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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission file number 000-25945
NETWORK ACCESS SOLUTIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1738938
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization)
Identification Number)
100 CARPENTER DRIVE
STERLING, VIRGINIA 20164
(Address and zip code of principal executive offices)
(703) 742-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
As of November 10, 1999, 45,140,008 shares of common stock ("Common
Stock") of the Registrant were outstanding.
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2
NETWORK ACCESS SOLUTIONS CORPORATION
INDEX
FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998 . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations for the three and nine months
ended September 30, 1999 (unaudited) and 1998 (unaudited) . . . 4
Statements of Cash Flows for the nine months ended
September 30, 1999 (unaudited) and 1998 (unaudited) . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . .14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. . .28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . .29
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . .29
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . .29
Item 4. Submission of Matters to Vote of Security Holders . . . . . . .29
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . .29
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .30
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
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3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS ------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 63,469,708 $ 5,518,117
Accounts receivable, net of allowance for doubtful accounts . . 3,171,020 1,806,791
Prepaid and other current assets. . . . . . . . . . . . . . . . 697,784 105,693
Income tax receivable . . . . . . . . . . . . . . . . . . . . . . 27,600 100,865
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,033 59,233
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . 67,541,145 7,590,699
Property and equipment, net . . . . . . . . . . . . . . . . . . . 44,121,873 5,030,793
Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,124 185,000
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . 121,586 121,586
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $111,869,728 $ 12,928,078
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . $ 3,250,827 $ 2,525,102
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 2,850,282 750,308
Current portion of capital lease obligations. . . . . . . . . . 4,995,643 328,982
Current portion of note payable . . . . . . . . . . . . . . . . 389,871 -
Current portion of deferred compensation liability. . . . . . . 333,333 333,333
Other current liabilities . . . . . . . . . . . . . . . . . . . 44,173 67,201
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . 69,805 -
------------ ------------
Total current liabilities. . . . . . . . . . . . . . . . . . 11,933,934 4,004,926
Long term portion of capital lease obligations. . . . . . . . . 14,981,015 1,184,156
Long term portion of note payable . . . . . . . . . . . . . . . 2,583,224 1,000,000
Long term portion of deferred compensation liability. . . . . . - 166,667
------------ ------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 29,498,173 6,355,749
------------ ------------
Commitments and contingencies
Series A mandatorily redeemable preferred stock, $.001 par value,
10,000,000 shares authorized, issued and outstanding
(liquidation preference $10,519,452) as of December 31, 1998,
no shares issued and outstanding as of September 30, 1999
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . - 5,640,651
------------ ------------
Stockholders' equity:
Common stock, $.001 par value, 150,000,000 shares authorized,
53,656,277 and 44,550,000 shares issued as of September 30,
1999 (unaudited) and December 31, 1998, respectively . . . . 53,656 44,550
Additional paid-in capital. . . . . . . . . . . . . . . . . . . 130,357,583 8,097,566
Deferred compensation on stock options. . . . . . . . . . . . . (19,855,531) (3,462,753)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . (26,284,153) (1,847,685)
Less treasury stock, at cost, 8,550,000 shares as of September
30, 1999 (unaudited) and December 31, 1998 . . . . . . . . . (1,900,000) (1,900,000)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . 82,371,555 931,678
------------ ------------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' equity . . . . . . . . . . . . . . . . . $111,869,728 $ 12,928,078
============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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4
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Product sales . . . . . . . . . . . . . . . . . . . . $ 3,113,333 $ 2,901,969 $ 9,981,312 $ 7,393,788
Consulting services . . . . . . . . . . . . . . . . . 525,731 274,197 1,893,059 1,053,171
Network services. . . . . . . . . . . . . . . . . . . 529,187 86,905 813,711 209,615
------------ ------------ ------------ ------------
Total revenue. . . . . . . . . . . . . . . . . . . 4,168,251 3,263,071 12,688,082 8,656,574
------------ ------------ ------------ ------------
Cost of revenue:. . . . . . . . . . . . . . . . . . . .
Product sales . . . . . . . . . . . . . . . . . . . . 2,682,816 2,548,936 8,705,594 6,353,364
Consulting services . . . . . . . . . . . . . . . . . 402,684 152,460 1,178,251 597,900
Network services. . . . . . . . . . . . . . . . . . . 1,358,839 7,060 2,142,000 15,268
------------ ------------ ------------ ------------
Total cost of revenue. . . . . . . . . . . . . . . 4,444,339 2,708,456 12,025,845 6,966,532
------------ ------------ ------------ ------------
Gross profit (loss) . . . . . . . . . . . . . . . . . . (276,088) 554,615 662,237 1,690,042
Operating expenses: . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . 8,808,507 1,356,922 16,725,879 2,403,371
Amortization of deferred compensation on
stock options. . . . . . . . . . . . . . . . . . . 1,431,114 - 6,699,302 -
Depreciation and amortization . . . . . . . . . . . . 1,612,262 47,542 2,497,445 60,412
------------ ------------ ------------ ------------
Loss from operations. . . . . . . . . . . . . . . . . . (12,127,971) (849,849) (25,260,389) (773,741)
Interest income . . . . . . . . . . . . . . . . . . . . 936,308 56,633 1,300,983 56,633
Interest expense. . . . . . . . . . . . . . . . . . . . (377,087) (31,383) (548,354) (58,217)
------------ ------------ ------------ ------------
Loss before income taxes. . . . . . . . . . . . . . . . (11,568,750) (824,599) (24,507,760) (775,325)
Provision (benefit) for income taxes. . . . . . . . . . 1,043 (47,003) (71,292) (27,973)
------------ ------------ ------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . (11,569,793) (777,596) (24,436,468) (747,352)
Preferred stock dividends . . . . . . . . . . . . . . . - 120,548 339,726 120,548
Preferred stock accretion . . . . . . . . . . . . . . . - 91,449 257,719 91,449
------------ ------------ ------------ ------------
Net loss applicable to common stockholders. . . . . . $(11,569,793) $ (989,593) $(25,033,913) $ (959,349)
============ ============ ============ ============
Net loss per common share (basic and diluted):
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (0.26) $ (0.03) $ (0.61) $ (0.03)
Preferred stock dividends and accretion . . . . . . . - (0.01) (0.02) (0.01)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders. . . . . . $ (0.26) $ (0.04) $ (0.63) $ (0.04)
============ ============ ============ ============
