<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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:
Sylvia M. Mahaffey, Esquire Scott M. Wornow, Esquire
Shaw Pittman Paul, Hastings, Janofsky & Walker LLP
2300 N Street, N.W. 399 Park Avenue, 31st Floor
Washington, D.C. 20037 New York, New York 10022
(202) 663-8000 (212) 318-6000
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>
<CAPTION>
==================================================================================
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Each Class of to be Offering Price Offering Registration
Securities to be Registered Registered Per Unit Price(1) Fee
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, par
value $.001............... 5,750,000 $27.875 $160,281,250 $42,314
==================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act.
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.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated , 2000
PROSPECTUS
Shares
[Network Access Solutions Logo Appears Here]
Common Stock
-----------
Network Access Solutions Corporation is selling shares of its common
stock. Our common stock is traded on the Nasdaq National Market under the
symbol "NASC." The last reported sales price of our common stock on was
$ per share.
Investing in our common stock involves risks, which are described in the
"Risk Factors" section beginning on page 7 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price................................. $ $
Underwriting discount................................. $ $
Proceeds, before expenses, to Network Access
Solutions............................................ $ $
</TABLE>
The selling stockholders have granted the underwriters the right to
purchase up to an additional shares of common stock at the public offering
price, less the underwriting discount, within 30 days from the date of this
prospectus, to cover over-allotments. We will not receive any proceeds from the
sale of shares by the selling stockholders.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined
whether this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 2000.
-----------
Merrill Lynch & Co.
-----------
The date of this prospectus is , 2000
<PAGE>
(ART TO COME)
[Diagram of the structure of our region-wide network and one illustrative
example of the structure of our city-wide networks. The model city-wide network
shows how different customers would typically connect to our network, whether
through a telephone company office or otherwise.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Price Range of Our Common Stock.......................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial and Other Data........................................ 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 34
Management............................................................... 57
Related Transactions and Relationships................................... 63
Principal Stockholders................................................... 65
Description of our Capital Stock......................................... 67
Shares Eligible for Future Sale.......................................... 71
Underwriting............................................................. 73
Validity of the Shares................................................... 75
Experts.................................................................. 75
Additional Information................................................... 75
Index to Financial Statements............................................ F-1
</TABLE>
---------------
Unless otherwise indicated, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
<PAGE>
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.
About Our Business
We are a major provider of high-speed data communications services, and
related applications, to business customers. We provide our data communications
services using digital subscriber line, or DSL, technology, and generally
market those services directly through our own sales force. DSL technology
allows our customers to access their corporate networks and the Internet
through high-speed, "always on" connections over traditional copper telephone
lines at speeds up to 7 megabits per second, substantially higher than common
dial-up modems. We have branded our DSL service "CopperNet," which we
commercially launched in the northeast and mid-Atlantic regions of the United
States, in January 1999.
In seeking to solve the data communications needs of our business
customers, we offer them network services, telecommunications products and
equipment made by others and consulting services. Although nearly all of our
revenue has historically been derived from our product sales and consulting
services, we expect to continue to dedicate most of our financial and
management resources to further developing our network services business.
Through this business, which includes our CopperNet service offering, we
provide metropolitan area and wide area network services to our customers as
well as manage and monitor our customers' networks. Through our product sales
business, we sell telecommunications equipment that our customers use to build,
maintain and secure their networks. Through our consulting services business,
we design our customers' networks, install the related equipment and provide
services to help them secure their networks. For the three months ended
September 30, 1999, approximately 12.7% of our revenue resulted from network
services, 74.7% from product sales and 12.6% from consulting services. During
the same period in 1998, network services represented 2.7% of our revenue. If
we are successful in implementing our business plan, we expect that network
services will constitute most of our revenue.
We currently offer our DSL-based networking solutions in the following
nine cities and their surrounding markets: Baltimore, Boston, New York,
Norfolk, Philadelphia, Pittsburgh, Richmond, Washington D.C., and Wilmington.
As of December 31, 1999, we had installed our equipment in central offices
within our target markets and we expect to have installed our equipment in
approximately 500 central offices by mid-2000, which will essentially complete
the roll-out of our network in these markets. We believe that by concentrating
the deployment of our network facilities in our target markets, we will be able
to serve the overall networking and data communications needs of our business
customers more effectively than our competitors. As of December 31, 1999, we
had installed high-speed access lines.
We have designed our network to support our customers' changing data
networking needs. Our network supports newer, evolving technologies designed to
transmit both data and 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 technologies generally allow for
a more efficient use of a network. Our CopperNet service is compatible with
packet-based communications systems such as asynchronous transfer mode, or ATM,
frame relay, and Internet protocol, or IP. This same architecture also supports
the traditional technologies that carry most of today's voice telephone
conversations. This network design allows us to offer businesses and their
telecommuters cost-effective solutions for accessing the Internet, as well as
other emerging applications and services of corporate networks, such as video
and audio conferencing, web and application hosting, multimedia and e-commerce.
We create city-wide, or metropolitan area networks, or MANs, and connect them
to our
<PAGE>
private, leased, 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, enabling them to operate as if
they were using their own private network. These virtual private networks, or
VPNs, have the capacity, speed, reliability and level of service that are
designed to meet our customers' needs.
Market Opportunity
We believe that a substantial business opportunity exists because of the
concurrence of several factors. The growing demand for high-speed data
communications by businesses, their employees and consumers has created a need
for a local access solution with a higher capacity than traditional dial-up
modems and integrated services digital networks, or ISDNs. There is an
increasing need by small- and medium-sized businesses for a cost-effective,
high performance networking solution in order to access the Internet and
utilize today's bandwidth applications. In addition, large businesses are
seeking to improve remote worker productivity so that workers have access to
the same high performance communication and networking resources available to
workers located at corporate headquarters. Businesses are also looking to
network service providers to implement and manage broadband-based applications
and services. The commercial availability and acceptance of DSL technology has
allowed service providers to meet their customers' needs through a high-speed
access alternative that requires a much lower initial fixed investment than
other alternatives, such as cable modems, fiber optic cable, fixed wireless and
satellite communication systems. The 1996 Telecom Act and its related
regulations also has allowed companies like us to implement DSL technology by
taking advantage of traditional telephone companies' existing infrastructure
rather than building our own at significant cost.
The NAS Solution
We provide a full range of services to allow businesses to effectively
outsource their Internet access, data transport, and other telecommunications
needs. Our service offering includes high-speed local connectivity through
CopperNet, MAN and WAN solutions, along with network management, monitoring,
security solutions and other value-added applications and services, which we
expect to change over time to meet evolving customer needs.
The NAS Strategy
Our goal is to be the premier provider of data communications and
networking solutions in the markets in which we focus. We plan to:
. Provide and expand coverage in our markets, initially within the
northeast and mid-Atlantic regions and potentially in other regions
in which we believe we can be successful;
. Focus on small- and medium-sized business customers, most of which
do not have a cost-effective, high-performance and integrated
solution to their Internet access and data transport needs;
. Focus on selected large enterprise customers, most of which do not
have an adequate solution that allows them to provide high-speed
access to remote workers;
. Continually enhance and expand our network to meet the broadest
array of business requirements;
. Offer value-added, network-enabled features and applications to
maximize revenues per customer;
. Provide superior customer care;
2
<PAGE>
. Focus on direct marketing to our customers by using our experienced
sales-force, which is supported by engineers who are trained,
certified experts in the products and technologies we sell;
. Selectively utilize wholesale marketing channels; and
. Capitalize on the lower fixed-cost economics of DSL technology.
---------------
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 the federal trademark for the mark COPPERNET and also own
applications for federal registration and claim rights in the following
trademarks: CU COPPERNET(TM) and CUNET(TM). This prospectus also refers to
trade names and trademarks of other companies.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by
Network Access Solu-
tions.................. shares
Common stock to be out-
standing after this of-
fering(1).............. shares
Use of proceeds(1)...... 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. We have not definitively allocated any portion
of the net proceeds of the offering. We will retain
complete discretion in applying the proceeds of this
offering.
Dividend policy......... We do not anticipate paying cash dividends for the
foreseeable future. Instead, we will retain our earnings,
if any, for the future operation and expansion of our
business.
Nasdaq National Market
symbol................. NASC
</TABLE>
- --------
(1) If the underwriters exercise the option granted to them in this offering by
our selling stockholders to purchase up to additional shares of our
common stock to cover over-allotments, then the total number of shares to
be offered would be increased to up to shares. We will not receive any
proceeds from the sale of shares by the selling stockholders. The number of
shares outstanding excludes options that have been granted or may be
granted under our stock option plans. As of December 31, 1999, options
were outstanding under our stock option plans.
4
<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 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 September 30, 1999 and the summary
historical statement of operations and other data as of and for each of the
nine months ended September 30, 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. The results of
the nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the full year.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------ -------------------
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 $ 7,394 $ 9,981
Consulting services.... 36 114 791 1,428 1,053 1,893
Network services....... -- -- 4 311 210 814
------ ------- ------ ------- -------- ----------
Total revenue.......... 1,927 14,482 8,945 11,639 8,657 12,688
------ ------- ------ ------- -------- ----------
Cost of revenue:
Product sales.......... 1,475 11,975 7,180 8,639 6,354 8,706
Consulting services.... 15 91 231 761 598 1,178
Network services....... -- -- 2 41 15 2,142
------ ------- ------ ------- -------- ----------
Total cost of revenue.. 1,490 12,066 7,413 9,441 6,967 12,026
------ ------- ------ ------- -------- ----------
Operating expenses:
Selling, general and
administrative........ 299 2,255 1,437 4,017 2,404 16,726
Amortization of
deferred compensation
on employee stock
options............... -- -- -- 219 48 6,699
Depreciation and
amortization.......... 9 7 12 130 60 2,497
------ ------- ------ ------- -------- ----------
Total operating
expenses.............. 308 2,262 1,449 4,366 2,512 25,922
------ ------- ------ ------- -------- ----------
Income (loss) from
operations............. 129 154 83 (2,168) (822) (25,260)
Interest income
(expense), net......... -- (1) (5) 64 (1) 753
------ ------- ------ ------- -------- ----------
Income (loss) before
income taxes........... 129 153 78 (2,104) (823) (24,507)
Provision (benefit) for
income taxes........... 39 63 36 (28) (28) (71)
------ ------- ------ ------- -------- ----------
Net income (loss)....... $ 90 $ 90 $ 42 $(2,076) $ (795) $ (24,436)
====== ======= ====== ======= ======== ==========
Net income (loss) per
common share (basic and
diluted)............... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $ (0.03) $ (0.61)
====== ======= ====== ======= ======== ==========
Weighted average common
shares outstanding
(basic and diluted).... 21,915 21,915 21,915 27,302 24,007 39,933
====== ======= ====== ======= ======== ==========
Other Data:
EBITDA(1)............... $ 138 $ 161 $ 95 $(1,819) $ (714) $ (16,064)
Capital expenditures.... 18 30 122 5,021 1,416 40,879
Net cash provided by
(used in) operating
activities............. 3 (27) 805 (2,810) (1,014) (15,142)
Net cash used in
investing activities... (18) (30) (122) (1,341) (1,394) (21,482)
Net cash provided by
financing activities... 42 55 9 8,956 7,982 94,575
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------
Actual (unaudited) (As Adjusted)(2)
------------------ ----------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $63,470
Property and equipment, net............... 44,122
Total assets.............................. 111,870
Total debt (including capital lease
obligations)............................. 22,950
Total stockholders' equity................ 82,372
</TABLE>
- --------
(1) 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.
(2) As adjusted to reflect the sale of shares of our common stock offered
by this prospectus at an offering price of $ per share, after deducting
the underwriting discount and the estimated offering expenses that we will
pay.
6
<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 has changed to the provision of network
services, including high-speed digital communications service, our business is
difficult to evaluate
We began operations in 1995 by helping our customers integrate their
network equipment, by selling them that network equipment and by providing them
with related network services. During the past several years, we have refocused
our company, through our CopperNet services, on the provision of DSL-based
high-speed digital communications services, which is a change from our
historical activities. Because our business focus has changed, and we expect to
dedicate most of our resources to develop our CopperNet 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 nine 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 CopperNet
services, will constitute the more significant portion of our revenue. Revenue
from network services, which we began offering in January 1999, represented
12.7% of our total revenue for the three months ended September 30, 1999. 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
principally on the success of our CopperNet services to achieve future 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 CopperNet 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 for a company
that does not offer DSL-based services.
We have only provided our CopperNet services since January 1999, so it is
difficult to assess whether we will be successful in this new and evolving
market
Because we have only recently begun providing CopperNet services, it is
difficult for us to predict the extent to which CopperNet will achieve market
acceptance. The market for DSL-based services is in the early stages of
development, is highly competitive and is quickly changing. Providers of high-
speed data communications services are testing products from various suppliers
for certain 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 CopperNet fails to develop, grows more slowly
than anticipated or becomes saturated with competitors, our business will not
reach or maintain the level of profitability we hope to achieve.
To remain successful, we must develop and market services that are widely
accepted by businesses at profitable prices. We may never be able to achieve
significant market acceptance, favorable operating results or profitability.
Due to the relatively limited deployment of CopperNet at this time, we cannot
guarantee that our network will be able to connect and manage a substantial
number of DSL lines at high transmission speeds. We may be unable to scale our
network to service a substantial number of DSL lines while achieving high
performance.
7
<PAGE>
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 CopperNet 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 CopperNet within current and future
target markets;
. attract and retain customers;
. increase awareness of CopperNet;
. 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 resources have been strained by our rapid growth, which could impair the
expansion of our business
We are in the process of rapidly expanding, and plan to continue this
rapid expansion of, our CopperNet operations. This rapid growth has placed, and
will continue to 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 operational, financial and management information
controls, reporting systems and procedures and implement new
controls;
. 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. In addition,
8
<PAGE>
if we were to make acquisitions in the future to expand our business, the
integration of those acquisitions could further strain our resources.
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 markets, is both an essential supplier of facilities and
services for CopperNet 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
and of the central office space we need to place, or collocate, our DSL
equipment and support services for CopperNet. Bell Atlantic may be reluctant to
cooperate with us in meeting our supply needs. Bell Atlantic has in the past,
and may in the future, reject certain of 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 retail 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 CopperNet 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 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 that are critical to providing our CopperNet services
We plan to purchase our equipment from many vendors, including Lucent
Technologies Inc., Ascend Communications, which has been acquired by Lucent
Technologies Inc., Cisco Systems, Inc., FORE Systems, Inc., a wholly-owned
subsidiary of Marconi p.l.c., and Paradyne Corporation. We out-source a
significant and growing percentage of installation and field service to third
parties. Because we depend on third parties, we do not have guaranteed capacity
nor do we fully control delivery schedules, quality assurance, production
yields
9
<PAGE>
and costs. If any significant installer or field service provider interrupts
its service to us or fails to perform to required specifications, or if any of
our vendors reduces or interrupts its supply, this interruption or reduction
would force us to seek alternative vendors and providers, which could 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 the continuity of our interconnection agreements
We depend on contractual arrangements, or interconnection agreements,
which enable us to use Bell Atlantic's copper telephone lines, to collocate our
equipment in their offices and to obtain from Bell Atlantic the back office
support systems we need in order to provide CopperNet services. The success of
our strategy depends on our ability to renew our interconnection agreements,
principally with Bell Atlantic and, as we expand, with other telephone
companies, on a timely basis and on satisfactory terms and conditions. Delays
in obtaining renewals or a failure to obtain satisfactory terms and conditions
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, for example, have initial
terms that expire in March 2000 for agreements covering Delaware, the District
of Columbia, Maryland, New Jersey, Pennsylvania and Virginia, and in January
2001, for agreements covering New York and the New England states. Although we
recently have begun negotiations on new agreements to replace those expiring on
March 1, 2000, those negotiations are not yet complete. We cannot guarantee
that we will be able to negotiate new agreements with Bell Atlantic that will
be beneficial to us.
Interconnection agreements are also subject to state telecommunications
regulatory, FCC and judicial over-sight. 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 52.7% and 4.3%,
respectively, of our revenue for the three months ended September 30, 1998 and
15.8% and 12.3%, respectively, of our revenue for the three months ended
September 30, 1999. Almost all of this revenue was derived from product sales
and consulting services. We have no long-term contracts with either customer
and the loss of either of these customers could have a material adverse effect
on our financial performance.
Our stock price may fluctuate significantly, depending on various factors,
including future operating results
The price at which our common stock trades depends 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.
10
<PAGE>
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 ISDN
technologies. ISDN 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 that are more favorable than contracts negotiated
by us.
Examples of competitive activity in our target markets include the
following:
. 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.
. 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.
Funding of our business may require significant additional capital in the
future, which we may not be successful in obtaining at all or on favorable
terms
We intend to fund our business, including anticipated operating losses,
and the completion of our network rollout by mid-2000, with a combination of
available funds, anticipated proceeds of this offering and, subject to certain
funding conditions, financing available through our existing vendor
relationships. We also
11
<PAGE>
expect that we would require significant additional capital for any expansion
of our network beyond our initial target markets and into other regions. Our
actual funding requirements may differ materially as our business evolves. We
also may be unable to generate revenue in the amount and within the time frame
we expect or if we have unexpected cost increases. Under any of these
circumstances, we may be required to find other sources of capital, which we
may not be successful in obtaining.
We may seek to borrow significant funds, the terms of which may contain
restrictive covenants that limit our ability to incur additional indebtedness,
pay dividends or undertake certain other transactions. These instruments also
could require us to pledge assets as security for the borrowings. If we were to
leverage our business by incurring significant debt, we would likely be
required to devote a substantial portion of our available cash or our cash flow
to service that indebtedness.
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.
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
CopperNet 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 Federal Communications Commission, or 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, including price, that we need in order to provide CopperNet
services. Regulatory policies may also affect the terms under which traditional
telephone companies provide us with the operational support and management of
telephone line usage that are crucial to the success of CopperNet. 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 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
certain aspects of this regulation are uncertain because they are 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
12
<PAGE>
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
Various traditional telephone companies have requested that the FCC
substantially deregulate the retail price they charge for various types of
telecommunications services, including high-speed data services like Copper-
Net. The FCC recently issued a decision in response that establishes a
procedure by which traditional telephone companies may apply for certain
pricing flexibility. We cannot yet determine the extent to which traditional
telephone companies will use this procedure or the impact of any pricing
flexibility that the FCC awards to any given company under this new procedure,
since no telephone company has yet applied for pricing flexibility under this
new procedure. The ultimate impact of the FCC's order also is uncertain because
the order has been appealed to the U.S. Court of Appeals. If the FCC were to
substantially eliminate price regulation of the high-speed data services that
traditional telephone companies provide in competition with CopperNet, our
business could be adversely affected.
The FCC has also proposed to permit traditional telephone companies to
provide advanced services through separate affiliates on a deregulated basis.
This proposal could permit the separate affiliates to provide advanced services
free of the requirements relating to interconnection, unbundling, resale and
collocation imposed by the Telecommunications Act of 1996. Bills have been
introduced in Congress that would grant regional Bell operating companies
regulatory relief to provide data services in areas where they are currently
restricted from doing so.
On November 2, 1999, the FCC held that a statute requiring that
traditional local telephone companies offer their retail services at a
wholesale price to competitors like us does not apply when these telephone
companies provide a discounted DSL service directed to Internet service
providers, or ISPs. In that case, while competitors may purchase the
traditional telephone companies' ISP-directed DSL offering on the same terms as
the ISPs, the FCC ruled that competitors have no legal right to a wholesale
discount off the price paid by ISPs. This ruling could adversely affect us if
it gives ISPs an economic incentive to meet all of their DSL needs by
subscribing to the traditional telephone companies' ISP-directed discounted DSL
offerings rather than by subscribing to DSL services offered by competitors
like us.
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.
13
<PAGE>
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 hire and 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. Moreover, we do not have
"key person" life insurance policies on any of our employees. Although we have
employment agreements with six members of the senior management team, these
agreements can be terminated by the employees on thirty days' notice. Each 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, 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. The
northern Virginia region, which is the location of our headquarters and where
we currently have our greatest hiring needs, is experiencing a severe shortage
of qualified employees in each of these areas. As a result, the costs of
attracting and retaining qualified employees has increased significantly during
recent periods and is continuing to increase. We may be unable to continue to
employ our key personnel or to attract and retain qualified personnel in the
future.
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 that 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
14
<PAGE>
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.
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 % of our common stock after this offering, or % 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.
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 formulated a
contingency plan to address the most reasonably likely worst case Year 2000
scenario.
You will incur immediate and substantial dilution of approximately $ per
share
The 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 $ in the net tangible book value per
share of the common stock you purchase in this offering. As of September 30,
1999, 10,724,209 shares of common stock were issuable upon exercise of
outstanding stock options at a weighted average exercise price of $1.05 per
share. If all of these stock options are exercised, you will experience further
dilution in the amount of $ 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
15
<PAGE>
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 days after the date of this prospectus without the prior written consent of
Merrill Lynch & Co. However, Merrill Lynch & Co. 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 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. On August 17,
1999, we filed a registration statement on Form S-8 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.
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 provides 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.
Any application of the Investment Company Act to our company would restrict our
business activities and capital structure
We have a significant amount of cash and cash equivalents and, pending
our utilization of all of the net proceeds from this offering, we will have an
even greater amount of cash invested in short-term interest-bearing securities,
which could subject us to the provisions of the U.S. Investment Company Act of
1940. We do not propose to engage in investment activities in a manner or to an
extent that would require us to register as an investment company under the
Investment Company Act. The Investment Company Act places restrictions on the
capital structure and business activities of companies registered thereunder.
Accordingly, we will seek to limit our holding of "investment securities" (as
defined in that Act) to an amount that is less than 40% of the value of our
total assets, calculated pursuant to the Investment Company Act. The Investment
Company Act permits a company to avoid becoming subject to that Act for a
period of up to one year despite the holding of investment securities in excess
of that level if, among other things, its board of directors has adopted a
resolution stating that the company does not intend to become an investment
company. Any application to us of the restrictions mandated by the Investment
Company Act would have a material adverse effect on our company.
This prospectus contains forward-looking statements that 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.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be
approximately $ million. This amount reflects deductions from the gross
proceeds of the offering of:
. approximately $ million, which will be retained by the
underwriters as discounts and commissions; and
. approximately $ million, representing our estimated expenses for
this offering.
We expect to use approximately $ 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. We have not definitively
allocated any portion of the net proceeds of the offering. We will retain
complete discretion in applying the proceeds of this offering.
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 cash 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.
PRICE RANGE OF OUR COMMON STOCK
Since our initial public offering on June 3, 1999, our common stock has
traded on the Nasdaq National Market under the symbol "NASC." The following
table sets forth the range of the high and low closing sales prices of our
common stock for the periods indicated:
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Year ending December 31, 1999:
Second Quarter (from June 3, 1999)........................... $13.94 $8.62
Third Quarter................................................ 18.00 10.00
Fourth Quarter ..............................................
</TABLE>
On December 21, 1999, the last reported sales price for our common stock
on the Nasdaq National Market was $32.875 per share. On December 15, 1999,
there were 74 holders of record of our common stock.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
1999 on an actual basis and as adjusted to reflect the offering.
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
Actual As
(unaudited) Adjusted(1)
-------------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents........................... $ 63,470
========
Long-term obligations:
Capital lease obligations (including current
portion)......................................... 19,977
Note payable...................................... 2,973
Deferred compensation............................. 333
--------
Total long-term obligations (including current
portion)....................................... 23,283
--------
Stockholders' equity:
Common stock, $0.001 par value, 150,000,000 shares
authorized, 53,656,277 shares issued (actual),
shares issued (as adjusted) (2).............. 54
Additional paid-in capital........................ 130,358
Deferred compensation on stock options............ (19,856)
Accumulated deficit............................... (26,284)
Less treasury stock, at cost, 8,550,000 shares.... (1,900)
--------
Total stockholders' equity...................... 82,372
--------
Total capitalization........................... $105,655
========
</TABLE>
- --------
(1) As adjusted to reflect the sale of shares of our common stock offered
by this prospectus, after deducting the underwriting discount and the
estimated offering expenses that we will pay.
(2) Excludes 10,724,209 shares of our common stock issuable upon exercise of
stock options outstanding on September 30, 1999.
18
<PAGE>
DILUTION
As of September 30, 1999, our net tangible book value was approximately
$82.4 million or $1.83 per common share. 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, our net tangible book value at September 30, 1999
would have been $ , or $ 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 net tangible book value of $
per common share to existing stockholders, and an immediate dilution in net
tangible book value of $ per common share to new investors purchasing our
common stock in this offering. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of our common stock in this offering and the as adjusted net tangible
book value per share of our common stock at September 30, 1999. The following
table illustrates this per share dilution.
<TABLE>
<S> <C>
Public offering price per common share ............................. $
Net tangible book value per common share at September 30, 1999 ..... $
Increase per share attributable to new investors ...................
Net tangible book value per common share after this offering .......
-----
Dilution per common share to new investors ......................... $
=====
</TABLE>
19
<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 September 30, 1999 and the summary
historical statement of operations and other data as of and for each of the
nine months ended September 30, 1998 and 1999 have been derived from our
unaudited financial statements that are included elsewhere in this prospectus.
The balance sheet data as of December 31, 1996 has been derived from our
audited financial statements not included 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. The results of the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the full year.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------- ---------------------
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 $ 7,394 $ 9,981
Consulting services.... 36 114 791 1,428 1,053 1,893
Network services....... -- -- 4 311 210 814
------- ------- ------- ------- --------- ----------
Total revenue.......... 1,927 14,482 8,945 11,639 8,657 12,688
------- ------- ------- ------- --------- ----------
Cost of revenue:
Product sales.......... 1,475 11,975 7,180 8,639 6,354 8,706
Consulting services.... 15 91 231 761 598 1,178
Network services....... -- -- 2 41 15 2,142
------- ------- ------- ------- --------- ----------
Total cost of revenue.. 1,490 12,066 7,413 9,441 6,967 12,026
------- ------- ------- ------- --------- ----------
Operating expenses:
Selling, general and
administrative........ 299 2,255 1,437 4,017 2,404 16,726
Amortization of
deferred compensation
on employee stock
options............... -- -- -- 219 48 6,699
Depreciation and
amortization.......... 9 7 12 130 60 2,497
------- ------- ------- ------- --------- ----------
Total operating
expenses.............. 308 2,262 1,449 4,366 2,512 25,922
------- ------- ------- ------- --------- ----------
Income (loss) from
operations............. 129 154 83 (2,168) (822) (25,260)
Interest income
(expense), net......... -- (1) (5) 64 (1) 753
------- ------- ------- ------- --------- ----------
Income (loss) before
income taxes........... 129 153 78 (2,104) (823) (24,507)
Provision (benefit) for
income taxes........... 39 63 36 (28) (28) (71)
------- ------- ------- ------- --------- ----------
Net income (loss)....... $ 90 $ 90 $ 42 $(2,076) $ (795) $ (24,436)
======= ======= ======= ======= ========= ==========
Net income (loss) per
common share (basic and
diluted)............... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $ (0.03) $ (0.61)
======= ======= ======= ======= ========= ==========
Weighted average common
shares outstanding
(basic and diluted).... 21,915 21,915 21,915 27,302 24,007 39,933
======= ======= ======= ======= ========= ==========
Other Data:
EBITDA(1)............... $ 138 $ 161 $ 95 $(1,819) $ (714) $ (16,064)
Capital expenditures.... 18 30 122 5,021 1,416 40,879
Net cash provided by
(used in) operating
activities............. 3 (27) 805 (2,810) (1,014) (15,142)
Net cash used in
investing activities... (18) (30) (122) (1,341) (1,394) (21,482)
Net cash provided by
financing activities... 42 55 9 8,956 7,982 94,575
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
As of December 31, As of September 30, 1999
--------------------------------- -----------------------------
As
1995 1996 1997 1998 Actual Adjusted(2)
----------- ------ ------ ------- -------------- ------------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 24 $ 22 $ 713 $ 5,518 $ 63,470
Property and equipment,
net.................... 8 31 140 5,031 44,122
Total assets............ 458 5,352 1,865 12,928 111,870
Total debt (including
capital lease
obligations)........... 30 84 93 2,513 22,950
Mandatorily redeemable
preferred stock........ -- -- -- 5,641 --
Total shareholders'
equity................. 118 208 250 932 82,372
</TABLE>
- --------
(1) 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.
(2) As adjusted to reflect the sale of shares of our common stock offered
by this prospectus at an offering price of $ per share, after deducting
the underwriting discount and the estimated offering expense that we will
pay.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We began operations in 1995 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.
Historically, we have primarily depended on AT&T and Zeneca for revenue from
our product sales and consulting services operations. 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.
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 a telephone company's network. We began CopperNet
service trials in November 1997 and began commercially offering our CopperNet
service in Philadelphia and Washington, D.C. in January 1999. We currently
offer our CopperNet service in the following nine cities and surrounding
markets: Baltimore, Boston, New York, Norfolk, Philadelphia, Pittsburgh,
Richmond, Washington D.C., and Wilmington. As of December 31, 1999, we have
completed collocating our equipment in central offices.
We currently are targeting the northeast and mid-Atlantic regions for our
CopperNet service. We believe that our focus on the northeast and mid-Atlantic
regions has allowed us to form a relationship with Bell Atlantic that we
believe will allow us to provide responsive, consistent and high quality
service in our target markets. Our depth of service enables 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, given our large
coverage of not only businesses, but the suburban residential areas in which
the employees of the business reside. As opportunities present themselves, we
may decide to expand our network beyond our initial target markets and into
other regions. Consistent with this strategy, we have entered into an
interconnection agreement with BellSouth, which has been approved by the state
public utility commissions in Alabama, Florida, Georgia, Kentucky, Louisiana
and South Carolina. We also have interconnection agreements with GTE, Sprint
Corporation and the Southern New England Telephone Company.
Since February 1997, we have invested increasing amounts in the
development and deployment of our CopperNet service. We have funded the
deployment of our CopperNet services through proceeds received from a preferred
and common stock financing in August 1998, issuance of promissory notes that
were converted into common stock during the three months ended June 30, 1999,
capital lease financing and our initial public offering. We intend to increase
our operating expenses and capital expenditures substantially 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. 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. 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.
22
<PAGE>
Revenue
Revenue consists of:
. 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.
. 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
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, e-
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
that we purchase from third parties.
Network services. Our network service costs generally comprise non-
employee-based charges such as:
. 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.
. 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.
. 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
23
<PAGE>
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 relationships with
companies, including Internet service providers, local and long
distance carriers and other networking services companies to sell
our services. These expenses have increased, and will continue to
increase, as we develop our CopperNet 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 stock options to purchase a total of 7,090,875 shares
of common stock as of December 31, 1998 and 5,625,000 and 10,724,209 shares of
common stock as of September 30, 1998 and 1999, respectively, at weighted
average exercise prices of $0.09, $0.09 and $1.05 per share, respectively. At
September 30, 1999, all of these options were exercisable into restricted
shares of our common stock that 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 $750,000 and $23.1
million for the nine months ended September 30, 1998 and 1999, respectively.
We recorded this amount as a reduction to stockholders' equity that will be
amortized as a charge to operations over the vesting periods. For the nine
months ended September 30, 1998 and 1999, we recognized $48,000 and $6.7
million of stock compensation expense, respectively, related to these options.
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.
24
<PAGE>
Interest Income (Expense), Net
Interest income (expense), net, primarily consists of interest income
from our cash and cash equivalents 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 tables present our results of operations data and the
components of net income (loss) in dollars and as a percentage of our revenue.
See Segment Information in Note 12 to the Financial Statements included in this
prospectus for additional financial information about industry segments.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------ ------------------
1996 1997 1998 1998 1999
------- ------ ------- -------- ---------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales.................. $14,368 $8,150 $ 9,900 $ 7,394 $ 9,981
Consulting services............ 114 791 1,428 1,053 1,893
Network services............... -- 4 311 210 814
------- ------ ------- ------- ---------
Total revenue................ 14,482 8,945 11,639 8,657 12,688
------- ------ ------- ------- ---------
Cost of revenue:
Product sales.................. 11,975 7,180 8,639 6,354 8,706
Consulting services............ 91 231 761 598 1,178
Network services............... -- 2 41 15 2,142
------- ------ ------- ------- ---------
Total cost of revenue........ 12,066 7,413 9,441 6,967 12,026
------- ------ ------- ------- ---------
Gross profit................. 2,416 1,532 2,198 1,690 662
------- ------ ------- ------- ---------
Operating expenses:
Selling, general and
administrative................ 2,255 1,437 4,017 2,404 16,726
Amortization of deferred
compensation on employee stock
options....................... -- -- 219 48 6,699
Depreciation and amortization.. 7 12 130 60 2,497
------- ------ ------- ------- ---------
Total operating expenses..... 2,262 1,449 4,366 2,512 25,922
------- ------ ------- ------- ---------
Income (loss) from operations.... 154 83 (2,168) (822) (25,260)
Interest income (expense), net... (1) (5) 64 (1) 753
Provision (benefit) for income
taxes........................... 63 36 (28) (28) (71)
------- ------ ------- ------- ---------
Net income (loss)................ $ 90 $ 42 $(2,076) $ (795) $ (24,436)
======= ====== ======= ======= =========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------- -------------------
1996 1997 1998 1998 1999
----- ----- ----- -------- ---------
(unaudited)
(percent of revenue)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales.................... 99.2% 91.1% 85.1% 85.4% 78.7%
Consulting services.............. 0.8 8.8 12.3 12.2 14.9
Network services................. -- 0.1 2.6 2.4 6.4
----- ----- ----- ------- ---------
Total revenue.................. 100.0% 100.0% 100.0% 100% 100%
----- ----- ----- ------- ---------
Cost of revenue:
Product sales.................... 82.7 80.3 74.2 73.4 68.6
Consulting services.............. 0.6 2.6 6.5 6.9 9.3
Network services................. -- 0.0 0.4 0.2 16.9
----- ----- ----- ------- ---------
Total cost of revenue.......... 83.3 82.9 81.1 80.5 94.8
----- ----- ----- ------- ---------
Gross profit................... 16.7 17.1 18.9 19.5 5.2
----- ----- ----- ------- ---------
Operating expenses:
Selling, general and
administrative.................. 15.6 16.1 34.5 27.8 131.8
Amortization of deferred
compensation on employee stock
options......................... -- -- 1.9 0.5 52.8
Depreciation and amortization.... 0.0 0.1 1.1 0.7 19.7
----- ----- ----- ------- ---------
Total operating expenses....... 15.6 16.2 37.5 29.0 204.3
----- ----- ----- ------- ---------
Income (loss) from operations...... 1.1 0.9 (18.6) (9.5) (199.1)
Interest income (expense), net..... 0.0 0.0 0.6 -- 6.0
----- ----- ----- ------- ---------
Income (loss) before taxes......... 1.1 0.9 (18.0) (9.5) (193.1)
Provision (benefit) for income
taxes............................. 0.4 0.4 (0.2) (0.3) (0.5)
----- ----- ----- ------- ---------
Net income (loss).................. 0.7% 0.5% (17.8)% (9.2)% (192.6)%
===== ===== ===== ======= =========
</TABLE>
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
principally attributable to a $2.6 million increase in product sales, primarily
from one of our largest customers, AT&T. Consulting services increased by
$840,000, which was attributable to increases in maintenance and consulting
contracts. Network services revenue increased by $604,000 arising from the
introduction of broader network service offerings in late 1998.
