerning compensation of our
Chief Executive Officer and the top four other highly compensated executive
officers whose salary and incentive compensation exceeded $100,000 for the year
ended December 31, 1998 (the "Named Executive Officers"). The column marked
"All Other Compensation" consists of relocation expenses for which we
reimbursed Mr. Bluestein.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
---------------- -----------------
Shares Underlying All Other
Name And Principal Position Salary Bonus Options Compensation
--------------------------- -------- ------- ----------------- ------------
<S> <C> <C> <C> <C>
Michael W. Malaga......................... $140,000 $14,215 -- --
President, CEO and Chairman of the Board
of Directors
Herman W. Bluestein....................... $ 60,769 $20,000 787,500 $105,491
Chief Development Officer
Robert F. Flood........................... $125,000 $12,692 -- --
Vice President, Operations
Samuel M. Lamonica, Jr. .................. $138,769 $13,877 33,750 --
Vice President, Information Technology
and Application Development
Richard J. Morris......................... $124,846 $12,485 -- --
Vice President, Engineering and Program
Management
</TABLE>
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<PAGE>
Option Grants and Exercises
The following table provides information concerning grants of options to
purchase our common stock made during the fiscal year ended December 31, 1998
to the Named Executive Officers. In the column marked "Potential Realizable
Value At Assumed Annual Rates of Stock Price Appreciation For Option Term,"
potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation only,
based on the SEC rules. Actual gains if any, on stock option exercises are
dependent on the future performance of the common stock, overall market
conditions and the option-holders' continued employment through the vesting
period. The amounts reflected in this table may not necessarily be achieved.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value At Assumed
Options Annual Rates of Stock
Granted To Exercise Price Appreciation
Options Employees or Base For Option Term
Granted In Fiscal Price Expiration ---------------------
Name (#) Year ($/SH) Date 5% ($) 10% ($)
---- ------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael W. Malaga........... -- -- -- -- -- --
Herman W. Bluestein......... 787,500 8.7% $0.55 9/14/08 $2,201,309 $3,573,369
Robert F. Flood............. -- -- -- -- -- --
Samuel M. Lamonica, Jr...... 33,750 0.04% $0.55 8/27/08 120,870 193,465
Richard J. Morris........... -- -- -- -- -- --
</TABLE>
The following table provides information concerning exercises of options to
purchase our common stock in the fiscal year ended December 31, 1998, and
unexercised options held as of December 31, 1998, by the Named Executive
Officers. The fair value of the unexercised in-the-money options was determined
by our management to be $1.41 per share at December 31, 1998, less the exercise
price of such options. The option exercise prices were set by our board of
directors and generally reflect its best estimate of the fair value of our
stock on the date of each grant based on recent sales of our equity securities,
developments in our business and developments in the financial markets. When
the board of directors elects to grant options at a lower price we recognize
deferred compensation for the difference.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-The-Money Options at
Held at December 31, 1998 December 31, 1998
--------------------------------- ---------------------------------
Name Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
---- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Michael W. Malaga............. -- -- -- --
Herman W. Bluestein........... -- 787,500 -- $675,500
Robert F. Flood............... -- -- -- --
Samuel M. Lamonica, Jr........ 25,312 109,687 $ 34,988 133,913
Richard J. Morris............. 675,000 225,000 933,000 311,000
</TABLE>
1997 Stock Option Plan
Our 1997 Stock Option Plan was adopted by the board of directors and approved
by the stockholders in September 1997. A total of 16,147,647 shares of common
stock has been reserved for issuance under the plan. As of April 19, 1999,
options to purchase 14,500,027 shares of common stock were outstanding under
the plan.
The plan provides for grants to employees of NorthPoint (including officers
and employee directors) of "incentive stock options" ("ISOs") within the
meaning of Section 422 of the Internal
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<PAGE>
Revenue Code of 1986, as amended (the "Code"), and for grants of nonstatutory
stock options ("NSOs") to employees (including officers and employee directors)
and consultants (including non-employee directors) of NorthPoint.
The plan is administered by the board of directors or a committee of the
board of directors. The plan is currently being administered by the
compensation committee of the board of directors. The administrator may
determine the terms of the options granted, including the exercise price, the
number of shares subject to each option and the exercisability of the option.
The administrator also has the full power to select the individuals to whom
options will be granted and to make any combination of grants to any
participants.
Options generally have a term of ten years. One-fourth of the shares subject
to the option vest on the one-year anniversary of the vesting commencement date
and 1/48th of the shares subject to the option vest on each monthly anniversary
of the vesting commencement date thereafter.
The option exercise price may not be less than 100% of the fair market value
of the common stock on the date of grant; provided, however, that NSOs may be
granted at exercise prices of not less than 85% of the fair market value on the
date the option is granted. In the case of an ISO or NSO granted to a person
who at the time of the grant owns stock representing more than 10% of the total
combined voting power of all classes of stock of NorthPoint, the option
exercise price for each share covered by such option may not be less than 110%
of the fair market value of a share of common stock on the date of grant of
such option.
The term of an option is determined by the specific option agreement;
provided, however, the term may not be longer than ten years. Furthermore, the
maximum term for an option granted to an optionee is five years, if at the time
of the grant the optionee owns more than 10% of the total combined voting power
of all classes of stock of NorthPoint. No option may be exercised by any person
after its term expires.
In the event of a sale of all or substantially all of the assets of
NorthPoint, or the merger of NorthPoint with or into another corporation, each
option must be assumed or an equivalent option substituted by the successor
corporation. If the successor corporation does not agree to assume the option
or to substitute an equivalent option, the option will terminate upon the
consummation of the merger or sale of assets; provided, however, the
administrator has the discretion to decide to accelerate the vesting of the
option to make it exercisable as to some or all of the shares subject to the
option. In March 1999, NorthPoint Communications Group assumed all of the
options then outstanding under the 1997 Stock Option Plan.
1999 Stock Plan
NorthPoint's 1999 Stock Plan was adopted by the board of directors in March
1999 and approved by our stockholders in April 1999. A total of 11,977,353
shares of common stock has been reserved for issuance under the 1999 Stock
Plan. As of April 19, 1999, 4,582,080 options had been issued under the 1999
Stock Plan.
The 1999 Stock Plan provides for grants of ISOs to employees, consultants and
members of NorthPoint's board of directors, and for grants of NSOs and stock
purchase rights to employees (including officers and employee directors) and
consultants (including non-employee directors) of NorthPoint.
The 1999 Stock Plan is administered by the compensation committee or another
committee of the board of directors. The 1999 Stock Plan is currently being
administered by the compensation committee. The administrator of the 1999 Stock
Plan may determine the terms of the options and
59
<PAGE>
stock purchase rights granted, including the exercise price, the number of
shares subject to each option and/or stock purchase right and the
exercisability of the option and/or stock purchase right. The administrator of
the 1999 Stock Plan also has the full power to select the individuals to whom
options and/or stock purchase rights will be granted, to make any combination
of grants to any participants and to determine whether stock acquired pursuant
to a stock purchase right is to be subject to repurchase by NorthPoint.
Options generally have a term of ten years. Options granted to employees vest
at a rate of no less than 20% per year over five years from the date the option
is granted. Under the 1999 Stock Plan, each independent director will receive
40,000 options at the time of the successful completion of this offering. These
options vest over three years at the rate of 1/36th on each monthly anniversary
of the vesting commencement date. At each subsequent meeting at which they are
re-elected, each outside director will receive 13,000 options which vest over
three years, starting at the beginning of the third year anniversary at the
rate of 1/12th on each monthly anniversary of the vesting commencement date.
Stock purchase rights may be subject to repurchase options that lapse at a rate
of no less than 20% per year over five years from the date of purchase.
Option exercise prices may not be less than 100% of the fair market value of
the common stock on the date of the grant; however, NSOs may be granted at
exercise prices of not less than 85% of the fair market value of the date the
option is granted. In the case of an ISO or NSO granted to a person who at the
time of the grant owns stock representing more than 10% of the total combined
voting power of all classes of stock of NorthPoint, the option exercise price
for each share covered by such option may not be less than 110% of the fair
market value of a share of common stock on the date of grant of such option.
Option terms are determined by the option agreements; however, no option may
have a term longer than ten years. The maximum term for an option granted to an
optionee is five years, if at the time of the grant the optionee owns more than
10% of the total combined voting power of all classes of NorthPoint stock. No
option may be exercised by any person after its term expires.
In the event of a sale of all or substantially all of the assets of
NorthPoint, or the merger of NorthPoint with or into another corporation, the
administrator may provide for the repurchase, replacement or termination of
options or stock purchase rights. The administrator also has the discretion to
accelerate the vesting of options or stock purchase rights to make them
exercisable as to some or all of the underlying shares.
1999 Employee Stock Purchase Plan
NorthPoint's 1999 Employee Stock Purchase Plan was adopted by the board of
directors in March 1999 and approved by the stockholders in April 1999. A total
of 2,250,000 shares of common stock has been reserved for issuance under the
purchase plan. As of the date of this prospectus, no shares have been issued
under the purchase plan.
The purchase plan, which is intended to qualify under Section 423 of the
Code, contains consecutive six-month offering periods. The offering periods
generally start on January 1 and July 1 of each year, except for the first
offering period, which will commence on the effective date of this offering and
will end on June 30, 1999.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, no employee may be granted a right
to purchase stock under the purchase plan (1) to the extent that, immediately
after the grant of the right to purchase stock, the employee would own (or be
treated as owning) stock possessing 5% or more of the total combined voting
power or value of all classes of the capital stock of NorthPoint or (2) to the
extent that his or her rights to purchase stock under all of our employee stock
purchase plans accrues at a rate which exceed $25,000 worth of
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<PAGE>
stock for each calendar year. The purchase plan permits participants to
purchase common stock through payroll deductions of up to 10% of the
participant's base compensation. Base compensation is defined as the
participant's gross base compensation, excluding overtime payments, sales
commissions, incentive compensation, bonuses, expense reimbursements, fringe
benefits and other special payments. The maximum number of shares a participant
may purchase with respect to a single offering period is 4,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lesser of the fair market value
of the common stock (1) at the beginning of the offering period or (2) at the
end of the offering period. Participants may end their participation at any
time other than the final ten days of an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with NorthPoint.
Rights to purchase stock granted under the purchase plan are not transferable
by a participant other than by will, the laws of descent and distribution, or
as otherwise provided under the purchase plan. The purchase plan provides that,
in the event of a merger of NorthPoint with or into another corporation or a
sale of substantially all of NorthPoint's assets, each outstanding right to
purchase stock may be assumed or substituted for by the successor corporation.
