<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1999
Registration No. 333--74679
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 7 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
NETWORK ACCESS SOLUTIONS CORPORATION
(Exact name of registrant as specified in its charter)
100 Carpenter Drive
Sterling, Virginia 20164
(703) 742-7700
(Address of principal executive offices)
<TABLE>
<S> <C> <C>
Delaware 4813 54-1738938
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
-------------------
Jonathan P. Aust
President and Chief Executive Officer
Network Access Solutions Corporation
100 Carpenter Drive
Sterling, Virginia 20164
(703) 742-7700
(Name, address, including zip code and telephone number, including area code
of agent for service)
-------------------
Copies to:
Edwin M. Martin, Jr., Esquire Scott M. Wornow, Esquire
Nancy A. Spangler, Esquire Paul, Hastings, Janofsky & Walker LLP
Piper & Marbury L.L.P. 399 Park Avenue, 31st Floor
1200 19th Street, N.W. New York, New York 10022
Washington, D.C. 20036 (212) 318-6000
(202) 861-3900
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title Of Each Class Amount Proposed Maximum Proposed Maximum Amount Of
Of Securities To Be To Be Offering Price Aggregate Registration Fee
Registered Registered Per Unit Offering Price (1) (2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.001....... 8,625,000 Shares $16.00 $138,000,000 $0
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act.
(2) A registration fee of $38,364 was previously paid in connection with this
registration statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--June 1, 1999
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7,500,000 Shares
[Network Access Solutions Logo Appears Here]
Common Stock
- --------------------------------------------------------------------------------
Network Access Solutions is offering 7,500,000 shares of its common stock.
This is our initial public offering. No public market currently exists for our
shares. We anticipate that the initial public offering price for our shares
will be between $14.00 and $16.00 per share.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "NASC."
Donaldson, Lufkin & Jenrette expects to deliver the shares of common stock to
purchasers on , 1999.
See "Risk Factors" beginning on page 9 to read about risks that you should
consider before purchasing any shares of our common stock.
-------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
--------------------------------------------------------------------
<S> <C> <C>
Public offering price, estimated: $ $
Underwriting fees:
Price of shares offered to two investors:
Proceeds to Network Access Solutions, after expenses:
--------------------------------------------------------------------
</TABLE>
We have granted the underwriters the right to purchase an additional 791,667
shares of common stock from us and selling stockholders have granted the
underwriters the right to purchase an additional 333,333 shares of common stock
at the initial public offering price, less underwriting fees, to cover over-
allotments. See "Principal Stockholders" beginning on page 72 for a list of
these selling stockholders.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
J.P. Morgan & Co.
DLJdirect Inc.
<PAGE>
[Diagram of our planned network coverage]
[Diagram of our region-wide and one illustrative city-wide network]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 9
Use of Proceeds..................... 21
Dividend Policy..................... 21
Capitalization...................... 22
Dilution............................ 23
Selected Financial and Other Data... 24
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations......................... 27
Business............................ 40
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management........................ 64
Related Transactions and
Relationships.................... 70
Principal Stockholders............ 72
Description of our Capital Stock.. 74
Shares Eligible for Future Sale... 77
Underwriting...................... 80
Validity of the Shares............ 83
Experts........................... 83
Additional Information............ 83
Index to Financial Statements..... F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain important information regarding our business
and this offering. You should read this entire prospectus, including the "Risk
Factors" and the financial statements and all related notes before deciding to
purchase our common stock. Except as otherwise indicated, the information in
this prospectus assumes that:
. our common stock will be sold at $15.00 per share to the public, which is
the mid-point of the range shown on the cover page of this prospectus;
. the underwriters will not exercise their over-allotment option;
. $5.0 million of our redeemable preferred stock will be converted into
333,334 shares of our common stock at the public offering price with the
remaining shares and all accrued dividends cancelled without additional
payment to the holders of those shares; and
. $10.0 million of convertible notes will be converted into 666,666 shares
of our common stock at the public offering price.
Network Access Solutions
Our Business
We seek to solve the data communications needs of our business customers. We
have historically done this primarily through the sale of telecommunications
products and equipment and the provision of consulting services, and, more
recently, through the provision of network services. As part of our network
services, we provide our customers with high speed data transmission services
using our digital subscriber line, or DSL, technology, which enables them to
transmit data over standard copper telephone lines at speeds substantially
higher than common dial-up modems. Although nearly all of our revenue has
historically been derived from our product sales and consulting services, in
1996 we began to refocus our business on the development and implementation of
our DSL services, which we have branded CuNet, pronounced "CopperNet." We
commercially launched CuNet in January 1999. Our revenue for the three months
ended March 31, 1999 reflects the current position of our business. For that
period, approximately 82.8% of our revenue resulted from product sales and
14.7% of our revenue resulted from consulting services. During that same
period, network services, which includes CuNet, accounted for approximately
2.5% of our revenue. While we are refocusing our business on the provision of
CuNet services and expect to dedicate most of our financial and management
resources to that effort, product sales and consulting services will continue
to form an important part of our business. If we are successful, we expect our
revenue mix to change significantly.
Our Services
We offer products, consulting services and network services to solve our
customers' data communications needs. Through our product sales business, we
sell the telecommunications equipment that our customers use to build, maintain
and secure their networks. These sales have constituted the bulk of our
business. Through our consulting services business, we design our customers'
networks, install the related equipment and provide services to help them
secure their networks. Through our network services business, we manage and
monitor our customers' networks
4
<PAGE>
and, more importantly, have recently begun offering our CuNet services. CuNet
allows our customers to access their corporate networks and the Internet
through high speed, continuous connections. We currently are targeting the Bell
Atlantic region for our CuNet services and offer these services in Boston, New
York, Philadelphia, Baltimore, Washington, D.C. and Richmond. Our prices for
CuNet are typically 30% to 70% of the costs our customers would incur if they
were to use traditional technologies that offer data transport speeds
comparable to DSL. We seek to combine, or bundle, our CuNet services and other
solutions that we offer so that we can solve, as a single vendor, many of the
data communications problems that we believe business are now confronting.
Our Business Strategy
Our goal is to become the premier provider of solutions to data
communications problems in our target markets. We plan to:
. rapidly provide depth of coverage for our CuNet services in our markets,
initially the Bell Atlantic region;
. capitalize on our core competency in direct sales and engineering support
to businesses;
. quickly design and deliver, or provision, reliable services by building
relationships with traditional telephone companies, long distance
carriers, Internet service providers and data service providers, which,
collectively, we call service providers;
. provide superior customer care;
. deliver our products and services through different types of marketing;
. enhance and expand our CuNet network to meet the broadest array of
business requirements; and
. capitalize on the attractive features of DSL, namely:
. DSL's use of existing copper telephone wires that can be converted
into a sophisticated high speed data network through the addition of
DSL equipment; and
. a significant portion of our DSL expenditures are "success-based"
because we incur them only as we add customers or end users.
--------------------
We are a Delaware corporation. Our headquarters are located at 100 Carpenter
Drive, Sterling, Virginia 20164. Our telephone number is (703) 742-7700. We
have established a Web site at www.nas-corp.com. The information on our Web
site is not part of this prospectus.
We own applications for federal registration and claim rights in the
following trademarks: COPPERNET(TM), CU COPPERNET(TM) and CUNET(TM). This
prospectus also refers to trade names and trademarks of other companies.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
7,500,000 shares of common
Stock offered................................ stock.
Stock to be outstanding after this offering.. 44,500,000 shares of common
stock, or
45,291,667 shares of common
stock, assuming the
underwriters exercise their
over-allotment option in full.
Use of proceeds.............................. We expect to use the proceeds
from this offering, after
expenses, to finance capital
expenditures, to finance
operating losses that we
expect to incur as we expand
our customer base and network
and for general corporate
purposes. See "Use of
Proceeds."
Dividend policy.............................. We do not anticipate declaring
or paying dividends for the
foreseeable future. Instead,
for the foreseeable future, we
will retain our earnings, if
any, for the future operation
and expansion of our business.
Nasdaq National Market symbol................ NASC
</TABLE>
375,000 of the shares being offered have been reserved for purchase by our
directors, officers and employees and their business associates and related
persons. 430,108 of the shares being offered have been reserved for purchase by
SBC Communications and 286,738 of the shares being offered have been reserved
for purchase by Telefonos de Mexico, although neither SBC nor Telefonos de
Mexico has an obligation to buy these shares.
The shares of common stock to be outstanding after the offering are stated
as of April 30, 1999 and include shares of common stock to be issued upon
automatic conversion of preferred stock and convertible debt upon completion of
this offering, based upon an assumed initial public offering price of $15.00
per share. The shares of common stock outstanding exclude 11,250,000 shares of
common stock reserved for issuance under our stock option plans, of which
9,666,084 shares were subject to outstanding options, including 1,479,164
shares subject to options which are fully vested and are exercisable at a
weighted average exercise price of $0.09 per share.
6
<PAGE>
Summary Financial And Other Data
We were incorporated on December 19, 1994, but did not begin operations
until after January 1, 1995. We present below summary financial and other data
for our company. The summary historical balance sheet data as of December 31,
1998 and the summary historical statement of operations and other data for each
of the three years ended December 31, 1998 have been derived from our audited
financial statements that are included elsewhere in this prospectus.
PricewaterhouseCoopers LLP has audited the financial statements as of and for
each of the three years in the period ended December 31, 1998. The summary
historical balance sheet data as of March 31, 1999 and the summary historical
statement of operations and other data for each of the three months ended March
31, 1998 and 1999 have been derived from our unaudited financial statements
that are included elsewhere in this prospectus. The summary financial data for
the year ended December 31, 1995 have been derived from our unaudited financial
statements that are not included in this prospectus. The unaudited financial
statements include, in the opinion of our management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of the information set forth. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
complete financial information included elsewhere in this prospectus. The
results of the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the full year.
<TABLE>
<CAPTION>
Three Months
Ended March
Year Ended December 31, 31,
-------------------------------------- ---------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product sales...................................... $ 1,891 $14,368 $ 8,150 $ 9,900 $2,194 $ 3,955
Consulting services................................ 36 114 791 1,428 317 702
Network services................................... -- -- 4 311 41 119
------- ------- ------- -------- ------ -------
Total revenue.................................... 1,927 14,482 8,945 11,639 2,552 4,776
------- ------- ------- -------- ------ -------
Cost of revenue:
Product sales...................................... 1,475 11,975 7,180 8,639 1,858 3,535
Consulting services................................ 15 91 231 761 160 299
Network services................................... -- -- 2 41 1 171
------- ------- ------- -------- ------ -------
Total cost of revenue............................ 1,490 12,066 7,413 9,441 2,019 4,005
------- ------- ------- -------- ------ -------
Operating expenses:
Selling, general and administrative................ 299 2,255 1,437 4,017 538 2,533
Amortization of deferred compensation on employee
stock options..................................... -- -- -- 219 -- 540
Depreciation and amortization...................... 9 7 12 130 4 187
------- ------- ------- -------- ------ -------
Total operating expenses......................... 308 2,262 1,449 4,366 542 3,260
------- ------- ------- -------- ------ -------
Income (loss) from operations........................ 129 154 83 (2,168) (9) (2,489)
Interest income (expense), net....................... -- (1) (5) 64 (12) (9)
------- ------- ------- -------- ------ -------
Income (loss) before income taxes.................... 129 153 78 (2,104) (21) (2,498)
Provision (benefit) for income taxes................. 39 63 36 (28) (8) --
------- ------- ------- -------- ------ -------
Net income (loss).................................... $ 90 $ 90 $ 42 $ (2,076) $ (13) $(2,498)
======= ======= ======= ======== ====== =======
Net income (loss) per common share (basic and
diluted)............................................ $ 0.00 $ 0.00 $ 0.00 $ (0.08) $(0.00) $ (0.07)
======= ======= ======= ======== ====== =======
Weighted average common shares outstanding (basic and
diluted)............................................ 21,915 21,915 21,915 27,302 21,915 36,000
======= ======= ======= ======== ====== =======
Pro forma net income (loss) per common share (basic
and diluted) (1).................................... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $(0.00) $ (0.07)
======= ======= ======= ======== ====== =======
Pro forma weighted average common shares outstanding
(basic and diluted) (1)............................. 21,915 21,915 21,915 27,302 21,915 37,000
======= ======= ======= ======== ====== =======
Other Data:
EBITDA (2)........................................... $ 138 $ 161 $ 95 $ (1,819) $ (5) $(1,762)
Capital expenditures................................. 18 30 122 1,156 1 4,966
Net cash provided by (used in) operating activities.. 3 (27) 805 (2,810) (273) 136
Net cash used in investing activities................ 18 30 122 1,341 1 4,966
Net cash provided by (used in) financing activities.. 42 55 9 8,956 54 (70)
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
-----------------------------------------
Actual Pro Forma(3) Pro Forma
(unaudited) (in thousands) as Adjusted(4)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 618 $ 10,618 $114,243
Property and equipment, net......... 10,094 10,094 10,094
Total assets........................ 14,631 24,631 128,256
Total debt (including capital lease
obligations)....................... 2,618 2,618 2,618
Mandatorily redeemable preferred
stock.............................. 5,988 -- --
Total stockholders' equity (deficit)
................................... (1,372) 14,616 118,241
</TABLE>
- --------------------
(1) The "pro forma" summary statement of operations data as of March 31, 1999
reflects the following events as if such events had occurred as of January
1, 1999:
. the conversion of $5.0 million of our mandatorily redeemable preferred
stock into 333,334 shares of our common stock at the public offering
price and the cancellation without consideration of the remaining shares
of our preferred stock and all accrued dividends,
. the conversion of $5.0 million of 8% convertible notes issued on
March 31, 1999 into 333,333 shares of our common stock at the public
offering price and
. the conversion into 333,333 shares of our common stock at the public
offering price of $5.0 million of 8% convertible notes issued on May 17,
1999 pursuant to the note purchase agreement entered into on March 31,
1999. See "Related Transactions and Relationships."
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. 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 determined in
accordance with GAAP. We may calculate EBITDA differently than other
companies. For further information, see our financial statements and
related notes elsewhere in this prospectus.
(3) The "pro forma" summary balance sheet data as of March 31, 1999 reflects
the events described in note 1 as if such events had occurred as of March
31, 1999.
(4) The "pro forma as adjusted" summary balance sheet data as of March 31, 1999
reflects the events described in note 3 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
8
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following risks, together with all other information
included in this prospectus, before you decide to buy our common stock.
Because the focus of our company is changing to a high speed digital
communications service, our business is difficult to evaluate
We have refocused our company, through our CuNet services, on the provision
of DSL-based high speed digital communications services, which is a change from
our historical activities. We began in 1995 by helping our customers integrate
their network equipment, by selling them that network equipment and by
providing them with related network services. Because our business focus has
now changed, and we expect to dedicate most of our resources to develop our
CuNet services, it is difficult to evaluate our business.
Our financial results now and in the future are not, and will not be,
directly comparable to our prior financial results. Substantially all of our
revenue in 1995, 1996, 1997, 1998 and the first three months of 1999 was
derived from product sales and consulting services. Although in the short term
we expect to continue to derive the majority of our revenue from these
activities, we expect that over time our network services, which includes our
CuNet services, will constitute the more significant portion of our revenue.
Revenue from CuNet, which we began offering in January 1999, has been minimal.
As a result, not only have we changed the focus of our company, you also have
very limited historical financial information upon which to base your
evaluation of our performance and an investment in our common stock. We are
depending on the success of our CuNet services to achieve revenue growth. If
our business does not evolve as we expect, we will likely grow at a
significantly slower pace than would be the case if our CuNet services are
successful. If that situation arises, it is possible that the price of our
common stock may reflect the slower growth that might be expected with a
company that does not offer DSL-based services. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We have not tested our CuNet strategy so it is difficult to assess whether we
will be successful in this new and evolving market
The market for DSL-based services is in the early stages of development.
Although we have begun to deploy our CuNet services, we have not truly tested
our CuNet strategy. The combination of our unproven business strategy and the
highly competitive and quickly changing market in which we compete makes it
difficult for us to predict the extent to which CuNet will achieve market
acceptance. Various providers of high speed data communication services are
testing products from various suppliers for various applications, and suppliers
have not broadly adopted an industry standard. Critical issues concerning
commercial use of DSL for Internet and local area network access, including
security, reliability, ease and cost of access and quality of service, remain
unresolved and may affect the growth of this market. If the market for CuNet
fails to develop, grows more slowly than anticipated or becomes saturated with
competitors, our business will not produce the level of profitability we hope
to achieve.
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. We may never be able to deploy our
network as planned or achieve significant
9
<PAGE>
market acceptance, favorable operating results or profitability. Due to the so
far limited deployment of CuNet, we cannot guarantee that our network will be
able to connect and manage a substantial number of end users at high
transmission speeds. We may be unable to scale our network to service a
substantial number of end users while achieving high performance.
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 data 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.
We are an early stage company in a new and rapidly evolving market, subject to
a number of risks that may limit our revenue growth
Our failure to address the risks, expenses and difficulties we may encounter
as we expand our business in providing CuNet services, including those
frequently encountered by early stage companies in new and rapidly evolving
markets, may limit our revenue growth and make it difficult for us to compete
effectively with others. These risks include our ability to:
. rapidly expand the coverage of CuNet within our target markets;
. attract and retain customers;
. increase awareness of CuNet;
. respond to competitive developments;
. continue to attract, retain and motivate qualified persons;
. continue to upgrade our technologies;
. introduce and develop new technology for our network services; and
. effectively manage our expanding operations.
If we fail to manage these risks successfully, it would materially adversely
affect our financial performance.
Our failure to manage future growth will strain our resources and could impair
the expansion of our business
We plan a significant expansion of our CuNet operations. This rapid growth
will place a significant strain on our management, financial controls,
operations systems, personnel and other resources. If we fail to manage this
growth effectively, the expansion of our business could be impaired. We may be
unable to meet our customers' need for services and technical support or
provide the customer service they expect. To manage our growth effectively, we
must:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
10
<PAGE>
. hire, train and manage sufficient additional qualified personnel;
. expand and upgrade our technologies; and
. manage multiple relationships with our customers, vendors and other
third parties.
If we fail to manage our growth effectively, it could adversely affect the
expansion of our customer base and service offerings and could result in a
lower level of profitability than we hope to achieve.
Bell Atlantic's expansion into the digital subscriber line business or
reluctance to cooperate with us could adversely affect our business
Bell Atlantic, as the dominant traditional telephone company operating in
our initial target market, is both an essential supplier of facilities and
services for CuNet and potentially a significant DSL competitor. Traditional
telephone companies, like Bell Atlantic, pose a significant risk to the success
of our business. Bell Atlantic has existing networks in local areas and across
metropolitan areas and has its own Internet service provider businesses. It has
also started residential sales of DSL-based access services. We believe that
Bell Atlantic could, if it chose, deploy DSL services to businesses on a
widespread basis.
Bell Atlantic is currently our sole supplier of copper telephone lines, the
space we need to place, or collocate, our DSL equipment and support services
for CuNet. Bell Atlantic may be reluctant to cooperate with us in meeting our
supply needs. For example, Bell Atlantic may reject our collocation
applications or delay providing us with the collocation space we need. We have
experienced lengthy delays between the time we apply for collocation space and
the time that Bell Atlantic actually permits us to place our equipment in this
space. We face competition for this space from other competitive
telecommunications companies. Bell Atlantic's position as both a DSL competitor
and a supplier of numerous essential inputs to our DSL offering also gives Bell
Atlantic an incentive to subsidize its own DSL offerings by failing to fully
allocate to its DSL service the costs it incurs in providing that service.
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 telephone lines and
Bell Atlantic's maintenance of such lines. We cannot assure you that we will be
able to obtain the copper telephone lines and the services we require from Bell
Atlantic 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.
We depend on other carriers to provide fiber optic transmission facilities to
connect our equipment, which is critical to providing our CuNet services
We depend on the availability of fiber optic transmission facilities from
Bell Atlantic and other third parties to connect our equipment within and
between metropolitan areas. If these facilities are unavailable, we may not
have alternative means immediately available to connect our DSL equipment in
different locations. These fiber optic carriers include long distance carriers,
traditional telephone companies like Bell Atlantic and other competitive
telecommunications companies. Many of these entities are, or may become, our
DSL competitors. We have not established a history of
11
<PAGE>
obtaining transmission facilities in large volumes which we expect will be
necessary for the deployment of our network. We may be unable to negotiate or
renew favorable supply agreements. We depend on the timeliness of fiber optic
carriers to process our orders for customers who seek to use our services. We
have in the past experienced supply problems with some of our fiber optic
suppliers, and they may not be able to meet our needs on a timely basis in the
future.
We depend on third parties to provide the equipment, installation and field
service, which is critical to providing our CuNet services
We plan to purchase our equipment from many vendors, including Ascend
Communications, Inc. and Paradyne Corporation. At peak demand times we intend
to outsource some of the installation and field service of our network to third
parties. Because we depend on third parties, we do not have guaranteed capacity
or control over delivery schedules, quality assurance, production yields and
costs. If any of our vendors reduces or interrupts its supply, or if any
significant installer or field service provider interrupts its service to us or
fails to perform to required specifications, this reduction or interruption
would force us to seek alternative vendors and providers which would disrupt
our business. Our suppliers may be unable to manufacture and deliver the amount
or quality of equipment we order, or the available supply may be insufficient
to meet our demand. Currently, the DSL modem and other equipment used for a
single connection over a copper telephone line must come from the same vendor
since there are no existing interoperability standards for the equipment used
in our higher speed services. If our competitors enter into exclusive or
restrictive arrangements with our suppliers or licensors, then these events may
materially and adversely affect the availability and pricing of the equipment
we purchase and the technology we license.
Our success depends on renewing our interconnection agreements with Bell
Atlantic
We depend on contractual arrangements, or interconnection agreements, which
enable us to use Bell Atlantic's copper telephone lines and to collocate our
equipment in their offices. The success of our strategy depends on our ability
to renew our interconnection agreements with Bell Atlantic on a timely basis.
Delays in obtaining renewals could have a material adverse effect on our
business, prospects, financial condition and results of operations.
Interconnection agreements typically have limited terms of two to three
years. Our Bell Atlantic interconnection agreements have an initial term that
expire in March 2000 and January 2001. Existing or new agreements may not be
extended or negotiated on terms favorable to us. Interconnection agreements are
also subject to state telecommunications regulatory, FCC and judicial
oversight. These governmental 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.
Because two of our customers account for a high percentage of our revenue, the
loss of a significant customer could harm our business
To date, our largest customers have been AT&T and Zeneca Pharmaceuticals, a
division of Zeneca, Inc. AT&T and Zeneca accounted for 50.4% and 8.0%,
respectively, of our revenue in 1998 and 55.5% and 10.0%, respectively, of our
revenue in the three months ended March 31, 1999. Almost all of this revenue
was derived from product sales and consulting services. To date, AT&T and
Zeneca have not been CuNet customers. We have no long term contracts with
either customer and the loss of either of these product sales and consulting
services customers could adversely affect our business.
12
<PAGE>
Our operating results are likely to fluctuate significantly, causing our stock
price to be volatile or to decline
The price at which our common stock will trade will depend upon many
factors, including 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, changes in our industry and general market and economic conditions.
Some of these factors are beyond our control. As a result, our operating
results in one or more future periods could fail to meet or exceed the
expectations of securities analysts or investors. If this happens, the trading
price of our common stock would likely decline. You should be aware that the
stock market has from time to time experienced extreme price and volume
fluctuations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The data communications market in which we operate is highly competitive and we
may not be able to compete effectively against established industry competitors
with significantly greater financial resources
We will face competition in the data communications market from many
competitors with significantly greater financial resources, well-established
brand names and large, existing installed customer bases. We expect the level
of competition to intensify in the future, including through consolidation of
our industry. Many of our competitors are offering, or may soon offer,
technologies and services that will directly compete with some or all of our
service offerings. Our competitors use technologies for local access
connections that include DSL, wireless data, cable modems and integrated
services digital network technologies. Integrated services digital network is a
technology that works with the traditional telephone system to send voice and
data over existing copper telephone lines at speeds up to 128 kilobits per
second. Some of our competitors or potential competitors may have the financial
resources to withstand substantial price competition. Moreover, our competitors
may be able to negotiate contracts with suppliers of telecommunications
services which are more favorable than contracts negotiated by us.
Examples of competitive activity in our target markets include:
. Bell Atlantic, through its network integration services division, and
other companies, like Tech Data Corporation, are offering product sales
and consulting services focused on integrating network components that
directly compete with our product sales and consulting services.
. Bell Atlantic and other traditional telephone companies present in our
target markets are conducting technical and market trials or have
commenced commercial deployment of DSL-based services.
. Many of the leading traditional long distance carriers, including AT&T,
MCI WorldCom and Sprint Corporation, are expanding their capabilities to
support high speed networking services.
. The newer long distance carriers, including The Williams Companies,
Inc., Qwest Communications International Inc. and Level 3
Communications, are building and managing high bandwidth, nationwide
packet-based networks and partnering with Internet service providers to
offer services directly to the public.
13
<PAGE>
. Cable modem service providers, like At Home Corporation, are offering or
preparing to offer high speed Internet access over cable and fiber
networks to consumers and have positioned themselves to do the same for
businesses.
. Several new companies are emerging as wireless or satellite-based data
service providers.
. Some Internet service providers with significant and even nationwide
presences provide DSL-based Internet access to residential and business
customers.
. Other competitive telecommunications companies like us, including Covad
Communications Group, Inc., Rhythms NetConnections Inc. and NorthPoint
Communications Holdings, Inc., have begun offering DSL-based access
services, and have attracted marketing allies and product development
partners. Others are likely to do the same in the future.
We may not be able to continue to grow our business if we do not obtain
significant additional funds on acceptable terms by the end of 2000
If we have not completed our network rollout by the end of 2000, it is likely
that we would need significant additional capital to continue funding our
operating losses. If we fail to obtain this financing, our ability to grow our
business will be substantially impaired. In addition, we expect that we will
require significant additional capital to expand our network beyond our initial
target markets and into adjacent regions. Our actual funding requirements may
differ materially if the assumptions underlying our estimate turn out to be
incorrect or change as our business evolves. Therefore, you should consider
that our funding requirements may increase, perhaps substantially, if we are
unable to generate revenue in the amount and within the time frame we expect or
if we have unexpected cost increases. We may be unable to obtain the future
equity or debt financing that we require on acceptable terms or at all.
If we borrow significant funds in the future, it could limit our flexibility
If we decide to borrow significant funds in the future to fund our business,
the terms of those borrowings would likely contain restrictive covenants that
limit our ability to incur additional indebtedness, pay dividends or undertake
certain other transactions. These instruments could also require us to pledge
assets as security for the borrowings. If we were to leverage our business by
incurring significant debt, we may be required to devote a substantial portion
of our cash flow to service that indebtedness. This could require us to modify
our business plan, for example, by delaying the capital expenditures necessary
to complete our network. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Uncertain federal and state tax and surcharges on our services may increase our
payment obligations and have a material adverse effect on our business
Telecommunication service providers pay a variety of surcharges and fees on
their gross revenue from interstate and intrastate services. The surcharges and
fees we currently are required to pay may increase due to periodic revisions of
the applicable surcharges by federal and state regulators. 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.
14
<PAGE>
Our services are subject to uncertain government regulation and changes in laws
or regulations could restrict the way we operate our business
Because many of the facilities and services we need in order to provide
CuNet are subject to regulation at the federal, state and local levels, changes
in applicable laws or regulations could have an adverse impact on our business.
For example, the FCC and state telecommunications regulators help determine the
terms under which collocation space is provided to us. They also oversee the
terms under which we gain access to a traditional telephone company's copper
telephone lines and transport facilities that we need in order to provide CuNet
services. Regulatory policies may also affect the terms under which Bell
Atlantic provides us with the operational support and management of telephone
line usage that are crucial to the success of CuNet. Future federal or state
regulations and legislation may have an adverse impact on our business. In
addition, we may choose to expend significant resources to participate in
regulatory proceedings at the federal or state level without achieving
favorable results. We expect traditional telephone companies like Bell Atlantic
to pursue litigation in courts, institute administrative proceedings with the
FCC and state telecommunications regulators and lobby the U.S. Congress in an
effort to affect the applicable laws and regulations in a manner that would be
more favorable to them and against our interests. Any changes in our regulatory
environment could create greater competitive advantages for all or some of our
competitors or could make it easier for additional parties to provide DSL
services.
The interconnection agreements that enable us to provide our services are
subject to uncertain regulation that is the subject of ongoing legal
proceedings
We are subject to FCC regulation for our contractual, or interconnection,
arrangements with the traditional telephone companies 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. If a rule that is
beneficial to our business is struck down by the courts, 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.
Various traditional telephone companies have requested regulatory relief to
provide data transmission services, which if granted, would allow them to
compete with us
Recently, various traditional telephone companies have requested that 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 like us. The FCC issued a
decision in response, but the issue is still pending before the FCC, and we
cannot be certain that the FCC will not reconsider its decision. 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. Moreover, these new rules may benefit our
15
<PAGE>
competitors to a greater extent than they benefit us, which could harm our
competitiveness. For more details about regulatory policies that affect our
business, see "Business--Government Regulation."
A recent U.S. Supreme Court decision has raised questions about our ability to
obtain essential facilities from Bell Atlantic, which may hurt our business
A January 1999 decision by the U.S. Supreme Court could adversely affect our
business because it has raised questions about whether we will be able to
obtain certain facilities from Bell Atlantic that we need in order to provide
CuNet in the future. In that decision, the Supreme Court invalidated an FCC
rule which defines the particular parts of a traditional telephone company's
network that must be provided to competitors like us, and it sent the matter
back to the FCC with instructions to consider further the question of which
parts of a traditional telephone company's network must be provided to
competitors. The FCC recently initiated a proceeding to establish which network
elements are required to be provided by traditional telephone companies to
competitors like us. The FCC has stated that it plans to issue a new decision
on this matter in the summer of 1999. We would be adversely affected if the FCC
were to exempt traditional telephone companies from the duty to provide any of
the facilities we need in order to provide CuNet.
The data communications industry is undergoing rapid technological change and
new technologies may be superior to the technology we use, which could
materially adversely affect our business
Our industry is subject to rapid and significant technological changes. DSL
technology does not presently have widely accepted standards and continues to
develop. Alternative technologies for providing high speed data communications
are available and may be superior to the technology we use. As a consequence:
. we will continue to 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 current 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.
If we are unable to retain our key personnel, our business will suffer
Given our stage of development, we depend on our ability to retain and
motivate high quality personnel, especially our management. Our success depends
on Jonathan P. Aust, our President and Chief Executive Officer, and our other
executive officers and key employees. Members of our senior management team
have worked together for only a short period of time. We do not have "key
person" life insurance policies on any of our employees. Generally, members of
our senior management team can terminate their employment agreements with us on
thirty days notice. Any of our other employees may terminate his or her
employment with us at any time. Our future success depends on our continuing
ability to identify, hire, train and retain highly qualified technical, sales,
16
<PAGE>
marketing and customer service personnel. The industry in which we compete has
a high level of employee mobility and aggressive recruiting of skilled
personnel. In particular, we face intense competition for qualified personnel,
particularly in software development, network engineering and product
management. We may be unable to continue to employ our key personnel or to
attract and retain qualified personnel in the future. See "Business--Employees"
and "Management."
A system failure could cause delays or interruptions of service to our
customers
The reliability of our services would be impaired by a natural disaster or
other unanticipated interruption of service at our owned or leased facilities.
If a traditional telephone company, competitive telecommunications company or
other service provider fails to provide the communications capacity we require,
as a result of a natural disaster, operational disruption or any other reason,
then this failure could interrupt our services and have a material adverse
effect on our business.
A breach of our network security could cause delays or interruptions of service
to our customers
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 cause us to be liable to our customers,
and might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and our customers' end users. Any of
these factors relating to network security could have a material adverse effect
on our business.
Our intellectual property protection may be inadequate to protect our
proprietary rights and we may be subject to infringement claims which could
materially adversely affect our business
The steps we have taken may be inadequate to protect our technology or other
intellectual property. Our inability to protect our proprietary rights could
have a material adverse effect on our business, prospects, financial condition
and results of operations. We currently have no patents or patent applications
pending. We also rely on unpatented trade secrets and know-how to maintain our
competitive position. We seek to protect this information by confidentiality
agreements with employees, consultants and others. These agreements may be
breached or terminated, leaving us with inadequate remedies. Our competitors
may learn or discover our trade secrets. Our competitors may independently
develop technologies that are substantially equivalent or superior to ours.
Third parties, including our competitors, may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we need to
conduct our business. Our management personnel were previously employees of
other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims. If such
claims materialize, it could materially adversely affect our business.
17
<PAGE>
Our principal stockholders and management own a significant percentage of our
company and will be able to exercise significant influence over our company
which could have a material and adverse effect on the market price of our
common stock
Our executive officers, directors and principal stockholders together will
beneficially own 83.2% of our common stock after this offering, or 81.1% if the
underwriters exercise their over-allotment option in full. These stockholders
will be able to determine the composition of our board of directors, will
retain the voting power to approve all matters requiring stockholder approval,
including any merger, and will continue to have significant influence over our
affairs. This concentration of ownership could have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have a
material and adverse effect on the market price of our common stock or prevent
you from realizing a premium over the market price for your shares of common
stock. See "Principal Stockholders" for information about the ownership of
common stock by our executive officers, directors and principal stockholders.
Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000
issue." The Year 2000 issue could result in system failures or miscalculations,
causing disruptions in our operations.
To the extent that Bell Atlantic or other third parties experience Year 2000
problems, our network and services could be adversely affected. We have not
been able to verify Bell Atlantic's Year 2000 compliance. We do not have any
way to verify information that our customers and other vendors have provided on
their Year 2000 compliance. Furthermore, the purchasing patterns of our
customers may be affected by Year 2000 issues as they expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase our services.
Any of these developments could have a material and adverse effect on our
business, operating results and financial condition. We have not yet formulated
a contingency plan to address the most reasonably likely worst case Year 2000
scenario.
The failure of an active trading market to develop for our common stock could
materially adversely affect your investment in our common stock
Our common stock has not been traded in the public market before this
offering. We have applied to the Nasdaq National Market to list our common
stock, but we do not know whether active trading in our common stock will
develop or continue after this offering. We will determine the price you will
pay for our common stock through negotiations with the underwriters. You may
not be able to resell your shares at or above the price you will pay for our
common stock. For a description of the factors that will be taken into account
to determine the offering price, see "Underwriting--Pricing of this Offering."
18
<PAGE>
You will incur immediate and substantial dilution of approximately $12.34 per
share.
The initial public offering price is substantially higher than the net
tangible book value of our outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
incur immediate and substantial dilution of $12.34 in the net tangible book
value per share of the common stock you purchase in this offering. As of March
31, 1999, 8,985,375 shares of common stock were issuable upon exercise of
outstanding stock options at a weighted average exercise price of $0.09 per
share. If all of these stock options are exercised, you will experience further
dilution in the amount of $0.43 per share. This dilution may cause the value of
your investment to decline.
Future sales of our common stock in the public market could depress our stock
price
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for our common stock. The number
of shares of common stock available for sale in the public market will be
limited by lock-up agreements under which certain holders of our outstanding
shares of common stock and options to purchase common stock will agree not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. However, Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
In addition to the adverse effect a price decline could have on holders of
common stock, that decline would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.
After this offering, the holders of 23,050,000 shares of common stock will
have the right to require us to register the sale of their shares, subject to
limitations and to the lock-up agreements with the underwriters. These holders
and one of our directors also have the right to require us to include their
shares in any future public offerings of our equity securities. Within
approximately 180 days after this offering, we intend to file a registration
statement under the Securities Act to register 11,250,000 shares of common
stock subject to outstanding stock options or reserved for issuance under our
stock incentive plan. The sale of these additional shares into the public
market may further adversely affect the market price of our common stock. See
"Shares Eligible for Future Sale."
Our certificate of incorporation and bylaws contain provisions that could delay
or prevent a change in control and therefore could hurt our stockholders
Provisions of our certificate of incorporation and bylaws could make it more
difficult for a third party to acquire control of our company, even if a change
in control would be beneficial to stockholders. Our certificate of
incorporation will provide for a classified board of directors and will allow
our board to issue, without stockholder approval, preferred stock with terms
set by the board. The preferred stock could be issued quickly with terms that
delay or prevent the change in control of our company or make removal of
management more difficult. Also, the issuance of preferred stock may cause the
market price of our common stock to decrease. See "Description of our Capital
Stock" for more information.
19
<PAGE>
This prospectus contains forward-looking statements which may not prove to be
accurate and such inaccuracy could materially and adversely affect the market
price of our common stock
This prospectus contains forward-looking statements and information relating
to our company. We generally identify forward-looking statements in this
prospectus using words like "believe," "intend," "expect," "may," "should,"
"plan," "project," "contemplate," "anticipate" or similar statements. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties and assumptions. Actual results may differ significantly from the
results discussed in these forward-looking statements.
20
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $103.6 million in net
proceeds from this offering based upon an assumed initial public offering price
of $15.00 per share. This amount reflects deductions from the gross proceeds of
the offering of:
. approximately $7.1 million, which will be retained by the underwriters
as discounts and commissions; and
. approximately $1.0 million, representing our estimated expenses for this
offering.
We expect to use approximately $40.0 million of the net proceeds from this
offering to finance capital expenditures. We expect to use the remaining net
proceeds to finance operating losses that we expect to incur as we expand our
customer base and network and for general corporate purposes. The actual amount
of net proceeds we spend on a particular use will depend on many factors,
including:
. our future revenue growth, if any;
. our future capital expenditures; and
. the amount of cash generated by our operations.
Many of these factors are beyond our control. Therefore, we will retain
broad discretion in the use of the net proceeds.
This use of proceeds does not reflect the underwriters' exercise of their
over-allotment option. We estimate that we will receive $11.0 million in
additional net proceeds if the underwriters exercise their over-allotment
option in full. We will not receive any of the proceeds from sales of shares by
selling stockholders as part of the over-allotment option.
Until we use the net proceeds of this offering, we intend to invest the net
proceeds in short-term investment-grade securities.
DIVIDEND POLICY
We have never declared or paid dividends. We do not anticipate declaring or
paying dividends for the foreseeable future. Instead, for the foreseeable
future, we will retain our earnings, if any, for the future operation and
expansion of our business.
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<PAGE>
CAPITALIZATION
The following table shows our capitalization at March 31, 1999 on an actual
basis, a pro forma basis and pro forma as adjusted basis to give effect to this
offering and the application of the estimated net proceeds we will receive in
this offering. See "Use of Proceeds." You should also refer to our financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------
(in thousands)
Actual Pro Forma
(unaudited) Pro Forma(1) as Adjusted(2)
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 618 $10,618 $114,243
======= ======= ========
Long-term obligations:
Capital lease obligations (including
current portion).................... 1,618 1,618 1,618
Note payable......................... 1,000 1,000 1,000
Deferred compensation (including
current portion).................... 500 500 500
------- ------- --------
Total long-term obligations
(including current portion)....... 3,118 3,118 3,118
------- ------- --------
Mandatorily redeemable preferred stock,
$0.001 par value, 15,000,000 shares
authorized, issued and outstanding
(liquidation preference $10,519,452)
(actual); no shares issued and
outstanding (pro forma); no shares is-
sued and outstanding
(pro forma as adjusted)............... 5,988 -- --
------- ------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value,
150,000,000 shares authorized,
44,550,000 shares issued (actual),
45,550,000 shares issued (pro
forma); 53,050,000 shares issued
(pro forma as adjusted) (3)......... 45 46 53
Additional paid-in capital........... 19,694 35,681 139,299
Deferred compensation on employee
stock options....................... (14,866) (14,866) (14,866)
Accumulated deficit.................. (4,345) (4,345) (4,345)
Less treasury stock, at cost,
8,550,000 shares.................... (1,900) (1,900) (1,900)
------- ------- --------
Total stockholders' equity
(deficit)......................... (1,372) 14,616 118,241
------- ------- --------
Total capitalization............. $7,734 $17,734 $121,359
======= ======= ========
</TABLE>
- ---------------------
(1) Reflects:
. conversion of $5.0 million of our mandatorily redeemable preferred stock
into 333,334 shares of our common stock at the public offering price and
the cancellation without consideration of the remaining shares of our
preferred stock and all accrued dividends as if such conversion and
cancellation had occurred as of March 31, 1999;
. conversion of $5.0 million of 8% convertible notes issued on March 31,
1999 into 333,333 shares of our common stock at the public offering
price; and
. conversion into 333,333 shares of our common stock at the public offering
price of $5.0 million of convertible notes issued on May 17, 1999
pursuant to the note purchase agreement entered into on March 31, 1999.
(2) Reflects the events described in note 1 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
(3) Excludes 8,985,375 shares of our common stock issuable upon exercise of
stock options outstanding on March 31, 1999.
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<PAGE>
DILUTION
As of March 31, 1999, our pro forma net tangible book value was
approximately $14,616,000, or $0.40 per common share, after giving effect to
the conversion of $5.0 million of redeemable preferred stock and our $10.0
million 8% convertible notes into common stock. Assuming no changes in our net
tangible book value, other than to give effect to the sale of the common stock
offered by this prospectus and the application of the net offering proceeds as
described under "Use of Proceeds," our pro forma net tangible book value at
March 31, 1999 would have been $118,240,080, or $2.66 per common share. Net
tangible book value is the amount of total tangible assets less total
liabilities. Net tangible book value per common share is net tangible book
value divided by the number of shares of common stock outstanding.
This represents an immediate increase in pro forma net tangible book value
of $2.26 per common share to existing stockholders, and an immediate dilution
in pro forma net tangible book value of $12.34 per common share to new
investors purchasing our common stock in this offering. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share, excluding
SBC and Telefonos de Mexico...................................... $15.00
Pro forma net tangible book value per common share at March 31,
1999 after giving effect to the conversion of $5.0 million of
redeemable preferred stock and $10.0 million 8% convertible notes
into common stock................................................ $0.40
Increase per share attributable to new investors.................. 2.26
Pro forma net tangible book value per common share after this
offering after giving effect to the conversion of $5.0 million of
redeemable preferred stock and $10.0 million 8% convertible notes
into common stock................................................ 2.66
------
Dilution per common share to new investors, excluding SBC and
Telefonos de Mexico.............................................. $12.34
======
</TABLE>
The following table summarizes at March 31, 1999:
. the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price per share
paid to us for these shares, valuing these shares at the initial public
offering price, including consideration received for and common stock
issuable upon conversion of $5.0 million of redeemable preferred stock
and our $10.0 million 8% convertible notes;
. the number of shares of our common stock purchased by new investors, the
total consideration and the price per share paid by them for these
shares; and
. the percentage of shares of our common stock purchased by the existing
stockholders and new investors and the percentage of consideration paid
to us for these shares.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Per
------------------ -------------------- Common Share
Number Percent Amount Percent ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 45,550,000 85.9% $ 17,599,142 12.0% $ 0.39
New investors, including
SBC and Telefonos de
Mexico................... 7,500,000 14.1 111,747,312 88.0 14.90
---------- ----- ------------ ----- ------
Total.................. 53,050,000 100.0% $129,346,454 100.0% $ 2.44
</TABLE>
These tables assume that none of the stock options outstanding upon the
closing of this offering will be exercised. As of March 31, 1999, 8,985,375
shares of common stock were issuable upon exercise of outstanding stock options
at a weighted average exercise price of $0.09 per share. If all of these stock
options are exercised, you will experience further dilution in the amount of
$0.43 per share.