Weighted average common shares outstanding
(basic and diluted) . . . . . . . . . . . . . . . . . 45,021,799 28,123,533 39,932,623 24,007,253
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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5
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (24,436,468) $ (747,352)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense. . . . . . . . . . . . . . . . . . . 2,497,445 47,542
Provision for doubtful accounts receivable . . . . . . . . . . . . . . . . 91,082 -
Shares issued to employee for services . . . . . . . . . . . . . . . . . . - 130,000
Amortization of deferred compensation on employee stock options. . . . . . 6,699,302 -
Net changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,455,311) (905,149)
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . (960,135) (181,145)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,003 11,402
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,850) -
Income tax receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 73,265 -
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . - 26,208
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617,021 448,833
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,822,392 146,890
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . - (132,064)
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . (23,028) 141,156
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,805 -
------------- ------------
Net cash used in operating activities . . . . . . . . . . . . . . . . (14,975,477) (1,013,679)
------------- ------------
Cash flows from investing activities:
Expenditures for networks. . . . . . . . . . . . . . . . . . . . . . . . . (16,704,704) (1,296,970)
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . (4,776,951) (96,556)
------------- ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . (21,481,655) (1,393,526)
------------- ------------
Cash flows from financing activities:
Borrowings on notes payable. . . . . . . . . . . . . . . . . . . . . . . . 12,000,000 -
Repayments of notes payable. . . . . . . . . . . . . . . . . . . . . . . . (26,905) (66,681)
Principal payments on capital leases . . . . . . . . . . . . . . . . . . . (934,098) -
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . 83,700,000 4,902,401
Issuance of redeemable preferred stock . . . . . . . . . . . . . . . . . . - 5,102,499
Issuance costs related to preferred and common stock offerings . . . . . . (1,846,099) (55,798)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . 1,682,492 -
Treasury stock acquired. . . . . . . . . . . . . . . . . . . . . . . . . . - (1,900,000)
Repayment of deferred compensation liability . . . . . . . . . . . . . . . (166,667) -
------------- ------------
Net cash provided by financing activities . . . . . . . . . . . . . . 94,408,723 7,982,421
------------- ------------
Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . 57,951,591 5,575,216
Cash and cash equivalents at the beginning of period. . . . . . . . . . . . . . 5,518,117 713,246
------------- ------------
Cash and cash equivalents at the end of period. . . . . . . . . . . . . . . . . $ 63,469,708 $ 6,288,462
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the year for: . . . . . . . . . . . . . . . . . . . . . .
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 511,585 $ 17,999
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 79,700
Non-cash investing and financing activities:
Capital leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,397,618 22,757
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . 339,726 120,548
Preferred stock accretion . . . . . . . . . . . . . . . . . . . . . . 257,719 91,449
Conversion of notes payable into common stock . . . . . . . . . . . . 10,000,000 -
Conversion of redeemable preferred stock into common stock. . . . . . 6,238,096 -
</TABLE>
The accompanying notes are an integral
part of these financial statements.
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6
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,
which includes high speed data transmission services using digital
subscriber line ("DSL") technology. Through its CopperNet branded service,
the Company offers its customers high speed connectivity using DSL
technology. As a complement to the Company's CopperNet service, the Company
also offers its customers a wide range of networking solutions, including
network integration, network management, network security and professional
services. In 1999, the Company began offering CopperNet in Boston, New
York, Pittsburgh, Philadelphia, Wilmington, Baltimore, Washington, D.C.,
Richmond and Norfolk. The Company sells its services directly and
indirectly to business customers. 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
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited balance sheets as of September 30, 1999, the unaudited
statements of operations for the three and nine months ended September 30,
1998 and 1999 and the unaudited statement of cash flows for the nine months
ended September 30, 1998 and 1999 have been prepared in accordance with
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7
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, and it is suggested that these financial statements be read in
conjunction with the financial statements and related notes included in the
Company's registration statement on Form S-1 dated June 1, 1999. 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 nine months ended September 30, 1999 are not
necessarily indicative of results that may be expected for the year ending
December 31, 1999.
REVENUE RECOGNITION
The Company derives revenue 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, including DSL-based services,
under monthly and fixed rate service contracts. Revenue on monthly
contracts is recognized when services are performed. Revenue on fixed rate
service contracts is recognized as costs are incurred over the related
contract period, which generally does not exceed one year. 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 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.
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 consist 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 from third
parties 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
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8
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 commences as individual network
components are placed in service and is depreciated over two to five years.
Expenditures for maintenance and repairs are expensed as incurred. When
assets are retired or disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss
is recognized in operations for the period.
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 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
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 product solutions based upon customized 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
services 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
CopperNet, the Company's high speed continuously connected DSL access to
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9
telecommunications networks. The Company's business is conducted
principally in the eastern United States. There are no foreign operations.
3. INITIAL PUBLIC OFFERING
In June 1999, the Company completed an initial public offering ("IPO")
of 7,500,000 shares of common stock. Total proceeds to the Company were
approximately $81,850,000, net of underwriting discounts and commissions of
approximately $5,500,000 and offering costs of approximately $1,850,000.