The board of directors has the authority to amend or terminate the purchase
plan. However, no such action by the board of directors may adversely affect
any outstanding rights to purchase stock under the purchase plan, except that
the board of directors may terminate an offering period on any exercise date if
the board of directors determines that the termination of the purchase plan is
in the best interests of NorthPoint and its stockholders. Notwithstanding
anything to the contrary, the board of directors may in its sole discretion
amend the purchase plan to the extent necessary and desirable to avoid
unfavorable financial accounting consequences by altering the purchase price
for any offering period, shortening any offering period or allocating remaining
shares among the participants.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Our bylaws provide that we shall
indemnify each of our directors and officers against expenses (including
attorneys' fees), judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was a director or officer of NorthPoint or serving
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise at our request. We have also entered into agreements
to indemnify directors and our executive officers.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 19, 1999 with
respect to the beneficial ownership of our common stock, as adjusted to reflect
the conversion of outstanding preferred stock into common stock immediately
prior to the completion of this offering, by:
. each person known by us to own beneficially more than five percent, in
the aggregate, of the outstanding shares of our common stock, assuming
the conversion of all preferred stock into common stock;
. our directors and our Named Executive Officers; and
. all executive officers and directors as group.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of April
19, 1999 as described in the footnotes below. Percentage of ownership is
calculated pursuant to SEC Rule 13d-3(d)(1). Percentage ownership calculations
before and after the offering are based on 106,041,144 shares and 121,041,144
shares, respectively, of common stock outstanding. The address for all
executive officers and directors is c/o NorthPoint Communications, Inc., 222
Sutter Street, San Francisco, CA 94108.
<TABLE>
<CAPTION>
Percent Ownership
-----------------
Shares Before After
Beneficially the the
Name Owned Offering Offering
- ---- ------------ -------- --------
<S> <C> <C> <C>
Accel Partners(1)............................. 11,735,602 11.1% 9.7%
428 University Avenue
Palo Alto, CA 94301
Benchmark Capital(2).......................... 11,999,592 11.3% 9.9%
2480 Sand Hill Road, Suite 200
Menlo Park, CA 94025
The Carlyle Group(3).......................... 23,902,257 22.5% 19.7%
1001 Pennsylvania Avenue N.W., Suite 220 S
Washington, D.C. 20004
Greylock IX Limited Partnership............... 11,999,590 11.3% 9.9%
One Federal Street
Boston, MA 02110
Vulcan Ventures Incorporated.................. 10,243,824 9.7% 8.5%
110 110th Avenue, N.E., Suite 650
Bellevue, WA 98004
Michael W. Malaga............................. 7,461,030 7.0% 6.2%
Herman W. Bluestein........................... 0 * *
Robert K. Dahl(4)............................. 209,975 * *
Michael J. Fitzpatrick........................ 0 * *
Robert F. Flood............................... 4,139,412 3.9% 3.4%
Reed E. Hundt(5).............................. 194,506 * *
Samuel M. Lamonica, Jr. ...................... 46,405 * *
Richard J. Morris............................. 900,000 * *
Andrew S. Rachleff(2)......................... 11,999,592 11.3% 9.9%
Dino J. Vendetti(6)........................... 31,869 * *
J. Peter Wagner(1)............................ 11,735,602 11.1% 9.7%
Frank D. Yeary(3)............................. 23,902,257 22.5% 19.7%
All directors and executive officers as a
group (20 persons)(7)(8)..................... 76,349,735 72.0% 63.1%
</TABLE>
- --------
* Less than 1%.
62
<PAGE>
(1) Consists of 11,735,602 shares held by various affiliates of Accel
Partners. Mr. Wagner, a General Partner of Accel Partners, may be deemed
to have voting and investment power over the shares held by Accel Partners
and its affiliates. Mr. Wagner disclaims beneficial interest in such
shares, except to the extent of his interest in Accel Partners.
(2) Consists of 10,528,132 shares held by Benchmark Capital Partners, L.P. and
1,471,460 shares held by Benchmark Founders' Fund, L.P. Mr. Rachleff, a
Managing Member of Benchmark Capital Management Co., LLC, the General
Partner of Benchmark Capital Partners, L.P. and Benchmark Founders' Fund,
L.P., may be deemed to have voting and investment power over the shares
held by Benchmark Capital Partners, L.P. and Benchmark Founders' Fund,
L.P. and its affiliates. Mr. Rachleff disclaims beneficial interest in
such shares, except to the extent of his interest in Benchmark Capital
Management Co., LLC.
(3) Consists of 23,902,257 shares held by various affiliates of The Carlyle
Group. Mr. Yeary, a director of NorthPoint, is a General Partner of The
Carlyle Group. Mr. Yeary disclaims beneficial interest in such shares,
except to the extent of his interest in The Carlyle Group and its
affiliates.
(4) Consists of 127,477 shares held by The Dahl Family Trust dated October 31,
1989, as amended May 3, 1990. Mr. Dahl is the Trustee of The Dahl Family
Trust.
(5) Consists of 127,477 shares held by Charles Ross Partners Investment Fund
Number 1. Mr. Hundt, a General Partner of Charles Ross Partners, may be
deemed to have voting and investment power over the shares held by Charles
Ross Partners Investment Fund Number 1. Mr. Hundt disclaims beneficial
interest in such shares, except to the extent of his interest in Charles
Ross Partners.
(6) Mr. Vendetti was appointed by Vulcan Ventures as its representative on
NorthPoint's Board of Directors.
(7) Includes 2,160,981 shares of common stock subject to options that are
exercisable within 60 days of April 19, 1999.
(8) Includes 10,528,132 shares held by Benchmark Capital Partners, L.P.;
1,471,460 shares held by Benchmark Founders' Fund, L.P.; 11,735,602 shares
held by affiliates of Accel Partners; 23,902,257 shares held by various
affiliates of the Carlyle Group. Andrew Rachleff, a director of
NorthPoint, is a Managing Member of Benchmark Capital Management Co., LLC,
the General Partner of Benchmark Capital Partners, L.P. and Benchmark
Founders' Fund, L.P. Peter Wagner, a director of NorthPoint, is a General
Partner of Accel Partners. Frank Yeary, a director of NorthPoint, is a
General Partner of The Carlyle Group.
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<PAGE>
CERTAIN TRANSACTIONS
Reorganization
In March 1999, we completed a reorganization in which NorthPoint
Communications, Inc. became a wholly owned subsidiary of a newly created
holding company, NorthPoint Communications Group, Inc. As a result of the
reorganization, the stockholders of NorthPoint Communications immediately
before the reorganization became the only stockholders of NorthPoint
Communications Group immediately after the reorganization. The reorganization
allows us to pledge the capital stock of NorthPoint Communications to the
lenders of our $110,000,000 secured credit facility, which closed in April
1999.
Issuance of Stock Options
We have reserved 28,125,000 shares of common stock for issuance under our
stock option plans. On February 26, 1998, we granted an option to purchase
247,500 shares of common stock at an exercise price of $0.03 per share to
Robert Dahl, a Director of NorthPoint. On May 15, 1998, we granted an option to
purchase 247,500 shares of common stock at an exercise price of $0.09 per share
to Reed Hundt, a Director of NorthPoint. On June 1, 1998, we granted an option
to purchase 731,250 shares of common stock at an exercise price of $0.09 per
share to Henry P. Huff, Vice President, Finance and Chief Financial Officer of
NorthPoint. On September 14, 1998, we granted an option to purchase 787,500
shares of common stock at an exercise price of $0.55 per share to Herman W.
Bluestein, Chief Development Officer of NorthPoint. On March 22, 1999, we
granted an option to purchase 2,025,000 shares of common stock at an exercise
price of $6.67 per share to Elizabeth A. Fetter, President and Chief Operating
Officer of NorthPoint. The option exercise prices were set by our board of
directors and generally reflect its best estimate of the fair value of our
stock on the date of each grant based on recent sales of our equity securities,
developments in our business and developments in the financial markets. When
the board of directors elects to grant options at a lower price, we recognize
deferred compensation for the difference.
Issuance of Series C Preferred Stock
In December 1998, we began negotiations for the sale of our Series C
preferred stock. On February 19, 1999, we sold 37,715,335 shares of Series C
preferred stock at a purchase price of $1.57 per share. Purchasers of the
Series C preferred stock included funds affiliated with The Carlyle Group
(23,902,257 shares). Other purchasers of the Series C preferred stock included
Vulcan Ventures Incorporated (10,243,824 shares), Benchmark Capital Partners,
L.P. (279,616 shares), Benchmark Founders' Fund, L.P. (39,079 shares), funds
affiliated with Accel Partners (311,683 shares), The Dahl Family Trust Dated
October 31, 1989, as amended May 3, 1990 (127,477 shares), Dino Vendetti
(31,869 shares) and The Sierra Ventures Mgmt. Co. 1989 Deferred Savings Plan
FBO Henry P. Huff (15,934 shares). Andrew Rachleff, Frank Yeary, Peter Wagner
and Dino Vendetti, each of whom currently serves as a member of the board of
directors, are affiliated with Benchmark Capital, The Carlyle Group, Accel
Partners and Vulcan Ventures, respectively. Upon the completion of this
offering, all outstanding shares of Series C preferred stock will automatically
convert into shares of common stock.
Registration Rights
Some holders of common stock issuable upon conversion of preferred stock and
upon exercise of certain warrants are entitled to registration rights. See
"Description of Capital Stock--Registration Rights."
Vendor Relations
Greylock IX Limited Partnership, a principal stockholder of NorthPoint, owns
more than 10% of the capital stock of Copper Mountain, a vendor of NorthPoint.
Our payments to Copper Mountain for
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the year ended December 31, 1998 totaled approximately $8,490,467. We believe
that the transactions with Copper Mountain were completed on an arm's-length
basis.
The Strategic Investments
The Series D-1 Preferred Stock Private Placements. In March and April 1999,
concurrently with the execution of commercial agreements, we received equity
investments from ALC Communications Corporation (an affiliate of Frontier
Corporation), At Home Corporation, Cable & Wireless USA, Inc., Concentric
Network Corporation, ICG Services, Inc. (an affiliate of ICG Communications,
Inc.), Netopia, Inc., Network Plus Corporation and Verio Inc. ALC
Communications Corporation purchased $4,900,016 of Series D-1 preferred stock.
At Home Corporation purchased $5,999,994 of Series D-1 preferred stock. Cable &
Wireless USA, Inc. purchased $4,999,994 of Series D-1 preferred stock.
Concentric Network Corporation purchased $5,001,120 of Series D-1 preferred
stock. ICG Services, Inc. purchased $9,999,990 of Series D-1 preferred stock.
Netopia, Inc. purchased $999,988 of Series D-1 preferred stock. Network Plus
Corporation purchased $2,499,992 of Series D-1 preferred stock. Verio Inc.
purchased $4,400,000 of Series D-1 preferred stock.
Upon completion of this offering, the Series D-1 preferred stock will convert
into Class B common stock. Each investor in Series D preferred stock will
receive the number of shares of Class B common stock that is the quotient of
their investment divided by $18.00, which is the lesser of (a) the midpoint of
the price range first set forth on the cover page of the preliminary prospectus
and (b) 90% of the initial public offering price. The Series D-1 purchasers
have each agreed not to transfer any Series D-1 preferred stock or Class B
common stock to any non-affiliated third party until March 2000. The Series D-1
purchasers have also each agreed not to acquire more than 10% of NorthPoint's
voting stock without our consent until March 2002. In addition, each of the
Series D-1 purchasers has agreed to vote any voting securities it holds as
recommended by our board of directors, except with respect to votes pursuant to
the protective provisions of our certificate of incorporation.