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
principally attributable to the increase in our 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.
26
<PAGE>
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, as compared to $48,000 for the nine months ended September 30, 1998. This
increase in amortization of deferred compensation expense is due to the
granting of additional stock options to employees at exercise prices below fair
market value. 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 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 that 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.
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 CopperNet 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
27
<PAGE>
in gross profit as a percentage of revenue was attributable to higher product
sales, increased revenue from consulting services and the introduction of
broader network service offerings 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 CopperNet 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 CopperNet network and other networking solutions.
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.
28
<PAGE>
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 in products sales from 1996 to
1997, offset in part by lower bonus and commission 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%.
Quarterly Results of Operations
The following table presents our results of operations data and the
components of net income (loss) for the last quarter of 1997, the four quarters
of 1998 and the first three quarters of 1999. In the opinion of management,
this information has been prepared substantially on the same basis as the
financial statements appearing elsewhere in this prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the unaudited quarterly
results when read in conjunction with the financial statements of the Company
and related notes thereto appearing elsewhere in this prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
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<PAGE>
Quarterly Summary
<TABLE>
<CAPTION>
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- --------- -------- -------- -------- ---------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Product sales.......... $1,901 $2,194 $2,297 $2,902 $ 2,507 $ 3,955 $ 2,913 $ 3,113
Consulting services.... 315 317 462 274 375 702 665 526
Network services....... -- 41 82 87 101 119 166 529
------ ------ ------ ------ ------- ------- -------- --------
Total revenue.......... 2,216 2,552 2,841 3,263 2,983 4,776 3,744 4,168
------ ------ ------ ------ ------- ------- -------- --------
Cost of revenue
Product sales.......... 1,602 1,858 1,947 2,549 2,285 3,535 2,488 2,683
Consulting services.... 60 160 285 152 164 299 476 402
Network services....... -- 1 7 7 26 171 612 1,359
------ ------ ------ ------ ------- ------- -------- --------
Total cost of revenue.. 1,662 2,019 2,239 2,708 2,475 4,005 3,576 4,444
------ ------ ------ ------ ------- ------- -------- --------
Gross profit (loss)..... 554 533 602 555 508 771 168 (276)
Operating expenses:
Selling, general and
administrative........ 495 538 509 1,357 1,613 2,533 5,385 8,809
Amortization of
deferred compensation
on stock options...... -- -- -- -- 219 540 4,728 1,431
Depreciation and
amortization.......... 8 4 9 48 69 187 698 1,612
------ ------ ------ ------ ------- ------- -------- --------
Total operating
expenses.............. 503 542 518 1,405 1,901 3,260 10,811 11,852
------ ------ ------ ------ ------- ------- -------- --------
Income (loss) from
operations............. 51 (9) 84 (850) (1,393) (2,489) (10,643) (12,128)
Interest income
(expense), net......... (3) (12) (14) 25 65 (9) 202 559
------ ------ ------ ------ ------- ------- -------- --------
Income (loss) before
taxes.................. 48 21 70 (825) (1,328) (2,498) (10,441) (11,569)
Provision (benefit) for
income taxes........... 22 (8) 27 (47) -- -- (72) 1
------ ------ ------ ------ ------- ------- -------- --------
Net income (loss)....... $ 26 $ (13) $ 43 $ (778) $(1,328) $(2,498) $(10,369) $(11,570)
====== ====== ====== ====== ======= ======= ======== ========
</TABLE>
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 that 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 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. 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. We anticipate capital expenditures for
1999 to range from $55.0 million to $70.0 million for the expansion of our
network to approximately 360 central offices. 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 during 2000 of between $40.0
million and $50.0 million, for the expansion of our network to approximately
500 central offices. The rollout of 500 central offices by mid-2000 will allow
us to provide DSL services throughout our initial target markets at capacity
levels anticipated by our business plan.
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
30
<PAGE>
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 interest rate of 9.5%. Ascend has the right to withdraw or suspend further
advances to us if our interconnection 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.
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<PAGE>
We believe that our existing cash and cash equivalents, existing and
anticipated equipment lease financings and future revenue generated from
operations, will, together with the anticipated proceeds of this offering, be
sufficient to fund our operating losses, capital expenditures, lease payments
and working capital requirements to complete the network roll-out in our
northeast and mid-Atlantic target markets. 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 expand beyond our initial target markets and into other regions. 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:
. 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 accelerate deployment of our network or otherwise alter the
schedule or targets of our CopperNet rollout plan;
. we expand our network coverage beyond the northeast and mid-
Atlantic regions in which we currently operate our network; or
. we engage in any strategic acquisitions or relationships.
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. When we use the phrase
"Year 2000 compliant" or "Year 2000 compliance," we mean 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 an 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.
32
<PAGE>
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 completed a contingency plan to address the most
reasonably likely worst case Year 2000 scenario.
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.
Forward-looking Statements
This prospectus includes forward-looking statements. These forward-
looking statements address, among other things:
. our CopperNet 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.
33
<PAGE>
BUSINESS
We are a major provider of high-speed data communications services, and
related applications to business customers. We provide our data communications
services using digital subscriber line, or DSL, technology and generally market
those services directly through our own sales force. DSL technology allows our
customers to access their corporate networks and the Internet through high-
speed, "always on" connections over traditional copper telephone lines at
speeds up to 7 megabits per second, substantially higher than common dial-up
modems. We have branded our DSL service CopperNet, which we commercially
launched in the northeast and mid-Atlantic regions of the United States, in
January 1999.
In seeking to solve the data communications needs of our business
customers, we offer them network services, telecommunications products and
equipment made by others and consulting services. Although nearly all of our
revenue has historically been derived from our product sales and consulting
services, we expect to continue to dedicate most of our financial and
management resources to further developing our network services business.
Through this business, which includes our CopperNet service offering, we
provide metropolitan area and wide area network services to our customers as
well as manage and monitor our customers' networks. Through our product sales
business, we sell telecommunications equipment that our customers use to build,
maintain and secure their networks. Through our consulting services business,
we design our customers' networks, install the related equipment and provide
services to help them secure their networks. For the three months ended
September 30, 1999, approximately 12.7% of our revenue resulted from network
services, 74.7% from product sales and 12.6% from consulting services. During
the same period in 1998, network services represented 2.7% of our revenue. If
we are successful in implementing our business plan, we expect that network
services will constitute most of our revenue.
Since we began offering our DSL-based service we have made substantial
progress in implementing our broadband network service platform. We currently
offer our DSL-based networking solutions in the following nine cities and their
surrounding markets: Baltimore, Boston, New York, Norfolk, Philadelphia,
Pittsburgh, Richmond, Washington D.C., and Wilmington. As of December 31, 1999,
we had installed our equipment in central offices within our target markets
and we expect to have installed our equipment in approximately 500 central
offices by mid-2000, which will essentially complete the roll-out of our
network in these markets. The central offices where we currently have installed
our equipment serve approximately 85% of the businesses in these areas. Upon
the completion of our network deployment, we believe that the central offices
where we have installed our equipment will serve approximately 95% of the
businesses in these areas. We believe that by concentrating the deployment of
our network facilities in our target markets, we will be able to serve the
overall networking and data communications needs of our business customers more
effectively than our competitors. As of December 31, 1999, we had installed
high-speed access lines.
We have designed our network to support our customers' changing data
networking needs. Our network supports newer, evolving technologies designed to
transmit both data and 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 technologies generally allow for
a more efficient use of a network. Our CopperNet service is compatible with
packet-based communications systems such as ATM, frame relay and IP. This same
architecture also supports the traditional technologies that carry most of
today's voice telephone conversations. This network design allows us to offer
businesses and their telecommuters cost-effective solutions for accessing the
Internet, as well as other emerging applications and services of corporate
networks, such as video and audio conferencing, application and Web hosting,
multimedia and e-commerce. We create city-wide MANs and connect them to our
private, leased, 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, enabling them to operate as if
they were using their own private network. These virtual private networks, or
VPNs, have the capacity, speed, reliability and level of service that are
designed to meet our customers' needs.
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<PAGE>
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. Many 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, or LANs, to enable employees to
work from remote locations and from home, and to create private networks that
connect corporate networks in multiple locations. Gartner Group estimates that
the U.S. market for packet-based, VPN and Internet data services will grow
from $3.4 billion in 1997 to $14.5 billion in 2003, a compounded annual growth
rate of 34%. Business demand for Internet access, e-mail, video and audio
services, web and application hosting and e-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, or IDC, 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 18%.
High-speed data communications have become important to businesses in
part due to the dramatic increase in Internet usage. According to IDC, the
number of Internet users worldwide reached approximately 69 million in 1997
and is forecasted to grow to approximately 320 million by 2002. IDC 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
3,000 in 1997, providing $1.87 billion in revenue to over 7.1 million lines
providing $18.00 billion in revenue, in 2003, representing a 373% compounded
annual growth rate in the number of lines and a 531% compounded annual growth
rate in revenue.
Increasing network congestion. The growing use of bandwidth-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 imbalance in capacity between local
and wide area networks. Although high-speed local access technologies such as
DSL will be deployed to help solve the local access or "last mile," bottle-
neck, 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. Although 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 traditional 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.
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<PAGE>
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 is designed to remove 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 ISDN 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. After the build-out of a central office, our subsequent
investments in DSL technology for customers within the area served by that
central office are directly related to the number of paying customers.
Needs of Small- and Medium-Sized Businesses. A significant number of
small- and medium-sized businesses have no practical alternative to low
performance dial-up or integrated services digital network, or ISDN, lines and
lack the financial resources to afford traditional high-cost alternatives, such
as T-1 or T-3 lines. As a result, their employees suffer productivity
limitations associated with slow transmission speeds. In addition, there is an
increasing need by these businesses for integrated, value-added applications
and services, such as web and application hosting or computer system back-up.
These applications also require an increasing amount of bandwidth capacity.
Needs of Large Businesses to Improve Remote Worker Productivity. Many
large companies are supporting increasing numbers of remote offices and workers
as a means of dealing with transportation infrastructure constraints, skilled
worker unavailability and other workplace issues. These companies face the
challenge of finding a cost effective way to make their workers as productive
as those who have access to all of the high performance communications and
networking resources available to workers located at corporate headquarters. A
high-speed network solution that encompasses access to the corporate local area
network, the corporate telephone system, the Internet, the corporate video
conferencing system, customers, suppliers, and partners permits a substantial
increase in remote office and worker productivity.
Significant and Growing Demand for Network-Enabled Broadband Applications
and Services. As applications become more advanced and necessary to conduct
day-to-day business, we expect that the demand for broadband capacity will rise
accordingly. Many companies lack the resources to develop, implement, manage
and continually enhance their business' hosting and information technology
applications needs. As a result, not only should the demand for bandwidth
capacity rise, but there should be strong demand for outsourcing many of these
applications so that companies are able to focus on their core competencies.
Impact of the 1996 Telecom Act. The 1996 Telecom Act (including its
related regulations) 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;
. to provide competitive telecommunications companies with the
operations support services necessary for competitive
telecommunications companies to compete; and
. to permit competitive telecommunications companies to share access
to and provide service over traditional telephone companies'
existing copper telephone lines.
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<PAGE>
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 provide a full range of services to allow businesses to effectively
outsource their Internet access, data transport, and other telecommunications
or data communications needs. We market our services both directly to
businesses through our sales force and indirectly through other service
providers.
High-speed, "Last Mile" Connectivity. CopperNet is designed to solve 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 CopperNet speeds
allow our customers to transfer data at rates faster than standard high-speed
data connections, like T-1 lines and frame relay circuits. We provide packet-
based connections like other DSL providers, but 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, CopperNet addresses both older channelized network requirements, like
traditional voice telephone networks, and the packet-based communications
better suited for newer, more efficient technologies such as ATM, frame relay
and IP, the set of standards that enable Internet communications. ATM 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, VPNs,
office-to-office connectivity, telecommuting solutions, collaborative computing
of users in different areas, Internet/intranet access, traditional voice, video
conferencing, multimedia, e-mail, video and audio transmission, web and
application hosting and e-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 MANs 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.
Wide Area Network Solutions. 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 WAN in our northeast and mid-Atlantic regions. This WAN provides high-
capacity, secure and reliable connections between geographically dispersed
locations. Because our WAN customers, like our MAN customers, are served end-
to-end on our CopperNet 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.
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<PAGE>
Network-Enabled Broadband Communications and Services. We believe that
providing high-speed access and data communications solutions will only be part
of our customers' solution. Because our emphasis is on building customer
relationships through our direct sales force and working with them to provide
the best communications solutions, we believe that we will be able to identify
further customer needs and effectively market and sell new solutions to meet
these needs. For example, we currently provide remote online control,
monitoring and management of our customers' networks. In addition, we develop
and implement sophisticated network security solutions to protect our
customers' networks and vital data, including VPNs, 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 security. In the future, we intend to offer additional services that may
include e-commerce, voice-over technology (including IP, frame relay and ATM),
web and application hosting, video conferencing and server back-up services.
The NAS Strategy
Our goal is to be the premier provider of data communications and
networking solutions in the markets in which we operate. To achieve our goal,
and to take advantage of our market opportunity, we plan to continue to
implement a strategy consisting of the following principal elements:
. Provide in-depth 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 a wide area of coverage of our markets. Thus,
we have pursued a strategy of providing services in a substantial
majority of the central offices in each of our target markets.
Furthermore, our focus on the northeast and mid-Atlantic regions
has enabled us to deploy our network with speed and depth. We
believe that our coverage within our target markets is much deeper
than that of other providers of DSL-based broadband access,
enabling us to better serve our customers by providing them with
access for substantially all of their end-users.
. Focus on small- and medium-sized business customers. We believe
that many small- and medium-sized businesses currently do not have
a cost-effective and integrated solution to their Internet access
and data transport needs. Many small- and medium-sized businesses
want to provide high-speed Internet access to their employees and
connect multiple branch offices in the same city or multiple
cities through a MAN or WAN connection. Our CopperNet solution is
more cost-effective than current solutions offered by traditional
telephone companies, such as T-1 or ISDN connections. In addition,
we believe that our marketing approach enables us to provide our
customers with a more effective and integrated solution to their
data communications needs.
. Focus on selected large enterprise customers. We believe that many
large enterprise customers that want to provide cost-effective
high-speed access to their remote workers do not have an adequate
solution. Many large businesses have remote offices and workers
that are not able to take advantage of the full array of
communications and networking resources available to workers at
the main office. Our extensive network coverage within our targets
allows us to provide service to most remote workers or office
locations within our markets.
. 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, VPNs, 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 and application hosting
and e-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.
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. Expand network-enabled features and applications. We seek to have
our network become a platform that facilitates the delivery of
productivity-enhancing features and applications to businesses and
their employees. We intend to either directly offer or jointly
provide these services. One of our objectives in providing these
enhanced features and applications is to strengthen customer
loyalty and increase revenue per customer.
. Provide superior customer care. We emphasize a comprehensive
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 it has contracted
according to our service level agreements. 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 emphasize direct sales and marketing to small- and
medium-sized businesses and to selected large enterprises. We also
sell our services indirectly through our sales partners, including
Internet service providers, long distance and local carriers and
other networking service companies. Our sales force, which
included employees at December 31, 1999, is supported by
engineers who are trained, certified experts in all our vendor-
partners' products and technologies, including Ascend, Paradyne,
Lucent, and Cisco Systems, Inc. We intend to leverage our existing
customer base through selling them additional products and
services. Some of our sales partners include Verio, Intermedia,
Net2000 Communications, Crosslink, Concentric, Pae-tec, and DSL
Networks.
. 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 T-1
lines and frame relay circuits, at approximately 30% to 70% of the
cost of such services. After we build out a central office, our
subsequent investments in DSL technology for the customers within
the area served by that central office are directly related to the
number of paying customers, making a significant portion of our
capital expenditures success-based.
. Expand our network coverage area. We may consider expanding our
coverage area beyond our initial target markets in the northeast
and mid-Atlantic regions and into other regions. For example, we
have entered into interconnection agreements with BellSouth and
other telephone companies that will permit us to operate in
additional markets, subject to our seeking and obtaining required
state regulatory approvals.
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. Accelerate growth through strategic acquisitions or
relationships. As part of our growth strategy, we intend to
evaluate and consider opportunities to pursue strategic
acquisitions, investments and relationships on an ongoing basis.
We expect to focus our efforts on companies with complementary
service capabilities, talented personnel with skills compatible
with our business technologies that will permit us to enhance or
expand our business and/or additional applications that will
enable us to expand our network services. In addition, we may
selectively acquire or partner with companies that permit us to
increase our customer base.
Service and Product Offerings
We offer our customers network services, products for sale and consulting
services. For the three months ended September 30, 1999, approximately 12.7% of
our revenue resulted from network services, 74.7% from product sales and 12.6%
from consulting services. During the same period in 1998, network services
represented 2.7% of our revenue.
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 CopperNet alone.
CopperNet. In January 1999, we began commercially offering our CopperNet
services. CopperNet uses DSL technology to provide high-speed continuously
connected packet-based and channelized communications services. CopperNet
connects business users to our metropolitan area networks and wide area network
using ATM, frame relay and DSL technologies over traditional copper telephone
lines. CopperNet customers are able to connect to our regional networks to
obtain high-capacity, secure and reliable connections between geographically
dispersed locations. Because our customers are served end-to-end on our
CopperNet network, we are able to deliver a true wide area, VPN with the
capacity, speed, reliability and level of service that they require.
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The chart below shows the service, speed, retail price (which includes
equipment installed at the customer's location), range and performance of our
CopperNet services, as of December 15, 1999:
<TABLE>
<CAPTION>
Retail
Retail List
Speed Speed List Price for
To End From End Price for Monthly
Service(1) User(2) User(2) Activation(3) Service(3) Market/Usage
---------- -------- -------- ------------- ---------- ------------------------
<C> <C> <C> <C> <C> <S>
Symmetrical:
CopperNet 128 128 Kbps 128 Kbps $270 $129 Integrated services
digital network
replacement for
telecommuters.
CopperNet 256 256 Kbps 256 Kbps $270 $146 Small businesses with
standard e-mail and web
usage.
CopperNet 384 384 Kbps 384 Kbps $270 $162 Higher bandwidth
solution for small to
medium-sized businesses
running moderately
visited web sites.
CopperNet 512 512 Kbps 512 Kbps $270 $185 Allows small- and
medium-sized businesses
to meet most network
video and Internet
needs.
CopperNet 768 768 Kbps 768 Kbps $270 $217 Supports high bandwidth
intensive applications
such as e-commerce,
video conferencing,
frame relay and voice
over frame relay.
CopperNet 1.0 1.0 Mbps 1.0 Mbps $270 $239 Close to full T-1 for
medium-to-large sized
businesses.
CopperNet 1.5 1.5 Mbps 1.5 Mbps $270 $294 Standard for large
organizations that
require high-capacity
connections.
Applications include the
ability to integrate
voice, data and Internet
services over a single
connection.
CopperNet 2.0 2.0 Mbps 2.0 Mbps $270 $348 Full motion video and
multimedia applications
for large businesses.
Asymmetrical:
CopperNet 1.5 1.5 Mbps 384 Kbps $270 $239 High-speed web access,
e-mail and file
distribution.
CopperNet 4.0 4.0 Mbps 1.0 Mbps $270 $429 Very high-speed web
access e-mail and file
distribution.
CopperNet 7.0 7.0 Mbps 2.0 Mbps $270 $729 Bandwidth and capacity
sufficient to meet most
asymmetrical data
communication
requirements.
</TABLE>
- --------
(1) In each case, the range from the central office is 18,000 feet. However,
through our symmetrical CopperNet 128 application, there is no limitation
on range.
(2) "Kbps" means kilobits per second. "Mbps" means megabits per second.
(3) Wholesale and volume discount prices are available for network service
providers.
CopperNet Frame. CopperNet Frame provides access to a seamless local and
long-distance network using ATM and DSL technologies to deliver a flexible
suite of frame relay services. The benefit to CopperNet 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 VPOP service provides network service providers access to our
entire CopperNet network. With VPOP, a network service provider can offer
services throughout the entire CopperNet network without additional investment
in network communications infrastructure. This service offers wholesale
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customers the opportunity to sell DSL circuits in cities outside of the local
serving area in which they physically connect to the CopperNet network.
Wholesale and volume discount prices are available for network service
providers.
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 customers' 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, VPN
service, encryption and access authentication solutions for customers looking
for the highest level of security on any network on which data is transported.
Value-Added Products and Services. We offer an array of network and
broadband enabled applications and features that take advantage of DSL's high-
speed connectivity. These applications extend the capabilities of small- and
medium-sized businesses and provide them access to expanded markets, resources,
and functionality.
Consulting Services
We provide professional consulting and network integration services to
complement our CopperNet, ROC, SOC and network security services. We also
provide network design, network evaluation, project and program management,
staging, installation, maintenance and warranty 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 security breaches. We will conduct organized security
breaches with software tools and techniques designed to expose
unauthorized information security breaches. These controlled
penetrations are tailored to customer requirements. Following a
security breach, 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
security breach is not lost during subsequent implementation and
maintenance phases.
Product Sales
We sell 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 primarily manufactured by Ascend, Cisco,
Paradyne and Lucent.
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We do not manufacture any of this equipment ourselves. Our engineers select
product solutions to improve our customers' operations and network
efficiencies, and then help install and configure the equipment in our
customers' networks.
Customers
As of December 31, 1999, we had more than customers. AT&T and Zeneca
Pharmaceuticals, a division of Zeneca, Inc., accounted for 52.7% and 4.3%,
respectively, of our revenue for the three months ended September 30, 1998, and
15.8% and 12.3% of our revenue, respectively, for the three months ended
September 30, 1999, almost all of which arose from product sales and consulting
services.
Network services, which includes our CopperNet service, represented 12.7%
of our revenue for the three months ended September 30, 1999 and 2.7% of our
revenue for the three months ended September 30, 1998.
Sales and Marketing
We emphasize direct sales and marketing to small- and medium-sized
businesses and to select large enterprises. 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 sales force of people at December 31, 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 CopperNet
connectivity to small and medium businesses and our account executives focus on
selling CopperNet 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. 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 rollout of our services; and
. 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 CopperNet sales through
partnerships with other service providers which offer complementary services
and can offer CopperNet as part of a complete business solution. 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.
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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.
Cisco Systems, Inc. In November 1999, we were awarded Cisco Powered
Network, or CPN, certification. The CPN certification represents our next step
towards introducing an enhanced business-class Internet access service that
includes Cisco routers as the customer premises equipment.
Verio Inc. In August, 1999, we were named as Verio's preferred provider
of DSL service in Richmond, Virginia. Verio will use our CopperNet network to
deliver reliable DSL Internet access up to 50 times faster than regular dial-up
internet access, enabling Richmond organizations to increase the productivity
of their online business activities.
Net2000 Communications. In May 1999, we entered into a master service
agreement with Net2000 Communications, a competitive telecommunications company
within the mid-Atlantic region, to provide Net2000 customers with CopperNet
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 mid-Atlantic region.
Our first right to supply means that when DSL Networks is providing DSL
services in the mid-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.
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. 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.
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 for the customer as well as
complex coordination issues. We work with each customer to develop project
implementation plans. These plans include 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
comprehensive 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 of our customers 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
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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
company's provisioning 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, 7 days a week to all our
customers. We serve as the sole contact for customers to whom we
make direct sales. We also provide the second level of support for
our indirect customers. 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 system integrates our critical business functions,
including sales, ordering, provisioning, customer support,
maintenance and repair, billing, accounting and decision support.
Network Structure and Technology
Overview. We operate a series of metropolitan area networks connected by
our private, leased, high-speed fiber optic backbone. Our network employs a
structure designed to deliver superior end-to-end capabilities, high-speed
"last mile" connections and efficient 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, flexible 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 CopperNet end-users are added to our network, capacity is
automatically added so that reliable performance is achieved for
all users as our network grows.
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. Flexible. From our network operations center, we 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 generally experience fewer network
security risks than users of common dial-up modems, ISDN lines or
dedicated access to the Internet because there is less risk of
unauthorized access. Our network is designed 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 provides a direct
connection between discrete locations, which reduces the
possibility of unauthorized access and allows our customers to
safely perform 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 provide for the quality of
the copper telephone lines we receive, thereby ensuring the
transmission speed of end-user connections.
. Central Office Collocation Spaces. Through FCC and state
telecommunications regulatory policies as well as our
interconnection agreements, we secure collocation space in central
offices from which we desire to offer CopperNet. These collocation
spaces are designed to offer the same high reliability and
availability standards as the telephone companies' other central
office spaces. 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 central offices and have complete
access to the space. With SCOPE collocation, we install and
maintain our equipment in central offices, but our access to the
space is non-exclusive. With virtual collocation, the telephone
company installs and maintains the equipment on our behalf, but we
have no access to the space. Approximately 80% of our central
office collocations are physical, and we expect over time to
eliminate virtual co-location.
. Metropolitan Area Backbone. Our metropolitan area backbone is a
private, leased, high-speed, meshed, fiber optic network that
connects our network access points in central offices, nodes
sites, and selected 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.
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. Node Sites. A node site is a physical location where we connect
with 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 of our
nine metropolitan areas.
. Wide Area Backbone. Our wide area backbone is a private, leased,
high-speed, 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.
. 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.
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
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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, 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 Net-Connections 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 T-1, 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, Excite@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 CopperNet. 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 Communications, 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 that are planning or are in the process of
building global satellite networks that 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
CopperNet. 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;
. the special conditioning Bell Atlantic provides to enable the
transmission of DSL signals on these lines;
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. 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 with Bell Atlantic have initial terms that
expire in March 2000, in the case of Delaware, Maryland, Pennsylvania, Virginia
and Washington, D.C., and January 2001 in the case of Massachusetts 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.
Recently, we have initiated negotiations with Bell Atlantic to renew each
of the agreements expiring in March 2000. Although we expect to renew these
agreements, there can be no assurance that we can do so 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 other regions that are served by traditional telephone
companies other than Bell Atlantic, we will need to enter into interconnection
agreements with those incumbent carriers. We have entered into an
interconnection agreement with BellSouth with an initial term that expires
December 1, 2000. This agreement has been approved by the state public utility
commissions in Alabama, Florida, Georgia, Kentucky, Louisiana and South
Carolina. We plan to submit the agreement for approval to state public utility
commissions in North Carolina and Tennessee as well. We also have
interconnection agreements with GTE (covering the states of Alabama, Florida,
Kentucky, North Carolina, Pennsylvania, South Carolina and Virginia), with
Sprint Corporation (covering New Jersey) and with the Southern New England
Telephone Company (covering Connecticut).
Government Regulation
The following summary of regulatory developments and legislation
describes material telecommunications regulations and legislation directly
affecting our industry.
The facilities and services that we obtain from Bell Atlantic in order to
provide CopperNet 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
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provide CopperNet 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 legislation 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 1996 Telecom 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 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 also 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 July 1997, 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
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.
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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 released an order on November
5, 1999 that sought to follow the Supreme Court's instructions in delineating
the particular network elements that traditional telephone companies must make
available to competitors. The FCC's November decision reaffirms its earlier
holding that traditional telephone companies must make available the particular
inputs that we need in order to provide our CopperNet services (including, but
not limited to, copper telephone lines, transmission facilities between local
telephone company offices and various back-office support services). In
addition, the FCC's November order requires, upon the request of competitive
telecommunications companies like us, that traditional telephone companies
provide competitive carriers like us with certain other inputs (such as
"subloops" and in some cases packet switching) that may prove useful as we
expand our CopperNet service, especially into more suburban areas.
The Supreme Court's determination in its January 1999 order 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 new regulations that
are designed to clarify the obligations of a traditional telephone company in
providing space inside its offices to competitors like us so that they can
access the telephone company's copper telephone lines and connect those lines
to the competitor's electronic equipment located inside that telephone company
office. Another rule adopted in that order is intended to help ensure that the
customers of companies who provide services like CopperNet do not receive
harmful interference from other users of the traditional telephone company
network on which the service is provided. Although these new FCC rules are now
in effect, several traditional telephone companies have appealed them to the
U.S. Court of Appeals for the District of Columbia Circuit. The appellants
claim that some of these rules are unlawful. We do not know how the Court will
decide these appeals, but any decision that invalidates one or more of these
rules could potentially have adverse consequences for our CopperNet business.
An FCC order released on December 9, 1999 is designed to make it easier
for companies like us to market high-speed data services like CopperNet to
residential customers for accessing the Internet. Under this "line-sharing"
order, traditional telephone companies are required to let a competitor use the
same copper telephone line for providing the customer with data service that
the telephone company uses for providing the same customer with local telephone
service. At present, the traditional telephone companies provide residential
customers with local phone service and high-speed Internet access service over
a single phone line, but the traditional telephone companies require
competitors like us to lease a separate phone line to provide high-speed
Internet access to any residential customer when that customer obtains local
phone service from the traditional local telephone company. The FCC's December
9, 1999 order is supposed to make it easier for companies like ours to compete
with the traditional local telephone companies in the residential high-speed
Internet access market by permitting competitors to reduce significantly their
costs to serve this market. However, it is not yet clear that the FCC's order
will achieve its intended objective since it will take several months before
the
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incumbent local telephone companies put in place the policies and procedures
necessary to implement the order. It also is possible that the order will be
appealed to the courts on grounds that the FCC's new line sharing requirements
are unlawful. If it is appealed, we have no way of determining whether the
FCC's requirements will be affirmed.
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 CopperNet 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 rather than state telecommunications regulators. This ruling is potentially
advantageous to us because it reduces the number of telecommunications
regulatory agencies that control the terms under which we provide CopperNet. 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 CopperNet constitutes
interstate service, we believe that we do not need a certificate from state
telecommunications regulatory agencies to provide CopperNet. Moreover, since we
believe CopperNet is special access, we provide the service to existing
customers pursuant to contract rather than tariff.
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
underserved 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.
On November 2, 1999, the FCC held that a statute requiring that
traditional local telephone companies offer their retail services at a
wholesale price to competitors like us does not apply when these telephone
companies provide a discounted DSL service directed to Internet service
providers, or ISPs. In that case, while competitors may purchase the
traditional telephone companies' ISP-directed DSL offering on the same terms as
the ISPs, the FCC ruled that competitors have no legal right to a wholesale
discount off the price paid by ISPs. This ruling could adversely affect us if
it gives ISPs an economic incentive to meet all of their DSL needs by
subscribing to the traditional telephone companies' ISP-directed discounted DSL
offerings rather than by subscribing to DSL services offered by competitors
like us.
Various traditional telephone companies have requested that the FCC
substantially deregulate the retail price they charge for various types of
telecommunications services, including high-speed data services like CopperNet.
The FCC recently issued a decision in response that establishes a procedure by
which traditional telephone companies may apply for certain pricing
flexibility. We cannot yet determine the extent to which traditional telephone
companies will use this procedure or the impact of any pricing flexibility that
the FCC awards to any given company under this new procedure, since no
telephone company has yet applied for pricing flexibility under this new
procedure. The ultimate impact of the FCC's order also is uncertain because the
order has been appealed to the U.S. Court of Appeals. If the FCC were to
substantially eliminate price regulation of the high-speed data services that
traditional telephone companies provide in competition with CopperNet, our
business could be adversely affected.
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The FCC has also proposed to permit traditional telephone companies to
provide advanced services like CopperNet through separate affiliates on a
deregulated basis. This proposal could permit the separate affiliates to
provide advanced services free of the requirements relating to interconnection,
unbundling, resale and collocation imposed by the Telecommunications Act of
1996. Bills have been introduced in Congress that would grant regional Bell
operating companies regulatory relief to provide data services in areas where
they are currently restricted from doing so.
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 copper telephone wires and
other network elements, the FCC has exercised that jurisdiction by 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. Other states have begun proceedings to
set new permanent prices based on more current data. 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, CopperNet may, as to some future customers, be classified as
intrastate service 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 non-expiring
state authorizations to provide intrastate services from the state regulatory
agency in all states where we currently provide CopperNet service, except
Maryland. Our application for certificate to provide intrastate services in
Maryland is pending. We also have obtained non-expiring certificates to provide
intrastate service in many of the states where we may provide CopperNet service
in the future (Alabama, Florida, Georgia, Kentucky and South Carolina). Our
applications for certificates to provide intrastate services are pending in
several other states (Arizona, Colorado, Connecticut, Louisiana, Minnesota,
Nebraska, New Mexico, North Carolina, Oregon, Tennessee, Utah and Washington).
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. In some
states, pursuant to state statutes and regulations, regulated
telecommunications carriers such as our company may be required to obtain prior
approval for certain actions, such as issuing stock, incurring indebtedness, or
transferring control of the company holding a state certification. We may be
required to obtain approvals in connection with this offering. Actions by state
telecommunications regulatory agencies could cause us to incur substantial
legal and administrative expenses.
It is possible that laws and regulations could be adopted that 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.
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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 copy rights, 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. We own a federal trademark for the mark COPPERNET for
use with "communications services, namely, high-speed electronic data
transmission services." We also have pending applications for the marks CUNET
and CU COPPERNET. 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 that
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 that 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 December 31, 1999, we employed individuals in engineering,
sales, marketing, customer support and related activities and general and
administrative functions. None of these employees is 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
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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.
On October 27, 1999, we executed a lease for approximately 113,000 square
feet in Herndon, Virginia. We intend to move our headquarters to this location
in March, 2000.
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 that have initial terms that expire in
2000 and 2001. 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.. 34 Chief Operating Officer and Director
Scott G. Yancey, Jr..... 47 Chief Financial Officer and Director
James A. Aust........... 38 Vice President, Engineering
John J. Hackett......... 46 Vice President, Sales and Marketing
Worth D. MacMurray...... 45 Vice President, Legal and Strategic Projects
Lester M. Lichter....... 53 Chief Information Officer
Brian D. Roberts........ 40 Vice President, Engineering and Operations
Brion B. Applegate...... 45 Director
Dennis R. Patrick....... 48 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 a Vice President
of Sales for Worldcom, and formerly, MFS Telcom, from September 1995 to March
1998. From June 1994 to September 1995, Mr. Melnick was a member of sales
management at MFS Telcom.