Concurrently with the IPO, $5,000,000 of the Company's Series A Mandatorily
Redeemable Preferred Stock ("Preferred Stock") was converted into 416,667
shares of common stock at $12.00 per share, the public offering price, with
the remaining shares of Preferred Stock and all accrued dividends cancelled
without additional payment to the holders of those shares. Concurrently
with the IPO, $10,000,000 of the Company's 8% convertible notes (see Note
7) was converted into 833,334 shares of common stock at $12.00 per share,
the public offering price.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
Network placed in service. . . . . . $ 28,926,259 $ -
Network development in process . . . 11,709,003 4,657,975
Office and computer equipment. . . . 5,164,025 355,962
Furniture and fixtures . . . . . . . 962,904 159,728
Less accumulated depreciation. . . . (2,640,318) (142,872)
------------ ------------
Property and equipment, net. . . . . $ 44,121,873 $ 5,030,793
============ ============
The Company's network includes equipment acquired under capital
leases, purchased equipment, installation, and nonrecurring fees paid to
obtain central office space for location of certain equipment. When a new
portion of the Company's network has been completed and made available for
use, it is transferred from network development in process to network
placed in service. As of September 30, 1999 and December 31, 1998, the
recorded cost of the network equipment under capital leases was $22,333,126
and $1,513,138, respectively. Accumulated amortization for this equipment
under capital leases was $1,774,870 and $20,739 as of September 30, 1999
and December 31, 1998, respectively.
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10
5. 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 by the Company 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.
On April 1, 1999, the Company entered into a stock option agreement,
which granted to 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. On June 3,
1999, the board member exercised the stock option by paying $1,667,500 to
the Company. In addition, the agreement stipulated that the board member
will be issued an additional option to purchase 407,500 shares of common
stock at an exercise price of $3.00 per share. These options immediately
vested upon the Company's IPO. As a result, the Company recognized
$3,504,375 of compensation expense during the nine months ended September
30, 1999.
As of September 30, 1999 and December 31, 1998, a total of 10,724,209
and 7,090,875, respectively, of stock options which were immediately
exercisable as of those dates had been granted at exercise prices ranging
from $.09 to $16.25 per share. Stock option activity was as follows:
<PAGE>
<PAGE>
11
<TABLE>
<CAPTION>
Weighted
Range of Average
Stock Exercise Exercise
Options Prices Price
---------- ------------ ---------
<S> <C> <C> <C>
Options outstanding, December 31, 1998 . . . . . 7,090,875 $ 0.09 $ 0.09
Options granted, January 1999. . . . . . . . . . 559,575 $ 0.09 $ 0.09
Options granted, March 1999. . . . . . . . . . . 1,350,000 $ 0.09 $ 0.09
Options granted, April 1999. . . . . . . . . . . 437,875 $ 0.09- 6.67 $ 3.84
Options granted, May 1999. . . . . . . . . . . . 479,900 $ 3.00- 6.00 $ 5.78
Options granted, June 1999 . . . . . . . . . . . 733,850 $ 3.00-13.94 $ 4.55
Options granted, July 1999 . . . . . . . . . . . 102,050 $ 6.00-16.25 $ 10.60
Options granted, August 1999 . . . . . . . . . . 395,050 $ 5.13-12.75 $ 6.43
Options granted, September 1999. . . . . . . . . 26,200 $13.00-13.75 $ 13.61
Options exercised. . . . . . . . . . . . . . . . (356,276) $ 0.09- 6.67 $ 4.72
Options cancelled. . . . . . . . . . . . . . . . (94,890) $ 0.09-16.25 $ 2.71
---------- ------------ ---------
Options outstanding, September 30, 1999. . . . . 10,724,209 $ 0.09-16.25 $ 1.05
========== ============ =========
</TABLE>
In certain instances, the Company has determined 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 $2,077,762 for the three months ended September 30, 1999
and $23,092,080 for the nine months ended September 30, 1999. This amount
was recorded as a reduction to stockholders' equity (deficit) and is being
amortized as a charge to operations over the vesting periods (three to four
years) of the underlying restricted common stock. The Company recognized
stock compensation expense related to these options of $1,431,114 for the
three months ended September 30, 1999 and $6,699,302 for the nine months
ended September 30, 1999. The Company did not record any deferred
compensation or recognize any stock compensation expense for the nine
months ended September 30, 1998.
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:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------ ------------
(Unaudited) (Unaudited)
Net loss as reported. . . . . . . . . . . $ (11,569,793) $ (24,436,468)
Pro forma net loss. . . . . . . . . . . . (11,725,461) (25,336,863)
Net loss per share as reported, basic
and diluted . . . . . . . . . . . . . . (0.26) (0.61)
Pro forma net loss per share, basic
and diluted . . . . . . . . . . . . . . (0.26) (0.63)
The weighted-average fair value of options granted during the three
months ended September 30, 1999 and the nine months ended September 30,
1999 were approximately $7.54 and $7.43, respectively, 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.
<PAGE>
<PAGE>
12
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 nine months ended September 30,
1999: Dividend yield of 0%; expected volatility ranging from 0% to 60%;
risk-free interest rates ranging from 5.21% to 6.25%; and expected term of
5 years.
As of September 30, 1999, the weighted average remaining contractual
life of the options is 9.1 years.
6. SEGMENT INFORMATION
In accordance with SFAS No. 131, the Company discloses certain segment
information. 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 (loss) of the Company's reportable segments for the
three months ended September 30, 1999 and 1998 and the nine months ended
September 30, 1999 and 1998. 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 regarding operating
matters.