23
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
We were incorporated on December 19, 1994, but did not begin operations
until after January 1, 1995. We present below summary financial and other data
for our company. The summary historical balance sheet data as of December 31,
1998 and the summary historical statement of operations and other data for each
of the three years ended December 31, 1998 have been derived from our audited
financial statements that are included elsewhere in this prospectus.
PricewaterhouseCoopers LLP has audited the financial statements as of and for
each of the three years in the period ended December 31, 1998. The summary
historical balance sheet data as of March 31, 1999 and the summary historical
statement of operations and other data for each of the three months ended March
31, 1998 and 1999 have been derived from our unaudited financial statements
that are included elsewhere in this prospectus. The summary financial data for
the year ended December 31, 1995 have been derived from our unaudited financial
statements that are not included in this prospectus. The unaudited financial
statements include, in the opinion of our management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of the information set forth. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
complete financial information included elsewhere in this prospectus. The
results of the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the full year.
<TABLE>
<CAPTION>
Three Months
Ended March
Year Ended December 31, 31,
-------------------------------------- ---------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Product sales......... $1,891 $14,368 $ 8,150 $ 9,900 $2,194 $ 3,955
Consulting services... 36 114 791 1,428 317 702
Network services...... -- -- 4 311 41 119
------ ------- ------- -------- ------ -------
Total revenue....... 1,927 14,482 8,945 11,639 2,552 4,776
------ ------- ------- -------- ------ -------
Cost of revenue:
Product sales......... 1,475 11,975 7,180 8,639 1,858 3,535
Consulting services... 15 91 231 761 160 299
Network services...... -- -- 2 41 1 171
------ ------- ------- -------- ------ -------
Total cost of
revenue............ 1,490 12,066 7,413 9,441 2,019 4,005
------ ------- ------- -------- ------ -------
Operating expenses:
Selling, general and
administrative....... 299 2,255 1,437 4,017 538 2,533
Amortization of
deferred compensation
on employee stock
options.............. -- -- -- 219 -- 540
Depreciation and
amortization......... 9 7 12 130 4 187
------ ------- ------- -------- ------ -------
Total operating
expenses........... 308 2,262 1,449 4,366 542 3,260
------ ------- ------- -------- ------ -------
Income (loss) from
operations............. 129 154 83 (2,168) (9) (2,489)
Interest income
(expense), net......... -- (1) (5) 64 (12) (9)
------ ------- ------- -------- ------ -------
Income (loss) before
income taxes........... 129 153 78 (2,104) (21) (2,498)
Provision (benefit) for
income taxes........... 39 63 36 (28) (8) --
------ ------- ------- -------- ------ -------
Net income (loss)....... $ 90 $ 90 $ 42 $ (2,076) $ (13) $(2,498)
====== ======= ======= ======== ====== =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------------------- ----------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) per
common share (basic and
diluted)............... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $ (0.00) $ (0.07)
======= ====== ======= ======= ======= =======
Weighted average common
shares outstanding
(basic and diluted).... 21,915 21,915 21,915 27,302 21,915 36,000
======= ====== ======= ======= ======= =======
Pro forma net income
(loss) per common share
(basic and
diluted) (1)........... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $ (0.00) $ (0.07)
======= ====== ======= ======= ======= =======
Pro forma weighted
average common shares
outstanding (basic and
diluted) (1)........... 21,915 21,915 21,915 27,302 21,915 37,000
======= ====== ======= ======= ======= =======
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
----------------------------------- ----------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA (2).............. $ 138 $ 161 $ 95 $(1,819) $ (5) $(1,762)
Capital expenditures.... 18 30 122 1,156 1 4,966
Net cash provided by
(used in) operating
activities............. 3 (27) 805 (2,810) (273) 136
Net cash used in
investing activities... 18 30 122 1,341 1 4,966
Net cash provided by
(used in) financing
activities............. 42 55 9 8,956 54 (70)
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31, 1999
--------------------------------- ---------------------------------------
Pro Forma
1995 1996 1997 1998 Actual Pro Forma(3) as Adjusted(4)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 24 $ 22 $ 713 $ 5,518 $ 618 $10,618 $114,243
Property and equipment,
net.................... 8 31 140 5,031 10,094 10,094 10,094
Total assets............ 458 5,352 1,865 12,928 14,631 24,631 128,256
Total debt (including
capital lease
obligations)........... 30 84 93 2,513 2,618 2,618 2,618
Mandatorily redeemable
preferred stock........ -- -- -- 5,641 5,988 -- --
Total stockholders'
equity (deficit)....... 118 208 250 932 (1,372) 14,616 118,241
</TABLE>
- ---------------------
(1) The "pro forma" selected statement of operations data as of March 31, 1999
reflects the following events as if such events had occurred as of January
1, 1999:
25
<PAGE>
. the conversion of $5.0 million of our mandatorily redeemable preferred
stock into 333,334 shares of our common stock at the public offering
price and the cancellation without consideration of the remaining shares
of our preferred stock and all accrued dividends,
. the conversion of $5.0 million of 8% convertible notes issued on March
31, 1999 into 333,333 shares of our common stock at the public offering
price and
. the conversion into 333,333 shares of our common stock at the public
offering price of $5.0 million of 8% convertible notes issued on May 17,
1999 pursuant to the note purchase agreement entered into on March 31,
1999.
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. 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 determined in
accordance with GAAP. We may calculate EBITDA differently than other
companies. For further information, see our financial statements and
related notes elsewhere in this prospectus.
(3) The "pro forma" selected balance sheet data as of March 31, 1999 reflects
the events described in note 1 as if such events had occurred as of March
31, 1999.
(4) The "pro forma as adjusted" selected balance sheet data as of March 31,
1999 reflects the events described in note 3 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In 1995, we began operations by selling data communications products and
providing consulting services for wide area networks. Shortly thereafter, we
began offering a complete suite of solutions to the data communications
problems of businesses. We provide network integration services, where we
design our customers' networks and sell and install related network equipment.
We also manage our customers' networks, ensure the security of their networks
and provide related professional services. From 1995 through 1998, our revenue
was derived primarily from product sales and consulting services. We have
primarily depended on AT&T and Zeneca for revenue. AT&T has accounted, through
product sales, for 68.8%, 38.2%, 50.4% and 55.5% of total revenue for 1996,
1997, 1998 and the three months ended March 31, 1999, respectively, while
Zeneca has accounted for 10.3%, 8.0% and 10.0% of total revenue for 1997, 1998
and the three months ended March 31, 1999, respectively. To date, AT&T and
Zeneca have not been CuNet customers.
In 1996, we began to pursue deployment of a series of city-wide networks
that enable DSL services. In February 1997, we began developing technical
standards for delivery of DSL-based services within our target markets through
a joint effort with Bell Atlantic. In April 1997, we entered into our first
interconnection agreement with Bell Atlantic, which allowed us to use their
copper telephone lines and to collocate our equipment in telephone company
offices known as "central offices." Central offices serve as the central
connection point for all copper telephone lines in a local area and form the
basis for our network and the telephone company's network. We began CuNet
service trials in November 1997 and began commercially offering CuNet in
Philadelphia and Washington, D.C. in January 1999. We currently offer CuNet in
Boston, New York, Philadelphia, Baltimore, Washington, D.C. and Richmond. We
expect to extend our network coverage to include Norfolk, Pittsburgh and
Wilmington, Delaware by the end of 1999. So far, we have collocated our
equipment in 51 Bell Atlantic central offices and expect to raise that number
to 360 by the end of 1999.
We currently are targeting the Bell Atlantic region for our CuNet service.
We believe that our focus on the Bell Atlantic region has allowed us to form a
relationship with Bell Atlantic which we believe will allow us to provide
responsive, consistent and high quality service in our target markets. As
opportunities present themselves, we may decide to expand our network beyond
our initial target markets and into adjacent regions. Consistent with this
strategy, we have recently entered into an interconnection agreement with Bell
South which requires state regulatory approval before it becomes effective.
Since February 1997, we have invested increasing amounts in the development
and deployment of CuNet. The proceeds of a preferred and common stock financing
which we completed in August 1998 and the proceeds from our 8% convertible
promissory notes have been used to fund the deployment of our CuNet services.
We intend to substantially increase our operating expenses and capital
expenditures in an effort to expand rapidly our infrastructure and DSL-based
network services. We expect to incur substantial operating losses, net losses
and negative cash flow during the build-out of our network and our initial
penetration of each new market we enter. These losses are expected to continue
for at least the next two to three years. Although in the short term we expect
to derive the majority of our revenue from our product sales and related
consulting services, we expect that over time revenue from network services,
which includes our CuNet services, will constitute the more significant portion
of our total revenue. During the past several years, market prices for many
telecommunications services have been declining, which is a trend we believe
will likely continue.
27
<PAGE>
This decline will force us to continue to price our services competitively in
relation to those of the traditional telephone companies and other competitors
in our markets which may affect our future revenue growth.
As we develop our CuNet services, our annual and quarterly operating results
may fluctuate significantly due to delays in the deployment of our network.
Because of the complexity of the process of building our network, we expect to
experience delays of one form or another. Delays could result from the timing
and availability on reasonable terms of Bell Atlantic copper telephone lines,
collocation space, operations support and management of telephone line usage.
Delays could also result from the timing and availability on reasonable terms
of fiber optic and other transport facilities, equipment and services from our
suppliers.
Revenue
Revenue consists of:
. Product sales. We sell, install and configure selected equipment from our
manufacturing partners. Our engineers select the right manufacturer's
product solution to improve our customers' operations and network
efficiencies. Our engineers refer to a standard network design that they
seek to customize to fit the needs of each customer:
. Consulting services. We bill customers for nonrecurring service
activation and installation charges. We also bill our customers for
network integration, on site network management, network security and
professional services based on time and materials for contracted
services. In addition, we derive revenue from the maintenance and
installation of equipment. Some of these services may be provided through
third party providers under contract to us.
. Network services. We charge monthly service fees for access to our CuNet
local, metropolitan and wide area networks. We also provide a wide
variety of network services to customers, including remote network
management and monitoring, network security, dedicated private
connections to our network, Internet access, electronic commerce and
other data applications. Some of these services are delivered to
customers using resources from third party providers under contract to
us.
Cost of Revenue
Product sales. We purchase equipment from various vendors whose technology and
hardware solutions we recommend to our customers. We do not manufacture any of
this equipment.
Consulting services. Consulting services cost of revenue consists of charges
for hardware maintenance, installation and certain contract services which we
purchase from third parties.
Network services. Our network service costs generally comprise non-employee-
based charges such as:
. CuNet service fees. We pay a monthly service fee for each copper line and
for each collocation arrangement, as well as usage fees, for the support
services we obtain from the traditional telephone companies we work with
in order to serve our CuNet customers. Sometimes, we must pay these
companies to perform special work, such as preparing a telephone line to
use DSL technology, when such work is required in order to serve a
particular client.
28
<PAGE>
. Other access costs and levied line expense. We pay installation charges
and monthly fees to competitive telecommunications companies or
traditional telephone companies for other types of access, other than
through our CuNet network, which we provide to customers as part of our
network services.
. Backbone connectivity charges. We incur charges for our fiber optic
network, or backbone, within a metropolitan area, typically from a
competitive telecommunications company or a traditional telephone
company, and for the backbone interconnecting our networks in different
metropolitan areas from a long distance carrier. We pay these carriers a
one-time installation and activation fee and a monthly service fee for
these leased network connections.
. Network operations expenses. We incur various recurring costs at our
network operations center. These costs include data connections,
engineering supplies and certain utility costs.
. Equipment operating lease expenses. In the future, we may decide to enter
into operating leases for some or all of the equipment we use in our
network, including the DSL equipment we use in the traditional telephone
company's central office locations and equipment installed on the
customer's premises. Currently, we generally use capital leases to
finance the acquisition of substantially all of this equipment, which we
depreciate over a range of two to five years.
Operating Expenses
Selling, general and administrative expenses
Our selling, general and administrative expenses include all employee-based
charges, including field technicians, engineering support, customer service and
technical support, information systems, billing and collections, general
management and overhead and administrative functions. Headcount in functional
areas, such as sales, customer service and operations will increase
significantly as we expand our network and as the number of customers
increases.
. Sales and marketing expenses. We distribute our products and services
through direct and indirect sales efforts, agents and telemarketing. Our
direct sales and marketing efforts focus on attracting and retaining
small, medium and large business customers in our target markets. We
enter into partnerships with other sales partners, including Internet
service providers, local and long distance service providers and other
networking services companies. These expenses have increased, and will
continue to increase, as we develop our CuNet services.
. General and administrative expenses. As we expand our network, we expect
the number of employees located in specific markets to grow. Certain
functions, such as customer service, network operations, finance, billing
and administrative services, are likely to remain centralized in order to
achieve economies of scale. We pay licensing fees for standard systems to
support our business processes, such as billing systems.
Amortization of deferred compensation on stock options
We had outstanding incentive stock options to purchase a total of 7,090,875
shares as of December 31, 1998 and 8,985,375 shares as of March 31, 1999, at a
weighted average exercise price of $0.09 per share. At March 31, 1999, all of
these options were exercisable into restricted shares of our common stock which
generally vest over a three to four year period. We estimate that the fair
value of the underlying common stock on the date of grant was in excess of the
exercise price of the options. As a result, we recorded deferred compensation
of $3.7 million for the year ended
29
<PAGE>
December 31, 1998 and $11.9 million for the three months ended March 31, 1999.
We recorded this amount as a reduction to stockholders' equity which will be
amortized as a charge to operations over the vesting periods. For the year
ended December 31, 1998, we recognized $219,000 and the three months ended
March 31, 1999, we recognized $540,000 of stock compensation expense related to
these options.
In April 1999, we granted an option to acquire 250,000 shares of our common
stock at a price of $6.67 per share to one of our directors, Dennis R. Patrick.
After this offering, Mr. Patrick will receive an option to purchase an
additional number of shares of common stock at an exercise price equal to 25%
of the public offering price, such that the aggregate difference between the
public offering price and the exercise price of the initial option and
additional option granted to Mr. Patrick equals $5.0 million. Mr. Patrick's
options will vest immediately upon the completion of this offering. Assuming an
initial public offering price of $15.00 per share, Mr. Patrick's additional
option will be exercisable for an additional 259,259 shares of our common stock
at an exercise price of $3.75 per share. As a result, we expect to recognize
stock compensation expense of approximately $3.5 million related to these
options in the quarter in which this offering is completed.
Depreciation and amortization
Depreciation expense arising from our network and equipment purchases for
our customers' premises will be significant and will increase as we deploy our
network. Collocation fees, build-out costs, including one-time installation and
activation fees, and other DSL-based equipment costs are capitalized and
amortized over a range of two to five years.
Interest Income (Expense), Net
Interest income (expense), net, primarily consists of interest income from
our cash and short-term investments less interest expense associated with our
debt and capital leases. As our capital expenditures increase, we anticipate
that our interest expense associated with our capital leases will increase.
Results of Operations
The following table presents our results of operations data and the
components of net income (loss) in dollars and as a percentage of our revenue:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
--------------------- --------------
1996 1997 1998 1998 1999
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales............................ $14,368 $8,150 $9,900 $2,194 $ 3,955
Consulting services...................... 114 791 1,428 317 702
Network services......................... -- 4 311 41 119
------- ------ ------ ------ -------
Total revenue.......................... 14,482 8,945 11,639 2,552 4,776
------- ------ ------ ------ -------
Cost of revenue:
Product sales............................ 11,975 7,180 8,639 1,858 3,535
Consulting services...................... 91 231 761 160 299
Network services......................... -- 2 41 1 171
------- ------ ------ ------ -------
Total cost of revenue...................... 12,066 7,413 9,441 2,019 4,005
------- ------ ------ ------ -------
Gross profit............................... 2,416 1,532 2,198 533 771
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
--------------------- ---------------
1996 1997 1998 1998 1999
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
----- ----- ------- ----- -------
Operating expenses:
Selling, general and
administrative.................... 2,255 1,437 4,017 538 2,533
Amortization of deferred
compensation on employee stock
options........................... -- -- 219 -- 540
Depreciation and amortization...... 7 12 130 4 187
----- ----- ------- ----- -------
Total operating expenses......... 2,262 1,449 4,366 542 3,260
----- ----- ------- ----- -------
Income (loss) from operations........ 154 83 (2,168) (9) (2,489)
Interest income (expense), net....... (1) (5) 64 (12) (9)
Provision (benefit) for income
taxes............................... 63 36 (28) (8) --
----- ----- ------- ----- -------
Net income (loss).................... $ 90 $ 42 $(2,076) $ (13) $(2,498)
===== ===== ======= ===== =======
<CAPTION>
Three Months
Year Ended Ended March
December 31, 31,
--------------------- ---------------
1996 1997 1998 1998 1999
(unaudited)
(percent of revenue)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales...................... 99.2% 91.1% 85.1% 86.0% 82.8%
Consulting services................ 0.8 8.8 12.3 12.4 14.7
Network services................... -- 0.1 2.6 1.6 2.5
----- ----- ------- ----- -------
Total revenue.................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ------- ----- -------
Cost of revenue:
Product sales...................... 82.7 80.3 74.2 72.8 74.0
Consulting services................ 0.6 2.6 6.5 6.3 6.3
Network services................... -- 0 0.4 0 3.6
----- ----- ------- ----- -------
Total cost of revenue................ 83.3 82.9 81.1 79.1 83.9
----- ----- ------- ----- -------
Gross profit......................... 16.7 17.1 18.9 20.9 16.1
----- ----- ------- ----- -------
Operating expenses:
Selling, general and
administrative.................... 15.6 16.1 34.5 21.1 53.0
Amortization of deferred
compensation on employee stock
options........................... -- -- 1.9 -- 11.3
Depreciation and amortization...... 0.0 0.1 1.1 0.2 3.9
----- ----- ------- ----- -------
Total operating expenses......... 15.6 16.2 37.5 21.3 68.2
----- ----- ------- ----- -------
Income (loss) from operations........ 1.1 0.9 (18.6) (0.4) (52.1)
Interest income (expense), net....... 0 0 0.6 (0.5) (0.2)
Provision (benefit) for income
taxes............................... 0.4 0.4 (0.2) (0.3) --
----- ----- ------- ----- -------
Net income (loss).................... 0.7% 0.5% (17.8)% (0.6)% (52.3)%
===== ===== ======= ===== =======
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenue. We recognized $4.8 million in revenue for the three months ended
March 31, 1999, as compared to $2.6 million for the three months ended March
31, 1998, an increase of $2.2 million, or 84.6%. Revenue increased as a result
of a $1.8 million increase in product sales, primarily from one
31
<PAGE>
of our largest customers, AT&T, from an increase in consulting services of
$400,000 attributable to increases in maintenance and consulting contracts, and
from growth in network services revenue of $78,000 arising from the
introduction of broader network service offerings in late 1998. We are
uncertain whether the increase in revenue from AT&T will continue.
Cost of revenue. Cost of revenue was $4.0 million for the three months ended
March 31, 1999, as compared to $2.0 million for the three months ended March
31, 1998, an increase of $2.0 million, or 100.0%. The increase was attributable
to growth in cost related to an increase in product sales of $1.7 million,
growth in cost related to additional consulting services of $139,000 and from
growth in cost of network services of $171,000 attributable to expenses
incurred to continue to develop and operate our CuNet and other networking
services.
Gross profit. Gross profit was $0.8 million and 16.1% of revenue for the
three months ended March 31, 1999, as compared to $0.5 million and 20.9% of
revenue for the three months ended March 31, 1998. Gross profit as a percentage
of revenue decreased primarily as a result of increased operating expenses
related to the continued expansion of our network. We did not yet realize
revenue from our customer base to offset the increase in our expenses.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.5 million and 53.0% of revenue for the three
months ended March 31, 1999, as compared to $0.5 million and 21.1% of revenue
for the three months ended March 31, 1998, an increase of $2.0 million, or
400.0%. This increase as a percentage of revenue was primarily due to increased
staffing and other expenses incurred to develop and operate our CuNet network
and other networking solutions.
Amortization of deferred compensation on employee stock options.
Amortization of deferred compensation was $540,000 for the three months ended
March 31, 1999. We had no amortization of deferred compensation for the three
months ended March 31, 1998.
Depreciation and amortization expense. Depreciation and amortization expense
was $187,000 and 3.9% of revenue for the three months ended March 31, 1999, as
compared to $4,000 and less than 0.2% of revenue for the three months ended
March 31, 1998, an increase of $183,000. This increase was primarily due to
investments in our CuNet network, computer equipment and software, office
furnishings and leasehold improvements.
Income (loss) from operations. Our loss from operations was $2.5 million for
the three months ended March 31, 1999, as compared to loss from operations of
$9,000 for the three months ended March 31, 1998. The loss for the three months
ended March 31, 1999 was primarily due to increased staffing and other
operating expenses we incurred in support of our CuNet network and other
networking solutions.
Interest income (expense), net. For the three months ended March 31, 1999,
we recorded net interest expense of $9,000, consisting of interest income of
$54,000 which was primarily attributable to interest income earned from the
proceeds of our issuance of $10.0 million of preferred and common stock in
August 1998, offset by $63,000 in interest expense, compared to $12,000 of
interest expense for the three months ended March 31, 1998. The increase in
interest expense is primarily due to interest on deferred compensation
liabilities and notes payable.
32
<PAGE>
Provision (benefit) for income taxes. We had no benefit or provision for
income taxes for the three months ended March 31, 1999. We had a benefit for
income taxes of $8,000 for the three months ended March 31, 1998.
Net income (loss). For the foregoing reasons, our net loss was $2.5 million
for the three months ended March 31, 1999, as compared to net loss of $13,000
for the three months ended March 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. We recognized $11.6 million in revenue for the year ended December
31, 1998, as compared to $8.9 million for the year ended December 31, 1997, an
increase of $2.7 million, or 30.3%. Revenue increased as a result of a $1.8
million increase in product sales, primarily from one of our largest customers,
AT&T, from an increase in consulting services of $0.6 million attributable to
increases in maintenance and consulting contracts, and from growth in network
services revenue of $0.3 million arising from the introduction of broader
network service offerings in late 1997.
Cost of revenue. Cost of revenue was $9.4 million for the year ended
December 31, 1998, as compared to $7.4 million for the year ended December 31,
1997, an increase of $2.0 million, or 27.0%. The increase was attributable to
growth in cost related to an increase in product sales of $1.5 million, growth
in cost related to additional consulting services of $0.5 million and from
growth in the cost of network services of $39,000 attributable to expenses
incurred to develop and operate our CuNet and other networking services.
Gross profit. Gross profit was $2.2 million and 18.9% of revenue for the
year ended December 31, 1998, as compared to $1.5 million and 17.1% of revenue
for the year ended December 31, 1997. The increase in gross profit as a per-
centage of revenue was attributable to higher product sales, increased revenue
from consulting services and the introduction of broader network service offer-
ings in late 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.0 million and 34.5% of revenue for the year
ended December 31, 1998, as compared to $1.4 million and 16.1% of revenue for
the year ended December 31, 1997, an increase of $2.6 million, or 186%. This
increase as a percentage of revenue was primarily due to increased staffing and
other expenses incurred to develop our CuNet network and other networking
solutions.
Amortization of deferred compensation on employee stock
options. Amortization of deferred compensation was $219,000 for the year ended
December 31, 1998. We had no amortization of deferred compensation for the year
ended December 31, 1997.
Depreciation and amortization expense. Depreciation and amortization expense
was $130,000 and 1.1% of revenue for the year ended December 31, 1998, as
compared to $12,000 and less than 1% of revenue for the year ended December 31,
1997, an increase of $118,000. This increase was primarily due to investments
in computer equipment and software, office furnishings and leasehold
improvements.
Income (loss) from operations. Our loss from operations was $2.2 million for
the year ended December 31, 1998, as compared to income from operations of
$83,000 for the year ended December 31, 1997. The loss in 1998 was primarily
due to increased staffing and other operating expenses we incurred in support
of our CuNet network and other networking solutions.
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Interest income (expense), net. For the year ended December 31, 1998, we
recorded net interest income of $64,000, consisting of interest income of
$145,000 which was primarily attributable to interest income earned from the
proceeds of our issuance of $10.0 million of preferred and common stock in
August 1998, offset by $81,000 in interest expense, compared to $5,000 of
interest expense in 1997. The increase in interest expense is primarily due to
interest on deferred compensation liabilities and notes payable.
Provision (benefit) for income taxes. We had a benefit for income taxes of
$28,000 for the year ended December 31, 1998, as compared to a provision for
income taxes of $36,000 for the year ended December 31, 1997. At December 31,
1998, our remaining tax effected net operating loss carryforward was $444,000.
Net income (loss). For the foregoing reasons, our net loss was $2.1 million
for the year ended December 31, 1998, as compared to net income of $42,000 for
the year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue. We recognized $8.9 million in revenue for the year ended December
31, 1997, as compared to $14.5 million for the year ended December 31, 1996, a
decrease of $5.6 million, or 38.6%. This decrease in revenue was primarily due
to a decrease in product sales of $6.2 million to one of our largest customers,
AT&T, which had purchased a significant amount of equipment from us in the last
half of 1996, offset by an increase in consulting services of $0.7 million
attributable to new maintenance and consulting service offerings.
Cost of revenue. Cost of revenue was $7.4 million for the year ended
December 31, 1997, as compared to $12.1 million for the year ended December 31,
1996, a decrease of $4.7 million, or 38.8%, resulting from the decline in
product sales, and offset by the increase in consulting services.
Gross profit. Gross profit was $1.5 million and 17.1% of revenue for the
year ended December 31, 1997, as compared to $2.4 million and 16.7% of revenue
for the year ended December 31, 1996. The increase in gross profit as a
percentage of revenue was the result of the increase in consulting services,
which has a higher gross profit percentage as compared to product sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.4 million and 16.1% of revenue for the year
ended December 31, 1997, as compared to $2.3 million and 15.6% of revenue for
the year ended December 31, 1996. This decrease in expenses was primarily due
to decreased bonus and commissions compensation in 1997 attributable to lower
revenue. The increase as a percentage of revenue was the result of a decrease
in product sales, without a related reduction in selling, general and
administrative expenses.
Depreciation and amortization expense. Depreciation and amortization expense
was $12,000 and less than 1% of revenue for the year ended December 31, 1997,
as compared to $7,000 and less than 1% of revenue for the year ended December
31, 1996, an increase of $5,000, or 71.4%. This increase was primarily due to
investments in computer equipment and software, office furnishings and
leasehold improvements.
Income (loss) from operations. Our income from operations was $83,000 for
the year ended December 31, 1997, as compared to an income from operations of
$154,000 for the year ended December 31, 1996, a decrease of $71,000, or 46.1%.
This decrease was primarily due to the decline
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in products sales from 1996 to 1997, offset in part by lower bonus and commis-
sion payments in 1997.
Interest income (expense), net. For the year ended December 31, 1997, we
recorded net interest expense of $5,000 as compared to $1,000 for the year
ended December 31, 1996. The increase in interest expense was substantially due
to a higher average balance on a bank line of credit during 1997. We terminated
this bank line of credit in 1998.
Provision (benefit) for income taxes. We had a provision for income taxes of
$36,000 for the year ended December 31, 1997, as compared to $63,000 for the
year ended December 31, 1996, a decrease of $27,000, or 42.8%, giving us an
effective tax rate above the aggregate statutory federal and state income tax
rates due to certain non-deductible business expenses such as business meals
and entertainment.
Net income (loss). For the foregoing reasons, our net income was $42,000 for
the year ended December 31, 1997, as compared to net income of $90,000 for the
year ended December 31, 1996, a decrease of $48,000, or 53.3%.
Liquidity and Capital Resources
While we do not require significant capital expenditures for our product
sales and consulting services segments, the development and expansion of our
CuNet network requires significant capital expenditures. The principal capital
expenditures which we expect to incur during our CuNet rollout include the
procurement, design and construction of our collocation spaces and the
deployment of DSL-based equipment in Bell Atlantic central offices and
connection sites. Capital expenditures were $5.0 million for 1998 and $5.3
million for the three months ended March 31, 1999. At this time, our only
material purchase commitment is to purchase software and services for
approximately $1.0 million. We expect our capital expenditures to be
substantially higher for the rest of 1999 and for future periods, primarily due
to continued collocation construction and the purchase of telecommunications
equipment for expansion of our network. Our capital expenditures will depend in
part upon obtaining adequate volume commitments or demand from our CuNet
customers. Based on our present plans, we anticipate capital expenditures
during the balance of 1999 to range from $40.0 million to $55.0 million for the
expansion of our network to approximately 360 central offices. The rollout of
360 central offices will allow us to provide DSL services throughout our
initial target markets at capacity levels anticipated by our business plan. We
will continue to expand our CuNet related capital expenditures and our number
of central offices as necessary to provide additional CuNet service capacity.
Based on our present plans we anticipate capital expenditures during the year
2000 of between $60.0 million and $70.0 million, for the expansion of our
network to over 430 central offices. As described under "Use of Proceeds," we
expect that we will use approximately $40.0 million of the net proceeds of this
offering for capital expenditures in connection with the expansion of our
network in 1999 and 2000. The balance of our network expansion will be financed
in the form of capital leases.
We have financed our operations to date primarily through a private
placement in August 1998 of preferred and common stock totaling $10.0 million,
the use of capital equipment leases totaling $1.7 million and borrowings of
$3.0 million from Ascend Communications. As of March 31, 1999, we had an
accumulated deficit of $4.3 million, and cash and cash equivalents of $0.6
million.
On March 18, 1999 we amended our certificate of incorporation to modify the
terms of the preferred stock. In the event of an initial public offering in
which we receive a market valuation in
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excess of $200.0 million, such as the offering made in this prospectus, the
terms of the preferred stock provide that 50% of the shares of our preferred
stock outstanding and all accrued dividends will be cancelled without
additional payment to the holders of those shares and the remaining preferred
stock will be automatically converted into 333,334 shares of our common stock.
On March 31, 1999, we entered into a financing agreement whereby two holders
of our redeemable preferred stock agreed to invest an additional $10.0 million.
Under this agreement, we received the first $5.0 million on April 1, 1999 by
issuing 8% convertible notes with a maturity date of December 31, 1999. We
subsequently amended our financing agreement and on May 17, 1999, these holders
purchased an additional $5.0 million in 8% convertible notes on the same terms.
The principal of and interest on the notes will be converted into shares of our
common stock upon our completion of an initial public offering with an
aggregate offering price to the public of not less than $25.0 million based on
a pre-money valuation of at least $200.0 million. The 8% convertible notes will
be converted into an aggregate of 666,666 shares of our common stock at the
public offering price.
We estimate that we will receive approximately $103.6 million in net
proceeds from this offering. We expect to use approximately $40.0 million of
the net proceeds to finance capital expenditures which includes $8.6 million
and $21.3 million of estimated expenditures for installation and collocation
fees, respectively. We do not expect to use any proceeds to purchase DSL
equipment since this equipment will be acquired through capital leases. We
expect to use the remaining net proceeds to finance operating losses that we
expect to incur as we expand our customer base and network and for general
corporate purposes. We have no immediate plans to retire any debt with the
proceeds of the offering.
Net cash used in operating activities was $27,000 in 1996 and $2.8 million
in 1998. Net cash provided by operations was $805,000 in 1997 and $136,000 for
the three months ended March 31, 1999. The change in operating cash flow from
1997 to 1998 was primarily the result of operating losses attributable to the
expansion of our historic business and the development of our CuNet services,
but also the result of an increase in accounts receivable accompanied by a
decrease in accounts payable. The net cash provided from operations during the
three months ended March 31, 1999, was primarily the result of an increase in
accounts payable exceeding the net loss for the period and an increase in
accounts receivable. The net cash used in investing activities was $30,000 in
1996, $122,000 in 1997, $1.3 million in 1998 and $5.0 million for the three
months ended March 31, 1999. The increase in 1998 and for the three months
ended March 31, 1999, was primarily due to the deployment of equipment for our
CuNet services. Net cash provided by financing activities was $55,000 in 1996,
$9,000 in 1997 and $9.0 million in 1998, of which $8.0 million was the net
result of the preferred and common stock financing and the repurchase of common
stock from existing stockholders. Net cash used in financing activities was
$70,000 in the three months ended March 31, 1999 resulting from principal
payments on capital leases.
Ascend has provided us with a $30.0 million capital lease facility to fund
acquisitions of certain Ascend equipment, under which $1.2 million was
outstanding as of March 31, 1999. Upon the completion of this offering, the
capital lease facility will be increased to $95.0 million. The terms of our
capital leases range from three to six years. These leases require monthly
lease payments and have an implicit interest rate of 9.5%. The present value of
future minimum capital lease payments as of December 31, 1998 are $461,370 for
the year ending December 31, 1999 and $1,354,352 thereafter. Ascend has the
right to withdraw or suspend further advances to us if our interconnection
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agreements with Bell Atlantic are not renewed or are terminated, or if certain
executive officers terminate their employment with us without Ascend's consent.
In addition, we have an arrangement with Paradyne to lease up to $4.0 million
of equipment, subject to vender approval. Under the terms of the Paradyne
master lease agreement, payments are due monthly for a lease period of 48
months, with a one dollar purchase option at lease expiration. The rental
payments for each and every lease schedule under this master equipment lease is
calculated and fixed at an interest rate of two hundred basis points above the
prime interest rate as published in The Wall Street Journal on the first
business day of the calendar quarter in which the lessor receives a request
from the leasee to prepare a new lease schedule. As of March 31, 1999 no
amounts were outstanding under the Paradyne master lease agreement.
Ascend has also provided a $5.0 million line of credit, under which $1.0
million was outstanding as of March 31, 1999. We borrowed an additional $2.0
million under the line of credit on May 4, 1999. We can draw on the $5.0
million line of credit in $1.0 million increments up to a maximum of
$5.0 million. We are required to make interest only payments at an annual rate
of 8.25% on the amounts advanced for the first nine months from the date of the
advance. For the next 33 months, we are required to make principal and interest
payments in accordance with a 60 month amortization schedule using an interest
rate of 8.25% for the first 18 months and a rate equal to the prevailing high
yield bond index for the next 15 months. The remaining unpaid interest is due
42 months after the related advance. This facility is subject to the same right
to withdraw and suspend further advances to us as noted above with respect to
the capital lease facility.
As of March 31, 1999, we had not entered into any financial instruments that
expose us to material market risk.
We believe that the net proceeds from this offering, our existing cash and
cash equivalents, existing and anticipated equipment lease financings and
future revenue generated from operations, will be sufficient to fund our
operating losses, capital expenditures, lease payments and working capital
requirements through the end of 2000. We expect our operating losses and
capital expenditures to increase substantially primarily due to our network
expansion. We expect that additional financing would be required in the future
if we were to expand beyond our initial target markets. We may attempt to
finance such an expansion of our operations through a combination of commercial
bank borrowings, leasing, vendor financing or the private or public sale of
equity or debt securities. If we were to leverage our business by incurring
significant debt, we may be required to devote a substantial portion of our
cash flow to service that indebtedness. This cash flow would otherwise be
available to finance the deployment of our network. If we are forced to use our
cash flow in this manner, we may be forced to delay the capital expenditures
necessary to complete our network. Any delay in the deployment of our network
could have a material adverse effect on our business. While we would probably
not have sufficient capital to complete our CuNet rollout if we do not complete
this offering, we would be able to continue to offer network services over
other forms of access.
Our capital requirements may vary based upon the timing and success of our
CuNet rollout, as a result of regulatory, technological and competitive
developments or if:
. demand for our services or cash flow from operations is more or less
than expected;
. our development plans or projections change or prove to be inaccurate;
. we engage in any acquisitions; or
. we accelerate deployment of our network or otherwise alter the schedule
or targets of our CuNet rollout plan.
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Equity or debt financing may not be available to us on favorable terms or at
all.
We intend to market CuNet to our existing base of network integration,
network management and network security customers and to market our network
integration, network management, network security services to new CuNet
customers. In working with our existing customer base, we have found that we
can sell a customer an initial product or service, and, based on the insights
gained and relationships built from the initial sale, expand the relationship
to provide comprehensive solutions to the customer's networking needs, thereby
improving the likelihood that we will retain these customers.
Impact of the Year 2000 Issue
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external providers. We have completed our Year 2000 compliance
testing for all of our internal information technology systems and our other
systems and believe that our internal business systems are Year 2000 compliant.
Because our systems were implemented within the last two years, we do not
anticipate significant Year 2000 issues to arise with our internal business
systems, although we cannot be certain about this. Therefore, there have been
few Year 2000 changes required to our existing systems and applications.
However, because our systems will be interconnected with those of traditional
telephone companies, which operate their 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 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 substantially
completed a compliance check of our significant external providers, except for
Bell Atlantic. Based on responses from these third parties other than Bell
Atlantic, we believe that they will not experience Year 2000 problems that
would materially adversely affect our business. However, we do not have any way
to verify information that our customers and other vendors have provided. We
have not been able to conduct a compliance check of Bell Atlantic nor assess
its Year 2000 compliance. To the extent that Bell Atlantic or other third
parties experience Year 2000 problems, our network and services could be
adversely affected. Furthermore, the purchasing patterns of our customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available for our services. Any of these developments
could have a material and adverse effect on our business, prospects, operating
results and financial condition.
Our aggregate historical and future costs for Year 2000 analysis, planning
and remediation have not been material and we do not expect them to be material
in the future. However, we cannot assure you 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. We have not yet formulated a contingency plan to address
the most reasonably likely worst case Year 2000 scenario. We expect to complete
our internal review of and planning for Year 2000 issues, including our most
reasonably likely worst case year 2000 contingency plans, by July 1999.
Financial Information
The preceding discussion and analysis is based on our financial statements
and the related notes and should be read in conjunction with the financial
statements and the related notes included in this prospectus.
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Forward-looking Statements
This prospectus includes forward-looking statements. These forward-looking
statements address, among other things:
. our CuNet deployment plans and strategies;
. development and management of our business;
. our ability to attract, retain and motivate qualified personnel;
. our ability to attract and retain customers;
. the extent of acceptance of our services;
. the market opportunity and trends in the markets for our services;
. our ability to upgrade our technologies;
. prices of telecommunication services;
. the nature of regulatory requirements that apply to us;
. our ability to obtain and maintain any required governmental
authorizations;
. our future capital expenditures and needs;
. our ability to obtain and maintain financing on commercially reasonable
terms;
. our ability to implement a Year 2000 readiness program; and
. the extent and nature of competition.
These statements may be found in this section, in the sections of this
prospectus entitled "Summary," "Risk Factors," "Use of Proceeds" and "Business"
and in this prospectus generally.
We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, including risks stated in "Risk Factors," or faulty
assumptions on our part. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:
. our ability to successfully market our services to current and new
customers;
. our ability to generate customer demand for our services in our target
markets;
. market pricing for our services and for competing services;
. the extent of increasing competition;
. our ability to acquire funds to expand our network;
. the ability of our equipment and service suppliers to meet our needs;
. trends in regulatory, legislative and judicial developments; and
. our ability to manage growth of our operations.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
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BUSINESS
We formed Network Access Solutions in 1995 and began selling data
communications products and providing related services for corporate networks.
We recognized that businesses were finding it extremely expensive and time
consuming to manage and secure the complex elements of their networks. To
exploit this opportunity, we began offering our customers additional services
to help them design, build, maintain and secure their networks.
In 1996, we recognized the opportunity presented by the convergence of three
factors:
.the accelerating growth in the data communications requirements of
businesses;
.deregulation of the local telephone network by the Telecommunications
Act of 1996, or the 1996 Telecom Act; and
.the compelling features of DSL technology.
To exploit this opportunity, we began developing technical standards and
processes for delivery of DSL-based services to our customers. Nearly all of
our revenue has historically been derived from our product sales and consulting
services. Our revenue for the three months ended March 31, 1999 reflects the
current position of our business. For that period, approximately 82.8% of our
revenue resulted from product sales and 14.7% of our revenue resulted from
consulting services. During that same period, network services, which includes
CuNet, accounted for approximately 2.5% of our revenue. While we are refocusing
our business on the provision of CuNet services and expect to dedicate most of
our financial and management resources to that effort, product sales and
consulting services will continue to form an important part of our business.
Although in the short term we expect to continue to derive the majority of our
revenue from product sales and consulting services, we expect that over time,
network services, which includes our CuNet services, will constitute the more
significant portion of our total revenue. We will continue to offer product
sales and consulting services as a complement to our network services in an
effort to provide a comprehensive data communications solution to our
customers.
We offer products, consulting services and network services to solve our
customers' data communications needs. Through our product sales business, we
sell telecommunications equipment that our customers use to build, maintain and
secure their networks. These sales have constituted the bulk of our business.
Through our consulting services business, we design our customers' networks,
install the related equipment and provide services to help them secure their
networks. Through our network services business, we manage and monitor our
customers' networks and, more importantly, have recently begun offering our
CuNet services. For more information on each of our three business segments,
please see note 11 of the notes to our financial statements included in this
prospectus.
We have designed our network to support our customers' changing needs. Our
network supports newer, evolving technologies designed to transmit data, as
well as voice. Unlike traditional telecommunications networks, these newer
technologies transmit data in small bundles, or packets, of information from
multiple users over the same lines, and are referred to as packet-based
technologies. These packet-based transmission technologies generally allow for
a more efficient use of a network. Our network design also supports the
traditional technologies that carry most of today's telephone conversations.
These traditional technologies transmit individual voice and data calls over
individual lines, or channels, and are referred to as channelized technologies.
Our CuNet service is compatible with both channelized and packet-based
communications systems and offers businesses and their telecommuters cost
effective solutions for accessing the Internet and the emerging applications of
corporate networks, such as video and audio conferencing, multimedia and
electronic commerce.
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We have formed city-wide, or metropolitan area, networks in Boston, New
York, Philadelphia, Baltimore, Washington, D.C. and Richmond and connect them
to our leased private, high speed fiber optic network, or backbone. This
network design enables us to provide our customers seamless connections to
remote offices or employees in other locations, including other cities. Our
network provides dedicated connections to our customers which enable them to
operate as if they were using their own private network. These "virtual"
private networks have the capacity, speed, reliability and level of service
that our customers require. We expect to extend our network coverage to include
Norfolk, Pittsburgh and Wilmington, Delaware by the end of 1999.
Industry Overview
We believe that a substantial business opportunity exists because of the
concurrence of several factors:
Growing demand for high speed data communications and networking
solutions. Businesses and other organizations are finding it extremely
expensive and time-consuming to manage the complex elements of their networks.
Businesses are implementing internal networks using Internet technology, or
intranets, and remote local area networks to enable employees to work from
remote locations and home, and to create private networks that connect
corporate networks in multiple locations. Gartner Group estimates that the U.S.
market for packet-based, virtual private network and Internet data services
will grow from $3.4 billion in 1997 to $18.5 billion in 2002, a compounded
annual growth rate of 40.3%. Business demand for Internet access, e-mail, video
and audio services, Web hosting and electronic commerce is also increasing.