Microsoft. We have entered into a commercial agreement with Microsoft, which
is described in "Business--Key Strategic and Commercial Relationships".
Microsoft has expressed its intention to purchase $30 million of our common
stock in this offering, but is not bound to do so. If Microsoft purchases $30
million of our common stock in this offering, it will also receive a warrant to
purchase an additional $30 million of our Class B common stock at an exercise
price per share that is 50% above the initial public offering price. This
warrant will be exercisable at any time and will expire five years after the
date of this offering. Commencing in March 2000, the Class B common stock may
be converted into common stock on a one-for-one basis, at Microsoft's option,
provided that Microsoft would not hold more than 10% of the voting stock of
NorthPoint. The Class B common stock will automatically convert into common
stock upon transfer by Microsoft to a third party after March 2000. This
warrant, the Class B common stock issuable upon exercise of this warrant and
the common stock issuable upon the conversion of the Class B common stock are
being registered by the registration statement that includes this prospectus.
In addition, we have agreed to grant Microsoft certain registration rights with
respect to the shares of Class B common stock (and the shares of common stock
issuable upon conversion of such shares) to be issued upon exercise of these
warrants.
Microsoft has agreed that, if it purchases any shares of our common stock in
this offering, or if it receives this warrant, it will not transfer any common
stock or Class B common stock issuable upon exercise of the warrant to any non-
affiliated third party until one year after this offering. Microsoft has also
agreed not to acquire more than 10% of our voting stock without our consent
until April 2002.
Each of the above strategic investors will own less than 2.5% of our common
stock outstanding after this offering.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 121,041,144 shares of common
stock outstanding, including shares to be issued upon completion of this
offering upon automatic conversion of preferred stock and convertible debt. The
shares sold in this offering, except for shares sold to Microsoft and Tandy,
will be freely tradable without restriction under the Securities Act, except
for any such shares held at any time by an "affiliate" of NorthPoint, as this
term is defined under Rule 144 under the Securities Act. Microsoft has agreed
that any shares it may purchase in this offering (including shares issuable
upon exercise of its warrant) will be subject to a lock-up agreement until one
year after this offering. Tandy will also be required to enter into a lock-up
agreement with the underwriters. Any of these reserved shares that are not
purchased by Microsoft or Tandy will be offered to the public on the same basis
as the other shares offered hereby and will be freely tradable following the
offering unless held by an affiliate of NorthPoint.
We issued and sold the remaining 106,041,144 shares in private transactions.
These shares may be publicly sold only if registered under the Securities Act
or sold in accordance with an applicable exemption from registration, such as
Rule 144. In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," as
that term is defined in Rule 144, is entitled to sell, within any three-month
period, a number of "restricted" shares that does not exceed the greater of one
percent (1%) of the then outstanding shares of common stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to manner of sale limitations, notice requirements
and the availability of current public information about NorthPoint. Rule
144(k) provides that a person who is not deemed an "affiliate" and who has
beneficially owned shares for at least two years is entitled to sell such
shares at any time under Rule 144 without regard to the limitations described
above. Of the 106,041,144 remaining shares outstanding, affiliates beneficially
own approximately 93% of such shares. Of the shares owned by non-affiliates, no
shares have been held by such non-affiliates in excess of two years. See "Risk
Factors--The Sale of Shares Eligible for Future Sale or Perception of Future
Sales Could Depress Our Stock Price."
Any employee, officer, director, advisor or consultant to NorthPoint who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permits non-
affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after NorthPoint becomes subject to the reporting requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934.
As of April 19, 1999, there were outstanding stock options to purchase an
aggregate of 19,082,107 shares of common stock, of which 3,034,819 are
presently exercisable or exercisable within 60 days. All outstanding stock
options are held by our executive officers, employees or consultants. Following
the offering, we intend to file registration statements on Form S-8 covering
the 28,125,000 shares of common stock issuable under our stock option plans
(including shares subject to outstanding options) and 4,000,000 shares issuable
under our employee stock purchase plan (including 2,250,000 shares currently
reserved for issuance), thus permitting the resale of such shares in the public
market without restriction under the Securities Act.
NorthPoint, NorthPoint's executive officers and directors, certain of
NorthPoint's stockholders, including all of the holders of our Series C
preferred stock, and certain NorthPoint employees holding shares or options
exerciseable in the six months following this offering, have agreed with the
underwriters, subject to certain exceptions, not to sell, otherwise dispose of
or hedge any shares of NorthPoint's common stock, any options or warrants to
purchase NorthPoint's common stock, or any
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securities convertible into, exchangeable for or that represent a right to
acquire shares of common stock for a period of 180 days from the date of this
prospectus without the prior written consent of the representatives of the
underwriters. The lock-up agreements by these persons (other than NorthPoint)
cover an aggregate of approximately 100 million shares. In addition, the
holders of our Series D-1 preferred stock have agreed not to sell or otherwise
dispose of their shares or any securities into which the Series D-1 preferred
stock may convert until March 2000.
Prior to this offering, there has been no public market for the common stock.
We are unable to estimate the number of shares that may be sold in the future
by our existing stockholders or the effect, if any, that sales of shares by
such stockholders will have on the market price of the common stock prevailing
from time to time. Sales of substantial amounts of common stock by existing
stockholders could adversely affect prevailing market prices.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our certificate of incorporation and other agreements referenced below. The
following summary gives effect to the conversion of all outstanding shares of
preferred stock into common stock upon the completion of this offering.
The authorized capital stock of NorthPoint consists of 281,250,000 shares of
common stock and 101,250,000 shares of preferred stock. As of April 19, 1999,
there were 67 holders of record of common stock. The common stock and the
preferred stock each have a par value of $0.001 per share. As of April 19,
1999, there were 26,039,194 shares of common stock outstanding and, after the
offering, there will be 121,041,144 shares outstanding. As of April 19, 1999,
options to purchase 19,082,107 shares of common stock were outstanding. Upon
the completion of this offering, no shares of preferred stock will be
outstanding. We also have certain other warrants and contingent warrants as
described below.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding preferred stock, holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available therefor. See
"Dividend Policy." In the event of NorthPoint's liquidation, dissolution or
winding up or NorthPoint's acquisition by another entity (including any
reorganization, merger or consolidation or sale of stock) or sale of all or
substantially all of NorthPoint's assets, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and satisfaction of preferential rights of the holders of any outstanding
preferred stock. The common stock has no preemptive or conversion rights or
other subscription rights.
Preferred Stock
Upon the completion of this offering, all outstanding shares of Series B and
Series C preferred stock will automatically convert on a one-for-one basis into
77,535,283 shares of common stock. Upon completion of this offering, all
outstanding shares of Series D-1 preferred stock will convert into 2,155,553
shares of Class B common stock. For more information about the Class B common
stock, see "--Class B Common Stock." See notes 9 and 14 of the notes to our
financial statements for a description of the currently outstanding preferred
stock.
Our preferred stock is divisible into and issuable in one or more series. The
rights and preferences of the different series may be established by the Board
of Directors without further action by the stockholders. The board of directors
is authorized with respect to each series to fix and determine, among other
things:
. its dividend rate;
. its liquidation preference;
. whether or not the shares will be convertible into, or exchangeable for,
any other securities; and
. whether or not the shares will have voting rights, and, if so, the
conditions under which the shares will vote as a separate class.
We believe that the board of directors' ability to issue preferred stock on
such a wide variety of terms will enable the preferred stock to be used for
important corporate purposes, such as financing acquisitions or raising
additional capital. However, were it inclined to do so, the board of directors
could issue all or part of the preferred stock with (among other things)
substantial voting power or
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<PAGE>
advantageous conversion rights. This stock could be issued to persons deemed by
the board of directors likely to support current management in a contest for
control of the company, either as a precautionary measure or in response to a
specific takeover threat. NorthPoint has no current plans to issue preferred
stock for any purpose.
Class B Common Stock
The rights of holders of Class B common stock are identical to the rights of
holders of common stock except that the holders of Class B common stock do not
have voting rights. Commencing in March 2000, the Class B common stock may be
converted into common stock on a one-for-one basis at the election of the
holder, provided that such holder and its affiliates would not hold more than
10% of the voting stock of NorthPoint, or will automatically convert into
common stock upon transfer after such date to a third party.
Bridge Warrants
Holders of warrants issued under our bridge loan agreement with MSBLF may
purchase shares of common stock for an exercise price of approximately $0.0044
per share for 562,500 shares, and $2.9644 per share for an additional 2,362,500
shares. The bridge warrants expire in July 2003. Holders of unexercised bridge
warrants are not entitled to receive dividends or other distributions or to
receive notice of any meeting of stockholders. Holders of unexercised bridge
warrants also do not have voting or any other rights of stockholders. The
exercise price and number of shares of common stock issuable upon exercise of
the bridge warrants are subject to adjustment upon specified events, including:
. stock or cash dividends, stock splits, reverse stock splits or
reclassifications;
. issuances of common stock, rights, options or warrants at prices per
share lower than the then current market value per share;
. distributions of debt, assets, or cash; and
. our consolidation or merger with or into another person or sale of all or
substantially all of our assets.
Other Warrants
In connection with an equipment lease, we have issued warrants to purchase an
aggregate of 917,779 shares of Series B preferred stock at an exercise price of
$0.30 per share. We have issued contingent warrants to Intel to purchase
212,568 shares of common stock at an exercise price of $1.57 per share,
provided certain conditions are met. In addition, certain holders of our Series
C preferred stock are entitled to receive warrants under antidilution
provisions. These provisions are expected to cause the issuance of warrants to
purchase approximately 510,860 shares of common stock at a weighted average
exercise price of $2.848 per share.
We have agreed that, upon the closing of this offering, in the event that
Microsoft purchases $30,000,000 worth of shares of our common stock
concurrently with this offering at the initial public offering price, we will
grant Microsoft a warrant to purchase $30,000,000 of Class B common stock at an
exercise price per share that is 50% above the initial public offering price of
our common stock. This warrant will be exercisable at any time and will expire
five years after the date of this offering. This warrant, and the Class B
common stock issuable upon exercise of this warrant, and the common stock
issuable upon the conversion of the Class B common stock, are being registered
by the registration statement that includes this prospectus.
Registration Rights
Pursuant to the Fifth Amended and Restated Rights Agreement dated March 22,
1999, as of April 19, 1999, holders of 83,139,519 shares of common stock issued
or issuable upon conversion of Series B preferred stock, Series C preferred
stock, Series D preferred stock, Series D-1 preferred stock
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and Class B common stock or exercise of warrants issued under our bridge loan
agreement with MSBLF and certain other outstanding warrants (collectively, the
"Rights Holders") are entitled to certain registration rights with respect to
these shares ("Registrable Securities").