<TABLE>
<CAPTION>
PRODUCT CONSULTING NETWORK RECONCILING
SALES SERVICES SERVICES ITEMS TOTAL
---------- ---------- ---------- ---------- ----------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
As of and for the three months ended September 30, 1999:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,113 $ 526 $ 529 $ - $ 4,168
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . $ 430 $ 124 $ (830) $ - $ (276)(1)
Property and equipment, net . . . . . . . . . . . . . . . . $ - $ - $ 38,571 $ 5,551 $ 44,122
As of and for the three months ended September 30, 1998:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,902 $ 274 $ 87 $ - $ 3,263
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . $ 353 $ 122 $ 80 $ - $ 555 (1)
Property and equipment, net . . . . . . . . . . . . . . . . $ - $ - $ 1,311 $ 198 $ 1,509
As of and for the nine months ended September 30, 1999:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,981 $ 1,893 $ 814 $ - $ 12,688
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . $ 1,275 $ 715 $ (1,328) $ - $ 662 (1)
Property and equipment, net . . . . . . . . . . . . . . . . $ - $ - $ 38,571 $ 5,551 $ 44,122
As of and for the nine months ended September 30, 1998:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,394 $ 1,053 $ 210 $ - $ 8,657
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . $ 1,040 $ 455 $ 195 $ - $ 1,690 (1)
Property and equipment, net . . . . . . . . . . . . . . . . $ - $ - $ 1,311 $ 198 $ 1,509
<CAPTION>
Note 1: Adjustments that are made to the total of the segments' gross
profit in order to arrive at income (loss) before income taxes are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . $ (276) $ 555 $ 662 $ 1,690
Operating expenses: . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . 8,809 1,357 16,726 2,404
Amortization of deferred compensation . . . . . . . . . . 1,431 - 6,699 -
Depreciation and amortization . . . . . . . . . . . . . . 1,612 48 2,497 60
---------- ---------- ---------- ----------
Loss from operations. . . . . . . . . . . . . . . . . . . . (12,128) (850) (25,260) (774)
Interest income . . . . . . . . . . . . . . . . . . . . . 936 57 1,301 57
Interest expense. . . . . . . . . . . . . . . . . . . . . (377) (32) (548) (58)
---------- ---------- ---------- ----------
Loss before income taxes. . . . . . . . . . . . . . . . . . $ (11,569) $ (825) $ (24,507) $ (775)
========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE>
13
7. DEBT
On March 31, 1999, the Company entered into a financing agreement
whereby certain holders of its 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 and an additional $5,000,000 on May
11, 1999 by issuing 8% convertible notes. Concurrent with the IPO, these
notes, including principal and interest, were converted into 833,334 shares
of common stock.
On May 4, 1999, the Company amended its financing agreements with
Ascend Communications, Inc. ("Ascend"), increasing the Company's total
available financing from this vendor from $40,000,000 to $100,000,000. The
amendment increased the Company's line of credit available for leasing of
equipment purchases from this vendor from $30,000,000 to $95,000,000. The
amendment also reduced the line of credit available for working capital
loans from $10,000,000 to $5,000,000 and relieved the Company's obligation
to repay these loans upon the Company's IPO. As of September 30, 1999, the
Company's total obligation under the agreement for leased equipment and for
working capital loans was $10,217,169 and $2,973,095, respectively.
8. COMMITMENTS
On April 1, 1999, the Company entered into a lease for additional
office space in Sterling, Virginia. The lease requires monthly payments of
approximately $41,000 and total payments of $2,478,223 over the lease term
of five years. On October 20, 1999, the Company entered into a lease for
additional office space in New York, New York. The lease requires monthly
payments of approximately $32,000 and total payments of $1,891,945 over the
lease term of five years. On October 27, 1999 the Company entered into a
lease for additional office space in Herndon, Virginia. The lease requires
monthly payments of approximately $242,000, which payments begin, on a
graduated basis, in March 2000, and total payments of approximately $29.0
million over the lease term of ten years.
<PAGE>
<PAGE>
14
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
the related notes included elsewhere in this Form 10-Q and the financial
statements and related notes and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our registration
statement on Form S-1 dated June 1, 1999 (File No. 333-74679). This
discussion contains forward-looking statements the accuracy of which
involves risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements for
many reasons including, but not limited to, those discussed herein and in
our registration statement. See "Forward-Looking Statements."
OVERVIEW
In 1995, we began operations by selling data communications products
made by others and providing consulting services for wide area networks.
Shortly thereafter, we began offering a wide range of networking solutions
for the data communications needs 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 accounted for 35.2% and 50.4% of total revenue
for the nine months ended September 30, 1999 and 1998, respectively, while
Zeneca accounted for 10.0% and 9.6% of total revenue for the nine months
ended September 30, 1999 and 1998, respectively. Zeneca is a CopperNet
customer. To date, AT&T has not been a CopperNet customer.
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 CopperNet service trials in November 1997 and
began commercially offering CopperNet in Philadelphia and Washington, D.C.
in January 1999. We currently offer CopperNet in Boston, New York,
Philadelphia, Pittsburgh, Wilmington, Baltimore, Washington, D.C., Richmond
and Norfolk. As of September 30, 1999, we have completed collocating our
equipment in 267 Bell Atlantic central offices and expect to raise that
number to approximately 360 by the end of 1999.
Since February 1997, we have invested increasing amounts in the
development and deployment of CopperNet. We have funded the deployment of
our CopperNet services through proceeds received from a preferred and
<PAGE>
<PAGE>
15
common stock financing in August 1998, issuance of promissory notes which
were converted into common stock during the three months ended June 30,
1999, capital lease financing and our initial public offering. We intend to
substantially increase our operating expenses and capital expenditures in
an effort to rapidly expand our equipment and human resource related
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
CopperNet 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. 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 CopperNet 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:
o Product sales. We sell, install and configure selected equipment
from our manufacturing partners. Our engineers select product
solutions 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.
o 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.
<PAGE>
<PAGE>
16
o Network services. We charge monthly service fees for access to our
CopperNet 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:
o CopperNet 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 CopperNet 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.
o 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 CopperNet network, which we provide to customers as
part of our network services.
o 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.
o Network operations expenses. We incur various recurring costs at our
network operations center. These costs include data connections,
engineering supplies and certain utility costs.