This demand in turn drives the need for high speed, high capacity
communications to support these applications. As businesses grow to take
advantage of the extended power presented by their networks and the Internet,
they will need extensive network management and security solutions designed to
protect their internal data. International Data Corporation estimates that the
U.S. market for network operations outsourcing services will more than double
from $4.0 billion in 1997 to $9.1 billion in 2002, a compounded annual growth
rate of 17.6%.
High speed data communications have become important to businesses in part
due to the dramatic increase in Internet usage. According to International Data
Corporation, the number of Internet users worldwide reached approximately 69
million in 1997 and is forecasted to grow to approximately 320 million by 2002.
International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $12 billion in
1997 to over $400 billion in 2002. To remain competitive, businesses
increasingly need high speed connections to maintain complex Web sites, access
critical business information and communicate more efficiently with employees,
customers and business partners.
Data communications is the fastest growing segment of the telecommunications
industry. The Gartner Group forecasts data traffic to grow over five times
faster than voice traffic through 2002. Furthermore, the Gartner Group projects
an increase in the number of DSL lines in use from 1,500, providing $360,000 in
revenue, in 1997, to over 3.1 million lines and $3.5 billion in revenue in
2002, representing a 361% compounded annual growth rate in the number of lines
and a 526% compounded annual growth rate in revenue.
Increasing network congestion. The growing use of capacity intensive
applications is creating a number of challenges for the existing copper lines
of the public telephone network, and for public data networks and private
networks. These challenges affect the structure of the existing network and
limit the ability of businesses to take full advantage of the benefits of new
information technologies. Networks are becoming increasingly congested due to
the rapid growth in data traffic and the
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imbalance in capacity between local and wide area networks. While high speed
local access technologies such as DSL will be deployed to help solve the local
access bottleneck, expertise and networking solutions will be needed to remedy
the other bottlenecks throughout existing networks.
The "last mile" is defined as that part of the network that runs from an end
user's location to the first central office or nearest service entry point into
the network. Since the break-up of AT&T, substantially all data services have
been configured with a local carrier, typically a regional Bell operating
company like Bell Atlantic, providing the last mile local access, and a long
distance carrier like AT&T, MCI WorldCom or Sprint providing the long distance
portion. While competition in the long distance market has evolved quickly and
caused price reductions, the local access markets have not similarly developed.
As a result, the local access market remains technologically behind the long
distance market, with last mile access to major public networks like the
Internet and data networks remaining either very slow or very expensive.
Commercial availability of low cost DSL technology. The full potential of
Internet and remote local area network applications cannot be realized without
removing the performance bottlenecks of the local telephone networks. DSL
technology removes this performance bottleneck by increasing the data carrying
capacity of copper telephone lines from the 56 kilobits per second speeds
available with common dial-up modems and 128 kilobits per second speeds
available on integrated services digital network lines to DSL speeds of up to 7
megabits per second. Because DSL technology reuses existing copper telephone
lines, DSL requires a lower initial fixed investment than that needed for
existing alternative technologies, such as cable modems, fiber, wireless and
satellite communications systems. Subsequent investments in DSL technology are
directly related to the number of paying customers.
Impact of the 1996 Telecom Act. The 1996 Telecom Act allows competitive
telecommunications companies like us to take advantage of traditional telephone
companies' existing copper telephone line networks rather than constructing a
competing infrastructure at significant cost. The 1996 Telecom Act requires
traditional telephone companies:
. to allow competitive telecommunications companies to lease copper lines
on a line by line basis;
. to permit competitive telecommunications companies to collocate their
equipment, including DSL equipment, in traditional telephone companies'
central offices, which enables competitive telecommunications companies
to access end users through existing telephone line connections; and
. to provide competitive telecommunications companies with the operations
support services necessary for competitive telecommunications companies
to compete.
The 1996 Telecom Act creates an incentive for some traditional telephone
companies, including Bell Atlantic, to cooperate with competitive
telecommunications companies because the incumbent carriers cannot provide long
distance service in the regions where they provide local exchange service until
the FCC determines that the traditional telephone company has satisfied
specific statutory criteria for opening its local markets to competition.
The NAS Solution
We offer a complete package of data communications solutions to businesses
through product sales, consulting services and network services. Since 1996, we
have completely refocused our business on the development and implementation of
high speed packet-based and channelized data communications services using a
combination of DSL and other technologies. For the three months
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ended March 31, 1999, approximately 82.8% of our revenue resulted from product
sales and approximately 14.7% of our revenue resulted from consulting services,
while revenue from network services, which includes our CuNet services,
accounted for approximately 2.5% of our revenue. Our services are offered
either by themselves or together with other services. We market our services
both directly to businesses through our direct sales force and indirectly
through network service providers and sales partners.
Single Source Data Communications Solutions. We provide comprehensive data
communications solutions to businesses that are increasingly outsourcing their
information systems and network integration, network management and network
security. Our engineers consult with our customers to design, install and
integrate all aspects of their networks across local, metropolitan and wide
areas. We sell the necessary data communications equipment to our customers. We
provide remote online control, monitoring and management. We also develop and
implement sophisticated network security solutions to protect our customers'
networks and vital data, including virtual private networks, encryption and
access authentication, risk assessment and audits, design consulting, security
testing through attempted breaches of security and analysis of and response to
breaches of securities. We maintain and manage our customers' networks and
security systems 24 hours a day, seven days a week from our network operations
center in Sterling, Virginia.
High Speed, "Last Mile" Connectivity. CuNet solves the last mile challenge
using DSL technology to convert standard copper telephone lines into high speed
data connections. Our network is capable of delivering data at speeds ranging
incrementally from 128 kilobits per second to 2 megabits per second
symmetrically, where data travels at the same speed to and from the customer,
and up to 7 megabits per second asymmetrically, where data travels faster to
the customer than from the customer. The highest CuNet speeds allow our
customers to transfer data at rates faster than standard high speed data
connections, like T1 lines and Frame Relay circuits. We provide packet-based
connections like other DSL providers. Because many of today's existing networks
use channelized technology, we also provide channelized connections, which we
believe no other major DSL provider currently offers. Thus, CuNet addresses
both older channelized data network requirements, like traditional voice
telephone networks, and the packet-based communications better suited for
newer, more efficient technologies such as asynchronous transfer mode, Frame
Relay and Internet Protocol, the set of standards that enable Internet
communications. Asynchronous transfer mode and Frame Relay are different
communications technologies, but both transmit data at high speed and can
accommodate multiple types of media, including voice, video and data.
Adaptable Network Design. The design of our network supports today's
bandwidth-intensive business requirements, such as corporate networks, virtual
private networks, office-to-office connectivity, telecommuting solutions,
collaborative computing of users in different areas, Internet/intranet access,
traditional voice, video conferencing and multimedia, e-mail, video and audio
transmission, web hosting and electronic commerce. We have designed our network
so that we can individually configure a customer's features and speeds from our
network operations center, eliminating the need for customers to upgrade their
hardware or for us to visit their premises in order to enhance or upgrade
services.
Metropolitan Area Network Solutions. We recognize that businesses with city-
wide locations, as well as remote users who telecommute, need to communicate
and share confidential information. We have constructed data communications
networks that cover an entire city-wide, or metropolitan area. These
metropolitan area networks provide high capacity, secure, direct connections
between these remote locations and provide cost effective private network
solutions to our customers with the capacity, speed, reliability and level of
service that they require.
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Wide Area Network Solutions. We recognize that many organizations have
offices and employees in multiple cities. By linking our metropolitan area
networks, we have constructed a data communications network that covers an
entire region-wide, or wide area network. This wide area network provides high
capacity, secure and reliable connections between geographically dispersed
locations. Because our wide area network customers, like our metropolitan area
network customers, are served end-to-end on our CuNet infrastructure, we are
able to deliver a wide area, private network to our customers with the
capacity, speed, reliability and level of service that they require. For
example, our wide area network enables our network service provider customers
to expand their geographic reach into areas where they lack a physical point of
presence through virtual points of presence, or VPOPs.
The NAS Strategy
Our goal is to become the premier provider of data communications and
networking solutions in the markets in which we focus. We plan to:
. Rapidly provide depth of coverage in our markets. Because DSL is a
localized technology tied to the proximity of end users to central
offices, we must collocate our equipment in many central offices in order
to provide depth of coverage. Thus, we are pursuing a strategy of
providing services in a substantial majority of the central offices in
each target market that we enter. Our initial focus on the Bell Atlantic
region will enable us to deploy our network with speed and depth. When
deployed, we believe our pervasive coverage of these markets will enable
us to better serve our end user business customers and network service
providers which are increasingly seeking a single service provider in
multiple metropolitan areas. Our depth of service will enable us to
provide our customers with a total business solution by providing them
with access for substantially all of their end users within our target
markets. As opportunities present themselves, we may decide to expand our
network beyond our initial target markets and into adjacent regions. As
part of this strategy, we have recently entered into an interconnection
agreement with Bell South, which requires state regulatory approval
before it becomes effective.
. Capitalize on core competency in direct sales and engineering support to
businesses. Through our direct sales force, we have been marketing,
selling and supporting comprehensive data communications solutions to
businesses since early 1995 and have provided data communications
solutions to over 475 customers. Our experienced direct sales force has
been supported by engineers who are trained, certified experts in all our
vendor-partners' products and technologies, including Ascend, Paradyne,
Lucent Technologies, Inc. and Cisco. We intend to market CuNet to our
existing base of network integration, network management and network
security customers and to market our network integration, network
management, network security services to new CuNet customers. In working
with our existing customer base, we have found that we can sell a
customer an initial product or service, and, based on the insights gained
and relationships built from the initial sale, expand the relationship to
provide comprehensive solutions to the customer's networking needs,
thereby improving the likelihood that we will retain these customers.
. Quickly provision reliable services by building relationships with
service providers. We have worked with our principal service providers,
including Bell Atlantic and Level 3 Communications for more than a year.
Because of these relationships, we believe we can manage these service
providers to deliver the highest quality network to our customers in the
shortest possible time. In February 1997, we began a joint operational
relationship with Bell Atlantic and have developed technical standards
specifying the provisioning and telephone line qualities necessary to
deliver dependable, high quality DSL circuits within the Bell Atlantic
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<PAGE>
region. We believe we have gained a competitive advantage through our
relationships with Bell Atlantic, the dominant traditional telephone
company in our initial target markets, and our other service providers. We
believe these relationships will enable us to continue to enhance and
maintain our network and provide high quality solutions on a timely basis.
. Provide superior customer care. We emphasize a one-stop total service
solution for our customers by developing a complete project
implementation plan for each installation and for the on-going
maintenance of their service. This is to ensure that each customer
receives the service for which they have contracted according to our
service level commitments. We manage all aspects of our customers'
connections to our network, including the design and installation of the
end-user's connection, equipment configuration and network monitoring on
a 24 hour a day, seven day a week basis. By providing our customers
regular reports on the performance of their services, we are able to
demonstrate to our customers our performance relative to our commitments
and how customers may benefit by acquiring additional networking services
from us.
. Deliver our products and services through different types of
marketing. We market our products and services directly and indirectly to
small, medium and large business customers using different types of sales
partners. CuNet's adaptability enables us to deploy services for all
market segments, including end users and wholesale customers. We will
continue to take advantage of our existing customer base through our
direct sales force, which we expect to grow to more than 140 people by
the end of 1999. We also sell our services indirectly through our sales
partners, including Internet service providers, long distance and local
carriers and other networking services companies. We have recently teamed
with Net2000 Communications, Inc. to be their provider of channelized
services in the Bell Atlantic region providing our CuNet services for the
integrated delivery of Net2000's voice and data products to their
customers. We also have a strategic relationship with DSL Solutions, Inc.
d/b/a DSL Networks as a provider of our packet-based services in the Bell
Atlantic region.
. Enhance and expand our network to meet the broadest array of business
requirements. Our network design and technology is designed to provide
our customers with adaptable networking solutions that take advantage of
many technologies. Our network supports a broad array of business
requirements, such as corporate networks, virtual private networks,
office-to-office connectivity, telecommuting solutions, collaborative
computing of users in different areas, Internet/intranet access, video
conferencing and multimedia, e-mail, video and audio transmission, Web
hosting and electronic commerce. Our network provides a solution that can
be adapted to meet the needs of our customers and integrate technological
innovations as they are developed.
. Capitalize on economics of DSL. DSL technology requires a lower initial
fixed investment than that needed for existing alternative technologies
because DSL uses existing copper telephone lines. Thus, we are able to
offer businesses services comparable to traditional wide area networking
technologies, like high speed T1 lines and Frame Relay circuits, at
approximately 30% to 70% of the cost of such services. Our subsequent
investments in DSL technology are directly related to the number of
paying customers, making a significant portion of our capital
expenditures success-based. We estimate that approximately two-thirds of
our cumulative capital expenditures over the next five years will be for
DSL equipment that is directly related to our end user subscription rate.
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Product and Service Offerings
We offer our customers network services in our target markets. Network
services include network management services, which we have branded ROC, for
remote online control, SOC, for secure online control, and CuNet. For the three
months ended March 31, 1999, revenue from network services accounted for
approximately 2.5% of our revenue. We began offering CuNet commercially in
January 1999. We offer our customers consulting services, which include network
security services and other professional services. For three months ended March
31, 1999, revenue from consulting services accounted for approximately 14.7% of
our revenue. We also sell data communications products that we use in our
network services and consulting services. For the three months ended March 31,
1999, revenue from product sales accounted for approximately 82.8% of our
revenue. Historically, almost all of our revenue has been derived from product
sales and consulting services. Although in the short term we expect to continue
to derive the majority of our revenue from product sales and consulting
services, we expect that over time our network services, which includes our
CuNet services, will constitute the more significant portion of our total
revenue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Network Services
Network Management Services. We provide our customers the opportunity to
outsource network management services that are difficult or costly for them to
manage internally. For example, we provide a single point of contact for vendor
management/coordination, including vendors for equipment on the customers'
premises, long distance carriers and traditional telephone companies, a help
desk for network administrators, monitoring and coordinated maintenance of
network services, analysis of network performance and capacity planning and
network monitoring.
We provide a wide variety of network management solutions customizable to
any requirement in order to meet our customers' unique management requirements
arising from their network configuration. We believe our strategy of providing
these services will allow us to address a larger market opportunity than that
represented by CuNet alone.
ROC Services. We offer remote online control, or ROC, services to meet our
customers' outsourced network requirements. From our network operations center
in Sterling, Virginia, we continuously monitor the integrity of our customers'
metropolitan and wide area networks, evaluate their network utilization,
implement problem resolution systems, provide network health and status
monitoring and other customized management offerings. We proactively monitor
the performance of our customers' network devices and perform trouble
resolution to address network problems, often before our customer's end users
become aware of them.
SOC Services. We offer secure online control, or SOC, services to meet our
customers' outsourced network security requirements. We provide proactive
network monitoring, intrusion detection and management of these network
security solutions on a 24 hour a day, seven day a week basis. We provide a
variety of security solutions including barriers, or firewalls, between
internal corporate networks and external networks like the Internet, virtual
private network service, encryption and access authentication solutions for
customers looking for the highest level of security on any network on which
data is transported.
CuNet. In January 1999, we began commercially offering our CuNet services.
CuNet uses DSL technology to provide high speed continuously connected packet-
based and channelized communications services. CuNet connects business users to
our metropolitan area networks and wide area network using ATM, Frame Relay and
DSL technologies over traditional copper telephone lines. CuNet customers are
able to connect to our regional network either within a city or between our
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cities, to obtain high capacity, secure and reliable connections between
geographically dispersed locations. Because our customers are served end-to-end
on our CuNet network, we are able to deliver a true wide area, virtual private
network with the capacity, speed, reliability and level of service that they
require.
The chart below shows the service, speed, retail price (which includes
equipment installed at the customer's location), range and performance of our
CuNet services, as of April 30, 1999:
<TABLE>
<CAPTION>
Retail List Range from
Speed to Speed Retail List Price Central
End From End Price for for Monthly Office
Service user(2) user(2) Activation(1) Service(1) (feet) Market/Usage
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Symmetrical
CuNet 128 128 Kbps 128 Kbps $270 $129 18,000 Integrated services digital
network replacement for
telecommuters.
CuNet 256 256 Kbps 256 Kbps $270 $146 18,000 Small businesses with standard
e-mail and web usage.
CuNet 384 384 Kbps 384 Kbps $270 $162 18,000 Higher bandwidth solution for
small to medium sized businesses
running moderately-visited web
sites.
CuNet 512 512 Kbps 512 Kbps $270 $185 18,000 Allows small and medium
businesses to meet most network
video and Internet needs.
CuNet 768 768 Kbps 768 Kbps $270 $217 18,000 Supports high bandwidth
intensive applications such as
electronic commerce, video
conferencing, Frame Relay and
voice over Frame Relay.
CuNet 1.0 1.0 Mbps 1.0 Mbps $270 $239 18,000 Close to full T1 for medium to
large sized businesses.
CuNet 1.5 1.5 Mbps 1.5 Mbps $270 $294 18,000 Standard for large organizations
that require high capacity
connections. Applications
include the ability to integrate
voice, data and Internet
services over a single
connection.
CuNet 2.0 2.0 Mbps 2.0 Mbps $270 $348 18,000 Full motion video and multimedia
applications for large
businesses.
Asymmetrical:
CuNet 1.5 1.5 Mbps 384 Kbps $270 $239 18,000 High speed web access, e-mail
and file distribution.
CuNet 4.0 4.0 Mbps 1.0 Mbps $270 $429 18,000 Very high speed web access, e-
mail and file distribution.
CuNet 7.0 7.0 Mbps 2.0 Mbps $270 $729 18,000 Bandwidth and capacity
sufficient to meet most
asymmetrical data communication
requirements.
</TABLE>
- ---------------------
(1) Wholesale and volume discount prices are available for network service
providers.
(2) "Kbps" means kilobits per second. "Mbps" means megabits per second.
CuNet Frame. CuNet Frame provides access to a seamless local and long
distance network using asynchronous transfer mode and DSL technologies to
deliver a flexible suite of Frame Relay
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<PAGE>
services. The benefit to CuNet Frame customers is the low cost and simplicity
of use when contrasted against traditional telephone company or long distance
carrier Frame Relay services.
VPOP. Our virtual point of presence service provides network service
providers access to our entire CuNet network. With VPOP, a network service
provider can offer services throughout the entire CuNet network without
additional investment in network communications infrastructure. This service
offers wholesale customers the opportunity to sell DSL circuits in cities
outside of the local serving area in which they physically connect to the CuNet
network. Wholesale and volume discount prices are available for network service
providers.
Consulting Services.
Our consulting services include network security and professional services.
We provide customers with network security services including:
. Risk assessments and audits. We work in conjunction with a customer's
engineering staff to determine if a network's critical components work
together, provide for overlapping network protection features and
adequate firewall security at the perimeter of a network. We also
determine whether an optimal defensive strategy exists and if it is
adhered to. We assess the effectiveness of a customer's reporting and
response mechanisms and determine vulnerabilities and other critical
issues.
. Network security architecture consulting. We provide expertise in
designing, implementing, modifying and protecting data networks of all
sizes.
. Controlled penetrations. We will conduct organized attacks with original
software tools and techniques designed to expose information security
breaches. These controlled penetrations are tailored to customer
requirements. Following a penetration, our engineers will interpret the
outcome and present results to both senior executives and lead engineers.
We also take steps to ensure that knowledge gained from a controlled
penetration is not lost during subsequent implementation and maintenance
phases.
. Incident forensics and response. Our engineers have rigorous training in
investigating, analyzing and responding to security breaches after they
occur and are well versed in the rules of evidence necessary to present
their findings in judicial proceedings on behalf of our customers.
We provide professional consulting and network integration services to
complement our CuNet, ROC, SOC and network security services. We provide
network design, network evaluation, project and program management, staging,
installation, maintenance and warranty services.
Product Sales.
Since 1995, we have sold data communications products as part of our overall
data communications solutions. We sell the network components and security
components that our customers require in order to build, maintain and secure
their networks. We provide equipment manufactured by Ascend, Cisco Systems,
Inc., Paradyne, Check Point Software, Ltd., Lucent Technologies Inc., Nortel
Networks Corporation, Cabletron Systems, Inc., Redcreek Communications Inc. and
Tut Systems, Inc. We do not manufacture any of this equipment ourselves. Our
engineers select the right manufacturer's product solution for our customer's
requirements and then help install and configure the equipment in our
customers' networks. The products we sell enable us to provide our customers
with consulting services and network services. While product sales have
accounted for the majority of our historical revenue, we believe that our
product sales are ancillary to our network services and consulting services.
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Customers
We have over 400 customers, including over 45 CuNet customers. We generally
sell our customers the products that we use in connection with our consulting
services. AT&T and Zeneca Pharmaceuticals, a division of Zeneca, Inc.,
accounted for 50.4% and 8.0%, respectively, of our revenue in 1998, almost all
of which arose from product sales and consulting services. For the three months
ended March 31, 1999, AT&T and Zeneca accounted for 55.5% and 10.0% of our
revenue, respectively. To date, AT&T and Zeneca have not been CuNet customers.
We have no long-term contracts with either of these customers, and the loss of
either of these product sales and consulting services customers would have a
material adverse effect on our business. At the end of 1998, AT&T accounted for
47% of our accounts receivable.
Some of our network services customers include the following:
<TABLE>
<S> <C>
American International
Group, Inc. Lucent Technologies Inc.
Ascend Communications, Inc. Manugistics Group, Inc.
AT&T Corp. National Rural Telecommunications Cooperative
Conectiv, Inc. Sallie Mae
ICI Americas University of Virginia
Lehigh Portland Cement
Company SEI Investments Company
Lockheed Martin Corporation Zeneca Pharmaceuticals
</TABLE>
Sales and Marketing
We market our full complement of products and services directly and
indirectly to small, medium and large business customers using different sales
channels. We take advantage of our existing customer base through our direct
sales force. We also sell our services indirectly through our sales partners,
including Internet service providers, long distance and local carriers and
other networking services companies.
Direct Sales. We market our full complement of products and services,
including our network services, consulting services and product sales, through
a direct sales force of 35 people which we expect to grow to over 140 people by
the end of 1999. Our direct sales force is supported by sales engineers who
also seek to sell our consulting services and network services. Our sales
representatives focus on selling CuNet connectivity to small and medium
businesses while our account executives focus on selling CuNet connectivity and
consulting services and network services to medium and large businesses. We
target enterprises that have at least one of the following requirements:
Internet connectivity, remote local area network access, traditional voice and
data applications and metropolitan or wide area network Frame Relay. We also
generate lead referrals for our direct sales forces through telemarketing
efforts. Our sales force seeks to deal directly with the chief information
officer or telecommunications manager responsible for access in the target
account. Our sales force is located in each of our target markets. We intend to
increase the size of our sales and technical support force to sell and support
these services as we expand our business. We also seek to coordinate our direct
sales and marketing efforts with our vendor partners, including Ascend,
Paradyne and Cisco. Our direct sales process generally ranges from 30 to 60
days for small and medium businesses, which generally require simple
connectivity and networking solutions. Larger businesses with more complex
networking requirements often require customized solutions. The large business
sales process may take up to six months and may involve:
. A significant technical evaluation;
. An initial trial roll-out of our services; and
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<PAGE>
. A commitment of capital and other resources by the customer.
Indirect Sales. We sell our full complement of products and services,
including our network services, consulting services and product sales, through
network service providers, including Internet service providers, long distance
and local carriers and other networking services companies. These providers
combine one or more of our services with their own Internet, Frame Relay and
voice services and resell those bundled services to their existing and new
customers. We address these markets through sales and marketing personnel
dedicated to this channel. We intend to augment our CuNet sales through
partnerships with other service providers which offer complementary services
and can offer CuNet as part of a complete business solution. For example, we
have recently entered into an agreement with an Internet service provider to
provide for the purchase, marketing and resale of our network security
services, primarily to the Internet service provider's small business and
enterprise customers. We also leverage our equipment vendors' partnerships as
sources for sales opportunities by offering joint technology seminars,
implementing marketing campaigns and sharing cross-selling opportunities.
Key Strategic and Commercial Relationships
We have entered into, are continuing to explore, and expect to enter into,
additional strategic and commercial relationships. We believe that these
relationships are valuable because they provide additional marketing and
distribution, network resources, technology and geographic expansion
opportunities. In some cases, these relationships involve capital investment,
product development or targeted numbers of new lines or customers. Our
strategic and commercial relationships include Ascend, Paradyne, Net2000
Communications and DSL Networks.
Product Sales.
Ascend. Since 1995, we have sold data communications products and equipment
made by Ascend. Ascend has provided us with a capital lease facility and a
credit facility for working capital. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations." In addition, we are
continuing to explore opportunities to participate in product development and
the distribution of products and services for their network of sales partners.
Paradyne. Since 1995, we have sold data communications products and
equipment made by Paradyne. In addition, we are continuing to explore
opportunities to participate in product development and the distribution of
products and services for their network of sales partners.
Consulting Services.
We have no material strategic or commercial relationships with respect to
our consulting services.
Network Services.
Net2000 Communications. In May 1999, we entered into our standard master
service agreement with Net2000 Communications, a competitive telecommunications
company within the Bell Atlantic region, to provide Net2000 customers with
CuNet services. We are continuing to explore integration of our sales and
marketing efforts in an effort to bring a bundled voice and data product to our
mutual customers, although we and Net2000 are not obligated to do so.
DSL Networks. In May 1999, we entered into an agreement with DSL Networks.
Under the agreement, DSL Networks will provide us with the first right to
supply DSL circuits sold by DSL Networks in the Bell Atlantic region. Our first
right to supply means that when DSL Networks is providing DSL services in the
Bell Atlantic region, we will have the first opportunity to provide the circuit
to DSL Networks, unless their customer requests otherwise. This agreement has a
term of three years.
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Customer Service
Network service providers and communications managers at businesses
typically have to assemble their digital communications networks using multiple
vendors. This leads to additional work and cost as well as complex coordination
issues. We work with each customer to develop a project implementation plan.
This plan includes qualifying the customer for our service offerings, placing
orders for connection facilities, coordinating the delivery of the connection,
turn up and final installation. We emphasize a one-stop total service solution
for our customers. We provide our service according to a predetermined service
level commitment with each customer. Our comprehensive solution includes:
. Customer Line Installation. We work with each customer to establish all
connection and configuration requirements to connect the customer's main
location to our network. We order the copper telephone line for our
customer, manage the installation process, test the copper telephone line
once installed, assist the customer in configuring the equipment that
terminates the copper telephone line, and monitor the copper telephone
line from our network operations center.
. End User Line Installation. We order all end user connections from the
traditional telephone companies according to pre-determined technical
line specifications. We manage the traditional telephone companies'
performance, test the installed line, and monitor the end user line from
our network operations center.
. End User Premises Wiring and Modem Configuration. We use both our own and
contracted installation crews to install any required inside wiring at
each end user site. We rely on contracted crews to meet customers'
demands at peak times. Our installation crews configure and install end
user equipment with information specific to each customer.
. Network Monitoring. We monitor our network from our network operations
center on a continuous end-to-end basis, which often enables us to
correct potential network problems before service to a customer or end
user is affected. We also provide direct monitoring access of end users
to our network service providers and enterprise customers.
. Customer Reporting. We communicate regularly with our customers about the
status of their service. We provide web-based tools to allow individual
network service providers and communications managers to monitor their
end users directly, to place orders for new end users, to enter work
orders on end user lines and to communicate with us on an ongoing basis.
. Customer Service and Technical Support. We provide service and technical
support 24 hours a day, seven days a week to all our customers. The
network service provider and communications managers serve as the initial
contact for end users and we provide the second level of support. We have
developed and will continue to expand a database containing the questions
we have addressed and the answers we have provided in response to past
network issues. In this way, we are able to better respond to future
customer questions.
. Operating Support Systems. We have designed an integrated group of
customized applications around our current and planned business
processes. By customizing and integrating products from vendors such as
Daleen Technologies, Inc. for billing, Eftia OSS Solutions Inc. for
operating support systems and Hewlett-Packard Company for network
management, we have designed a system that will facilitate rapid service
responsiveness and reduce the cost of customer support. Our "NAS Total
System Solution" seamlessly integrates all of our business functions,
including sales, ordering, provisioning, customer support, maintenance
and repair, billing, accounting and decision support, ensuring that every
function has accurate, up-to-date information and the tools necessary to
efficiently complete their work.
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Network Structure and Technology
Overview. We lease and operate a series of metropolitan area networks
connected by our private high speed fiber optic backbone. Our network employs a
structure designed to deliver superior end-to-end capabilities, high speed
"last mile" connections and intelligent data traffic management. Our
technologically advanced network design has positioned us to deliver the high
level of data communications services, including Internet access, virtual
private networks, video conferencing and a broad array of multimedia services,
increasingly demanded by businesses. We have planned for growth by ensuring
that our network is scalable, intelligent and secure.
. Scalable. Our adaptable, hierarchical network structure allows us to
provide both channelized and packet-based services reliably and
incrementally, which enables us to match investment with demand. As new
CuNet end users are added to our network, capacity is automatically added
so that the same reliable performance is achieved for all users as our
network grows.
. Intelligent. From our network operations center, we are able to
constantly monitor our network, the network service providers' networks
and our customers' connections, as well as perform network diagnostics
and equipment surveillance, and initialize our end users' connections.
Because our network is centrally managed, we can identify and dynamically
enhance network quality, service and performance and address network
problems promptly, often without our end users becoming aware of the
repairs. This capability also allows us to control costs associated with
on-site network configuration and repair.
. Secure. With dedicated, direct access to our private network, our end
users and businesses experience fewer network security risks than users
of common dial-up modems, integrated services digital network lines or
dedicated access to the Internet because there is less risk of
unauthorized access. Our network is designed to provide enhanced security
to ensure secure availability of all internal applications and
information for all end users, whether they are within the corporate
headquarters or telecommuting from remote locations. Our network
structure connects end users at fixed locations to a single business,
which reduces the possibility of unauthorized access and allows our
customers to safely perform all of their required tasks.
Components. Our components are integrated into networks across local,
metropolitan and wide areas that combine speed and balanced capacity in a
manner designed to deliver a high performance networking experience for our
customers.
. Customer Endpoint. We currently offer channelized and packet-based DSL
connections in our network. We offer to provide the customer with a DSL
modem as part of our complete service offering, the cost of which is
included in the list price of the service. We configure and install these
modems with the end user's computer and network equipment along with any
required on site wiring needed to connect the modem and the telephone
line. Under FCC policies, a customer also is free to obtain compatible
modems from sources other than us.
. Copper Telephone Lines. We lease copper telephone lines, known as
unbundled network elements, which run from our network access points in
central offices to the customer endpoint under terms specified in
telecommunications regulations and our interconnection agreements. We
have worked closely with Bell Atlantic to define specifications that
ensure the quality of the copper telephone lines we receive, thereby
ensuring the transmission speed of end user connections.
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. Central Office Collocation Spaces. Through FCC and state
telecommunications regulatory policies as well as our interconnection
agreements with Bell Atlantic, we secure collocation space in central
offices from which we desire to offer CuNet. These collocation spaces are
designed to offer the same high reliability and availability standards as
Bell Atlantic's other central office space. At present, our collocation
spaces are either physical, virtual or SCOPE, which is secured
collocation in an open physical environment. With physical collocation,
we install and maintain our equipment in Bell Atlantic's central offices
and have complete access to the space. With SCOPE collocation, we install
and maintain our equipment in Bell Atlantic's central offices, but our
access to the space is non-exclusive. With virtual collocation, Bell
Atlantic installs and maintains the equipment on our behalf, but we have
no access to the space.
. Metropolitan Area Backbone. Our metropolitan area backbone is a fiber
optic network that connects our network access points in central offices
to our node sites and our node sites to our customer locations. To date,
we have leased fiber optic circuits capable of speeds of up to 45
megabits per second from Bell Atlantic, Level 3 Communications and other
providers for metropolitan area backbone services. We continue to review
alternative providers in an effort to reduce costs. We do not have long
term lease agreements for these fiber optic circuits. We have in the past
experienced supply problems with some of our fiber optic suppliers, and
they may not be able to meet our needs on a timely basis in the future.
If these circuits are not available, we will need to seek alternative
sources for the fiber optics to connect our DSL equipment in different
central offices, which could delay our network rollout.
. Node Sites. A node site is a physical location where we connect all of
our central offices within a particular metropolitan area network to
businesses and network service providers. The node site houses our
equipment to switch and interconnect customer traffic from central
offices within a region or across our entire network. Our node sites are
housed in a secured facility in each metropolitan area. We currently have
a node site in Boston, New York, Philadelphia, Baltimore, Washington,
D.C. and Richmond. We expect to establish node sites in Pittsburgh,
Norfolk and Wilmington, Delaware by the end of 1999.
. Wide Area Backbone. Our wide area backbone is a fiber optic network that
interconnects our node sites in various metropolitan areas. To date, we
have leased fiber optic circuits capable of speeds of up to 155 megabits
per second from Level 3 Communications, Virginia Electric and Power
Company and other providers. We do not have long term lease agreements
for these fiber optic circuits. We intend to upgrade our wide area
backbone to higher capacities as necessary to deliver the quality of
service that our customers demand. We continue to evaluate alternative
providers of capacity in order to reduce costs. We have in the past
experienced supply problems with some of our fiber optic suppliers, and
they may not be able to meet our needs on a timely basis in the future.
If these circuits are not available, we will need to seek alternative
sources for the fiber optics to connect our node sites in different
cities, which could delay our network rollout.
. Network Operations Center. We manage our network from our network
operations center located in our corporate headquarters in Sterling,
Virginia. We provide end-to-end network management to our customers using
advanced network management tools on a 24 hour a day, seven day a week
basis. This enhances our ability to address performance or connectivity
issues before they affect the end user experience. From our network
operations center, we can monitor our network, including the equipment
and circuits in our metropolitan area networks and central offices, and
our customers' networks, including individual end user lines and DSL
modems. See "--Network Services."
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CuNet Rollout. We currently offer CuNet in Boston, New York, Philadelphia,
Baltimore, Washington, D.C. and Richmond and have collocated our equipment in
51 central offices. We intend to build networks and offer services in
Pittsburgh, Norfolk and Wilmington, Delaware by the end of September 1999. We
plan to offer services in these nine target markets through the 360 central
offices in which we expect to collocate our equipment by the end of 1999. To
the extent opportunities present themselves, we may decide to expand our
network beyond our initial target markets and into adjacent regions. As part of
this strategy, we have recently entered into an interconnection agreement with
Bell South, which requires state regulatory approval before it becomes
effective.
Research and Development. We are also pursuing a program of ongoing network
development. Our engineering efforts focus on the design and development of new
technologies and services to increase the speed, efficiency, reliability and
security of our network and to facilitate the development of network
applications by third parties that will increase the use of our network.
Currently, Ascend provides the packet-based DSL modem and other equipment used
in CuNet and Paradyne provides the channelized DSL modem and equipment used in
CuNet. Other major DSL providers could enter into exclusive arrangements with
our equipment providers that may materially and adversely affect the
availability and pricing of the equipment.
Competition
In each of our businesses, we face competition from many companies with
significantly greater financial resources, well-established brand names and
large, existing installed customer bases. We expect the level of competition to
intensify in the future. Some of the competitive factors we face in each of our
business segments include:
. reliability of service;
. diversity of product and service offerings;
. breadth of network coverage;
. price/performance;
. network security;
. ease of access and use;
. service bundling;
. sales relationships;
. customer support;
. strategic relationships; and
. operating experience.
We believe that each potential customer presents a unique opportunity for
competition and presents competitive challenges specific to that customer. The
significance of the different competitive factors we face will vary with each
customer depending on the needs of the particular customer and the particular
competitor we face. For example, if we are competing for a customer against
another provider of product sales and consulting services, we expect to compare
favorably as to diversity of product and service offerings and operating
experience, but perhaps less favorably as to brand recognition and financial
resources. If we are competing for a customer against a traditional telephone
company, we expect to compare favorably as to client support, transmission
speed and price/performance, but perhaps less favorably as to brand
recognition, access to capital and operating experience. If we are competing
for a customer against another provider of DSL, we expect to compare favorably
as to diversity of service offerings, sales relationships and operating
experience,
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but perhaps less favorably as to the geographic breadth of network coverage. We
expect to improve our competitive position relative to other DSL providers by
expanding the geographic breadth of our network through opportunistic growth of
our network and, in part, through strategic alliances. We believe that our most
direct competition for product sales and consulting services will come from
Bell Atlantic's network integration services division and from other providers
of network integration services like Tech Data. Historically, these companies
have been our principal competitors.
By focusing our business on high speed data communications, we anticipate
encountering a different set of competitors. We believe that our most direct
competition for high speed data communications services will come from Bell
Atlantic and other traditional telephone companies operating in our target
markets and other major DSL providers. However, we also anticipate competition
from service providers using other technologies.
Bell Atlantic and Other Traditional Telephone Companies. Bell Atlantic and
the other traditional telephone companies present in our target markets are
conducting technical and/or market trials or have commenced commercial
deployment of DSL-based services. We recognize that each traditional telephone
company has the potential to quickly overcome many of the obstacles that we
believe have delayed widespread deployment of DSL services by traditional
telephone companies in the past. The traditional telephone companies currently
represent and will in the future increasingly represent strong competition in
all of our target markets. The traditional telephone companies have an
established brand name, a large number of existing customers and a reputation
for high quality in their service areas, possess sufficient 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 the absence of strong oversight by the FCC and
state telecommunications regulators, traditional telephone companies also have
an economic incentive to benefit their own DSL retail operations by providing
themselves with the copper telephone lines, collocation, support services and
other essential DSL service inputs on more favorable terms than they provide
these facilities and services to their DSL competitors, like us. These factors
give the traditional telephone companies a potential competitive advantage
compared with us. Accordingly, we may be unable to compete successfully against
Bell Atlantic or the other traditional telephone companies, and any failure to
do so would materially and adversely affect our business, operating results and
financial condition.
Other Major DSL Providers. Other competitive telecommunications companies
plan to offer or have begun offering DSL-based access services in our targeted
markets, and others are likely to do so in the future. Competitive
telecommunications companies that provide DSL service include Covad
Communications, Rhythms NetConnections and NorthPoint Communications.
Other Service Providers. Many of our competitors are offering, or may soon
offer, technologies and services that will compete with some or all of our high
speed DSL offerings. These technologies include T1, integrated services digital
network, satellite, cable modems and analog modems and could be provided by the
following:
. Cable Modem Service Providers. Cable modem service providers, like
MediaOne Group, Inc., At Home, through its @Home service offering, and
their cable partners, are offering or preparing to offer high speed
Internet access over fiber and cable networks to consumers. At Home,
through its @Work service offering, has positioned itself to do the same
for businesses. Where deployed, these networks provide local access
services, in some cases at higher speeds than our CuNet. They typically
offer these services at lower prices than our services, in part by
sharing the capacity available on their cable networks among multiple end
users.
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. Traditional Long Distance Carriers. Many of the leading traditional long
distance carriers, like AT&T, Sprint and MCI WorldCom, are expanding
their capabilities to support high speed, end-to-end networking services.
Increasingly, their services include high speed local access combined
with metropolitan and wide area networks, and a full range of Internet
services and applications. We expect them to offer combined data, voice
and video services over these networks. These carriers have deployed
large scale networks, have large numbers of existing business and
residential customers and enjoy strong brand recognition, and, as a
result, represent significant competition. For instance, they have
extensive fiber networks in many metropolitan areas that primarily
provide high speed data and voice communications to large companies. They
could deploy DSL services in combination with their current fiber
networks. They also have interconnection agreements with many of the
traditional telephone companies and have secured collocation spaces from
which they could begin to offer competitive DSL services.
. New Long Distance Carriers. New long distance carriers, such as Williams,
Qwest Communications and Level 3 Communications, are building and
managing high bandwidth, nationwide packet-based technology networks for
the wide area network. These same providers are acquiring or partnering
with Internet service providers to offer services directly to business
customers. These companies could extend their existing networks to
include fiber optic networks within metropolitan areas and high speed
services using DSL technology, either alone, or in partnership with
others.
. Internet Service Providers. Internet service providers provide Internet
access to business and residential customers. These companies generally
provide Internet access over the traditional telephone company's networks
at integrated services digital network speeds or below. Some Internet
service providers have begun offering DSL-based access using DSL services
offered by the traditional telephone company or other DSL-based
competitive telecommunications companies. Some Internet service providers
such as Concentric Network Corporation, Mindspring Enterprises, Inc.,
PSINet and Verio Inc. have significant and even nationwide marketing
presences and combine these with strategic or commercial alliances with
DSL-based competitive telecommunications companies.
. Wireless and Satellite Data Service Providers. Several new companies are
emerging as wireless and satellite-based data service providers over a
variety of frequency bands. Companies such as Teligent, Inc., Advanced
Radio Telecom Corp. and WinStar Communications, Inc., hold point-to-point
microwave licenses to provide fixed wireless services such as voice, data
and videoconferencing. We also may face competition from satellite-based
systems such as Motorola Satellite Systems, Inc., Hughes Space
Communications, Iridium World Communications, Ltd., Globalstar and others
which are planning or are in the process of building global satellite
networks which can be used to provide broadband voice and data services.
Relationship with Bell Atlantic
Our relationship with Bell Atlantic is critical to our business. We depend
on Bell Atlantic for collocation facilities, copper telephone lines, support
services and some of the fiber optic transport that we use for CuNet. Our
interconnection agreements with Bell Atlantic govern much of this critical
relationship. We have signed interconnection agreements with Bell Atlantic in
each of the states covering our initial target markets. These agreements cover
a number of aspects including:
. the price and terms to lease access to Bell Atlantic's copper lines;
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. the special conditioning Bell Atlantic provides to enable the
transmission of DSL signals on these lines;
. the price and terms for collocation of our equipment in Bell Atlantic's
central offices;
. the price and terms to access Bell Atlantic's transport facilities;
. the terms to access conduits and other rights of way Bell Atlantic has
constructed for its own network facilities;
. the operational support systems and interfaces that we use to place
orders and trouble reports and monitor Bell Atlantic's response to our
requests;
. the dispute resolution process we and Bell Atlantic use to resolve
disagreements on the terms of the interconnection agreement; and
. the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with Bell Atlantic.
Our interconnection agreements have an initial term that expires in March
2000, in the case of Baltimore, Philadelphia, Pittsburgh, Norfolk, Richmond,
Wilmington, Delaware and Washington, D.C., and January 2001 in the case of
Boston and New York. Thereafter, the agreements will continue until terminated
by either party upon ninety days prior notice. If an agreement is terminated,
our service arrangements will continue without interruption under:
. terms of a new agreement;
. terms imposed by a state commission;
. tariff terms generally applicable to competitive carriers and other
carriers; or
. if none of these are available, on a month-to-month basis under the
terms of the initial agreement.
Thus, we may be required to renegotiate our agreements in the future. Although
we expect to renew our interconnection agreements, there can be no assurance
that we can extend or renegotiate agreements on favorable terms.