Company Registration. If we propose to register any of our or a holder's
common stock under the Securities Act, the Rights Holders are entitled to
notice of such proposed registration and the opportunity to include the
Registrable Securities in the registration. If the registration involves an
underwriting, the underwriters have the right to limit shares proposed to be
included in the registration and underwriting by the Rights Holders to 20% of
the total number of securities included in such registration and underwriting,
unless such offering is the initial public offering of our securities in which
case the Rights Holders may be excluded if no other stockholders' securities
are included.
Requested Registration. At any time after the earlier of (1) six months after
the effective date of the first registration statement for a public offering of
common stock or (2) June 30, 2001, if the holders of at least 20% of the
Registrable Securities relating to the Series B preferred stock, Series C
preferred stock, Series D preferred stock, Series D-1 preferred stock and Class
B common stock or the holders of at least 40% of the Registrable Securities
relating to the Bridge Warrants request that we file a registration statement,
we are required to use our best efforts to cause such shares to be registered,
subject to certain conditions and limitations. The holders of the Registrable
Securities relating to the Series B preferred stock, Series C preferred stock,
Series D preferred stock, Series D-1 preferred stock and Class B common stock
and of the Registrable Securities relating to the warrants issued under our
bridge loan agreement with MSBLF are each entitled to two such demand
registrations. If, in an underwritten public offering, the underwriters require
a limitation on the number of securities to be included in the registration,
then the number of shares of Registrable Securities that may be included in the
registration and underwriting will be allocated (1) among all Rights Holders in
proportion, as nearly as practicable, to the respective amounts of Registrable
Securities held by the Rights Holders at the time of filing the registration
statement in the case of a registration requested by the holders of Registrable
Securities relating to the Series B preferred stock and Series C preferred
stock, and (2) first to the holders of Registrable Securities relating to the
Bridge Warrants and then among all other Rights Holders in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities held
by such Rights Holders at the time of filing the registration statement in the
case of a registration requested by the holders of Registrable Securities
relating to the warrants issued under our bridge loan agreement with MSBLF.
Registration on Form S-3. The Rights Holders have the right to require us to
register all or a portion of their Registrable Securities on Form S-3 when this
form becomes available to us, provided that the aggregate proceeds of such
registration are expected to exceed $1,000,000 or cover all remaining
Registrable Securities relating to the warrants issued under our bridge loan
agreement with MSBLF and provided that we are not required to effect more than
one such registration in any twelve-month period.
Termination of Registration Rights. The registration rights terminate as to
any Rights Holder five years following a bona fide firm underwritten public
offering of shares of common stock registered under the Securities Act,
provided the per share public offering price is not less than $2.55 as adjusted
to reflect subsequent stock dividends, stock splits or recapitalizations and
the aggregate offering price, net of underwriting discounts and commissions,
exceeds $50,000,000.
Other Registration Rights
In addition, in the event we grant a warrant to purchase Class B common stock
to Microsoft concurrently with this offering, we have agreed to grant Microsoft
registration rights with respect to the shares of Class B common stock, and the
shares of common stock issuable upon conversion of
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these shares, to be issued upon exercise of this warrant. Specifically, at any
time after one year following the effective date of the first registration
statement for a public offering of common stock, if the holders of at least 50%
of the Microsoft registrable securities then held by Microsoft or any of its
transferees request that we file a registration statement, we are required to
use our best efforts to cause the shares to be registered, subject to
conditions and limitations. The holders of the Microsoft registrable securities
are entitled to two demand registrations. The rights of the holders of the
Microsoft registrable securities are subject to the registration rights granted
to the Rights Holders pursuant to the Rights Agreement. The registration rights
granted to Microsoft and its transferees terminate five years following a bona
fide firm underwritten public offering of shares of common stock registered
under the Securities Act, provided the per share public offering price is not
less than $2.55 as adjusted to reflect subsequent stock dividends, stock splits
or recapitalizations and the aggregate offering price, net of underwriting
discounts and commissions, exceeds $50,000,000.
Certificate of Incorporation, Bylaw and Statutory Provisions Affecting
Stockholders
Our certificate of incorporation divides our board of directors into three
classes of directors serving staggered three-year terms. Under the Delaware
General Corporation Law, directors serving on a classified board can be removed
only for cause.
Our certificate of incorporation and bylaws also provide that stockholder
action can be taken only at an annual or special meeting of stockholders and
cannot be taken by written consent in lieu of a meeting. The certificate of
incorporation and bylaws also:
. provide that special meetings of the stockholders may be called only by a
resolution adopted by a majority of the board of directors;
. establish an advance notice procedure for stockholder proposals;
. require that certain business combinations be approved by supermajority
vote; and
. reserve to the board the exclusive right to change the number of
directors or to fill vacancies on the board.
NorthPoint is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law, which generally prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the time that the
person became an interested stockholder, unless:
. before such time the board of directors of the corporation approved
either the business combination or the transaction in which the person
became an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested person owns at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are
directors and also officers of the corporation and by certain employee
stock plans; or
. at or after such time the business combination is approved by the Board
of Directors of the corporation and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative
vote of at least 66 2/3% of the outstanding voting stock of the
corporation that is not owned by the interested stockholder.
A "business combination" generally includes mergers, asset sales and similar
transactions between the corporation and the interested stockholder, and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's outstanding voting stock or
who is an affiliate or
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associate of the corporation and, together with his or her affiliates and
associates, has owned 15% or more of the corporation's outstanding voting stock
within three years.
The provisions of the certificate of incorporation, bylaws and the Delaware
General Corporation Law described above would make more difficult or discourage
a proxy contest or acquisition of control by a holder of a substantial block of
our stock or the removal of the incumbent board of directors. Such provisions
could also have the effect of discouraging an outsider from making a tender
offer or otherwise attempting to obtain control of NorthPoint, even though such
an attempt might be beneficial to us and our stockholders.
Our certificate of incorporation and bylaws also:
. eliminate the personal liability of directors for monetary damages
resulting from breaches of fiduciary duty to the extent permitted by the
Delaware General Corporation Law; and
. indemnify directors and officers to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, including in
circumstances in which indemnification is otherwise discretionary.
We believe that these provisions are necessary to attract and retain
qualified directors and officers. We have also entered into agreements to
indemnify our directors and certain of our officers.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C. is the transfer agent and registrar
for the common stock.
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LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon for
NorthPoint by Latham & Watkins, Menlo Park, California and for the underwriters
by Sullivan & Cromwell, Los Angeles, California. Regulatory and other matters
requested by the underwriters will be passed upon for NorthPoint by Steven J.
Gorosh, our General Counsel. A partner of Latham & Watkins holds shares of
Northpoint's common stock. These shares represent less than 0.1% of
Northpoint's outstanding common stock.
EXPERTS
The financial statements of NorthPoint Communications, Inc. as of December
31, 1997 and 1998, for the period from May 16, 1997 (date of inception) to
December 31, 1997, and for the year ended December 31, 1998 have been included
in this registration statement and the related prospectus in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, appearing
elsewhere herein, and upon the authority of that firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement, certain portions of which are omitted as permitted
by the rules and regulations of the SEC. For further information about
NorthPoint and the shares offered by this prospectus, you should refer to the
registration statement, including the exhibits and schedules filed with the
Registration Statement. You may obtain copies of the registration statement (of
which this prospectus is a part), together with such exhibits and schedules,
upon payment of the fee prescribed by the SEC, or you may examine these
documents without charge at the office of the SEC.
After the offering is completed, NorthPoint will be subject to the
informational requirements of the Securities Exchange Act of 1934 and will be
required to file annual and quarterly reports, proxy statements and other
information with the SEC. You can inspect and copy reports and other
information filed by NorthPoint with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0300. The SEC also maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements regarding issuers,
including NorthPoint, that file electronically with the SEC.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NorthPoint Communications Group, Inc.
The following consolidated financial statements do not include separate
consolidated financial statements of NorthPoint Communications Group, Inc. as
management has determined that they would not be material to investors. This
determination is based on the fact that, as of December 31, 1998, on a
consolidated basis, (i) NorthPoint Communications Group, Inc. had not commenced
operations, (ii) NorthPoint Communications Group, Inc. had no significant
assets, liabilities, contingent liabilities or commitments, and (iii) the
expected merger of NorthPoint Communications, Inc., with and into NorthPoint
Merger Sub, Inc., a wholly owned subsidiary of NorthPoint Communications Group,
Inc., would be a reorganization under common control.
NorthPoint Communications, Inc.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Accountants' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998.............. F-3
Consolidated Statements of Operations for the period from May 16, 1997
(date of inception) through December 31, 1997 and for the year ended
December 31, 1998........................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from May 16, 1997 (date of inception) through December 31, 1997 and for
the year ended December 31, 1998......................................... F-5
Consolidated Statements of Cash Flows for the period from May 16, 1997
(date of inception) through December 31, 1997 and for the year ended
December 31, 1998........................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
In March 1999, NorthPoint Communications, Inc. merged with and into
NorthPoint Merger Sub, Inc., a wholly owned subsidiary of NorthPoint
Communications Group, Inc. The financial statements of NorthPoint
Communications, Inc. have been included because they would represent virtually
all of the operations, assets and liabilities of NorthPoint Communications
Group, Inc., had the merger been completed as of December 31, 1998.
F-1
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
Report of Independent Accountants
To the Board of Directors and Stockholders of
NorthPoint Communications, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
NorthPoint Communications, Inc. and its wholly-owned subsidiary (the Company)
as of December 31, 1997 and 1998, and the results of their operations and their
cash flows for the period from May 16, 1997 (date of inception) through
December 31, 1997 and for the year ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
February 24, 1999, except for Note 14,
for which the date is April 16, 1999
F-2
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 9,448,259 $ 10,955,655
Accounts receivable, net of an allowance of $0 and
$18,640, respectively............................. -- 523,261
Prepaid expenses and other assets.................. 59,005 2,649,268
----------- ------------
Total current assets.............................. 9,507,264 14,128,184
Property and equipment, net......................... 1,775,732 46,077,796
Deposits............................................ 72,941 295,520
----------- ------------
Total assets...................................... $11,355,937 $ 60,501,500
=========== ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable, including related party payables
of $86,423 and $5,189,469, respectively........... $ 277,820 $ 9,379,322
Accrued expenses................................... -- 5,481,033
Deferred revenue................................... -- 188,754
Capital lease obligations, current portion, net of
unamortized debt discount of $0 and $265,321,
respectively...................................... 236,339 925,418
Line of credit borrowings, net of unamortized debt
discount of $0 and $2,303,434, respectively....... -- 48,421,566
----------- ------------
Total current liabilities......................... 514,159 64,396,093
----------- ------------
Capital lease obligations, long-term portion, net of
unamortized debt discount of $0 and $597,760,
respectively....................................... 865,558 2,639,580
Line of credit borrowings, long-term portion........ 1,000 --
----------- ------------
Total liabilities................................. 1,380,717 67,035,673
----------- ------------
Commitments and contingencies (Note 7).