<PAGE>
<PAGE>
17
o 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.
o 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 carriers and other networking services companies. These
expenses have increased, and will continue to increase, as we develop
our CopperNet services.
o 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 stock options to purchase a total of 7,090,875
shares as of December 31, 1998 and 10,724,209 shares as of September 30,
1999, at weighted average exercise prices of $0.09 and $0.98 per share,
respectively. At September 30, 1999, all of these options were exercisable
into restricted shares of our common stock which generally vest over a
three to four year period. In certain instances, we determined 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 $23.1 million for the nine months ended September 30, 1999.
We recorded this amount as a reduction to stockholders' equity which will
be amortized as a charge to operations over the vesting periods.
<PAGE>
<PAGE>
18
For the nine months ended September 30, 1999, we recognized $6.7 million of
stock compensation expense related to these options. No deferred
compensation was recorded for the comparable period in 1998 because there
were no stock options issued during this period.
On April 1, 1999, we entered into a stock option agreement, which
granted to one of our directors an option to purchase 250,000 shares of our
common stock at an exercise price of $6.67 per share. On June 3, 1999, this
director exercised this option. In addition the agreement stipulated that
this director will be issued an additional option to purchase 407,500
shares of common stock at an exercise price of $3.00 per share. These
options immediately vested upon our initial public offering. As a result we
recognized approximately $3.5 million of compensation expense during the
nine months ended September 30, 1999.
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.
<PAGE>
<PAGE>
19
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. (See Note 6, Segment Information included in Item 1. Financial
Statements for additional financial information about industry segments.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Product sales . . . . . . . . . . . . . . . . . . . . . . $ 3,113 $ 2,902 $ 9,981 $ 7,394
Consulting services . . . . . . . . . . . . . . . . . . . 526 274 1,893 1,053
Network services. . . . . . . . . . . . . . . . . . . . . 529 87 814 210
---------- ---------- ---------- ----------
Total revenue. . . . . . . . . . . . . . . . . . . . . 4,168 3,263 12,688 8,657
---------- ---------- ---------- ----------
Cost of revenue:
Product sales . . . . . . . . . . . . . . . . . . . . . . 2,683 2,549 8,706 6,354
Consulting services . . . . . . . . . . . . . . . . . . . 402 152 1,178 598
Network services. . . . . . . . . . . . . . . . . . . . . 1,359 7 2,142 15
---------- ---------- ---------- ----------
Total cost of revenue. . . . . . . . . . . . . . . . . 4,444 2,708 12,026 6,967
---------- ---------- ---------- ----------
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . (276) 555 662 1,690
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative . . . . . . . . . . . 8,809 1,357 16,726 2,404
Amortization of deferred compensation on stock options. . 1,431 - 6,699 -
Depreciation and amortization . . . . . . . . . . . . . . 1,612 48 2,497 60
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . 11,852 1,405 25,922 2,464
---------- ---------- ---------- ----------
Loss from operations. . . . . . . . . . . . . . . . . . . (12,128) (850) (25,260) (774)
Interest income (expense), net. . . . . . . . . . . . . . 559 25 753 (1)
Provision (benefit) for income taxes. . . . . . . . . . . 1 (47) (71) (28)
---------- ---------- ---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (11,570) $ (778) $ (24,436) $ (747)
========== ========== ========== ==========
</TABLE>
<PAGE>
<PAGE>
20
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited)
(percent of revenue)
<S> <C> <C> <C> <C>
Revenue:
Product sales . . . . . . . . . . . . . . . . . . . . . . 74.7% 88.9% 78.7% 85.4%
Consulting services . . . . . . . . . . . . . . . . . . . 12.6 8.4 14.9 12.2
Network services. . . . . . . . . . . . . . . . . . . . . 12.7 2.7 6.4 2.4
---------- ---------- ---------- ----------
Total revenue. . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------
Cost of revenue:
Product sales . . . . . . . . . . . . . . . . . . . . . . 64.4 78.1 68.6 73.4
Consulting services . . . . . . . . . . . . . . . . . . . 9.7 4.7 9.3 6.9
Network services. . . . . . . . . . . . . . . . . . . . . 32.6 0.2 16.9 0.2
---------- ---------- ---------- ----------
Total cost of revenue. . . . . . . . . . . . . . . . . 106.7 83.0 94.8 80.5
---------- ---------- ---------- ----------
Gross profit (loss) . . . . . . . . . . . . . . . . . . . . (6.7) 17.0 5.2 19.5
---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative . . . . . . . . . . . 211.3 41.5 131.8 27.8
Amortization of deferred compensation on stock options. . 34.3 - 52.8 -
Depreciation and amortization . . . . . . . . . . . . . . 38.7 1.5 19.7 0.7
---------- ---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . 284.3 43.0 204.3 28.5
---------- ---------- ---------- ----------
Loss from operations. . . . . . . . . . . . . . . . . . . . (291.0) (26.0) (199.1) (9.0)
Interest income (expense), net. . . . . . . . . . . . . . . 13.5 0.8 6.0 -
Provision (benefit) for income taxes. . . . . . . . . . . . 0.1 (1.4) (0.5) (0.4)
---------- ---------- ---------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . (277.6)% (23.8)% (192.6)% (8.6)%
========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
Revenue. We recognized $4.2 million in revenue for the three months
ended September 30, 1999, as compared to $3.3 million for the three months
ended September 30, 1998, an increase of $905,000, or 27.4%. This increase
was primarily attributable to a $442,000 increase in network services
revenue arising from both the introduction of broader network service
offerings in late 1998 and a related increase in sales and marketing
efforts in 1999. The remaining increase was due to an increase in
consulting services of $252,000 and an increase in product sales of
$211,000.
Cost of Revenue. Cost of revenue was $4.4 million for the three
months ended September 30, 1999, as compared to $2.7 million for the three
months ended September 30, 1998, an increase of $1.7 million, or 63.0%. The
increase was primarily attributable to an increase in cost of network
services of $1.4 million. These costs will continue to increase as we
develop and operate our CopperNet and other networking services.