Additionally, the FCC, state telecommunications regulators and the courts
have authority to interpret our interconnection agreements and to resolve
disputes in the event of a disagreement between us and Bell Atlantic. There can
be no assurance that these bodies will not interpret the terms or prices of our
interconnection agreements in ways that could adversely affect our business,
operating results and financial condition.
If we expand into adjacent regions which are served by traditional telephone
companies other than Bell Atlantic, we will need to enter into interconnection
agreements with those incumbent carriers. We have recently entered into an
interconnection agreement with Bell South. However, that agreement will become
effective only after it is approved by the state regulatory agencies where Bell
South operates as the traditional telephone company. While we anticipate such
approval in the summer of 1999, we cannot assure you that it will be approved
then, or ever.
Government Regulation
The following summary of regulatory developments and legislation describes
material telecommunications regulations and legislation directly affecting our
industry.
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The facilities and services that we obtain from Bell Atlantic in order to
provide CuNet are regulated extensively by the FCC and state telecommunications
regulatory agencies. To a lesser extent, the FCC and state telecommunications
regulators exercise direct regulatory control over the terms under which we
provide CuNet to the public. Municipalities also regulate limited aspects of
our telecommunications business by imposing zoning requirements, permit or
right-of-way procedures or fees, among other regulations. The FCC and state
regulatory agencies generally have the authority to condition, modify, cancel,
terminate or revoke operating authority for failure to comply with applicable
laws, or rules, regulations or policies. Fines or other penalties also may be
imposed for such violations. We cannot assure you that regulators or third
parties would not raise issues regarding our compliance or non-compliance with
applicable laws and regulations. We believe that we operate our business in
compliance with applicable laws and regulations of the various jurisdictions in
which we operate and that we possess the approvals necessary to conduct our
current operations.
Federal Regulation. The 1996 Telecom Act substantially departs from prior
legislation in the telecommunications industry by establishing competition as a
national policy in all telecommunications markets. This Act removes many state
regulatory barriers to competition in telecommunications markets dominated by
incumbent carriers and preempts, after notice and an opportunity to comment,
laws restricting competition in those markets. Among other things, the Act also
greatly expands the interconnection requirements applicable to traditional
telephone companies. It requires the traditional telephone companies to:
. provide collocation, which allows competitive telecommunications
companies to install and maintain their own network termination equipment
in traditional telephone company central offices;
. unbundle and provide access to components of their service networks to
other providers of telecommunications services;
. establish "wholesale" rates for the services they offer at retail to
promote resale by competitive telecommunications companies; and
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Traditional telephone companies are required by the 1996 Telecom Act to
negotiate an interconnection agreement in good faith with carriers requesting
any or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state telecommunications regulatory agency.
The FCC and state telecommunications regulators also are instructed by the
1996 Telecom Act to perform certain duties to implement the regulatory policy
changes prescribed by the 1996 Telecom Act. The outcome of various ongoing
proceedings to carry out these responsibilities, or judicial appeals of these
proceedings, could materially affect our business, operating results and
financial condition.
In October 1996, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the 1996
Telecom Act, including rules:
. providing the detailed standard that state telecommunication regulators
must use in prescribing the price that traditional telephone companies
charge for collocation and for the copper
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telephone lines and other network elements that competitive
telecommunications companies must obtain from traditional telephone
companies in order to provide service and
. giving competitive telecommunications companies the right to "pick-and-
choose" interconnection provisions by requiring that a traditional
telephone company enter into an interconnection agreement with the
competitive telecommunications companies that combines provisions from a
variety of interconnection agreements between that traditional telephone
company and other competitive telecommunications companies.
The FCC and others appealed this decision to the U.S. Supreme Court. In
January 1999, the U.S. Supreme Court reversed much of the Eighth Circuit's
decision, finding that the FCC has broad authority to interpret the 1996
Telecom Act and issue rules for its implementation, including authority to
establish the methodology that state telecommunication regulators must use in
setting the price that incumbent carriers charge competitive telecommunications
companies for collocation, copper telephone lines and other network elements.
The Supreme Court also reversed the Eighth Circuit's holding invalidating the
FCC's "pick-and-choose" rule. However, the Supreme Court found that the FCC had
violated the 1996 Telecom Act in defining the individual network elements
incumbent carriers must make available to competitive telecommunications
companies, and required the FCC to reconsider its delineation of these
elements. It sent the matter back to the FCC with instructions to consider
further the question of which parts of a traditional telephone company's
network must be provided to competitors. The FCC recently initiated a
proceeding to establish which network elements are required to be provided by
incumbent carriers to competitors. The FCC has stated that it plans to issue a
new decision on this matter in the summer of 1999. We would be adversely
affected if the FCC were to exempt traditional telephone companies from the
duty to provide any of the facilities we need in order to provide our CuNet
services.
The Supreme Court's order is potentially beneficial to us in several
important respects. For example, the Supreme Court's decision requiring that
the Eighth Circuit reinstate the FCC's "pick-and-choose" rule could help us
obtain the benefit of specific provisions from interconnection agreements
between Bell Atlantic and other competitive telecommunications companies who
had more bargaining leverage than we had at the time we negotiated our
interconnection agreements. However, the Eighth Circuit has not yet reinstated
the FCC's "pick and choose" rule, and we cannot predict when it will do so. The
Supreme Court's determination that the FCC rather than state telecommunications
regulators has jurisdiction to determine pricing methodology also could be
beneficial to us since the FCC has adopted a pricing standard that appears to
be more beneficial to competitive telecommunications companies in some respects
than the pricing standards that some state telecommunications regulators have
employed. However, it remains unclear whether the particular pricing
methodology prescribed by the FCC will go into effect because some parties have
challenged the lawfulness of that methodology in the U.S. Court of Appeals for
the Eighth Circuit, and that litigation is still pending.
In an order released March 31, 1999, the FCC adopted several new regulations
that potentially could have a positive impact on our business. In particular,
several new FCC rules require traditional telephone companies to provide
collocation arrangements in a manner that potentially will be less costly than
the manner in which such arrangements are provided at present. Another new rule
is intended to reduce the number of situations in which incumbent carriers deny
collocation applications based on a claim that there is no space available.
Still another is intended to help ensure that the customers of companies who
provide services like CuNet do not receive harmful interference from other
users of the traditional telephone company network on which the service is
provided. It remains
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to be seen whether the FCC's new rules will accomplish their intended
objectives since they will not go into effect until late May 1999 at the
earliest. Nor can we predict whether any of these new rules will be appealed
and, if so, whether the appeals will be successful.
The FCC made another potentially favorable ruling for our industry in
another recent case. That case involved the question of whether a
telecommunications service like CuNet that provides high speed dedicated access
to the Internet is an interstate service or an intrastate service. An
interstate service must be provided subject to FCC regulatory controls, whereas
an intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is offered.
In its decision, the FCC held that such services are jurisdictionally
interstate and therefore must be provided on terms and conditions set by the
FCC. This ruling is potentially advantageous to us because it reduces the
number of telecommunications regulatory agencies that control the terms under
which we provide CuNet. It also is potentially advantageous because FCC
regulatory controls in many respects are less burdensome than state regulatory
controls. For example, the 1996 Telecom Act authorizes the FCC to forbear from
regulating the terms under which carriers classified as "non-dominant" provide
interstate telecommunications service. The FCC has exercised its forbearance
authority by issuing rulings that exempt non-dominant domestic carriers like us
from obtaining a certificate from the FCC prior to providing any interstate
service or from filing a tariff setting forth the terms under which they
provide any interstate access service. Because we believe that CuNet
constitutes interstate service, we believe that we do not need an FCC
certificate to provide CuNet. Moreover, since we believe CuNet is special
access, we provide the service to existing customers pursuant to contract
rather than tariff.
The FCC is considering whether to adopt some regulations that could
adversely affect us. In particular, we could be hurt by adoption of a proposal
that would exempt incumbent carriers from some existing FCC regulations
designed to help ensure that the price incumbent carriers charge for their own
retail DSL service offering recovers the actual costs they incur in providing
that service. We also could be hurt by adoption of a proposal to let incumbent
carriers provide DSL services through an affiliate of the incumbent carrier
unless the FCC requires that the traditional telephone company provide copper
telephone lines, collocation and back-office support services to its affiliates
on terms that are no more favorable than the terms available to competitive
telecommunications companies like us.
On May 8, 1997, in compliance with the requirements of the 1996 Telecom Act,
the FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to under-served
individuals and customers in high-cost or low-income areas, and to companies
that provide telecommunications services for schools and libraries and to rural
health care providers. We are required to contribute to the universal service
fund and are also may be required to contribute to state universal service
funds. The new universal service rules are administered jointly by the FCC, the
fund administrator, and state regulatory authorities, many of which are still
in the process of establishing their administrative rules. We cannot determine
the net revenue effect of these regulations at this time.
State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the 1996
Telecom Act that are intended to open all telecommunications markets to
competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's jurisdiction to prescribe the methodology traditional
telephone companies must use in setting the price of local telephone wires and
other network elements, the FCC has exercised that jurisdiction by
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adopting a pricing standard and has given state regulators substantial
authority to apply that standard in order to determine actual prices. Many
states have set only temporary prices for some network elements that are
critical to the provision of DSL services because they have not yet completed
the regulatory proceedings necessary to determine permanent prices. The results
of these proceedings will determine the price we pay for, and whether it is
economically attractive for us to use, these network elements and services.
The 1996 Telecom Act also gives state telecommunications regulators broad
authority to approve or reject interconnection agreements that competitive
telecommunications companies enter with traditional telephone companies and
broad authority to resolve disputes that arise under these interconnection
agreements. Under the 1996 Telecom Act, if we request, traditional telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to unbundled network elements. A
separate agreement is signed for each of the states in which we operate. During
these negotiations either the traditional telephone company or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period provided in the 1996 Telecom
Act, we may submit outstanding disputes to the states for arbitration. The 1996
Telecom Act also allows state regulators to supplement FCC regulations as long
as the state regulations are not inconsistent with FCC requirements.
In addition, CuNet may, as to some future customers, be classified as
intrastate services subject to state regulation. All of the states where we
operate, or will operate, require some degree of state regulatory commission
approval to provide certain intrastate services. We have obtained state
authorizations to provide all types of intrastate services in seven of our
initial nine target markets, and our applications for certificates to provide
intrastate services in the remaining two markets are pending. In most states,
intrastate tariffs are also required for various intrastate services, although
non-dominant carriers like us are not typically subject to price or rate of
return regulation for tariffed intrastate services. Actions by state
telecommunications regulation agencies could cause us to incur substantial
legal and administrative expenses.
It is possible that laws and regulations could be adopted which address
other matters that affect our business. We are unable to predict what laws or
regulations may be adopted in the future, to what extent existing laws and
regulations may be found applicable to our business, or the impact such new or
existing laws or regulations may have on our business. In addition, laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, thereby decreasing demand for our services.
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 traditional telephone companies, are subject to the
FCC's interconnection rules, including the rule requiring that traditional
telephone companies' data services be subject to unbundling and resale
requirements under the 1996 Telecom Act. However, several traditional telephone
companies recently have asked the FCC to reconsider certain aspects of its
decision in this regard, including the FCC's ruling that data services are
subject to the mandatory resale provisions of the 1996 Telecom Act. The FCC has
also initiated a proceeding to determine whether traditional telephone
companies will be able to avoid certain of their obligations by providing data
services through "truly" separate affiliates, whether the FCC will specifically
require traditional telephone companies 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
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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 traditional telephone companies
and on the competition that we will face from traditional telephone companies
cannot be predicted.
Local Government Regulation. In certain instances, we may be required to
obtain various permits and authorizations from municipalities in which we
operate our own facilities. The extent to which such actions by local
governments pose barriers to entry for competitive telecommunications companies
that may be preempted by the FCC is the subject of litigation. Although our
network consists primarily of unbundled network elements of the traditional
telephone companies, in certain instances we may deploy our own facilities and
therefore may need to obtain certain municipal permits or other authorizations.
The actions of municipal governments in imposing conditions on the grant of
permits or other authorizations or their failure to act in granting such
permits or other authorizations could have a material adverse effect on our
business, operating results and financial condition.
Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. There can be no assurance these methods will be
sufficient to protect our technology and intellectual property. We also
generally enter into confidentiality agreements with our employees and
consultants, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, or to develop similar
technology independently. Currently, we are the owner of three trademark
registration applications, but have not filed to register any copyrights. We
expect to seek registration of our copyrights in software and other
intellectual property to the extent possible. There is no assurance that we
will obtain any significant copyright protection for our systems which would
protect our intellectual property from competition. Currently, we have not
filed any patent applications. We intend to prepare applications and to seek
patent protection for our systems and services to the extent possible. There is
no assurance that we will obtain any patents or that any such patents would
protect our intellectual property from competition which could seek to design
around or invalidate such patents. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain
foreign countries, and the global nature of the Internet makes it virtually
impossible to control the ultimate destination of our proprietary information.
There can be no assurance that the steps we have taken will prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. In addition, some of our
information, including our competitive carrier status in individual states and
our interconnection agreements, is a matter of public record and can be readily
obtained by our competitors and potential competitors, possibly to our
detriment.
Employees
As of May 12, 1999, we employed 141 individuals in engineering, sales,
marketing, customer support and related activities and general and
administrative functions. None of these employees is
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represented by a labor union, and we consider our relations with our employees
to be satisfactory. We are not a party to any collective bargaining agreement.
Our ability to achieve our financial and operational objectives depends in
large part upon the continued service of our senior management and key
technical, sales, marketing and managerial personnel, and our continuing
ability to attract and retain highly qualified technical, sales, marketing and
managerial personnel. Competition for such qualified personnel is intense,
particularly in software development, network engineering and product
management, and we may be unable to identify, attract and retain such personnel
in the future.
Properties
Our headquarters are in Sterling, Virginia in facilities consisting of
approximately 15,000 square feet under a lease that will expire in August 2001
and approximately 62,000 square feet under a lease that will expire in 2004. We
have established branch offices in Philadelphia and Richmond and plan to
establish additional branch offices in Boston and New York to cover our nine
initial target markets.
We also lease collocation space in central offices from Bell Atlantic where
we operate or plan to operate under the terms of our interconnection agreements
with Bell Atlantic and regulations imposed by state telecommunications
regulators and the FCC. While the terms of these leases are perpetual, the
productive use of our collocation facilities is subject to the terms of our
interconnection agreements which have initial terms that expire in 2000 and
2001. See "--Relationship with Bell Atlantic." We will increase our collocation
space as we expand our network.
Legal Proceedings
We are not currently involved in any legal proceedings that we believe could
have a material adverse effect on our business, financial position, results of
operations or cash flows. We are, however, subject to state telecommunications
regulators, FCC and court decisions as they relate to the interpretation and
implementation of the 1996 Telecom Act, the Federal Communications Act of 1934,
as amended, various state telecommunications statutes and regulations, the
interpretation of competitive telecommunications company 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, operating
results and financial condition.
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MANAGEMENT
Our Directors and Executive Officers
The following table shows information about our directors and executive
officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jonathan P. Aust........... 41 President, Chief Executive Officer and Chairman
of the Board of Directors
Christopher J. Melnick..... 33 Chief Operating Officer and Director
Scott G. Yancey, Jr. ...... 46 Chief Financial Officer and Director
James A. Aust.............. 37 Vice President, Engineering
John J. Hackett............ 45 Vice President, Sales and Marketing
Brion B. Applegate......... 45 Director
Dennis R. Patrick.......... 47 Director
</TABLE>
Jonathan P. Aust has been our Chief Executive Officer since founding Network
Access Solutions, with his wife Longma, in December 1994. In August 1998, Mr.
Aust also became our President and Chairman of the Board of Directors. Mr. Aust
was the National Account Manager for AT&T Paradyne responsible for the Federal
Reserve System from October 1987 to December 1994. From June 1982 to October
1987, Mr. Aust held numerous engineer and sales positions at Paradyne
Corporation, a manufacturer of data communications equipment.
Christopher J. Melnick has been our Chief Operating Officer since joining us
in July 1998 and a Director since August 1998. Mr. Melnick was the Vice
President and General Manager for the Southeast Region of Level 3
Communications from March 1998 to July 1998. Mr. Melnick was the Vice President
of Telcom Access Sales for the Washington, Baltimore and Richmond markets of
WorldCom from December 1996 to March 1998. Mr. Melnick was the Vice President
of Sales for MFS Telcom from September 1995 to December 1996 and Sales Manager
for Washington, D.C. and Baltimore MFS Telcom from June 1994 to September 1995.
Mr. Melnick was a Senior Account Executive for MFS Telcom from April 1992 to
June 1994.
Scott G. Yancey, Jr. has been our Chief Financial Officer since joining us
in July 1998 and a Director since August 1998. Mr. Yancey was the Chief
Financial Officer and General Manager of the data division of Cable & Wireless
USA, a telecommunications service provider, from July 1982 to May 1998.
James A. Aust has been our Vice President of Engineering since joining us in
July 1995. Mr. Aust was a Consultant Systems Engineer for AT&T from May 1990 to
July 1994. In this role, Mr. Aust was responsible for network design and
implementation issues for key accounts and worked closely with hardware and
software developers at Bell Laboratories, defining products and feature sets to
fulfill customer networking requirements. Mr. Aust also served on the AT&T
Engineering Council which was responsible for formulating methods and
procedures for AT&T's System Engineering from August 1988 to May 1990.
John J. Hackett has been our Vice President, Sales and Marketing since
joining us in February 1999. Mr. Hackett was the Division President of MCI
WorldCom and MFS Telcom from September 1993 to February 1999 responsible for
Sales and Customer Support.
64
<PAGE>
Brion B. Applegate has been a Director of Network Access Solutions since
August 1998. Mr. Applegate is a co-founder and has been a Managing General
Partner of Spectrum Equity Investors since March 1993. Mr. Applegate is a
director of Tut Systems, Inc.
Dennis R. Patrick has been a Director of Network Access Solutions since
April 1999. Mr. Patrick is and has been the President and Chief Executive
Officer of Patrick Communications Inc. and Doeg Hill Ventures LLC since
November 1997. Patrick Communications provides analysis of investment
opportunities in the telecommunications and media industries to a select group
of clients. Doeg Hill Ventures is a closely held venture capital enterprise
focusing on early stage investments in the telecommunications industry. Mr.
Patrick was the founder and Chief Executive Officer of Milliwave LP, a local
exchange telephone company using digital radio frequencies to transmit data,
from June 1995 to January 1997. Milliwave was acquired by Winstar
Communications in January 1997 and Mr. Patrick served on the board of directors
of the combined entity until September 1997. From February 1990 to December
1995, Mr. Patrick served as Chief Executive Officer of Time Warner
Telecommunications, a division of Time Warner Entertainment. From November 1983
to August 1989, Mr. Patrick was a Commissioner and then Chairman of the FCC.
Our executive officers are elected by our board of directors and serve at
its discretion. Jonathan P. Aust and James A. Aust are brothers. There are no
other family relationships among our officers and directors.
Our certificate of incorporation and bylaws will provide for a classified
board of directors consisting of three classes of directors, each serving
staggered three-year terms. As a result, a portion of our board of directors
will be elected each year. To implement the classified structure, prior to
consummation of the offering, two of the nominees to the board will be elected
to a one-year term, two will be elected to two-year terms and one will be
elected to a three-year term. Thereafter, directors will be elected for three-
year terms. Messrs. Yancey and Melnick will be Class I directors with terms
expiring at the 2000 annual meeting of stockholders, Messrs. Applegate and
Patrick will be Class II directors, with terms expiring at the 2001 annual
meeting of stockholders, and Mr. Aust will be a Class III director, with a term
expiring at the 2002 annual meeting of stockholders.
Board Committees
Our board of directors established an audit committee in April 1999. The
audit committee consists of Messrs. Applegate and Patrick. The responsibilities
of the audit committee include:
. recommending to our board of directors the independent public
accountants to conduct the annual audit of our books and records;
. reviewing the proposed scope of the audit;
. approving the audit fees to be paid;
. reviewing accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
. reviewing and approving transactions between us and our directors,
officers and affiliates.
Our board of directors established a compensation committee in August 1998.
The compensation committee consists of Jonathan P. Aust, Mr. Applegate and Mr.
Patrick. The compensation committee determines the compensation of our
executive officers and administers our stock plans and
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<PAGE>
generally reviews our compensation plans to ensure that they meet our
objectives. Mr. Aust will not participate in decisions regarding his own
compensation.
Compensation Committee Interlocks and Insider Participation
During 1998, members of our compensation committee were Messrs. Jonathan P.
Aust and Applegate. None of our executive officers has served as a member of
the compensation committee or other committee serving an equivalent function of
any other entity, whose executive officers served as a director of or member of
our compensation committee. Mr. Aust is our President and Chief Executive
Officer. Mr. Applegate is the Managing General Partner of Spectrum Equity
Investors, which is a holder of our redeemable preferred stock and common
stock. See "Related Transactions and Relationships" for a description of
transaction between our company and Mr. Aust and our company and Spectrum
Equity Investors.
Directors' Compensation
Our directors have received no compensation for serving as directors. We
reimburse our directors for reasonable expenses they incur to attend board and
committee meetings. Our non-employee directors are eligible to receive grants
of options to acquire our common stock under our stock incentive plan. In April
1999, we granted an option to acquire 250,000 shares of our common stock at a
price of $6.67 per share to Mr. Patrick. After this offering, Mr. Patrick will
receive an option to purchase an additional number of shares of common stock at
an exercise price equal to 25% of the public offering price, such that the
aggregate difference between the public offering price and the exercise price
of the initial option and additional option granted to Mr. Patrick equals
$5.0 million. Mr. Patrick's options will vest immediately upon the completion
of this offering. Assuming an initial public offering price of $15.00 per
share, Mr. Patrick's additional option will be exercisable for an additional
259,259 shares of our common stock at an exercise price of $3.75 per share.
Executive Compensation
The following table summarizes the compensation paid to our chief executive
officer, executive officers and two other individuals whose total salary and
bonus exceeded $100,000 during 1998, whom we identify as "named executive
officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ------------
------------------------- Securities
Name and Principal Underlying All Other
Position Salary Bonus Other Options Compensation
<S> <C> <C> <C> <C> <C>
Jonathan P. Aust.......... $122,992 $135,000 -- -- --
President and Chief
Executive Officer
Christopher J. Melnick.... 101,624 -- -- 3,150,000 --
Chief Operating Officer
James A. Aust............. 99,750 25,000 -- 292,500 --
Vice President, Engi-
neering
William H. Farrer......... 65,000 113,500 $85,601 -- $84,500
Sales Manager
Gerald A. Buhl............ 33,750 2,500 119,171 -- --
Account Executive
</TABLE>
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<PAGE>
The salary paid to Mr. Melnick is from July 1998, the date of his
employment. The other compensation paid to Mr. Farrer represents $85,601 of
sales commissions and $84,500, representing the taxable compensation value of
585,000 shares of our common stock issued at $0.14 per share in exchange for
past services rendered. The other compensation paid to Mr. Buhl represents
sales commissions.
Options Grants in 1998
The following table shows information about our grants of options to
purchase our common stock made to the named executive officers during 1998:
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates Of Stock Price
Individual Grants Appreciation for Option Term (5)
------------------------------------------------------------ ---------------------------------------
Number of
Securities Percent of Based on
Underlying Total Options Market Price Initial
Options Granted to Exercise or at Grant Public
Granted Employees Base Price Date Expiration Offering
Name (1) in 1998 (2) ($/share) ($/share)(3) Date (4) 0% 5% 10% Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust.. -- --% $ -- $-- -- $ -- $ -- $ -- $ --
Christopher J. Melnick.. 3,150,000 44.4 0.09 0.22 7/23/08 409,500 845,324 1,513,964 46,966,500
James A. Aust..... 292,500 4.1 0.09 2.09 11/1/08 585,000 969,459 1,559,295 4,361,175
William H. Farrer.. 112,500 1.6 0.09 2.09 11/1/08 225,000 372,869 599,729 1,677,375
Gerald A. Buhl.... 18,000 0.3 0.09 2.09 11/1/08 36,000 59,659 95,957 268,380
</TABLE>
- ---------------------
(1) All options were granted under our 1998 stock incentive plan. All options
were incentive stock options which vest over time. Generally, these options
vest in quarterly installments over 36 to 42 months. All of these options
immediately vest in the event of a change in control of our company. If a
majority of our stockholders elect to sell all or part of our company, then
the option holder is required to sell an equivalent percentage of the
shares underlying the option.
(2) Based on options to purchase 7,090,875 shares of our common stock granted
to employees in 1998.
(3) We believe that these options were granted at an exercise price that
equaled the fair market value of the underlying common stock on the date of
grant. However, in preparing for this offering, we revisited the valuation
of these options and determined that they did have a compensatory element.
We now value these options on the basis of the price paid for our common
stock in August 1998, an independent valuation, a treasury stock
transaction with our founders, our general financial condition, discussions
with our underwriters and information relating to other companies in our
industry.
(4) The options have ten year terms, subject to earlier termination upon death,
disability or termination of employment.
(5) We recommend caution in interpreting the financial significance of the
figures representing the potential realizable value of the stock options.
They are calculated by multiplying the number of options granted by the
difference between a future hypothetical stock price and the option
exercise price and are shown pursuant to rules of the SEC. They assume the
fair value of common stock appreciates 5% or 10% each year, compounded
annually, for ten years (the term of each option). They are not intended to
forecast possible future appreciation, if any, of our stock price or to
establish a present value of options. Also, if appreciation does occur at
the 5% or 10% per year rate, the amounts shown would not be realized by the
recipients until the year 2008. Depending on inflation rates, these amounts
may be worth significantly less in 2008, in real terms, than their value
today.
None of the named executive officers exercised any stock options during
1998.
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<PAGE>
Year-End Option Values
The following table shows information about unexercised options held by the
named executive officers at December 31, 1998:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options at Options at
December 31, 1998 December 31, 1998(1)
---------------------------- ----------------------------
Exercisable Unexercisable(2) Exercisable Unexercisable(2)
<S> <C> <C> <C> <C>
Jonathan P. Aust........ -- -- -- --
Christopher J. Melnick.. 262,500 2,887,500 $3,913,875 $43,052,625
James A. Aust........... -- 292,500 -- 4,361,175
William H. Farrer....... -- 112,500 -- 1,677,375
Gerald A. Buhl.......... -- 18,000 -- 268,380
</TABLE>
- ---------------------
(1) Calculated on the basis of $15.00 per share, the assumed initial public
offering price of our common stock, less the exercise price payable for
those shares, multiplied by the number of shares underlying the option.
(2) Upon award, the options are immediately exercisable into shares of common
stock which have certain transfer, vesting and forfeiture restrictions.
Upon exercise, unvested common stock cannot be transferred and, until
vested, is subject to repurchase by us in the event the named executive
officer terminates his employment.
No compensation intended to serve as incentive for performance to occur over
a period longer than one year was paid pursuant to a long-term incentive plan
during the last year to any of the executive officers named above.
Employment Arrangements
We have entered into an employment agreement with each of our executive
officers. Each agreement has an initial term of four years, subject to earlier
termination upon 30 days prior notice. The term of each agreement is
automatically extended for additional one year terms unless we or the executive
elects to terminate the agreement within 30 days before the end of the current
term. Under these agreements, these executives receive an initial annual base
salary that will be increased by at least 5% each year, based upon performance
objectives set by our board of directors. These executives also receive an
annual bonus of up to 20% of the executive's then current salary. The bonus is
payable in cash, stock or a combination of both at the election of our board of
directors. The executives have received options to acquire shares of our common
stock which vest in quarterly installments over either three or four years from
the date of grant. The following table shows information about the compensation
arrangements we have with our executive officers:
<TABLE>
<CAPTION>
Options Granted
Current Annual Base Salary Maximum Annual Bonus (Shares)
<S> <C> <C> <C>
Jonathan P. Aust........ $240,000 20% --
Christopher J. Melnick.. 200,000 20 3,150,000
Scott G. Yancey, Jr..... 200,000 20 2,250,000
John J. Hackett......... 175,000 20 1,350,000
James A. Aust........... 125,000 20 292,500
</TABLE>
Our board of directors has approved an increase in the annual base salary of
Jonathan P. Aust to $450,000, effective on June 1, 1999. Mr. Aust's annual
bonus and any salary increase will be determined by our compensation committee
on an annual basis.
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<PAGE>
If, during the term of one of these employment agreements, we terminate the
executive's employment without cause or the executive terminates his employment
for good reason, then the executive will be entitled to receive his base
salary, bonus and all employee benefits for a period of one year from the date
of the termination of employment.
Under the terms of these agreements, these executives have agreed to
preserve the confidentiality and the proprietary nature of all information
relating to our business during the term of the agreement and after the
agreement ends indefinitely. In addition, each of these executives has agreed
to non-competition and non-solicitation provisions that will be in effect
during the term of his agreement and for one year after the agreement ends.
We have no employment agreements with Messrs. Farrer or Buhl. These
individuals receive annual salaries of $65,000 and $33,750, respectively. They
both receive bonuses based upon the achievement of sales milestones established
by our board of directors and commissions based on the sales they generate.
We require all of our employees to sign agreements which prohibit the
employee from directly or indirectly competing with us while they are employed
by us and generally for a period of one year. We require all of our employees
to sign agreements which prohibit the disclosure of our confidential or
proprietary information.
1998 Stock Incentive Plan
Our stock incentive plan authorizes the grant of:
. stock options;
. stock appreciation rights;
. stock awards;
. phantom stock; and
. performance awards.
The compensation committee of our board of directors administers our stock
incentive plan. The committee has sole power and authority, consistent with the
provisions of our stock incentive plan, to determine which eligible
participants will receive awards, the form of the awards and the number of
shares of our common stock covered by each award. The committee may impose
terms, limits, restrictions and conditions upon awards, and may modify, amend,
extend or renew awards, to accelerate or change the exercise timing of awards
or to waive any restrictions or conditions to an award.
The maximum number of shares available for issuance under our stock
incentive plan is 11,250,000. As of April 30, 1999, we had issued no shares of
our common stock in connection with awards granted, we had granted or committed
to grant awards with respect to 9,666,084 shares of our common stock and
1,583,916 shares remained available for us to grant under our stock incentive
plan.
Stock Options. Our stock incentive plan permits the granting of options to
purchase shares of our common stock intended to qualify as incentive stock
options under the Internal Revenue Code and stock options that do not qualify
as incentive options. The option exercise price of each option will be
determined by the committee. The term of each option will be fixed by the
committee. The
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<PAGE>
committee will determine at what time or times each option may be exercised
and, the period of time, if any, after retirement, death, disability or
termination of employment during which options may be exercised.
Stock Appreciation Rights. The committee may grant a right to receive a
number of shares or, in the discretion of the committee, an amount in cash or a
combination of shares and cash, based on the increase in the fair market value
of the shares underlying the right during a stated period specified by the
committee.
Stock Awards. The committee may award shares of our common stock to
participants at no cost or for a purchase price. These stock awards may be
subject to restrictions or may be free from any restrictions under our stock
incentive plan. The committee shall determine the applicable restrictions. The
purchase price the shares of our common stock will be determined by the
committee.
Phantom Stock. The committee may grant stock equivalent rights, or phantom
stock, which entitle the recipient to receive credits which are ultimately
payable in the form of cash, shares of our common stock or a combination of
both. Phantom stock does not entitle the holder to any rights as a stockholder.
Performance Awards. The committee may grant performance awards to
participants entitling the participants to receive cash, shares of our common
stock, or a combination of both, upon the achievement of performance goals and
other conditions determined by the committee. The performance goals may be
based on our operating income, or on one or more other business criteria
selected by the committee.
RELATED TRANSACTIONS AND RELATIONSHIPS
In August 1998 we entered into a Series A Preferred Stock Purchase Agreement
with Spectrum Equity Investors II, L.P., FBR Technology Venture Partners, LLC
and other investors and issued a total of 10,000,000 shares of mandatorily
redeemable preferred stock and 22,050,000 shares of common stock in exchange
for $10,004,900. Pursuant to this agreement, we issued to Spectrum Equity
Investors II, L.P. and its affiliates 8,470,000 shares of our preferred stock
and 18,676,350 shares of our common stock in exchange for an aggregate purchase
price of $8,474,150. Spectrum now beneficially owns 51.9% of our common stock.
Brion B. Applegate, a Managing General Partner of Spectrum, is a member of our
board of directors. We also issued to FBR Technology Venture Partners, LLC
1,500,000 shares of our Series A Preferred Stock and 3,307,500 shares of our
common stock in exchange for an aggregate purchase price of $1,500,735. FBR now
owns 9.2% of our common stock.
In March 1999, we amended our certificate of incorporation to modify the
terms of our outstanding preferred stock. The terms of our preferred stock now
provide that upon completing this offering:
. 50% of our redeemable preferred stock outstanding will be cancelled and
cease to exist without compensation or recourse;
. the remaining shares of preferred stock will be automatically converted
into 333,334 shares of our common stock, which is based on the preferred
stock aggregate per share stated value of $5,000,000 divided by the
assumed public offering price of $15.00 per share; and
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<PAGE>
. no dividends on the preferred stock whether accrued or unaccrued will be
payable.
On March 31, 1999, we entered into a Note Purchase Agreement with Spectrum
and FBR. Pursuant to this agreement, Spectrum purchased a convertible note in
the principal amount of $4,250,000 and FBR purchased a convertible note in the
principal amount of $750,000. The notes bear interest at a rate of 8% per
annum. The principal of and interest on the notes will be converted into shares
of our common stock upon our completion of an initial public offering with an
aggregate offering price to the public of not less than $25,000,000 based upon
a pre-money valuation of our company of at least $200,000,000.
The notes will convert into an aggregate of 333,333 shares of our common
stock at the closing of the offering. Pursuant to our amended Note Purchase
Agreement, Spectrum purchased an additional convertible note in the principal
amount of $4,250,000 and FBR purchased an additional convertible note in the
principal amount of $750,000 on May 17, 1999. These notes will convert into an
aggregate of 333,333 shares of our common stock at the closing of the offering.
These investors have registration rights for the shares of common stock they
hold but have agreed not to sell any shares of our common stock for 180 days
after this offering. See "Description of our Capital Stock--Registration
Rights" and "Shares Eligible for Future Sale--Lock-up Agreements."
Following the sale of our preferred stock in August 1998, we repurchased
some of the shares of our common stock held by James A. Aust, Jonathan P. Aust,
Longma M. Aust and Stephen C. Aust. We repurchased 1,350,000 shares of our
common stock for an aggregate purchase price of $300,000 from James A. Aust. We
repurchased 1,953,950 shares of our common stock for an aggregate purchase
price of $434,211 from Jonathan P. Aust. We repurchased 3,986,051 shares of our
common stock for an aggregate purchase price of $885,789 from Longma M. Aust.
We repurchased 1,260,000 shares of our common stock for an aggregate purchase
price of $280,000 from Stephen C. Aust. Jonathan P. Aust and Longma M. Aust are
husband and wife. James A. Aust, Jonathan P. Aust and Stephen C. Aust are
brothers.
In July 1998, we issued an option to purchase 2,250,000 shares of our common
stock at an exercise price of $0.09 per share to Mr. Yancey, our Chief
Financial Officer. In August 1998, we issued 585,000 shares of our common stock
to Mr. Farrer, one of our sales managers, in exchange for past services
rendered valued at a price of $0.22 per share. In March 1999, we issued an
option to purchase 1,350,000 shares of our common stock at an exercise price of
$0.09 per share to Mr. Hackett, our Vice-President, Sales and Marketing. We
have also granted options to acquire shares of our common stock to Messrs.
Patrick, James A. Aust, Buhl, Farrer and Melnick that are described under
"Management--Directors' Compensation" and "Management--Executive Compensation."
We have entered into employment agreements with each of our senior executive
officers. For details of these agreements, see "Management--Employment
Arrangements."
We believe that the transactions discussed above were made on terms no less
favorable to us than would have been obtained from unaffiliated third parties.
We have adopted a policy that requires all future transactions between us and
our officers, directors and affiliates to be on terms no less favorable than
could be obtained from unrelated third parties. These transactions must be
approved by a majority of the disinterested members of our board of directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of April 30, 1999 and that will be owned after
this offering by:
. all persons known to us to beneficially own more that 5% of our common
stock;
. each director and named executive officer; and
. all directors and executive officers as a group.
The following assumes the conversion of our outstanding preferred stock and
the conversion of our outstanding convertible notes at the closing of this
offering. An asterisk indicates ownership of less than 1%.
As of April 30, 1999, there were 36,000,000 shares of our common stock
outstanding. After this offering, 44,500,000 shares of our common stock will be
outstanding or 45,291,667 shares if the underwriters exercise their over-
allotment option in full.
<TABLE>
<CAPTION>
Before Offering After Offering
-------------------- --------------------
Shares Shares
Beneficially Beneficially
Name of Beneficial Owner Owned (1) Percent Owned (1) Percent
- ------------------------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Jonathan P. Aust (2)................. 9,387,000 26.1% 9,387,000 21.1%
Christopher J. Melnick (3)........... 787,500 2.1 787,500 1.7
James A. Aust (4).................... 1,836,563 5.1 1,836,563 4.1
William H. Farrer (5)................ 599,063 1.7 599,063 1.3
Gerald A. Buhl (6)................... 2,250 * 2,250 *
Brion B. Applegate (7) .............. 18,676,350 51.9 19,525,349 43.9
245 Lytton Avenue
Palo Alto, California 94301
Dennis R. Patrick (8)................ 250,000 * 509,259 1.1
Scott G. Yancey, Jr. (9)............. 562,500 1.5 562,500 1.2
Spectrum Equity Investors II, L.P.
(7) ................................ 18,676,350 51.9 19,525,349 43.9
245 Lytton Avenue
Palo Alto, California 94301
FBR Technology Venture Partners, LP.. 3,307,500 9.2 3,457,500 7.8
1001 19th Street
Arlington, Virginia 22209
Stephen C. Aust (10) ................ 1,953,000 5.4 1,953,000 4.4
All named executive officers and di-
rectors as a
group (8 persons) (11).............. 32,101,226 85.3 33,209,484 71.6
</TABLE>
- ---------------------
(1) The number of shares beneficially owned includes outstanding shares of our
common stock held by that person and shares of our common stock issuable
upon exercise of stock options exercisable within 60 days of April 30,
1999. The address of Messrs. Jonathan P. Aust, James A. Aust, Stephen C.
Aust, Buhl, Farrer, Melnick, Patrick and Yancey is 100 Carpenter Drive,
Sterling, Virginia 20164.
(2) Includes 374,999 shares held by the Jonathan P. Aust Grantor Retained
Annuity Trust, 5,962,660 shares held by Longma M. Aust, Mr. Aust's wife,
and 375,001 shares held by the Longma M. Aust Grantor Retained Annuity
Trust.
(3) Includes 787,500 shares issuable upon exercise of options to acquire our
common stock.
(4) Includes 36,563 shares issuable upon exercise of options to acquire our
common stock and 162,000 shares held by the James Arthur Aust Grantor
Retained Annuity Trust.
(5) Includes 14,603 shares issuable upon exercise of options to acquire our
common stock.
(6) Includes 2,250 shares issuable upon exercise of options to acquire our
common stock.
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<PAGE>
(7) Spectrum Equity Investors II, L.P. is under common control with SEA 1998
II, L.P. and, therefore, beneficial ownership of the shares of our common
stock owned by SEA is attributed to Spectrum. Mr. Applegate is a Managing
General Partner of Spectrum and, therefore, beneficial ownership of the
shares of our common stock owned by Spectrum is attributed to
Mr. Applegate.
(8) Includes 250,000 shares issuable upon exercise of options to acquire our
common stock and 259,259 shares issuable upon exercise of options to be
granted upon the closing of this offering.
(9) Includes 562,500 shares issuable upon exercise of options to acquire our
common stock.
(10) Includes 108,000 shares held by the Stephen C. Aust Grantor Retained
Annuity Trust.
(11) Includes 1,653,416 shares issuable upon exercise of options to acquire our
common stock that are held before the offering by Messrs. James A. Aust,
Buhl, Farrer, Melnick, Patrick and Yancey and an additional 259,259 shares
issuable upon exercise of options to be granted to Mr. Patrick upon the
closing of the offering.
Messrs. Jonathan P. Aust, James A. Aust, Stephen C. Aust and Spectrum Equity
Investors have granted the underwriters an option to purchase 133,333, 16,667,
16,667, and 166,667 shares of common stock, respectively, as part of the
underwriters' over-allotment option. If this option is exercised in full, after
this offering these stockholders would have the following beneficial ownership
interests:
<TABLE>
<CAPTION>
Before Offering After Offering
-------------------- --------------------
Shares Shares
Beneficially Beneficially
Name of Beneficial Owner Owned Percent Owned Percent
- ------------------------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Jonathan P. Aust...................... 9,387,000 26.2 9,253,667 20.8%
James A. Aust......................... 1,836,563 5.2 1,819,896 4.1
Stephen C. Aust....................... 1,953,000 5.4 1,936,333 4.4
Spectrum Equity Investors............. 18,676,350 51.9 19,358,682 43.5
</TABLE>
Jonathan P. Aust is our President and Chief Executive Officer. James A. Aust
is our Vice President, Engineering. Jonathan P. Aust, James A. Aust and Stephen
C. Aust are brothers. Mr. Applegate is one of our directors and the Managing
General Partner of Spectrum Equity Investors.
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<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common stock,
par value $0.001 per share, and 15,000,000 shares of preferred stock, par value
$0.001 per share. As of April 30, 1999, there were 36,000,000 shares of our
common stock outstanding, held by 13 holders of record. As of April 30, 1999,
there were 10,000,000 shares of our preferred stock, stated value $1.00,
outstanding, held of record by four holders of record. After this offering, we
will not have any outstanding shares of preferred stock.
After this offering, we will have outstanding 44,500,000 shares of common
stock if the underwriters do not exercise their over-allotment option, or
45,291,667 shares of common stock if the underwriters exercise their over-
allotment option in full.
The following is a description of our capital stock.
Common Stock
We are authorized to issue 150,000,000 shares of common stock. Each
stockholder of record will be entitled to one vote for each outstanding share
of our common stock owned by that stockholder on every matter properly
submitted to the stockholders for their vote. After satisfaction of the
dividend rights of holders of preferred stock, holders of common stock are
entitled to any dividend declared by the board of directors out of funds
legally available for this purpose. After the payment of liquidation
preferences to holders of any outstanding preferred stock, holders of our
common stock are entitled to receive, on a pro rata basis, all our remaining
assets available for distribution to the stockholders in the event of our
liquidation, dissolution, or winding up. Holders of our common stock do not
have any preemptive right to become subscribers or purchasers of additional
shares of any class of our capital stock. In the opinion of our counsel, Piper
& Marbury L.L.P., the shares of common stock offered in this offering will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences
and privileges of holders of our common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock that we may designate and issue in the future.
Preferred Stock
At April 30, 1999, we had outstanding 10,000,000 shares of our preferred
stock, stated value $1.00. The holders of our outstanding preferred stock are
entitled to receive dividends at a rate of 8% of the stated value per year.
Upon the closing of our public offering, $5.0 million of our preferred stock
will be converted into 333,334 shares of our common stock at the public
offering price with the remaining shares of preferred stock and all accrued
dividends cancelled without additional payment to the holders of the preferred
stock.