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.
Worth D. MacMurray has been our Vice President, Legal and Strategic
Projects, since joining us in September, 1999. Prior to joining us, Mr.
MacMurray served as Vice President, Legal & Administration from November 1998
to August 1999 at Landmark Systems Corporation, a performance management
software
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company. Prior to joining Landmark, Mr. MacMurray served as Vice President and
General Counsel of Intersolv, Inc., a software tools company, from October 1997
to October 1998. From February 1988 to September 1997, Mr. MacMurray served in
various legal capacities for GTSI, an information technology reseller,
including as general counsel.
Lester M. Lichter has been our Chief Information Officer since October
1999. Prior to joining us, Mr. Lichter was Executive Vice President and Chief
Information Officer of Excel Communications from November 1997 to February
1999, where he was responsible for developing information services solutions to
support the company's business development activities. Mr. Lichter was Chief
Information Officer of Cable & Wireless USA from June 1996 to November 1997.
Before joining Cable & Wireless USA, Mr. Lichter was Vice President and Chief
Information Officer of AT&T from December 1993 to May 1996.
Brian D. Roberts has been our Vice President for Engineering and
Operations since August 1999. Prior to joining us, Mr. Roberts was Managing
Partner for Network Solutions in the Mid-Atlantic Region for USWeb/CKS from
February 1998 to August 1999. Mr. Roberts was Vice President for Engineering
and Operations for ACSI Advanced Data Systems Division (now e.spire
Communications, Inc.) from November 1997 to February 1999. Before joining ACSI,
Mr. Roberts was Vice President for Operations and Data Services at MFS
Communications (now MCI WorldCom) from August 1992 to April 1997.
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 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. Prior to consummation of our initial public offering
on June 3, 1999, two of the nominees to the board were elected to a one-year
term, two were elected to two-year terms and one was elected to a three-year
term. Thereafter, directors will be elected for three-year terms. Messrs.
Yancey and Melnick are Class I directors with terms expiring at the 2000 annual
meeting of stockholders, Messrs. Applegate and Patrick are Class II directors,
with terms expiring at the 2001 annual meeting of stockholders, and Mr. Aust is
Class III director, with a term expiring at the 2002 annual meeting of
stockholders.
58
<PAGE>
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 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 Brion B. 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 approximately 43.6% of our 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. On June 3, 1999, Mr. Patrick received
an option to purchase an additional 407,500 shares of common stock at an
exercise price equal to $3.00 per share. Mr. Patrick exercised the option to
acquire 250,000 shares of our common stock on June 3, 1999. The options granted
to Mr. Patrick vested immediately upon the completion of our initial public
offering on June 3, 1999.
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<PAGE>
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
Annual Compensation Compensation
------------------------- ------------
Securities
Underlying All Other
Name and Principal Position Salary Bonus Other Options Compensation
- --------------------------- -------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jonathan P. Aust........... $122,992 $135,000 -- -- --
President and Chief Execu-
tive Officer
Christopher J. Melnick..... 101,624 -- -- 3,150,000 --
Chief Operating Officer
James A. Aust.............. 99,750 25,000 -- 292,500 --
Vice President, Engineer-
ing
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>
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 $0.14 per share in exchange for
past services rendered. The other compensation paid to Mr. Buhl represents
sales commissions.
Options Grants in 1998
The following table shows information about our grants of options to
purchase our common stock made to the named executive officers during 1998:
<TABLE>
<CAPTION>
Potential Realizable Value
at
Assumed Annual Rates of
Stock
Price Appreciation for
Individual Grants Option Term(5)
---------------------------------------------------------- ---------------------------
Number of
Securities Percent of
Underlying Total Options Exercise Market
Options Granted to or Base Price at
Granted Employees Price Grant Date Expiration
(1) in 1998(2) ($/share) ($/share)(3) Date(4) 5% 10%
---------- ------------- --------- ------------ ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust........ -- --% $ -- $ -- -- $ -- $ --
Christopher J. Melnick.. 3,150,000 44.4 0.09 0.22 7/23/08 845,324 1,513,964
James A. Aust........... 292,500 4.1 0.09 2.09 11/1/08 969,459 1,559,295
William H. Farrer....... 112,500 1.6 0.09 2.09 11/1/08 372,869 599,729
Gerald A. Buhl.......... 18,000 0.3 0.09 2.09 11/1/08 59,659 95,957
</TABLE>
- --------
(1) All options were granted under our 1998 stock incentive plan. All options
were incentive stock options that 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.
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<PAGE>
(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 connection with our initial public offering on June 3,
1999, 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.
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 $3,126,375 $34,390,125
James A. Aust........... -- 292,500 -- 3,483,675
William H. Farrer....... -- 112,500 -- 1,339,875
Gerald A. Buhl.......... -- 18,000 -- 214,380
</TABLE>
- --------
(1) Calculated on the basis of the initial public offering price of our common
stock on June 3, 1999 ($12.00 per share), 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 that 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.
61
<PAGE>
Employment Arrangements
We have entered into employment agreements with the following executive
officers: James Aust, Jonathan Aust, John Hackett, Christopher Melnick, Worth
MacMurray and Scott Yancey. Each of these agreements 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 that 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>
Current Annual Maximum Options Granted
Base Salary Annual Bonus (Shares)
-------------- ------------ ---------------
<S> <C> <C> <C>
Jonathan P. Aust................... $450,000 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
Worth D. MacMurray................. 200,000 20 125,000
</TABLE>
The annual bonus and any salary increase for Jonathan Aust will be
determined by our compensation committee on an annual basis.
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 each receive annual salaries of $65,000. 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 that 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 that 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;
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<PAGE>
. 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 September 30, 1999, we had issued 356,276
shares of our common stock in connection with awards granted, we had granted or
committed to grant awards with respect to 10,724,209 shares of our common stock
and 525,791 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 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 of 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 that 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. As of September 30, 1999, Spectrum beneficially
owned 43.8% of our common stock. Brion B. Applegate, a Managing General Partner
of Spectrum, is a member of our board of
63
<PAGE>
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. As of September 30,
1999, FBR owned 7.8% of our common stock.
In March 1999, we amended our certificate of incorporation to modify the
terms of our then outstanding preferred stock. Upon completion of our initial
public offering on June 3, 1999, 50% of our redeemable preferred stock was
cancelled and ceased to exist without compensation or recourse, and the
remaining shares of preferred stock were converted into 416,667 shares of our
common stock.
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 principal of and interest on the notes
were converted into 416,667 shares of our common stock upon the closing of our
initial public 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. Those notes converted into an aggregate of
416,667 shares of our common stock upon the closing of the initial public
offering on June 3, 1999.
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. In
August 1999, we issued options to purchase 125,000 shares of common stock at an
exercise price of $5.12 to both Mr. MacMurray, our Vice President, Legal and
Strategic Projects, and Mr. Roberts, our Vice President, Engineering and
Operations. In October 1999, we issued an option to purchase 75,000 shares of
our common stock at an exercise price of $12.62 to Mr. Lichter, our Chief
Information Officer. 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 six 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 December 15, 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.
An asterisk indicates ownership of less than 1%.
As of December 15, 1999, there were 45,231,153 shares of our common stock
outstanding. After this offering, shares of our common stock will be
outstanding.
<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 20.8% %
Christopher J. Melnick(3)........... 1,625,000 3.5
James A. Aust(4).................... 1,891,406 4.2
William H. Farrer(5)................ 620,156 1.4
Gerald A. Buhl(6)................... 5,625 --
Brion B. Applegate(7)............... 19,737,601 43.6
245 Lytton Avenue
Palo Alto, CA 94301
Dennis R. Patrick(8)................ 657,500 1.4
Scott G. Yancey, Jr.(9)............. 1,155,000 2.5
Spectrum Equity Investors II, 19,737,601 43.6
L.P.(7) ...........................
245 Lytton Avenue
Palo Alto, CA 94301
FBR Technology Venture Partners, 3,495,000 7.7
LP.................................
1001 19th Street
Arlington, VA 22209
Stephen C. Aust(10)................. 1,953,000 4.3
All executive officers and directors
as a group (10 persons)(11)........ 35,329,569 72.5
</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 December 15,
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 1,575,000 shares issuable upon exercise of options to acquire our
common stock.
(4) Includes 91,406 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 35,156 shares issuable upon exercise of options to acquire our
common stock.
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<PAGE>
(6) Includes 5,625 shares issuable upon exercise of options to acquire our
common stock.
(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 Equity Investors. Mr.
Applegate is a Managing General Partner of Spectrum Equity Investors and,
therefore, beneficial ownership of the shares of our common stock owned by
Spectrum Equity Investors is attributed to Mr. Applegate.
(8) Includes 407,500 shares issuable upon exercise of options to acquire our
common stock.
(9) Includes 1,125,000 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 3,487,968 shares issuable upon exercise of options to acquire our
common stock that are held by Messrs. James A. Aust, Hackett, Lichter,
MacMurray, Melnick, Patrick, Roberts and Yancey.
have granted the underwriters an option to purchase shares of
common stock as part of the underwriters' overallotment 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>
% %
</TABLE>
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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 December 15, 1999, there were 45,231,153
shares of our common stock outstanding, held by 74 holders of record. As of
December 15, 1999, there were no shares of our preferred stock outstanding.
After this offering, we will have outstanding shares of common stock.
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, Shaw
Pittman, 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
Our certificate of incorporation allows us to issue without stockholder
approval preferred stock having rights senior to those of our common stock. Our
board of directors is 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. There currently are no shares of
our preferred stock outstanding.
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 23,300,001 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 4,660,000 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. 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
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<PAGE>
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 that 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 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 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.
68
<PAGE>
Classified Board of Directors; Removal, Vacancies. Our certificate of
incorporation provides 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 provides 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 by-laws 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, 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 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
69
<PAGE>
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.
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have shares of common stock outstanding.
We sold 7,500,000 shares of common stock in our initial public offering on June
3, 1999. All of the shares we sell in this offering and those sold in the
initial public 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.
Of the remaining shares of common stock outstanding after this offering,
shares will not be freely tradeable under the terms of the Securities Act.
Transfer of shares will be further limited by lock-up agreements as
described below.
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 that 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 shares of our common stock after
this offering assuming the sale of shares of our common stock by these
stockholders in 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
On August 17, 1999, we filed a registration statement on Form S-8 under
the Securities Act registering 11,250,000 shares of our common stock underlying
outstanding stock options or reserved for issuance under our 1998 stock
incentive plan. This registration statement became effective upon filing, and
shares covered by the registration statement are eligible for sale in the
public market, subject to the lock-up agreements with the underwriters.
71
<PAGE>
Lock-up Agreements
Other than with respect to up to shares to be sold by selling
stockholders if the underwriters exercise their over-allotment option, our
officers, directors, employees and certain of our other stockholders, who will
hold an aggregate of approximately shares of common stock and options to
acquire approximately shares of our common stock after this offering, have
agreed that they will not, without the prior written consent of Merrill Lynch &
Co., 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
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 Merrill Lynch & Co. 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. Merrill Lynch & Co. 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.
72
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as
representative of the underwriters named below. Subject to the terms and
conditions described in a purchase agreement among us, the selling stockholders
and the underwriters, we and the selling stockholders have agreed to sell to
the underwriters, and the underwriters severally have agreed to purchase from
us, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith ..........................
Incorporated
-----
Total.........................................................
=====
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of the shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect
of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officers' certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
Commissions and Discounts
The representative has advised us and the selling stockholders that the
underwriters propose initially to offer the shares to the public at the public
offering price on the cover page of this prospectus and to dealers at that
price less a concession not in excess of $ per share. The underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us and, if the overallotment option is
exercised, the selling stockholders. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price................. $ $ $
Underwriting discount.................
Proceeds, before expenses, to Network
Access...............................
Proceeds, before expenses, to the
selling stockholders.................
</TABLE>
73
<PAGE>
The expenses of the offering, not including the underwriting discount,
are estimated at $ and are payable by us.
Over-allotment Option
The selling stockholders have granted an option to the underwriters to
purchase up to shares at the public offering price less the underwriting
discount. The underwriters may exercise this option for 30 days from the date
of this prospectus solely to cover any over-allotments. If the underwriters
exercise this option, each will be obligated, subject to conditions contained
in the purchase agreement, to purchase a number of additional shares
proportionate to that underwriter's initial amount reflected in the above
table.
No Sales of Similar Securities
We, the selling stockholders and our executive officers and directors and
certain of our other stockholders have agreed, with exceptions, not to sell or
transfer any common stock for days after the date of this prospectus
without first obtaining the written consent of Merrill Lynch. Specifically, we
and these other persons or entities have agreed not to directly or indirectly
. offer, pledge, sell or contact to sell any common stock;
. sell any option or contact to purchase any common stock;
. purchase any option or contact to sell any common stock;
. grant any option, right or warrant for the sale of any common
stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to
the common stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery
of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
Quotation on the Nasdaq National Market
The shares are quoted on the Nasdaq National Market under the symbol
"NASC."
Price Stabilization and Short Positions
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short
position by purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the over-
allotment option described above. Purchases of the common stock to stabilize
its price or to reduce a short position may cause the price of the common stock
to be higher than it might be in the absence of such purchases.
74
<PAGE>
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
Passive Market Making
In connection with this offering, underwriters and selling group members
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act during a period before the commencement of offers or sales of
common stock and extending through the completion of distribution. A passive
market maker must display its bid at a price not in excess of the highest
independent bid of that security. However, if all independent bids are lowered
below the passive market maker's bid, that bid must then be lowered when
specified purchase limits are exceeded.
Other Relationships
Merrill Lynch and its affiliates have engaged in, and may in the future
engage in, investment banking and other commercial dealings in the ordinary
course of business with us and with certain of the selling stockholders or
other companies in which certain of the selling stockholders may have an
ownership interest. They have received, and may in the future receive,
customary fees and commissions for these transactions.
VALIDITY OF THE SHARES
Shaw Pittman, 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 that 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.
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.
75
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999
(unaudited).............................................................. F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998 and for the nine months ended September 30, 1998 (unaudited) and
1999 (unaudited)......................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December
31, 1996, 1997 and 1998 and for the nine months ended September 30, 1999
(unaudited) ............................................................. F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and for the nine months ended September 30, 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 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
Note 1 for which the
date is May 7, 1999
F-2
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
---------------
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
---------------------- -------------
1997 1998 1999
---------- ----------- -------------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents............... $ 713,246 $ 5,518,117 $ 63,469,708
Accounts receivable, net of allowance
for doubtful accounts.................. 765,325 1,806,791 3,171,020
Prepaid and other current assets........ -- 105,693 697,784
Inventory............................... 47,547 59,233 175,033
---------- ----------- ------------
Total current assets.................. 1,526,118 7,489,834 67,513,545
Property and equipment, net.............. 140,177 5,030,793 44,121,873
Deposit.................................. -- 185,000 85,124
Income tax receivable.................... -- 100,865 27,600
Deferred tax asset....................... 198,732 121,586 121,586
---------- ----------- ------------
Total assets.......................... $1,865,027 $12,928,078 $111,869,728
========== =========== ============
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 796,945 $ 2,525,102 $ 3,250,827
Accrued expenses........................ 92,502 750,308 2,850,282
Current portion of deferred
compensation liability................. -- 333,333 333,333
Current portion of capital lease
obligations............................ -- 328,982 4,995,643
Current portion note payable............ 93,348 -- 389,871
Income tax payable...................... 132,064 -- --
Other current liabilities............... -- 67,201 44,173
Deferred revenue........................ -- -- 69,805
---------- ----------- ------------
Total current liabilities............. 1,114,859 4,004,926 11,933,934
Long term portion of capital lease
obligations............................ -- 1,184,156 14,981,015
Long term portion note payable.......... -- 1,000,000 2,583,224
Long term portion of deferred
compensation liability................. 500,000 166,667 --
---------- ----------- ------------
Total liabilities..................... 1,614,859 6,355,749 29,498,173
---------- ----------- ------------
Commitments and contingencies
Series A mandatorily redeemable preferred
stock, $.001 par value, 10,000,000
shares authorized, issued and outstand-
ing, as of December 31, 1998 and 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,
21,915,000, 44,550,000 and 53,656,277
(unaudited) shares issued as of Decem-
ber 31, 1997, December 31, 1998 and
September 30, 1999, respectively....... 21,915 44,550 53,656
Additional paid-in capital.............. -- 8,097,566 130,357,583
Deferred compensation on stock
options................................ -- (3,462,753) (19,855,531)
Retained earnings (deficit)............. 228,253 (1,847,685) (26,284,153)
Less treasury stock, at cost, 8,550,000
shares as of December 31, 1998 and
September 30, 1999 (unaudited)......... -- (1,900,000) (1,900,000)
---------- ----------- ------------
Total stockholders' equity ........... 250,168 931,678 82,371,555
---------- ----------- ------------
Total liabilities, mandatorily redeem-
able preferred stock and
stockholders' equity ................ $1,865,027 $12,928,078 $111,869,728
========== =========== ============
</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 Nine Months
For the Years Ended December 31, Ended September 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales......... $14,368,264 $8,149,680 $ 9,899,623 $7,393,788 $ 9,981,312
Consulting services... 114,119 791,280 1,428,531 1,053,171 1,893,059
Network services...... -- 3,856 310,921 209,615 813,711
----------- ---------- ----------- ----------- ------------
Total revenue....... 14,482,383 8,944,816 11,639,075 8,656,574 12,688,082
----------- ---------- ----------- ----------- ------------
Cost of revenue:
Product sales......... 11,975,534 7,180,064 8,639,337 6,353,364 8,705,594
Consulting services... 90,851 230,565 761,315 597,900 1,178,251
Network services...... -- 2,406 40,738 15,268 2,142,000
----------- ---------- ----------- ----------- ------------
Total cost of
revenue............ 12,066,385 7,413,035 9,441,390 6,966,532 12,025,845
----------- ---------- ----------- ----------- ------------
Gross profit............ 2,415,998 1,531,781 2,197,685 1,690,042 662,237
Operating expenses:
Selling, general and
administrative....... 2,255,231 1,436,513 4,017,057 2,403,371 16,725,879
Amortization of
deferred compensation
on stock options..... -- -- 218,997 47,529 6,699,302
Depreciation and
amortization......... 7,256 12,298 130,004 60,412 2,497,445
----------- ---------- ----------- ----------- ------------
Income (loss) from
operations............. 153,511 82,970 (2,168,373) (821,270) (25,260,389)
Interest income......... -- -- 145,468 56,633 1,300,983
Interest expense........ (868) (5,144) (81,006) (58,217) (548,354)
----------- ---------- ----------- ----------- ------------
Income (loss) before
income taxes........... 152,643 77,826 (2,103,911) (822,854) (24,507,760)
Provision (benefit) for
income taxes........... 62,460 35,674 (27,973) (27,973) (71,292)
----------- ---------- ----------- ----------- ------------
Net income (loss)....... 90,183 42,152 (2,075,938) (794,881) (24,436,468)
Preferred stock
dividends.............. -- -- 322,192 120,548 339,726
Preferred stock
accretion.............. -- -- 244,417 91,449 257,719
----------- ---------- ----------- ----------- ------------
Net income (loss)
applicable to common
stockholders......... $ 90,183 $ 42,152 $(2,642,547) $(1,006,878) $(25,033,913)
=========== ========== =========== =========== ============
Net income (loss) per
common share (basic and
diluted):
Net income (loss)..... $ 0.00 $ 0.00 $ (0.08) $ (0.03) $ (0.61)
Preferred stock
dividends and
accretion............ -- -- (0.02) (0.01) (0.02)
----------- ---------- ----------- ----------- ------------
Net income (loss)
applicable to common
stockholders......... $ 0.00 $ 0.00 $ (0.10) $ (0.04) $ (0.63)
=========== ========== =========== =========== ============
Weighted average common
shares outstanding
(basic and diluted).... 21,915,000 21,915,000 27,302,144 24,007,253 39,932,623
=========== ========== =========== =========== ============
</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
for the years ended December 31, 1996, 1997 and 1998 and the nine months ended
September 30, 1999 (unaudited)
---------------
<TABLE>
<CAPTION>
Deferred
Common Stock Additional Compensation Retained Treasury Stock
------------------ Paid- on 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
Sale of common stock,
net of direct issuance
costs of $1,846,100
(unaudited)............ 7,500,000 7,500 81,846,400 -- -- -- -- 81,853,900
Conversion of
convertible notes
(unaudited)............ 833,334 833 9,999,167 -- -- -- -- 10,000,000
Conversion of preferred
stock (unaudited)...... 416,667 417 4,999,583 -- -- -- -- 5,000,000
Cancellation of
preferred stock
(unaudited)............ -- -- 1,238,096 -- -- -- -- 1,238,096
Exercise of stock
options (unaudited).... 356,276 356 1,682,136 -- -- -- -- 1,682,492
Accrual of preferred
stock dividends
(unaudited)............ -- -- (339,726) -- -- -- -- (339,726)
Accretion of preferred
stock (unaudited)...... -- -- (257,719) -- -- -- -- (257,719)
Deferred compensation
(unaudited)............ -- -- 23,092,080 (23,092,080) -- -- -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- 6,699,302 -- -- -- 6,699,302
Net loss (unaudited).... -- -- -- -- (24,436,468) -- -- (24,436,468)
---------- ------- ------------ ------------ ------------ --------- ----------- ------------
Balance, September 30,
1999 (unaudited)....... 53,656,277 $53,656 $130,357,583 $(19,855,531) $(26,284,153) 8,550,000 $(1,900,000) $ 82,371,555
========== ======= ============ ============ ============ ========= =========== ============
</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 Nine Months
For the Years Ended December 31, Ended September 30,
------------------------------------- -------------------------
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) $ (794,881) $(24,436,468)
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 47,542 2,497,445
Provision for
doubtful accounts
receivable.......... -- 23,826 28,133 -- 91,082
Benefit (provision)
for deferred income
taxes............... (62,337) (118,274) 77,146 -- --
Shares issued to
employee for
services............ -- -- 130,000 130,000 --
Amortization of
deferred
compensation on
stock options....... -- -- 218,997 47,529 6,699,302
Net changes in assets
and liabilities:
Accounts
receivable........ (4,435,883) 4,072,345 (1,069,599) (905,149) (1,455,311)
Inventory.......... (347,870) 300,678 (11,686) 11,402 52,003
Income tax
receivable........ -- -- (127,073) 73,265
Prepaid and other
current assets.... (10,000) 10,000 (105,693) (181,145) (960,135)
Accounts payable... 4,138,912 (3,612,797) (139,113) 448,833 617,021
Accrued expenses... 241,254 (148,752) 173,795 146,890 1,822,392
Deferred
compensation
liability......... 208,333 291,667 -- -- (166,667)
Deposits........... -- -- -- -- (22,850)
Income tax
payable........... -- -- (132,064) (132,064) --
Deferred tax
asset............. -- -- 26,208 26,208 --
Deferred revenue... -- -- -- -- 69,805
Other current
liabilities....... 142,948 (68,195) 67,201 141,156 (23,028)
----------- ----------- ----------- ----------- ------------
Net cash (used in)
provided by oper-
ating activi-
ties............. (27,204) 804,948 (2,809,682) (1,013,679) (15,142,144)
----------- ----------- ----------- ----------- ------------
Cash flows from
investing activities:
Expenditures for
networks ............. -- -- (640,511) (1,296,970) (16,704,704)
Purchases of property
and equipment......... (29,792) (121,915) (515,690) (96,556) (4,776,951)
Deposit for software
and services ......... -- -- (185,000) -- --
----------- ----------- ----------- ----------- ------------
Net cash used in
investing
activities....... (29,792) (121,915) (1,341,201) (1,393,526) (21,481,655)
----------- ----------- ----------- ----------- ------------
Cash flows from
financing activities:
Borrowings on notes
payable............... 1,500,000 1,500,000 2,406,652 -- 12,000,000
Repayments of notes
payable............... (1,445,458) (1,491,291) (1,500,000) (66,681) (26,905)
Principal payments on
capital leases........ -- -- -- -- (934,098)
Issuance of common
stock................. -- -- 4,902,401 4,902,401 83,700,000
Issuance of redeemable
preferred stock....... -- -- 5,102,499 5,102,499 --
Exercise of stock
options............... -- -- -- -- 1,682,492
Issuance costs related
to preferred and
common stock
offerings............. -- -- (55,798) (55,798) (1,846,099)
Treasury stock
acquired.............. -- -- (1,900,000) (1,900,000) --
----------- ----------- ----------- ----------- ------------
Net cash provided
by financing
activities....... 54,542 8,709 8,955,754 7,982,421 94,575,390
----------- ----------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ (2,454) 691,742 4,804,871 5,575,216 57,951,591
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 $ 6,288,462 $ 63,469,708
=========== =========== =========== =========== ============
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest............. $ 868 $ 5,142 $ 27,948 $ 17,999 $ 511,585
Income taxes......... -- 222,143 153,343 79,700 --
Non-cash investing and
financing activities:
Capital leases....... -- -- 1,513,138 22,757 19,397,618
Preferred stock
dividends........... -- -- 322,192 120,548 339,726
Preferred stock
accretion........... -- -- 244,417 91,449 257,719
Shares issued to
employee for
service............. -- -- 130,000 -- --
Expenditures for
networks included in
accounts payable and
accrued expenses.... -- -- 2,351,281 -- --
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.
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, which is a major provider of high-speed data communications
services, and related applications, provides network services,
telecommunications products and equipment and consulting services to business
customers. Through its CopperNet branded service, the Company offers its
customers high-speed connectivity using Digital Subscriber Line (DSL)
technology. The Company provides metropolitan area and wide area network
services, manages and monitors its customers' networks, sells
telecommunications equipment, designs networks for its customers, installs the
equipment and provides related services. The Company currently offers its DSL-
based networking solutions in the following nine cities and their surrounding
markets: Baltimore, Boston, New York, Norfolk, Philadelphia, Pittsburgh,
Richmond, Washington, D.C., and Wilmington.
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
Financial information for the periods after December 31, 1999 are
unaudited and accordingly, the consolidated balance sheet as of September 30,
1999, the consolidated statements of operations and cash flows for the nine
months ended September 30, 1998 and 1999 and the statement of changes in
stockholders' equity for the nine months ended September 30, 1999 have been
prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. In the opinion
of management, the interim data includes all adjustments (consisting only of
normal recurring adjustments) 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.
F-7
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 activitation 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.
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.
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>
Nine Months Ended
Years Ended December 31, September 30,
-------------------------------- -----------------------
Customer 1996 1997 1998 1998 1999
-------- ---------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
AT&T.................... $9,978,104 $3,421,878 $5,869,901 $4,364,752 $4,472,088
Zeneca, Inc............. -- 921,356 933,556 $ 832,678 $1,273,614
Network Monitoring and
Repair, Inc............ -- 1,301,440 -- -- --
---------- ---------- ---------- ---------- ----------
$9,978,104 $5,644,674 $6,803,457 $5,197,430 $5,745,702
========== ========== ========== ========== ==========
</TABLE>
F-8
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 commences as individual network components are placed in service
and are 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 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
F-9
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
and the nine months ended September 30, 1998 and 1999, are 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
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: network services, product
sales and consulting services. 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, e-commerce and CopperNet, the Company's high-speed, continuously
connected DSL access to telecommunications networks. 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 Company's business is currently conducted
principally in the eastern United States. There are no foreign operations.
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, 2000. 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.
F-10
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Initial Public Offering
In June 1999, the Company completed an initial public offering (IPO) of
7,500,000 (unaudited) shares of common stock. Total proceeds to the Company
were approximately $81,850,000 (unaudited), net of underwriting discounts and
commissions of approximately $5,500,000 (unaudited) and offering costs of
approximately $1,850,000 (unaudited). Concurrently with the IPO, $5,000,000
(unaudited) of the Company's Series A Mandatorily Redeemable Preferred Stock
(Preferred Stock) was converted into 416,667(unaudited) shares of common stock
at $12.00 per share, the public offering price, with the remaining shares of
Preferred Stock and all accrued dividends and accretion amounting to $1,238,096
(unaudited) cancelled without additional payment to the holders of those
shares. Concurrently with the IPO, $10,000,000 (unaudited) of the Company's 8%
convertible notes (see Note 5) was converted into 833,334 (unaudited) shares of
common stock at $12.00 per share, the public offering price.
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September
December 31, 30,
-------------------- -----------
1997 1998 1999
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Network placed in service .............. $ -- $ -- $28,926,259
Network development in process.......... -- 4,657,975 11,709,003
Office and computer equipment........... 133,419 355,962 5,164,025
Furniture and fixtures.................. 19,626 159,728 962,904
Less accumulated depreciation........... (12,868) (142,872) (2,640,318)
-------- ---------- -----------
Property and equipment, net............. $140,177 $5,030,793 $44,121,873
======== ========== ===========
</TABLE>
The Company's network includes equipment under capital leases, equipment,
installation, and collocation fees. Collocation fees represent 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 to network placed
in service. As of December 31, 1998 and September 30, 1999, the recorded cost
of the network equipment under capital leases was $1,513,138 and $22,333,126
(unaudited), respectively. Accumulated amortization for this equipment under
capital leases was $20,739 and $1,774,870 (unaudited) as of December 31, 1998
and September 30, 1999, respectively.
For the years December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999, depreciation expense charged to operations
amounted to $7,256, $12,298, $130,004, $47,542 (unaudited) and $2,497,445
(unaudited), respectively.
5. Debt
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 could draw on the line of credit in $1,000,000
increments up to a maximum of $5,000,000. The Company could 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 was 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
F-11
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
thirty-three months the Company was 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 at a rate equal to the
prevailing high yield bond index for the next fifteen months. The remaining
unpaid interest was due forty-two months after the related advance. The credit
agreement required 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, $1,000,000 was outstanding under this agreement.
On May 4, 1999, the Company amended its financing agreements with Ascend,
increasing the Company's total available financing from this vendor from
$40,000,000 (unaudited) to $100,000,000 (unaudited). The amendment increased
the Company's line of credit available for leasing of equipment purchases from
this vendor from $30,000,000 (unaudited) to $95,000,000 (unaudited). The
amendment also reduced the line of credit available for working capital loans
from $10,000,000 (unaudited) to $5,000,000 (unaudited) 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 (unaudited) and
$2,973,095 (unaudited), respectively.
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.
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 (unaudited) in the Company. Under the agreement, the Company
received $5,000,000 (unaudited) on April 1, 1999 and an additional $5,000,000
(unaudited) on May 11, 1999 by issuing 8% convertible notes. Concurrent with
the IPO, these notes, including principal and accrued interest, were converted
into 833,334 (unaudited) shares of common stock.
6. 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.
7. 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, $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)
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 (unaudited), 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.
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 and
September 30, 1999, 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
===========
<CAPTION>
Twelve months ended September 30, 1999 Amount
-------------------------------------- -----------
(unaudited)
<S> <C>
2000.......................................................... $ 6,634,014
2001.......................................................... 6,649,325
2002.......................................................... 6,574,641
2003.......................................................... 3,604,174
2003 and thereafter........................................... 62,960
-----------
23,525,114
Less amounts representing interest............................ 3,548,456
-----------
Present value of net minimum lease payments................... 19,976,658
Less current portion of capital lease obligations............. 4,995,643
-----------
Long term portion of capital lease obligations................ $14,981,015
===========
</TABLE>
The Company has entered into a master lease agreement with Ascend to
finance purchases of up to $95,000,000 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.
F-13
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. As of November 23, 1999,
all fees under this agreement had been paid.
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 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.
8. 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.
F-14
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 (there are no material changes to the Company's effective tax rate for
1999):
<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>
9. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Mandatorily Redeemable Preferred Stock
Concurrently with the IPO, $5,000,000 (unaudited) of the Company's Series
A Mandatorily Redeemable Preferred Stock (Preferred Stock) was converted into
416,667(unaudited) shares of common stock at $12.00 per share, the public
offering price, with the remaining shares of Preferred Stock and all accrued
dividends and accretion amounting to $1,238,096 (unaudited) cancelled without
additional payment to the holders of those shares. Concurrently with the IPO,
$10,000,000 (unaudited) of the Company's 8% convertible notes (see Note 5) was
converted into 833,334 (unaudited) shares of common stock at $12.00 per share,
the public offering price.
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 had 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 had 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 could not declare or pay any
distributions by dividend or otherwise, payable other than in common stock,
until the holders of the Preferred Stock first received a distribution equal to
the cumulative dividend due for each outstanding share of Preferred Stock.
Dividends continued to accrue until redemption. The Preferred Stock was
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 had 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 were entitled to a liquidation preference
equal to $1.00 per share plus any accrued and unpaid dividends. No dividends
were declared through December 31, 1998. The Preferred Stock did not provide
its holders with voting rights, however, the Company must have received
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.
F-15
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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)................... -- 339,726
Accretion to redemption price (unaudited)....... -- 257,719
Conversion of preferred stock to common stock
(unaudited).................................... (5,000,000) (5,000,000)
Cancellation of preferred stock (unaudited)..... (5,000,000) (1,238,096)
---------- -----------
Balance, September 30, 1999 (unaudited)......... -- $ --
========== ===========
</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 treasury stock
transaction was accounted for at cost.
10. 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, performace 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 (unaudited) and 11,250,000 (unaudited), respectively.
On April 1, 1999, the Company entered into a stock option agreement,
which granted a board of director member an option to purchase 250,000
(unaudited) shares of the Company's common stock at an
F-16
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
exercise price of $6.67 (unaudited) per share. On June 3, 1999, the board
member exercised the stock option by paying $1,667,500 (unaudited) to the
Company. In addition, the agreement stipulated the board of director member was
issued an additional option to purchase 407,500 (unaudited) shares of common
stock at an exercise price of $3.00 (unaudited) per share and is unexercised as
of September 30, 1999. These options immediately vested upon the Company's IPO.
As a result, the Company recognized $3,504,375 (unaudited) of compensation
expense during the nine months ended September 30, 1999.