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value,
49,060,250 shares authorized, 37,014,122 and
38,499,054 shares issued and outstanding at
December 31, 1997 and 1998, respectively,
liquidation preference of $15,492,710............. $ 37,014 $ 38,499
Common stock, $0.001 par value, 112,500,000 shares
authorized, 24,345,000 and 24,592,950 shares
issued and outstanding at December 31, 1997 and
1998, respectively................................ 24,345 24,593
Warrants........................................... -- 5,232,403
Additional paid-in capital......................... 12,384,132 31,480,066
Deferred compensation.............................. (1,030,002) (13,022,759)
Accumulated deficit................................ (1,440,269) (30,286,975)
----------- ------------
Total stockholders' equity (deficit).............. 9,975,220 (6,534,173)
----------- ------------
Total liabilities and stockholders' equity
(deficit)........................................ $11,355,937 $ 60,501,500
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
May 16, 1997
(date of inception) to Year ended
December 31, 1997 December 31, 1998
---------------------- -----------------
<S> <C> <C>
Revenues.............................. $ -- $ 930,776
Operating expenses:
Network expenses.................... 55,553 3,970,339
Selling, marketing, general and
administrative..................... 1,373,782 18,339,817
Amortization of deferred
compensation....................... 173,612 2,663,725
Depreciation and amortization....... 27,179 1,318,575
----------- ------------
Total operating expenses............ 1,630,126 26,292,456
----------- ------------
Loss from operations................ (1,630,126) (25,361,680)
Interest income....................... 189,874 209,124
Interest expense...................... (17) (3,694,150)
----------- ------------
Net loss............................ $(1,440,269) $(28,846,706)
=========== ============
Net loss per common share--basic and
diluted.............................. $ (0.07) $ (1.18)
=========== ============
Weighted average shares used in
computing net loss per common share--
basic and diluted.................... 21,733,560 24,379,445
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Total
-------------------- ------------------ Paid-in Deferred Accumulated Stockholders'
Shares Amount Shares Amount Warrants Capital Compensation Deficit Equity (Deficit)
----------- ------- ---------- ------- ---------- ----------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
inception (May
16, 1997)........ -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of
common stock.... 22,700,250 22,700 77,300 100,000
Issuance of
preferred stock
Series A........ 13,095,000 13,095 568,905 582,000
Conversion of
preferred stock
Series A into
preferred stock
Series B........ (11,152,633) -- --
Issuance of
preferred stock
Series B........ 35,071,755 23,919 10,484,788 10,508,707
Issuance of
common stock.... 1,644,750 1,645 49,525 51,170
Deferred
compensation.... 1,203,614 (1,203,614) --
Amortization of
deferred
compensation.... 173,612 173,612
Net loss........ (1,440,269) (1,440,269)
----------- ------- ---------- ------- ---------- ----------- ------------ ------------ ------------
Balances at
December 31,
1997............. 37,014,122 37,014 24,345,000 24,345 12,384,132 (1,030,002) (1,440,269) 9,975,220
Issuance of
common stock.... 247,950 248 38,937 39,185
Issuance of
preferred stock
Series C........ 1,484,932 1,485 4,400,515 4,402,000
Issuance of
common and
preferred stock
warrants ....... 5,232,403 5,232,403
Deferred
compensation.... 14,656,482 (14,656,482) --
Amortization of
deferred
compensation.... 2,663,725 2,663,725
Net loss........ (28,846,706) (28,846,706)
----------- ------- ---------- ------- ---------- ----------- ------------ ------------ ------------
Balances at
December 31,
1998............. 38,499,054 $38,499 24,592,950 $24,593 $5,232,403 $31,480,066 $(13,022,759) $(30,286,975) $ (6,534,173)
=========== ======= ========== ======= ========== =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
May 16, 1997
(date of
inception) to Year ended
December 31, December 31,
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................... $ (1,440,269) $ (28,846,706)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 27,179 1,318,575
Amortization of deferred compensation........... 173,612 2,663,725
Amortization of debt discount................... -- 2,065,888
Changes in assets and liabilities:
Accounts receivable............................. -- (523,261)
Prepaid expenses and other assets............... (59,005) (2,590,263)
Deposits........................................ (72,941) (222,579)
Accounts payable................................ -- 9,101,502
Accrued expenses................................ 277,820 5,481,033
Deferred revenue................................ -- 188,754
------------ -------------
Net cash used in operating activities.......... (1,093,604) (11,363,332)
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment............... (701,014) (41,549,724)
------------ -------------
Net cash used in investing activities.......... (701,014) (41,549,724)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common and preferred
stock........................................... 11,241,877 4,441,185
Borrowings from line of credit................... 1,000 50,724,000
Principal payments on capital lease obligations.. -- (744,733)
------------ -------------
Net cash provided in financing activities...... 11,242,877 54,420,452
------------ -------------
Net increase in cash and cash equivalents......... 9,448,259 1,507,396
Cash and cash equivalents at beginning of period.. -- 9,448,259
------------ -------------
Cash and cash equivalents at end of period........ $ 9,448,259 $ 10,955,655
============ =============
Supplemental cash flow information and noncash ac-
tivities:
Fixed assets obtained through capital lease...... $ 1,101,897 $ 4,085,092
============ =============
Warrants issued for bridge loan and capital
lease........................................... $ -- $ 5,232,403
============ =============
Income taxes paid................................ $ 800 $ 800
============ =============
Interest paid.................................... $ 17 $ 992,437
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
The Company
NorthPoint Communications, Inc. was formed in May 1997 to provide high speed
network and data transport services, allowing Internet Service Providers
(ISPs), broadband data service providers and long distance and local phone
companies (collectively, network service providers or NSPs) to meet the rapidly
increasing information needs of small and medium-sized businesses, people who
work in home offices and telecommuters.
Basis of Presentation
The consolidated financial statements include the accounts of NorthPoint
Communications, Inc. and its wholly-owned subsidiary (the Company). All
material intercompany accounts and transactions have been eliminated.
The Company was considered a development stage company in 1997. Although the
Company was incorporated on May 16, 1997, principal operations did not
effectively begin until August 1997. These principal activities included
developing business plans, procuring governmental authorizations and central
office collocation space improvements, raising capital, hiring management and
other key personnel, working on the design and development of the Company's
network architecture and operations support system, acquiring equipment and
facilities and negotiating interconnection agreements. In March 1998, the
Company began generating revenue from providing transport services to NSP
customers.
Certain prior year balances have been reclassified to conform with the
current year presentation.
All financial statements have been restated to give retroactive effect for
all periods to a common stock split of 2.0178 for 1 effective August 16, 1997,
a 3 for 2 common and preferred stock split effective April 9, 1999 and a 3 for
2 common and preferred stock split effective April 16, 1999 (Note 14).
2. Summary of Significant Accounting Policies
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.
Business Risks and Credit Concentrations
The Company's operations are subject to significant risks and uncertainties
including competitive, financial, developmental, operational, technological,
regulatory and other risks associated with an emerging business.
As of December 31, 1998, the Company's cash and cash equivalents are
deposited with one financial institution in the form of demand deposits and
money market accounts. At December 31, 1998, the Company had bank deposits of
$10,855,655 in excess of federally insured limits.
F-7
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company sells its services on a wholesale basis to NSPs. For the year
ended December 31, 1998, two NSP customers accounted for 70% of revenue. These
same customers accounted for 55% of accounts receivable at December 31, 1998.
The Company is dependent upon a small number of major suppliers and service
providers.
Cash and Cash Equivalents
The Company considers all highly liquid monetary instruments with an original
maturity of three months or less at the date of purchase to be cash
equivalents.
Property and Equipment
Property and equipment, including property and equipment under capital
leases, are recorded at cost and are depreciated using the straight-line method
over the shorter of their useful lives or, for leased assets, the remaining
lease term. The estimated useful life is three years for software, and five
years for all other property and equipment. Maintenance and repairs are charged
to expense as incurred, and improvements and betterments are capitalized. When
assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in operations in the period in which they are realized.
Central office collocation space improvements represent payments to
compensate carriers for infrastructure improvements within their central
offices to allow the Company to install its equipment, which allows the Company
to interconnect with the carrier's network. These payments are capitalized and
are amortized over their estimated useful lives of five years.
The Company capitalizes costs associated with the design and implementation
of the Company's network including internally and externally developed
software. Capitalized external software costs include the actual costs to
purchase existing software from vendors. Capitalized internal software costs
generally include personnel costs incurred in the enhancement and
implementation of purchased software packages. As of December 31, 1997 and
1998, no internal costs have been capitalized.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If undiscounted expected future cash
flows are less than the carrying value of the assets, an impairment loss is to
be recognized based on the fair value of the assets. No impairment losses have
been recognized to date.
Revenues
Revenues from transport services are recognized when the services are
provided. Payments received in advance of providing services are recorded as
deferred revenue until the period such services are provided. Revenues related
to installation services are recognized when the installation is completed. To
date, such revenues have not significantly exceeded the direct costs of
installation.
F-8
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Advertising and Sales Promotion Costs
Advertising and sales promotion costs are expensed as incurred and totaled $0
and $281,539 in 1997 and 1998, respectively.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards No. 109. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
Fair Value of Financial Instruments
Amounts reported for cash and cash equivalents, accounts receivable, accounts
payable, line of credit borrowings, and other accrued expenses are considered
to approximate fair value primarily due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar
terms, the carrying value of the capital lease obligations approximates fair
value.
Earnings (Loss) Per Share
The Company computes net loss per share pursuant to Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is
computed by dividing income or loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding
during the period after having given consideration to shares subject to
repurchase. Diluted net loss per share is determined in the same manner as
basic net loss per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and conversion of the Company's convertible preferred stock.
The following table presents the calculation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
May 16, 1997
(date of inception) Year ended
to December 31, 1997 December 31, 1998
-------------------- -----------------
<S> <C> <C>
Net loss............................ $ 1,440,269 $ 28,846,706
------------ ------------
Basic & Diluted:
Weighted average shares of common
stock outstanding................ 21,733,560 24,419,328
Less weighted average shares
subject to repurchase............ -- 39,883
------------ ------------
Weighted average shares used in
computing basic and diluted net
loss per share................... 21,733,560 24,379,445
------------ ------------
Basic and diluted net loss per
share.......................... $ (0.07) $ (1.18)
============ ============
</TABLE>
The dilutive effect of options, warrants and convertible preferred stock has
not been considered as their effect would be antidilutive for all periods
presented. See Notes 9 and 10.
F-9
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the option. The Company accounts for equity instruments issued to nonemployees
in accordance with the provisions of SFAS No. 123 and Emerging Issues Task
Force ("EITF") 96-18.
Comprehensive Income
The Company has adopted the accounting treatment prescribed by Statement of
Financial Accounting Standards No. 130, Comprehensive Income. The adoption of
this statement had no impact on the Company's financial statements for the
periods presented.