Our certificate of incorporation will allow us to issue without stockholder
approval preferred stock having rights senior to those of our common stock.
After this offering, no shares of preferred stock will be outstanding. Our
board of directors will be authorized, without further stockholder approval, to
issue up to 15,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, and to fix the number of shares constituting any
series and the designations of these series.
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<PAGE>
Our issuance of preferred stock may have the effect of delaying or
preventing a change in control. Our issuance of preferred stock could decrease
the amount of earnings and assets available for distribution to the holders of
our common stock or could adversely affect the rights and powers, including
voting rights, of the holders of our common stock. The issuance of preferred
stock could have the effect of decreasing the market price of our common stock.
Registration Rights
Holders of an aggregate of 23,050,000 shares of our common stock can require
us to register the sale of their shares under the Securities Act. Subject to
limitations and the lock-up agreements with the underwriters, we must register
the sale of these shares if at any time after six months following this
offering, the holders of at least 4,610,000 of these shares request
registration. We are not required to effect more than three of these requested
registrations. Subject to limitations, these holders may require us to file an
unlimited number of registration statements on Form S-3 when we are eligible to
use Form S-3, generally one year after this offering. If we propose to register
our securities under the Securities Act after this offering, these stockholders
and Mr. Patrick will be entitled to notice of the registration and to include
their shares in the registration provided that the underwriters for the
proposed offering will have the right to limit the number of shares included in
the registration. We must pay all expenses in connection with these
registrations, other than underwriters' discounts and commissions.
Limitation Of Liability
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption
of stock; or
. for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our board of directors. The indemnification provided under our
certificate of incorporation and bylaws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided
that the payment of these expenses incurred by a director or officer in advance
of the final disposition of a proceeding may be made only upon delivery to us
of an undertaking by or on behalf of the director or officer to repay all
amounts so paid in advance if it is ultimately determined that the director or
officer is not entitled to be indemnified. If we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
claimant may at any time thereafter bring an action to recover the unpaid
amount of the claim
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<PAGE>
and, if successful the director or officer will be entitled to be paid the
expense of prosecuting the action to recover these unpaid amounts.
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling
one of these capacities, and related expenses, whether or not we would have the
power to indemnify the person against the claim under the provisions of the
Delaware General Corporation Law. We intend to purchase director and officer
liability insurance on behalf of our directors and officers.
Possible Anti-Takeover Effects
Our certificate of incorporation and bylaws will contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors. In addition, provisions of Delaware law may hinder or delay
an attempted takeover of our company other than through negotiation with our
board of directors. These provisions could have the effect of discouraging
attempts to acquire us or remove incumbent management even if some or a
majority of our stockholders believe this action to be in their best interest,
including attempts that might result in the stockholders' receiving a premium
over the market price for the shares of our common stock held by the
stockholders.
Classified Board of Directors; Removal, Vacancies. Our certificate of
incorporation will provide that our board of directors will be divided into
three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
stockholders to change the composition of the board of directors in a
relatively short period of time. Our certificate of incorporation will provide
that directors may be removed only for cause. In addition, vacancies and newly
created directorships resulting from any increase in the size of our board of
directors may be filled only by the affirmative vote of a majority of the
directors then in office, a quorum, or by a sole remaining director. These
provisions would prevent stockholders from removing incumbent directors without
cause and filling the resulting vacancies with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our bylaws will establish an advance notice procedure
with regard to the nomination, other than by the board of directors, of
candidates for election to our board of directors and with regard to certain
matters to be brought before an annual meeting of our stockholders. For
nominations and other business to be brought properly before an annual meeting
by a stockholder, the stockholder must deliver notice to us not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting. Separate provisions based on public notice by us specify
how this advance notice requirement operates if the date of the annual meeting
is advanced by more than 30 days or delayed by more than 60 days from the
anniversary date. The stockholder's notice must set forth specified information
regarding the stockholder and its holdings, as well as certain background
information regarding any director nominee, together with the person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected, and a brief description of any business desired to be
brought before the meeting, the reasons for conducting the business at the
meeting and any material interest of the stockholder in the business proposed.
In the case of a special meeting of stockholders called for the purpose of
electing directors,
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<PAGE>
nominations by a stockholder may be made only by delivery to us, no later than
10 days after the day on which public announcement of the special meeting is
made, of a notice that complies with the above requirements. Although our
bylaws do not give our board of directors any power to approve or disapprove
stockholder nominations for the election of directors or any other business
desired by stockholders to be conducted at an annual meeting, our bylaws:
. may have the effect of precluding a nomination for the election of
directors or precluding the conduct of certain business at a particular
annual meeting if the proper procedures are not followed; or
. may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of Network Access Solutions, even if the conduct of this
solicitation or such attempt might be beneficial to Network Access
Solutions and our stockholders.
Special Stockholders' Meetings. Our certificate of incorporation and bylaws
will provide that, special meetings of stockholders, unless otherwise
prescribed by statute, may be called only:
. by the board of directors or by our chairman or president; or
. by the holders of at least majority of our securities outstanding and
entitled to vote generally in the election of directors.
Section 203 of Delaware Law. In addition to these provisions of our
certificate of incorporation and bylaws, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. These
provisions could have the effect of delaying, deferring or preventing a change
in control of our company or reducing the price that certain investors might be
willing to pay in the future for shares of our common stock.
Transfer Agent and Registrar
American Stock Transfer & Trust Company is the transfer agent and registrar
for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 44,500,000 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 45,291,667 shares of common stock outstanding. All of the shares
we sell in this offering will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares purchased
by our affiliates, as that term is defined in Rule 144, may generally only be
sold in compliance with the limitations of Rule 144 described below.
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<PAGE>
The remaining shares of common stock outstanding after this offering will
not be freely tradeable under the terms of the Securities Act. Transfer of
37,716,846 shares will be further limited by lock-up agreements as described
below.
Before this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices and could impair our future ability
to raise capital through the sale of our equity securities.
Rule 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding for at least one year is entitled to sell, within any
three-month period, a number of these restricted shares that does not exceed
the greater of:
. one percent of the then outstanding shares of our common stock, or
approximately shares immediately after this offering; or
. the average weekly trading volume in our common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
to sell shares of common stock which are not restricted securities.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The
one- and two-year holding periods described above do not begin to run until the
full purchase price is paid by the person acquiring the restricted shares from
us or an affiliate of ours.
Registration Rights
We have entered into an investor rights agreement with some of our
stockholders, who will own an aggregate of 23,050,000 shares of our common
stock after this offering. These stockholders and Mr. Patrick have certain
registration rights. See "Description of our Capital Stock--Registration
Rights."
Common Stock and Options Issuable under our Stock Incentive Plan
We intend to file one or more registration statements under the Securities
Act within 180 days after this offering to register up to 11,250,000 shares of
our common stock underlying outstanding stock options or reserved for issuance
under our 1998 stock incentive plan. We expect these registration statements
will become effective upon filing, and shares covered by these registration
statements will be eligible for sale in the public market immediately after the
effective dates of these registration statements, subject to the lock-up
agreements with the underwriters.
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<PAGE>
Lock-up Agreements
Other than with respect to up to 333,333 shares to be sold by selling
stockholders if the underwriters exercise their over-allotment option, our
officers, directors, certain of our other stockholders, SBC and Telefonos de
Mexico, who will hold an aggregate of approximately 37,892,772 shares of common
stock after this offering, have agreed that they will not, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation, offer,
sell, pledge or otherwise dispose of any shares of our capital stock or any
securities convertible into or exercisable or exchangeable for, or any rights
to acquire or purchase, any of our capital stock or publicly announce an
intention to effect any of these transactions, for a period of 180 days after
the date of the underwriting agreement, other than shares of common stock
transferred in connection with a pledge agreement or disposed of as bona fide
gifts approved by Donaldson, Lufkin & Jenrette Securities Corporation. The
stockholders who are parties to our investor rights agreement are required by
the terms of the investor rights agreement to enter into these lock-up
agreements. Donaldson, Lufkin & Jenrette Securities Corporation has advised us
that it has no current intention to consent to any disposition of shares
covered by these lock-up agreements, but will consider each request for its
consent at the time and under the circumstances of the request.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc.,
J.P. Morgan Securities Inc. and DLJdirect Inc. have severally agreed to
purchase the number of shares of our common stock shown opposite their names
below:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Underwriters:
Donaldson, Lufkin & Jenrette Securities Corporation...........
Bear, Stearns & Co. Inc. .....................................
J.P. Morgan Securities Inc. ..................................
DLJdirect Inc. ...............................................
---------
Total......................................................... 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations, the receipt of a
"comfort letter" from our accountants, the listing of our common stock on the
Nasdaq National Market and no occurrence of an event that would have a material
adverse effect on us. The underwriters are obligated to purchase and accept
delivery of all the shares, other than those covered by the over-allotment
option described below, if they purchase any of our shares.
The underwriters propose to initially offer some of our shares directly to
the public at the initial public offering price shown on the cover page of this
prospectus and some of the shares to dealers at the initial public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to other dealers. After the initial offering of the shares to
the public, the representatives of the underwriters may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees we and the selling
stockholders will pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of our common stock.
<TABLE>
<CAPTION>
Paid by Paid by
Network Access Solutions Selling Stockholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
<S> <C> <C> <C> <C>
Per share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
We will pay the offering expenses, estimated to be $1,000,000.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 791,667 additional shares and
certain stockholders have granted to the underwriters an option, exercisable
for 30 days from the date of this prospectus, to purchase up to 333,333
additional shares, all at the initial public offering price less the
underwriting fees. The
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<PAGE>
underwriters may exercise their option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise their option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitment.
We and the selling stockholders have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act or to contribute to payments that the underwriters may be required to make
in respect of those liabilities.
Network Access Solutions, our executive officers, directors and stockholders
have agreed that, other than with respect to sales by the selling stockholders
upon exercise of the underwriters' over-allotment option, for a period of 180
days from the date of this prospectus, we and they will not, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation do
either of the following:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of our common
stock.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise.We may, however, issue stock
options under our stock incentive plan and issue shares of our common stock in
connection with the exercise of any options or warrants outstanding on the date
of the underwriting agreement.
At our request, the underwriters have reserved up to 5% of the shares
offered by this prospectus for sale at the initial public offering price to our
employees, officers, directors and other individuals associated with us and
members of their families. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase or confirm for purchase, orally or in writing, such reserved shares.
Any reserved shares not purchased or confirmed for purchase will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
At our request, the underwriters have reserved up to $6.0 million of common
stock to be issued by us and offered for sale to SBC Communications at the
initial public offering price, less any underwriting discount or commission
applicable to shares sold to the public. In addition, at our request, the
underwriters have reserved up to $4.0 million of common stock to be issued by
us and offered for sale to Telefonos de Mexico at the initial public offering
price, less any underwriting discount or commission applicable to shares sold
to the public. Each of SBC and Telefonos de Mexico have expressed to us their
intention to purchase these shares, but are under no obligation to do so. We
have assumed in this prospectus that we will sell 430,108 shares of our common
stock to SBC and 286,738 shares of our common stock to Telefonos de Mexico,
based upon an assumed price of $13.95 per share, our assumed initial public
offering price of $15.00 per share less any underwriting discount or commission
applicable to share sold to the public, with aggregate net proceeds to us of
$10.0 million. The sale of shares of common stock to SBC and Telefonos de
Mexico will be made on the same terms and conditions available to the public,
except that:
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<PAGE>
. they will purchase the shares at the initial public offering price less
any underwriting discount or commission applicable to shares sold to the
public;
. they have agreed not to sell any shares of common stock that they may
acquire in the offering for a period of 180 days after this offering;
. they have each agreed not to acquire more than 10% of our voting stock
for a period of 270 days after this offering; and
. no underwriting discount or commissions will be paid on the shares sold
to SBC or Telefonos de Mexico.
Application has been made to list the common stock on the Nasdaq National
Market under the symbol "NASC." In order to meet the requirements for listing
the common stock on the Nasdaq National Market, the underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial
owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
Stabilization
In connection with this offering, any of the underwriters may decide to
engage in transactions that stabilize, maintain or otherwise affect the price
of our common stock. Specifically, the underwriters may overallot this
offering, creating a syndicate short position. In addition, the underwriters
may bid for and purchase shares of our common stock in the open market to cover
syndicate short positions or to stabilize the price of our common stock. These
activities may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
Pricing of this Offering
Prior to this offering, there has been no established public market for our
common stock. The initial public offering price for the shares of our common
stock offered by this prospectus will be determined by negotiation between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. our history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
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. the recent market prices of securities of generally comparable
companies; and
. the general conditions of the securities market at the time of the
offering.
VALIDITY OF THE SHARES
Piper & Marbury L.L.P., Washington, D.C., will pass upon the validity of the
shares of common stock on our behalf. Paul, Hastings, Janofsky & Walker LLP,
New York, New York, will pass upon legal matters for the underwriters.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information which we believe is material to
an investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about
Network Access Solutions, our common stock and this offering, including the
full texts of the exhibits, some of which have been summarized in this
prospectus. After this offering, we will be subject to the informational
requirements of the Securities Exchange Act. We will be required to file annual
and quarterly reports, proxy statements and other information with the SEC.
You can inspect and copy our registration statement, reports and other
information at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information about the operation of the
Public Reference Room by calling the SEC at 1-800-SEC- 0330. In addition, the
SEC maintains an Internet site that contains our registration statement,
reports and other information. The address of the SEC's Internet site is
"http://www.sec.gov."
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants. You may obtain copies of our
annual and quarterly reports and proxy statements from our Web site at www.nas-
corp.com.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999
(unaudited)............................................................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998 and for the three months ended March 31, 1998 (unaudited) and 1999
(unaudited)............................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998 and for the three months ended March 31,
1999 (unaudited) ......................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and for the three months ended March 31, 1998 (unaudited) and 1999
(unaudited) .............................................................. F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
Network Access Solutions Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Network Access
Solutions Corporation (the Company) at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period 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
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 18, 1999, except for the
second paragraph of Note 12 for
which the date is May 11, 1999,
the third and fourth paragraphs
for which the date is April 1,
1999 and the fifth, sixth and
seventh paragraphs for which the
dates are May 4, May 6 and May 7,
1999, respectively.
F-2
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
---------------------
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
---------------------- -----------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents................ $ 713,246 $ 5,518,117 $ 617,671
Accounts receivable, net of allowance
for doubtful accounts................... 765,325 1,806,791 2,715,741
Prepaid and other current assets......... -- 105,693 426,242
Inventory................................ 47,547 59,233 123,360
---------- ----------- -----------
Total current assets................... 1,526,118 7,489,834 3,883,014
Property and equipment, net............... 140,177 5,030,793 10,093,757
Deferred offering costs................... -- -- 246,314
Deposit................................... -- 185,000 185,000
Income tax receivable..................... -- 100,865 100,865
Deferred tax asset........................ 198,732 121,586 121,586
---------- ----------- -----------
Total assets........................... $1,865,027 $12,928,078 $14,630,536
========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... $ 796,945 $ 2,525,102 $ 5,830,303
Accrued expenses......................... 92,502 750,308 858,460
Current portion of deferred compensation
liability............................... -- 333,333 333,333
Current portion of capital lease
obligations............................. -- 328,982 406,025
Note payable............................. 93,348 -- --
Income tax payable....................... 132,064 -- --
Other current liabilities................ -- 67,201 62,507
Deferred revenue......................... -- -- 146,029
---------- ----------- -----------
Total current liabilities.............. 1,114,859 4,004,926 7,636,657
Long term portion of capital lease
obligations............................. -- 1,184,156 1,212,132
Note payable............................. -- 1,000,000 1,000,000
Long term portion of deferred
compensation liability.................. 500,000 166,667 166,667
---------- ----------- -----------
Total liabilities...................... 1,614,859 6,355,749 10,015,456
---------- ----------- -----------
Commitments and contingencies
Series A mandatorily redeemable preferred
stock, $.001 par value, 10,000,000
shares authorized, issued and outstand-
ing (liquidation preference $10,519,452
(unaudited)), as of December 31, 1998
and March 31, 1999 (unaudited).......... -- 5,640,651 5,987,554
---------- ----------- -----------
Stockholders' equity (deficit):
Common stock, $.001 par value,
150,000,000 shares authorized,
21,915,000, 44,550,000 and 44,550,000
(unaudited) shares issued as of Decem-
ber 31, 1997, December 31, 1998 and
March 31, 1999, respectively............ 21,915 44,550 44,550
Additional paid-in capital............... -- 8,097,566 19,694,745
Deferred compensation on employee stock
options................................. -- (3,462,753) (14,866,366)
Retained earnings (deficit).............. 228,253 (1,847,685) (4,345,403)
Less treasury stock, at cost, 8,550,000
shares as of December 31, 1998 and
March 31, 1999 (unaudited).............. -- (1,900,000) (1,900,000)
---------- ----------- -----------
Total stockholders' equity (deficit)... 250,168 931,678 (1,372,474)
---------- ----------- -----------
Total liabilities, mandatorily redeem-
able preferred stock and
stockholders' equity (deficit)........ $1,865,027 $12,928,078 $14,630,536
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF OPERATIONS
---------------------
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales......... $14,368,264 $8,149,680 $ 9,899,623 $2,194,291 $ 3,955,110
Consulting services... 114,119 791,280 1,428,531 317,360 702,008
Network services...... -- 3,856 310,921 40,840 119,049
----------- ---------- ----------- ---------- -----------
Total revenue 14,482,383 8,944,816 11,639,075 2,552,491 4,776,167
----------- ---------- ----------- ---------- -----------
Cost of revenue:
Product sales......... 11,975,534 7,180,064 8,639,337 1,857,540 3,535,369
Consulting services... 90,851 230,565 761,315 159,642 299,328
Network services...... -- 2,406 40,738 1,335 170,846
----------- ---------- ----------- ---------- -----------
Total cost of
revenue 12,066,385 7,413,035 9,441,390 2,018,517 4,005,543
----------- ---------- ----------- ---------- -----------
Gross profit........... 2,415,998 1,531,781 2,197,685 533,974 770,624
Operating expenses:
Selling, general and
administrative ...... 2,255,231 1,436,513 4,017,057 537,841 2,532,519
Amortization of
deferred compensation
on employee stock
options.............. -- -- 218,997 -- 540,469
Depreciation and
amortization......... 7,256 12,298 130,004 4,290 186,710
----------- ---------- ----------- ---------- -----------
Income (loss) from
operations............ 153,511 82,970 (2,168,373) (8,157) (2,489,074)
Interest income........ -- -- 145,468 -- 54,312
Interest expense....... (868) (5,144) (81,006) (12,688) (62,956)
----------- ---------- ----------- ---------- -----------
Income (loss) before
income taxes.......... 152,643 77,826 (2,103,911) (20,845) (2,497,718)
Provision (benefit) for
income taxes.......... 62,460 35,674 (27,973) (8,050) --
----------- ---------- ----------- ---------- -----------
Net income (loss)...... 90,183 42,152 (2,075,938) (12,795) (2,497,718)
Preferred stock
dividends............. -- -- 322,192 -- 197,260
Preferred stock
accretion............. -- -- 244,417 -- 149,643
----------- ---------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders......... $ 90,183 $ 42,152 $(2,642,547) $ (12,795) $(2,844,621)
=========== ========== =========== ========== ===========
Net income (loss) per
common share (basic
and diluted):
Net income (loss)..... $ 0.00 $ 0.00 $ (0.08) $ (0.00) $ (0.07)
Preferred stock
dividends and
accretion............ -- -- (0.02) -- (0.01)
----------- ---------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders......... $ 0.00 $ 0.00 $ (0.10) $ (0.00) $ (0.08)
=========== ========== =========== ========== ===========
Weighted average common
shares outstanding
(basic and diluted)... 21,915,000 21,915,000 27,302,144 21,915,000 36,000,000
=========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1996, 1997 and 1998 and the three months ended
March 31, 1999 (unaudited)
---------------------
<TABLE>
<CAPTION>
Deferred
Common Stock Additional Compensation Retained Treasury Stock
------------------ Paid- on Employee Earnings ---------------------
Shares Amount in Capital Stock Options (Deficit) Shares Amount Total
---------- ------- ----------- ------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... 21,915,000 $21,915 $ -- $ -- $ 95,918 -- $ -- $ 117,833
Net income.............. -- -- -- -- 90,183 -- -- 90,183
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, December 31,
1996................... 21,915,000 21,915 -- -- 186,101 -- -- 208,016
Net income.............. -- -- -- -- 42,152 -- -- 42,152
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, December 31,
1997................... 21,915,000 21,915 -- -- 228,253 -- -- 250,168
Sale of common stock,
net of direct issuance
costs of $27,341....... 22,050,000 22,050 4,853,010 -- -- -- -- 4,875,060
Purchase of treasury
stock at cost.......... -- -- -- -- -- 8,550,000 (1,900,000) (1,900,000)
Shares issued to
employee for service... 585,000 585 129,415 -- -- -- -- 130,000
Accrual of preferred
stock dividends........ -- -- (322,192) -- -- -- -- (322,192)
Accretion of preferred
stock.................. -- -- (244,417) -- -- -- -- (244,417)
Deferred compensation... -- -- 3,681,750 (3,681,750) -- -- -- --
Amortization of deferred
compensation........... -- -- -- 218,997 -- -- -- 218,997
Net loss................ -- -- -- -- (2,075,938) -- -- (2,075,938)
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, December 31,
1998................... 44,550,000 44,550 8,097,566 (3,462,753) (1,847,685) 8,550,000 (1,900,000) 931,678
Accrual of preferred
stock dividends
(unaudited)............ -- -- (197,260) -- -- -- -- (197,260)
Accretion of preferred
stock (unaudited)...... -- -- (149,643) -- -- -- -- (149,643)
Deferred compensation
(unaudited)............ -- -- 11,944,082 (11,944,082) -- -- -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- 540,469 -- -- -- 540,469
Net loss (unaudited).... -- -- -- -- (2,497,718) -- -- (2,497,718)
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, March 31, 1999
(unaudited)............ 44,550,000 $44,550 $19,694,745 $(14,866,366) $(4,345,403) 8,550,000 $(1,900,000) $(1,372,474)
========== ======= =========== ============ =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CASH FLOWS
---------------------
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income (loss)...... $ 90,183 $ 42,152 $(2,075,938) $ (12,795) $(2,497,718)
Adjustment to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization
expense............. 7,256 12,298 130,004 4,290 186,710
Provision for
doubtful accounts
receivable.......... -- 23,826 28,133 -- 43,439
Benefit (provision)
for deferred income
taxes............... (62,337) (118,274) 77,146 -- --
Shares issued to
employee for
services............ -- -- 130,000 -- --
Amortization of
deferred
compensation on
employee stock
options............. -- -- 218,997 -- 540,469
Net changes in assets
and liabilities:
Accounts
receivable........ (4,435,883) 4,072,345 (1,069,599) (880,858) (952,389)
Inventory.......... (347,870) 300,678 (11,686) 36,046 (64,127)
Income tax
receivable........ -- -- (100,865) (6,073) --
Prepaid and other
current assets.... (10,000) 10,000 (105,693) -- (320,549)
Accounts payable... 4,138,912 (3,612,797) (139,113) 571,189 2,950,183
Accrued expenses... 241,254 (148,752) 173,795 147,419 108,152
Deferred
compensation
liability......... 208,333 291,667 -- -- --
Income tax
payable........... -- -- (132,064) (132,064) --
Deferred revenue... -- -- -- -- 146,029
Other current
liabilities....... 142,948 (68,195) 67,201 -- (4,694)
----------- ----------- ----------- --------- -----------
Net cash (used in)
provided by oper-
ating activi-
ties............. (27,204) 804,948 (2,809,682) (272,846) 135,505
----------- ----------- ----------- --------- -----------
Cash flows from
investing activities:
Expenditures for
network under
development........... -- -- (640,511) -- (4,291,325)
Purchases of property
and equipment......... (29,792) (121,915) (515,690) (1,103) (674,996)
Deposit for software
and services ......... -- -- (185,000) -- --
----------- ----------- ----------- --------- -----------
Net cash used in
investing
activities....... (29,792) (121,915) (1,341,201) (1,103) (4,966,321)
----------- ----------- ----------- --------- -----------
Cash flows from
financing activities:
Borrowings on notes
payable............... 1,500,000 1,500,000 2,406,652 281,143 --
Repayments of notes
payable............... (1,445,458) (1,491,291) (1,500,000) (226,739) --
Principal payments on
capital leases........ -- -- -- -- (69,630)
Issuance of common
stock................. -- -- 4,902,401 -- --
Issuance of redeemable
preferred stock....... -- -- 5,102,499 -- --
Issuance costs related
to preferred and
common stock
offering.............. -- -- (55,798) -- --
Deferred offering
costs................. -- -- -- -- --
Treasury stock
acquired.............. -- -- (1,900,000) -- --
----------- ----------- ----------- --------- -----------
Net cash provided
by (used in)
financing
activities....... 54,542 8,709 8,955,754 54,404 (69,630)
----------- ----------- ----------- --------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (2,454) 691,742 4,804,871 (219,545) (4,900,446)
Cash and cash
equivalents at the
beginning of period.... 23,958 21,504 713,246 713,246 5,518,117
----------- ----------- ----------- --------- -----------
Cash and cash
equivalents at the end
of period.............. $ 21,504 $ 713,246 $ 5,518,117 $ 493,701 $ 617,671
=========== =========== =========== ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest............. $ 868 $ 5,142 $ 27,948 $ 12,688 $ 22,637
Income taxes......... -- 222,143 153,343 130,087 --
Non-cash investing and
financing activities:
Capital leases....... -- -- 1,513,138 -- 174,649
Preferred stock
dividends........... -- -- 322,192 -- 197,260
Preferred stock
accretion........... -- -- 244,417 -- 149,643
Shares issued to
employee for
service............. -- -- 130,000 -- --
Expenditures for
network under
development included
in accounts payable
and accrued
expenses............ -- -- 2,351,281 -- 108,704
Expenditures for
offering costs
included in accounts
payable............. -- -- -- -- 246,314
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
---------------------
1. Business
The Company
Network Access Solutions Corporation (the Company), was originally
incorporated in the Commonwealth of Virginia on December 19, 1994. On August 3,
1998, the Company reincorporated in the State of Delaware. Prior to the
reincorporation, the Company had authorized 10,000 shares of common stock, of
which 7,803 shares were issued and outstanding. As of August 3, 1998, the
Company was recapitalized with authorized capital stock of 15,000,000 shares of
common stock, $.001 par value per share and 10,000,000 shares of preferred
stock, $.001 par value per share. On March 18, 1999, the Company increased the
authorized common stock to 50,000,000 shares with a par value of $.001 per
share. In conjunction with this reincorporation and recapitalization, the
Company changed from a July 31 year-end to a calendar year-end. On March 18,
1999, the Company and its Board of Directors declared a two for one stock
split, effected as a stock dividend, of its common stock. On May 7, 1999, the
Company and its Board of Directors declared a 2.25 for one stock split,
effected as a stock dividend, of its common stock. All share information has
been retroactively adjusted for all periods presented to reflect the new
capital structure and stock splits.
The Company is a provider of data communications solutions to businesses
through product sales, consulting services and network services, including high
speed data transmission services using DSL technology. Through its CuNet
branded service, the Company offers its customers high speed connectivity using
DSL technology. As a complement to the Company's CuNet service, the Company
also offers its customers a complete suite of networking solutions, including
network integration, network management, network security and professional
services. In 1999, the Company began offering CuNet in Boston, New York,
Philadelphia, Baltimore, Washington, D.C. and Richmond. The Company will sell
its services directly and indirectly to small, medium and large businesses. The
Company sells its services to its existing customer base through a direct sales
force. The Company also sells its services indirectly through its sales
partners, including Internet service providers, long distance and local
carriers and other networking services companies.
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 at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The estimates involve judgments with
respect to, among other things, various future factors which are difficult to
predict and are beyond the control of the Company. Therefore, actual amounts
could differ from these estimates.
Unaudited Interim Financial Statements
The unaudited consolidated balance sheet as of March 31, 1999, the unaudited
statements of operations and cash flows for the three months ended March 31,
1998 and 1999 and the statement of
F-7
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
changes in stockholders equity for the three months ended March 31, 1999, have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of results that may be expected
for the year ending December 31, 1999.
Revenue Recognition
The Company's revenue is derived from the sale of products, consulting
services and network services. The Company recognizes revenue on the sale of
its products when a valid purchase order is received, shipment occurs,
collection is probable and no significant obligations remain related to the
completion of installation and performance of support services.
The Company provides consulting services, including network planning,
design, and integration services, under time-and-material type contracts and
recognizes revenue as services are performed and as costs are incurred.
The Company provides network services under fixed rate service contracts
with an average contractual period of one year. Revenue on fixed rates service
contracts is recognized as costs are incurred over the related contract period.
The Company annually evaluates performance under these contracts. Contract
losses are immediately recorded to operations and accrued liabilities when
identified.
Revenue from digital subscriber line services are recognized when the
services are provided. Payments received in advance of providing services are
recorded as deferred revenue until the period in which such services are
provided. Revenue related to installation and activation fees are recognized to
the extent of direct costs incurred. Any excess installation and activation
fees over direct costs are deferred and amortized to revenue over a one year
service contract. Such revenue is not expected to significantly exceed the
direct costs. In certain situations, the Company will waive non-recurring
installation and activation fees in order to obtain a sale. The Company will
expense the related direct costs as incurred.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held in a money market account at a
national financial institution. The Company has not experienced any losses on
its cash and cash equivalents.
F-8
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The Company grants uncollateralized credit in the form of accounts
receivable to its customers. As of December 31, 1998, AT&T, Corp. (AT&T)
comprised 47% of accounts receivable. The customers with concentrations of
revenue greater than 10% of total revenue are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
-------------------------------- -----------------------------
Customer 1996 1997 1998 1998 1999
- ------------------------ ---------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
AT&T.................... $9,978,104 $3,421,878 $5,869,901 $1,342,016 $2,651,468
Zeneca, Inc............. -- 921,356 933,556 481,976 476,316
Network Monitoring and
Repair, Inc............ -- 1,301,440 -- -- --
---------- ---------- ---------- -------------- --------------
$9,978,104 $5,644,674 $6,803,457 $1,823,992 $3,127,784
========== ========== ========== ============== ==============
</TABLE>
Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method. Inventories consist primarily of components,
subassemblies and finished products held for sale.
Property and Equipment
Property and equipment, consists of network costs associated with the
development and implementation of the DSL networks, office and computer
equipment, and furniture and fixtures. The costs associated with the DSL
network under development are comprised of collocation fees, equipment,
equipment held under capital leases, and equipment installation. These assets
are stated at cost. The Company leases certain of its equipment under capital
lease agreements. The capital lease assets are stated at the lower of the
present value of the net minimum lease payments or the fair value at the
inception of the lease, and are depreciated over the shorter of the estimated
useful life or the lease term. Depreciation of office and computer equipment
and furniture and fixtures is computed using the straight-line method,
generally over three to five years, based upon estimated useful lives,
commencing when the assets are placed in service. The depreciation of the DSL
network costs will commence as individual network components are placed in
service and will be depreciated over two to five years. Expenditures for
maintenance and repairs are expensed as incurred. When assets are retired or
disposed, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in operations for the
period.
Income Taxes
The Company accounts for income taxes by utilizing the liability method.
Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are
F-9
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
expected to affect taxable income. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized. The provision for income taxes consists of the Company's current
provision (benefit) for federal and state income taxes and the change in net
deferred tax assets and liabilities during the period.
Fair Value Information
The carrying amount of current assets and current liabilities approximates
fair value because of the short maturity of these instruments. The fair value
of redeemable preferred stock is estimated by discounting the remaining cash
flows at the current interest rates. As of December 31, 1998, the carrying
amount of these financial instruments approximates fair value.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets. This valuation consists of a comparison of the carrying value of the
assets with the assets' expected future cash flow undiscounted and without
interest costs. If the carrying value of an asset exceeds the expected future
cash flows, an impairment exists. An impairment loss is measured by the amount
by which the carrying value of the asset exceeds future discounted cash flows.
No impairment losses have been recognized to date.
Net Income (Loss) Per Share
The Company presents basic and diluted net income (loss) per share. Basic
net income (loss) per share is computed based on the weighted average number of
outstanding shares of common stock. Diluted net income (loss) per share adjusts
the weighted average for the potential dilution that could occur if stock
options, warrants or other convertible securities were exercised or converted
into common stock. Diluted loss per share for the year ended December 31, 1998,
is the same as basic loss per share because the effects of such items were
anti-dilutive.
Stock-Based Compensation
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Under the intrinsic value method of accounting
for stock-based compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the underlying stock on the
date of grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 supercedes SFAS No. 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
F-10
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
performance as the source of the Company's reportable segments. SFAS No. 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Currently the Company does not utilize derivative
instruments, therefore the adoption of SFAS 133 is not expected to have a
significant effect on the Company's results of operations or its financial
position. The Company will adopt SFAS 133 for the year ending December 31,
2000.
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
-------------------- -----------
1997 1998 1999
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
DSL network development in process........... $ -- $4,657,975 $ 9,232,653
Office and computer equipment................ 133,419 355,962 906,155
Furniture and fixtures....................... 19,626 159,728 284,531
Less accumulated depreciation................ (12,868) (142,872) (329,582)
-------- ---------- -----------
Property and equipment, net.................. $140,177 $5,030,793 $10,093,757
======== ========== ===========
</TABLE>
The DSL network development in process includes the acquisition of equipment
under capital leases, equipment, installation, and collocation fees.
Collocation fees represent nonrecurring fees paid to obtain central office
space for location of certain Company equipment. As of December 31, 1998 and
March 31, 1999, the recorded cost of the network equipment under capital leases
was $1,513,138 and $1,687,787 (unaudited), respectively. Accumulated
amortization for this equipment under capital leases was $20,739 and $121,434
as of December 31, 1998 and March 31, 1999, respectively.
For the years December 31, 1996, 1997 and 1998, depreciation expense charged
to operations amounted to $7,256, $12,298, and $130,004, respectively.
4. Notes Payable
On October 16, 1998, the Company entered into a $10,000,000 line of credit
agreement with Ascend Communications, Inc. (Ascend). Under the terms of the
line of credit, the Company can draw on the line of credit in $1,000,000
increments up to a maximum of $5,000,000. The Company may
F-11
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
draw down the remaining $5,000,000, also in $1,000,000 increments, upon (i)
completing the purchase or lease of equipment in excess of $15,000,000 from
Ascend and (ii) demonstrating that at least 70% of such equipment is being used
by the Company to generate revenue. The Company is required to make interest
only payments at an annual rate of 8.25% on the amounts advanced for the first
nine months from the date of the advance. For the next thirty-three months the
Company is required to make principal and interest payments in accordance with
a sixty month amortization schedule using an interest rate of 8.25% for the
first eighteen months and a rate equal to the prevailing high yield bond index
for the next fifteen months. The remaining unpaid interest is due forty-two
months after the related advance. The credit agreement requires immediate
repayment in the event of an initial public offering or debt offering in excess
of $40,000,000 or a change in control, as defined. At December 31, 1998 and
March 31, 1999, $1,000,000 was outstanding under this agreement.
The Company had a $1,500,000 line of credit agreement with a bank which
matured on November 30, 1998, was repaid and not renewed. Interest on
outstanding borrowings accrued at the bank's prime rate of interest plus three-
quarters of a percent (9.25% during 1998). At December 31, 1997, there was
$93,348, of outstanding borrowings under this agreement.
5. Deferred Compensation Liability
The Company has an unfunded deferred compensation plan for certain key
executives. Under the plan, executives deferred a portion of their compensation
by electing future payments in three equal installments in June 1999, December
1999 and June 2000. At December 31, 1997 and 1998, the deferred compensation
liability was $500,000, respectively. Interest accrues on deferred amounts on a
quarterly basis at a rate determined by management which is currently 6% based
on the rate of interest for 3-year Federal treasury notes. Accrued interest
related to these amounts was $17,500 and $47,500 at December 31, 1997 and 1998,
respectively.
6. Commitments and Contingencies
Leases
The Company leases and subleases office space in Virginia and Pennsylvania
and collocation space in central offices under the terms of the interconnection
agreements with Bell Atlantic and other vendors. Commitments for minimum rental
payments under noncancelable leases and subleases at December 31, 1998 are as
follows: $329,311 in 1999, and $331,382 in 2000, $255,853 in 2001, and $9,212
in 2002.
Rent expense for the years ended December 31, 1996, 1997 and 1998, was
$46,742, $80,103 and $113,600, respectively.
F-12
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
During 1998, the Company entered into capital leases related to the
acquisition of equipment for the development of the DSL network. The present
value of future minimum capital lease payments as of December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
----------------------------------------------------------------- ----------
<S> <C>
1999............................................................. $ 461,370
2000............................................................. 501,064
2001............................................................. 500,521
2002............................................................. 330,892
2003............................................................. 21,875
----------
1,815,722
Less amounts representing interest............................... 302,584
----------
Present value of net minimum lease payments...................... 1,513,138
Less current portion of capital lease obligations................ 328,982
----------
Long term portion of capital lease obligations................... $1,184,156
==========
</TABLE>
The Company has entered into a master lease agreement with Ascend to finance
purchases of up to $30,000,000 through capital lease agreements. The Company
has an arrangement with Paradyne Corporation whereby the Company can finance
DSL equipment purchases of up to $4,000,000 subject to vendor approval.
Purchase commitments
On November 24, 1998 the Company entered into an agreement with a software
and service provider to support its DSL services. The Company's majority
shareholder is also a shareholder of this software and service provider. Under
the terms of the agreement, software licensing and service fees will
approximate $1,023,700 which are payable through a $185,000 deposit which was
made upon signing the agreement, $402,700 due upon project completion, and
$436,000 payable within twenty-four months of project completion. Amounts not
paid within 30 days of project completion accrue interest at a rate of 10%. The
agreement requires immediate payment if the Company obtains $40,000,000 in
funding and requires accelerated payment, based on a formula, if the Company
receives funding in excess of $10,000,000. The Company commenced implementing
the software and support service in 1999.
Employment agreements
The Company has entered into an employment agreement with each of its
executive officers. Each agreement has an initial term of four years, subject
to earlier termination upon 30 days prior notice. These agreements are
automatically extended for additional one year terms unless the Company or the
employee elects to terminate the agreement within 30 days before the end of the
current term. Under these agreements, these employees will receive an initial
annual base salary that
F-13
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
will be increased by at least 5% each year, based upon performance objectives
set by the Board of Directors. The employees will also receive an annual bonus
of up to 20% of the executives' then current salary. The bonus is payable in
cash, stock or a combination of both at the election of the board of directors.
Other Matter
The Company is not currently involved in any legal proceedings that it
believes could have a material adverse effect on its business, financial
position, results of operation or cash flows.
7. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current tax (benefit) provision................. $142,918 $153,948 $(105,119)
Deferred tax provision (benefit)................ (80,458) (118,274) 77,146
-------- -------- ---------
Total (benefit) provision for income taxes...... $ 62,460 $ 35,674 $ (27,973)
======== ======== =========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998
-------- ---------
<S> <C> <C>
Deferred compensation...................................... $193,100 $ 349,956
Accrued interest........................................... 5,632 19,149
Bad debt expense........................................... -- 20,066
Depreciation expense....................................... -- (2,083)
Net operating loss......................................... -- 444,160
Valuation allowance........................................ -- (709,662)
-------- ---------
Net deferred tax asset..................................... $198,732 $ 121,586
======== =========
</TABLE>
As of December 31, 1998, a valuation allowance was established to reduce
total deferred tax assets to an amount that management believes will more
likely than not be realized, based on income taxes paid in the loss carryback
period net of refundable taxes.
A reconciliation between income taxes from operations computed using the
federal statutory income tax rate and the Company's effective tax rate is as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1996 1997 1998
----- ---- -----
<S> <C> <C> <C>
Federal statutory rate.................................... 34.0% 34.0% (34.0)%
State income taxes, net of federal provision (benefit).... 4.9 5.4 (2.7)
Increase to valuation allowance........................... -- -- 33.7
Business meals, entertainment, penalties and other........ 2.0 6.4 1.5
----- ---- -----
40.9% 45.8% (1.5)%
===== ==== =====
</TABLE>
F-14
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
8. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Mandatorily Redeemable Preferred Stock
On August 6, 1998, the Company issued 10,000,000 shares of Series A
mandatorily redeemable preferred stock (Preferred Stock) and 22,050,000 shares
of common stock for total proceeds of $10,004,900, excluding direct issuance
costs of $55,798. The Company has allocated $5,074,042 and $4,875,060 of the
net proceeds to the Preferred Stock and common stock, respectively, based on
the Company's estimate of fair value of the Preferred Stock and common stock.
The Preferred Stock has a par value of $.001 per share, a stated value of $1.00
per share (Stated Value) and a cumulative dividend of 8% of the Stated Value
per annum, compounded annually. The Company may not declare or pay any
distributions by dividend or otherwise, payable other than in common stock,
until the holders of the Preferred Stock first receive a distribution equal to
the cumulative dividend due for each outstanding share of Preferred Stock.
Dividends continue to accrue until redemption. The Preferred Stock is
redeemable, at the option of the holder, at the earlier of the closing of a
public offering or the sixth anniversary of the initial Preferred Stock
issuance at a redemption price equal to $1.00 per share plus any accrued and
unpaid dividends. For the year ended December 31, 1998, the Company has accrued
preferred stock dividends of $322,192 and increased the preferred stock
carrying value by $244,417 for accretion to the redemption price.
In the event of a liquidation, dissolution, or winding up of the Company,
the holders of the Preferred Stock are entitled to a liquidation preference
equal to $1.00 per share plus any accrued and unpaid dividends. No dividends
have been declared through December 31, 1998. The Preferred Stock does not
provide its holders with voting rights, however, the Company must receive
approval from the holders of two-thirds of Preferred Stock to (i) authorize,
create or issue, or increase the authorized or issued amount of any class of
equity which is senior or equal to the Preferred Stock, (ii) reclassify or
modify any class of equity such that it ranks senior or equal to the Preferred
Stock, or (iii) amend, alter or repeal any of the provisions applicable to the
Preferred Stock so as to adversely change the dividend, liquidation and
redemption terms.
On March 18, 1999, the Company's certificate of incorporation was amended to
modify the terms of the Preferred Stock. In the event of an initial public
offering in which the Company receives a market valuation in excess of
$200,000,000, the terms of the Preferred Stock provide that (i) 50% of the
Preferred Stock outstanding will be cancelled and cease to exist without
compensation or recourse, (ii) the remaining shares of Preferred Stock will be
automatically converted into common stock based on the Preferred Stock
aggregate per share stated value of $5,000,000 divided by the per share public
offering price and (iii) no dividends on the Preferred Stock whether accrued or
unaccrued through the date of the offering will be payable.