As of December 31, 1998 and September 30, 1999, a total of 7,090,875 and
10,724,209 (unaudited), respectively, of stock options which were immediately
exercisable as of those dates had been granted at an exercise prices ranging
from $.09 to $16.25 per share. Stock option activity was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Range of Average
Stock Exercise Exercise
Options Price Price
---------- -------------- --------
<S> <C> <C> <C>
Options outstanding, December 31,
1997................................ -- $ -- $--
Options granted, July 1998........... 5,400,000 0.09 0.09
Options granted, August 1998......... 225,000 0.09 0.09
Options granted, November 1998....... 1,465,875 0.09 0.09
---------- -------------- -----
Options outstanding, December 31,
1998................................ 7,090,875 0.09 0.09
Options granted, January 1999
(unaudited)......................... 559,575 0.09 0.09
Options granted, March 1999
(unaudited)......................... 1,350,000 0.09 0.09
Options granted, April 1999
(unaudited)......................... 437,875 0.09 - 6.67 3.84
Options granted May 1999
(unaudited)......................... 479,900 3.00 - 6.00 5.78
Options granted June 1999
(unaudited)......................... 733,850 3.00 - 13.94 4.55
Options granted July 1999
(unaudited)......................... 102,050 6.00 - 16.25 10.60
Options granted, August 1999
(unaudited)......................... 395,050 5.13 - 12.75 6.43
Options granted, September 1999
(unaudited)......................... 26,200 13.00 - 13.75 13.61
Options exercised (unaudited)........ (356,276) 0.09 - 6.67 4.72
Options cancelled (unaudited)........ (94,890) 0.09 - 16.25 2.71
---------- -------------- -----
Options outstanding, September 30,
1999 (unaudited).................... 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 $3,681,750, $750,000 (unaudited) and $23,092,080 (unaudited) for the year
ended December 31, 1998 and for the nine months ended September 30, 1998 and
1999, respectively. This amount was recorded as a reduction to stockholders'
equity and is being amortized as a charge to operations over the vesting
periods which range from three to four years of the underlying restricted
common stock. The Company recognized stock compensation expense related to
those options of $218,997, $47,529 (unaudited) and $6,699,302 (unaudited) for
the year ended December 31, 1998 and the nine months ended September 30, 1998
and 1999, respectively.
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
F-17
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
Nine Months Ended
Year Ended September 30,
December 31, 1998 1999
----------------- -----------------
(unaudited)
<S> <C> <C>
Net loss as reported................. $(2,075,938) $(24,436,468)
Pro forma net loss................... (2,100,700) (25,336,863)
Net loss per share as reported, basic
and diluted......................... (0.08) (0.61)
Pro forma net loss per share, basic
and diluted......................... (0.08) (0.63)
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1998 and the nine months ended September 30, 1999 was
approximately $1.04 and $7.43 (unaudited), 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.
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 and the
nine months ended September 30, 1999: Dividend yield of 0%; expected volatility
of 0% to 60%; risk-free interest rates of 5.21% and 6.25%; and expected term of
5 years.
As of December 31, 1998 and September 30, 1999, the weighted average
remaining contractual life of the options is 9.8 and 9.1 (unaudited) years,
respectively.
11. 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 incrementally vest in Company
contributions on a linear basis over their first three years of employment. The
Company did not make contributions to the Plan during 1998.
F-18
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. 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 years ended December 31,
1996, 1997, and 1998 and for the nine months ended September 30, 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
regarding operating matters.
<TABLE>
<CAPTION>
Network Product Consulting Reconciling
Services Sales 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................. $ 4 $ 8,150 $ 791 $ -- $ 8,945
======= ======= ====== ====== =======
Gross profit............ $ 1 $ 970 $ 561 $ -- $ 1,532 (1)
======= ======= ====== ====== =======
As of and for the year
ended December 31,
1998:
Revenue................. $ 311 $ 9,900 $1,428 $ -- $11,639
======= ======= ====== ====== =======
Gross profit............ $ 270 $ 1,260 $ 668 $ -- $ 2,198 (1)
======= ======= ====== ====== =======
Property and equipment,
net.................... $ 4,652 $ -- $ -- $ 379 $ 5,031
======= ======= ====== ====== =======
As of and for the nine
months ended September
30, 1999 (unaudited):
Revenue................. $ 814 $ 9,981 $1,893 $ -- $12,688
======= ======= ====== ====== =======
Gross profit (loss)..... $(1,328) $ 1,275 $ 715 $ -- $ 662 (1)
======= ======= ====== ====== =======
Property and equipment,
net.................... $38,571 $ -- $ -- $5,551 $44,122
======= ======= ====== ====== =======
</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
nine
months
For the years ended ended
December 31, September 30,
----------------------- -------------
1996 1997 1998 1999
------ ------ ------- -------------
(unaudited)
<S> <C> <C> <C> <C>
Gross profit (loss)............... $2,416 $1,532 $ 2,198 $ 662
Operating expenses:
Selling, general and
administrative................. 2,255 1,437 4,017 16,726
Amortization of deferred
compensation................... -- -- 219 6,699
Depreciation and amortization... 7 12 130 2,497
------ ------ ------- --------
Income (loss) from operations..... 154 83 (2,168) (25,260)
Interest income................. -- -- 145 1,301
Interest expense................ (1) (5) (81) (548)
------ ------ ------- --------
Income (loss) before income
taxes.......................... $ 153 $ 78 $(2,104) $(24,507)
====== ====== ======= ========
</TABLE>
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
[LOGO OF NETWORK ACCESS SOLUTIONS CORPORATION]
Common Stock
---------------
P R O S P E C T U S
---------------
Merrill Lynch & Co.
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............. $ 42,314
National Association of Securities Dealers, Inc. filing fee..... 7,000
Nasdaq National Market listing fee.............................. 17,500
Transfer agent's and registrar's fees........................... 10,000
*Printing expenses.............................................. 100,000
*Legal fees and expenses........................................ 150,000
*Accounting fees and expenses................................... 150,000
*Miscellaneous expenses......................................... 135,000
--------
Total....................................................... $611,814
========
</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.
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
II-1
<PAGE>
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 on June 3, 1999.
(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 on June 3, 1999.
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 Shaw Pittman, 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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.
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
10.31 Employment Agreement dated as of September 13, 1999 by and between
the Company and Worth D. MacMurray
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.32 Nonqualified Stock Option Grant Agreement dated August 9, 1999 by
and between the Company and Worth D. MacMurray
10.33 Lease Agreement by and between Dulles Tech, Inc. and the Company
dated October 27, 1999
23.1 Consent of PricewaterhouseCoopers, LLP
23.2** Consent of Shaw Pittman (included as part of Exhibit 5.1)
24.1 Power of Attorney
27 Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-74679).
** To be filed by amendment.
+ 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
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.
(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-4
<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 22nd day of December, 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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Jonathan P. Aust President, Chief Executive December 22, 1999
______________________________________ Officer and Chairman of
Jonathan P. Aust the Board of Directors
(Principal Executive
Officer)
/s/ Scott G. Yancey, Jr. Chief Financial Officer December 22, 1999
______________________________________ and Director (Principal
Scott G. Yancey, Jr. Accounting and Financial
Officer)
/s/ Christopher J. Melnick Chief Operating Officer December 22, 1999
______________________________________ and Director
Christopher J. Melnick
/s/ Brion B. Applegate Director December 22, 1999
______________________________________
Brion B. Applegate
/s/ Dennis R. Patrick Director December 22, 1999
______________________________________
Dennis R. Patrick
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S> <C>
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 Shaw Pittman, 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
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
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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
10.31 Employment Agreement dated as of September 13, 1999 by and between
the Company and Worth D. MacMurray
10.32 Nonqualified Stock Option Grant Agreement dated August 9, 1999 by
and between the Company and Worth D. MacMurray
10.33 Lease Agreement by and between Dulles Tech, Inc. and the Company
dated October 27, 1999
23.1 Consent of PricewaterhouseCoopers, LLP
23.2** Consent of Shaw Pittman (included as part of Exhibit 5.1)
24.1 Power of Attorney
27 Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-74679).
** To be filed by amendment.
+ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
II-7
<PAGE>
Exhibit 10.31
EMPLOYMENT AGREEMENT
AGREEMENT dated as of September 13, 1999, by and between NETWORK ACCESS
SOLUTIONS CORPORATION a Delaware corporation ("NAS" or the "Company"), and Worth
MacMurray (the "Executive").
In consideration of the mutual covenants herein contained and of the mutual
benefits herein provided, the Company and the Executive agree as follows:
1. Representations and Warranties. The Executive represents and
warrants to the Company that Executive is not bound by any restrictive covenants
and has no prior or other obligations or commitments of any kind that would in
any way prevent, restrict, hinder or interfere with Executive's acceptance of
continued employment or the performance of all duties and services hereunder to
the fullest extent of the Executive's ability and knowledge. The Executive
agrees to indemnify and hold harmless the Company for any liability which the
Company may incur as the result of the existence of any such covenants,
obligations or commitments.
2. Term of Employment. The Company will continue to employ the
Executive and the Executive accepts continued employment by the Company on the
terms and conditions herein contained for a period (the "Employment Period")
provided in paragraph 5.
3. Duties and Functions.
(a) (1) The Executive shall be employed as Vice President, General
Counsel of the Company and shall oversee and direct all legal and
contractual affairs of the Company. The Executive shall report directly to
the Chief Executive Officer
(2) The Executive agrees to undertake the duties and
responsibilities inherent in the position of Vice President, General
Counsel, which may encompass different or additional duties as may, from
time to time, be assigned by the Board. The Executive agrees to abide by
the rules, regulations, instructions, personnel practices and policies of
the Company and any change thereof which may be adopted at any time by the
Company.
(b) During the Employment Period, the Executive will devote his full
time and efforts to the business of the Company and will not engage
in consulting work or any trade or business for his own account or
for or on behalf of any other person, firm or corporation which
competes, conflicts or interferes with the performance of his
duties hereunder in any way. The Executive may engage in non-
competitive business or charitable activities for reasonable
periods of time each month so long as such activities do not
interfere with the Executive's responsibilities under this
Employment Agreement.
-1-
<PAGE>
4. Compensation.
(a) Base Salary: As compensation for his services hereunder, during
-----------
the Executive's employment, the Company agrees to pay the Executive a base
salary at the rate of $200,000 per annum, payable in accordance with the
Company's normal payroll schedule, or on such other periodic basis as may
be mutually agreed upon. Such salary shall be subject to annual review,
based on corporate policy and contributions made by Executive to the
enterprise. As a result of each annual review, the Executive's salary will
increase by a minimum of five percent (5%). Said annual salary increase
will commence, effective September 13, 2000, and continue annually on
September 13th thereafter. The Company may withhold from any amounts
payable under this Agreement such federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
(b) Bonus: Executive shall be eligible to receive an annual cash
-----
and/or stock bonus award with a target bonus of 20% of the Executive's then
current salary. Said bonus is contingent upon the Executive achieving
deliverables or goals agreed to by the Executive and the Board or
Compensation Committee. Said bonus shall be determined by the Board or
Compensation Committee and paid annually in December. The Executive's bonus
for calendar year 1999 shall be prorated to take into account the partial
year of the Executive's employment contract period.
(c) Other Expenses: In addition to the compensation provided for
--------------
above, the Company agrees to pay or to reimburse the Executive during his
employment for all reasonable, ordinary and necessary, properly vouchered,
client-related business or entertainment expenses incurred in the
performance of his services hereunder in accordance with Company policy in
effect from time to time, provided, however, that the amount available to
the Executive for such travel, entertainment and other expenses may require
advance approval by the Chief Executive Officer. The Executive shall submit
vouchers and receipts for all expenses for which reimbursement is sought.
(d) Vacation: The Executive shall be allowed 3 weeks of paid vacation
--------
during each calendar year.
(e) Fringe Benefits: In addition to his compensation provided by the
---------------
foregoing, the Executive shall be entitled to the benefits available
generally to Company employees pursuant to Company programs, including, by
way of illustration, personal leave, paid holidays, sick leave, profit-
sharing, retirement, disability, dental, vision, group sickness, accident
or health insurance programs of the Company which may now or, if not
terminated, shall hereafter be in effect, or in any other or additional
such programs which
-2-
<PAGE>
may be established by the Company, as and to the extent any such programs
are or may from time to time be in effect, as determined by the Company and
the terms hereof.
5. Employment Period; Termination.
(a) The Executive's employment shall continue unabated until terminated
by either party pursuant to the terms of this Agreement.
(b) The Executive's employment with the Company under this Agreement
shall be effective as of the date of this Agreement and shall continue
until terminated upon the earlier to occur of the following events: (i) the
close of business on the fourth anniversary of this Agreement or (ii) the
death or permanent disability (as defined in Paragraph 5 (f)) of the
Executive, provided, however, that, on the fourth anniversary of the date
of this Agreement, and on every subsequent annual anniversary, and unless
either party has given the other party written notice at least thirty (30)
days prior to the such anniversary date, the term of this Agreement and the
Employment Period shall be renewed for a term ending one (1) year
subsequent to such date, unless sooner terminated as provided herein.
(c) Notwithstanding the provisions of paragraphs 5 (a) and (b) above,
the Executive may terminate the employment relationship at any time for any
reason by giving the Company written notice at least thirty (30) days prior
to the effective date of termination. Unless otherwise provided by this
Section, all compensation and benefits paid by the Company to the Executive
shall cease upon his last day of employment. However, if the Executive
terminates his employment due to a material breach of this Employment
Agreement by the Company or due to a material reduction in the
responsibilities or reporting relationship of the Executive, the Company
will continue to pay the Executive's base salary, bonus compensation and
medical benefits for up to twelve (12) months. The Executive acknowledges
and agrees that the non-compete restrictions set forth in Section 7 of this
Employment Agreement will remain in full force and effect for the twelve
(12) month period after the termination of his employment. At its sole
election and discretion, the Company may release the Executive from the
non-compete restrictions of this Agreement. If said election is made, the
Company will continue to pay the Executive's base salary, a pro-rated bonus
and medical benefits for a six (6) month period.
(d) If the Executive's employment is terminated "for cause," the
Executive will not be entitled to and shall not receive any compensation or
benefits of any type following the effective date of termination. As used
in this Agreement, the term "for cause" shall include a termination for
conviction of a felony, a willful unauthorized disclosure of material
confidential information, a violation of any material Company rule,
regulation or policy which has a material adverse impact to the Company, or
a breach of any material obligation under this Agreement, including,
without limitation, willful refusal to perform the Executive's duties
hereunder, except in the event that the Executive becomes
-3-
<PAGE>
permanently disabled as set forth in paragraph 5 (f). Anything herein to
the contrary notwithstanding, the Company shall give the Executive written
notice prior to terminating this Agreement of the Executive's material
breach of this Agreement, setting forth the exact nature of any alleged
breach and the conduct required to cure such breach. The Executive shall
have thirty (30) days from the giving of such notice within which to cure,
and shall be entitled to appear before the Board to discuss such written
notice of material breach. Notwithstanding the forgoing, actions or
inactions on the part of the Executive which were taken or not taken in
good faith shall not constitute a material breach of this agreement.
(e) Upon sixty (60) days written notice, the Company shall retain the
right to terminate the Executive without cause. If the Executive's
employment is terminated by the Company without cause, the Executive shall
continue to receive his base salary, bonus and medical benefits for a
period of twelve (12) months. The Executive acknowledges and agrees that
the non-compete restrictions set forth in Section 7 of this Employment
Agreement will remain in full force and effect for the twelve (12) month
period subsequent to his termination. At its sole election and discretion,
the Company may release the Executive from the non-compete restrictions of
this Agreement. If said election is made, the Company will continue to pay
the Executive's base salary, a pro-rated bonus and medical benefits for a
six (6) month period.
(f) In the event the Executive becomes permanently disabled during
employment with the Company, the Company may terminate this Agreement by
giving thirty (30) days notice to the Executive of its intent to terminate,
and unless the Executive resumes performance of the duties set forth in
Paragraph 3 within five (5) days of the date of the notice and continues
performance for the remainder of the notice period, this Agreement shall
terminate at the end of the thirty (30) day period. The Executive will not
be entitled to and shall not receive any compensation or benefits of any
type following the effective date of termination. "Permanently disabled"
for the purposes of this Agreement means the inability, due to physical or
mental ill health, to perform the Executive's duties for one hundred eighty
(180) days during any one employment year irrespective of whether such days
are consecutive.
(g) This Agreement will terminate immediately upon the Executive's
death and no further compensation or benefits of any type will be paid to
the Executive or his heirs thirty (30) days following the date of the
Executive's death, except that bonuses earned but not paid prior to the
Executive's death will be paid.
6. Company Property. All correspondence, records, documents, software,
promotional materials, and other Company property, including all copies, which
come into the Executive's possession by, through or in the course of his
employment, regardless of the source and whether created by the Executive, are
the sole and exclusive property of the Company, and
-4-
<PAGE>
immediately upon the termination of the Executive's employment, the Executive
shall return to the Company all such property of the Company.
7. Non-Competition.
(a) The Executive agrees that while he is in the employ of the Company
and for a one year period after the termination of his employment, he shall
not, either on his own behalf or on behalf of any third party, except on
behalf of the Company, directly or indirectly:
(1) Other than through his ownership of stock of the Company, as
an individual proprietor, partner, stockholder, officer, employee,
director, joint venturer, investor, lender, or in any other capacity
whatsoever (other than as the holder of not more than one percent (1%) of
the total outstanding stock of a publicly held company), engage directly in
any substantial business in markets where NAS has a physical office that
competes against NAS for its existing customer base at the time of
departure; or
(2) Attempt in any manner to solicit from a current client or
customer of the Company at the time of his termination, business of the
type performed by the Company or to persuade any client of the Company to
cease to do business or to reduce the amount of business which any such
client has customarily done or actively contemplates doing with the
Company; or
(3) Recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company or its affiliates to terminate their
employment with, or otherwise cease their relationship with the Company or
its affiliates.
(b) The parties agree that the relevant public policy aspects of
covenants not to compete have been discussed, and that every effort has
been made to limit the restrictions placed upon the Executive to those that
are reasonable and necessary to protect the Company's legitimate interests.
(c) If any restriction set forth in Section 7 are found by any court of
competent jurisdiction to be unenforceable because it extends for too long
a period of time or over too great a range of activities or geographic
area, it shall be interpreted to extend over the maximum period of time,
range of activities or geographic areas as to which it may be enforceable.
(d) The restrictions contained in Section 7 are necessary for the
protection of the business and goodwill of the Company and/or its
affiliates and are considered by the Executive to be reasonable for such
purposes. The Executive agrees that any material breach of Section 7 will
cause the Company and/or its affiliates substantial and irrevocable damage
and therefore, in the event of any such breach, in addition to such other
remedies which may be available, the Company shall have the right to seek
specific
-5-
<PAGE>
performance and injunctive relief. The Executive acknowledges
that he will receive compensation for the terms of Section 7 pursuant to
various stock option agreements which will be executed between the
Executive and the Company.
(e) The provisions of Section 7 shall survive termination of this
Agreement.
8. Protection of Confidential Information. The Executive agrees that
all information, whether or not in writing, relating to the business, technical
or financial affairs of the Company and that it is generally understood in the
industry as being confidential and/or proprietary information, is the exclusive
property of the Company. The Executive agrees to hold in a fiduciary capacity
for the sole benefit of the Company all secret, confidential or proprietary
information, knowledge, data, or trade secret ("Confidential Information")
relating to the Company or any of its affiliates or their respective clients,
which Confidential Information shall have been obtained during his employment
with the Company. The Executive agrees that he will not at any time, either
during the Term of this Agreement or after its termination, disclose to anyone
any Confidential Information, or utilize such Confidential Information for his
own benefit, or for the benefit of third parties without written approval by an
officer of the Company. Executive further agrees that all memoranda, notes,
records, data, schematics, sketches, computer programs, prototypes, or written,
photographic, magnetic or other documents or tangible objects compiled by him or
made available to him during the Term of his employment concerning the business
of the Company and/or its clients shall be the property of the Company and shall
be delivered to the Company on the termination of his employment, or at any
other time upon request of the Company.
9. Intellectual Property. During the Term of this Agreement, the
Executive will disclose to the Company all ideas, concepts, inventions, product
ideas, new products, discoveries, methods, software, business plans and business
opportunities developed by him during working time through the use of Company
resources, which relate directly or indirectly to the Company's business or the
business of any of its affiliates or their respective clients, including without
limitation, any process, product or product improvement, product ideas, new
products, discoveries, methods or software which may or may not be patentable or
copyrightable, any trade names, trademarks or slogans. The Executive agrees
that such will be the property of the Company and that he will at the Company's
request and cost do whatever is necessary to secure for the Company the rights
thereto by patent, copyright or otherwise.
10. Publicity. Neither party shall issue without consent of the other
party any press release or make any public announcement with respect to this
Agreement or the employment relationship between them.
11. Binding Agreement. This Agreement shall be binding upon and inure
to the benefit of the parties hereto, their heirs, personal representatives,
successors and assigns. In the event the Company is acquired, is a non surviving
party in a merger, or transfers substantially all of its assets, this Agreement
shall not be terminated and the transferee or surviving company
-6-
<PAGE>
shall be bound by the provisions of this Agreement. The parties understand that
the obligations of the Executive are personal and may not be assigned by him.
12. Entire Agreement. This Agreement contains the entire understanding
of the Executive and the Company with respect to employment of the Executive and
supersedes any and all prior understandings, written or oral. This Agreement may
not be amended, waived, discharged or terminated orally, but only by an
instrument in writing. By entering into this Agreement, the Executive certifies
and acknowledges that he has carefully read all of the provisions of this
Agreement and that he voluntarily and knowingly enters into said Agreement.
13. Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be deemed
severable from the remainder of this Agreement, and the remaining provisions
contained in this Agreement shall be construed to preserve to the maximum
permissible extent the intent and purposes of this Agreement. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
14. Governing Law and Submission to Jurisdiction. This Agreement shall
be governed by, and construed and enforced in accordance with, the laws of the
Commonwealth of Virginia, without giving effect to the principles of conflicts
of law thereof.
15. Notices. Any notice provided for in this Agreement shall be
provided in writing. Notices shall be effective from the date of service, if
served personally on the party to whom notice is to be given, or on the second
day after mailing, if mailed by first class mail, postage prepaid. Notices shall
be properly addressed to the parties at their respective addresses or to such
other address as either party may later specify by notice to the other.
16. Arbitration. The parties agree that any controversy, claim or
dispute arising out of or relating to this Agreement, or the breach thereof, or
arising out of or relating to the employment of the Executive, or the
termination thereof, including any statutory or common law claims under federal,
state, or local law, but excluding actions to enforce provisions of Sections 7
and 8 hereof, shall be resolved by arbitration in Sterling, Virginia in
accordance with the Employment Dispute Resolution Rules of the American
Arbitration Association. The parties agree that any award rendered by the
arbitrator shall be final and binding, and that judgment upon the award may be
entered in any court having jurisdiction thereof.
17. Indemnification. The Company shall indemnify and hold harmless the
Executive for any liability incurred by reason of any act or omission performed
by the Executive while acting in good faith on behalf of the Company and within
the scope of the authority of the Executive pursuant to this Agreement and under
the rules and policies of the Company, except that the Executive must have in
good faith believed that such action was in the best interest of the Company and
such course of action or inaction must not have constituted gross negligence,
fraud, willful misconduct, or breach of a fiduciary duty.
-7-
<PAGE>
18. Miscellaneous.
(a) No delay or omission by the Company in exercising any right under
this Agreement shall operate as a waiver of that or any other right. A
waiver or consent given by the Company on any one occasion shall be
effective only in that instance and shall not be construed as a bar or
waiver of any right on any other occasion.
(b) The captions of the sections of this Agreement are for convenience
of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed and delivered under seal, by its authorized officers or
individually, on the 19th day of August, 1999.
NETWORK ACCESS SOLUTIONS
________________________________________
Worth D. MacMurray
________________________________________
Scott Yancey
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<PAGE>
Exhibit 10.32
NETWORK ACCESS SOLUTIONS CORPORATION
1998 STOCK INCENTIVE PLAN
NONQUALIFIED STOCK OPTION GRANT AGREEMENT
This Grant Agreement (the "Agreement") is entered into by and between
NETWORK ACCESS SOLUTIONS CORPORATION a Delaware corporation (the "Corporation"),
and the grantee whose name appears on Schedule A hereto effective as of the
Grant Date as defined in Article 1 hereof.
In consideration of the premises, mutual covenants and agreements herein,
the Corporation and the Grantee agree as follows:
ARTICLE 1
GRANT OF OPTION
Section 1.1 Grant of Option. The Corporation hereby grants to the
----------------------------
Grantee, pursuant to the provisions of the Network Access Solutions Corporation
1998 Stock Incentive Plan (the "Plan"), a nonqualified stock option to purchase
shares of Common Stock, par value of $0.01 per share, of the Corporation
("Stock"), subject to the provisions of this Agreement (the "Option"). Unless
stated otherwise herein, capitalized terms in this Agreement shall have the same
meaning as defined in the Plan. Schedule A, attached hereto and incorporated
herein, sets forth the following terms of the Option:
(i) the date the Administrator approved the Option (the "Grant Date");
(ii) the number of shares of Stock which the Grantee may purchase under
the Option;
(iii) the exercise price per share (the "Exercise Price"); and
(iv) the date as of which the Option shall expire (the "Expiration
Date"), at 5:00 p.m. Eastern Time, unless terminated earlier
pursuant to other provisions of this Agreement.
Section 1.2 Limitation on Term of Option. Notwithstanding the foregoing,
-----------------------------------------
in no event shall the Option expire later than 5:00 p.m. Eastern Time on the day
prior to the tenth (10th) anniversary of its Grant.
<PAGE>
ARTICLE 2
VESTING
Section 2.1 Vesting Schedule Subject to Section 2.2 below, unless the
-----------------------------
Option has earlier terminated pursuant to the provisions of the Agreement, the
Grantee shall become vested in the shares of Stock subject to the Option over a
four (4) year period as follows: the Grantee shall become vested in 6.25% of
the total shares of Stock subject to the Option on the date that is three months
from the Grant Date (the "Initial Vesting Date") and shall become vested in
6.25% of the total shares of Stock subject to the Option every third (3rd) month
after the Initial Vesting Date, on the date in each such month that corresponds
with the Initial Vesting Date (each referred to as a "Vesting Date"), during the
forty-eight (48) month period immediately following the Initial Vesting Date, so
that the Grantee shall be vested in 100% of the shares of Stock subject to the
Option on the fourth (4th) anniversary of the Grant Date; provided, however,
that the Grantee must be in the continuous employ or service of the Corporation
or an Affiliate at all times from the Grant Date through the specified Vesting
Date or Initial Vesting Date, as applicable, for such vesting to occur.
Section 2.2 Acceleration of Vesting. Notwithstanding the foregoing, in the
------------------------------------
event of a "change of control," as defined below, the Grantee shall become
vested in 100% of any unvested Option that has not been terminated in accordance
with the terms of this Agreement. For purposes of this Agreement, a "change of
control" shall be deemed to occur upon the first of the following events:
(i) any person becomes the beneficial owner, directly or
indirectly, of securities of the Corporation representing 50% or more of the
combined voting power of the Corporation's then outstanding voting securities
and such person has the ability to elect a majority of the members of the
Corporation's Board of Directors, if such ownership is not in place on the
date of grant;
(ii) any person becomes the beneficial owner, directly or
indirectly, of securities of the Corporation sufficient to elect a majority
of the members of the Board of Directors of the Corporation, provided that
Optionee's responsibilities as an employee or consultant of the Corporation
are materially adversely diminished by such change in control; or
(iii) the sale of all or substantially all the assets of the
Corporation, or a merger, consolidation, or similar transaction of the
Corporation in which the Corporation is not the surviving entity or the
Corporation's stockholders immediately prior to such transaction hold less
than 50% of the voting securities of the surviving entity.
A "change in control" shall not include either of the following
events:
-2-
<PAGE>
(i) a transaction, the sole purpose of which is to change the
state of the Corporation's incorporation; or
(ii) a transaction, the result of which is to sell all or substantially
all of the assets of the Corporation to another entity (the "surviving entity");
provided that the surviving entity is owned directly or indirectly by the
Corporation's stockholders immediately following such transaction in
substantially the same proportions as their ownership of the Corporation's
voting capital stock immediately preceding such transaction.
ARTICLE 3
EXERCISE OF OPTION
Section 3.1 Exercisability of Option. Pursuant to the terms of the
-------------------------------------
Agreement, the Option may be exercised at any time, and from time to time, with
respect to the number of shares subject to the Option.
Section 3.2 Stock Restriction Agreement. The Administrator in its sole
----------------------------------------
discretion may require as a condition precedent to the exercise of the Option
granted pursuant to Section 1.1, that the Grantee or such other person
exercising the Option be, or shall execute and become, a party to a Stock
Restriction Agreement in substantially the form attached to this Agreement as
Exhibit A.
Section 3.3 Manner of Exercise. The Option may be exercised, in whole or
------------------------------
in part, by delivering written notice to the Administrator in such form as the
Administrator may require from time to time; provided, however, that the Option
may not be exercised at any one time as to fewer than one hundred (100) shares
(or such number of shares as to which the Option is then exercisable if such
number of shares then exercisable is less than one hundred (100)). Such notice
shall specify the number of shares of Stock subject to the Option as to which
the Option is being exercised, and shall be accompanied by full payment of the
Exercise Price for such shares.
Payment of the Exercise Price shall be made (a) in cash (or cash
equivalents acceptable to the Administrator in the Administrator's discretion);
(b) in the Administrator's discretion at the time of exercise, by tender to the
Corporation of shares of the Corporation's common stock owned by the Grantee,
having a Fair Market Value on the date of tender not less than the Exercise
Price, which either have been owned by the Grantee at least six (6) months or
were not acquired, directly or indirectly, from the Corporation; (c) in the
Administrator's discretion at the time of exercise, by the Grantee's full
recourse promissory note in a form approved by the Administrator; (d) by a
broker-assisted cashless exercise in accordance with Regulation T of the Board
of Governors of the Federal Reserve System and the provisions of the next
paragraph; or (e) by any combination of the foregoing. In the Administrator's
sole and absolute discretion, the Administrator may authorize payment of the
Exercise Price to be made, in whole or in
-3-
<PAGE>
part, by such other means as the Administrator may prescribe. The Option may be
exercised only in multiples of whole shares and no fractional shares shall be
issued.
If the Stock is registered under Section 12(b) of the Securities Exchange
Act of 1934, as amended, payment of the exercise price may be made, in whole or
in part, subject to such limitations as the Administrator may determine, by
delivery of a properly executed exercise notice, together with irrevocable
instructions: (i) to a brokerage firm approved by the Administrator to deliver
promptly to the Corporation the aggregate amount of sale or loan proceeds to pay
the exercise price and any withholding tax obligations that may arise in
connection with the exercise, and (ii) to the Corporation to deliver the
certificates for such purchased shares directly to such brokerage firm.
Section 3.4 Issuance of Shares and Payment of Cash upon Exercise. Upon
-----------------------------------------------------------------
exercise of the Option, in whole or in part, in accordance with the terms of the
Agreement and upon payment of the Exercise Price for the shares of Stock as to
which the Option is exercised and delivery of such executed Stock Restriction
Agreement as may be required by the Administrator pursuant to Section 3.2, the
Corporation shall issue to the Grantee or such other person exercising the
Option, as the case may be, the number of shares of Stock so paid for, in the
form of fully paid and nonassessable Stock and, except as otherwise provided in
the Stock Restriction Agreement, shall deliver certificates therefor as soon as
practicable thereafter. The stock certificates for any shares of Stock issued
hereunder shall, unless such shares are registered or an exemption from
registration is available under applicable federal and state law, bear a legend
restricting transferability of such shares and referencing the Stock Restriction
Agreement, if applicable.
ARTICLE 4
TERMINATION OF OPTION
Section 4.1 Termination, In General. The Option granted hereby shall
------------------------------------
terminate and be of no force or effect after the Expiration Date set forth on
Schedule A, unless terminated prior to such time as provided below.
Section 4.2 Termination of Employment or Service for Reason Other Than
-----------------------------------------------------------------------
Death or Disability. Unless the Option has earlier terminated pursuant to the
- -------------------
provisions of the Agreement, the Option shall terminate in its entirety,
regardless of whether the Option is vested in whole or in part, thirty (30) days
after the date the Grantee is no longer employed by, nor in the service of, the
Corporation and its Affiliates for any reason other than the Grantee's death or
Disability. Notwithstanding the foregoing, the Option shall terminate in its
entirety, regardless of whether the Option is vested in whole or in part, upon
termination of the employment or service of the Grantee by the Corporation or an
Affiliate for "Cause".
If the Grantee is a party to a written employment agreement or service
agreement with the Corporation or an Affiliate which contains a definition of
"cause", "termination for cause" or words of similar import, whether such
Grantee is terminated for "Cause"
-4-
<PAGE>
pursuant to this Section 4.2 shall be determined according to the terms of and
in a manner consistent with the provisions of such written agreement. If the
Grantee is not party to such a written employment agreement or service agreement
with the Corporation or an Affiliate, then for purposes of this Section 4.2,
"Cause" shall mean (a) the conviction of the Grantee of, or the entry of a
pleading of guilty or nolo contendere by the Grantee to, any crime involving
moral turpitude that may reasonably be expected to have an adverse impact on the
Corporation's reputation or standing in the community or any felony, (b) willful
misconduct in connection with the Grantee's duties, willful failure to follow
the directions of the Grantee's supervisor or supervisors, or willful failure to
perform his or her responsibilities in the best interest of the Corporation,
except in cases involving the mental or physical incapacity or disability of the
Grantee, or (c) in the sole judgment of the President of the Corporation, the
Grantee has acted or is acting in a manner that is not in the best interest of
the Corporation or its employees, including but not limited to, disparaging the
Corporation or its products or engaging in harassment or other inappropriate
behavior directed towards employees of the Corporation. "Willful misconduct" and
"willful failure to perform" shall not include actions or inactions on the part
of the Grantee which were taken or not taken in good faith by the Grantee. The
good faith determination by the Administrator of whether the Grantee's
employment or service was terminated by the Corporation for "Cause" shall be
final and binding for all purposes hereunder.
Section 4.3 Upon Grantee's Death. Unless the Option has earlier
---------------------------------
terminated pursuant to the provisions of the Agreement, upon the Grantee's death
the Grantee's executor, personal representative, or the person(s) to whom the
Option shall have been transferred by will or the laws of descent and
distribution, may exercise all or any part of the outstanding Option with
respect to the shares of Stock as to which the Option is vested as of the
Grantee's date of death, provided such exercise occurs within twelve (12) months
after the date of the Grantee's death, but not later than the Expiration Date of
the Option. Unless sooner terminated, the Option shall terminate upon the
expiration of such twelve- (12-) month period.
Section 4.4 Termination of Employment or Service by Reason of Disability.