Segment Information
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information (SFAS
No. 131). SFAS No. 131 supersedes SFAS 14, Financial Reporting for Segments of
a Business Enterprise. replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. The
Company operates in one segment: High speed network and data transport
services. SFAS No. 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 had no
impact on the Company's Financial Statements for the periods presented.
Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet determined the
impact of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
On April 3, 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, (SOP 98-5), Reporting on the Costs of Start-Up
Activities, which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. SOP-98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. As the
Company has not capitalized such costs to date, the adoption of SOP 98-5 is not
expected to have an impact on the financial statements of the Company.
F-10
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Networking equipment................................ $ 146,890 $22,856,460
Central office collocation space improvements....... 459,051 14,706,047
Computers and software.............................. 72,099 2,488,542
Leasehold improvements.............................. 4,848 1,244,924
Furniture, fixtures and office equipment............ 18,126 938,877
Property and equipment under capital leases:
Networking equipment............................... 564,568 3,184,894
Central office collocation space improvements...... 221,908 892,537
Furniture, fixtures and equipment.................. 285,032 987,888
Leasehold improvements............................. 30,389 121,670
---------- -----------
Total property and equipment...................... 1,802,911 47,421,839
Less accumulated depreciation and amortization...... (27,179) (1,344,043)
---------- -----------
Property and equipment, net....................... $1,775,732 $46,077,796
========== ===========
</TABLE>
Included in accumulated depreciation and amortization is $22,759 and $630,121
of accumulated depreciation and amortization relating to property and equipment
under capital leases as of December 31, 1997 and 1998, respectively (See Note
8).
Depreciation and amortization expense was $27,179 and $1,318,575 for the
period from May 16, 1997 (date of inception) to December 31, 1997 and for the
year ended December 31, 1998, respectively, including amortization of software
of $236 and $88,099, respectively.
4.Income Taxes
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
May 16, 1997
(date of
inception) to Year ended
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
Current tax expense:
Federal.............................. $ -- $ --
State................................ 800 800
--------- -----------
800 800
Deferred tax expense:
Federal.............................. (445,065) (8,188,230)
State................................ -- (1,397,905)
Valuation allowance for deferred tax
assets.............................. 445,065 9,586,135
--------- -----------
Net tax expense.................... $ 800 $ 800
========= ===========
</TABLE>
F-11
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The primary components of temporary differences which give rise to deferred
taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
--------- ------------
<S> <C> <C>
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards.................. $ 534,549 $ 9,410,087
Depreciation...................................... (89,484) (81,222)
Accrued liabilities............................... -- 702,335
--------- ------------
Gross deferred tax asset........................ 445,065 10,031,200
Valuation allowance............................... (445,065) (10,031,200)
--------- ------------
Net deferred tax asset.......................... $ 0 $ 0
========= ============
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has recorded a valuation
allowance against its net deferred tax asset at both December 31, 1997 and
1998. Management evaluates the recoverability of the deferred tax asset and the
level of the valuation allowance. At such time as it is determined that it is
more likely than not that the deferred tax asset will be realizable, the
valuation allowance will be reduced.
At December 31, 1997 and 1998, the Company had net operating loss
carryforwards of approximately $1,336,000 and $23,525,000, respectively, for
both federal and state income tax purposes. The federal carryforwards expire in
the years 2012 through 2018. For federal and state tax purposes, a portion of
the Company's net operating loss may be subject to certain limitations on
annual utilization in case of changes in ownership, as defined by federal and
state tax laws. Such amount, if any, has not yet been determined.
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
May 16, 1997
(date of
inception) to Year ended
December 31, December 31,
1997 1998
------------- ------------
<S> <C> <C>
Provision computed at federal statutory rate... $ (504,094) $(9,705,573)
State taxes, net of federal tax benefit........ -- (1,397,906)
Change in valuation allowance.................. 445,065 9,586,135
Permanent difference........................... 59,029 1,505,761
Others......................................... -- 11,583
---------- -----------
Net tax provision.............................. $ 0 $ 0
========== ===========
</TABLE>
5.Line of Credit
The Company has a bank line of credit collateralized by accounts receivable,
equipment, and inventories. The line requires monthly payments of interest
only, at prime plus 1.5%, and any unpaid principal and interest will be due on
May 1, 1999. The line has a maximum amount available of $1,000,000, of which
$275,000 is designated under an available standby letter of credit at
December 31, 1998. The letter of credit expires on February 28, 1999. The
amount outstanding under the bank line of credit was $1,000 and $725,000 as of
December 31, 1997 and 1998, respectively, and the interest rate in effect was
10% and 9.25%, respectively.
F-12
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6.Bridge Loan
In July 1998, the Company finalized a commitment from an investment bank to
provide up to $50,000,000 of debt financing (the "Bridge Loan"). The Bridge
Loan carries interest at 10% per annum through January 15, 1999. The interest
rate increases to 11.5% by July 15, 1999 at which date the Bridge Loan is
payable. If not paid by July 15, 1999, the Bridge Loan converts into Senior
Rollover Notes, Series A and B with principal balances of $15,000,000 and
$35,000,000 respectively and the interest rate increases by 50 basis points at
the end of each three month period for which the Senior Rollover Notes remain
outstanding. As of December 31, 1998, the Company has drawn down the entire
$50,000,000 available under its bridge loan commitment.
The Bridge Loan contains various business and financial covenants including,
among other things, (i) limitations on dividends, redemptions and repurchases
of capital stock, (ii) limitations on the incurrence of indebtedness, liens,
leases and sale-leaseback transactions and (iii) limitations on capital
expenditures.
In connection with the Bridge Loan, the Company issued warrants (the Bridge
Loan Warrants) to purchase 2,250,000 shares of common stock to this bank, at
an exercise price of $0.0044 per share for the first 562,500 shares, and
$2.9644 for the remainder. Upon draw down of funds in excess of $15,000,000,
the Company is required to issue warrants to purchase up to 1,350,000
additional shares of common stock at a price of $2.9644. The amount of
additional warrants issued is based on the outstanding principal of the bridge
loan, divided by $35 million and multiplied by 337,500, as of each three month
anniversary of each draw date.
Under the terms of the loan, warrants to purchase 2,587,500 shares of common
stock have been issued, none of which have been exercised as of December 31,
1998. (Note 10)
The fair value of the warrants has been determined using a Black-Scholes
Model, applying an expected life of 5 years, a weighted average risk-free
interest rate of 5.31%, an expected dividend yield of zero percent and a
volatility of 75%. Based on the fair value of these warrants, the Company has
recognized a discount of $4,171,118 to the bridge loan, which is amortized
over the life of the loan term. Amortization of this discount amounted to $0
and $1,867,684 in 1997 and 1998, respectively.
At various dates throughout the period January to July 1999, the Company is
required to issue warrants to purchase a total of 1,012,500 additional shares
of common stock under the Bridge Loan (Note 14). If the loan is repaid prior
to July 15, 1999, fewer warrants will be issued. The fair value of these
warrants will be recognized upon issuance and will be amortized over the
remaining life of the Bridge Loan.
7. Commitments and Contingencies
The Company is subject to state public utilities commission, Federal
Communications Commission and court decisions as they relate to the
interpretation and implementation of the Telecommunications Act, the
interpretation of CLEC interconnection agreements in general and the Company's
interconnection agreements in particular. In some cases the Company may be
bound by the results of ongoing proceedings of these bodies or the legal
outcomes of other contested interconnection agreements that are similar to the
Company's agreements. The Company cannot estimate the effect, if any, of these
proceedings.
F-13
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Capital and Operating Leases
In October 1997, the Company entered into an agreement with a lease provider
under which the Company obtained a capital lease facility of up to $7,500,000.
Under this agreement, the Company entered into capital leases for property
and equipment in 1997 and 1998 (Note 3). The property and equipment leased
under this facility are pledged as collateral for the lease commitment.
The Company leases office space under noncancelable operating leases. Rent
expense under operating leases was $56,838 and $830,655 for the period from May
16, 1997 (date of inception) to December 31, 1997 and for the year ended
December 31, 1998, respectively, which includes $3,879 and $272,983 in sublease
rent expense, respectively. The following is a schedule of future minimum lease
payments under capital and operating leases for the year ending December 31,
1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
1999................................................. $1,512,058 $2,171,043
2000................................................. 1,512,058 1,622,769
2001................................................. 1,512,058 1,532,353
2002................................................. 557,719 1,582,097
2003................................................. -- 462,486
---------- ----------
Total minimum lease payments......................... 5,093,893 $7,370,748
==========
Less amount representing interest.................... 665,814
----------
Present value of minimum lease payments.............. 4,428,079
Less discount recognized for value of warrants (note
10)................................................. 863,081
----------
Net capital lease obligations........................ 3,564,998
Less current portion of net capital lease
obligations......................................... 925,418
----------
Long-term portion of net capital lease obligations... $2,639,580
==========
</TABLE>
9. Convertible Preferred Stock
The Company has authorized 49,060,250 shares of preferred stock, of which
38,265,646 shares are designated Series B preferred stock (Series B stock) and
10,794,604 shares are designated as Series C preferred stock (Series C stock).
On June 18, 1997, the Company issued 13,095,000 shares of Series A preferred
stock (Series A stock) with total proceeds of $582,000. In August 1997 the
Company issued to the holders of Series A stock 1,942,366 shares of Series B
preferred stock at a price of $0.2996345 per share, payable in cash or by
surrender of 2.996345 shares of Series A stock, based on the fair value of
Series B preferred stock and the original issue price of Series A stock. All
holders of Series A stock chose to pay by surrender of their Series A stock and
consequently no shares of Series A stock are outstanding since August 1997. At
December 31, 1998, 37,014,122 shares of Series B stock were outstanding and
1,484,932 shares of Series C stock were outstanding.
Dividends
The holders of Series B stock are entitled to receive noncumulative dividends
and the holders of Series C stock are entitled to receive cumulative dividends
in preference to any dividend on common stock, at an annual rate equal to the
greater of (i) $0.03555555 or $0.18826666 per share, respectively, in the case
of the Series B stock or Series C stock or (ii) a per share amount equal to
F-14
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the per share amount paid on any other outstanding shares of capital stock of
the Company, on an as-converted basis when and if declared by the Board of
Directors. No such dividends have been declared or paid to date.
Liquidation Preference
In the event of any liquidation, dissolution, or winding up of the Company,
including a change of control, the holders of the preferred stock are entitled
to receive, in preference to the holders of common stock, .29963454 per share
for each share of Series B stock and 1.56888888 per share for each share of
Series C stock ($15,492,710 in total), plus all declared but unpaid dividends,
if any. Holders of preferred Series B and Series C stock are then entitled to
receive assets and funds of the Company in proportion to the number of shares
as if converted pursuant to the following paragraph.
Conversion Rights
Each share of Series B and Series C preferred stock is convertible into one
share of common stock, (i) in the event of the closing of an underwritten
public offering of any of the Company's equity securities, (ii) upon the
election of the holders of at least a majority of the then outstanding shares
of Preferred Stock, or (iii) at anytime at the option of the holder.