F-15
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The Preferred Stock activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Amount
---------- ----------
<S> <C> <C>
Balance, December 31, 1997............................ -- $ --
Issuance of shares.................................... 10,000,000 5,102,499
Issuance costs........................................ -- (28,457)
Accrued dividends..................................... -- 322,192
Accretion to redemption price......................... -- 244,417
---------- ----------
Balance, December 31, 1998............................ 10,000,000 5,640,651
Accrued dividends (unaudited)......................... -- 197,260
Accretion to redemption price (unaudited)............. -- 149,643
---------- ----------
Balance, March 31, 1999 (unaudited)................... 10,000,000 $5,987,554
========== ==========
</TABLE>
Stock Repurchase
On August 6, 1998, the Company repurchased 8,550,000 shares of common stock
for $1,900,000 from certain founders of the Company. This repurchase was
accounted for at cost.
9. Stock-Based Compensation
On July 23, 1998, the Company adopted the 1998 Incentive Stock Plan (the
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards or any combination thereof may be granted to the Company's
employees and certain other persons in accordance with the Plan. The Board of
Directors, which administers the Plan, determines the number of options
granted, the vesting period and the exercise price. The Board of Directors may
terminate the Plan at any time. Options granted under the Plan are fully
exercisable into restricted shares of the Company's common stock upon award
and expire ten years after the date of grant. The restricted common stock
generally vests over a three or four year period. Subsequent to exercise,
unvested shares of restricted stock cannot be transferred while vested shares
are subject to a right of first refusal by the Company to repurchase the
shares at fair value. Upon voluntary termination unvested shares of restricted
stock can be repurchased at the lower of fair value or the exercise price. At
December 31, 1998, 9,000,000 shares were reserved for issuance under the Plan.
Effective March 18, 1999 and April 1, 1999, the Company increased the number
of shares of common stock reserved for issuance under the Plan to 10,125,000
and 11,250,000, respectively.
F-16
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
As of December 31, 1998 and March 31, 1999, a total of 7,090,875 and
8,985,375 incentive stock options which were immediately exercisable as of
those dates had been granted at an exercise price of $.09 per share. Stock
option activity was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Average
Stock Exercise Exercise
Options Price Price
--------- -------- --------
<S> <C> <C> <C>
Options outstanding, December 31, 1997........ -- $-- $--
Options granted, July 1998.................... 5,400,000 .09 .09
Options granted, August 1998.................. 225,000 .09 .09
Options granted, November 1998................ 1,465,875 .09 .09
Options exercised............................. -- -- --
Options cancelled............................. -- -- --
--------- ---- ----
Options outstanding, December 31, 1998........ 7,090,875 .09 .09
Options granted, January 1999 (unaudited)..... 559,575 .09 .09
Options granted, March 1999 (unaudited)....... 1,350,000 .09 .09
Options exercised (unaudited)................. -- -- --
Options cancelled (unaudited)................. (15,075) .09 .09
--------- ---- ----
Options outstanding, March 31, 1999
(unaudited).................................. 8,985,375 $.09 $.09
========= ==== ====
</TABLE>
The Company has estimated the fair value of the underlying common stock on
the date of grant was in excess of the exercise price of the options. As a
result, the Company recorded deferred compensation of $3,681,750 and
$11,944,082 (unaudited) for the year ended December 31, 1998 and for the three
months ended March 31, 1999, respectively. This amount was recorded as a
reduction to stockholders' equity (deficit) and is being amortized as a charge
to operations over the vesting periods of the underlying restricted common
stock. For the year ended December 31, 1998 and the three months ended March
31, 1999, the Company recognized $218,997 and $540,469 (unaudited),
respectively, of stock compensation expense related to these options.
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 for
options granted to employees and disclose pro forma net loss and loss per
share. Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
(unaudited)
<S> <C> <C>
Net loss as reported..................... $(2,075,938) $(2,497,718)
Pro forma net loss....................... (2,100,700) (2,508,081)
Net loss per share as reported, basic and
diluted................................. (0.08) (0.07)
Pro forma net loss per share, basic and
diluted................................. (0.08) (0.07)
</TABLE>
F-17
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The weighted-average fair value of options granted during the year ended
December 31, 1998 was approximately $1.04 based on the Black-Scholes option
pricing model. Upon termination, unvested shares of restricted stock are
repurchased by the Company at the lower of the exercise price or fair market
value.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998: Dividend
yield of 0%; expected volatility of 0%; risk-free interest rate of 5.21%; and,
expected term of 5 years.
As of December 31, 1998, the weighted average remaining contractual life of
the options is 9.8 years.
10. Employee Benefit Plan
On September 16, 1998, the Company adopted the Network Access Solution, Inc.
401(k) Profit Sharing Plan and Trust (the Plan). As allowed under Section
401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary
deductions for eligible employees. Participants must be at least 21 years of
age and may make voluntary contributions to the Plan of up to 15% of their
compensation not to exceed the federally determined maximum allowable
contribution. The Company is not obligated to make contributions or to match
participant contributions. Participants vest in Company contributions' until
after three years of employment. The Company did not make contributions to the
Plan during 1998.
11. Segment Information
The Company has determined its reportable segments based on the Company's
method of internal reporting, which disaggregates its business by product
category. The Company's reportable segments are: product sales, consulting
services and network services. The product sales segment provides sales of
selected equipment from manufacturing partners. Engineers select the right
manufacturer's product solution based upon customized dependable network
designs to improve the customers' operations and network efficiencies. The
consulting services segment provides nonrecurring service activation and
installation, network integration, on site network management, network security
consulting and professional services. In addition, the consulting services
segment provides maintenance and installation of equipment some of which may be
provided through third party providers under contract. The network services
segment provides local, metropolitan and wide area data communications to
customers. This segment also provides a wide variety of other services to
customers, including remote network management and monitoring, network
security, virtual private networks, electronic commerce and CuNet, our high
speed continuously connected DSL access to telecommunications networks. The
Company's business is conducted principally in the eastern United States. There
are no foreign operations.
F-18
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The financial results of the Company's segments are presented on an accrual
basis. The Company evaluates the performance of its segments and allocates
resources to them based on gross profit. There are no intersegment revenues.
The table below presents information about the reported gross profit of the
Company's reportable segments for the years ended December 31, 1996, 1997 and
1998 and for the three months ended March 31, 1999. Asset information is not
reported for the product sales and consulting services segments, as this data
is not considered by the Company in making its decisions. Asset data, which
represents DSL equipment, is only presented for the network services segment as
of December 1998 and March 1999, as the Company only began to consider this
data upon offering CuNet which occurred during 1998.
<TABLE>
<CAPTION>
Product Consulting Network Reconciling
Sales Services Services Items Total
------- ---------- -------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the year ended
December 31, 1996:
Revenue................... $14,368 $ 114 $ -- $-- $14,482
======= ====== ====== ==== =======
Gross profit.............. $ 2,393 $ 23 $ -- $-- $ 2,416 (1)
======= ====== ====== ==== =======
For the year ended
December 31, 1997:
Revenue................... $ 8,150 $ 791 $ 4 $-- $ 8,945
======= ====== ====== ==== =======
Gross profit.............. $ 970 $ 561 $ 1 $-- $ 1,532 (1)
======= ====== ====== ==== =======
As of and for the year
ended
December 31, 1998:
Revenue................... $ 9,900 $1,428 $ 311 $-- $11,639
======= ====== ====== ==== =======
Gross profit.............. $ 1,260 $ 668 $ 270 $-- $ 2,198 (1)
======= ====== ====== ==== =======
Property and equipment,
net...................... $ -- $ -- $4,652 $379 $ 5,031
======= ====== ====== ==== =======
As of and for the three
months ended
March 31, 1999
(unaudited):
Revenue................... $ 3,955 $ 702 $ 120 $-- $ 4,777
======= ====== ====== ==== =======
Gross profit (loss)....... $ 420 $ 402 $ (51) $-- $ 771 (1)
======= ====== ====== ==== =======
Property and equipment,
net...................... $ -- $ -- $9,264 $830 $10,094
======= ====== ====== ==== =======
</TABLE>
F-19
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
Note 1: Adjustments that are made to the total of the segments gross profit
in order to arrive at income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
For the
three
months
For the years ended ended
December 31, March 31,
----------------------- -----------
1996 1997 1998 1999
------ ------ ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Gross profit............................... $2,416 $1,532 $ 2,198 $ 771
Operating expenses:
Selling, general and administrative...... 2,255 1,437 4,017 2,533
Amortization of deferred compensation.... -- -- 219 540
Depreciation and amortization............ 7 12 130 187
------ ------ ------- -------
Income (loss) from operations.............. 154 83 (2,168) (2,489)
Interest income........................... -- -- 145 54
Interest expense.......................... (1) (5) (81) (63)
------ ------ ------- -------
Income (loss) before income taxes......... $ 153 $ 78 $(2,104) $(2,498)
====== ====== ======= =======
</TABLE>
12. Subsequent Events
The Company filed a Registration Statement with the Securities and Exchange
Commission for an initial public offering of its common stock.
On March 31, 1999, the Company entered into a financing agreement whereby
the majority holders of the Preferred Stock agreed to invest an additional
$10,000,000 in the Company. Under the agreement, the Company received
$5,000,000 on April 1, 1999, by issuing an 8% convertible note with a maturity
date of December 31, 1999. The financing agreement originally provided for an
additional equity investment of $5,000,000, but was subsequently amended. On
May 11, 1999, the Company amended its financing agreement whereby the Company
issued an additional $5,000,000 of 8% convertible notes rather than receiving
the $5,000,000 as an equity investment. The terms of these convertible notes
were amended such that the principal of and interest on the notes will convert
if the Company completes an initial public offering with an aggregate offering
price to the public of not less than $25,000,000 based on a pre-money Company
valuation of at least $200,000,000.
On April 1, 1999, the Company entered into a lease for additional office
space in Sterling, Virginia. The lease requires total payments of $2,478,223
over the lease term of five years.
On April 1, 1999, the Company granted a board member an option to purchase
250,000 shares of the Company's common stock at an exercise price of $6.67 per
share. The option vests over a three year period, except that in the event of
an initial public offering the option will vest immediately. The estimated fair
value of the underlying common stock upon the date of grant was $8.87 per share
resulting in deferred compensation of $550,000 to be recognized over the three
year vesting period. The unamortized deferred compensation will be recognized
as compensation expense
F-20
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
upon the effectiveness of an initial public offering. The stock option
agreement also stipulates that in the event of an initial public offering, the
board member will be issued an additional option, with no vesting period, to
acquire a number of shares of common stock at an exercise price per share to be
determined using a formula based on the public offering price. This formula
provides the board member the right to obtain an additional stock option at an
exercise price equal to 25% of the public offering price such that the
aggregate difference between the public offering price and the exercise price
of the initial option and the additional option equals $5,000,000. Assuming an
initial public offering price of $15.00 per share, this individual will receive
an additional option to purchase 259,259 shares of common stock at an exercise
price of $3.75 per share which would result in the immediate recognition of
approximately $2,900,000 of compensation expense.
On May 4, 1999, the Company amended its line of credit agreement with
Ascend. The amendment reduced the line of credit to $5,000,000 and relieved the
Company's obligation to repay the line of credit in the event of an initial
public offering. On May 4, 1999, the Company borrowed an additional $2,000,000
under this line of credit. On May 4, 1999 the Company amended its master lease
agreement with Ascend to finance up to an additional $65,000,000 of equipment
purchases through capital lease agreements, contingent upon the Company's
successful completion of a $50,000,000 offering of its common stock.
In May 1999, the Company entered into letter agreements with SBC
Communications Inc. (SBC) and Telefonos de Mexico, S.A. de C.V. (Telmex),
whereby the Company offered Telmex and SBC shares of its common stock for cash
with an aggregate value of $10,000,000. SBC and Telmex are not obligated to
purchase these shares.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO OF NETWORK ACCESS SOLUTIONS CORPORATION]
7,500,000 Shares of Common Stock
-------------------
P R O S P E C T U S
-------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
J.P. Morgan & Co.
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the Company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering and when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
offered hereby, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the National Association Securities Dealers, Inc. filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 37,853
National Association of Securities Dealers, Inc. filing
fee......................................................... 14,300
Nasdaq National Market listing fee.......................... 95,000
Transfer agent's and registrar's fees....................... 10,000
*Printing expenses........................................... 300,000
*Legal fees and expenses..................................... 300,000
*Accounting fees and expenses................................ 150,000
*Blue Sky filing fees and expenses........................... 10,000
*Miscellaneous expenses...................................... 82,847
----------
Total...................................................... $1,000,000
==========
</TABLE>
- ---------------------
* Estimated.
14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance
that protects its officers, directors, employees and agents against any
liabilities incurred in connection with their service in such positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its directors and officers, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act.
II-1
<PAGE>
15. Recent Sales of Unregistered Securities
The following information relates to securities issued or sold by the
Registrant within the last three years. During that time, the Registrant has
issued unregistered securities in the transactions described below. Securities
issued in such transactions were offered and sold in reliance upon the
exemption from registration under Section 4(2) of the Securities Act, relating
to sales by an issuer not involving any public offering, or under Rule 701
under the Securities Act on the basis that these options were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to compensation. The sales of securities were made without
the use of an underwriter and the certificates evidencing the shares bear a
restrictive legend permitting the transfer thereof only upon registration of
the shares or an exemption under the Act.
(1) In August 1998 the Registrant issued 585,000 shares of Common Stock in a
private placement to an employee at a price of $0.22 per share in exchange
for services rendered.
(2) In August 1998 the Registrant issued 22,050,000 shares of Common Stock in a
private placement to a group of four accredited investors at a purchase
price of $0.0002 per share for an aggregate price of $4,900.
(3) In August 1998 the Registrant issued 10,000,000 shares of Series A
Preferred Stock in a private placement to a group of four accredited
investors, at a purchase price of $1.00 per share for an aggregate price of
$10,000,000.
(4) In March 1999 the Registrant issued in a private placement to two of its
existing accredited stockholders $5,000,000 aggregate principal amount of
notes convertible into shares of Common Stock based upon the Registrant's
initial public offering price.
(5) Between July 1998 and April 1999, the Registrant issued options to its
employees and directors exercisable for an aggregate of 9,000,450 shares of
Common Stock at an exercise price of $0.09 per share pursuant to its 1998
Stock Incentive Plan.
(6) In April 1999 the Registrant issued options to one of its directors
exercisable for an aggregate of 250,000 shares of Common Stock at an
exercise price of $6.67 per share, subject to adjustment pursuant to its
1998 Stock Incentive Plan.
(7) In May 1999 the Registrant issued in a private placement to two of its
existing accredited stockholders $5,000,000 aggregate principal amount of
notes convertible into shares of Common Stock based upon the Registrant's
initial public offering price.
16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen stock certificate for shares of Common Stock of the
Company
5.1* Form of opinion of Piper & Marbury L.L.P., regarding legality of
securities being registered
10.1+ Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2+ Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3* Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.4* Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5* Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1* First Lease Amendment dated June 26, 1998, by and between the
Company and Sterling/Gunston LLC
10.5.2* Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6* Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7* Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8* Employment Agreement dated as of August 16, 1998, by and between
the Company and Jonathan P. Aust
10.9* Employment Agreement dated as of July 13, 1998, by and between the
Company and Christopher J. Melnick
10.10* Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11* Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12* Employment Agreement dated as of March 1, 1999, by and between the
Company and John J. Hackett
10.13* 1998 Stock Incentive Plan, as amended
10.14* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
10.16* Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17* Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and Jonathan P. Aust
10.19* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and James A. Aust
10.20* Repurchase Agreement dated August 6, 1998, by and between the
Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and
Stephen L. Aust
10.21* Investor Rights Agreement dated August 6, 1998, by and between the
Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P.,
FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC,
as amended
10.22* Series A Preferred Stock Purchase Agreement dated August 6, 1998,
by and between the Company, Spectrum Equity Investors II, L.P.,
SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2
Venture Partners, LLC
10.23* Amended and Restated Note Purchase Agreement dated as of March 31,
1999 and amended as of May 11, 1999, by and between the Company,
Spectrum Equity Investors II, L.P. and FBR Technology Venture
Partners L.P.
10.24* Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and Spectrum Equity Investors II, L.P.
10.25* Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and FBR Technology Venture Partners
L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.26* Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
and between the Company and Dennis R. Patrick
10.27* Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.28* Letter Agreement dated May 6, 1999, by and between the Company and
SBC Communications, Inc.
10.29* Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de C.V.
10.30 Letter Agreement dated May 10, 1999, by and between the Company
and DSL Solutions, Inc. d/b/a DSL Networks
11.1* Statement of computation of loss per share
23.1 Consent of PricewaterhouseCoopers, LLP
23.2* Consent of Piper & Marbury L.L.P. (included as part of Exhibit
5.1)
24.1* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
+ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be shown in
the schedules is not applicable or is included elsewhere in our financial
statements or the notes thereto.
17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Certificate of Incorporation or
Bylaws or the Delaware General Corporation Law or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted form the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-4
<PAGE>
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sterling, Virginia, on
the 1st day of June, 1999.
NETWORK ACCESS SOLUTIONS CORPORATION
/s/ Jonathan P. Aust
By: _________________________________
Jonathan P. Aust
President, Chief Executive Officer
and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Name Title Date
/s/ Jonathan P. Aust President, Chief
- ------------------------------------- Executive Officer June 1,
Jonathan P. Aust and Chairman of the 1999
Board of Directors
(Principal Executive
Officer)
* Chief Financial
- ------------------------------------- Officer and Director June 1,
Scott G. Yancey, Jr. (Principal 1999
Accounting and
Financial Officer)
* Chief Operating
- ------------------------------------- Officer and Director June 1,
Christopher J. Melnick 1999
* Director
- ------------------------------------- June 1,
Brion B. Applegate 1999
Director
- -------------------------------------
Dennis R. Patrick
*By: /s/ Jonathan P. Aust
- -------------------------------------
Jonathan P. Aust
Attorney-in-Fact
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen stock certificate for shares of Common Stock of the
Company
5.1* Form of opinion of Piper & Marbury L.L.P., regarding legality of
securities being registered
10.1+ Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2+ Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3* Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
10.4* Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5* Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1* First Lease Amendment dated June 26, 1998, by and between the
Company and Sterling/Gunston LLC
10.5.2* Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6* Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7* Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8* Employment Agreement dated as of August 16, 1998, by and between
the Company and Jonathan P. Aust
10.9* Employment Agreement dated as of July 13, 1998, by and between the
Company and Christopher J. Melnick
10.10* Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11* Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12* Employment Agreement dated as of March 1, 1999, by and between the
Company and John J. Hackett
10.13* 1998 Stock Incentive Plan, as amended
10.14* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
10.16* Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17* Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
Jonathan P. Aust
10.19* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
James A. Aust
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.20* Repurchase Agreement dated August 6, 1998, by and between the
Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and
Stephen C. Aust
10.21* Investor Rights Agreement dated August 6, 1998, by and between the
Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P.,
FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC,
as amended
10.22* Series A Preferred Stock Purchase Agreement dated August 6, 1998,
by and between the Company, Spectrum Equity Investors II, L.P.,
SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2
Venture Partners, LLC
10.23* Amended and Restated Note Purchase Agreement dated as of March 31,
1999 and amended as of May 11, 1999, by and between the Company,
Spectrum Equity Investors II, L.P. and FBR Technology Venture
Partners L.P.
10.24* Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and Spectrum Equity Investors II, L.P.
10.25* Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and FBR Technology Venture Partners
L.P.
10.26* Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
and between the Company and Dennis R. Patrick
10.27* Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.28* Letter Agreement dated May 6, 1999, by and between the Company and
SBC Communications, Inc.
10.29* Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de C.V.
10.30 Letter Agreement dated May 10, 1999, by and between the Company
and DSL Solutions, Inc. d/b/a DSL Networks
11.1* Statement of computation of loss per share
23.1 Consent of PricewaterhouseCoopers, LLP
23.2* Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
hereto)
24.1* Power of Attorney (included in signature pages)
27* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
+ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
II-8
<PAGE>
MASTER EQUIPMENT EXHIBIT 10.1
LEASE AGREEMENT
MASTER LEASE AGREEMENT NO. P98-24481
Master Lease Agreement ("Lease") made this 17th day of November 1998 between
----
Paradyne Credit Corp. ("Lessor") with its principal place of business located at
8545 126th Avenue N. Largo, FL 33773 and Network Access Solutions (NAS)
("Lessee") having its principal place of business located at 100 Carpenter Drive
Suite 206 Sterling, Va. 22170.
1. LEASE AGREEMENT
Lessor hereby leases to Lessee and Lessee hereby leases from Lessor all of
the personal property ("Equipment") described in Equipment Lease
Schedule(s), which are or may from time to time be executed by Lessor and
Lessee and attached hereto or which incorporate this Lease by reference
("Schedules"), upon the terms and conditions set forth in this Lease, as
supplemented by the terms and conditions set forth in the appropriate
Schedule(s) identifying such items of Equipment. All terms and conditions of
this Lease shall govern the rights and obligations of Lessor and Lessee
except as specifically modified In writing and signed by the parties hereto.
Each Schedule shall constitute a separate lease and a distinct and
independent obligation of the Lessee which shall incorporate by reference
the terms and conditions of this Lease. In the event of a conflict between
the terms and conditions of this Lease and the Schedule(s) hereto, those of
the Schedule(s) shall prevail. All Equipment leased hereunder shall be
leased for a term of forty-eight (48) months, with a one dollar ($1)
purchase option at lease expiration.
2. SELECTION OF EQUIPMENT; ACCEPTANCE
Lessee will select the type, quantity, and supplier of each item of
Equipment designated in the appropriate Schedule, and in reliance thereon
such Equipment will then be ordered by Lessor from such supplier or Lessor
will accept an assignment of any existing purchase order therefore. Lessor
will have no liability for any delivery or failure by the supplier to fill
the purchase order or to meet the conditions thereof. Lessee acknowledges
that Lessor has not participated and will not participate in any way in
Lessee's selection of the Equipment or the supplier. Within sixty (60) days
from date of shipment of the Equipment, Lessee agrees to inspect the
Equipment and to execute an Acknowledgment and Acceptance of Equipment by
Lessee notice, as provided by Lessor, after the Equipment has been delivered
and after Lessee is satisfied that the Equipment is satisfactory in every
respect. In the event that Lessee fails to execute an Acknowledgment and
Acceptance of Equipment within such sixty (60) day period or fails to notify
Lessor in writing that the Equipment is not acceptable, Lessee shall be
deemed to have irrevocably accepted the Equipment. This Lease and all
Schedules are non-cancelable and Lessee agrees to pay the total rent for the
term indicated in each Schedule, plus any other sums provided for herein.
Lessee hereby authorizes Lessor to insert in this Lease and Schedules serial
numbers or other identifying data with respect to the Equipment.
3. DISCLAIMER OF WARRANTIES AND CLAIMS; LIMITATION OF REMEDIES LESSOR IS
NEITHER THE MANUFACTURER OF THE EQUIPMENT NOR THE MANUFACTURER'S AGENT, AND
MAKES NO EXPRESS OR IMPLIED WARRANTY OF ANY KIND WHATSOEVER WITH RESPECT TO
THE EQUIPMENT, INCLUDING BUT NOT LIMITED TO, THE MERCHANTABILITY OF THE
EQUIPMENT OR ITS FITNESS FOR ANY PARTICULAR PURPOSE; THE DESIGN OR CONDITION
OF THE EQUIPMENT; THE QUALITY OR CAPACITY OF THE EQUIPMENT; THE WORKMANSHIP
IN THE EQUIPMENT; COMPLIANCE OF THE EQUIPMENT WITH THE REQUIREMENT OF ANY
LAW, RULE, SPECIFICATION OR CONTRACT PERTAINING THERETO; PATENT
INFRINGEMENT; OR LATENT DEFECTS. LESSEE LEASES THE EQUIPMENT "AS IS" AND
WITH ALL FAULTS. Lessee accordingly agrees not to assert any claim
whatsoever against Lessor for loss of anticipatory profits or consequential
damages. Lessor shall have no obligation to install, erect, test, service,
or maintain the Equipment. Lessee shall look to the manufacturer and/or
seller for any claims related to the Equipment.
If the Equipment is not properly installed, does not operate as represented
or warranted by the supplier or manufacturer, or is unsatisfactory for any
reason, regardless of cause or consequence, Lessee's only remedy, if any,
shall be against the supplier or manufacturer of the Equipment and not
against Lessor.
<PAGE>
Lessor hereby acknowledges that any manufacturer's and/ or sellers
warranties are for the benefit of both Lessor and Lessee. NOTWITHSTANDING
THE FOREGOING, LESSEE'S OBLIGATIONS TO PAY THE RENTALS OR OTHERWISE UNDER
THIS LEASE SHALL BE AND ARE ABSOLUTE AND UNCONDITIONAL. To the extent
permitted by the manufacturer or seller, provided Lessee is not in default
under this Lease, Lessor shall make available to Lessee all manufacturer
and/or seller warranties with respect to Equipment.
Lessee specifically acknowledges that the Equipment is leased to Lessee
solely for lawful commercial or business purposes.
4. STATUTORY FINANCE LEASE
Lessee agrees and acknowledges that it Is the Intent of both parties to this
Lease that it qualify as a statutory finance lease under Article 2A of the
Uniform Commercial Code. Lessee acknowledges and agrees that Lessee has
selected both: (1) the Equipment; and (2) the supplier from whom Lessor is
to purchase of the Equipment. Lessee acknowledges that Lessor has not
participated in any way in Lessee's selection of the Equipment or the
supplier, and Lessor has not selected, manufactured, or supplied the
Equipment.
LESSEE IS ADVISED THAT IT MAY HAVE RIGHTS UNDER THE CONTRACT EVIDENCING THE
LESSOR'S PURCHASE OF THE EQUIPMENT FROM THE SUPPLIER CHOSEN BY LESSEE AND
THAT LESSEE SHOULD CONTACT THE SUPPLIER OF THE EQUIPMENT FOR A DESCRIPTION
OF ANY SUCH RIGHTS.
5. ASSIGNMENT BY LESSEE PROHIBITED.
LESSEE SHALL NOT ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE, OR OTHERWISE DISPOSE
OF, ENCUMBER OR PERMIT A LIEN UPON OR AGAINST ANY INTERESTS IN THE LEASE,
ANY SCHEDULE OR THE EQUIPMENT OR PERMIT THE EQUIPMENT TO BE USED BY ANYONE
OTHER THAN LESSEE OR LESSEE'S EMPLOYEES OR SUBLEASE THE EQUIPMENT COVERED
HEREBY WITHOUT LESSOR'S PRIOR WRITTEN CONSENT.
6. COMMENCEMENT; RENTAL PAYMENTS; INTERIM RENTALS
This Lease shall commence upon the written acceptance hereof by Lessor and
shall end upon full performance and observance by Lessee of each and every
term, condition, and covenant set forth in this Lease, any Schedules hereto
and any extensions hereof. Rental payments shall be in the amounts and
frequency as set forth on the face of this Lease or any Schedules hereto. In
addition to the rental payments set forth herein and in any Schedules
hereto, and provided that Lessee accepts the Equipment on any day of the
month other than the first day of the month, then, with respect to each
Schedule, Lessee shall pay to Lessor interim rent for the use of the
Equipment from the date on which such acceptance occurs through the last day
of that month. Interim rent shall be in an amount equal to 1/30th of the
monthly rental amount, multiplied by the number of days elapsing between the
date on which the Equipment is accepted by Lessee and the last day of the
month in which acceptance occurs. The payment of interim rent shall be due
and payable upon Lessee's receipt of invoices from Lessor therefor. The
rental period under the Lease shall terminate following the last day of the
term stated on the face hereof or in any Schedule hereto unless such Lease
or Schedule has been extended or otherwise modified. The rental payments for
each and all Schedules hereto shall be calculated and fixed at an interest
rate of two hundred (200) basis points above the prime interest rate as
published in The Wall Street Journal on the first Business Day of the
calendar quarter in which Lessor receives a request from Lessee to prepare a
new Schedule hereto. All rental payments shall be calculated In arrears.
Lessee shall not be required to pay to Lessor a security deposit for any
Schedule hereto. Lessor agrees to provide Lessee with one single monthly
invoice inclusive of all Equipment leased hereunder. Lessor shall have no
obligation to Lessee under this Lease if the Equipment, for whatever reason,
is not delivered to Lessee in form satisfactory to Lessor, within ninety
(90) days from the date Lessee orders the Equipment.
<PAGE>
7. LIMITED PREARRANGED AMENDMENTS. SPECIFIC POWER OF ATTORNEY;
In the event it is necessary to amend the terms of this Lease, or the terms of
any Schedule to reflect a change in one or more of the following conditions:
7.1. Lessor's actual cost of procuring the Equipment; or
7.2. Lessor's actual cost of providing Equipment to Lessee; or
7.3. A change in the Lease payments as a result of (1) and/or (2) above; or
7.4. Description of the leased Equipment
Lessee agrees that any such amendment shall be described in a letter from
Lessor to Lessee. Lessee shall respond to such amendment request within ten
(10) business days with its acceptance or rejection of the proposed
amendment. Should Lessee fail to respond, this Lease and any affected
Schedules shall be deemed amended and such amendments shall be incorporated
herein/therein as if originally set forth herein/therein.
Lessee grants to Lessor a specific power of attorney for Lessor to use as
follows: (1) Lessor may sign and file on Lessee's behalf any document Lessor
deems necessary to perfect or protect Lessors Interest in the Equipment or
pursuant to the Uniform Commercial Code; and (2) Lessor may sign, endorse, or
negotiate for Lessor's benefit any instrument representing proceeds from any
policy of insurance covering the Equipment.
8. LOCATION
The equipment shall be kept at the location specified in each Schedule or,
if none is specified, at Lessee's address as set forth above, and shall not
be removed therefrom without Lessor's prior written consent, which shall not
be unreasonably withheld.
9. USE
Lessee shall use the Equipment in a careful manner, shall make all necessary
repairs at Lessee's expense, and shall comply with all laws relating to its
possession, use or maintenance and shall not make any alterations,
additions, or improvements to the Equipment without Lessor's prior written
consent, which shall not be unreasonably withheld. All additions, repairs,
or improvements made to the Equipment shall belong to Lessor.
10. MAINTENANCE SERVICES
At its own expense, Lessee shall maintain the Equipment in the same
condition as when delivered, subject only to ordinary wear and tear. Upon
request, Lessor, or any party designated by Lessor, shall have the right to
inspect the Equipment and Lessee's applicable maintenance records at any
reasonable upon written notification. Should any such inspection reveal that
the Equipment is not being appropriately maintained, The Lessor may, in it's
discretion and at the Lessee's expense, enter into a maintenance agreement
for such Equipment.
If Lessee has specified the inclusion of maintenance services on any
Schedule, Lessor may in it's discretion arrange for the provision of
maintenance service for the products for which the Lessee has ordered
maintenance services. This service will be in accordance with the option
Lessee has selected and with the vendor selected. Lessee acknowledges that
it has read and understands the terms and conditions of the maintenance
service provider's service offerings which Lessee has selected.
11. LESSEE WARRANTIES
11.1. Lessee represents, warrants and covenants to Lessor that:
11.2. Lessee is duly organized, validly existing and in good standing under
the laws of the Jurisdiction in which activities of Lessee require such
qualification.
11.3. Lessee and/or the party that has executed this Lease, Schedules and
Acknowledgment and Acceptance of Equipment has the power and authority to
enter into this Lease and each Schedule.
11.4. This Lease is enforceable against Lessee in accordance with its terms
and conditions and does not create a default under any instrument or
agreement binding on Lessee or its properties.
11.5. There are no pending or threatened actions before any court or
administrative agency that could have a material adverse effect on the
Lessee or this Lease.
11.6. The financial and other information provided to Lessor was and will
be true and correct as of the date made.
11.7. Lessee agrees to deliver to Lessor, at Lessor's request, annual
financial statements, which shall be prepared in accordance with generally
accepted accounting principles, and quarterly unaudited management-prepared
financial statements.
<PAGE>
12. OWNERSHIP; PERSONALITY
The Equipment is, and shall remain, the property of Lessor, and Lessee shall
have no right, title or interest therein or thereto except as expressly set
forth In this Lease. The Equipment shall remain personal property even
though installed in or attached to real property. Lessee hereby agrees to
hold Lessor harmless from and indemnify Lessor with regard to any and all
claims, actions, damages, costs and attorneys fees asserted by any landlord
or mortgagee against Lessor or the Equipment herein.
13. SURRENDER
Upon the expiration or termination of any Schedule or this Lease and
provided that Lessee has not exercised its options as per Section 14, or in
the Event of Default pursuant to Section 21 hereof, Lessee at its expense,
shall return all of the Equipment per each Schedule in good repair, ordinary
wear and tear resulting from proper use thereof alone excepted, by
delivering it, packed and ready for shipment, to such place or carrier as
Lessor may specify within the continental United States. If Lessee fails to
return the Equipment as provided herein, Lessee shall pay Lessor, in
addition to all rent and other purchase option amounts due under this Lease
and the Schedules, a sum equal to six (6) months rent for such Equipment as
liquidated damages to compensate Lessor for the economic loss suffered by
Lessor as a result of its inability to realize the residual value of the
Equipment when anticipated. Lessee agrees to pay Lessor a processing fee for
he return of the Equipment, which shall not exceed ten (10) percent of the
Equipment value as of the date the Lessee executed the Acknowledgment and
Acceptance of the Equipment. Nothing contained herein is intended to relieve
Lessee of its obligations to return the Equipment to Lessor as provided
herein or restrict Lessor's right to recover the Equipment in the event of
the failure of Lessee to so return the Equipment or pay the additional rent
at the expiration or termination of the applicable Schedule.
14. PURCHASE CONVERSION
14.1. Lessee shall have the fight at the end of the initial lease
term to purchase the Equipment on each Schedule for One Dollar ($1.00).
Lessee shall be deemed to have elected the One Dollar ($1) buy out option at
the end of lease term unless the Lessee notifies Lessor in writing not less
than ninety (90) days prior to the end of the lease term of its intent not
to purchase such Equipment.
14.2. Prior to the expiration of the lease term set forth in each Schedule,
Lessee shall have the option to terminate the Lease Agreement, with respect
to each Schedule, through the purchase of the leased Equipment. The purchase
price shall be as indicated on the Purchase Conversion/Buyout Table provided
for each Equipment Schedule
14.3. In the event that Lessee does not purchase the Equipment at the end
of the initial lease term as provided herein, this Lease shall continue in
full force and effect on a month-to-month basis, under the same terms,
conditions and pricing, until such time as Lessee purchases or returns the
Equipment.
15. LOSS AND DAMAGE
Lessee shall bear the entire risk of loss, theft, damage or destruction of
the Equipment from any cause whatsoever, and no loss, theft, damage or
destruction of the Equipment shall relieve Lessee of its obligation to pay
rent or to comply with any other obligation under this Lease.
In the event of damage to any item of Equipment, Lessee shall immediately
place the same in good repair at Lessee's expense. If Lessor determines that
any item of Equipment is lost, stolen, destroyed or damaged beyond repair,
Lessee shall at Lessee's option do one of the two following options:
15.1 Replace the same with like Equipment in good repair, acceptable to
Lessor; or
15.2 Pay Lessor in cash the following: (i) all amounts due by Lessee to
Lessor with respect to all affected Schedules up to the date of the loss;
(ii) the unpaid balance of the total rent for the remaining term of the
affected Schedules attributable to said item, reduced to present value at a
discount rate of 5% as of the date of the loss; and (iii) the Lessor's
estimate as of the time this Lease was entered into of Lessors residual
Interest, if any, in the Equipment, discounted to present value at a
discount rate of 5% as of the date of the loss.
Upon Lessor's receipt of payment as set forth above, Lessee shall be
entitled to the affected Equipment, without any warranties from Lessor. If
insurance proceeds are used to fully comply with this subparagraph, any
balance of such proceeds shall go to Lessee as compensation for loss of use
of the Equipment for the remaining term of the Lease.
<PAGE>
16. LIENS; TAXES
Lessee shall keep the Equipment free and clear of all levies, liens and
encumbrances. Lessee shall pay all charges and taxes (local, state and
federal) which may now or hereafter be imposed upon the ownership, leasing,
rental, sale, purchase, possession or use of the Equipment excluding,
however, all taxes on or measured by Lessor's net income.
17. INSURANCE
At its own expense, Lessee shall provide and maintain the following
insurance:
17.1.1. Insurance against the loss or theft of or damage to the Equipment
for the full replacement value thereof, naming Lessor and its assigns as a
loss payee.
17.1.2. General liability insurance naming Lessor and its assigns as an
additional insured.
Such insurance shall be in a form amount, and with companies satisfactory to
Lessor and shall include the agreement to give Lessor thirty (30) days prior
written notification of cancellation or material change, and shall be
payable to Lessor regardless of any act, omission, or breach by Lessee.
Lessee shall furnish to Lessor from the insurer a certificate of Insurance,
insurance policies or copies thereof or evidence that Lessee is self-insured
on or before the date the Acknowledgment and Acceptance of the Equipment is
executed.
If Lessee fails to procure or maintain said Insurance or to pay said
charges, or taxes, Lessor shall have the right, but shall not be obligated
to effect such insurance, or pay such charges or taxes. In that event,
Lessor shall notify Lessee of such payment and Lessee shall repay to Lessor
the cost thereof within 15 days after such notice is mailed to Lessee.
18. INDEMNITY
Lessee shall indemnify and hold Lessor, its agents, employees, successors
and assigns, harmless from and against any and all claims, actions, suits,
proceedings, costs, expenses, damages or liabilities, including all attorney
fees, arising out of or connected with, or resulting from the Equipment, a
Schedule or this Lease without limitation, the manufacture, selection,
delivery, possession, use, lease, operation, removal or return of the
Equipment. Such indemnification shall survive the expiration, cancellation
or termination of the Lease. Lessee waives any immunity Lessee may have
under any industrial insurance act with regard to indemnification of Lessor.
19. ASSIGNMENT BY LESSOR
LESSOR MAY, WITHOUT CONSENT OR NOTICE TO LESSEE, ASSIGN OR TRANSFER THIS
LEASE OR ANY SCHEDULE OR GRANT A SECURITY INTEREST IN ANY EQUIPMENT, ANY
RENTAL PAYMENTS, OR ANY OTHER SUMS DUE OR TO BECOME DUE HEREUNDER, AND IN
SUCH EVENT ANY ASSIGNEE OF LESSOR SHALL HAVE ALL OF THE RIGHTS, POWERS,
PRIVILEGES, AND REMEDIES BUT NONE OF THE OBLIGATIONS OF LESSOR UNDER THIS
LEASE. LESSEE SHALL RECOGNIZE AND HEREBY CONSENTS TO ANY ASSIGNMENT OF THIS
LEASE BY LESSOR, AND LESSEE SHALL NOT ASSERT AGAINST THE ASSIGNEE ANY
DEFENSE, COUNTERCLAIM, OR OFFSET TO ANY ACTION THAT LESSEE MAY HAVE AGAINST
LESSOR. Lessee agrees that, following its receipt of notice of any
assignment by Lessor of this Lease, any Schedule or the rental payments
payable hereunder, it will pay the rental payments due hereunder directly to
the assignee (or whomever the assignee shall designate). Upon Lessor's
request, Lessee will execute a consent and acknowledgment of Lessor's
assignment to its assignee. Subject to the foregoing, this Lease inures to
the benefit of and is binding upon the heirs, devisees, personal
representatives, survivors, successors in interest and assigns of the
parties hereto.
20. SERVICE CHARGES; INTEREST
If Lessee shall fail to make any payment required by this Lease within 15
days of the due date thereof, Lessee shall pay to Lessor interest on any
delinquent payment or amount due under this Lease from the due date thereof
until paid, at the lesser of the maximum rate of interest allowed by law or
18% per annum.
21. DEFAULT
Lessee shall be in default (Event of Default) of this Lease if:
21.1. Lessee shall fail to make any rental payment or any other amount when
due under the terms of this Lease for a period of 30 days from the due date
thereof; or
21.2. Lessee shall fail to observe, keep or perform any other provision of
this Lease, and such failure shall continue for a period of 30 days from
notification by Lessor, or
<PAGE>
21.3 Lessee has made any misleading or false statement in connection with
Section 11 of this lease; or
21.4. The Equipment or any part thereof shall be subject to any lien, levy,
seizure, assignment, transfer, bulk transfer, encumbrance, application,
attachment, execution, sublease, or sale without prior written consent of
Lessor, or if Lessee shall abandon the Equipment or permit any other entity
or person to use the Equipment other than Equipment utilized at the customer
premise (CPE) without prior written consent of Lessor; or
21.5. Lessee, without the prior written approval of Lessor, which shall not
be unreasonably withheld, sells substantially all of its assets out of the
ordinary course of business, merges or consolidates with any other person,
or sustains a change in the ownership of more than fifty percent (50%) of
its equity to a party that had no ownership interest in Lessee at the
commencement of this Agreement; or if Lessee dies or ceases to exist; or
21.6. Lessee defaults on any other agreement it has with Lessor; or
21.7. Lessee becomes insolvent or makes an assignment for the benefit of
creditors; or a receiver, trustee, conservator or liquidator of Lessee or of
all or a substantial part of its assets is appointed with or without the
application or consent of Lessee; or a petition is filed by or against
Lessee under the Bankruptcy Code or any amendment thereto, or under any
other insolvency law or laws, providing for the relief to debtors, which is
not discharged within thirty (30) days of commencement; or
21.8. Any guarantor of this Lease defaults on any obligation to Lessor, or
any of the above-listed events of default occur with respect to any
guarantor, or any such guarantor files a petition or a petition is filed
against guarantor under the Bankruptcy Code or any amendment thereto, or
under any other insolvency law or laws, providing for the relief to debtors.
22. REMEDIES
If Lessee is in default Lessor, with or without notice to Lessee, shall have
the right to exercise any one or more of the following remedies,
concurrently or separately and without any election of remedies being deemed
to have been made. Lessor may enter upon Lessee's premises and without any
court order or other process of law may repossess and remove the Equipment,
or render the Equipment unusable without removal, either with or without
notice to Lessee. Lessee hereby waives any trespass or right of action for
damages by reason of such entry, removal, or disabling. Any such
repossession shall not constitute a termination of this Lease;
Lessor may require Lessee, at its expense, to return the Equipment in good
repair, ordinary wear and tear resulting from proper use thereof alone
excepted, by delivering it, packed and ready for shipment, to such place or
carrier as Lessor may specify;
Lessor may cancel or terminate this Lease and may retain any and all prior
payments paid by Lessee:
Lessor may declare all sums due and to become due under this Lease
immediately due and payable, including as to any or all items of Equipment,
without notice or demand to Lessee; Lessor may re-lease the Equipment to any
third party, without notice to Lessee, upon such terms and conditions as
Lessor alone shall determine, or may sell the Equipment without notice to
Lessee, at private or public sale, at which sale Lessor may be the
purchaser;
Lessor may sue for and recover from Lessee the sum of all unpaid rents and
other payments due under this Lease then accrued, plus all accelerated
future payments due under this Lease, reduced to their present value using a
discount rate of 5%, as of the date of default, plus Lessor's estimate at
the time this Lease was entered into of the Lessor's residual Interest in
the Equipment, reduced to present value at a discount rate of 5% as of the
date of default, less the net proceeds of disposition if any, of the
Equipment;
To pursue any other remedy available at law, by statute or in equity.