-------------------------------------------------------------------------
Unless the Option has earlier terminated pursuant to the provisions of the
Agreement, in the event that the Grantee ceases, by reason of Disability, to be
an employee or consultant of or in the service of the Corporation or an
Affiliate, the outstanding Option may be exercised in whole or in part with
respect to the shares of Stock as to which the Option is vested as of the date
of the Grantee's termination of employment or service due to Disability at any
time within twelve (12) months after the date of such termination, but not later
than the Expiration Date of the Option. Unless sooner terminated, the Option
shall terminate upon the expiration of such twelve- (12-) month period.
For purposes of this Agreement, Disability shall mean the inability to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted or can be expected to last for a continuous period of
not less than twelve (12) months. The
-5-
<PAGE>
Administrator may require such proof of Disability as the Administrator in its
sole discretion deems appropriate and the Administrator's determination as to
whether the Grantee is Disabled shall be final and binding on all parties
concerned.
Section 4.5 Leave of Absence. For purposes of this Agreement, the
-----------------------------
Grantee's employment or service with the Corporation or an Affiliate shall not
be deemed to terminate if the Grantee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Administrator of ninety (90)
days or less. In the event of a leave in excess of ninety (90) days, the
Grantee's employment or service shall be deemed to terminate on the ninety-first
(91st) day of the leave unless the Grantee's right to re-employment with the
Corporation or Affiliate remains guaranteed by statute or contract.
Notwithstanding the foregoing, unless otherwise determined by the Administrator
(or required by law), a leave of absence shall not be treated as employment or
service for purposes of vesting in additional shares of Stock during such leave
pursuant to Section 2.1 of this Agreement.
ARTICLE 5
DRAG-ALONG RIGHTS
Section 5.1 Drag-Along Rights. If at any time any stockholder of the
------------------------------
Corporation or group of stockholders owning a majority or more of the voting
capital stock of the Corporation proposes to enter into any transaction
involving (i) the sale of all or substantially all of the assets of the
Corporation; (ii) the sale of more than fifty percent (50%) of the outstanding
common stock of the Corporation in a non-public sale; (iii) any merger, share
exchange, consolidation or other reorganization or business combination of the
Corporation, if immediately after such transaction either (A) persons who were
directors of the Corporation immediately prior to such transaction do not
constitute at least a majority of the directors of the surviving entity, or (B)
persons who hold a majority of the voting capital stock of the surviving entity
are not persons who held a majority of the voting capital stock of the
Corporation immediately prior to such transaction; or (iv) the dissolution or
liquidation of the Corporation, the Corporation and/or the transferring
stockholders may require the Grantee to participate in such transaction by
giving the Grantee written notice thereof at least ten (10) days in advance of
the date of the transaction or the date that tender is required, as the case may
be. Upon receipt of such notice, the Grantee shall sell, assign, tender or
transfer the same percentage of shares subject to the Option as the percentage
of the shares of Stock proposed to be sold, assigned, tendered or transferred by
the transferring stockholders collectively, upon the same terms and conditions
applicable to the transferring stockholders and at a price equal to the
difference between the Exercise Price per share under the Option and the price
per share of Stock the transferring stockholders will receive pursuant to the
terms of the transaction. If the Grantee has options to purchase Stock of the
Corporation other than the Option hereunder, and such options are subject to
terms similar to those set forth in this Section 5.1, then the Grantee's options
shall be
-6-
<PAGE>
transferred in the order in which they were granted. The provisions of this
Section 5.1 shall apply in the event of the Grantee's death, to the Grantee's
executor, personal representative or the person(s) to whom the Option shall have
been transferred by will or the laws of descent and distribution, as though such
person is the Grantee.
ARTICLE 6
ADJUSTMENTS; BUSINESS COMBINATIONS
Section 6.1 Adjustments for Events Affecting Common Stock. In the event of
- ----------------------------------------------------------
changes in the Common Stock of the Corporation by reason of any stock dividend,
split-up, recapitalization, merger, consolidation, business combination or
exchange of shares and the like, the Administrator shall, in its discretion,
make appropriate adjustments to the number, kind and price of shares covered by
this Option, and shall, in its discretion and without the consent of the
Grantee, make any other adjustments in this Option, including but not limited to
reducing the number of shares subject to the Option or providing or mandating
alternative settlement methods such as settlement of the Option in cash or in
shares of Common Stock or other securities of the Corporation or of any other
entity, or in any other matters which relate to the Option as the Administrator
shall, in its sole discretion, determine to be necessary or appropriate.
Section 6.2 Pooling of Interests Transaction. Notwithstanding anything in the
- ---------------------------------------------
Plan or the Agreement to the contrary and without the consent of the Grantee,
the Administrator, in its sole discretion, may make any modifications to the
Option, including but not limited to cancellation, forfeiture, surrender or
other termination of the Option in whole or in part regardless of the vested
status of the Option, in order to facilitate any business combination that is
authorized by the Board to comply with requirements for treatment as a pooling
of interests transaction for accounting purposes under generally accepted
accounting principles.
Section 6.3 Binding Nature of Adjustments. Adjustments under this Article 6
- ------------------------------------------
will be made by the Administrator, whose determination as to what adjustments,
if any, will be made and the extent thereof will be final, binding and
conclusive. No fractional shares will be issued pursuant to this Option on
account of any such adjustments
ARTICLE 7
MISCELLANEOUS
Section 7.1 Non-Guarantee of Employment. Nothing in the Plan or the
----------------------------------------
Agreement shall alter the employment status of the Grantee, nor be construed as
a contract of employment between the Corporation (or an Affiliate) and the
Grantee, or as a contractual right of the Grantee to continue in the employ or
service of the Corporation or an Affiliate, or as a limitation of the right of
the Corporation or an Affiliate to discharge the Grantee at any time with or
without cause or notice.
-7-
<PAGE>
Section 7.2 No Rights of Stockholder. The Grantee shall not have any of
-------------------------------------
the rights of a stockholder with respect to the shares of Stock that may be
issued upon the exercise of the Option until such shares of Stock have been
issued to him upon the due exercise of the Option. No adjustment shall be made
for dividends or distributions or other rights for which the record date is
prior to the date such certificate or certificates are issued.
Section 7.3 Nonqualified Nature of Option. The Option is intended to be a
------------------------------------------
stock option that does not qualify as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
this Agreement shall be so construed.
Section 7.4 The Corporation's Rights. The existence of this Option shall
-------------------------------------
not affect in any way the right or power of the Corporation or its stockholders
to make or authorize any or all adjustments, recapitalizations, reorganizations
or other changes in the Corporation's capital structure or its business, or any
merger or consolidation of the Corporation, or any issue of bonds, debentures,
preferred or other stocks with preference ahead of or convertible into, or
otherwise affecting the Stock or the rights thereof, or the dissolution or
liquidation of the Corporation, or any sale or transfer of all or any part of
the Corporation's assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
Section 7.5 Withholding of Taxes. The Corporation or any Affiliate shall
---------------------------------
have the right to deduct from any compensation or any other payment of any kind
(including withholding the issuance of shares of Stock) due the Grantee the
amount of any foreign, federal, state or local taxes required by law to be
withheld as the result of the exercise of the Option or the lapsing of any
restriction with respect to any shares of Stock acquired on exercise of the
Option; provided, however, that the value of the shares of Stock withheld may
not exceed the statutory minimum withholding amount required by law. In lieu of
such deduction, the Administrator may require the Grantee to make a cash payment
to the Corporation or an Affiliate equal to the amount required to be withheld.
If the Grantee does not make such payment when requested, the Corporation may
refuse to issue any Stock certificate under the Plan until arrangements
satisfactory to the Administrator for such payment have been made.
Section 7.6 Grantee. Whenever the word "Grantee" is used in any provision
--------------------
of this Agreement under circumstances where the provision should logically be
construed to apply to the estate, personal representative or beneficiary to whom
this Option may be transferred by will or by the laws of descent and
distribution, the word "Grantee" shall be deemed to include such person.
Section 7.7 Nontransferability of Option. The Option shall be
-----------------------------------------
nontransferable otherwise than by will or the laws of descent and distribution
and during the lifetime of the Grantee, the Option may be exercised only by the
Grantee or, during the period the
-8-
<PAGE>
Grantee is under a legal disability, by the Grantee's guardian or legal
representative. Except as provided in the preceding sentence, the Option may not
be assigned, transferred, pledged, hypothecated or disposed of in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process.
Section 7.8 Notices. All notices and other communications made or given
--------------------
pursuant to the Agreement shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to the Grantee at
the address contained in the records of the Corporation, or addressed to the
Administrator, care of the Corporation for the attention of its Secretary at its
principal office or, if the receiving party consents in advance, transmitted and
received via telecopy or via such other electronic transmission mechanism as may
be available to the parties.
Section 7.9 Entire Agreement; Modification. The Agreement contains the
-------------------------------------------
entire agreement between the parties with respect to the subject matter
contained herein and may not be modified, except as provided in the Plan or in a
written document signed by each of the parties hereto. Any oral or written
agreements, representations, warranties, written inducements, or other
communications made prior to the execution of the Agreement shall be void and
ineffective for all purposes.
Section 7.10 Conformity with Plan. This Agreement is intended to conform
----------------------------------
in all respects with, and is subject to all applicable provisions of, the Plan,
which is incorporated herein by reference. Inconsistencies between this
Agreement and the Plan shall be resolved in accordance with the terms of the
Plan. In the event of any ambiguity in the Agreement or any matters as to which
the Agreement is silent, the Plan shall govern. A copy of the Plan is available
upon request to the Administrator.
Section 7.11 Governing Law. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the Commonwealth of Virginia, other
than the conflict of laws principles thereof.
Section 7.12 Headings. The headings in the Agreement are for reference
----------------------
purposes only and shall not affect the meaning or interpretation of the
Agreement.
{signatures on next page}
-9-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer as of the date first above written.
ATTEST: NETWORK ACCESS SOLUTIONS
CORPORATION
____________________________ By:___________________________
The undersigned hereby acknowledges that he/she has carefully read this
Agreement and the Plan and agrees to be bound by all of the provisions set forth
in such documents.
WITNESS: GRANTEE
____________________________ ______________________________
Date: ________________________
Enclosure: Network Access Solutions, Inc. 1998 Stock Incentive Plan
-10-
<PAGE>
SCHEDULE A
Stock Option Granted to: Worth MacMurray
Grant Date: August 9, 1999
Number of Shares: 125,000
Exercise Price Per Share: $5.125
Expiration Date: August 9, 2009
<PAGE>
Exhibit 10.33
THREE DULLES TECH CENTER
LEASE AGREEMENT
BY AND BETWEEN
DULLES TECH, INC, AS LANDLORD
AND
NETWORK ACCESS SOLUTIONS CORPORATION, AS TENANT
October 27, 1999
<PAGE>
LEASE AGREEMENT
TABLE OF CONTENTS
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II.
Section 2.1 Premises 1
Section 2.2 Term 2
Section 2.3 Use 2
ARTICLE III.
Section 3.1 Rental Payments 2
Section 3.2 Additional Rent 3
Section 3.3 Security 6
Section 3.4 Tenant's Review Right 7
ARTICLE IV.
Section 4.1 Services 7
Section 4.2 Keys and Locks 8
Section 4.3 Graphics and Building Directory 9
ARTICLE V.
Section 5.1 Occupancy of Premises 9
Section 5.2 Entry for Repairs and Inspection 9
Section 5.3 Hazardous Materials 9
ARTICLE VI.
Section 6.1 Leasehold Improvements 10
Section 6.2 Repairs by Landlord 11
Section 6.3 Repairs by Tenant 11
Section 6.4 Liens 12
Section 6.5 Indemnification 12
ARTICLE VII.
Section 7.1 Condemnation 12
Section 7.2 Force Majeure 13
Section 7.3 Fire or Other Casualty Damage 13
Section 7.4 Insurance 14
Section 7.5 Waiver of Subrogation Rights 14
ARTICLE VIII.
Section 8.1 Default by Tenant 15
Section 8.2 Landlord's Remedies 15
Section 8.3 Waiver of Duty to Relet or Mitigate 16
Section 8.4 Reentry 17
Section 8.5 Rights of Landlord in Bankruptcy 17
Section 8.6 Waiver of Certain Rights 17
Section 8.7 NonWaiver 17
Section 8.8 Holding Over 17
Section 8.9 Abandonment of Personal Property 17
ARTICLE IX.
Section 9.1 Transfers 17
Section 9.2 Assignment by Landlord 19
Section 9.3 Limitation of Landlord's Liability 19
<PAGE>
ARTICLE X.
Section 10.1 Subordination 19
Section 10.2 Estoppel Certificate or Three-Party Agreement 19
Section 10.3 Notices 20
ARTICLE XI.
Section 11.1 Right to Relocate Tenant 20
Section 11.2 Rights and Remedies Cumulative 20
Section 11.3 Legal Interpretation 20
Section 11.4 Authority 21
Section 11.5 No Brokers 21
Section 11.6 Consents by Landlord 21
Section 11.7 Joint and Several Liability 21
Section 11.8 Independent Covenants 21
Section 11.9 Attorneys' Fees and Other Expenses 21
Section 11.10 Recording 21
Section 11.11 Disclaimer; Waiver of Jury Trial 21
Section 11.12 Access to Roof 22
Section 11.13 Parking 22
Section 11.14 No Accord or Satisfaction 22
Section 11.15 Acceptance 22
Section 11.16 Waiver of Counterclaim 22
Section 11.17 Time Is of the Essence 22
Section 11.18 Counterparts 22
EXHIBITS
Exhibit A - Land
Exhibit B - Floor Plan(s) of Premises
Exhibit C - Special Stipulations
Exhibit D - Commencement Date Agreement
Exhibit E - Work Letter Agreement
Exhibit F - Building Rules and Regulations
Exhibit G - Proposed Tenant Signage
Exhibit H - Cleaning Specifications
Exhibit I - Parking Area
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is made and entered into as of the 27th day
-----
of October, 1999, by and between DULLES TECH, INC., a Delaware corporation
("Landlord"), whose address is c/o West World Management, Inc., 4 Manhattanville
- ----------
Road, Purchase, New York 10577, and NETWORK ACCESS SOLUTIONS CORPORATION, a
Delaware corporation ("Tenant"), whose address is 100 Carpenter Drive, Suite
------
206, Sterling, Virginia 20164, Attention: Manager, Facilities. Subject to all
of the terms, provisions, covenants and conditions of this Lease, and in
consideration of the mutual covenants, obligations and agreements contained in
this Lease, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Landlord and Tenant agree as
follows:
ARTICLE I.
BASIC LEASE PROVISIONS
Landlord, for and in consideration of the rents and all other charges and
payments hereunder and of the covenants, agreements, terms, provisions and
conditions to be kept and performed hereunder by Tenant, demises and leases to
Tenant, and Tenant hereby hires and takes from Landlord, the premises described
below, subject to all matters hereinafter set forth and upon and subject to the
covenants, agreements, terms, provisions and conditions of this Lease for the
term hereinafter stated. For purposes of this Lease, the following terms shall
have the meanings ascribed to them below:
Base Year shall mean calendar year 2000.
- ---------
Building shall mean the approximately 113,093 rentable square foot structure
- --------
situated upon the Land (hereinafter defined) commonly known as Three Dulles Tech
Center located at 13650 Dulles Technology Drive, Herndon, Virginia 20171, County
of Fairfax, State of Virginia as the same currently exists or as it may from
time to time hereafter be expanded or modified.
Commencement Date shall mean March 1, 2000, provided that the First Phase
- -----------------
Premises are Substantially Complete (as defined in Exhibit E to this Lease). In
the event the First Phase Premises are not Substantially Complete by March 1,
2000, the Commencement Date will be extended day for day until Landlord makes
the First Phase Premises Substantially Complete.
Land shall mean that certain tract of 12.14 acres of land situated in Fairfax
- ----
County, Virginia and more particularly described on Exhibit A attached hereto
and hereby made a part hereof.
Lease Year shall mean each consecutive twelve (12) month period during the Term
- ----------
commencing with the Commencement Date.
Prepaid Rent shall mean the amount of $227,822.63 for the first and a portion
- ------------
of the second month of the Term. Prepaid Rent shall be paid by Tenant to
Landlord no later than January 1, 2000.
Project shall mean the Building, together with the Land and the parking area
- -------
serving the Building, all other improvements situated on the Land or directly
benefitting the Building, and all additional facilities or improvements directly
benefitting the Building that may be constructed in subsequent years.
Security Deposit shall mean the amount of $1,600,000 as shall be posted and
- ----------------
reduced during the Term of this Lease as set forth in Section 3.3.
Term shall mean One Hundred Twenty (120) months from the Commencement Date, as
- ----
the same may be extended pursuant to Section C of Exhibit C attached hereto.
<PAGE>
ARTICLE II.
Section 2.1 Premises. The Premises demised by this Lease are deemed to be
--------
(i) 57,709 rentable square feet consisting of an approximately 10,397 rentable
square foot portion of the first floor, as shown on Exhibit B attached hereto,
---------
and the entirety of Floors four and five of the Building (the "First Phase
-----------
Premises"); (ii) 46,022 rentable square feet known or to be known as Suites 200
- --------
and 300, on Floors two and three, respectively, of the Building (with each Suite
occupying the entire floor) (the "Second Phase Premises"); and (iii) 9,362
---------------------
rentable square feet on the first floor of the Building, as shown on Exhibit B
attached hereto, which is to serve as a network and/or telecommunications
operations center or for similar use by Tenant (the "Third Phase Premises"),
--------------------
together with the nonexclusive use of the common areas of the Project made
available by Landlord from time to time to all tenants of the Project (the First
Phase Premises, the Second Phase Premises and the Third Phase Premises are
collectively referred to herein as the "Premises"). The Premises are outlined
--------
on Exhibit B attached hereto and hereby made a part hereof. All square footage
---------
utilized in this Lease has been or will be as to future space, made in
accordance with "Standard Method for Measuring Floor Area in Office Buildings",
published by the Secretariat, Buildings Owners and Managers Association
International (ANSI/BOMA Z65.1 - 1996), approved June 7, 1996 (the "Standard
--------
Measure"). Unless otherwise specifically designated, all references to square
- -------
footage or square feet in this Lease are to rentable square footage or square
feet. Landlord shall have its space planner or architect re-measure the
Premises upon completion of the Tenant Space Plan (as defined in Exhibit E)
---------
and/or Tenant's Work (as defined in Exhibit E), and at no time thereafter, to
---------
confirm that the measurement provided herein is accurate and conforms to the
Standard Measure. In the event that such re-measurement shows a different
rentable square footage for the Premises, all relevant terms of this Lease shall
be adjusted to conform to such re-measurement.
Section 2.2 Term. The Term of this Lease shall begin on the Commencement
----
Date and shall continue in full force and effect for the Term of this Lease
unless extended or sooner terminated in accordance with the provisions of this
Lease. After the occurrence of the Commencement Date, Tenant and Landlord shall
execute a certificate in the form attached as Exhibit D stipulating and agreeing
---------
to the Commencement Date. If the Commencement Date should be changed for any
reason, including a change pursuant to the terms of Exhibit E hereto, Landlord
---------
shall not be liable or responsible for any claims, damages or liabilities in
connection therewith or by reason thereof. If the First Phase Premises are not
Substantially Complete as of March 1, 2000 for any reason other than a Tenant
Delay, then the term Commencement Date shall mean such subsequent date upon
which the First Phase Premises are Substantially Complete, and such failure to
Substantially Complete the First Phase Premises on the earlier date shall not
constitute a default by Landlord hereunder or render Landlord liable for any
loss or damage that may be incurred as a result of such failure.
Section 2.3 Use. The Premises are to be used only for general office
---
purposes, including but not limited to, use of a portion of the first floor of
the Building, to the extent permitted by law or covenant, as a network and/or
telecommunications operations center or related use and for no other business or
purpose without the prior written consent of Landlord which consent shall not be
unreasonably withheld or delayed. No act shall be done in or about the Premises
that is unlawful or that will increase the existing rate of insurance on the
Building. In the event of a breach of this covenant, Tenant shall, after
written notice, (a) immediately cease the performance of any unlawful act and
(b) with respect to acts that will or has increased the existing rate of
insurance, Tenant shall either cease such act that is increasing or has
increased the existing rate of insurance (and pay for any such increases
theretofor charged to Landlord) or shall pay to Landlord any and all increases
in insurance premiums resulting from such breach. Tenant shall not commit or
allow to be committed any waste upon the Premises, or any public or private
nuisance or other act or thing which disturbs the quiet enjoyment of any other
tenant in the Building. If any of Tenant's office machines or equipment disturb
any other tenant in the Building, then Tenant shall provide adequate insulation,
or take such other action as may be necessary to eliminate the noise or
disturbance at its sole cost and expense. Tenant shall not, without Landlord's
prior consent which consent shall not be unreasonably withheld or delayed,
install any equipment, machine, device, tank or vessel which is subject to any
federal, state or local permitting requirement. Tenant, at its expense, shall
comply with all laws, statutes, ordinances and governmental rules, regulations
or requirements governing the installation, operation and removal of any such
equipment, machine, device, tank or vessel. Tenant, at its expense, shall
<PAGE>
comply with all laws, statutes, ordinances, governmental rules, regulations or
requirements, and the provisions of any recorded documents now existing or
hereafter in effect relating to its use, operation or occupancy of the Premises
and shall observe such reasonable and non-discriminatory rules and regulations
as may be adopted and made available to Tenant by Landlord from time to time for
the safety, care and cleanliness of the Premises or the Building and for the
preservation of good order therein; provided, however, that such rules and
-------- -------
regulations do not conflict with this Lease, materially increase Tenant's
obligations or liability with respect to the Premises and to the extent such
rules and regulations do conflict with the terms of this Lease, the terms of
this Lease shall govern. The current rules and regulations for the Building are
attached hereto as Exhibit F. Without limiting the foregoing, Tenant agrees to
---------
be wholly responsible at Tenant's sole cost and expense for any accommodations
or alterations which need to be made to the Premises to comply with the
provisions of the Americans With Disabilities Act of 1990, as amended (the
"ADA"). Landlord will be responsible for compliance of the common areas of the
---
Building as well as the Building shell (as described in Exhibit E) with the
provisions of ADA.
ARTICLE III.
Section 3.1 Rental Payments.
---------------
(a) Base Rent. Commencing (i) on the Commencement Date as to the First
---------
Phase Premises, (ii) on the date of Substantial Completion of the Second Phase
Premises (or such earlier date as the Second Phase Premises would have been
Substantially Complete but for Tenant Delays) as to the Second Phase Premises,
and (iii) on the earlier of July 1, 2000 or the date of Substantial Completion
of the Third Phase Premises as to the Third Phase Premises, and continuing
thereafter throughout the Term, Tenant shall pay the Base Rent, which is due and
payable each Lease Year during the Term hereof in twelve (12) equal installments
on the first (1st) day of each calendar month during the Term to Landlord at
Landlord's address specified in this Lease (or such other address as may be
designated by Landlord from time to time) monthly in advance at the following
rates:
Lease Base Rent Per
Year Rentable Square Foot
----- --------------------
1 $25.50
2 $25.94
3 $25.95
4 $25.94
5 $25.50
6 $25.50
7 $25.50
8 $25.50
9 $25.50
10 $25.50
So long as Tenant is not then in default under this Lease, in the event Tenant
has paid Landlord any Prepaid Rent such Prepaid Rent shall be applied to the
first (1st) monthly and a portion of the second (2nd) installment of Base Rent
due hereunder.
(b) First Year Credit. Notwithstanding anything to the contrary in Section
-----------------
3.1(a), Tenant shall receive a credit against the Base Rent payable during the
first year of the Term of the Lease in an aggregate amount of Twelve Thousand
Five Hundred and No/100's Dollars ($12,500.00) per month.
(c) Annual CPI Adjustment. On each anniversary of the Commencement Date,
---------------------
the annual Base Rent for the entire Premises (but, for purposes of this
Subsection, excluding from the Base Rent in respect of the second, third and
fourth lease years, the sums per rentable square foot of $0.44, $0.45 and $0.44
respectively) shall be adjusted as follows: beginning the first day of the
<PAGE>
second lease year following the Commencement Date, the Base Rent shall be
increased by an amount equal to three hundred percent (300%) of any increase in
the CPI. The amount of the adjustment shall be determined by multiplying the
previous year's adjusted Base Rent by a product of (a) three hundred percent
(300%) and (b) a fraction, the numerator of which shall be (i) the CPI for the
period immediately preceding the anniversary date of the lease year for which
the adjustment is to be made, minus (ii) the CPI for the period immediately
preceding the previous lease year, and the denominator of which shall be the CPI
for the period immediately preceding the previous lease year. Notwithstanding
this calculation, the adjustment to the Base Rent shall not exceed three percent
(3%) of the Base Rent for the immediately preceding Lease Year.
The CPI as used herein shall mean the United States Bureau of Labor
Statistics, Consumer Price Index for Urban Consumers, all items for Washington,
D.C.-MD-VA (CPI-U) (1982 - 1984 = 100). If the CPI shall be discontinued with
no successor or comparable successor index, Landlord shall promptly so notify
Tenant and the parties shall attempt to agree within thirty (30) days after
Tenant's receipt of such notice upon a substitute index which measures, on at
least an annual basis, fluctuations in the cost of goods to consumers of such
goods in the Washington, D.C. metropolitan area. If the parties are unable to
agree upon a substitute index, then the matter shall be determined by
arbitration in accordance with the rules of the American Arbitration Association
then prevailing.
(d) Partial Month. If the date for Tenant to start paying any of the
-------------
amounts of Basic Rent set forth above is other than the first (1st ) day of a
calendar month or if this Lease expires or terminates on a day other than the
last day of a calendar month, then the installments of Base Rent for such month
or months shall be prorated based upon multiplying the applicable Base Rent by a
fraction, the numerator of which shall be the number of days of the Term
occurring during said commencement or termination month, as the case may be, and
the denominator of which shall be the number of days in such month.
(e) Payment; Late Charge; Past Due Rate. The Base Rent, the Additional
-----------------------------------
Rent (hereinafter defined), any Prepaid Rent and any and all other payments
which Tenant is obligated to make to Landlord under this Lease shall constitute
and are sometimes hereinafter collectively referred to as "Rent". Tenant shall
pay all Rent and other sums of money as shall become due from and payable by
Tenant to Landlord in lawful money of the United States of America at the times
and in the manner provided in this Lease, without demand, deduction, abatement,
setoff, counterclaim or prior notice. Tenant hereby acknowledges that late
payment to Landlord of Rent or other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. If any Rent or other sum due from Tenant is
not received on or before its due date, then Tenant shall pay to Landlord
immediately upon Landlord's demand therefor, in addition to such overdue amount,
a late charge in an amount equal to Five Thousand and No/100's Dollars ($5,000),
plus any reasonable attorneys' fees and costs incurred by Landlord by reason of
Tenant's failure to pay Rent and other charges when due hereunder; provided,
--------
however, that Landlord shall waive such charge as to the first such instance in
- -------
any Lease year (but in no event more than three (3) times during the Term of the
Lease) as to which such late charge would otherwise be payable. Additionally,
all Rent under this Lease shall bear interest from the date due until paid at
the lesser of twelve percent (12%) or the maximum nonusurious rate of interest
then permitted by the applicable laws of the state in which the Building is
located or the United States of America, whichever shall permit the higher
nonusurious rate, such interest being in addition to and cumulative of any other
rights and remedies which Landlord may have with regard to the failure of Tenant
to make any such payments under this Lease.
Section 3.2 Additional Rent.
---------------
(a) Definitions:
-----------
(i) "Base Operating Expenses" means Operating Expenses (hereinafter
-----------------------
defined) for the Base Year.
<PAGE>
(ii) "Operating Expenses" means all expenses, costs and disbursements
------------------
of every kind and nature, provided such expenses, costs and disbursements are
actually incurred, relating to or incurred or paid in connection with the
ownership and operation of the Project, computed on an accrual basis in
accordance with generally accepted accounting principles consistently applied,
including but not limited to the following:
(A) the proportionate share of wages and salaries of all persons
directly engaged in the operation, maintenance, security or access control of
the Project, including all taxes, insurance and benefits relating thereto,
provided that no such amounts are allowed for any employee above the level of
property engineer;
(B) the cost of all supplies, tools, equipment and materials used in
the operation and maintenance of the Project, including rental fees for the
same, if such items are not purchased and amortized pursuant to this Section 3.2
-----------
below;
(C) the cost of all utilities for the Project, including but not
limited to the cost of water and power, heating, lighting, air conditioning and
ventilating (excluding those costs billed to specific tenants) of the Building
and Project;
(D) the cost of all maintenance and service agreements for the Project
and the equipment therein, including but not limited to alarm service, security
service, access control, landscaping, window cleaning, pest control, elevator
maintenance and janitorial service;
(E) the cost of repairs and general maintenance, excluding (y) repairs
and general maintenance paid by proceeds of insurance, by Tenant or by other
third parties, and (z) alterations attributable solely to tenants of the
Building;
(F) amortization (at an interest rate of 8% per annum) of the cost of
capital investment items which are installed for the purpose of reducing
operating expenses, promoting safety, complying with governmental requirements
or maintaining the quality of the Building over the useful life of such item;
(G) the cost of all insurance relating to the Project, including, but
not limited to, the cost of property insurance, casualty, rental loss and
liability insurance applicable to the Project and Landlord's personal property
used in connection therewith and the cost of commercially reasonable deductibles
paid on claims made by Landlord;
(H) Landlord's and/or Landlord's managing agent's reasonable
accounting and audit costs and attorneys' fees applicable to the Project;
(I) all property management fees for the Project, provided that such
fees shall not exceed three percent (3%) of gross receipts for the Project; and
(J) all taxes, assessments and governmental charges, whether or not
directly paid by Landlord, whether federal, state, county or municipal and
whether they are imposed by taxing districts or authorities currently taxing the
Project or by others subsequently created or otherwise, and any other taxes and
assessments, assessed against or attributable to the Project or its operation,
excluding, however, (i) federal and state taxes on income, death taxes,
- --------- -------
franchise taxes and any taxes imposed or measured on or by the income of
Landlord from the operation of the Project, (ii) transfer taxes or fees imposed
in connection with any change of ownership of the Project together with the
reasonable cost (including attorneys, consultants and appraisers) of any
negotiation, contest or appeal pursued by Landlord in an effort to reduce any
such tax, assessment or charge, and all of Landlord's administrative costs in
relation to the foregoing ("Real Estate Taxes"); provided, however, that if at
----------------- -------- -------
any time during the Term the present method of taxation or assessment shall be
so changed that the whole or any part of the taxes, assessments, levies,
impositions or charges now levied, assessed or imposed on real estate and the
improvements thereof shall be changed and as a substitute therefor, or in lieu
of or in addition thereto, taxes, assessments, levies, impositions or charges
shall be levied, assessed or imposed wholly or partially as a capital levy or
otherwise on the rents received from the Project or the rents reserved herein or
any part thereof, then such substitute or additional taxes, assessments, levies,
<PAGE>
impositions or charges, to the extent so levied, assessed or imposed, shall be
deemed to be included within the Real Estate Taxes to the extent that such
substitute or additional tax would be payable if the Project were the only
property of the Landlord subject to such tax, (iii) any environment assessments,
charges or liens arising in connection with the remediation of Hazardous
Materials from the Project, the causation of which arose prior to the
Commencement Date or was caused by Landlord, its agents, employees or
contractors or any tenant of the Project (other than Tenant or its sublessees or
assignees), (iv) costs or fees payable to public authorities in connection with
any future construction, renovation and/or improvements to the Project other
than Tenant's Work, including fees for transit, housing, schools, open space,
child care, arts programs, traffic mitigation measures, environmental impact
reports, traffic studies, and transportation system management plans or (v)
reserves for future taxes.
Notwithstanding the foregoing provisions of this Section 3.2(a)(ii),
------------------
Operating Expenses shall not include any of the following:
(A) legal fees, brokerage commissions, advertising costs or related
expenses in connection with the leasing of the Project and/or administration of
Landlord's ownership entity;
(B) except as allowable under Section 3.2(a)(ii)(F), capital repairs,
---------------------
alterations, additions, improvements or replacements connected with or arising
from the renovation of the Project or any repairs or replacements made to
rectify or correct any defect in the design, materials or workmanship of any
portion of the Project or Commons Areas;
(C) costs incurred in connection with damage or repairs which are covered
under any insurance policy carried by Landlord in connection with the Project or
Common Areas (except for commercially reasonable deductibles);
(D) expenses for repair or replacement paid by condemnation awards;
(E) costs associated with damage or repairs to the Project or the Common
Areas necessitated by the gross negligence or willful misconduct of Landlord or
Landlord's employees, agents, contractors or invitees;
(F) increases in insurance premiums over those in effect on the
Commencement Date to the extent any other tenant causes Landlord's insurance
premiums to increase or obligates Landlord to purchase additional insurance;
(G) reserves for Landlord's repair, replacement or improvement of the
Project or any portion thereof;
(H) charitable or political contributions or fees paid to trade
associates;
(I) Landlord's general overhead expenses not related to the Project or
Common Areas;
(J) all principal, interest, loan fees, and other carrying costs related to
any mortgage or deed of trust encumbering the Project and all rental and other
payables due under any ground or underlying lease;
(K) legal fees, accountant fees and other expenses incurred in disputes
with other tenants or occupants of the Project or associated with the
enforcement of any other leases or defense of Landlord's title to or interest in
the Project or any part thereof;
(L) costs (including permit, license and inspection fees) incurred in
renovating or otherwise improving, decorating, painting, expanding or altering
space for other tenants or other occupants of vacant space in the Project;
(M) any costs, fines, or penalties incurred due to violations by Landlord
or any tenant of the Project (other than Tenant) of any governmental rule or
authority, this Lease or any other lease in the Project, or due to Landlord's
gross negligence or willful misconduct;
<PAGE>
(N) payments for rented equipment, the cost of which equipment would be a
capital expenditure if such equipment were purchased by Landlord;
(O) the cost of any special service provided to Tenant or other occupants
of the Project for which Landlord is entitled, pursuant to the terms of leases,
to be reimbursed;
(P) the costs of major repairs and/or replacements of the roof, foundation,
and structural supports of the Premises unless such costs are amortized over the
useful life of the item;
(Q) any amounts paid to any person, firm or corporation related to or
otherwise affiliated with Landlord or any general partner, officer, director or
shareholder of Landlord or any of the foregoing, to the extent the same exceeds
arm's length competitive prices paid in Fairfax County, Virginia for similar
services or goods; and
(R) costs of acquisition of sculpture or other objects of art for the
Project.