The preferred stock carries provisions which protect the holders of such
securities from dilution caused by capital reorganizations, stock splits, or
other such capital changes.
Redemption Rights
The convertible preferred stock is not redeemable.
Voting Rights
The holders of preferred stock are entitled to vote on all matters and
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted pursuant to the conversion
rights. Except as otherwise required by law, the holders of the preferred stock
have voting rights equal to those of the common stockholders.
The holders of preferred stock have the right to elect three members of the
Board of Directors and the holders of the shares of common stock have the right
to elect one member of the Board of Directors. Any additional directors shall
be elected by holders of both classes of stock.
10.Stock Warrants
Equipment Lease Warrants
In conjunction with the capital leases of property and equipment (Note 8),
the Company has issued warrants to purchase up to 1,251,524 shares of Series B
preferred stock to an equipment lease provider, at an exercise price of $0.30
per share. As of December 31, 1997 and 1998, warrants to purchase 250,303 and
917,779 shares, respectively, had vested. The fair value of the warrants on
each of the vesting dates has been determined using a Black-Scholes Model,
applying an expected life of 5 years, a weighted average risk-free interest
rate of 5.7%, an expected dividend yield of zero percent and a volatility of
75%, resulting in a debt discount of $1,061,286 and related amortization of
$198,204 in 1998.
F-15
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants vest based on the aggregate amounts drawn under the lease facility
up to $7,500,000 as follows: 83,434 fully paid and nonassessable shares of
Preferred Stock vest upon the funding of any portion of each incremental
$500,000 drawn in the aggregate under the facility, and any remaining unvested
warrants will vest on March 31, 1999. In the event that (i) the Company
terminates its right to draw down any unused portion available under the
facility before March 31, 1999; and (ii) at the time of such termination the
amounts drawn representing software and tenant improvements do not exceed 35%
of the aggregate amount drawn under the facility, the remaining unvested
warrants will be cancelled. If however at the time of termination the amounts
drawn representing software and tenant improvements are in excess of 35% of the
aggregate amount drawn under the facility warrants will vest to the maximum of
1,251,524 shares of Preferred Stock.
Bridge Loan Warrants
In conjunction with the Bridge Loan (Note 6) the Company issued warrants to
purchase 562,500 shares of common stock for an exercise price of $.0044 per
share, and 2,025,000 shares of common stock for an exercise price of $2.9644
per share. The Bridge Loan Warrants are exercisable immediately and expire in
July 2003. These warrants carry provisions which protect the holder from
dilution caused by certain specified events, including:
. stock or cash dividends, stock splits, reverse stock splits or
reclassifications;
. issuances of common stock, rights, options or warrants at prices per
share lower than the then current market value per share;
. distributions of debt, assets, or cash; and
. consolidation or merger with or into another person or sale of all or
substantially all of the Company's assets.
In these events, the exercise price and number of shares issuable upon exercise
of these warrants will be adjusted to reduce the dilution caused by these
events.
Contingent Warrants
The Company has agreed to issue warrants to purchase up to 212,568 shares of
its common stock at a price of $1.5689 per share to one of its shareholders,
contingent on the introduction of DSL services in certain markets by the
Company and the placement of a purchase order by this shareholder for a certain
number of DSL end users in those markets, prior to September 30, 1999. No
warrants have been issued under this agreement at December 31, 1998.
11. Stock Options
In September 1997, the Company adopted the 1997 Stock Option Plan under which
the Board of Directors may grant options to purchase common stock either as
incentive stock options to employees and directors or nonstatutory stock
options to employees, directors, and consultants. Options granted as incentive
stock options are issued at an exercise price between 100% and 110% of fair
market value, as determined by the Board of Directors. Nonstatutory options are
issued at between 85% and 110% of their fair market value. At December 31, 1997
and 1998, 8,194,639 and 16,875,000 shares of common stock, respectively, have
been authorized for the exercise of stock options.
Generally, options granted under this plan become exercisable at a rate of
1/4 of the total at the end of twelve months from the vesting commencement
date, and 1/48 of the total per month
F-16
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
thereafter of employment. Options generally expire ten years from the date of
the grant except in the case of an incentive stock option granted to an
optionee who, at the time of the option is granted, owns stock representing
more than ten percent of the voting power of all classes of stock outstanding.
In this case, the term of the option is 5 years from the date of the grant.
The following table summarizes activity under the Company's stock option plan
for the period from May 16, 1997 (date of inception) to December 31, 1997 and
for the year ended December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Shares Number of Average
available Options Exercise
for Grant Outstanding Price
---------- ----------- --------
<S> <C> <C> <C>
Reserved for issuance...................... 8,194,639
Granted................................... (5,130,000) 5,130,000 $0.03
Exercised................................. -- --
Cancelled................................. -- --
---------- ---------- -----
Balances as of December 31, 1997........... 3,064,639 5,130,000 $0.03
Reserved for issuance...................... 8,680,360
Granted................................... (9,088,087) 9,088,087 $0.29
Exercised................................. -- (241,875) $0.15
Cancelled................................. 217,969 (217,969) $0.10
---------- ---------- -----
Balances as of December 31, 1998........... 2,874,881 13,758,243 $0.20
========== ========== =====
</TABLE>
The following table summarizes information with respect to stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Prices at 12/31/98 (Years) Price at 12/31/98 Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.03 7,618,781 8.86 $.03 2,038,144 $ .03
$.09 1,594,125 9.41 $.09 731,250 $ .09
$.22 - $.36 1,081,125 9.51 $.32 -- --
$.56 - $.67 3,464,212 9.70 $.59 -- --
---------- ---------
13,758,243 9.18 $.20 2,769,394 $ .04
========== =========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Options Issued to Employees and related
interpretations in accounting for its employee stock options. Under APB No. 25,
compensation expense is recognized based on the amount by which the fair value
of the underlying common stock exceeds the exercise price of the stock options
at the measurement date, which in the case of employee stock options is
typically the date of grant. For financial reporting purposes, the Company has
determined that the deemed fair market value on the date of grant of employee
stock options was in excess of the exercise price of the options. As a result,
the Company recorded deferred compensation of $1,203,614 and $14,380,698, for
the period from May 16, 1997 to December 31, 1997 and for the year ended
December 31, 1998, respectively. This amount was recorded as a reduction of
stockholders' equity and is being amortized as a charge to operations over the
vesting period of the applicable options.
F-17
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the period from inception to December 31, 1997 and the year ended
December 31, 1998, the Company recognized $173,612 and $2,387,941,
respectively, of stock compensation expense.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption of
a fair value-based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method
under APB No. 25 for options granted to employees and disclose pro forma net
earnings and earnings per share in accordance with SFAS No. 123. Had
compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net earnings and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Net loss as reported............................ $(1,440,269) $(28,846,706)
Pro forma net loss.............................. (1,453,377) (29,994,072)
Net loss per share as reported, basic and
diluted ....................................... (0.07) (1.18)
Pro forma net loss per share, basic and
diluted........................................ (0.07) (1.23)
</TABLE>
The weighted average fair value of stock options granted during the period
from May 16, 1997 (date of inception) to December 31, 1997 and during the year
ended December 31, 1998 was $0.05 and $.75, respectively.
The effects of applying SFAS No. 123 for the pro forma disclosures are not
representative of the effects expected on reported net earnings and earnings
per share in future years, since valuations are based on highly subjective
assumptions about the future, including stock price volatility and exercise
patterns.
The Company used the Black-Scholes option pricing model to determine the fair
value of grants made in 1997 and 1998. The following assumptions were applied
in determining the pro forma compensation cost:
<TABLE>
<CAPTION>
1997 1998
---- -----
<S> <C> <C>
Weighted average risk-free interest rate.......................... 5.7% 5.25%
Expected dividend yield........................................... 0% 0%
Expected option life in years..................................... 5 5
</TABLE>
Because the Company does not have actively traded equity securities,
volatility is not considered in determining the fair value of stock-based
awards to employees.
The Company applies SFAS No. 123 to account for options granted to non-
employees. The fair value of stock options issued to non-employees, using a
Black-Scholes Model with the above assumptions and a volatility of 75% was $0
in 1997 and $275,784 in 1998 which was recognized as deferred compensation.
Amortization was $0 in 1997 and $275,784 in 1998.
12.Employee Benefit Plan
In January 1997, the Company established the NorthPoint Communications 401(k)
plan (the Plan) which covers substantially all employees. Under the Plan,
employees are permitted to contribute up to 20% of gross compensation not to
exceed the annual 402(g) limitation for any plan year. Discretionary
contributions may be made by the Company as determined by the Board of
Directors. No contributions were made by the Company during 1997 and 1998.
F-18
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13.Related Party Transactions
In 1997 and 1998, legal fees of approximately $76,804 and $114,831,
respectively, were paid to a law firm which, along with two partners of the
firm, is a Series B preferred stockholder in the Company.
A principal stockholder of the Company owns more than 10% of the capital
stock of a vendor of the Company. The Company's payments to the vendor for the
period from May 16, 1997 (date of inception) to December 31, 1997, and for the
year ended December 31, 1998 totaled approximately $203,000 and $8,490,467,
respectively.
14.Subsequent Events
NorthPoint Communications Group, Inc.
On February 24, 1999, the Board of Directors approved the merger of
NorthPoint Communications, Inc. with and into NorthPoint Merger Sub, Inc., a
wholly owned subsidiary of NorthPoint Communications Group, Inc. This
reorganization was completed on March 1999, and was a reorganization under
common control.
After the merger, the capital structure and ownership of NorthPoint
Communications Group, Inc. is identical to the capital structure and ownership
of NorthPoint Communications, Inc. prior to the merger. Prior to the merger,
NorthPoint Communications Group, Inc., on a consolidated basis, had not
commenced operations, and had no significant assets, liabilities, contingent
liabilities or commitments.
In April 9, 1999, the Board of Directors of NorthPoint Communications Group,
Inc. authorized two 3-for-2 splits of its common and preferred stock effective
April 9 and April 16, 1999, respectively. All share and per-share amounts in
the accompanying consolidated financial statements have been restated to give
retroactive effect to the stock splits for all periods. Prior to giving
retroactive effect to the stock splits, loss per share was $0.13 and $2.39 for
the period from May 16, 1997 (date of inception) to December 31, 1997 and the
year ended December 31, 1998, respectively.
Common Stock
From January 1, 1999 to April 12, 1999, the Company granted to certain
employees options to purchase an aggregate of 4,883,933 shares of common stock
at an exercise price of $.67 to $6.67 per share. Under the provisions of APB
No. 25, deferred compensation will be recognized in connection with these
grants of approximately $6,465,000.
Pursuant to the terms of the Bridge Loan Agreement (Note 6), the Company has
issued warrants to purchase an additional 337,500 shares of common stock. The
fair value of these warrants, determined using the method and assumptions
discussed in Note 6 was $3,075,000 which will be recognized as debt discount
and amortized as interest expense, over the term of the loan. On April 5, 1999,
the Company paid off the Bridge Loan and therefore all remaining unamortized
debt discount will be recognized as interest expense in 1999. As of April 16,
1999 warrants to issue a total of 2,925,000 shares of common stock were issued
under the Bridge Loan.