No fight or remedy conferred upon or reserved to Lessor is exclusive of any
other fight or remedy herein, or by law or by equity provided or permitted,
but each shall be cumulative of every other fight or remedy given herein or
now or hereafter existing by law or equity or by statute or otherwise and
may be enforced concurrently therewith or from time to time. No single or
partial exercise by Lessor of any fight or remedy hereunder shall preclude
any other or further exercise of any other fight or remedy.
23. FORCE MAJEURE
Lessor shall have no liability for its delay or failure in performance or
for damages due to fire, explosion, lightning, pest damage, power surges or
failures, strikes or labor disputes, water, acts of God, the elements, war,
civil disturbances, acts of civil or military authorities or the public
enemy, inability to secure raw materials, transportation facilities, fuel or
energy shortages, acts or omissions of communication carriers, or other
causes beyond Lessor's control whether or not similar to the foregoing.
Nothing herein shall obligate Lessor to settle any strike or labor dispute.
<PAGE>
24. SURVIVAL, QUIET ENJOYMENT
All representations, warranties and covenants made by the Lessee hereunder
shall survive the termination of this Lease and shall remain in full force
and effect. All of Lessor's rights and privileges, to the extent that they
are fairly attributable to events or conditions occurring on or prior to the
termination of this Lease, shall survive such termination and be enforceable
by Lessor. So long as no Event of Default exists, Lessor will not interfere
with Lessee's quiet enjoyment of the Equipment.
25. MULTIPLE LESSEES
Lessee and each of them are jointly and severally responsible and liable to
Lessor under the Lease. Lessor may, and with the consent of any one of the
Lessees hereunder, modify, extend or change any of the terms hereof without
consent or knowledge of the others, without in any way releasing, waiving or
impairing any fight granted to Lessor against the others.
26. EXPENSE OF ENFORCEMENT
In the event of any legal action with respect to this Lease, the prevailing
party in any such action shall be entitled to reasonable attorneys fees,
including reasonable attorneys fees incurred at the trial level, including
action in bankruptcy court, on appeal, or review, or incurred without
action, suits or proceedings, together with all reasonable costs and
expenses incurred in pursuit thereof.
27. MISCELLANEOUS
27.1. LESSEE HEREBY ACKNOWLEDGES THAT THIS LEASE IS NONCANCELABLE FOR THE
ORIGINAL RENTAL TERM SET FORTH IN EACH SCHEDULE.
27.2. LESSEE UNDERSTANDS AND ACKNOWLEDGES THAT NO BROKER OR SUPPLIER NOR
ANY SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLER IS AUTHORIZED TO
WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE, AND NO REPRESENTATION AS
TO THE EQUIPMENT OR ANY OTHER MATTER BY A BROKER OR SUPPLIER OR ANY
SALESMAN, BROKER OR AGENT OF ANY BROKER OR SUPPLIER SHALL IN ANY WAY AFFECT
LESSEE'S DUTY TO PAY THE RENTALS AND TO PERFORM LESSEE'S OBLIGATIONS SET
FORTH IN THIS LEASE.
27.3. ONLY THE COPY MARKED "ORIGINAL" SHALL CONSTITUTE CHATTEL PAPER FOR
PURPOSES OF PERFECTING A SECURITY INTEREST UNDER THE UNIFORM COMMERCIAL
CODE.
28. SEVERABILITY
This lease is intended to constitute a valid enforceable legal instrument.
In the event any provision hereof is declared invalid, such provision will
be deemed severable from the remaining provisions of this Lease, all of
which will remain in full force and effect.
29. ENTIRE AGREEMENT; WAIVER
This instrument and the Schedules executed by Lessor and Lessee constitute
the entire agreement between Lessor and Lessee with respect to the Equipment
and the subject matter of the Lease. No provision of this Lease shall be
modified unless in writing signed by an authorized representative of Lessor.
Waiver by Lessor of any provision hereof in one instance shall not
constitute a waiver of any other instance.
30. CHOICE OF LAW; JURISDICTION
This Lease shall not be effective until signed by Lessor at its principal
place of business listed above. This Lease shall be considered to have been
made in the state of Lessor's principal place of business and shall be
interpreted in accordance with the laws and regulations of that state.
<PAGE>
Lessee agrees to jurisdiction in the state of Lessee's principal place of
business in any action, suit, or proceeding arising out of this Lease, and
concedes that it, and each of them transacted business in the said state may be
entering into this Lease. In the event of legal action to enforce this Lease,
Lessee agrees that venue may be laid in the county of Lessor's principal place
of business.
Lessee initials: /s/ SY
------------------------------
LESSEE: NETWORK ACCESS SOLUTIONS, INC. PARADYNE CREDIT CORP., LESSOR:
/s/ Scott Yancey
- -------------------------------- --------------------------------
Scott Yancey Date: 11/17/98 Date:
- -------------------------------- -------------------- -------
printed name printed name
CFO
- -------------------------------- --------------------------------
title title
<PAGE>
Paradyne
Schedule to Master Lease Agreement No. P98-24481
Dated Nov. 17, 1998
Schedule No. 1211-01
<TABLE>
<S> <C>
Lessee Name Lessor Name
Network Access Solutions Paradyne Credit Corporation
100 Carpenter Drive, Suite 206 8454 126th Ave. N.
Sterling, VA 20164 Largo, FL 33773
</TABLE>
This Schedule covers the following described property ("equipment"):
<TABLE>
<CAPTION>
MODEL MANUFACTURER DESCRIPTION PRICE SERIAL # RENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
MODEL MANUFACTURER DESCRIPTION PRICE SERIAL # RENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
MODEL MANUFACTURER DESCRIPTION PRICE SERIAL # RENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
MODEL MANUFACTURER DESCRIPTION PRICE SERIAL # RENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL PURCHASE PRICE ***
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RENT AMOUNT PER MONTH ***
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
The Equipment is hereby leased pursuant to the provisions of the Master Lease
Agreement between the undersigned Lessee and Lessor dated Nov. 17, 1998
("Lease"), the terms of which are incorporated herein by reference thereto.
<TABLE>
<CAPTION>
<S> <C> <C>
A. Term of this schedule (number of months) 48
B. Commencement Date of this schedule ***
C. Service Provider _________ N/A ____________
E. Total Rental Payments ***
F. Advance Rental payments ***
G. All rental payment shall be in the amount of ***
and the first such Rental payment will be due on ***
and subsequent rental payments will be due on the same day,
monthly, thereafter
H. Security Deposit ***
I. Lessee hereby irrevocably authorizes Lessor to insert in this schedule the
Commencement Date and the date due of the first rental payment.
J. Except as expressly provided or modified hereby, all the terms and
provisions of the Master Lese Agreement shall remain in full force and
effect.
</TABLE>
IN WITNESS WHEREOF, this Schedule is hereby executed and agreed to this _____
day of ____________, 19__.
<TABLE>
<CAPTION>
- ------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C>
Lessor: Paradyne Credit Corp. Lessee: Network Access Solutions
By: ______________________ By: _____________________
Signature Signature
Printed Name Printed Name
Title: ______________________ Title: _____________________
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Paradyne
Schedule to Master Lease Agreement No. P98-24481
Dated Nov. 23, 1998
Schedule No. 1211-02
<TABLE>
<S> <C>
Lessee Name Lessor Name
Network Access Solutions Paradyne Credit Corporation
100 Carpenter Drive, Suite 206 8454 126th Ave. N.
Sterling, VA 20164 Largo, FL 33773
</TABLE>
This Schedule covers the following described property ("equipment"):
***
<TABLE>
<CAPTION>
MODEL MANUFACTURER DESCRIPTION PRICE SERIAL # RENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
MODEL MANUFACTURER DESCRIPTION PRICE SERIAL # RENT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
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*** PARADYNE *** ***
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
TOTAL PURCHASE PRICE ***
- ----------------------------------------------------------------------------------------------------------------------
TOTAL RENT AMOUNT PER MONTH ***
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
The Equipment is hereby leased pursuant to the provisions of the Master Lease
Agreement between the undersigned Lessee and Lessor dated Nov. 17, 1998
("Lease"), the terms of which are incorporated herein by reference thereto.
<TABLE>
<CAPTION>
<S> <C> <C>
A. Term of this schedule (number of months) 48
B. Commencement Date of this schedule ***
C. Service Provider _________ N/A ____________
D. Maintenance Option (8X5, 7X24, etc.)
E. Total Rental Payments ***
F. Advance Rental payments ***
G. All rental payment shall be in the amount of ***
and the first such Rental payment will be due on ***
and subsequent rental payments will be due on the same day,
monthly, thereafter
H. Security Deposit ***
I. Lessee hereby irrevocably authorizes Lessor to insert in this schedule the
Commencement Date and the date due of the first rental payment.
J. Except as expressly provided or modified hereby, all the terms and
provisions of the Master Lese Agreement shall remain in full force and
effect.
</TABLE>
IN WITNESS WHEREOF, this Schedule is hereby executed and agreed to this _____
day of ____________, 19__.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------- ----------------------------------------------------
Lessor: Paradyne Credit Corp. Lessee: Network Access Solutions
By: ______________________ By: _____________________
Signature Signature
Printed Name Printed Name
Title: ______________________ Title: _____________________
</TABLE>
*** Confidential information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Exhibit 10.2
PURCHASE AND SALE AGREEMENT
---------------------------
THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as
of the 16th day of October, 1998 by and between Ascend Communications, Inc., a
----
California corporation, having its principal office at 1701 Harbor Bay Parkway,
Alameda, California, 94502 ("Seller") and Network Access Solutions, Inc., a
Delaware corporation having its principal office at 100 Carpenter Drive, Suite
206, Sterling, Virginia 20164 ("Buyer").
WITNESSETH
----------
WHEREAS, Seller manufactures and owns all of the rights, title and interest in
and to the telecommunications network equipment described and identified on
Exhibit A hereto (individually and collectively such items of equipment being
- ---------
referred to as the "Equipment"); and
WHEREAS, Seller and Buyer have reached an understanding whereby Seller has
agreed to cause its affiliate, Ascend Credit Corporation ("Ascend Credit"), to
purchase from Seller and lease to Buyer the items of Equipment ordered from
Seller by the Buyer from time to time, with an option for Buyer to purchase the
leased Equipment from Ascend Credit at the termination of such lease.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Sale and Purchase of Equipment.
------------------------------
(a) Subject to the terms and conditions set forth herein, Seller hereby
irrevocably agrees to sell to Buyer from time to time during the term
of this Agreement and to cause Ascend Credit to purchase from Seller
and lease to Buyer up to $95,000,000 worth of Equipment, as may be
selected by Buyer from the list of available Equipment set forth in
Exhibit A and detailed in a purchase order. Such Equipment shall be
---------
leased and sold on the terms and conditions of that certain Master
Lease Agreement No. 9314 between Buyer and Ascend Credit dated for
reference October 9, 1998, a copy of which is attached hereto as
Exhibit B (the "Lease Agreement").
---------
(b) In consideration for the Equipment, Buyer agrees to pay to Seller ***.
2. Term of Agreement.
-----------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
The term of this Agreement shall be 24 months from the date hereof.
3. Seller's Representations, Warranties and Covenants.
--------------------------------------------------
Seller hereby represents, warrants and covenants to Buyer that:
(a) Seller is a corporation duly organized, validly existing and in good
standing under the laws of California and has all requisite corporate
power and authority to enter into and perform this Agreement and the
transactions contemplated hereby.
(b) All requisite corporate action has been authorized for the execution
and delivery to Buyer of this Agreement and the agreements
contemplated hereunder and for the performance of Seller's obligations
hereunder. This Agreement is a valid and binding obligation of
Seller, enforceable against Seller in accordance with its terms.
(c) There are no actions, suits or proceedings pending or, to the best of
the knowledge of Seller, threatened against or affecting Seller or of
which the Equipment is the subject matter or any proceedings with
respect to Seller or any of the Equipment before any federal, state or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign that would in any way adversely
affect the transactions contemplated herein.
(d) Seller possesses valid legal rights in and title to all of the
Equipment, free from all pledges, liens, security interests,
encumbrances or charges.
(e) All necessary approvals and authority to enter into this Agreement and
bind Seller have been obtained, the person executing this Agreement on
behalf of Seller has express authority to do so and, in doing, to bind
Seller hereto and the execution of this Agreement by Seller does not
violate any provision of any by-law, charter, regulation or any other
governing authority of Seller.
(f) At such time as Buyer exercises its right to purchase the Equipment
under the Lease Agreement, Seller will transfer to Buyer all of its
right, title and interest in and to the Equipment, free and clear of
any Third Party (as defined herein below) rights or other
encumbrances, and Buyer shall have the right to sell, license, assign
or otherwise convey the Equipment to any Third Party. Seller shall
agree to execute any and all instruments and agreements to effect the
conveyance and assignment of the Equipment as Buyer may deem
necessary. The term "Third Party" as used herein means any person or
entity that is not a party to this Agreement.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-2-
<PAGE>
(g) The Equipment delivered to Buyer shall materially conform with and
perform the functions set forth in the specifications attached hereto
as Exhibit A (the "Specifications") as are applicable to the Equipment
---------
and shall be free from defects in material or workmanship that impair
Buyer's use of the Equipment. If notified by Buyer of any such
defects in material or workmanship or nonconformity with the
Specifications, Seller shall, at its election and expense, repair or
replace any such defective Equipment. Any Equipment repaired or
replaced under this Section [3(g)] shall be subject to the provisions
of this Section [3(g)].
4. Buyer's Representations, Warranties and Covenants.
-------------------------------------------------
Buyer hereby represents, warrants and covenants to Seller that:
(a) Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to enter into and perform this Agreement
and the transactions contemplated hereby.
(b) All requisite corporate action has been authorized for the execution
and delivery to Seller of this Agreement and the agreements
contemplated hereunder and for the performance of Buyer's obligations
hereunder. This Agreement is a valid and binding obligation of Buyer,
enforceable against Buyer in accordance with its terms.
(c) There are no actions, suits or proceedings pending or, to the best of
the knowledge of Buyer, threatened against or affecting Buyer or any
proceedings with respect to Buyer before any federal, state or other
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign that would in any way adversely
affect the transactions contemplated herein.
(d) All necessary approvals and authority to enter into this Agreement and
bind Buyer have been obtained, the person executing this Agreement on
behalf of Buyer has express authority to do so and, in doing, to bind
Buyer hereto and the execution of this Agreement by Buyer does not
violate any provision of any by-law, charter, regulation or any other
governing authority of Buyer.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-3-
<PAGE>
5. Seller Financing.
----------------
Seller acknowledges that, as an inducement to Buyer to enter into this Agreement
and to commit a substantial portion of its network technology to Seller, Buyer
is relying on Seller, or its affiliate, to provide financing for all Equipment
purchases hereunder as well as operating capital financing in the manner
described in that certain Letter of Intent dated September 24, 1998, (the
"LOI"), a copy of which is attached hereto as Exhibit C as evidenced by
---------
Promissory Notes made by Buyer in favor of Seller, or its affiliate,
substantially in the form attached hereto as Exhibit D. In the event that
---------
Seller, or its affiliate, *** Buyer as described in the LOI, Buyer *** and
Seller shall *** Buyer *** Buyer pursuant to this Agreement which is *** which
Buyer is then *** Seller, or its affiliate, *** Buyer *** shall be *** made by
Buyer *** .
6. Indemnification.
---------------
Seller and Buyer agree to indemnify and hold each other harmless from and
against all claims, demands or causes of action brought against the other for
injury to persons (including death), or loss or damage to tangible property
(including reasonable legal fees) resulting from the intentional or negligent
acts or omissions, or strict liability, of either party, its officers, agents,
employees, or subcontractors in the performance of this Agreement. If Seller
and Buyer jointly cause such losses, claims, demands, damages, or causes of
action, the parties shall share the liability in proportion to their respective
degree of causal responsibility.
7. Limitation of Liability.
-----------------------
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, IN NO
EVENT, WHETHER AS A RESULT OF BREACH OF CONTRACT, WARRANTY, TORT (INCLUDING BUT
NOT LIMITED TO NEGLIGENCE OR INFRINGEMENT), SHALL SELLER OR BUYER BE LIABLE
UNDER THIS AGREEMENT FOR ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES OF ANY NATURE
WHATSOEVER, INCLUDING LOST PROFITS OF THE OTHER PARTY, BEFORE OR AFTER
ACCEPTANCE, WHETHER OR NOT SUCH DAMAGES ARE FORESEEABLE OR WHETHER A PARTY HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
8. Indemnity for Product Liability.
-------------------------------
Notwithstanding anything contained herein to the contrary, Seller agrees to
defend and indemnify Buyer, its officers, agents and employees, from and against
any damages, claims, demands, liabilities and expenses (including reasonable
attorneys' fees) that arise out of or result from the death or bodily injury to,
or damage to property of any third party resulting solely from a defect in the
Equipment delivered by Seller to Buyer. Seller shall pay all costs, damages and
reasonable attorneys' fees that a court awards as a result of such claim
provided that: (i) Seller
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-4-
<PAGE>
has sole control of the defense and related settlement negotiations; (ii) Buyer
provides Seller with assistance, information and authority reasonably necessary
for Seller to perform its obligations under this Section [8] and (iii) Buyer
notifies Seller in writing within thirty (30) days of the discovery of the
claim.
9. Termination and Default.
-----------------------
(a) Each of Seller and Buyer shall be entitled to terminate this Agreement
in whole or in part:
(i) if either party fails to observe, keep or perform any material
term or condition of this Agreement or repeatedly fails to
observe, keep or perform any non-material term or condition of
this Agreement, which repeated breaches collectively constitute a
material breach;
(ii) if a voluntary or involuntary petition is commenced by or against
either party under any laws relating to bankruptcy, insolvency,
reorganization, moratorium and creditors' rights and remedies
generally, and such voluntary or involuntary petition is not
withdrawn or dismissed, as applicable, within 30 days of filing;
or
(iii) if a party becomes insolvent because they are unable to pay their
debts in the ordinary course of business as they become due, any
substantial part of either party's property becomes subject to
any levy, seizure, assignment, application or sale for or by any
creditor or governmental agency or if a receiver shall be
appointed for either party.
(b) The party seeking to terminate this Agreement shall give the other
party written notice of any of the foregoing claimed to be a basis for
termination and the date of termination. The Agreement shall
terminate no less than fifteen 15 days after receipt of such notice in
the event of the occurrence under Section [9](a)(iii) above. In the
event of an occurrence of an event under Section [9](a)(i), a party in
breach shall have 30 days to cure, if curable, any such breach. In the
event that a party does not cure such breach within that cure period,
the non-breaching party may terminate this Agreement immediately upon
notice to the breaching party.
(c) Any and all provisions of this Agreement which by their nature or
terms contemplate survival beyond the expiration of this Agreement or
which are reasonably necessary to survive termination in order to
achieve their respective fundamental purposes, including, without
limitation, any provisions of this Agreement relating to and
specifically the Sections entitled Indemnification, Limitation of
--------------- -------------
Liability, Indemnity for Product Liability, the provision contained in
--------- -------------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-5-
<PAGE>
Section [3(g)] and Sections [10 through 18] relating to miscellaneous
matters, as applicable, shall survive and continue to bind the parties
following any termination of this Agreement.
10. Dispute Resolution.
------------------
Any dispute arising out of or in connection with this Agreement shall be settled
by arbitration in Alameda, California under the Rules of the American
Arbitration Association ("Rules"), as modified by this Section [10]. The number
of arbitrators shall be one (1). The arbitrator shall be appointed by the
parties, if both parties agree on an arbitrator. If the parties are unable to
agree on an arbitrator within fifteen (15) days of the date of a request for
arbitration made by any party hereto, then the arbitrator shall be appointed in
accordance with the Rules. The decision of the arbitrator shall be delivered in
writing to, and shall be binding upon, the parties and judgment may be entered
upon such award in any court of competent jurisdiction.
11. Governing Law.
-------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of California, not including the conflicts of laws principles of that
jurisdiction.
12. Letter of Intent.
----------------
The terms and conditions contained in Sections 1 through 8 and 10 through 11 of
the LOI that are not specifically addressed in the body of this Agreement are
incorporated herein by reference and made a part of this Agreement with the same
force and effect as though set forth in their entirety herein and the parties
hereto agree that they shall be bound by all such terms and conditions. In the
event of any conflict or inconsistency among the provisions of this Agreement
and the LOI, such conflict or inconsistency shall be resolved by giving
precedence to this Agreement and thereafter to the LOI.
13. Severability.
------------
In the event any provision of this Agreement shall be held invalid, illegal or
unenforceable by a court of competent jurisdiction, the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
14. Headings.
--------
The headings of the sections of this Agreement are for convenience of reference
only and are not to be considered in construing this Agreement.
15. Counterparts.
------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-6-
<PAGE>
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one instrument.
16. Waivers and Amendments.
----------------------
Except as otherwise expressly provided herein, this Agreement or any provision
hereof may be amended, waived, discharged or terminated only by a statement in
writing signed by the parties hereto.
17. Notices.
-------
Except as otherwise expressly provided herein, any notice required or permitted
hereunder shall be given in writing and shall be deemed to have been duly given
upon receipted personal delivery (professional courier permissible), receipted
certified delivery or registered mail delivery to the last address either party
(with respect to itself) furnishes to the other party in writing, or electronic
transmission, with a confirmation copy sent in the manner previously described.
Any notice or communication required or desired to be served, given or delivered
hereunder shall be in the form and manner specified below, and shall be
addressed to the party to be notified as follows:
<TABLE>
<S> <C>
If to Lender: Ascend Communications, Inc.
1701 Harbor Bay Parkway
Alameda, California 94502
Attention: Fran Jewels, Esq.
Telecopier: (510) 747-2638
If to Borrower: Networks Access Solutions, Inc.
100 Carpenter Dr.
Sterling, VA 20164
Attention: Scott Yancey, CFO
Telecopier: (703) 742-7706
</TABLE>
18. Effective Date.
--------------
This Agreement shall become effective on the date first written above.
19. Entire Agreement.
----------------
This document and the attached Exhibits represent the entire Agreement of the
parties with respect to its subject matter.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-7-
<PAGE>
IN WITNESS WHEREOF the parties hereto have authorized their respective
representatives to execute this Agreement as of the day and year first herein
before written.
Seller:
- ------
ASCEND COMMUNICATIONS , INC.
By: /s/ Bernard V. Schnader
---------------------------
Name: Bernard V. Schander
---------------------------
Title: Treasurer
---------------------------
Buyer:
- ------
NETWORK ACCESS SOLUTIONS, INC.
By: /s/ Scott G. Yancey
---------------------------
Name: Scott G. Yancey
---------------------------
Title: Chief Financial Officer
---------------------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-8-
<PAGE>
EXHIBIT A
---------
LIST OF AVAILABLE EQUIPMENT,
----------------------------
SPECIFICATIONS (including Core Systems Publications Library, dated 2/98),
-------------------------------------------------------------------------
ASCEND/NAS-CuNet SERVICE MARKETING PROGRAM PROPOSAL,
----------------------------------------------------
AND PRICING
-----------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Ascend's xDSL
Proposal for Network Access Solutions
for CopperNet Service
&
Financial Term Sheet
August 25, 1998
-----------------------------------------------
ASCEND LOGO
-----------------------------------------------
Ascend Communications, Inc.
<PAGE>
Ascend Proprietary and Confidential
<TABLE>
<S> <C> <C> <C>
1. INTRODUCTION............................................................................. 1
1.1 Ascend's MultiDSL Strategy.......................................................... 1
1.2 Ascend's MultiDSL solution.......................................................... 1
1.3 Ascend's Vision..................................................................... 2
2. DIGITAL SUBSCRIBER (DSL)................................................................. 3
2.1 Data Rates.......................................................................... 3
2.2 Line Rates.......................................................................... 3
2.3 Port Capacity....................................................................... 3
3. CENTRAL OFFICE EQUIPMENT (COE)........................................................... 5
3.1 COE Availability.................................................................... 5
3.2 DSLTNT/TM/.......................................................................... 5
3.3 IDSL line card for MAX 4002 and 4004................................................ 6
3.4 IDSL line card for DSLTNT and MAX TNT............................................... 6
3.4.1 IDSL Capacity.................................................................. 6
3.4.2 IDSL Packet Flow............................................................... 7
3.5 SDSL line card for DSLTNT and MAX TNT............................................... 7
3.5.1 SDSL Capacity.................................................................. 7
3.5.2 SDSL Packet Flow............................................................... 7
3.6 RADSL-CAP line card for DSLTNT and MAX TNT.......................................... 7
3.6.1 RADSL Implementation........................................................... 8
3.6.2 Intra-building solutions....................................................... 8
3.6.3 Provision and Manage RADSL..................................................... 9
3.6.4 Integrated voice and data capabilities provide flexibility over a single pair.. 9
3.6.5 ADSL Capacity.................................................................. 9
3.6.6 ADSL Packet Flow............................................................... 9
3.7 RADSL-DMT line card for DSLTNT and MAX TNT.......................................... 10
3.8 RADSL-CAP Stand-alone COE Unit...................................................... 10
3.9 SDSL Stand-alone COE Unit........................................................... 10
4. CUSTOMER PREMISES EQUIPMENT (CPE)........................................................ 10
4.1 CPE Availability.................................................................... 10
4.2 Pipeline............................................................................ 10
4.3 DSLPipe Requirements and Features................................................... 11
4.4 DSLPipe-S........................................................................... 11
4.5 DSLPipe-2S.......................................................................... 12
4.6 DSLPipe-C........................................................................... 12
4.7 DSLPipe-D........................................................................... 12
4.8 Splitters........................................................................... 12
4.8.1 Passive Splitter............................................................... 12
4.8.2 ANSI T1.413.................................................................... 13
4.8.3 Siecor support as the NID vendor............................................... 13
4.8.4 Remote Site POTS splitter configuration........................................ 13
4.8.5 Central Site POTS splitter configuration....................................... 13
4.8.6 POTS splitting In the Central Office........................................... 14
4.8.7 Standard 50 Pin Telco Connectors............................................... 14
4.8.8 Un-interruptable POTS service in the event of a power failure at either end.... 14
4.9 Miscellaneous DSLPipe............................................................... 14
4.9.1 Network Address Translation (NAT) products..................................... 14
4.9.2 Rate Adaptation................................................................ 14
4.9.3 Multiple MAC Addresses......................................................... 15
4.10 Miscellaneous Pipeline......................................................... 15
4.10.1 Maximum number of concurrent TCP & UDP sessions and users supported............ 15
</TABLE>
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
<TABLE>
<S> <C> <C> <C>
4.10.2 LAN and WAN Interfaces, and the maximum number supported....................... 15
5. MISCELLANEOUS............................................................................ 15
5.1 Interoperability.................................................................... 15
5.2 Bridging and Routing................................................................ 16
5.2.1 DSLPipe Bridging and Routing................................................... 16
5.2.2 Bridging and Routing Configuration............................................. 16
5.2.3 Bridging and/or routing protocol support....................................... 16
5.3 LAN segment limitations............................................................. 16
5.4 Statistical Multiplexing/Bandwidth Optimization..................................... 16
6. SECURITY................................................................................. 17
6.1 Secure Access....................................................................... 17
6.2 Authentication...................................................................... 17
6.3 Filtering........................................................................... 17
6.3.1 Traffic Filtering Functionality................................................ 18
6.4 Comprehensive security for iron-clad remote networking.............................. 18
6.5 Secured Connections................................................................. 18
6.6 Security............................................................................ 18
6.6.1 Password....................................................................... 19
7. SOFTWARE PRODUCT FUNCTION................................................................ 19
8. MULTIDSL PRODUCT MATRIX.................................................................. 19
9. MULTIDSL PORT DENSITY.................................................................... 20
</TABLE>
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
1. Introduction
Plain Old Telephone Service (POTS) requires a twisted pair of copper wire (two
wires) between the residence/home and the Central Office (CO) of the telephone
company. Currently, there are over 800+ million such telephone lines that exist
worldwide between the CO and the residences.
These telephone lines are used not only for voice conversation but also for
sending data between two remote locations using analog modems. The modem
technology seems to have reached its speed limit (currently 33.6 Kbps), although
an asymmetric 56K capability was recently announced over these telephone voice
grade lines. Next came ISDN, Basic Rate Interface (BRI) with speeds up to 128
Kbps of user data.
The carriers' Public Switched Telephone Network (PSTN) was originally designed
for voice calls only. On an average, voice calls last three to five minutes.
Data calls last around 20 minutes. When data calls use the same PSTN as voice
calls, the result is bottlenecks and switch congestion. The explosion of
Internet with more users making data calls over the PSTN, has compounded network
congestion. There can be serious consequences if the PSTN is overloaded when
voice calls have to be made for emergency services.
Cable companies such as TCI, the largest cable provider in US, are planning to
offer data services using their cable network. This competitive pressure, along
with the recent deregulation in the telephone industry, has forced telephone
companies to look for alternate ways to offer high-speed data services at an
affordable price by reusing the existing copper wires.
Digital Subscriber Line (DSL) technology includes a variety of digital signaling
methods that provide high-speed access at 128 Kbps to 7 Mbps. This technology
affects the physical layer. It can utilize a wide range of existing protocols
such as Point-to-Point Protocol (PPP), MultiLink PPP (MPP), MultiLink Protocol
Plus/TM/ (MP+), Frame Relay and Asynchronous Transfer Mode (ATM) at the link and
network level.
1.1 Ascend's MultiDSL Strategy
Ascend's Mu1tiDSL/TM/ is a family of DSL products that include both the Central
Office Equipment (COE) and Customer Premises Equipment (CPE) required for a wide
range of DSL technologies including IDSL, SDSL, RADSL-CAP and RADSL-DMT. All of
these DSL technologies utilize the existing pair of wires between the Central
Office (CO) and the residences/businesses. The MultiDSL products for COs permit
carriers to launch high-speed access services from 128 Kbps to 7 Mbps. The COE
consists of DSL line cards for the MAX/TM/ 4000, 4002, 4004, DSLTNT/TM/ and MAX
TNT/TM/ family of products. The DSLPipe /TM/ family offers CPE products for the
various DSL technologies.
With the MultiDSL offering, Ascend becomes the only vendor in the industry to
offer a truly integrated DSL solution for both COE and CPE.
1.2 Ascend's MultiDSL solution
Ascend is the only vendor in the industry to offer a fully integrated single
platform such as MAX 4000, 4002, 4004, DSLTNT or MAX TNT that can deliver
multiprotocols (IP, IPX, PPP, MP, MP+, Frame Relay, routing/bridging,
authentication and security) and multiservice (analog, ISDN, Frame Relay and
MultiDSL). Ascend's MAX family of products is installed in hundreds of networks
and delivers the reliability, scalability and functionality to offer a fully
integrated DSL WAN access switch.
With the introduction of the Mu1tiDSL strategy and products, Ascend has once
again proven to be the leader in remote networking, so Ascend's customers can
offer competitive services to their end users.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
1.3 Ascend's Vision
***
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-2-
<PAGE>
2. Digital Subscriber (DSL)
Digital Subscriber Line technologies benefit from the fact that higher bandwidth
can be attained on the copper pair between the CO and residence/business by
operating at to 1.2 MHz, as opposed to analog modems that are limited to 300-
3,400 Hz.
There are a wide range of DSL technologies such as IDSL, SDSL, HDSL and RADSL
that can operate on the existing pair of copper wire.
2.1 Data Rates
<TABLE>
<CAPTION>
xDSL Downstream Upstream Loop Cable Modulation Pots
Length Gauge Technique Supported
(reach)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
IDSL 128 Kbps 128 Kbps 18,000 ft. 26 AWG 2B1Q No
SDSL 768 Kbps 768 Kbps 11,400 ft. 26 AWG 2B1Q No
ADSL-CAP 1.54 Mbps** 64 Kbps** 18,000 ft. 24 AWG CAP Yes
ADSL-CAP 6.14 Mbps** 640 Kbps** 12,000 ft. 24 AWG CAP Yes
ADSL-CAP 7.l68 Mbps** 1Mbps** 9,000 ft. 24 AWG CAP Yes
ADSL-DMT 1.54 Mbps** 176 Kbps** 18,000 ft. 24 AWG DMT Yes
ADSL-DMT 6.14 Mbps** 640 Kbps** 12,000 ft... 24 AWG DMT Yes
ADSL-DMT 7.168 Mbps** 640 Kbps** 10,000 ft. 24 AWG DMT Yes
</TABLE>
**Both CAP and DMT are RADSL implementations. Data rates may vary substantially
depending upon the line length, condition and noise environment.
2.2 Line Rates
The table below outlines the different MultiDSL offerings provided by Ascend.
Minimum line rates for CAP based ADSL are 64 Kbps upstream and 1.54 Mbps
downstream. DMT based ADSL provides a minimum bandwidth of 178 Kbps upstream and
1.54 Mbps downstream.
<TABLE>
<CAPTION>
xDSL Upstream Downstream Loop Length Bound
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ISDL 128 Kbps 128 Kbps 18,000 ft. N/A
SDSL 768 Kbps 768 Kbps 12,000 ft. N/A
ADSL-CAP* 64 Kbps 1.54 Mbps 18,000 ft. Minimum
640 Kbps 6.14 Mbps 12,000 ft. Maximum
ADSL-DMT* 176 Kbps 1.54 Mbps 18,000 ft. Minimum
640 Kbps 6.14 Mpbs 12,000 ft. Maximum
</TABLE>
* Rate adaptive
* Expected performance
2.3 Port Capacity
<TABLE>
<CAPTION>
xDSL Ports per MAX Ports per MAX Ports per 3 CPE Equipment
TNT Line Card TNT shelf Chassis MAX
TNT System
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IDSL 32 224 672 P50/75, Netwarp
SDSL 16 240 720 DSLPipe-S
</TABLE>
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-3-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
ADSL-CAP 6 90 270 DSLPipe-C
ADSL-DMT TBD TBD TBD DSLPipe-D
</TABLE>
Both the ADSL line types are rate adaptive, offering a wide range of rates using
the same CPE and COE equipment. Moreover, the ability to offer Frame Relay based
PVC over the subscriber link allows one to set differing Committed Information
Pate per PVC allows a finer granularity in which bandwidth over the subscriber
loop can be controlled while maintaining the same CPE and COE based devices.
Considering each PVC represents a concurrent virtual link to a separate
destination or service across the transport network, the ability to set CIR
provides the further benefit of controlling the amount bandwidth that any one
service is allocated.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-9-
<PAGE>
3. Central Office Equipment (COE)
Ascend offers a comprehensive range of DSL products for both the central office
and customer premises. The DSLTNT, MAX TNT, MAX 4000, 4002 and 4004 products
deliver the multiprotocol, multiservice capabilities that are required at the
central office of the carriers and service providers.
Ascend's Digital Subscriber Line cards are supported on the MAX 4000, 4002,
4004, DSLTNT and MAX TNT. The support of these line cards ensures that the MAX
4000, 4002, 4004, DSLTNT and MAX TNT products continue to offer the next
generation of high-speed services from carriers and service providers. These
services may be Internet access, remote office connectivity or telecommuting
applications that demand high bandwidth.
Support of both PPP and Frame Relay protocols in the MAX products ensure greater
flexibility and investment protection for both carriers as well as subscribers.
3.1 COE Availability
<TABLE>
<CAPTION>
Items Port Density Max # of Availability
Ports
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IDSL line cards for MAX 4002 and 4004 8 ports 40 Now
IDSL line cards for DSLTNT and MAX TNT 32 ports 224 Now
SDSL line card for DSLTNT and MAX TNT 16 ports 240 Now
RADSL-CAP line card for DSLTNT and MAX TNT 6 ports 90 Now
RADSL-DMT line card for DSLTNT and MAX TNT TBD TBD 1998
TBD RADSL-CAP stand-alone unit 1 port - Now
SDSL stand-alone unit 1 port - Now
</TABLE>
3.2 DSLTNT/TM/
The DSLTNT is a fully integrated, true multiservice xDSL concentrator designed
for a telephone company's Central Office (CO). The DSLTNT consists of a 14"
chassis with support for DC or AC power supplies, a main controller module and
16 slots for MultiDSL line cards (e.g. IDSL, SDSL, HDSL, RADSL-CAP and RADSL-
DMT) and network interface cards such as DS-3, T1/PRI, E1/PRI, Frame Line,
10Base-T, 100Base-T, FDDI and HSSI.
The DSLTNT is designed as a basic chassis with provision to upgrade to add
additional functionality as required by the service providers. These additional
functionality are controlled through softkey or hash codes.
All MultiDSL line cards and other slot cards that are used with MAX TNT can be
used with DSLTNT as well thus protecting Ascend's customers' investment on
DSLTNT and MAX TNT systems.
The DSLTNT basic chassis includes support for 1 power supply (AC/DC), one main
controller card and support for RADSL-CAP/DMT line cards and network interface
cards. The DSLTNT may be upgraded using softkey (hash code) to add support for
IDSL and SDSL line cards. This helps service providers to get RADSL services off
the ground cost effectively and at the same time has the flexibility to offer
other xDSL services as the market demands in the future.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-5-
<PAGE>
The DSLTNT is modular and permits service providers to install various hot-plug-
in MultiDSL line cards and offer different xDSL services concurrently using a
single manageable platform. The redundant power supplies ensure continuous
operation under unforeseen circumstances while sharing the load under nor-mal
conditions.
The DSLTNT offers the highest port density of IDSL, SDSL, RADSL-CAP and RADSL-
DMT line cards. At the same time, the DSLTNT utilizes minimum power for these
various MultiDSL line cards to meet the low power consumption requirement of the
telephone companies' Central Office (CO).
o DSLTNT is a 14" chassis with 16-slots for line cards and/or network
interface cards
o Load sharing redundant power supply (AC/DC)
o Wide range of xDSL support on a single platform: IDSL, SDSL, RADSL-CAP
and RADSL-DMT
o Supports other traditional data services
o Highest xDSL port density in the industry per 7-foot rack; Up to 1344
IDSL ports; Up to 1440 SDSL ports; Up to 540 RADSL-CAP ports
o Wide range of egress to the network: DS-3, T1/PRI, E1/PRI, Serial WAN,
HSSI, 10Base-T and 100Base-T
o Lowest power consumption per port; 0.5 Watts per IDSL port, 1.25 Watts
per SDSL port, 5.0 Watts per RADSL-CAP port
o Transport protocols: Point-to-Point Protocol (PPP), MP, MP+ or Frame
Relay
o Manageable from a central network management system and SNMP support
o Fits seamlessly into the existing authentication infrastructure such as
RADIUS, TACACS+, Token cards
3.3 IDSL line card for MAX 4002 and 4004
The IDSL Line cards offer eight ports per card and up to five cards per MAX
4000, 4002 and 4004, for a total of up to 40 IDSL ports. Each IDSL port supports
a 128 Kbps digital connection to subscribers and connects end users' ISDN
terminal adapters, Ascend's Pipeline and IP application software.
An HDLC controller card is required if more than four IDSL cards are installed.
Also, ISDN signaling software is required for IDSL to function. The IDSL cards
support voice/fax and data over the same IDSL line permitting 128 Kbps data
while dynamically relieving and assigning 64 Kbps or 128 Kbps for voice/fax and
later on back to data.
3.4 IDSL line card for DSLTNT and MAX TNT
The IDSL line card for the DSLTNT and MAX TNT supports 32 ports per card and
occupies one slot. The DSLTNT and MAX TNT may support up to 7 cards for a total
of 224 IDSL ports. Each IDSL port supports a 128 Kbps digital connection to
subscribers and connects end users' (third party) ISDN terminal adapters,
Ascend's Pipeline and IP application software. ISDN signaling software is
required to support IDSL. HDLC cards are not required since the HDLC controllers
are built into the IDSL Card itself.
3.4.1 IDSL Capacity
<TABLE>
<CAPTION>
Per Module Capacity Per Shelf Capacity Per System Capacity
<S> <C> <C>
32 circuits per module 7 ISDL Modules per Shelf 21 IDSL Modules per system
224 IDSL connections per Shelf 672 per system
</TABLE>
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-6-
<PAGE>
3.4.2 IDSL Packet Flow
IDSL is an innovation from Ascend that provides a standard ISDN BRI U interface
for data only services that may remain "up all the time" without using any
resources of the public switched telephone network. The subscriber is equipped
with any ISDN Terminal Adapter supporting PPP/MP/MP+. When the subscriber is
ready to communicate with the Internet or corporate intranet, the CPE "places a
call" to the CO based MAX across the 2 wire local loop using standard ISDN BRI D
channel signaling. Each called number may represent a specific Internet service
provider or corporate Intranet and do not have to be real telephone numbers. The
CO based MAX "answers the call" and does one of many things based on how the
customer is configured.
3.5 SDSL line card for DSLTNT and MAX TNT
The SDSL line card for DSLTNT and MAX TNT supports 16 ports per card and
occupies one slot. The DSLTNT and MAX TNT may support up to 15 cards for a total
of 240 SDSL ports. Each SDSL port supports a 768 Kbps digital connection to
subscribers' SDSL CPE equipment such as Ascend's DSLPipe-S (SDSL).
3.5.1 SDSL Capacity
<TABLE>
<CAPTION>
Per Module Capacity Per Shelf Capacity Per System Capacity
<S> <C> <C>
15 ports per module 15 SDSL Modules per Shelf 45 SDSL Modules per system
240 SDSL connections per Shelf 720 per system
</TABLE>
3.5.2 SDSL Packet Flow
SDSL is a single pair, 768 Kbps symmetric, data only access service that uses
frame relay as the layer two protocol across the local loop. The subscriber is
equipped with a DSLPipe S. Traffic leaves one or more personal computers onto an
Ethernet and into the DSLPipe S. Because SDSL uses frame relay, and the MAX TNT
may be configured as a frame relay concentrator, a PVC may be defined from the
DSLPipe S to the MAX where authentication and routing functionality may be
utilized to access multiple service destinations, or a PVC may be defined from
the DSLPipe S all the way through the MAX and through the Network core to the
ISP or corporate frame relay router.
3.5.2.1 Support for multiple Frame Relay PVCs
Support for multiple Frame Relay PVCs across the local loop has been added to
the DSL Pipe S. Traffic leaves one or more personal computers onto an Ethernet
and into the DSLPipe S. The DSLPipe dynamically makes a routing or bridging
decision (depending upon configuration) to determine which PVC leads to the
appropriate service destination.
3.6 RADSL-CAP line card for DSLTNT and MAX TNT
The Rate Adaptive RADSL (RADSL) adapts dynamically to the line condition and
optimizes the transmission date rate. The RADSL-CAP line card for DSLTNT and MAX
TNT supports six ports per card and occupies one slot. The DSLTNT and MAX TNT
may support up to 15 cards for a total of 90 RADSL-CAP ports. Each RADSL-CAP
port supports digital connection with speeds up to 7 Mbps downstream and 1 Mbps
upstream to subscribers' RADSL CPE equipment such as Ascend's DSLPipe-C (RADSL-
CAP).
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-7-
<PAGE>
<TABLE>
<CAPTION>
ADSLType Upstream Downstream Loop Length Bound
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ADSL-CAP 64 Kbps 1.54 Mbps 18,000 ft. Minimum
640 Kbps 6.14 Mbps 12,000 ft. Maximum
ADSL-DMT 176 Kbps 1.54 Mbps 18,000 ft. Minimum
</TABLE>
Current product provides 2.5 Mbps down and 1.0Mbps upstream maximum rates.