Operating Expenses shall be reduced by all cash discounts, trade discounts
or quantity discounts received by Landlord or Landlord's managing agent in the
purchase of any goods, utilities or services in connection with the prudent
operation of the Building. In the calculation of any expenses hereunder, it is
understood that no expense shall be charged more than once. Landlord shall use
its reasonable efforts in good faith to effect an equitable proration of bills
for services rendered to the Building and to any other property owned by
Landlord or an affiliate of Landlord.
Landlord agrees that, upon Tenant's request from time to time, Landlord
shall confer with Tenant to consider mutually acceptable ways to minimize or
reduce Operating Expenses.
(iii) "Adjustment Period" means each calendar year occurring during
-----------------
the Term beginning with calendar year 2001, which shall be the first Adjustment
Period.
(iv) "Tenant's Pro Rata Share" means the percentage calculated by
-----------------------
dividing the rentable area of the Premises (numerator) by the rentable area of
the Building (denominator), and expressing the fraction as a percentage.
(b) Gross-Up Adjustment. If the Building is less than fully occupied or if
-------------------
standard Landlord services are not provided to the entire Building during the
Base Year or any Adjustment Period, then Operating Expenses for the Base Year or
such Adjustment Period shall be "grossed up" by Landlord to that amount of
Operating Expenses that, using reasonable projections, would normally be
expected to be incurred during the Base Year or Adjustment Period if the
Building was one hundred percent (100%) occupied and receiving building standard
Landlord services during the Base Year or Adjustment Period, as determined under
generally accepted accounting principles consistently applied.
(c) Payment by Tenant. If the Operating Expenses for any Adjustment Period
-----------------
exceed the Base Operating Expenses (any such excess being known collectively as
the "Expense Increase"), then Tenant agrees to pay Landlord as additional rent
----------------
(the "Additional Rent") Tenant's Pro Rata Share of the Expense Increase;
---------------
provided, however, that notwithstanding any other provision of this Lease to the
- -------- -------
contrary, no such payment with respect to excess Operating Expenses shall be due
from Tenant during the first twelve (12) months commencing with the Commencement
Date.
(d) Manner of Payment.
-----------------
(i) Landlord shall give Tenant notice of Landlord's estimate of
amounts payable under this Section 3.2 for each Adjustment Period based upon
-----------
generally accepted accounting principles consistently applied. By the first day
of each month during the Adjustment Period, Tenant shall pay Landlord one-
twelfth (1/12th) of the estimated amount. If for any reason the estimate is not
given before the Adjustment Period begins, Tenant shall continue to pay on the
<PAGE>
basis of the previous year's estimate, if any, until the month after the new
estimate is given.
(ii) Within one hundred twenty (120) days after each Adjustment Period
ends, or as soon thereafter as reasonably practical, Landlord shall give Tenant
a statement (the "Statement"), in reasonable detail as to line items, showing
---------
the: (A) actual Operating Expenses for the Adjustment Period; (B) Base Operating
Expenses; (C) the Expense Increase for the Adjustment Period; (D) the amount of
Tenant's Pro Rata Share of the Expense Increase; (E) the amount, if any, paid by
Tenant during the Adjustment Period towards the Expense Increase; and (F) the
amount Tenant owes towards the Expense Increase or the amount Landlord owes as a
refund. Delay by Landlord in providing to Tenant any Statement shall not relieve
Tenant from the obligation to pay any Expense Increase upon the rendering of
such Statements nor shall it relieve Landlord from paying any refund if so due.
(iii) If the Statement shows that the actual amount Tenant owes for
the Adjustment Period is less than any estimated Expense Increase paid by Tenant
during the Adjustment Period, Landlord shall return the difference (the
"Overpayment"). If the Statement shows that the actual amount Tenant owes is
- ------------
more than any estimated Expense Increase paid by Tenant during the Adjustment
Period, Tenant shall pay the difference (the "Underpayment"). The Overpayment
------------
or Underpayment shall be paid within thirty (30) days after the Statement is
delivered to Tenant.
(iv) During any Adjustment Period in which this Lease is not in effect
for a complete calendar year, unless it was ended due to Tenant's default,
Tenant's obligation for Additional Rent for those Adjustment Periods shall be
prorated by multiplying the Additional Rent for the Adjustment Period by a
fraction expressed as a percentage, the numerator of which is the number of days
of the Adjustment Period included in the Term and the denominator of which is
365.
Section 3.3 Security. (a) Tenant has delivered to Landlord, as security
--------
for the performance of Tenant's obligations under this Lease, either (i) the sum
of One Million Six Hundred Thousand and No/100 Dollars ($1,600,000.00) by good
check (the "Security Deposit"), (ii) an unconditional, irrevocable letter of
----------------
credit in the amount of One Million Six Hundred Thousand and No/100 Dollars
($1,600,000.00) in a form satisfactory to Landlord, issued by a New York
Clearinghouse member bank, including First Union National Bank, or a bank
reasonably satisfactory to Landlord and available for presentation in the
Borough of Manhattan in New York, New York ("Letter of Credit") or (iii) a
----------------
Security Deposit and a Letter of Credit, the sum of which equals One Million Six
Hundred Thousand and No/100 Dollars ($1,600,000.00; such amount whether in the
form of a Security Deposit or Letter of Credit or both being herein referred to
as the "Initial Amount"). The Letter of Credit shall either (i) expire on the
--------------
date which is sixty (60) days after the expiration or earlier termination of
this Lease (the "LC Date") or (ii) be automatically self-renewing until the LC
-------
Date. If Landlord, at any time during the Term, is not reasonably satisfied
with the bank issuing the Letter of Credit, it may so notify Tenant, and Tenant,
within ten (10) business days after receipt of such notice, shall replace the
Letter of Credit then held by Landlord with a substitute letter of credit (the
"Substitute Letter of Credit") issued by a New York Clearinghouse member bank
- ----------------------------
(or other bank reasonably acceptable to Landlord) which satisfies the terms of
this Section 3.3(a). If the Letter of Credit or any replacement Letter of
--------------
Credit has an expiration date or is otherwise scheduled to terminate prior to
the LC Date, then at least thirty (30) days prior to such expiration or
termination date, Tenant shall deliver to Landlord a replacement Letter of
Credit issued by the issuing bank of the then current Letter of Credit, or a
bank reasonably satisfactory to Landlord, available for presentation in the
Borough of Manhattan in New York, New York, in substantially the same form as
the original Letter of Credit, and in the amount provided for herein. If Tenant
shall not have provided such replacement Letter of Credit by the date which is
thirty (30) days prior to the expiration or other scheduled termination of the
then current Letter of Credit, then Landlord shall have the right to draw down
the full amount the then current Letter of Credit, at which time the amount so
drawn shall become the Security Deposit.
<PAGE>
(b) On the third (3rd) anniversary of the Commencement Date, the Initial
Amount shall be reduced to an amount equal to Nine Hundred Twenty Thousand and
No/100 Dollars ($920,000.00), provided that no default shall then be continuing
--------
and any amounts drawn by Landlord upon the Security Deposit or the Letter of
Credit have been replaced by Tenant. On the fourth (4th) anniversary of the
Commencement Date, the amount of the Security Deposit or Letter of Credit or
both, as applicable, shall then be reduced to an amount equal to Two Hundred
Forty Thousand and No/100 Dollars ($240,000.00), provided that no default shall
--------
then be continuing and any amounts drawn by Landlord upon the Security Deposit
or the Letter of Credit have been replaced by Tenant.
(c) On or before the LC Date: (i) if there shall be no uncured defaults
hereunder, Landlord shall return to Tenant the Security Deposit or Letter of
Credit or Substitute Letter of Credit then held by Landlord or (ii) if Landlord
shall have drawn upon such Security Deposit or Letter of Credit or Substitute
Letter of Credit to remedy defaults by Tenant in the payment or performance of
any of Tenant's obligations under this Lease, Landlord shall return to Tenant
that portion, if any, of such Security Deposit or of the proceeds of the Letter
of Credit or Substitute Letter of Credit remaining in Landlord's possession,
which has not been applied to remedy, and will not be required to remedy, any
Tenant default. If Landlord shall have so drawn upon the Security Deposit or
the Letter of Credit, Tenant shall, upon written demand made prior to the LC
Date, deposit with Landlord, or cause the Letter of Credit to be increased by, a
sum equal to the amount so drawn by Landlord.
Section 3.4 Tenant's Review Right. Following Tenant's receipt of the
---------------------
annual Statement for any Lease Year until ninety (90) days thereafter, Tenant
shall have the right to dispute items on such Statement. In such event,
Landlord and Tenant will consult in a good faith effort to resolve the dispute
within thirty (30) days after Landlord receives notice of such dispute. In the
event that such consultations within such thirty (30) day period do not resolve
the matter, Tenant shall be entitled, provided that Tenant shall have paid to
Landlord the amounts shown thereon as due from Tenant, to have an independent
certified public accounting firm hired by Tenant and reasonably approved by
Landlord review the books, receipts and records pertaining to such disputed
items for such Lease Year. Tenant shall have the right to make copies of such
books, receipts and records. The results of any such review shall be provided
simultaneously to Landlord and Tenant by the accounting firm and shall be
binding upon Landlord and Tenant and, in the event that any such review reveals
a net underpayment or overpayment with respect to Operating Expenses and/or the
Expense Increase, the applicable party shall pay to the other, within ten (10)
business days following demand therefor, the amount necessary to effect the
appropriate adjustments. In the event an overpayment exceeds 7%, Landlord shall
pay the costs of the accounting firm's review, not to exceed $2,500.00. No more
than one such review may be conducted with respect to any Lease Year. Tenant
shall keep all information gained in connection with any review or inspection of
Landlord's records, and all information contained in any annual Statement,
confidential and shall not disclose it to third parties except to carry out the
purposes of this Section and except as required by law; provided, however, that
-------- -------
Tenant may disclose such information to the extent reasonably needed in
connection with financing arrangements or assignments of Tenant's interests in
the Premises so long as Tenant takes reasonable steps to assure that the
applicable lender or proposed assignee keeps such information confidential.
ARTICLE IV.
Section 4.1 Services.
--------
(a) Services Provided. Landlord shall furnish to Tenant while Tenant is
-----------------
occupying the Premises:
(i) Hot and cold domestic water in common use restrooms and toilets
in locations provided for general use and as reasonably deemed by Landlord to be
in keeping with the Project standards.
(ii) Heating and air conditioning in season from 8:00 a.m. to 6:00
p.m. on Monday through Friday and 9:00 a.m. to 1:00 p.m. on Saturday ("Business
--------
Hours"), excluding
- -----
<PAGE>
the hereinafter defined Holidays, subject to curtailment as required by
governmental laws, rules or regulations, in such amounts as are considered by
Landlord to be standard, but such service at times during weekdays other than
the hours stated above, and on Saturdays, Sundays and Holidays, shall be
furnished only upon request of Tenant, and for such service Tenant shall pay
Landlord upon demand an amount equal to Landlord's actual costs at that time of
providing such service.
(iii) Electric lighting service for all public areas and special
service areas of the Building in the manner and to the extent deemed by Landlord
to be standard.
(iv) Janitor service on a five (5) day week basis in a manner
considered by Landlord to be standard for similar projects in the area and as
described in Exhibit H attached hereto; provided, however, if Tenant's floor
--------- -------- -------
coverings or other improvements require special care, Tenant shall pay the
additional cleaning cost attributable thereto.
(v) Access control for the Project comparable as to coverage,
control and responsiveness (but not necessarily as to means for accomplishing
same) to other similarly situated multi-tenant office buildings in the vicinity;
provided, however, Landlord shall have no responsibility to prevent, and shall
- -------- -------
not be liable to Tenant for, any liability or loss to Tenant, its agents,
employees and visitors arising out of losses due to theft, burglary, or damage
or injury to persons or property caused by persons gaining access to the
Premises, and Tenant hereby releases Landlord from all liability for such
losses, damage or injury.
(vi) Sufficient electrical capacity to operate (i) incandescent
lights, typewriters, calculating machines, photocopying machines and other
machines of similar voltage electrical consumption (120/220 volts), provided
that the total rated electrical design load for said lighting and machines of
low electrical voltage shall not exceed four and one-half (4.50) watts per
square foot of rentable area; and (ii) lighting and equipment of high voltage
electrical consumption (277/480 volts), provided that the total rated electrical
design load for said lighting and equipment of high electrical voltage shall not
exceed two (2.00) watts per square foot of rentable area (each such rated
electrical design load to be hereinafter referred to as the "Building standard
rated electrical design load"). Tenant shall be allocated Tenant's pro rata
share of the Building standard circuits provided on the floor(s) Tenant
occupies.
Should Tenant's fully connected electrical design load exceed the Building
standard rated electrical design load for either low or high voltage electrical
consumption, or if Tenant's electrical design requires low voltage or high
voltage circuits in excess of Tenant's share of the Building standard circuits,
Landlord will (at Tenant's expense) install one (1) additional high voltage
panel and/or one (1) additional low voltage panel with associated transformer,
space for which has been provided in the base building electrical closets based
on a maximum of two (2) such additional panels per floor for all tenants on the
floor (which additional panels and transformers shall be hereinafter referred to
as the "additional electrical equipment"). If the additional electrical
equipment is installed because Tenant's low or high voltage rated electrical
design load exceeds the applicable Building standard rated electrical design
load, then a meter shall also be added (at Tenant's expense) to measure the
electricity used through the additional electrical equipment.
The design and installation of any additional electrical equipment (or
related meter) required by Tenant shall be subject to the prior approval of
Landlord (which approval shall not be unreasonably withheld). All expenses
incurred by Landlord in connection with the review and approval of any
additional electrical equipment shall also be reimbursed to Landlord by Tenant.
Tenant shall also pay on demand the actual metered cost of electricity consumed
through the additional electrical equipment (if applicable), plus any actual
accounting expenses incurred by Landlord in connection with the metering
thereof.
If any of Tenant's electrical equipment requires conditioned air in excess
of Building standard air conditioning, the same shall be installed by Landlord
(on Tenant's behalf), and Tenant shall pay all design, installation, metering
and operating costs relating thereto.
<PAGE>
If Tenant requires that certain areas within the Premises must operate in
excess of the Business Hours set forth above, the electrical service to such
areas shall be separately circuited and metered such that Tenant shall be billed
the actual costs associated with electricity consumed during hours other than
the Business Hours. Without limiting the foregoing, Tenant shall arrange to
have its network and/or telecommunications operating center separately circuited
and metered as aforesaid.
(vii) All fluorescent bulb and ballast replacement for Building
standard lighting in all areas and all incandescent bulb replacement in public
areas, toilet and restroom areas and stairwells.
(viii) Nonexclusive operatorless passenger elevator service to the
Premises twenty-four (24) hours per day; provided, that Landlord may reasonably
limit the number of elevators in operation on weekdays after the Business Hours.
(b) Cessation of Services. To the extent the services described in Section
--------------------- -------
4.1(a) of this Lease require electricity, gas and water supplied by public
- ------
utilities, Landlord's covenants thereunder shall only impose on Landlord the
obligation to use its reasonable efforts to cause the applicable public
utilities to furnish the same. Failure by Landlord to furnish the services
described in this Section 4.1 to any extent, or any cessation thereof, shall
-----------
not, unless such failure was caused by the gross negligence or willful
misconduct of Landlord or of Landlord's employees, agents and contractors, (i)
render Landlord in default hereunder or liable in any respect for damages to
either person or property, or (ii) be construed as an eviction of Tenant, or
(iii) work an abatement of Rent, or (iv) relieve Tenant from fulfillment of any
covenant or agreement hereof. In addition to the foregoing, should any of the
equipment or machinery break down, cease to function properly for any cause
other than the gross negligence or willful misconduct of Landlord or Landlord's
employees, agents or contractors or be intentionally turned off for testing or
maintenance purposes, Tenant shall have no claim for abatement or reduction of
Rent or damages on account of an interruption in service occasioned thereby or
resulting therefrom; provided, however, Landlord agrees to use diligent efforts
-------- -------
to repair said equipment or machinery and to restore said services and Tenant's
rent shall abate after five (5) consecutive business days of such cessation of
services for the duration of the cessation so long as the Premises are not and
cannot reasonably be used for the conduct of Tenant's business operation and are
not being so used by Tenant.
(c) Holidays. The following dates shall collectively be known as
--------
"Holidays" and individually known as a "Holiday": New Year's Day; Memorial Day;
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Independence Day; Labor Day; Thanksgiving Day; Friday following Thanksgiving
Day; Christmas Day; any other holiday recognized and taken by tenants occupying
at least one-half (1/2) of the rentable area of office space of the Building and
any other holiday recognized and taken by any unions which service the Building
in any manner. If in the case of any Holiday, a different day shall be observed
than the respective day above described, then that day which constitutes the day
observed by national banks in the city or proximate area in which the Building
is located, on account of such Holiday, shall constitute the Holiday under this
Lease.
Section 4.2 Keys and Locks. Subject to the terms and provisions of this
--------------
Lease, Tenant shall have access to the Premises 24 hours a day, 7 days a week.
Landlord shall initially furnish Tenant with [five hundred thirty-one (531)]
card keys or keys, respectively, for the building entrance and for the standard
corridor doors serving the Premises. Additional keys will be furnished by
Landlord upon an order signed by Tenant and at Tenant's expense. All such keys
shall remain the property of Landlord. Without the prior written consent of
Landlord, no additional locks shall be allowed on any door of the Premises, and
Tenant shall not make or permit to be made any duplicate keys, except those
furnished by Landlord. Upon termination or expiration of this Lease or a
termination of possession of the Premises by Tenant, Tenant shall surrender to
Landlord all keys to any locks on doors entering or within the Premises.
Landlord shall also provide card-key controlled access (or other similar access
control device or mechanism as Landlord may from time to time elect to provide)
intended to limit the general public's access to the Building during other than
Business Hours. Landlord, however, shall have no liability to Tenant, its
employees, agents, invitees or licensees for any loss, damage or injury of any
kind or nature caused by or as a result of the presence of any unauthorized
person in the
<PAGE>
Premises, the Building or the Project, including without limitation any loss,
damage or injury due to theft, burglary or other criminal conduct by any person,
nor shall Landlord be required to insure against any such loss, damage or injury
Section 4.3 Graphics and Building Directory. Landlord shall provide and
-------------------------------
install, at Tenant's expense, all letters or numerals at the entrance to the
Premises, and a strip containing a listing of Tenant's name on the Building
directory board to be placed in the main lobby of the Building. All such
letters and numerals shall be in Building standard graphics. Landlord shall not
be liable for any inconvenience or damage occurring as a result of any error or
omission in any directory or graphics. No signs, numerals, letters or other
graphics shall be used or installed by Tenant on the exterior of, or which may
be visible from outside, the Premises, unless approved in writing by Landlord.
Additionally, Landlord agrees to provide to Tenant, at Tenant's sole cost and
expense, prominent and exclusive signage (subject however to the provisions of
Section 5.2) at or about the top of the Building to the maximum size permitted
under the signage provisions of the Fairfax County Zoning Ordinance and any
other applicable laws or covenants. The design, size, placement, style,
lighting, colors and materials of such sign shall require Landlord's prior
approval, which approval will not be unreasonably withheld, conditioned or
delayed, and will be subject further to Tenant's obtaining approval from the
Dulles Tech Center association and applicable governmental authorities. Upon
the expiration or earlier termination of this Lease, Tenant shall remove all
such signage and/or graphics and repair any and all damage caused by or
resulting from the installation, maintenance, operation and/or removal of such
signage or graphics at Tenant's sole cost and expense. Tenant's proposed
signage is attached hereto as Exhibit G, and Landlord approves such signage,
subject to Tenant's obtaining the other approvals and permits referred to
hereinabove.
ARTICLE V.
Section 5.1 Occupancy of Premises. Tenant shall throughout the Term of
---------------------
this Lease, at its own expense, maintain the Premises and all improvements
thereon and keep them free from waste, damage or nuisance, and shall deliver up
the Premises in a clean and sanitary condition at the expiration or termination
of this Lease or the termination of Tenant's right to occupy the Premises by
Tenant, in good repair and condition, reasonable wear and tear excepted. In the
event Tenant should neglect to maintain and/or return the Premises in such
manner at any time, Landlord shall have the right, but not the obligation, to
cause repairs or corrections to be made, and any reasonable costs therefor shall
be payable by Tenant to Landlord within ten (10) days of demand therefor by
Landlord. Upon the expiration or termination of this Lease or the termination
of Tenant's right to occupy the Premises by Tenant, Landlord shall have the
right to reenter and resume possession of the Premises. No act or thing done by
Landlord or any of Landlord's agents (hereinafter defined) during the Term of
the Lease shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender of the Premises shall be valid unless the same
be made in writing and executed by Landlord. Tenant shall notify Landlord at
least ten (10) days prior to vacating the Premises and shall arrange to meet
with Landlord for a joint inspection of the Premises. If Tenant fails to give
such notice or to arrange for such inspection, then Landlord's inspection of the
Premises shall be deemed correct for the purpose of determining Tenant's
responsibility for repair and restoration of the Premises.
Section 5.2 Entry for Repairs and Inspection. Tenant shall permit
--------------------------------
Landlord and its agents to enter the Premises (provided Landlord gives Tenant
reasonable prior notice and Tenant has the option to have a representative
accompanying Landlord during such entry) at all reasonable times to inspect the
same; to show the Premises to prospective tenants (within twelve (12) months of
the expiration of the term of this Lease), or interested parties such as
prospective lenders and purchasers; to exercise its rights under this Lease; to
clean, repair, alter or improve the Premises or the Building; to discharge
Tenant's obligations when Tenant has failed to do so within the time required
under this Lease or within a reasonable time after written notice from Landlord,
whichever is earlier; to post notices of nonresponsibility and similar notices
and "For Sale" signs at any time and to place "For Lease" signs upon or adjacent
to the Building or the Premises at any time within twelve (12) months of the
expiration of the term of this Lease. Tenant shall permit Landlord and its
agents to enter the Premises at any time in the event of an emergency. When
reasonably necessary, Landlord may temporarily close entrances, doors,
corridors, elevators or other facilities without liability to Tenant by reason
of such closure.
<PAGE>
Section 5.3 Hazardous Materials.
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(a) As used in this Lease, the term "Hazardous Materials" shall mean and
-------------------
include any substance that is or contains petroleum, asbestos, polychlorinated
biphenyls, lead, or any other substance, material or waste which is now or is
hereafter classified or considered to be hazardous or toxic under any federal,
state or local law, rule, regulation or ordinance relating to pollution or the
protection or regulation of human health, natural resources or the environment
(collectively "Environmental Laws") or poses or threatens to pose a hazard to
------------------
the health or safety of persons on the Premises or any adjacent property.
Landlord represents and warrants that to the best of Landlord's actual
knowledge, there are no Hazardous Materials located in, on or under the Building
or the Land, and Landlord has received no notices concerning violation of any
laws relating to Hazardous Materials with respect to the Building or the Land.
If Hazardous Materials are discovered in the Building or on the Land after the
Commencement Date and were not caused or permitted by Tenant or Tenant's
employees, assignees agents or invitees, then Landlord will be responsible for
all costs and expenses associated with regulatory requirements to eliminate any
violations of law resulting from such presence and Landlord shall indemnify,
defend, and hold Tenant and Tenant's employees, assignees, agents and invitees
harmless from any and all claims, costs, liabilities or expenses associated with
such Hazardous Materials.
(b) Tenant agrees that during its use and occupancy of the Premises it will
not permit Hazardous Materials to be present on or about the Premises except in
a manner and quantity necessary for the ordinary performance of Tenant's
business and that it will comply with all Environmental Laws relating to the
use, storage or disposal of any such Hazardous Materials.
(c) If Tenant's use of Hazardous Materials on or about the Premises results
in a release, discharge or disposal of Hazardous Materials on, in, at, under, or
emanating from, the Premises or the property in which the Premises are located,
Tenant agrees to investigate, clean up, remove or remediate such Hazardous
Materials in full compliance with (a) the requirements of (i) all Environmental
Laws and (ii) any governmental agency or authority responsible for the
enforcement of any Environmental Laws; and (b) any additional requirements of
Landlord that are reasonably necessary to protect the value of the Premises or
the property in which the Premises are located. Landlord shall also have the
right, but not the obligation, to take whatever action with respect to any such
Hazardous Materials that it deems reasonably necessary to protect the value of
the Premises or the property in which the Premises are located. All costs and
expenses paid or incurred by Landlord in the exercise of the right set forth in
this Section 5.3(c) shall be payable by Tenant upon demand.
--------------
(d) Upon reasonable notice to Tenant, Landlord may, at its sole cost and
expense unless a violation is discovered, inspect the Premises for the purpose
of determining whether there exists on the Premises any Hazardous Materials or
other condition or activity that is in violation of the requirements of this
Lease or of any Environmental Laws. The right granted to Landlord herein to
perform inspections shall not create a duty on Landlord's part to inspect the
Premises, or liability on the part of Landlord for Tenant's use, storage or
disposal of Hazardous Materials, it being understood that Tenant shall be solely
responsible for all liability in connection therewith.
(e) Tenant shall surrender the Premises to Landlord upon the expiration or
earlier termination of this Lease free of debris, waste or Hazardous Materials
placed on or about the Premises by Tenant or its agents, employees, contractors
or invitees, and in a condition which complies with all Environmental Laws.
(f) Tenant agrees to indemnify and hold harmless Landlord and Landlord's
employees, assignees, agents and invitees from and against any and all claims,
losses (including, without limitation, loss in value of the Premises or the
property in which the Premises are located), liabilities and expenses (including
reasonable attorney's fees) sustained by Landlord attributable to (i) any
Hazardous Materials placed on or about the Premises by Tenant or its agents,
employees, contractors or invitees or (ii) Tenant's breach of any provision of
this Section 5.3.
-----------
<PAGE>
(g) The provisions of this Section 5.3 shall survive the expiration or
-----------
earlier termination of this Lease.
ARTICLE VI.
Section 6.1 Leasehold Improvements.
----------------------
(a) Acceptance of Premises. Tenant has made a complete inspection of the
----------------------
Premises and, except as set forth in this Section 6.1 and Exhibit E, shall
----------- ---------
accept the Premises and the Project in their "AS IS," "WHERE IS," and "WITH ALL
FAULTS" condition on the Commencement Date without recourse to Landlord, subject
to the terms of Exhibit E attached hereto and hereby made a part hereof. Except
---------
as expressly provided in this Lease, Landlord shall have no obligation to
furnish, equip or improve the Premises or the Project. The taking of possession
of the Premises by Tenant shall be, except as set forth in this Section 6.1 and
-----------
Exhibit E, conclusive evidence against Tenant that (i) Tenant accepts the
- ---------
Premises and the Project as being suitable for its intended purpose and in a
good and satisfactory condition, (ii) acknowledges that the Premises and the
Project comply fully with Landlord's covenants and obligations under this Lease
and (iii) waives any defects in the Premises and its appurtenances and in all
other parts of the Project. Notwithstanding the foregoing, Landlord agrees
that upon the Commencement Date, the Building, its common areas, and all central
mechanical, electrical and plumbing systems will be in good working order,
condition and repair, and the Building and the Land will be in compliance with
all applicable laws in effect at the Commencement Date (subject to Tenant's
performance of the Tenant Work). In the event of a material breach of the
covenant contained in the preceding sentence, Landlord shall promptly after
receipt of written notice from Tenant setting forth the nature and extent of
such material breach, rectify same at Landlord's cost and expense, as Tenant's
sole remedy therefor. After the Commencement Date, Landlord will be responsible
for the costs of compliance with applicable laws with respect to the common
areas of the Building and the Land as well as all structural elements of the
Building, provided that such costs are not the result of Tenant's use,
occupancy, manner of use or occupancy, or the negligence of Tenant.
(b) Improvements and Alterations. Tenant shall not make or allow to be
----------------------------
made (except as otherwise provided in this Lease) any improvements, alterations
or physical additions (including fixtures) in or to the Premises or the Project,
without first obtaining the written consent of Landlord, which approval shall
not be unreasonably withheld, conditioned or delayed (except in the case of
structural changes or changes to any Building system, in which case Landlord may
withhold such approval in its sole discretion), including Landlord's written
approval of Tenant's contractor(s) and of the plans, working drawings and
specifications relating thereto (none of which shall be unreasonably withheld,
conditioned or delayed, except in the case of structural changes or changes to
any Building system, in which case Landlord may withhold such approval in its
sole discretion). Approval by Landlord of any of Tenant's drawings and plans
and specifications prepared in connection with any alterations, improvements,
modifications or additions to the Premises or the Project shall not constitute a
representation or warranty of Landlord as to the adequacy or sufficiency of such
drawings, plans and specifications, or alterations, improvements, modifications
or additions to which they relate, for any use, purpose or conditions, but such
approval shall merely be the consent of Landlord as required hereunder. Except
as otherwise expressly provided in Exhibit E attached hereto, any and all
furnishing, equipping and improving of or other alteration and addition to the
Premises shall be: (i) made at Tenant's sole cost, risk and expense, and Tenant
shall pay for Landlord's reasonable costs incurred in connection with and as a
result of such alterations or additions; (ii) performed in a good and
workmanlike manner with labor and materials of such quality as Landlord may
reasonably require; (iii) constructed in accordance with all plans and
specifications approved in writing by Landlord prior to the commencement of any
such work; (iv) prosecuted diligently and continuously to completion so as to
minimize interference with the normal business operations of other tenants in
the Building, the performance of Landlord's obligations under this Lease or any
mortgage or ground lease covering or affecting all or any part of the Building
or the Land and any work being done by contractors engaged by Landlord with
respect to or in connection with the Building; and (v) performed by contractors
approved in writing by Landlord, which approval shall not be unreasonably
withheld, conditioned or delayed. Tenant shall have no (and hereby waives all)
rights to payment or compensation for any such item.
<PAGE>
Tenant shall notify Landlord upon completion of such alterations, improvements,
modifications or additions and Landlord shall inspect same for workmanship and
compliance with the approved plans and specifications. Tenant and its
contractors shall comply with all commercially reasonable requirements Landlord
may impose on Tenant or its contractors with respect to such work (including but
not limited to, insurance and indemnity requirements), and shall deliver to
Landlord a complete copy of the "as-built" or final plans and specifications for
all alterations or physical additions so made in or to the Premises within
thirty (30) days of completing the work. Tenant shall not place safes, vaults,
filing cabinets or systems, libraries or other heavy furniture or equipment
within the Premises without Landlord's prior written consent, which approval
shall not be unreasonably withheld, conditioned or delayed.
Notwithstanding the foregoing provisions of this Section 6.1(b),
--------------
Tenant shall notify Landlord of, but shall not be obligated to obtain Landlord's
prior consent for any improvement, alteration or physical addition which costs
less than $20,000.00 and does not affect the Building's structure or the
Building's HVAC, electrical or plumbing systems.
(c) Title to Alterations. All alterations, physical additions,
--------------------
modifications or improvements in or to the Premises (including fixtures) shall,
when made, become the property of Landlord and shall be surrendered to Landlord
upon termination or expiration of this Lease or termination of Tenant's right to
occupy the Premises, whether by lapse of time or otherwise, without any payment,
reimbursement or compensation therefor; provided, however, that (i) Tenant shall
-------- -------
retain title to and shall remove from the Premises movable equipment or
furniture owned by Tenant, (ii) Tenant repairs any damage caused by a removal
pursuant to Section 6.1(c)(i), and (iii) Tenant returns the Premises to their
-----------------
condition existing immediately prior to removal (with respect to a removal of
an improvement pursuant to Section 6.1(c)(i) only). Notwithstanding any of the
-----------------
foregoing to the contrary, Landlord may require Tenant to remove all
alterations, additions or improvements to the Premises (including, but not
limited to, the network and/or telecommunications operations center) that are
other than a standard office buildout in the Reston/Herndon area in which the
Building is located, including, without limitation, any cabling or other
computer, satellite or telecommunications equipment or hardware, whether or not
such alterations, additions, or improvements are located in the Premises upon
the expiration or earlier termination of this Lease or the termination of
Tenant's right to possession of the Premises and restore the same to Building
standard condition, reasonable wear and tear excepted. If Tenant fails to
remove any movable equipment or furniture or any alterations, additions or
improvements so required hereunder to be removed, then Landlord may remove such
items, at Tenant's sole cost and expense. The rights conferred to Landlord
under this Section 6.1(c) shall be in addition to (and not in conflict with) any
--------------
other rights conferred on Landlord by this Lease, in equity or at law.
Notwithstanding the foregoing provisions of this Section 6.1(c), Tenant shall
--------------
not be required to remove any addition, modification or improvement to the
Premises unless Landlord informs Tenant in writing, either at the time Landlord
gives its consent to such addition, modification or improvement or within ten
(10) business days of Tenant's written request for an addition, modification or
improvement which does not require Landlord's consent, that it will have to
remove such addition, modification or improvement at the expiration or earlier
termination of this Lease.
(d) Personal Property Taxes; Sales, Use and Excise Taxes. Tenant shall be
----------------------------------------------------
responsible for and shall pay ad valorem taxes and other taxes, assessments or
charges levied upon or applicable to Tenant's personal property, the value of
Tenant's leasehold improvements in the Premises in excess of Building standard
(and if the taxing authorities do not separately assess Tenant's leasehold
improvements, Landlord may make a reasonable allocation of the taxes assessed on
the Project to give effect to this Section 6.l(d)) and all license fees and
--------------
other fees or charges imposed on the business conducted by Tenant on the
Premises before such taxes, assessments, charges or fees become delinquent.
Tenant shall also pay to Landlord with all Rent due and owing under this Lease
an amount equal to any sales, rental, excise and use taxes levied, imposed or
assessed by the State or any political subdivision thereof or other taxing
authority upon any amounts classified as Rent.
Section 6.2 Repairs by Landlord. All repairs, alterations or additions
-------------------
that affect the Project's structural components shall be made by Landlord or
its contractors only, and, in the case of any damage to such components or
systems caused the negligence or willful misconduct
<PAGE>
of Tenant or Tenant's agents, shall be paid for by Tenant in an amount equal to
Landlord's costs plus twelve percent (12%) as an overhead expense. Unless
otherwise provided herein, Landlord shall not be required to make any
improvements to or repairs of any kind or character to the leasehold
improvements located in the Premises during the Term, except such repairs as
Landlord deems necessary for normal maintenance operations of the Building.
Section 6.3 Repairs by Tenant. Subject to Section 6.2 of this Lease,
----------------- -----------
Tenant shall be responsible, at its own cost and expense, for all repair or
replacement of any damage to the leasehold improvements in the Premises (unless
such damage is caused by the negligence or willful misconduct of Landlord or
Landlord's employees, agents or contractors), together with any damage to the
Project or any part thereof caused by Tenant or any of Tenant's agents. Except
insofar as Landlord is expressly obligated under this Lease to maintain and
repair the Building, in addition to the maintenance and repair obligations of
Tenant otherwise expressly set forth in this Lease, Tenant is also obligated to
perform, at Tenant's own cost and expense and risk, all other maintenance and
repairs necessary or appropriate to cause the Premises to be maintained in good
condition and suitable for Tenant's intended commercial purpose reasonable wear
and tear excepted.