Gross Profit (Loss). Gross loss was $(276,000) for the three months
ended September 30, 1999, as compared to gross profit of $555,000 for the
three months ended September 30, 1998. This was primarily a result of
increased network services costs of $1.4 million related to the continued
expansion of our network. As a result of this expansion of our network,
expenses have exceeded our revenue realized from our customer base.
<PAGE>
<PAGE>
21
Selling, general and administrative expenses. Selling, general and
administrative expenses were $8.8 million and 211.3% of revenue for the
three months ended September 30, 1999, as compared to $1.4 million and
41.5% of revenue for the three months ended September 30, 1998. This
increase was primarily due to increased staffing and other expenses
incurred to develop and operate our CopperNet network and other networking
solutions.
Amortization of deferred compensation on stock options. Amortization
of deferred compensation was $1.4 million and 34.3% of revenue for the
three months ended September 30, 1999. We had no amortization of deferred
compensation for the three months ended September 30, 1998. This increase
in amortization of deferred compensation expense is due to the addition of
new employees. The unamortized balance of $19.9 million at September 30,
1999 will be amortized over the remaining vesting period of each stock
option grant.
Depreciation and amortization expense. Depreciation and amortization
expense was $1.6 million and 38.7% of revenue for the three months ended
September 30, 1999, as compared to $48,000 and 1.5% of revenue for the
three months ended September 30, 1998. This increase was primarily due to
investments in our CopperNet network, computer equipment and software,
office furnishings and leasehold improvements.
Loss from operations. Our loss from operations was $12.1 million for
the three months ended September 30, 1999, as compared to a loss from
operations of $850,000 for the three months ended September 30, 1998. This
change was primarily due to increased staffing, amortization of deferred
compensation and other operating expenses we incurred in support of our
CopperNet network.
Interest income (expense), net. For the three months ended September
30, 1999, we recorded net interest income of $559,000, consisting of
interest income of $936,000 which was primarily attributable to interest
income earned from the net proceeds of our initial public offering of $81.8
million in June 1999, offset by $377,000 in interest expense, compared to
$31,000 of interest expense for the three months ended September 30, 1998.
The increase in interest expense is primarily due to interest on notes
payable and capital leases which commenced during 1999.
Provision (benefit) for income taxes. We had a provision for income
taxes of $1,000 for the three months ended September 30, 1999, as compared
to a benefit for income taxes of $47,000 for the three months ended
September 30, 1998.
Net loss. For the foregoing reasons, our net loss was $11.6 million
for the three months ended September 30, 1999, as compared to $778,000 for
the three months ended September 30, 1998.
<PAGE>
<PAGE>
22
NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenue. We recognized $12.7 million in revenue for the nine months
ended September 30, 1999, as compared to $8.7 million for the nine months
ended September 30, 1998, an increase of $4.0 million, or 46.0%. This
increase was attributable to a $2.6 million increase in product sales,
primarily from one of our largest customers, AT&T. In addition, consulting
services increased by $840,000 which was attributable to increases in
maintenance and consulting contracts and network services revenue increased
by $604,000 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 $12.0 million for the nine
months ended September 30, 1999, as compared to $7.0 million for the nine
months ended September 30, 1998, an increase of $5.0 million, or 71.4%. The
increase was attributable to growth in cost related to an increase in
product sales of $2.4 million and a growth in cost of network services of
$2.1 million attributable to expenses incurred to continue to develop and
operate our CopperNet and other networking services. These were
accompanied by a growth in cost related to additional consulting services
of $580,000.
Gross profit. Gross profit was $662,000 and 5.2% of revenue for the
nine months ended September 30, 1999, as compared to $1.7 million and 19.5%
of revenue for the nine months ended September 30, 1998. Gross profit as a
percentage of revenue decreased primarily as a result of increased network
services costs related to the continued expansion of our network. As a
result of this expansion of our network, expenses have exceeded our revenue
realized from our customer base.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $16.7 million and 131.8% of revenue for the
nine months ended September 30, 1999, as compared to $2.4 million and 27.8%
of revenue for the nine months ended September 30, 1998, an increase of
$14.3 million, or 596%. This increase as a percentage of revenue was
primarily due to increased staffing and other expenses incurred to develop
and operate our CopperNet network and other networking solutions.
Amortization of deferred compensation on stock options. Amortization
of deferred compensation was $6.7 million for the nine months ended
September 30, 1999. We had no amortization of deferred compensation for the
nine months ended September 30, 1998. This increase in amortization of
deferred compensation expense is due to the addition of new employees. The
unamortized balance of $19.9 million at September 30, 1999 will be
amortized over the remaining vesting period of each stock option grant.
Depreciation and amortization expense. Depreciation and amortization
expense was $2.5 million and 19.7% of revenue for the nine months ended
September 30, 1999, as compared to $60,000 and less than 0.7% of revenue
for the nine months ended September 30, 1998. This increase was primarily
<PAGE>
<PAGE>
23
due to investments in our CopperNet network, computer equipment and
software, office furnishings and leasehold improvements.
Loss from operations. Our loss from operations was $25.3 million for
the nine months ended September 30, 1999, as compared to $774,000 for the
nine months ended September 30, 1998. The increased loss for the nine
months ended September 30, 1999 was primarily due to increased staffing,
amortization of deferred compensation and other operating expenses we
incurred in support of our CopperNet network.
Interest income (expense), net. For the nine months ended September
30, 1999, we recorded net interest income of $753,000, consisting of
interest income of $1.3 million which was primarily attributable to
interest income earned from the net proceeds of our initial public offering
of $81.8 million in June 1999, offset by $548,000 in interest expense,
compared to $(58,000) of interest expense for the nine months ended
September 30, 1998. The increase in interest expense is primarily due to
interest on notes payable and capital leases which commenced during 1999.
Benefit for income taxes. We had a benefit for income taxes of
$71,000 for the nine months ended September 30, 1999, as compared to a
benefit of $28,000 for the nine months ended September 30, 1998.
Net loss. For the foregoing reasons, our net loss was $24.4 million
for the nine months ended September 30, 1999, as compared to a net loss of
$747,000 for the nine months ended September 30, 1998.