3.6.1 RADSL Implementation
Ascend's Rate Adaptive Asymmetric Digital Subscriber Line (RADSL) products
provide carriers, corporations and service providers both the Central Office
Equipment (COE) and the Customer Premises Equipment (CPE) required for
immediately implementing multiple DSL technologies. This offering utilizes the
existing single pair copper to combine data, voice and video traffic over a
RADSL line at speeds up to 7 Mbps. By consolidating access lines and minimizing
changes to the existing infrastructure, Ascend's RADSL solution reduces the
overall cost of ownership.
Rate Adaptive Asymmetric Digital Subscriber Line (RADSL) is part of Ascend's
broad range of MultiDSL offerings and is designed to give carriers, service
providers and corporations a cost-effective way to immediately enter the DSL
market. RADSL works by adapting transmission speed based on the length and
signal quality of the local loop. This ensures that subscribers will have a
higher quality transmission, especially when there is noise on the line.
It is the fastest of the DSL technologies that operates on a copper wire and
supports up to 17,000 feet distance on a copper pair. For distances of 10,000
feet, the data rate on the downstream portion of the circuit (CO to the
subscriber) is 7 Mbps while the data rate on the upstream portion (subscriber to
the CO) is l Mbps. At 12,000 feet, the data rate is 2.5 Mbps on the downstream
and l Mbps on the upstream. At 17,000 feet, the data rate is 640 Kbps on the
downstream and 544 Kbps on the upstream. Implementing asymmetric rates is
desirable in situations where higher bandwidth is needed on the downstream path
from a central site or Internet. RADSL-Carrierless Amplitude Phase (RADSL-CAP)
modulation divides the spectrum into three parts with the lower band designated
for voice transmission. The higher band is used for data transmission and
optimum speed is determined dynamically.
Ascend's RADSL-CAP products include both the Central Office Equipment (COE) and
the Customer Premise Equipment (CPE) required for implementing RADSL-CAP-based
services immediately. The COE includes the DSL/MAX TNT as well as RADSL line
cards. Users can place the DSL/MAX TNT in their networks to offer high-speed
RADSL services as well as support for IDSL, SDSL (Single pair HDSL), analog,
ISDN and Frame Relay. The CPE consists of DSLPipe products, which are high-speed
routers based on Ascend's award-winning Pipeline(R) product family. Together,
these products are part of the most comprehensive DSL product line available on
the market today.
Implementing RADSL can be as easy as installing a high-density DSL/MAX TNT/TM/
multiservice platform along with RADSL line card modules. As requirements
change, use the same platform to support MultiDSL/TM/ technologies such as IDSL,
single pair HDSL as well as analog, ISDN or Frame Relay. End users can take
advantage of high-speed RADSL services using a DSLPipe/TM/. This powerful router
lets users access multiple destinations simultaneously to download high-
resolution graphics, participate in Web hosting or to support intra-building
applications. Ascend's RADSL products offer a complete, turnkey xDSL solution
for satisfying high-bandwidth applications.
3.6.2 Intra-building solutions
RADSL-CAP is a secure and inexpensive intra-building solution for corporations,
property management firms and network service providers. With a DSL/MAX TNT and
RADSL-CAP line cards, network managers can cost-effectively offer analog, data
and video services to subscribers who work or live in a high-rise building,
apartment
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-8-
<PAGE>
complex or campus environment A DSL/MAX TNT can be installed in the wiring
closet and connected to all groups or businesses in the building/campus using
the existing telephone wire. Each group has a unique connection. protecting the
data from unauthorized access. With Ascend's RADSL-CAP solution, network
managers have minimal wiring requirements and simplified management while
subscribers have the throughput needed for the most bandwidth-intensive
applications.
3.6.3 Provision and Manage RADSL
Ascend's RADSL technology lets network administrators manage the RADSL lines
directly from the central office, allowing them to reduce on-site maintenance
costs. In addition, Ascend's NavisAccess network management software gives
network managers customized information about the MAX for in-depth, end-to-end
network control.
o Real Time Signal Quality measures signal strength and line quality,
allowing network managers to pinpoint any copper-related problems
o NavisAccess provides discovery and mapping, configuration management,
performance measurement and fault monitoring
o Out of service command lets the network admin take a line out of service
for diagnostic purposes
o Loopback test command lets service providers place a line in loopback
model
3.6.4 Integrated voice and data capabilities provide flexibility over a single
pair
Ascend's RADSL-CAP solution lets service providers split a single-pair local
loop to offer subscribers high-speed data links as well as regular telephone
service over a single line. In the past, both analog and digital calls were
first processed through the CO switch before arriving at the data network.
Because RADSL data calls are routed directly to the data network, the CO switch
is free to handle voice calls without bottlenecks or delays. By using a
splitter, subscribers can use a single line to make calls, send e-mail and surf
the Internet.
o Data and voice over a single pair
o Direct connection to the data network
o Lifeline POTS with splitters
3.6.5 ADSL Capacity
<TABLE>
<CAPTION>
Per Module Capacity Per Shelf Capacity Per System Capacity
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
6 circuits per module 15 ADSL Modules per Shelf 45 ADSL Modules per system
90 ADSL connections per Shelf 270 per system
</TABLE>
o Single slot card (CAP or DMT)
o Utilizing Rate Adaptive DSL (RADSL)
3.6.6 ADSL Packet Flow
This scenario is quite similar to the SDSL scenario in that the subscriber has a
DSLPipe, this time a model "A" for ADSL, and frame relay is used as the layer
two protocol across the local loop. Packets are routed the same as described for
SDSL, but now we may offer lifeline POTS service to the subscriber at the same
time over the same single pair local loop.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-9-
<PAGE>
3.7 RADSL-DMT line card for DSLTNT and MAX TNT
The RADSL-CAP line card for the DSLTNT and MAX TNT provides a digital connection
with speeds of 7 Mbps downstream and 1 Mbps upstream to subscribers' RADSL-DMT
CPE equipment such as Ascend's DSLPipe-D (RADSL-DMT). The main difference
between the RADSL-CAP and RADSL-DMT line cards is in the modulation technique
used. Although the Discrete Multi-Tone (DMT) has been accepted as the standard
(ANSI T1.413), the Carrier Amplitude Phase Modulation is more widely used by the
carriers. Ascend's DSLTNT and MAX TNT provides a solution for both types of
modulations.
3.8 RADSL-CAP Stand-alone COE Unit
The RADSL-CAP Standalone unit provides 1 RADSL-CAP port, 1 Ethernet port and 1
console port. This works in conjunction with the DSLPipe-C (CPE) to deliver up
to 7 Mbps downstream and 1 Mbps upstream for a distance of 10,000 feet, 2.5 Mbps
downstream and 1 Mbps upstream for up to 1200 feet and 640 Kbps downstream and
544 Kbps upstream for up to 17,000 feet.
3.9 SDSL Stand-alone COE Unit
The DSLPipe-S/TM/, an SDSL customer premises equipment (CPE) may be converted
into a stand-alone COE by switching the jumper settings inside unit. With the
COE configuration, this stand-alone unit may be connected to a DSLPipe-S (CPE)
and two networks may be connected at 768 Kbps for up to l2,000 feet.
4. Customer Premises Equipment (CPE)
Ascend's Pipeline products are offered as the CPE for the IDSL solution, and the
DSLPipe products are offered as the CPE for other DSL technologies. These
include the DSLPipe-S (SDSL), DSLPipe-C (RADSL-CAP) and DSLPipe-D (RADSL-DMT).
4.1 CPE Availability
<TABLE>
<CAPTION>
Items Port Density Availability
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
DSLPipe-C 1 RADSL(CAP), 1 Ethernet, 1 console port Now
DSLPipe-D 1 RADSL(DMT), 1 Ethernet port, 1 console port 1998
DSLPipe-S 1 SDSL, 1 Ethernet port, 1 console port Now
DSLPipe-2S 2 SDSL Ports, 1 Ethernet port, 1 Console Port Now
</TABLE>
4.2 Pipeline
The Pipeline products are the IDSL-based CPEs from Ascend. Since Ascend's IDSL
solution is based on 2B1Q signaling, a standard used with ISDN BRI circuits, it
will function with ISDN BRI terminal adapters from third party vendors as well.
Pipeline 25-Px, 50, and 75 models support high-speed ISDN BRI communications for
stand-alone PCs and PC/LANs. Analog devices are supported on the Pipeline 25-Px,
25-Fx and 75 models. High-performance Pipeline 130 models support growth from a
56 Kbps Frame Relay dial-up or leased line connection at up to T1/E1 speeds. The
Pipeline 130 provides a dedicated WAN connection and an integrated switched
connection for mission-critical backup and overflow applications.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-10-
<PAGE>
4.3 DSLPipe Requirements and Features
Ascend's DSLPipe family of xDSL CPE is based on the award winning, market share
leading Pipeline family of CPE, we are able to leverage several years of feature
development targeted at the power user immediately into our DSL CPE.
The requirements that have been addressed by our CPE development include:
o Easy to configure, easy to use, easy to troubleshoot
o Transparently and dynamically communicate with multiple destinations
o Support for market share leading protocols (IP, IPX)
o Support for dynamically assigned addresses
o Support for systems using "illegal" addresses
o Small footprint
Thc features that have been developed in the Pipeline family that are or will be
available in the DSLPipe CPE family to address these consumer requirements
include:
o JAVA based Pipeline Configurator for simple GUI configuration of the
unit SNMP management
o Full featured IP routing engine with complex inbound and outbound packet
filters
o Full featured IPX routing engine with complex inbound and outbound
packet filters
o IPX SAP filters and spoofing
o Frame Relay support for multiple PVCs
o DHCP support and DHCP spoofing
o Dynamic IP address assignment
o Network Address Translation (NAT)
o Data compression
o Integrated termserv console functionality for detailed troubleshooting
either locally (RS-232) or remotely (password protected TELNET)
o Ping and Traceroute functionality
o Complete debug facility for bit level troubleshooting
Further customer requirements that have been addressed by Ascend's COE
development include:
o Bellcore compliance
o Integrated platform including DSL modems, router, authentication and
accounting
o High port density to conserve expensive CO rack space
o Robust TMN compliant OSS support through the Carrier Scale Integration
Alliance with Newbridge.
o Clear migration path from today's technologies (dial-up analog) through
tomorrows technologies (ADSL-DMT to ATM 0C3) in a single carrier-class
platform that may simultaneously support several different types of
services to maximize the customers revenue streams.
o Complimentary CPE family for each DSL offering that may be resold by the
customer to the consumer as part of a package or managed service
offering.
4.4 DSLPipe-S
The DSLPipe-S is a SDSL-based CPE with one SDSL port for connection to the
network, and it includes one Ethernet port. It also comes with a console port
for connection to a VT-100 terminal for configuration of the unit. The speed of
the connection to the CO will be 768 Kbps, which is half the T1 data rate using
a single twisted pair.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-11-
<PAGE>
Although Frame Relay generally is used for data transmission, PPP can also be
used if the DSL service is offered by an ISP that requires PPP for
authentication of the user using PAP or CHAP.
4.5 DSLPipe-2S
This is an SDSL-based CPE with two SDSL ports for connection to the network, one
Ethernet port and one console port. Service providers can combine 2 SDSL ports
to offer 1.54 Mbps using two pairs of wires with Multilink PPP or use one of the
ports to offer 768 Kbps using single pair of wires.
4.6 DSLPipe-C
The DSLPipe-C is an RADSL-CAP CPE that includes one connection to the CO and one
Ethernet port. It also comes with a console port for connection to a VI-100
terminal for configuration of the unit. Depending upon the condition of the
physical line, the speed of the connection to the CO may be as high as 7 Mbps
downstream and 1 Mbps upstream over a single twisted pair. This unit utilizes
the CAP modulation. Although Frame Relay generally is used for data
transmission, PPP can also be used if the DSL service is offered by a service
provider that requires PPP for authentication of the user using PAP or CHAP.
4.7 DSLPipe-D
The DSLPipe-D is an RADSL-DMT CPE that includes one connection to the CO and one
Ethernet port. It also comes with a console port for connection to a VT-100
terminal for configuration of the unit.
Depending upon the condition of the physical line, the speed of the connection
to the CO may be as high as 7 Mbps downstream and 1 Mbps upstream over a single
twisted pair. This unit utilizes the DMT modulation. Although Frame Relay
generally is used for data transmission, PPP can also be used if the DSL service
is offered by an ISP that requires PPP for authentication of the user using PAP
or CHAP.
4.8 Splitters
Splitters separate the POTS line from the DSL line. Generally it operates in
pairs one at the CO and the other at the customer premises. The CPE with DSL
line and the analog telephone will be connected to the Splitter at the customer
site. The Splitter at the CO splits the signal again and connects the POTS
signal to the PSTN switch, and it also connects the DSL line to the DSLTNT or
MAX TNT.
4.8.1 Passive Splitter
Ascend has developed the passive splitters to work with our RADSL-CAP product.
There are two types of splitters.
o DSLVSO, a rackmountable version for the central site
o DSLVSP, a standalone splitter for the customer premises.
These passive splitters permit integration of lifeline POTS (Voice) with the
ADSL data on a single pair of wire (local loop). These splitters are passive and
do not require AC/DC power. Therefore, even if the power goes down at the
customer premises, the phones will continue to operate.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-12-
<PAGE>
Ascend Communications, Inc.
The Ascend ADSL solution provides a passive splitter for the voice band at both
the central site and remote site. At the central office a rack mountable
splitter directs voice based traffic to the PSTN, while data traffic is directed
at a DSL port on the DSL/MAX TNT.
- -----------------------------------------------------------------------
- ------------------------------------------------------------------------
Figure: C.O. Splitter Arrangement
4.8.2 ANSI T1.413
Ascend's current splitter is POTS only and is designed to meet ANSI T1.413
standards pertaining to the splitter. Parameters are a frequency cutoff of 8KHz,
impedance matched and return loss is within limits of the above ANSI
specification.
4.8.3 Siecor support as the NID vendor
The Ascend POTS splitter can be packaged to fit in SiecorNID product.
4.8.4 Remote Site POTS splitter configuration
For use only to provide additional life-line POTS if required to the remote
site.
The Remote site NID (Network Interface Device) is a small inside wall mounted
device that terminates the incoming local loop pair. There are RJ11 interfaces
on the NID that can be connected to the remote site and a stand-alone telephone.
The NID is a passive device. (non-powered)
4.8.5 Central Site POTS splitter configuration
For use only to provide additional life-line POTS if required to the remote
site. Ascend has a 1RU (1.75inch) 19inch rack mountable POTS splitter
configuration that houses up to 24 individual splitters. This device is passive.
(non-powered) Termination of the POTS ports is onto an Amphenol Telco 50 Pin
connector.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-13-
<PAGE>
Ascend Communications, Inc.
4.8.6 POTS splitting In the Central Office.
The Ascend ADSL solution provides a passive splitter for the voice band at both
the DSL/MAX TNT and DSLPIPE. At the central office a rack mountable splitter
directs voice based traffic to the PSTN, while data traffic is directed at a DSL
port on the DSL/MAX TNT. Ascend supplies an external rack mounted splitter for
the Central Office. The splitter density corresponds to that of the DSL/MAX
TNT's ADSL line cards. Current plans aggregate the POTS feed from multiple
splitters into for a single cable for minimal appearance at the POTS switch.
4.8.7 Standard 50 Pin Telco Connectors
Standard 50 pin telco connectors (Amphenol) will be used for the DSL and/or POTS
interfaces into the xDSL channel bank.
4.8.8 Un-interruptable POTS service in the event of a power failure at either
end.
This feature is available on DSLPipe units.
ADSL on DSL/MAX TNT
Ascend provides an external splitter at the NID to direct voice band traffic to
the local telephone infrastructure at the subscriber site. Likewise a companion
splitter arrangement is provided at the CO. Power for POTS is provide by the CO
voice switch, the passive splitter arrangement both at the CO and the subscriber
site, pass the POTS signal and power without modification or interruption. Thus
should the DSLPipe unit or DSL/MAX TNT line card fail, no interruption shall
occur to the POTS service.
SDSL and IDSL do not offer life-line service. Future development will
automatically switch to POTS line in case of power loss.
4.9 Miscellaneous DSLPipe
4.9.1 Network Address Translation (NAT) products
All Pipeline's, MAX 4000's, and the DSL/MAX TNT support NAT. NAT is supported
in Software release 5.0 of the DSLPipe Family of products.
4.9.1.1 Network Address Translation (NAT) capabilities
With Ascend's Network Address Translation capability, end users can utilize
unregistered network IP addresses to access the Internet. This eliminates the
cost and complexity involved with obtaining and owning dedicated IP addresses
exclusively.
o A network address is transparently assigned to the unit allowing users
to utilize an unregistere d address for the duration of the session
o IP addresses are released and reassigned to other users
o Cost of owning a dedicated IP address is eliminated
4.9.2 Rate Adaptation
The Ascend IDSL line cards are configurable for single "B" channel (64 Kbps)
access or two "B" channel access (128Kbps) access. The Ascend ADSL units, the
DSLPipe-C and DSLPipe-D in conjunction with the DSL/MAX
-14-
<PAGE>
Ascend Communications, Inc.
TNT ADSL line cards are rate adaptive. Rate adaptation occurs after the initial
connection, and proceeds to provide the highest sustainable connection rates
possible for the given line conditions.
Ascend R-ADSL allows for adjustments or retraining of the DSL line rates without
interrupting current network sessions.
Ascend has the capability of limiting each user's data-rate to a specified rate
based on attributes assigned to each users data profile. The DSL TNT monitors
the data-rates, and discards any non-compliant bits at the ingress to the DSL-
TNT.
4.9.3 Multiple MAC Addresses
The DSLPipe product currently provides support for multiple MAC address. In
addition the DSLPipe includes an IP Route table, an ADP table, and IPX SAP and
RIP tables.
4.10 Miscellaneous Pipeline
4.10.1 Maximum number of concurrent TCP & UDP sessions and users supported
<TABLE>
<S> <C>
Pipeline 25 Px 1 user
Pipeline 50 *
Pipeline 75 *
Pipeline 130 *
DSLPipe *
</TABLE>
*The number of users depends upon how many IP addresses have been assigned to
the particular Pipeline. This is a user configurable issue.
4.10.2 LAN and WAN Interfaces, and the maximum number supported
<TABLE>
<CAPTION>
<S> <C> <C>
Pipeline 25 Px 1 Ethernet / 1 BRI
Pipeline 50 1 Ethernet / 1 BRI
Pipeline 75 1 Ethernet / 1 BRI
Pipeline 130 1 Ethernet / 1 BRI & 1 T-1 or 56kbs
DSLPipe 1 Ethernet / 1 DSL link
</TABLE>
5. Miscellaneous
5.1 Interoperability
Ascend is committed to interoperability. Just as Ascend has provided for
interoperability on dial modems, Ascend is currently working to bring products
to market based upon standards that can interoperate, such as the ANSI
T1.E1.4/94-006 HDSL standard. Currently Ascend can interoperate on a line-coding
level with single pair HDSL units that conform to the ANSI T1.E1.4/94-006 HDSL
standard and ADSL units that utilize the GlobeSpan chipset. Ascend will
participate in industry standard forums that will lead to interoperability so
that the DSLPIPE and STU-R can be sold as CPE.
5.2 Bridging and Routing
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-15-
<PAGE>
Ascend Communications, Inc.
The DSLPipe units and the DSL/MAX TNT support both bridging and routing options.
Bridging is enabled by default.
5.2.1 DSLPipe Bridging and Routing
The DSLPipe family of products provide a 10BaseT or AUI based Ethernet LAN
connection. The Ethernet framing type is selectable, supported both IP and IPX
based routing. The DSLPipe units combine both routing and bridging with a DSL
network access, providing the customer with a complete solution not requiring
additional equipment. The fact that the unit is both a bridge and router with a
true LAN interface, it will operate with IP and IPX stacks, as well as non-
routable protocols.
Bridging can be used where and when required. Routing is a must, on any access
equipment, to be able to provide simultaneous secure connections to multiple
destinations; something a solely bridged solution cannot provide without
managing massive MAC address tables.
Furthermore, the DSLPipe solution provides for RIPv2 both on the LAN and the DSL
link to facilitate variable length addressing (Classless IP) from the Customer
to the subscriber. The DSLPipe line will also provide for network address
translation over the PVC, allowing local addresses to be translated to
addressing assigned by the far end of the connection.
5.2.2 Bridging and Routing Configuration
Bridging and Routing are separate options and can be enabled or disabled
separately. This configuration allows both to occur simultaneously, routing will
take precedence and bridging will relate only to those protocols not routed.
5.2.3 Bridging and/or routing protocol support
The Ascend DSL/MAX TNT and DSLPipe can support both Routing and bridging. The
routing protocols supported are RIP, RIP V2, OSPF, Appletalk, BCP Bridging, IGMP
multicast.
5.3 LAN segment limitations
Multiple machines can be connected to a single xDSL line. Maximum number of
devices supported is 500. LAN segment can have up to 1000 devices if used in
bridging mode, but performance with this number is dependent upon utilization.
Bridging mode is not recommended for data security reasons. Initially multiple
destinations are supported through PVCs. There are eight connection profiles
available on the DSLPipe. Each connection profile maps to a PVC, for a maximum
number of PVCs of eight (8). Because of this only eight devices may have
different destinations (or route).
5.4 Statistical Multiplexing/Bandwidth Optimization
The inherent nature of being able to provide Frame Relay on the edge of the
transport network, over the DSL link, is ability to divide the link into
separate PVC's. Each PVC can be declared with its own CIR, effectively
controlling allotted bandwidth. The various CIR's can be controlled by the
Element Management System for adjustment as customer needs change, optimizing
each subscribers bandwidth to his evolving applications.
The NNI capacity of the MAX TNT allows the concentration of PVC from the various
subscriber links to a single or multiple high speed links for access to the
ATM/FR edge device for protocol independent delivery across the ATM
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-16-
<PAGE>
Ascend Communications, Inc.
transport. Over-subscription can be accomplished when mapping a number of PVCs
to the concentration link. It is recommended that over-subscription does not
exceed the total CIR assigned across the concentration link. In this manner the
bandwidth required for the concentration link is not directly related to the sum
of subscriber DSL access rates, but instead to CIR.
6. Security
6.1 Secure Access
Ascend Secure Access Firewall, certified by the (USA) National Computer
Security Agency, is a full function stateful firewall option. NCSA Certified
products have been tested to protect against a standardized and evolving suite
of attacks while allowing significant business functions to be accomplished.
Ascend supports any kind of offset packet filter. Ascend also supports call
filters and data filters.
6.2 Authentication
Authentication can take place in several ways: CLID, user name and password,
and a variety of third party solutions. The following is a list of the current
authentication schemes supported by Ascend products:
PAP, CHAP, RADIUS, TACACS, TACACS+, SecureID, Cryptocard RB-1, Digipath
Defender, Enigma Logic Safeword, Bellcore S/Key, MIT Kerberos, and AFS
Kerberos.
Each service destination is at the other end of a PVC that leaves the MAX TNT to
the ATM network. As each DSL user connects, authentication is required through
Ascend Access Control (RADIUS). Once the user is authenticated, a custom
connection profile is loaded from Access Control to the MAX TNT. Each user's
connection profile may be configured with static packet filters that may check
source and destination address, protocol and port, inbound vs. outbound packets,
and applications that use defined ports. Using these packet filters, access to
any service destination may be selectively allowed or disallowed.
SDSL and ADSL: In the case where a PVC is mapped all the way from the
ISP/Corporate site through the MAX TNT to the DSLPipe, the user has no ability
to access any other service destination because traffic is directly forwarded
from inbound DLCI to the pre-mapped outbound DLCI without any routing decision.
One to one mapping of the IDSL port to an outbound PVC/service destination is
provided. Traffic can be passed from the DSL port to the service destination as
if the PVC were extended from the ISP/corporate site all the way to the IDSL
CPE.
IDSL, SDSL, ADSL: Each service destination is at the other end of a PVC that
leaves the MAX TNT to the ATM network When the PVC from the DSLPipe is
terminated at the MAX TNT rather than passed through, Ascend's Secure Access
Firewall, an integrated state-of-the-art stateful inspection firewall, may be
applied to each of the outbound PVCs (service destinations) that inspects each
packet to insure only authorized users may access the service. Secure Access
Firewall consults a rule set that may be configured to check source and
destination address, protocol and port, inbound vs. outbound packets, and
applications that use defined ports among many other options.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-17-
<PAGE>
Ascend Communications, Inc.
6.3 Filtering
Filtering can be applied to traffic based on the following:
Network address, host names, protocols (UDP, TCP, ICMP), source / destination
ports, direction send / receive, TCP session state (start, ack, reset,
establish, end), application level (TFTP, FTP, source routing, telnet, WWW,
SMTP, POP Mail, ping / trace route), and more.
The system can generate and log alarms when certain security events and
thresholds occur, and can dynamically shut down a user connection based on
specific security events and/or broadcast traffic threshold.
Ascend supplies one of the broadest capabilities for using third party security
systems on the market. The supported methods include PAP, CHAP, RADIUS, TACACS,
TACACS+, SecureID, Cryptocard RB-1, Digipath Defender, Enigma Logic Safeword,
Bellcore S/Key, MIT Kerberos, AFS Kerberos, and others.
Ascend will support the IPsec RFC's (1825-1829) in the IPsec product, which will
include ISAKMP/Oakley. These products will be exported in compliance with US
government export regulations.
6.3.1 Traffic Filtering Functionality
The DSLPipe products are both learning bridges and IP/IPX based routers. They
support both IP and IPX filter capabilities as well a packet based bit level
filter capability. IP filters allow filtering on the source and destination
addresses with network masking, service port numbers and protocol type. IPX
based filters allow for SAP filters and spoofing. Ascends unique generic filter
allows one to specify bit streams within a packet or frame by specifying an
offset and fully bit maskable bit pattern. This allows for the keying of MAC
addresses for filtering reasons regardless of the protocol type.
An additional level of security can be provided by Ascend's optional Secure
Access firewall. This stateful firewall offers dynamic address and application
filtering. Unlike statically defined filters that leave service ports 1024 and
above, fully open, to accommodate randomly selected return ports for TCP/IP
sessions, the firewall installs filters sets only as required and removes them
when a session terminates.
6.4 Comprehensive security for iron-clad remote networking
o Support for user authentication makes it easy to manage the security of
large-scale remote access applications.
o Authentication profiles such as PAP and CHAP
o Token-based security including support for multiple vendors' products
o Transmit and receive packet filtering
o Ascend Secure Access Firewall option provides complete network
protection
o Telnet password
6.5 Secured Connections
By using mapped PVCs over the ATM/FR infrastructure the DSLPipe line can
supply secure connections to multiple service providers today over ADSL (as well
as the other xDSL offerings).
6.6 Security
Each of the LCI ports requires the entry and validation of a User ID and
password. Varying levels access are available as well.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-18-
<PAGE>
Ascend Communications, Inc.
Multiple security levels can be configured onto both the DSLPipe units and the
DSL/MAX TNT units. The restrictions are completely configurable allowing for
customization of the varying levels to fit with the customers needs.
6.6.1 Password
This system can be enforced by administration specifying passwords to varying
degrees including one with at least eight characters, with at least one non-
alpha character.
7. Software Product Function
Since the DSL line cards affect only the physical layer, all functionality
that is normally available on the MAX 4000, 4002, 4004, DSLTNT and the MAX TNT
is still available with the DSL line cards installed. As a result, carriers and
service providers can offer multiple services using these platforms. PPP and
Frame Relay are among the most common protocols used today for Internet/intranet
access as well as for remote office connectivity. Now, with the DSL high-speed
access services, the same protocols may be used to ensure minimal changes and
upgrades at the carrier network and at the end user site.
8. MultiDSL product matrix
<TABLE>
<CAPTION>
Product IDSL SDSL RADSL-CAP RADSL-DMT IDSL with Voice
- ----------------------------------------------------------------------------------------
CENTRAL OFFICE EQUIPMENT (COE)
<S> <C> <C> <C> <C> <C>
MAX 4002 Yes - - - Yes
MAX 4004 Yes - - - Yes
MAX TNT Yes1 Yes Yes 1998 Yes
ADSL-COE - - Yes - -
SDSL-COE Yes - - -
<CAPTION>
CUSTOMER PREMISES EQUIPMENT (CPE)
<S> <C> <C> <C> <C> <C>
NetWarp Yes - - - -
Pipeline 50 Yes - - - -
Pipeline 75 Yes - - - Yes
Pipeline 130 Yes - - - -
Pipeline 25 Yes - - - Yes2
DSLPipe-C - - Yes - -
DSLPipe-S - Yes - - -
DSLPipe-D - - - 1998 -
</TABLE>
/1/ IDSL card for TNT is 2-slot wide; that is why only up to 7 IDSL cards per
TNT shelf.
/2/ Pipeline 25 S/T version supports voice over IDSL since it has the necessary
hardware to generate dial tone. Pipeline 25 U version does not support voice
over IDSL.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-19-
<PAGE>
Ascend Communications, Inc.
9. MultiDSL Port Density
<TABLE>
<CAPTION>
Product IDSL SDSL RADSL-CAP RADSL-DMT IDSL with Voice
- ------------------------------------------------------------------------------------------------
CENTRAL OFFICE EQUIPMENT (COE)
<S> <C> <C> <C> <C> <C>
MAX 4002 8 port/card - - - 8 port/card
Max:40 ports Max:40 ports
- ------------------------------------------------------------------------------------------------
MAX 4004 8 port/card - - - 8 port/card
Max:40 ports Max:40 ports
- ------------------------------------------------------------------------------------------------
MAX TNT 32 port/card 16 port/card 6 port/card 1998 32-port/card
Max:224 ports 1 Max:240 ports Max:90 ports Max:224 ports
- ------------------------------------------------------------------------------------------------
ADSL-COE - - Single port - -
standalone unit
- ------------------------------------------------------------------------------------------------
SDSL-COE Single port - - -
standalone unit
<CAPTION>
CUSTOMER PREMISES EQUIPMENT (CPE)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
DSLPipe-C - - Single port - -
DSLPipe-S - Single port - - -
DSLPipe-D - - - Single port -
NetWarp Single port - - - -
Pipeline 50 Single port - - - -
Pipeline 75 Single port - - - 1 IDSL port, 2
POTs ports
Pipeline 130 Single port - - - -
Pipeline 25 Single port - - - 1 IDSL port, 2
POTs ports 2
</TABLE>
1 IDSL card for TNT is 2-slot wide; that is why only up to 7 IDSL cards per TNT
shelf.
2 Pipeline 25 S/T version supports voice over IDSL since it has the necessary
hardware to generate dial tone. Pipeline 25 U version does not support voice
over IDSL.
Note 1: IDSL continues to work with any ISDN TA from any vendor for Data only
application. If voice and data are required over IDSL, then the CPE must be a
Pipeline 75 or Pipeline 25 (S/T version) with external NT-l.
Note 2: Typically in an 7-foot rack, up to 5 TNT shelves can be accommodated.
In which case, the port density is 6 times the density of a single shelf.
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-20-
<PAGE>
Ascend Communications, Inc.
ASCEND/NAS-CuNet Service
Marketing Program Plan
***
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-21-
<PAGE>
Ascend Communications, Inc.
PRICING NOTES FOR ASCEND COMMUNICATIONS "XDSL PRICING"
***
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-22-
<PAGE>
Ascend Communications, Inc.
MULTI-DSL TNT QUIKQUOTE Rev 2.6
Customer: NAS/Coppernet Date
POC: Scott Yancey 8/25/98
POC PHONE#: 703.742.7700 FAX#: 703.742.7706
<TABLE>
<CAPTION>
# Ascend Part Number Description Qty Unit Discounted Extended
Price Price Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 *** *** *** *** *** ***
2 *** *** *** *** *** ***
3 *** *** *** *** *** ***
4 *** *** *** *** *** ***
5 *** *** *** *** *** ***
6 *** *** *** *** *** ***
7 *** *** *** *** *** ***
8 *** *** *** *** *** ***
9 *** *** *** *** *** ***
10 *** *** *** *** *** ***
11 *** *** *** *** *** ***
12 *** *** *** *** *** ***
13 *** *** *** *** *** ***
14 *** *** *** *** *** ***
15 *** *** *** *** *** ***
16 *** *** *** *** *** ***
17 *** *** *** *** *** ***
18 *** *** *** *** *** ***
19 *** *** *** *** *** ***
20 *** *** *** *** *** ***
21 *** *** *** *** *** ***
22 *** *** *** *** *** ***
23 *** *** *** *** *** ***
24 *** *** *** *** *** ***
25 *** *** *** *** *** ***
26 *** *** *** *** *** ***
27 *** *** *** *** *** ***
28 *** *** *** *** *** ***
29 *** *** *** *** *** ***
30 *** *** *** *** *** ***
31 *** *** *** *** *** ***
32 *** *** *** *** *** ***
33 *** *** *** *** *** ***
34 *** *** *** *** *** ***
*** *** *** *** ***
DSL CPE SubTotal ***
*** TOTAL NET PRICE DSL TNT AND DSL ***
CPE
</TABLE>
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-23-
<PAGE>
Ascend Communications, Inc.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
35 *** *** *** *** *** ***
36 *** *** *** *** *** ***
37 *** *** *** *** *** ***
38 *** *** *** *** *** ***
39 *** *** *** *** *** ***
40 *** *** *** *** *** ***
41 *** *** *** *** *** ***
42 *** *** *** *** *** ***
</TABLE>
***
***
25-Aug-98
Terms: Payment terms: 30 days
FOB Origin: Alameda, CA
Purchase Orders should be faxed to the Ascend Order Desk at 703.925.4299
Hard copies should be mailed to: Order Desk, Ascend Communications
1275 Harbor Bay Parkway, Alameda, CA 94502
***
Territory: Mid Atlantic Federal
Customer: Network Access Solutions Corporation Coppernet service
Domestic or Int'l: Domestic
***
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-24-
<PAGE>
EXHIBIT B
_________
LEASE AGREEMENT
---------------
(Filed as Exhibit 10.3)
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT C
---------
LETTER OF INTENT
----------------
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
To: Network Access Solutions, Inc.
From: Ascend Communications, Inc.
Date: 9/24/98
Re: NAS-CUNET SERVICE OFFERING Financing Proposal
Ascend offers the following to Network Access Solutions, inc. herein referred to
as (NAS):
o Credit Line
1. Equipment Financing: Ascend will provide equipment financing totaling
$95MM. The facility will be used for the purchase and subsequent lease
financing of Ascend equipment by NAS. The facility will be available for
24 months following the initial draws of moneys from the facility. Up to
$30,000,000 of the equipment financing is immediately available. The
remaining $65,000,000 of the equipment financing shall be available to NAS
at any point after the closing of the initial public offering the common
stock of NAS pursuant to a registration statement under the Securities Act
of 1933, as amended, and which yields gross proceeds to NAS in excess of
$50,000,000. If for any reason Ascend shall not make the remaining
facility available to NAS, then NAS has no further purchase commitment to
Ascend. There will no commitment fee or other fixed fees charged to NAS
(other than the lease payments themselves) outside of the lease financing
under agreement, for the use of the facility or reserve of unused capacity
under the facility.
o Financing terms: All sales under the agreement will have a deferred
start date of 60 days. Ascend will provide to NAS a capital lease, 42
terms in duration, at the interest rate set forth below, with a $l
buyout at termination:
<TABLE>
<S> <C>
Leverage Ratio (post-lease)* Interest Rate
0.00 to 0.50 Prime
0.51 to 0.75 Prime + 0.75%
0.76 to 1.00 Prime + 1.50%
1.01+ Prime + 2.25%
</TABLE>
* Leverage Ratio is defined as the ratio of total debt (including the
contemplated lease schedule amount) to total net worth.
2. Working capital: Ascend will provide a working capital line of credit of
$5MM to be used at the sole discretion of NAS for the purchase of other
vendor's equipment in the event that Ascend cannot provide like equipment,
or to pay for operating expenses. The draws against this $5MM will be set
at a minimum of $1MM each. There will be no commitment or fixed fees
charged to NAS for the use of the facility or reserve of unused capacity
under the working capital facility other than the interest financing under
agreement per the terms of the promissory note.
o Financing terms: Ascend will extend financing for working capital in the
form of a secured promissory note. The note will be as follows: Each
Draw will be 42 months in duration beginning with the date of each draw.
Principal payments will be made on the basis of a 60 month linear
amortization starting with the 10th month. The interest rate will be at
8.5% per annum for the first 27 months' payments. The first 9 months'
payments will be at interest only. The next 18 months' payments will be
at the stated amortized rate. The remaining 15 months' payments will be
at an interest rate consistent with the prevailing "high-yield" bond
index and at the stated amortized rate. All accrued interest and
principal will be immediately due and payable at the end of the 42nd
month. There will be no penalty for prepayment in the working capital
financing. Monthly payments will
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
be due on the 30th day of each month. Payment to reflect the monthly
aggregate amount due for all draws.
3. Security Interest: The Ascend equipment will secure the note.
4. Review of financial performance: Ascend will require NAS to provide
audited financials within 90 days of the close of each fiscal year end and
informal unaudited balance sheets and income statements within 60 days of
the close of each quarter. This requirement will be in effect after the
acceptance of the sales agreement, execution of related financing
agreements, and NAS's utilization of any financing under the Equipment
Financing Credit Line or the Working Capital Credit Line.
5. Mandatory prepayment: The principal indebtedness and all accrued but
unpaid interest in respect to the promissory note will become immediately
due and payable in the event of and upon a change of control, defined as
acquisition of more than 50% of the voting common equivalent shares of NAS
by any entity or person other than NAS' existing shareholders.
6. *** /Technology ***: For the *** period, beginning with ***, Ascend will
*** will be *** as follows: ***, based on the date *** within the first
*** of the ***. As an example, *** would be ***. This *** will *** after
purchase.
Product ***: Ascend agrees to *** but not *** in the NAS-CUNET SERVICE
OFFERING to the *** in the NAS *** between *** products using the *** to
the item *** as against the ***.
7. Joint Venture Funds: Funding in the amount of 1.5% as a joint venture
fund. These funds may be used to offset professional service fees, joint
marketing expenses, development of training curriculum for ILEC Central
Office staff, and other non-equipment purchase-based uses; the use of
which shall be pre-approved by Ascend. In no event shall the Joint Venture
Funds and Working Capital exceed 25% of Ascend equipment purchased/leased
by NAS.
8. On-site engineer: An on-site engineer will be assigned to NAS for a one-
year period from the time of initial equipment staging and deployment.
After which NAS will bear the cost for engagement beyond the first year.
Beginning the second year Ascend will provide to NAS free of charge for a
period of time of 12 months and Advantage Plus Major Account Support
contract. NAS will bear the cost Advantage Plus Major Account Support
beyond the second year.
9. Warranty: All equipment ordered by NAS from Ascend will carry a warranty
period of *** months form date of receipt by NAS.
10. Shipping is FOB-ORIGIN-Alameda, CA (DSL technology) and Westford, MA (Core
Products)
11. Public Communication: Both parties agree that no public disclosure of
terms relating to this agreement will take place without mutual consent as
to the content and timing of such disclosure.
12. General Requirements: Ascend shall have the right to withdraw or suspend
further advances to NAS in the event:
(a) NAS' interconnect agreement with Bell Atlantic is not renewed or is
terminated during the life of the financing facilities;
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-2-
<PAGE>
(b) Jon Aust or Scott Yancey terminates employment with NAS without
Ascend's prior written consent, such consent not to be unreasonably
withheld.
Both sides recognize that this term sheet is not the definitive agreement. The
terms of this proposal will be set forth in a purchase agreement, a master lease
agreement, and secured promissory note; both parties will mutually agree upon
the terms and provisions of which; however, both parties represent that they are
not aware of any other substantive terms and conditions which would represent
material conditions precedent to Ascend making the equipment financing facility
and working capital line of credit available to NAS.
Singed and accepted:
/s/ Scott G. Yancey 9/24/98 CFO
- -----------------------------------
NAS, Inc. Date:
/s/ Illegible 9/25/98
- -----------------------------------
Ascend Communications, Inc. Date:
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
-3-
<PAGE>
EXHIBIT D
---------
PROMISSORY NOTES FOR VENDOR FINANCING
-------------------------------------
AND OPERATING CAPITAL FINANCING
-------------------------------
(Filed as Exhibit 10.4)
*** Confidential Information has been omitted and filed separately with the
Securities and Exchange Commission.
<PAGE>
Exhibit 10.30
May 10, 1999
Chris Melnick
Chief Operating Officer
Network Access Solutions Corporation
100 Carpenter Drive
Sterling, VA 20164
Dear Mr. Melnick:
This letter shall serve as an amendment to the Network Access Solutions (NAS)
Master Service Agreement (MSA) signed by myself on behalf of DSL Networks on May
5, 1999, and accepted by NAS by John Hackett, Vice President, Sales and
Marketing on Monday, May 10, 1999. DSL Networks hereby agrees to a Preferred
Partnership with NAS, providing NAS with all the benefits customarily extended
to a Preferred Partner as well as the "First Right of Refusal" for all DSL
circuits sold by DSL Networks in the Bell Atlantic Region. "First Right of
Refusal" means that when DSL Networks is providing DSL services in the Bell
Atlantic region, NAS will have the first opportunity to provide the circuit to
DSL Networks, except when DSL Networks' End User requests otherwise. His
Preferred Partnership has a term congruent with the MSA signed by DSL Networks.
DSL Networks will also issue a press statement regarding this Preferred
Partnership as soon as possible. This press release is to be drafted by NAS and
sent to DSL Networks by Tuesday, May 11, 1999 for approval. The targeted date
of approval by DSL Networks for this press release is by close of business
Friday, May 14, 1999 for release on Monday, May 17, 1999. At NAS' discretion,
NAS may also issue a press release regarding our new partnership.
My signature below evidences DSL Networks' agreement to the terms contained
herein. If NAS agrees with the terms of this letter, please sign below and
return an original copy to me.
Sincerely, Seen and agreed:
/s/ Brad Connors /s/ Chris Melnick
- --------------------------------------- ------------------------------------
Brad Connors Chris Melnick
President and Chief Executive Officer Chief Operating Officer
DSL Networks Network Access Solutions Corporation
577 2nd Street 100 Carpenter Drive
San Francisco, CA 94107 Sterling, VA 20164
Telephone: (415) 356-3800 Telephone: (703) 742-7700
Facsimile: (415) 356-3810 Facsimile: (703) 742-7706
E-mail: [email protected] E-mail: [email protected]
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our report dated March 18, 1999, except for the information in the second
paragraph of Note 12 for which the date is May 11, 1999, the third and fourth
paragraphs for which the date is April 1, 1999, and the fifth, sixth and seventh
paragraphs for which the dates are May 4, 1999, May 6, 1999 and May 7, 1999,
respectively, relating to the financial statements of Network Access Solutions
Corporation. We also consent to the references to our firm under the captions
"Experts," "Summary Financial And Other Data," and "Selected Financial And Other
Data."
/s/ PricewaterhouseCoopers, LLP
- --------------------------------
McLean, Virginia
June 1, 1999