Section 6.4 Liens. Tenant shall keep the Premises and the Building free
-----
from any liens, including but not limited to liens filed against the Premises by
any governmental agency, authority or organization, arising out of any work
performed, materials ordered or obligations incurred by or on behalf of Tenant,
and Tenant hereby agrees to indemnify and hold Landlord, its agents, employees,
independent contractors, officers, directors, partners, and shareholders
harmless from any liability, cost or expense associated with any lien caused by
Tenant. Tenant shall cause any lien imposed as a result of Tenant's actions or
inaction to be released of record by payment or posting of the proper bond
acceptable to Landlord within ten (10) days after the earlier of imposition of
the lien or written request by Landlord. Tenant shall give Landlord written
notice of Tenant's intention to perform work on the Premises which might result
in any claim of lien, at least ten (10) days prior to the commencement of such
work to enable Landlord to post and record a notice of nonresponsibility or
other notice deemed proper before commencement of any such work. If Tenant
fails to remove any lien within the prescribed ten (10) day period, then
Landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord
for such amount, including reasonable attorneys' fees and costs, shall be deemed
Additional Rent. Tenant shall have no power to do any act or make any contract
which may create or be the foundation for any lien, mortgage or other
encumbrance upon the reversion or other estate of Landlord, or of any interest
of Landlord in the Premises.
Section 6.5 Indemnification. Tenant shall defend, indemnify and hold
---------------
harmless Landlord, its agents, employees, officers, directors, partners and
shareholders ("Landlord's Related Parties") from and against any and all
--------------------------
liabilities, judgments, demands, causes of action, claims, losses, damages,
costs and expenses, including reasonable attorneys' fees and costs, arising out
of the use, occupancy, conduct, operation, or management of the Premises by, or
the willful misconduct or negligence of, Tenant, its officers, contractors,
licensees, agents, servants, employees, guests, invitees, or visitors in or
about the Building or Premises or arising from any breach or default under this
Lease by Tenant, or arising from any accident, injury, or damage, howsoever and
by whomsoever caused, to any person or property, occurring in or about the
Building or Premises. This indemnification shall survive termination or
expiration of this Lease. This provision shall not be construed to make Tenant
responsible for loss, damage, liability or expense resulting from injuries to
third parties caused by the negligence or willful misconduct of Landlord, or
its officers, contractors, licensees, agents, employees, or invitees.
Landlord shall indemnify, defend and hold harmless Tenant as well as
Tenant's employees, agents and invitees ("Tenant's Related Parties") from and
------------------------
against all liability, claims, losses and expenses (i) resulting from the
negligent acts, omissions or willful misconduct of Landlord or Landlord's
Related Parties in connection with Landlord's or Landlord's Related Parties'
activities in, on or about the Project except to the extent that such liability
or claim is for damage to Tenant's personal property, fixtures or furniture in
the Premises and is covered by insurance that Tenant is required to obtain under
this Lease (or would have been covered had Tenant carried the insurance required
under this Lease) and (ii) Landlord's breach of this Lease. This provision
shall not be construed to make Landlord responsible for any losses, liabilities,
<PAGE>
damages or expenses resulting from injuries or damage caused by the negligence
or willful misconduct of Tenant, or its officers, contractors, licensees,
agents, employees or invitees.
ARTICLE VII.
Section 7.1 Condemnation.
------------
(a) Total Taking. In the event of a taking or damage related to the
------------
exercise of the power of eminent domain, by any agency, authority, public
utility, person, corporation or entity empowered to condemn property (including
without limitation a voluntary conveyance by Landlord in lieu of such taking or
condemnation) (individually, a "Taking") of (i) the entire Premises, (ii) so
------
much of the Premises as to prevent or substantially impair its use by Tenant
during the Term of this Lease or (iii) portions of the Building or Project
required for reasonable access to, or reasonable use of, the Premises including,
without limitation, material portions of the parking areas (individually, a
"Total Taking"), the rights of Tenant under this Lease and the leasehold estate
- -------------
of Tenant in and to the Premises shall cease and terminate as of the date upon
which title to the property taken passes to and vests in the condemnor or the
effective date of any order for possession if issued prior to the date title
vests in the condemnor ("Date of Taking").
--------------
(b) Partial Taking. In the event of a Taking of only a part of the
--------------
Premises or of a part of the Project which does not constitute a Total Taking
during the Term of this Lease (individually, a "Partial Taking"), the rights of
--------------
Tenant under this Lease and the leasehold estate of Tenant in and to the portion
of the property taken shall cease and terminate as of the Date of Taking, and an
adjustment to the Rent shall be made based upon the reduced area of the
Premises.
(c) Termination by Landlord. In the event of a Taking of the Building
-----------------------
(other than the Premises) such that, in Landlord's reasonable opinion, the
Building cannot be restored in a manner that makes its continued operation
practically or economically feasible, Landlord may terminate this Lease by
giving notice to Tenant within ninety (90) days after the date notice of such
Taking is received by Landlord.
(d) Rent Adjustment. If this Lease is terminated pursuant to this Section
--------------- -------
7.1, Landlord shall refund to Tenant any prepaid unaccrued Rent and any other
- ---
sums due and owing to Tenant (less any sums then due and owing Landlord by
Tenant), and Tenant shall pay to Landlord any remaining sums due and owing
Landlord under this Lease, each prorated as of the Date of Taking where
applicable.
(e) Repair. If this Lease is not terminated as provided for in this
------
Section 7.1, then Landlord at its expense shall promptly repair and restore the
- -----------
Building, Project and/or the Premises to approximately the same condition that
existed at the time Tenant entered into possession of the Premises, wear and
tear excepted (and Landlord shall have no obligation to repair or restore
Tenant's improvements to the Premises or Tenant's Property), except for the part
taken, so as to render the Building or Project as complete an architectural unit
as practical, but only to the extent of the condemnation award received by
Landlord for the damage.
(f) Awards and Damages. Except as expressly provided below, Landlord
------------------
reserves all rights to damages and awards paid because of any Partial or Total
Taking of the Premises or the Project. So long as it does not reduce the amount
of the award payable to Landlord, Tenant (i) shall be entitled to receive any
amount attributable to any excess of the market value of the Premises for the
remainder of the Term over the present value as of the Expiration Date of the
rent payable for the remainder of the Term and (ii) shall have the right to make
a separate claim in any condemnation proceeding for the taking of the
unamortized or undepreciated value of the improvements and alterations owned by
Tenant which Tenant may remove at the expiration or earlier termination of this
Lease, reasonable removal and relocation costs for any improvements Tenant has
the right to remove and elects to remove, relocation costs, the claim for which
Tenant may pursue by separate action independent of this Lease and any other
amount. Tenant shall have the right to negotiate directly with the condemnor
for the recovery of the portion of the award that Tenant is entitled to under
subsection (ii) above. Further, Tenant shall not make claims against Landlord
or the condemning authority for damages. If a temporary taking of part
<PAGE>
of the Premises or a portion of the Project which prevents Tenant's use or
occupancy of all or a material portion of the Premises occurs through (a) the
exercise of any government power (by legal proceedings or otherwise) by
condemnor or (b) a voluntary sale or transfer by Landlord to any condemnor,
either under threat of exercise of eminent domain by a condemnor or while legal
proceedings for condemnation are pending, Rent shall abate during the time of
such taking in proportion to the portion of the Premises taken. The entire award
relating to the temporary taking shall be and remain the property of Landlord.
Tenant irrevocably assigns and transfers to Landlord all rights to and interest
in such award and fully releases and relinquishes any claim to, right to make a
claim on, and any other interest in the award.
Section 7.2 Force Majeure. Neither Landlord nor Tenant shall be required
-------------
to perform any term, provision, agreement, condition or covenant in this Lease
(other than the obligations of Tenant to pay Rent as provided herein) so long as
such performance is delayed or prevented by "Force Majeure", which shall mean
-------------
acts of God, strikes, injunctions, lockouts, material or labor restrictions by
any governmental authority, civil riots, floods, fire, theft, public enemy,
insurrection, war, court order, requisition or order of governmental body or
authority, and any other cause not reasonably within the control of Landlord or
Tenant and which by the exercise of due diligence Landlord or Tenant is unable,
wholly or in part, to prevent or overcome. Neither Landlord nor any mortgagee
shall be liable or responsible to Tenant for any loss or damage to any property
or person occasioned by any Force Majeure, or for any damage or inconvenience
which may arise through repair or alteration of any part of the Project as a
result of any Force Majeure.
Section 7.3 Fire or Other Casualty Damage.
-----------------------------
(a) Damage. If any portion of the Premises shall be destroyed or damaged
------
by fire or any other casualty, Tenant shall immediately give notice thereof to
Landlord. Within thirty (30) days of the date of Tenant's notice, Landlord
shall provide Tenant with a reasonable written estimate, calculated in good
faith, of the number of days that it will take to restore the Building and/or
Premises (the "Restoration Estimate"). If the Restoration Estimate is greater
--------------------
than 180 days, both Landlord and Tenant shall have the right to terminate this
Lease by giving 30 days written notice to the other. If the Restoration
Estimate is less than 180 days, Landlord shall promptly commence and diligently
pursue through completion the restoration of the Building and/or Premises and
this Lease shall continue in full force and effect. If, however, the cost of
the restoration exceeds the insurance proceeds Landlord reasonably expects to
receive due to the casualty (provided, however, that the insurance required to
-------- -------
be carried by Landlord by this Lease was in effect on the date of the casualty)
or Landlord's lender demands that such insurance proceeds be paid to it,
Landlord may terminate the Lease, subject to Tenant's right to propose keeping
the Lease in effect by Tenant's paying for the restoration. If Tenant elects to
do so, Tenant shall notify Landlord within ten (10) business days of receiving
Landlord's notice of termination of the Lease, and the parties shall engage in
good faith negotiations to determine the terms of Tenant's election to pay for
the restoration; provided, however, that if the parties do not reach agreement
-------- -------
to keep this Lease in effect within ten (10) business days after Tenant delivers
such written notice to Landlord, then this Lease shall terminate as of the date
set forth in Landlord's notice of termination. Following a casualty, Tenant's
obligation to pay Rent shall be abated in proportion to the interference caused
to its use and occupation of the Premises provided that Tenant no longer
occupies or uses such affected Premises for the active conduct of its business.
Notwithstanding the terms of the foregoing paragraph, if the casualty
occurs in the last year of the Term (unless Tenant shall have renewed this Lease
as provided herein) and materially affects Tenant's use or occupation of the
Premises (i.e., more than 25% of the Premises has been damaged, or the cost to
repair is reasonably estimated by Landlord to exceed $250,000), either Landlord
or Tenant may elect to terminate this Lease by giving the other party 30 days
prior written notice. Notwithstanding the provisions of the immediately
preceding paragraph to the contrary, if Landlord elects to terminate this Lease
as a result of such casualty occurring in the last year of the Term (unless
Tenant shall have renewed this Lease as provided herein), Tenant shall not have
the right to keep this Lease in effect by paying for the restoration.
<PAGE>
(b) Repair. Landlord shall use reasonable efforts to give Tenant written
------
notice of its decisions, estimates or elections under this Section 7.3 within
-----------
thirty (30) days after any such damage or destruction. If Landlord is obligated
to repair and restore the Premises or other portion of the Project, this Lease
shall continue in full force and effect, and the repairs will be made as
promptly as is commercially reasonable (not to exceed 120 days from the date of
the Restoration Estimate, subject to the provisions of Section 7.2 of this
-----------
Lease. Should the repairs, despite Landlord's use of commercially reasonable
efforts, not be completed within that period, both Landlord and Tenant shall
each have the option of terminating this Lease by written letter of termination.
If this Lease is terminated as herein permitted, Landlord shall refund to Tenant
any prepaid Rent (unaccrued as of the date of damage or destruction) and any
other sums due and owing by Landlord to Tenant (less any sums then due and owing
Landlord by Tenant) and any remaining sums due and owing by Tenant to Landlord
shall be paid to Landlord. If Landlord has elected to repair and reconstruct
the Premises or other portion of the Project to the extent stated above, the
Term will be extended for a time equal to the period from the occurrence of such
damage to the completion of such repair and reconstruction. If Landlord elects
to rebuild the Premises or other portion of the Project, Landlord shall only be
obligated to restore or rebuild the Premises or other portion of the Project to
approximately the same condition as existed at the time Tenant entered into
possession of the Premises, wear and tear excepted and not be required to
rebuild, repair or replace any part of Tenant's Property or Tenant's leasehold
improvements. Notwithstanding anything contained in this Lease to the contrary,
if Landlord shall elect to repair and restore the Premises or other portion of
the Project pursuant to this Section 7.3, in no event shall Landlord be required
-----------
to expend under this Article VII any amount in excess of the proceeds actually
-----------
received from the insurance carried by Landlord pursuant to Section 7.4(a) of
--------------
this Lease. Landlord shall not be liable for any inconvenience or annoyance to
Tenant or injury to the business of Tenant resulting in any way from such damage
or destruction or the disregard of the repair thereof.
(c) Negligence of Tenant. Notwithstanding the provisions of Sections
-------------------- --------
7.3(a) and 7.3(b) of this Lease, if the Premises, the Project or any portion
- -----------------
thereof, are damaged by fire or other casualty resulting from the fault or
negligence of Tenant or any of Tenant's agents, the Rent under this Lease will
not be abated during the repair of that damage, and Tenant will be liable to
Landlord for the cost and expense of the repair and restoration of the Premises,
the Project or any part thereof, caused thereby to the extent that cost and
expense is not covered by insurance proceeds (including without limitation the
amount of any insurance deductible).
Section 7.4 Insurance.
---------
(a) Landlord shall maintain, or cause to be maintained, standard fire and
extended coverage insurance on the Buildings and Building standard tenant
improvements (excluding leasehold improvements by Tenant in excess of Building
standard and Tenant's Property) in amounts considered by Landlord to be
reasonable and customary. The insurance required to be obtained by Landlord may
be obtained by Landlord through blanket or master policies insuring other
entities or properties owned or controlled by Landlord.
(b) Tenant shall, at its sole cost and expense, procure and maintain during
the Term of this Lease (and during any period prior to the Commencement Date in
which Tenant is performing work in any portion of the Building) all such
policies of insurance as Landlord may require, including without limitation
commercial general liability insurance (including personal injury liability,
premises/operation, property damage, independent contractors) in amounts of not
less than a combined single limit of $5,000,000; comprehensive automobile
liability insurance; business interruption insurance for a period of at least
twelve (12) months; contractual liability insurance; property insurance with
respect to Tenant's Property, and all leasehold improvements, alterations and
additions in excess of Building standard, to be written on an "all risk" basis
for full replacement cost; worker's compensation and employer's liability
insurance; and comprehensive catastrophe liability insurance; all maintained
with companies, on forms and in such amounts as Landlord may, from time to time,
reasonably require and endorsed to include Landlord as an additional insured (on
all but the workers compensation coverage), with the premiums fully paid on or
before the due dates. The insurer must be licensed to do business in the state
in which the Building is located. Tenant, and not Landlord, will be liable for
any costs or damages in excess of the statutory limit for which Tenant would, in
the absence of worker's
<PAGE>
compensation, be liable. In the event that Tenant fails to take out or maintain
any policy required by this Section 7.4 to be maintained by Tenant, such failure
-----------
shall be a defense to any claim asserted by Tenant against Landlord by reason of
any loss sustained by Tenant that would have been covered by such policy,
notwithstanding that such loss may have been proximately caused solely or
partially by the negligence or willful misconduct of Landlord or any of
Landlord's Related Parties. If Tenant does not procure insurance as required,
Landlord may, upon advance written notice to Tenant, cause this insurance to be
issued and Tenant shall pay to Landlord the premium for such insurance within
ten (10) days of Landlord's demand, plus interest at the past due rate provided
for in Section 3.1(c) of this Lease until repaid by Tenant.
--------------
All policies of insurance required to be maintained by Tenant shall specifically
provide that Landlord shall be given at least thirty (30) days' prior written
notice of any cancellation or nonrenewal of any such policy. A certificate
evidencing each such policy shall be deposited with Landlord by Tenant on or
before the Commencement Date, and a replacement certificate evidencing each
subsequent policy shall be deposited with Landlord at least thirty (30) days
prior to the expiration of the preceding such policy. All insurance policies
obtained by Tenant shall be written as primary policies (primary over any
insurance carried by Landlord), not contributing with and not in excess of
coverage which Landlord may carry, if any.
Section 7.5 Waiver of Subrogation Rights. Each party hereto waives all
----------------------------
rights of recovery, claims, actions or causes of actions arising in any manner
in its (the "Injured Party's") favor and against the other party for loss or
damage to the Injured Party's property located within or constituting a part or
all of the Project, to the extent the loss or damage: (a) is covered by the
Injured Party's insurance; or (b) would have been covered by the insurance the
Injured Party is required to carry under this Lease, whichever is greater,
regardless of the cause or origin, including the sole, contributory, partial,
joint, comparative or concurrent negligence of the other party. This waiver
also applies to each party's directors, officers, employees, shareholders,
partners, representatives and agents. All insurance carried by either Landlord
or Tenant covering the losses and damages described in this Section 7.5 shall
provide for such waiver of rights of subrogation by the Injured Party's
insurance carrier to the maximum extent that the same is permitted under the
laws and regulations governing the writing of insurance within the state in
which the Building is located. Both parties hereto are obligated to obtain such
a waiver and provide evidence to the other party of such waiver. The waiver set
forth in this Section 7.5 shall be in addition to, and not in substitution for,
any other waivers, indemnities or exclusions of liability set forth in this
Lease.
ARTICLE VIII.
Section 8.1 Default by Tenant. The occurrence of any one or more of the
-----------------
following events shall constitute a default by Tenant under this Lease:
(a) Tenant shall fail to pay to Landlord any Rent or any other monetary
charge due from Tenant hereunder as and when due and payable;
(b) Tenant breaches or fails to comply with any term, provisions,
conditions or covenant of this Lease, other than as described in Section 8.1(a),
--------------
or with any of the Building rules and regulations now or hereafter established
to govern the operation of the Project;
(c) A Transfer (hereinafter defined) shall occur, without the prior written
approval of Landlord;
(d) The interest of Tenant under this Lease shall be levied on under
execution or other legal process;
(e) Any petition in bankruptcy or other insolvency proceedings shall be
filed by or against Tenant, or any petition shall be filed or other action taken
to declare Tenant a bankrupt or to delay, reduce or modify Tenant's debts or
obligations or to reorganize or modify Tenant's capital structure or
indebtedness or to appoint a trustee, receiver or liquidator of Tenant or of any
property of Tenant, or any proceeding or other action shall be commenced or
taken by any governmental authority for the dissolution or liquidation of Tenant
and, within thirty (30) days hereafter, Tenant fails to secure a discharge
thereof;
<PAGE>
(f) Tenant shall become insolvent, or Tenant shall make an assignment for
the benefit of creditors, or Tenant shall make a transfer in fraud of creditors,
or a receiver or trustee shall be appointed for Tenant or any of its properties;
or
(g) Tenant shall abandon the Premises or any substantial portion thereof
for any reason other than destruction or condemnation of the Premises.
Section 8.2 Landlord's Remedies. Upon occurrence of any default by Tenant
-------------------
under this Lease and (i) if the event of default described in Section 8.l(a) is
--------------
not cured within five (5) days after receipt by Tenant of written notice from
Landlord of such default stating the nature of the default; or (ii) the events
described in Sections 8.1 (b), (d), (f) and (g) are not cured within thirty (30)
---------------- --- --- ---
days after receipt by Tenant of written notice stating the nature of the default
from Landlord of such default provided that if such default cannot be cured
within thirty (30) days after receipt by Tenant of such notice, Tenant shall not
be in default hereunder so long as Tenant promptly commences curative action
within such thirty (30) day period and thereafter diligently and continuously
pursues such cure to completion within ninety (90) days after delivery of such
notice (there being no notice and cure period for events of defaults described
in Sections 8.1 (c) and (e) except as otherwise set forth herein), the Landlord
---------------- ---
shall have the option to do and perform any one or more of the following in
addition to, and not in limitation of, any other remedy or right permitted it by
law or in equity by this Lease:
(a) Continue this Lease in full force and effect, and this Lease shall
continue in full force and effect as long as Landlord does not terminate this
Lease, and Landlord shall have the right to collect Rent, Additional Rent and
other charges when due.
(b) Terminate this Lease, and Landlord may forthwith repossess the Premises
and be entitled to recover as damages a sum of money equal to the total of (i)
the cost of recovering the Premises, (ii) the cost of removing and storing
Tenant's or any other occupant's property, (iii) the unpaid Rent and any other
sums accrued hereunder at the date of termination, (iv) a sum equal to the
amount, if any, by which the present value of the total Rent and other benefits
which would have accrued to Landlord under this Lease for the remainder of the
Term, if the terms of this Lease had been fully complied with by Tenant,
discounted at five percent (5%) per annum exceeds the total fair market value of
the Premises for the balance of the Term (it being the agreement of the parties
hereto that Landlord shall receive the benefit of its bargain), (v) the cost of
any attempted reletting or reletting and the collection of rent accruing from
such reletting, (vi) the cost of any reasonable brokerage fees or commission
payable by Landlord in connection with any reletting or attempted reletting,
(vii) any other costs reasonably incurred by Landlord in connection with any
such reletting or attempted reletting, (viii) any increase in insurance premiums
caused by the vacancy of the Premises and (ix) any other sum of money or damages
owed by Tenant to Landlord at law, in equity or hereunder. In the event
Landlord shall elect to terminate this Lease, Landlord shall at once have all
the rights of reentry upon the Premises, without becoming liable for damages, or
guilty of trespass.
(c) Terminate Tenant's right of occupancy of the Premises and reenter and
repossess the Premises by entry, forcible entry or detainer suit or otherwise,
without demand or notice of any kind to Tenant and without terminating this
Lease, without acceptance of surrender of possession of the Premises, and
without becoming liable for damages or guilty of trespass, in which event
Landlord may, but shall be under no obligation to, relet the Premises or any
part thereof for the account of Tenant (nor shall Landlord be under any
obligation to relet the Premises before Landlord relets or leases any other
portion of the Project or any other property under the ownership or control of
Landlord) for a period equal to or lesser or greater than the remainder of the
Term of the Lease on whatever terms and conditions Landlord, at Landlord's sole
discretion, deems advisable. Tenant shall be liable for and shall pay to
Landlord all Rent payable by Tenant under this Lease (plus interest at the past
due rate provided in Section 3.1(c) of this Lease if in arrears) plus an amount
--------------
equal to (i) the cost of recovering possession of the Premises, (ii) the cost of
removing and storing any of Tenant's or any other occupant's property left on
the Premises or the Project after reentry, (iii) the cost of decorations,
repairs, changes, alterations and additions to the Premises and the Project,
(iv) the cost of any attempted reletting or reletting and the collection of the
rent accruing from such reletting, (v) the cost of any
<PAGE>
brokerage fees or commissions payable by Landlord in connection with any
reletting or attempted reletting, (vi) any other costs incurred by Landlord in
connection with any such reletting or attempted reletting, (vii) the cost of any
increase in insurance premiums caused by the termination of possession of the
Premises, (viii) the amount of any unamortized improvements to the Premises paid
for by Landlord, (ix) the amount of any unamortized brokerage commissions or
other costs paid by Landlord in connection with the leasing of the Premises and
(x) any other sum of money or damages owed by Tenant to Landlord at law, in
equity or hereunder, all reduced by any sums received by Landlord through any
reletting of the Premises; provided, however, that in no event shall Tenant be
-----------------
entitled to any excess of any sums obtained by reletting over and above Rent
provided in this Lease to be paid by Tenant to Landlord. For the purpose of such
reletting Landlord is authorized to decorate or to make any repairs, changes,
alterations or additions in or to the Premises that may be necessary. Landlord
may file suit to recover any sums falling due under the terms of this Section
-------
8.2(c) from time to time,and no delivery to or recovery by Landlord of any
- ------
portion due Landlord hereunder shall be any defense in any action to recover any
amount not theretofore reduced to judgment in favor of Landlord. No reletting
shall be construed as an election on the part of Landlord to terminate this
Lease unless a written notice of such intention is given to Tenant by Landlord.
Notwithstanding any such reletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such previous default and/or
exercise its rights under Section 8.3(b) of this Lease.
--------------
(d) Enter upon the Premises and do whatever Tenant is obligated to do under
the terms of this Lease; and Tenant agrees to reimburse Landlord on demand for
any expenses which Landlord may incur in effecting compliance with Tenant's
obligations under this Lease twelve percent (12%) of such cost to cover overhead
plus interest at the past due rate provided in this Lease, and Tenant further
agrees that Landlord shall not be liable for any damages resulting to Tenant
from such action. No action taken by Landlord under this Section 8.2(d) shall
--------------
relieve Tenant from any of its obligations under this Lease or from any
consequences or liabilities arising from the failure to perform such
obligations.
(e) Without waiving such default, apply all or any part of any unapplied
Prepaid Rent to cure the default or to any damages suffered as a result of the
default to the extent of the amount of damages suffered. Tenant shall reimburse
Landlord for the amount of such depletion of any Prepaid Rent on demand.
(f) Change all door locks and other security devices of Tenant at the
Premises and/or the Project, and Landlord shall not be required to provide the
new key to the Tenant except during Tenant's regular business hours, and only
upon the condition that Tenant has cured any and all defaults hereunder and in
the case where Tenant owes Rent to the Landlord, reimbursed Landlord for all
Rent and other sums due Landlord hereunder. Landlord, on terms and conditions
satisfactory to Landlord in its sole discretion, may upon request from Tenant's
employees, enter the Premises for the purpose of retrieving therefrom personal
property of such employees, provided, Landlord shall have no obligation to do
so.
(g) Exercise any and all other remedies available to Landlord in this
Lease, at law or in equity.
Section 8.3 Waiver of Duty to Relet or Mitigate. Notwithstanding anything
-----------------------------------
contained herein to the contrary, to the full extent permitted under applicable
law, Tenant and Landlord agree that Landlord shall have no duty to relet the
Premises or otherwise mitigate damages under this Lease and Tenant hereby
releases Landlord from any and all duty to relet the Premises or otherwise
mitigate damages. Tenant agrees that Landlord shall not be liable, nor shall
Tenant's obligations hereunder be diminished, because of Landlord's failure to
relet the Premises or collect rent due with respect to such reletting.
Furthermore, Tenant hereby waives any and all rights to plead such failure of
Landlord to mitigate damages as affirmative defense in any proceeding based on
any Default by Tenant under this Lease. In the event, and only in the event,
that (despite such waiver and contrary to the intent of the parties hereunder)
applicable law requires Landlord to attempt to mitigate damages, Landlord and
Tenant agree that any such duty to mitigate shall be satisfied and Landlord
shall be deemed to have used objectively reasonable efforts to fill the Premises
by doing the following: (a) posting a "For Lease" sign on the Premises; (b)
advising Landlord's leasing agent of the availability of the Premises; and (c)
<PAGE>
advising at least one outside commercial brokerage entity of the availability of
the Premises; provided, however, that Landlord shall not be obligated to relet
-----------------
the Premises before leasing any other unoccupied portions of the Project and any
other property under the ownership or control of Landlord. If Landlord receives
any payments from the reletting of the Premises and is required to mitigate
damages (despite the intent of the parties hereunder), any such payment shall
first be applied to any costs or expenses incurred by Landlord as a result of
Tenant's Default under this Lease.
Section 8.4 Reentry. If Tenant fails to allow Landlord to reenter and
-------
repossess the Premises, Landlord shall have full and free license to enter into
and upon the Premises with or without process of law for the purpose of
repossessing the Premises, expelling or removing Tenant and any others who may
be occupying or otherwise within the Premises, removing any and all property
therefrom and changing all door locks of the Premises. Landlord may take these
actions without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer, without accepting surrender of possession of the
Premises by Tenant, and without incurring any liability for any damage resulting
therefrom, including without limitation any liability arising under applicable
state law and without relinquishing Landlord's right to Rent or any other right
given to Landlord hereunder or by operation of law or in equity, Tenant hereby
waiving any right to claim damage for such reentry and expulsion, including
without limitation any rights granted to Tenant by applicable state law.
Section 8.5 Rights of Landlord in Bankruptcy. Nothing contained in this
--------------------------------
Lease shall limit or prejudice the right of Landlord to prove for and obtain in
proceedings for bankruptcy or insolvency, by reason of the expiration or
termination of this Lease or the termination of Tenant's right of occupancy, an
amount equal to the maximum allowed by any statute or rule of law in effect at
the time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater, equal to, or less than the amount
of the loss or damages referred to in this Section 8.5. In the event that under
-----------
applicable law, the trustee in bankruptcy or Tenant has the right to affirm this
Lease and continue to perform the obligations of Tenant hereunder, such trustee
or Tenant shall, in such time period as may be permitted by the bankruptcy court
having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the
date of the affirmance of this Lease and provide to Landlord such adequate
assurances as may be necessary to ensure Landlord of the continued performance
of Tenant's obligations under this Lease.
Section 8.6 Waiver of Certain Rights. Tenant hereby expressly waives any
------------------------
and all rights Tenant may have under applicable state law to its right to
recover possession of the Premises or terminate this Lease. Tenant hereby
waives any and all liens (whether statutory, contractual or constitutional) it
may have or acquire as a result of a breach by Landlord under this Lease.
Tenant also waives and releases any statutory lien and offset rights it may have
against Landlord, including without limitation the rights conferred upon
applicable state law.
Section 8.7 NonWaiver. Failure on the part of Landlord to complain of
---------
any action or nonaction on the part of Tenant, no matter how long the same may
continue, shall not be deemed to be a waiver by Landlord of any of its rights
under this Lease. Further, it is covenanted and agreed that no waiver at any
time of any of the provisions hereof by Landlord shall be construed as a waiver
of any of the other provisions hereof and that a waiver at any time of any of
the provisions hereof shall not be construed as a waiver at any subsequent time
of the same provisions. The consent or approval by Landlord to or of any action
by Tenant requiring Landlord's consent or approval shall not be deemed to waive
or render unnecessary Landlord's consent or approval to or of any subsequent
similar act by Tenant.
Section 8.8 Holding Over. In the event Tenant remains in possession of
------------
the Premises after the expiration or termination of this Lease without the
execution of a new lease, then Tenant, at Landlord's option, shall be deemed to
be occupying the Premises as a tenant at will at a base rental equal to one
hundred fifty percent (150%) of the then applicable Base Rent, and shall
otherwise remain subject to all the conditions, provisions and obligations of
this Lease insofar as the same are applicable to a tenancy at will, including
without limitation the payment of all other Rent; provided, however, nothing
-----------------
contained herein shall require Landlord to give Tenant more than thirty (30)
days prior written consent to terminate Tenant's tenancy-at-will. No holding
over
<PAGE>
by Tenant after the expiration or termination of this Lease shall be construed
to extend or renew the Term or in any other manner be construed as permission by
Landlord to hold over. Tenant shall indemnify Landlord (y) against all claims
for damages by any other tenant to whom Landlord may have leased all or any part
of the Premises, effective upon the date that is forty-five (45) days after the
date of termination or expiration of this Lease and (z) for all other losses,
costs and expenses, including reasonable attorneys' fees, incurred by reason of
such holding over after such 45th day.
Section 8.9 Abandonment of Personal Property. Any personal property left
--------------------------------
in the Premises or any personal property of Tenant left about the Project at the
expiration or termination of this Lease, the termination of Tenant's right to
occupy the Premises or the abandonment, desertion or vacating of the Premises by
Tenant, shall be deemed abandoned by Tenant and may, at the option of Landlord,
be immediately removed from the Premises or such other space by Landlord and
stored by Landlord at the full risk, cost and expense of Tenant. Landlord shall
in no event be responsible for the value, preservation or safekeeping thereof.
In the event Tenant does not reclaim any such personal property and pay all
costs for any storage and moving thereof within thirty (30) days after the
expiration or termination of this Lease, the termination of Tenant's right to
occupy the Premises or the abandonment, desertion or vacating of the Premises by
Tenant, Landlord may dispose of such personal property in any way that it deems
proper. If Landlord shall sell any such personal property, it shall be entitled
to retain from the proceeds the amount of any Rent or other expenses due
Landlord, together with the cost of storage and moving and the expense of the
sale. Notwithstanding anything contained herein to the contrary, in addition to
the rights provided herein with respect to any such property, Landlord shall
have the option of exercising any of its other rights or remedies provided in
the Lease or exercising any rights or remedies available to Landlord at law or
in equity.
ARTICLE IX.