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 CopperNet network does require significant capital
expenditures. The principal capital expenditures which we expect to incur
during our CopperNet 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 $40.9 million for the nine
months ended September 30, 1999. At this time, we have no material purchase
commitments. During the rest of 1999 and for future periods, we expect our
capital expenditures to increase substantially primarily due to continued
collocation construction and due to 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 CopperNet customers. Based on our present plans, we anticipate capital
expenditures during the balance of 1999 to range from $15.0 million to
$30.0 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 CopperNet
related capital expenditures and our number of central offices as necessary
to provide additional CopperNet service capacity. Based on our present
plans we anticipate capital expenditures by the end of the year 2000 of
<PAGE>
<PAGE>
24
between $40.0 million and $50.0 million, for the expansion of our network
to approximately 500 central offices.
The net proceeds from our initial public offering were approximately
$81.8 million. As of September 30, 1999, we have used approximately $18.3
million of these net proceeds. Of this amount, approximately $12.4 million
was used to finance capital expenditures for central office installation
and collocation fees, and approximately $3.6 million was used to finance
operating losses. We expect to use approximately $17.6 million of the
remaining net proceeds to finance additional capital expenditures for
central office installation and collocation fees. We expect that the
remaining portion of our capital expenditures, including DSL equipment,
will be financed using capital leases. We expect to use the remaining net
proceeds from our initial public offering to finance operating losses that
we expect to incur as we expand our customer base and network, to make
payments under lease commitments and for general corporate purposes.
Net cash used in operating activities was approximately $15.0 million
and $1.0 million for the nine months ended September 30, 1999 and September
30, 1998, respectively. The net cash used in operations for the nine months
ended September 30, 1999 was primarily the result of operating losses of
$24.4 million attributable to the expansion of our network and the
development of our CopperNet services, but also the result of an increase
in accounts receivable and other current assets. These were offset by
increases in non-cash expenses for amortization of deferred compensation of
$6.7 million and depreciation of $2.5 million accompanied by increases in
accounts payable and accrued liabilities. The net cash used for operations
during the nine months ended September 30, 1998, was primarily the result
of an increase in accounts receivable, but also the result of operating
losses. These were partially offset by a increase in accounts payable. The
net cash used in investing activities was $21.5 million and $1.4 million
for the nine months ended September 30, 1999 and September 30, 1998,
respectively. The net cash used for the nine months ended September 30,
1999, was primarily due to the deployment of equipment for our CopperNet
services of $16.7 million accompanied by purchases of property and
equipment of $4.8 million. The net cash used for the nine months ended
September 30, 1998, was primarily due to the deployment of equipment for
our CopperNet services of $1.3 million. Net cash provided by financing
activities was $94.4 million for the nine months ended September 30, 1999.
This was primarily the result of proceeds from our initial public offering
of $83.7 million partially offset by issuance costs paid of $1.8 million,
proceeds from the issuance of notes payable of $12.0 million and proceeds
from exercise of stock options of $1.7 million. These were partially offset
by principal payments on our capital leases of $934,000. Notes payable of
$10.0 million were converted into common stock upon our initial public
offering. Net cash provided by financing activities was $8.0 million for
the nine months ended September 30, 1998. This was the net result of our
preferred and common stock financing and the repurchase of common stock
from existing shareholders.
Ascend has provided us with a $95.0 million capital lease facility to
fund acquisitions of certain Ascend equipment, under which $10.4 million
was outstanding as of September 30, 1999. 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%. Ascend has the right to
withdraw or suspend further advances to us if our interconnection
<PAGE>
<PAGE>
25
agreements with Bell Atlantic are not renewed or are terminated, or if
certain key employees terminate their employment with us without competent
replacement in the reasonable commercial judgement of Ascend. In addition,
we have an arrangement with Paradyne to lease up to $4.0 million of
equipment, subject to vendor 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 lessee to prepare a new lease schedule.
As of September 30, 1999 approximately $2.7 million was outstanding under
the Paradyne master lease agreement.
Ascend has also provided a $5.0 million line of credit for working
capital loans, under which approximately $3.0 million was outstanding as of
September 30, 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.
We believe that 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.
Our capital requirements may vary based upon the timing and success of
our CopperNet rollout, as a result of regulatory, technological and
competitive developments or if:
<PAGE>
<PAGE>
26
o demand for our services or cash flow from operations is more or
less than expected;
o our development plans or projections change or prove to be
inaccurate;
o we engage in any acquisitions; or
o we accelerate deployment of our network or otherwise alter the
schedule or targets of our CopperNet rollout plan
Equity or debt financing may not be available to us on favorable terms
or at all.
IMPACT OF THE YEAR 2000 ISSUE
Our Year 2000 plan applies to two areas: internal information
technology systems and compliance by external providers. We have completed
our Year 2000 compliance testing for all of our internal information
technology systems and believe that these systems are Year 2000 compliant.
(As used herein, "Year 2000 compliant" or "Year 2000 compliance" means that
the referenced information technology hardware and/or software systems are
able to correctly interpret and manipulate dates up to and through the year
2000, without interruption as the result of the change to this date.)
Because our systems were implemented within the last two years, we do not
anticipate significant Year 2000 issues to arise with our internal
information technology systems, although we cannot be certain that all such
systems are completely Year 2000 compliant. There have been few Year 2000
changes required to our existing information technology systems. However,
because our systems will be interconnected with the systems of various
third parties, including those of traditional telephone companies, and
other service providers, any disruption of operations in the systems of
these third parties could also have adverse impact on our systems.
In the provision of our DSL and other 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 completed a compliance check of our significant third party service
and product providers. Based on responses from these third parties, 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.
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.
<PAGE>
<PAGE>
27
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 completed a
contingency plan to address the most reasonably likely worst case Year 2000
scenario. We expect to complete our planning for Year 2000 issues,
including our most reasonably likely worst case year 2000 contingency
plans, by mid-December 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 Form 10-Q.
FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not historical facts
are "forward-looking statements" (as such term is defined in Section 27A of
the Securities Act of 1933 and section 21E of the Securities Exchange Act
of 1934), which can be identified by the use of forward-looking terminology
such as "estimate," "project," "anticipate," "expect," "intend," "believe,"
or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and
uncertainties. These forward-looking statements address, among other
things:
o our CopperNet deployment plans and strategies;
o development and management of our business;
o our ability to attract, retain and motivate qualified personnel;
o our ability to attract and retain customers;
o the extent of acceptance of our services;
o the market opportunity and trends in the markets for our services;
o our ability to upgrade our technologies;
o prices of telecommunication services;
o the nature of regulatory requirements that apply to us;
o our ability to obtain and maintain any required governmental
authorizations;
o our future capital expenditures and needs;
<PAGE>
<PAGE>
28
o our ability to obtain and maintain financing on commercially
reasonable terms;
o our ability to implement a Year 2000 readiness program; and
o the extent and nature of competition.
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, 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:
o our ability to successfully market new and existing services to
current and new customers;
o our ability to generate customer demand for our services in our target
markets;
o market pricing for our services and for competing services;
o the extent of increasing competition;
o our ability to acquire funds to expand our network;
o the ability of our equipment and service suppliers to meet our needs;
o trends in regulatory, legislative and judicial developments; and
o our ability to manage growth of our operations.
All written and oral forward-looking statements made in connection
with this report on Form 10-Q which are attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the "Risk
Factors" and other cautionary statements included in our registration
statement on Form S-1 (File No. 333-74679). We disclaim any obligation to
update information contained in any forward-looking statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 1999 we had not entered into any financial
instruments that expose us to material market risk.
<PAGE>
<PAGE>
29
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
None
REPORT OF OFFERING OF SECURITIES AND USE OF PROCEEDS THEREFROM
In June 1999, we commenced and completed a firm commitment
underwritten initial public offering of 7,500,000 shares of our common
stock. The shares were registered with the Securities and Exchange
Commission pursuant to a registration statement on Form S-1 (No. 333-
74679), which was declared effective on June 3, 1999. After deducting
underwriting discounts and commissions of $5.5 million and expenses of $1.8
million, we received net proceeds of $81.8 million. As of September 30,
1999, we have used approximately $18.3 million of these net proceeds. Of
this amount, approximately $12.4 million was used to finance capital
expenditures for central office installation and collocation fees, and
approximately $3.6 million was used to finance operating losses.
As of September 30, 1999, we had invested the net proceeds from our
initial public offering in short- and long-term investments in order to
meet anticipated cash needs for future working capital. We invested our
available cash principally in high-quality corporate issuers and in debt
instruments of the U.S. Government and its agencies. This use of proceeds
from the offering reflects an increase in offering expenses of
approximately $850,000, but otherwise does not represent a material change
in the use of proceeds described in the registration statement. None of the
net proceeds of the offering were paid directly or indirectly to any of our
directors or officers, or their associates, or persons owning 10 percent or
more of any class of our equity securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
<PAGE>
<PAGE>
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
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
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* Deed of Lease dated April 8, 1999, by and between the
Company and TransDulles 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.
<PAGE>
<PAGE>
31
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 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* Note Purchase Agreement dated March 31, 1999, by and between
the Company, Spectrum Equity Investors II, L.P. and FBR
Technology Venture Partners L.P.
10.24* Convertible Note dated March 31, 1999, by and between the
Company and Spectrum Equity Investors II, L.P.
10.25* Convertible Note dated March 31, 1999, by and between the
Company and FBR Technology Venture Partners L.P.
<PAGE>
<PAGE>
32
10.26* Nonqualified Stock Option Grant Agreement dated April 1,
1999, by and between the Company and Dennis R. Patrick
10.27* Letter Agreement Dated May 6, 1999, by and between the
Company and SBC Communications, Inc.
10.28* Letter Agreement dated May 7, 1999, by and between the
Company and Telefonos de Mexico, S.A. de C.V.
10.29* Letter Agreement dated May 10, 1999, by and between the
Company and DSL Solutions Inc. d/b/a DSL Networks
27 Financial Data Schedule.
- ----------
* Incorporated by reference from the Company's Registration Statement on
Form S-1 (No. 333-74679).
^ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission.
(b) REPORTS ON FORM 8-K:
None
<PAGE>
<PAGE>
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NETWORK ACCESS SOLUTIONS CORPORATION
By: /s/ SCOTT G. YANCEY, JR.
-----------------------------------
Name: Scott G. Yancey, Jr.
Title: Chief Financial Officer
(Principal Accounting and
Financial Officer)
Dated: November 12, 1999
<PAGE>
<PAGE>
INDEX TO EXHIBITS
===========================================================================
EXHIBIT |
NUMBER | DESCRIPTION
- ---------------------------------------------------------------------------
27 | Financial Data Schedule
===========================================================================
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> EXHIBIT 27 - FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF NETWORK ACCESS
SOLUTIONS CORPORATION, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<CASH> 63,470
<SECURITIES> 0
<RECEIVABLES> 3,314
<ALLOWANCES> (143)
<INVENTORY> 175
<CURRENT-ASSETS> 67,541
<PP&E> 46,762
<DEPRECIATION> (2,640)
<TOTAL-ASSETS> 111,870
<CURRENT-LIABILITIES> 11,934
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 82,318
<TOTAL-LIABILITY-AND-EQUITY> 111,870
<SALES> 12,688
<TOTAL-REVENUES> 12,688
<CGS> 12,026
<TOTAL-COSTS> 12,026
<OTHER-EXPENSES> 25,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 548
<INCOME-PRETAX> (24,508)
<INCOME-TAX> 71
<INCOME-CONTINUING> (24,436)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,436)
<EPS-BASIC> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