Preferred Stock
On February 19, 1999, the Company issued 37,715,357 shares of Series C
preferred stock with total proceeds of approximately $59,200,000.
F-19
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with this issuance the Company also issued 1,320,874 shares of
Series C stock to existing holders of Series C stock under anti-dilution
provisions agreed upon with these holders upon their original purchase. The
issuance of additional shares effectively reduces the price per share paid by
these existing holders to the price per share of the February 19, 1999
issuance.
In connection with the February 19, 1999 issuance of Series C stock the
Company committed to issuing to one purchaser of this stock warrants to
purchase common stock upon exercise of warrants by other warrant holders. Under
this arrangement the Company will be required to issue warrants to purchase a
number of shares of the type of capital stock of the Company such that the
purchaser's fully diluted ownership percentage in the Company after the
exercise of such warrants is equal to its fully diluted percentage in the
Company immediately prior to the exercise of such warrants. As of April 16,
1999 no warrant holder has exercised warrants and consequently no warrants were
issued under this arrangement. Should all warrant holders exercise their
warrants, the Company would be required to issue warrants to purchase a maximum
of 644,770 shares of common stock at a weighted price of $2.85 per share.
In March and April 1999, NorthPoint Communications Group, Inc. issued
3,968,174 shares of Series D-1 preferred stock (Series D-1 stock) with total
proceeds of $38.8 million. Rights and preferences attached to Series D-1 stock
are similar to Series C preferred stock, except that Series D-1 stock is non-
voting and is convertible into a non-voting class of common stock. The
conversion ratio is one-on-one, except in the event of an initial public
offering of the Company's equity securities or sale of the Company, in which
case each investor in Series D preferred stock will receive the number of
shares of Class B common stock that is the quotient of their investment divided
by the lesser of (a) the midpoint of the price range first set forth on the
cover page of the preliminary prospectus for the Company's initial public
offering and (b) 90% of the initial public offering price. In connection with
this issuance, the purchasers agreed that their Series D-1 stock or common
stock into which it converts will not be transferable for a period of one year
after the exercise or the closing date of an initial public offering of
NorthPoint Communications Group, Inc. common stock. In addition, the purchasers
agreed that for a period of three years after the closing date they will not
purchase or otherwise acquire shares that would result in their direct or
indirect or beneficial ownership of more than 10% of NorthPoint Communications
Group, Inc. voting stock.
In connection with the issuance of Series C and Series D-1 preferred stock
the Company issued certain rights to holders of 83,413,558 shares of common
stock issued or issuable upon conversion of Series B stock. Series C stock and
Series D-1 stock or exercise of Bridge Warrants and certain other outstanding
options and warrants (collectively, the "Rights Holders"). The Rights Holders
are entitled to notification if the Company proposes to register any of its or
a holder's common stock under the Securities Act. In addition, subject to
certain conditions and limitations, they can also require the Company to
include their shares in such a registration, or a later registration, or use
its best efforts to cause such shares to be registered.
F-20
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Credit Facility
On April 5, 1999, the Company entered into a secured credit facility with two
banks consisting of:
. a $10,000,000 senior first priority secured term loan, all of which was
drawn down on the closing date;
. a $50,000,000 senior first priority secured revolving credit facility
that will convert into a senior first priority secured term loan within
six months, $5,000,000 of which was drawn down on the closing date; and
. a $40,000,000 second priority secured term loan, all of which was drawn
down on the closing date.
The secured credit facility matures on the fifth anniversary of its closing
date.
The total amounts outstanding under the senior first priority secured loans
bear interest, in the absence of an event of default, at our option at:
. the LIBOR rate plus four and one-half percent per year; or
. the greater of the prime rate or the federal funds rate as announced by
The Wall Street Journal plus four percent per year.
The total amounts outstanding under the second priority secured term loan
bear interest, in the absence of an event of default, at the Company's option
at:
. the LIBOR rate plus eight percent per year; or
. the greater of the prime rate or the federal funds rate as announced by
The Wall Street Journal plus seven and one-half percent per year.
Borrowings under the senior secured credit facility are restricted based upon
the Company's leverage ratio and the value of the Company's telecommunications
assets from time to time.
The capital stock in NorthPoint Communications held by NorthPoint
Communications Group is pledged as collateral under the Senior Secured Credit
Facility, as well as substantially all of the Company's consolidated assets.
Convertible Promissory Note
In February 1999, the Company issued a subordinated convertible promissory
note in the amount of $5.6 million to a customer. This note converts into a
non-voting class of common stock in the event of an initial public offering of
the Company's stock or upon an earlier sale of the Company at a conversion rate
equal to the then outstanding principal amount, plus accrued interest, of the
note divided by the initial price of the Company's common stock to the public
or other sale price.
Commitments
In March 1999, the Company entered into several strategic marketing
agreements under which the Company is obligated to contribute a total of $16
million during 1999 and $600,000 during 2000 to support the development of a
web site and other marketing activities.
F-21
<PAGE>
NORTHPOINT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Microsoft Investment and Warrant
In April 1999, Microsoft Corporation announced its intention to invest $30
million worth of shares of the Company's common stock concurrently with an
initial public offering at the initial public offering price. In the event that
Microsoft makes such a purchase, the Company will grant Microsoft a warrant to
purchase $30 million of Class B common stock at an exercise price per share
that is 50% above the initial public offering of the Company's common stock.
This warrant will be exercisable immediately and will expire five years after
the initial public offering.
F-22
<PAGE>
UNDERWRITING
NorthPoint and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Morgan Stanley &
Co. Incorporated and Credit Suisse First Boston Corporation are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ....................................... 4,250,000
Morgan Stanley & Co. Incorporated........................... 4,250,000
Credit Suisse First Boston Corporation...................... 4,250,000
BT Alex. Brown Incorporated................................. 381,000
J.C. Bradford & Co. ........................................ 115,000
CIBC World Markets Corp. ................................... 381,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 381,000
PaineWebber Incorporated.................................... 381,000
Charles Schwab & Co., Inc................................... 115,000
Salomon Smith Barney Inc.................................... 381,000
Wit Capital Corporation..................................... 115,000
----------
Total..................................................... 15,000,000
==========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
2,250,000 shares from NorthPoint to cover such sales. They may exercise that
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by NorthPoint. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option
to purchase additional shares.
<TABLE>
<CAPTION>
Paid by NorthPoint
------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ 1.68 $ 1.68
Total.............................................. $25,200,000 $28,980,000
</TABLE>
At NorthPoint's request, the underwriters have reserved at the initial public
offering price 2,083,333 shares of NorthPoint's common stock for sale to
Microsoft Corporation and Tandy Corporation. If Microsoft and Tandy purchase
the shares reserved for them, the underwriting discount will be reduced and the
amount paid by NorthPoint will decrease by an amount equal to $1.68 per share
with respect to the shares purchased by them, or an aggregate of approximately
$3,500,000.
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $1.00 per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $.10 per share from
the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
U-1
<PAGE>
NorthPoint, NorthPoint's executive officers and directors and certain of
NorthPoint's stockholders, including all of the holders of our Series C
preferred stock, have agreed with the underwriters not to sell, otherwise
dispose of or hedge any of their common stock, any options or warrants to
purchase NorthPoint's common stock, or securities convertible into,
exchangeable for or that represent a right to acquire shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives and except that (1) holders of warrants
outstanding on the date of this prospectus may exercise those warrants and (2)
we may issue our common stock or securities convertible into or exchangeable
for shares of our common stock in connection with strategic relationships and
acquisitions of businesses, technologies or products complementary to those of
ours, so long as the recipients of such securities agree to be bound by a lock-
up agreement for the remainder of the 180-day lock-up period. The lock-up
agreement by NorthPoint does not apply to any existing employee benefit plans.
The lock-up agreements by persons other than NorthPoint cover an aggregate of
approximately 100 million shares. In addition, the holders of the Series D-1
preferred stock have agreed not to sell or otherwise dispose of their shares or
any securities into which the Series D-1 preferred stock may convert until
March 2000. See "Shares Eligible for Future Sale" for a discussion of certain
transfer restrictions.
At the request of NorthPoint, the underwriters will reserve at the initial
public offering price $30 million of common stock for sale to Microsoft
Corporation and $20 million of common stock for sale to Tandy Corporation,
representing a total of 2,083,333 reserved shares. There can be no assurance
that any of the reserved shares will be purchased. Microsoft will agree that,
if it purchases any shares of common stock or other securities of NorthPoint,
it will not sell or otherwise dispose of or hedge such shares or securities
until one year after this offering. Tandy will also be required to agree to a
lock-up.
The price of shares reserved for Microsoft and Tandy will be the initial
public offering price on the cover of this prospectus. The number of shares
available to the general public will be reduced to the extent that Microsoft
and Tandy purchase the reserved shares. Any reserved shares not purchased by
them at the closing of the public offering will be offered by the underwriters
to the general public on the same terms as the other shares offered by this
prospectus.
Prior to this offering, there has been no public market for the shares. The
initial public offering price has been negotiated among NorthPoint and the
representatives. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, were
NorthPoint's historical performance, estimates of the business potential and
earnings prospects of NorthPoint, an assessment of NorthPoint's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "NPNT".
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
U-2
<PAGE>
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of common
stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq, in
the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
NorthPoint estimates that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1,350,000.
Certain of the underwriters or their affiliates have in the past and may in
the future provide investment banking or other services for the Company. In
July 1998, an affiliate of Morgan Stanley & Co. Incorporated made a $50,000,000
bridge loan to NorthPoint, and in February 1999 an affiliate of Goldman, Sachs
& Co. committed to provide half of a $110,000,000 secured credit facility to
NorthPoint. These are described in greater detail in "Management's Discussion
and Analysis of Financial Conditions and Results of Operations--Liquidity and
Capital Resources." NorthPoint paid or will pay fees and other considerations
in connection with these transactions.
NorthPoint has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
U-3
<PAGE>
[MAP OF UNITED STATES SHOWING THE NORTHPOINT NETWORK ARCHITECTURE]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 22
Dividend Policy.......................................................... 22
Capitalization........................................................... 23
Dilution................................................................. 25
Selected Consolidated Financial Data..................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 36
Management............................................................... 53
Principal Stockholders................................................... 62
Certain Transactions..................................................... 64
Shares Eligible for Future Sale.......................................... 66
Description of Capital Stock............................................. 68
Legal Matters............................................................ 73
Experts.................................................................. 73
Where You Can Find More Information...................................... 73
Index to Financial Statements............................................ F-1
Underwriting............................................................. U-1
</TABLE>
Through and including May 30, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
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15,000,000 Shares
NorthPoint Communications Group, Inc.
Common Stock
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[LOGO OF NORTHPOINT]
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Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Credit Suisse First Boston
Representatives of the Underwriters
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