Section 9.1 Transfers. Tenant shall not, by operation of law or
---------
otherwise, (a) assign, transfer, mortgage, pledge, hypothecate or otherwise
encumber this Lease, the Premises or any part of or interest in this Lease or
the Premises, (b) grant any concession or license within the Premises, (c)
sublet all or any part of the Premises or any right or privilege appurtenant to
the Premises, or (d) permit any other party to occupy or use all or any part of
the Premises (collectively, a "Transfer"), without the prior written consent of
--------
Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed. This prohibition against a Transfer includes, without limitation, (i)
any subletting or assignment which would otherwise occur by operation of law,
merger, consolidation, reorganization, transfer or other change of Tenant's
corporate or proprietary structure; (ii) an assignment or subletting to or by a
receiver or trustee in any federal or state bankruptcy, insolvency, or other
proceedings; (iii) the sale, assignment or transfer of all or substantially all
of the assets of Tenant, with or without specific assignment of Lease; (iv) the
change in control in a partnership; or (v) conversion of Tenant to a limited
liability entity. If Tenant converts to a limited liability entity without
obtaining the prior written consent of Landlord: (i) the conversion shall be
null and void for purposes of the Lease, including the determination of all
obligations and liabilities of Tenant and its partners to Landlord; (ii) all
partners of Tenant immediately prior to its conversion to a limited liability
shall be fully liable, jointly and severally, for obligations of Tenant accruing
under this Lease pre-conversion and post-conversion, and all members and other
equity holders in Tenant post-conversion shall be fully liable for all
obligations and liabilities of Tenant accruing under the Lease after the date
such members and other equity holders are admitted to the limited liability
entity as if such person or entity had become a general partner in a
partnership; and (iii) Landlord shall have the option of declaring Tenant in
default under this Lease. If Tenant requests Landlord's consent to any
Transfer, then Tenant shall provide Landlord with a written description of all
terms and conditions of the proposed Transfer, copies of the proposed
documentation, and the following information about the proposed transferee: name
and address; reasonably satisfactory information about its business and business
history; its proposed use of the Premises; a copy of the proposed sublease or
assignment agreement; banking, financial and other credit information; and
general references sufficient to enable Landlord to determine the proposed
transferee's creditworthiness and character. In addition to its right to
approve or reject the proposed Transfer, Landlord shall have the option, upon
written notice to Tenant within thirty (30) days after the receipt of such
information concerning the proposed transferee, to (x) sublease the applicable
space on the terms
<PAGE>
and conditions of this Lease or (y) in the case of a proposed assignment or
proposed subletting for all or substantially all of the Term, to terminate this
Lease as to the space so affected as of the date of the proposed assignment or
such subletting, in which event the provisions of this Lease governing such
space shall terminate (except for any provisions that pursuant to this Lease
expressly survive such termination); provided, however, that
-------- -------
Landlord's rights set forth in this sentence shall not apply if (A) the proposed
subletting is for less than fifty percent (50%) of the Premises and (B) the
proposed term of such subletting is for less than a four (4) year term
(including any renewal terms). Landlord's consent to a Transfer shall not
release Tenant from performing its obligations under this Lease, but rather
Tenant's transferee shall assume all of Tenant's obligations under this Lease in
a writing satisfactory to Landlord, and Tenant and its transferee shall be
jointly and severally liable therefor. Landlord's consent to any Transfer shall
not waive Landlord's rights as to any subsequent Transfer. While the Premises
or any part thereof are subject to a Transfer, Landlord may collect directly
from such transferee all rents or other sums relating to the Premises becoming
due to Tenant or Landlord and apply such rents and other sums against the Rent
and any other sums payable hereunder. If the aggregate rental, bonus or other
consideration paid by a transferee for any such space exceeds the sum of (y)
Tenant's Rent to be paid to Landlord for such space during such period and (z)
Tenant's costs and expenses actually incurred in connection with such Transfer,
including reasonable brokerage fees, reasonable costs of finishing or renovating
the space affected and reasonable cash rental concessions, which costs and
expenses are to be amortized over the term of the Transfer, then fifty percent
(50%) of such excess shall be paid to Landlord within thirty (30) days after
such amount is earned by Tenant. Such overage amounts in the case of a sublease
shall be calculated and adjusted (if necessary) on a Lease Year (or partial
Lease Year) basis, and there shall be no cumulative adjustment for the Term.
Landlord shall have the right to audit Tenant's books and records relating to
the Transfer. Tenant authorizes its transferees to make payments of rent and
any other sums due and payable, directly to Landlord upon receipt of notice from
Landlord to do so. Any attempted Transfer by Tenant in violation of the terms
and covenants of this Article IX shall be void and shall constitute a default by
----------
Tenant under this Lease. In the event that Tenant requests that Landlord
consider a sublease or assignment hereunder, Tenant shall pay Landlord's
reasonable attorneys' fees and costs incurred by Landlord in connection with the
consideration of such request or such sublease or assignment.
Notwithstanding the prohibition against assignment and subleasing contained
in the immediately preceding paragraph, Tenant may, without the prior written
consent of Landlord, but only after giving Landlord at least thirty (30) days
prior written notice (which notice shall include the identity of the Affiliate
(hereinafter defined) and the relationship of the Affiliate to Tenant), sublet
the Premises or any part thereof to an affiliate or assign this Lease to an
Affiliate or permit occupancy of any portion of the Premises by an Affiliate
(each a "Permitted Transfer"). If Tenant is a partnership, the term "Affiliate"
shall mean (i) any corporation which, directly or indirectly, controls or is
controlled by or is under common control with the general partner of Tenant,
(ii) any corporation not less than fifty percent (50%) of whose outstanding
stock shall, at the time be owned directly or indirectly by Tenant's general
partner or (iii) any partnership or joint venture in which Tenant or the general
partner of Tenant is a general partner or joint venturer (with joint and several
liability for all of the partnership's or venture's obligations). If Tenant is
a corporation or individual, the term "Affiliate" shall mean (i) any corporation
which, directly or indirectly, controls or is controlled by or is under common
control with Tenant or (ii) any corporation not less than fifty percent (50%) of
whose outstanding stock shall, at the time, be owned directly or indirectly by
Tenant or Tenant's parent corporation. An "Affiliate" shall also include any
entity resulting from the merger, consolidation or other reorganization with
Tenant, whether or not Tenant is the surviving entity or any person or legal
entity which acquires all or substantially all of the assets or stock of Tenant.
Before such transfer shall be effective, (y) in the event of an assignment of
this Lease, said Affiliate shall assume, in full, the obligations of Tenant
under this Lease and (z) the use of the Premises by the Affiliate shall be as
set forth in Section 2.3. For purposes of this paragraph, a public or private
------------
offering of Tenant stock is a Permitted Transfer and the term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management, affairs and policies of anyone, whether through the
ownership of voting securities, by contract or otherwise. The bonus rental
provisions of this Section 9.1 shall not apply to a transfer by Tenant to a
-----------
Permitted Transfer. A Permitted Transfer shall not constitute a Transfer for
purposes of this Lease.
<PAGE>
Section 9.2 Assignment by Landlord. Landlord shall have the right at any
----------------------
time to sell, transfer or assign, in whole or in part, by operation of law or
otherwise, its rights, benefits, privileges, duties, obligations or interests in
this Lease or in the Premises, the Building, the Land, the Project and all other
property referred to herein, without the prior consent of Tenant, and such sale,
transfer or assignment shall be binding on Tenant provided that (i) Tenant is
notified of the transfer and (ii) except as provided in any SNDA, any such
transferee shall assume, in writing, all non-accrued obligations of Landlord
under this Lease. After such sale, transfer or assignment, Tenant shall attorn
to such purchaser, transferee or assignee, and Landlord shall be released from
all liability and obligations under this Lease accruing after the effective date
of such sale, transfer or assignment.
Section 9.3 Limitation of Landlord's Liability. Any provisions of this
----------------------------------
Lease to the contrary notwithstanding, Tenant hereby agrees that no personal,
partnership or corporate liability of any kind or character (including, without
limitation, the payment of any judgment) whatsoever now attaches or at any time
hereafter under any condition shall attach to Landlord or any of Landlord's
Related Parties or any mortgagee for payment of any amounts payable under this
Lease or for the performance of any obligation under this Lease. The exclusive
remedies of Tenant for the failure of Landlord to perform any of its obligations
under this Lease shall be to proceed against the interest of Landlord in and to
the Project and/or the proceeds of insurance or condemnation. The provision
contained in the foregoing sentence is not intended to, and shall not, limit any
right that Tenant might otherwise have to obtain injunctive relief against
Landlord or Landlord's successors in interest or any suit or action in
connection with enforcement or collection of amounts which may become owing or
payable under or on account of insurance maintained by Landlord. In no event
shall Landlord be liable to Tenant, or any interest of Landlord in the Project
be subject to execution by Tenant, for any indirect, special, consequential or
punitive damages.
ARTICLE X.
Section 10.1 Subordination. This Lease shall be subject and subordinated
-------------
at all times to (a) all ground or underlying leases which may hereinafter be
executed affecting the Project, and (b) the lien or liens of all mortgages and
deeds of trust in any amount or amounts whatsoever hereafter placed on the
Project or Landlord's interest or estate therein or on or against such ground or
underlying leases and to all renewals, modifications, consolidations,
replacements and extensions thereof and to each advance made or hereafter to be
made thereunder; provided, however, that Tenant obtains from the holder of such
mortgage or deed of trust a Tenant's non-disturbance agreement in such party's
standard form (the "SNDA"). Tenant shall execute and deliver upon demand any
----
instruments, releases or other commercially reasonable documents requested by
any lessor or mortgagee for the purpose of subjecting and subordinating this
Lease to such ground leases, mortgages or deeds of trust, subject to Tenant's
receipt of the SNDA. Tenant shall, subject to its receipt of the SNDA, attorn
to any party succeeding to Landlord's interest in the Premises, whether by
purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination
of lease or otherwise, only upon such party's request and at such party's sole
discretion but not otherwise. Notwithstanding such attornment, Tenant agrees
that any such successor in interest shall not be (a) liable for any act or
omission of, or subject to any rights of setoff, claims or defenses otherwise
assertable by Tenant against, any prior owner of the Project (including without
limitation, Landlord), (b) bound by any rents paid more than one (1) month in
advance to any prior owner, and (d) if such successor is a mortgagee or a
ground lessor whose address has been previously given to Tenant, bound by any
modification, amendment, extension or cancellation of the Lease not consented to
in writing by such mortgagee or ground lessor. Subject to Tenant's receipt of
the SNDA, Tenant shall execute all such commercially reasonable agreements
confirming such attornment as such party may reasonably request. Tenant shall
not seek to enforce any remedy it may have for any default on the part of
Landlord without first giving written notice by certified mail, return receipt
requested, specifying the default in reasonable detail, to any mortgagee or
lessor under a lien instrument or lease covering the Premises whose address has
been given to Tenant, and affording such mortgagee or lessor a reasonable
opportunity to perform Landlord's obligations hereunder. Notwithstanding the
generality of the foregoing, any mortgagee or ground lessor may at any time
subordinate any such deeds of trust, mortgages, other security instruments or
ground leases to this Lease on such terms and conditions as such mortgagee or
ground lessor may deem appropriate. Tenant shall execute any such
<PAGE>
subordination or attornment documents as described herein within ten (10) days
after demand therefor, subject to Tenant's receipt of the SNDA. Landlord
represents and warrants that, as of the date of this Lease, there is no
mortgagee or holder of a deed of trust on the Project.
Section 10.2 Estoppel Certificate or Three-Party Agreement. Tenant agrees
---------------------------------------------
within ten (10) days following written request therefor by Landlord (a) to
execute, acknowledge and deliver to Landlord and any other persons specified by
Landlord, a certificate or three-party agreement among Landlord, Tenant and/or
any third party dealing with Landlord, certifying (i) that this Lease is
unmodified and in full force and effect, or, if modified, stating the nature of
such modification (ii) the date to which the Rent and other charges are paid in
advance, if any, (iii) that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or so specifying such defaults, if
any, as are claimed and/or (iv) any other matters as such third party may
reasonably require in connection with the business dealings of Landlord and/or
such third party and (b) to deliver to Landlord current financial statements of
Tenant, including a balance sheet and a profit and loss statement for at least
two (2) years, all prepared in accordance with generally accepted accounting
principles consistently applied. Tenant's failure to deliver such certificate
or three-party agreement within such ten (10) day period shall be conclusive
upon Tenant (x) that this Lease is in full force and effect without modification
except as may be represented by Landlord, (y) that to Tenant's knowledge there
are no uncured defaults in Landlord's performance, and (z) that no Rent has been
paid in advance except as set forth in this Lease.
Section 10.3 Notices. Any Notice, demand, request, consent, approval,
-------
disapproval or certificate ("Notice") required or desired to be given under this
------
Lease shall be in writing and given by certified mail, return receipt requested,
by personal delivery or by Federal Express or a similar nationwide over-night
delivery service providing a receipt for delivery. Notices may not be given by
facsimile. Notwithstanding anything to the contrary herein, whenever any
provision of the Lease provided the Tenant with a grace period in which to
perform an obligation of Tenant hereunder, such time period shall not commence
until Tenant has actually received (or has refused receipt of) a copy of such
written notice by one of the methods described in this Section 10.3. Any
------------
written notice whose receipt is refused by either Landlord or Tenant shall be
deemed given on the date that such written notice is refused. All notices,
demands, requests, consents, approvals, disapprovals, or certificates shall be
addressed as follows:
To Landlord:
------------
DULLES TECH, INC.
C/o West World Management, Inc.
4 Manhattanville Road, 2nd Floor
Purchase, NY 10577
To Tenant (if prior to Commencement Date):
------------------------------------------
Network Access Solutions Corporation
100 Carpenter Drive
Suite 206
Sterling, VA 20164
Attn: Manager, Facilities
To Tenant (if after Commencement Date):
---------------------------------------
Network Access Solutions Corporation
at the Premises
Attn: Manager, Facilities
With a copy to:
---------------
Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
7929 Westpark Drive, Suite 400
McLean, Virginia 22102
Attention: John G. Lavoie, Esquire
<PAGE>
Either party may change its address by giving notice of same in accordance with
the methods described in this paragraph reasonably in advance.
ARTICLE XI.
Section 11.1 Right to Relocate Tenant. [Intentionally Omitted.]
------------------------
Section 11.2 Rights and Remedies Cumulative. The rights and remedies of
------------------------------
Landlord under this Lease shall be nonexclusive and each right or remedy shall
be in addition to and cumulative of all other rights and remedies available to
Landlord under this Lease or at law or in equity. Pursuit of any right or
remedy shall not preclude pursuit of any other rights or remedies provided in
this Lease or at law or in equity, nor shall pursuit of any right or remedy
constitute a forfeiture or waiver of any Rent due to Landlord or of any damages
accruing to Landlord by reason of the violation of any of the terms of this
Lease.
Section 11.3 Legal Interpretation. This Lease and the rights and
--------------------
obligations of the parties hereto shall be interpreted, construed and enforced
in accordance with the laws of the state in which the Building is located and
the United States. The determination that one or more provisions of this Lease
is invalid, void, illegal or unenforceable shall not affect or invalidate any
other provision of this Lease, and this Lease shall be construed as if such
invalid, illegal or unenforceable provision had never been contained in this
Lease, and, so far as is reasonable and possible, effect shall be given to the
intent manifested by the portion held invalid or inoperative. All obligations
of either party hereunder not fully performed as of the expiration or
termination of the Term of this Lease shall survive the expiration or
termination of the Term of this Lease and shall be fully enforceable in
accordance with those provisions pertaining thereto. Article and section titles
and captions appearing in this Lease are for convenient reference only and shall
not be used to interpret or limit the meaning of any provision of this Lease.
No custom or practice which may evolve between the parties in the administration
of the terms of this Lease shall waive or diminish the right of Landlord to
insist upon the performance by Tenant in strict accordance with the terms of
this Lease. This Lease is for the sole benefit of Landlord and Tenant, and,
without the express written consent thereto, no third party shall be deemed a
third party beneficiary hereof. Tenant agrees that this Lease supersedes and
cancels any and all previous statements, negotiations, arrangements, brochures,
agreements and understandings, if any, between Landlord and Tenant with respect
to the subject matter of this Lease or the Premises and that this Lease,
including written extrinsic documents referred to herein, is the entire
agreement of the parties, and that there are no representations, understandings,
stipulations, agreements, warranties or promises (express or implied, oral or
written) between Landlord and Tenant with respect to the subject matter of this
Lease or the Premises. It is likewise agreed that this Lease may not be
altered, amended, changed or extended except by an instrument in writing signed
by both Landlord and Tenant. The terms and provisions of this Lease shall not
be construed against or in favor of a party hereto merely because such party is
the "Landlord" or the "Tenant" hereunder or because such party or its counsel is
the draftsman of this Lease. All references to days in this Lease and any
Exhibits or Addenda hereto mean calendar days, not working or business days,
unless otherwise stated.
Section 11.4 Authority. Each party warrants and represents to the other
---------
that (a) it is a duly organized and validly existing legal entity, in good
standing and qualified to do business in the state in which the Building is
located, with no proceedings pending or contemplated for its dissolution or
reorganization, voluntary or involuntary, (b) it has full right, power and
authority to execute, deliver and perform this Lease, (c) the person executing
this Lease on its behalf is authorized to do so, and (d) upon execution of this
Lease by such party, this Lease shall constitute a valid and legally binding
obligation of such party.
Section 11.5 No Brokers. Landlord and Tenant warrant and represent to the
----------
other that it has not dealt with any real estate broker and/or salesman (other
than Trammell Crow Real Estate Services, Inc. who represented Landlord and The
Irving Group, who represented Tenant) in connection with the negotiation or
execution of this Lease and no such broker or salesman has been involved in
<PAGE>
connection with this Lease, and each party agrees to defend, indemnify and hold
harmless the other party from and against any and all costs, expenses,
attorneys' fees or liability for any compensation, commission and charges
claimed by any real estate broker and/or salesman (other than the aforesaid
brokers) due to acts of such party or such party's representatives. Landlord
shall pay the brokers identified above pursuant to separate agreements.
Section 11.6 Consents by Landlord. In all circumstances under this Lease
--------------------
where the prior consent or permission of Landlord is required before Tenant is
authorized to take any particular type of action, such consent must be in
writing and the matter of whether to grant such consent or permission shall,
except as otherwise expressly provided herein, be within the sole and exclusive
judgment and discretion of Landlord, and it shall not constitute any nature of
breach by Landlord under this Lease or any defense to the performance of any
covenant, duty or obligation of Tenant under this Lease that Landlord delayed or
withheld the granting of such consent or permission, whether or not the delay or
withholding of such consent or permission was prudent or reasonable or based
upon good cause.
With respect to any provision of this Lease which provides that Landlord
shall not unreasonably withhold or unreasonably delay any consent or any
approval, Tenant, in no event, shall be entitled to make nor shall Tenant make
any claim for, and Tenant hereby waives any claim for money damages; nor shall
Tenant claim any money damages by way of setoff, counterclaim or defense, based
upon any claim or assertion by Tenant that Landlord has unreasonably withheld or
unreasonably delayed any consent or approval; but, unless Landlord shall have
acted in bad faith, Tenant's sole remedy shall be an action or proceeding to
enforce any such provision, or for specific performance, injunction or
declaratory judgment.
Section 11.7 Joint and Several Liability. If there is more than one
---------------------------
Tenant, then the obligations hereunder imposed upon Tenant shall be joint and
several.
Section 11.8 Independent Covenants. The obligation of Tenant to pay Rent
---------------------
and other monetary obligations provided to be paid by Tenant under this Lease
and the obligation of Tenant to perform Tenant's other covenants and duties
under this Lease constitute independent, unconditional obligations of Tenant to
be performed at all times provided for under this Lease, save and except only
when an abatement thereof or reduction therein is expressly provided for in this
Lease and not otherwise, and Tenant acknowledges and agrees that in no event
shall such obligations, covenants and duties of Tenant under this Lease be
dependent upon the condition of the Premises or the Project, or the performance
by Landlord of its obligations hereunder.
Section 11.9 Attorneys' Fees and Other Expenses. In the event either
----------------------------------
party hereto defaults in the faithful performance or observance of any of the
terms, covenants, provisions, agreements or conditions contained in this Lease,
the party in default shall be liable for and shall pay to the nondefaulting
party all reasonable expenses incurred by such party in enforcing any of its
remedies for any such default, and if the nondefaulting party places the
enforcement of all or any part of this Lease in the hands of an attorney, the
party in default agrees to pay the nondefaulting party's reasonable attorneys'
fees in connection therewith.
Section 11.10 Recording. Neither Landlord nor Tenant shall record this
---------
Lease, but a short- form memorandum hereof may be recorded at the request of
Landlord.
Section 11.11 Disclaimer; Waiver of Jury Trial. LANDLORD AND TENANT
--------------------------------
EXPRESSLY ACKNOWLEDGE AND AGREE, AS A MATERIAL PART OF THE CONSIDERATION FOR
LANDLORD'S ENTERING INTO THIS LEASE WITH TENANT, THAT, EXCEPT AS OTHERWISE SET
FORTH IN THIS LEASE, (a) LANDLORD HAS MADE NO WARRANTIES TO TENANT AS TO THE
USE OR CONDITION OF THE PREMISES OR THE PROJECT, EITHER EXPRESS OR IMPLIED, AND
(b) LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE
PREMISES OR THE PROJECT ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE OR
ANY OTHER WARRANTY (EXPRESS OR IMPLIED) REGARDING THE PREMISES OR THE PROJECT.
EXCEPT AS EXPRESSLY SET FORTH IN THIS LEASE, LANDLORD AND TENANT EXPRESSLY AGREE
THAT THERE ARE NO, AND SHALL NOT BE ANY, IMPLIED WARRANTIES OF MERCHANTABILITY,
<PAGE>
HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER KIND ARISING OUT OF
THIS LEASE, ALL SUCH OTHER EXPRESS OR IMPLIED WARRANTIES IN CONNECTION HEREWITH
BEING EXPRESSLY DISCLAIMED AND WAIVED.
LANDLORD AND TENANT WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS LEASE. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY TENANT AND TENANT
ACKNOWLEDGES THAT NEITHER LANDLORD NOR ANY PERSON ACTING ON BEHALF OF LANDLORD
HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR
IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. TENANT FURTHER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE
SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO
DISCUSS THIS WAIVER WITH COUNSEL. TENANT FURTHER ACKNOWLEDGES THAT IT HAS READ
AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION AND AS
EVIDENCE OF SAME HAS EXECUTED THIS LEASE.
Section 11.12 Access to Roof. At no additional charge by Landlord during
--------------
the Term and any renewal thereof, Tenant shall have the sole and exclusive
access to the Building's (i) roof to install, repair and maintain upon the
Building's roof telecommunication devices, such as satellite dishes and antennae
or other similar devices, for the purpose of receiving and sending radio,
television, computer, telephone or other communications signals for its own use
and (ii) risers and conduits in order to connect such telecommunication devices
to the Premises as well as to outside cable, fiber and/or telephone lines,
including easements or rights of way, as reasonably required. Tenant shall
advise Landlord at least ten (10) days in advance of the planned installation of
such devices which such installation shall be subject to Landlord's prior
approval, which approval shall not be unreasonably withheld, conditioned or
delayed. Tenant will be responsible for complying and/or obtaining all required
association or governmental approvals or permits with respect to the
installation of the telecommunication devices set forth herein (including
screening of such telecommunication devices if so required). To the extent that
any telecommunication devices installed by Tenant interferes with other
telecommunication devices installed by Landlord or any of Landlord's tenants at
13600 Dulles Technology Drive, Landlord may require that Tenant relocate, at
Landlord's sole cost and expense, such telecommunication device to another area
of the Building's roof such that it does not interfere with such other
telecommunication device. Tenant shall remove the telecommunication devices and
any connecting equipment from the Building upon the expiration or earlier
termination of this Lease. Tenant shall be solely responsible and shall pay for
any damage to the Building arising out of or resulting from the installation,
operation, maintenance and/or removal of the antennae.
Section 11.13 Parking. Tenant's occupancy of the Premises shall include,
-------
at no additional cost, the use of five hundred thirty-one (531) parking spaces
(at a ratio of 4.7/1000 rentable square feet) which shall be used in common with
other tenants, invitees and visitors of the Building, as shown on Exhibit I
---------
attached hereto. Tenant shall have access to up to fifteen (15) visitor's
spaces reserved for Tenant's use in locations proximate to the Building mutually
acceptable to Landlord and Tenant. Tenant agrees not to overburden the
parking facilities, to cooperate with Landlord and other tenants in use of the
parking facilities and that neither it nor shall any of its employees, agents or
invitees park any vehicles overnight in the parking facilities. Landlord
reserves the right in its absolute discretion to determine whether the parking
facilities are becoming overburdened and to allocate and reassign parking spaces
among Tenant and other tenants, and to reconfigure the parking area and modify
the existing ingress to and egress from the parking area as Landlord shall deem
reasonably appropriate provided that Tenant continues to have use of and access
to the [five hundred thirty-one (531)] parking spaces set forth above.
Section 11.14 No Accord or Satisfaction. No payment by Tenant or receipt
-------------------------
by Landlord of a lesser amount than the Rent and other sums due hereunder shall
be deemed to be other than on account of the earliest Rent or other sums due,
<PAGE>
nor shall any endorsement or statement on any check or accompanying any check or
payment be deemed an accord and satisfaction; and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of such
Rent or other sum and to pursue any other remedy provided in this Lease.
Section 11.15 Acceptance. The submission of this Lease by Landlord does
----------
not constitute an offer by Landlord or other option for, or restriction of, the
Premises, and this Lease shall only become effective and binding upon Landlord,
upon full execution hereof by Landlord and delivery of a signed copy to Tenant.
Section 11.16 Waiver of Counterclaim. Tenant hereby waives the right to
----------------------
interpose any counterclaim of whatever description in any summary proceeding.
Section 11.17 Time Is of the Essence. Time is of the essence of this
----------------------
Lease. Unless specifically provided otherwise, all references to terms of days
or months shall be construed as references to calendar days or calendar months,
respectively.
Section 11.18 Counterparts. This Lease may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but such counterparts shall together constitute one and the same instrument.
<PAGE>
IN TESTIMONY WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.
LANDLORD:
- ---------
DULLES TECH, INC.,
a Delaware corporation
By: _____________________________
Charles Schouten, President
Tax Identification No.:__________________________________
[Remainder of Page Intentionally Left Blank.]
<PAGE>
TENANT:
------
NETWORK ACCESS SOLUTIONS CORPORATION, a
Delaware corporation
By: _________________________________
Name: _______________________________
Title: ______________________________
Tax Identification No.:____________________
[Remainder of Page Intentionally Left Blank.]
NOTE: Certain exhibits have been omitted from the filing. The Registrant
undertakes to supply these exhibits to the Securities and Exchange Commission
supplementally upon request.
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF LAND
-------------------------
<PAGE>
EXHIBIT B
FLOOR PLAN OF PREMISES
----------------------
<PAGE>
EXHIBIT C
SPECIAL STIPULATIONS
--------------------
These Special Stipulations are hereby incorporated into this Lease and in
the event that they conflict with any provisions of this Lease, these Special
Stipulations shall control.
A. Renewal Options. 1. If, on the expiration of the Term of this Lease
---------------
and the date Tenant notifies Landlord of its intention to renew the Lease Term
(as provided in subsection (2) below), (i) Tenant is not in default under this
Lease beyond any applicable notice and cure period provided for in this Lease,
and (ii) this Lease is in full force and effect, then Tenant shall have and may
exercise an option to renew this Lease for an additional term of five (5) years
(the "Renewal Term") upon the same terms and conditions contained in this Lease
------------
with the exceptions that the rental for the Renewal Term shall be the then-
prevailing market rate of rent in the Herndon, Virginia area, inclusive of
consideration of then-current market concessions (including, without limitation,
refurbishment allowances and rent abatement) (the "Renewal Rental Rate").
-------------------
2. If Tenant desires to renew this Lease pursuant to subsection (1)
above, Tenant must notify Landlord in writing of its intention to renew (the
"Renewal Notice") not less than twelve (12) months prior to the expiration of
- ---------------
the Term of this Lease (the "Expiration Date"). Landlord shall, within ten (10)
---------------
business days following the later of Landlord's receipt of such Renewal Notice
or the date which is twelve (12) months prior to the Expiration Date, notify
Tenant in writing of Landlord's determination of the Renewal Rental Rate and
Tenant shall, within the next ten (10) business days following receipt of
Landlord's determination of the Renewal Rental Rate, notify Landlord in writing
of Tenant's acceptance or rejection of Landlord's determination of the Renewal
Rental Rate. If Tenant timely notifies Landlord of Tenant's acceptance of
Landlord's determination of the Renewal Rental Rate, this Lease shall be
extended as provided herein and Landlord and Tenant shall enter into an
amendment to this Lease to reflect the extension of the Lease Term and changes
in Base Rent in accordance with this Exhibit. If (i) Tenant timely notifies
Landlord in writing of Tenant's rejection of Landlord's determination of the
Renewal Rental Rate or (ii) Tenant does not notify Landlord in writing of
Tenant's acceptance or rejection of Landlord's determination of the Renewal
Rental Rate within such ten (10) business day period, Landlord and Tenant will
promptly attempt to agree on the Renewal Rental Rate. If Landlord and Tenant
cannot agree within ten (10) business days of Tenant's rejection in subclause
(i) hereinabove or the expiration of the ten (10) business days period referred
to in subclause (ii) hereinabove, then Tenant may either (A) withdraw its
Renewal Notice by written notice to Landlord, in which event, all of Tenant's
rights under this Paragraph A shall immediately and irrevocably terminate, or
(B) proceed promptly to determine the Renewal Rental rate by appraisal, in which
case, Landlord and Tenant shall each select a qualified independent real estate
broker or appraiser (i.e., a real estate broker or appraiser with no prior or
existing contractual relationship with either party) with at least five (5)
years experience in leasing office buildings in the Herndon, Virginia area to
determine the Renewal Rental Rate. If the values determined by the
brokers/appraisers are less than ten percent (10%) apart, the average of the
values determined by them shall be deemed the Renewal Rental Rate for the
Premises. If the brokers/appraisers do not agree, and if their determinations
are more than ten percent (10%) apart, then on or before seventy-five (75) days
prior to the commencement of the Renewal Term, the two brokers/appraisers shall
select a third independent broker/appraiser who will determine the Renewal
Rental Rate for the Premises. If the value determined by the third
broker/appraiser is between the values determined by the two prior
broker/appraisers, the determination of the third broker/appraiser will control.
If the third broker/appraiser's determination is not between the values
determined by the two prior broker/appraisers, then the value of the first two
broker/appraisers closest to the value of the third broker/appraiser will be the
Renewal rental Rate for the Premises. Each party shall pay the fees and
expenses of its broker/appraiser, and the fees and expenses of the third
broker/appraiser shall be shared equally between Landlord and Tenant.
<PAGE>
B. Landlord Lien Waiver. Landlord hereby waives any lien rights which it
---------------------
may otherwise have concerning Tenant's property, which shall include furniture,
fixtures, equipment, any and all equipment and/or supplies utilized by Tenant in
its business operations, and Tenant shall have the right to remove the same at
any time without Landlord's consent. Furthermore, Landlord acknowledges Tenant's
right to finance and to secure under the Uniform Commercial Code, inventory,
furnishings, furniture, equipment, machinery, leasehold improvements and other
personal property located in or at the Premises, and Landlord agrees to execute
commercially reasonable waiver forms releasing liens in favor of any purchase
money seller, lessor or lender who has financed or may finance in the future
such items. Without limiting the effectiveness of the foregoing, provided that
no default shall have occurred and be continuing, Landlord shall, upon the
request of Tenant, and at the Tenant's sole cost and expense, execute and
delivery any commercially reasonable instruments necessary or appropriate to
confirm any such grant, release, dedication, transfer, annexation or amendment
to any person or entity permitted under this paragraph including landlord
waivers with respect to any of the foregoing.
<PAGE>
EXHIBIT D
COMMENCEMENT DATE AGREEMENT
---------------------------
This Commencement Date Agreement (this "Agreement") is made and entered
---------
into this ____day of ___________, 19___, by and between DULLES TECH, INC.
("Landlord") and NETWORK ACCESS SOLUTIONS ("Tenant").
- ---------- ------
WHEREAS, Landlord and Tenant entered into that certain Lease (the "Lease")
-----
dated October ___, 1999, with respect to certain premises located at 13650
Dulles Technology Drive, Herndon, Virginia 20171, as such demised premises are
more particularly described in the Lease.
WHEREAS, this Agreement is executed by Landlord and Tenant to confirm the
Commencement Date and the Expiration Date, as those terms are defined in the
Lease;
NOW, THEREFORE, for and in consideration of the demised premises and the
mutual covenants expressed in the Lease, it is hereby agreed by Landlord and
Tenant as follows:
1. The Premises were substantially complete and the Base Rent and
Additional Rent (as such terms are defined in the Lease) commenced on
_____________, 19__ (the "Commencement Date") and will expire on ___________,
-----------------
20___ (the "Expiration Date").
---------------
2. This Agreement shall not be deemed or construed to alter or amend
the Lease in any manner.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be
executed as of the day and year first above written.
LANDLORD:
--------
DULLES TECH, INC., a Delaware corporation
By: ______________________________
Charles Schouten, President
TENANT:
------
NETWORK ACCESS SOLUTIONS CORPORATION,
a Delaware corporation
By: ______________________________
Name: ______________________________
Title:______________________________
<PAGE>
EXHIBIT E
WORK LETTER AGREEMENT ("WORK AGREEMENT")
----------------------------------------
The following provisions shall govern (A) the preparation and approval
process for the drawings and specifications for the build-out of the Premises
and (B) terms and conditions relating to contractors and subcontractors in
connection with the build-out of the Premises.
A. Description of Landlord's Work. Subject to the terms and conditions
------------------------------
of this Work Agreement, Landlord agrees to construct, at its sole cost and
expense, a building shell which shall contain the following items ("Landlord's
----------
Work"):
- ----
As described in Landlord's October 15, 1999 proposal attached hereto
in Exhibit E-2 with the following additions:
-----------
1) All concrete flooring should be level, complete and ready to
accept carpet, VCT or other floor applications.
2) The base Building should have an energy management system of a
quality found in similar class buildings in Reston/Herndon, Virginia submarket.
B. General Matters regarding Plans and Specification. Tenant shall cause
-------------------------------------------------
its architect ( The M Group, except as otherwise set forth in this Work
Agreement) and/or engineer (B&A Consulting Engineers, except as otherwise set
forth in this Work Agreement) to prepare "Tenant's Space Plans", the "Working
Drawings" and the "Final Plans" (as such terms are defined below) for the Tenant
Improvement Work. The fees of Tenant's architect and engineer shall be paid by
Landlord from the "Tenant Improvement Allowance", as defined below.
C. Tenant Improvement Work. (1) Tenant shall submit to Landlord for
-----------------------
Landlord's approval a space plan for the build-out of the Premises ("Tenant's
--------
Space Plans"), by the respective date(s) for each phase shown on the
- -----------
construction schedule set forth in Exhibit E-1 hereto, prepared by Tenant's
-----------
architect showing the interior layout of the Premises and its integration with
Building systems, core areas and the building shell improvements in sufficient
detail to permit Landlord a reasonable opportunity to review and provide
preliminary approval or comments regarding Tenant's proposed interior design.
Landlord shall review and approve or disapprove of Tenant's Space Plans as to
the First Phase Premises and Second Phase Premises by the date set forth on the
attached construction schedule set forth in Exhibit E-1 hereto, which approval
-----------
shall not be unreasonably withheld, conditioned or delayed, except or to the
extent such plans affect the structure of the Building or the Building's
systems, in which case, Landlord may withhold such approval in its sole
discretion. Landlord shall endeavor to adhere to a similar construction
schedule, review periods and level of cooperation with Tenant as to the
planning, approving and completion of the Third Phase Premises thereafter. If
Landlord disapproves, either in whole or in part, of Tenant's Space Plans,
Landlord shall provide to Tenant with reasonable specificity Landlord's reasons
for its disapproval, which shall be commercially reasonable to the extent
required in the preceding sentence. Tenant shall promptly correct or otherwise
address all disapproved items identified by Landlord. The work shown in
Tenant's Space Plans shall be deemed "Tenant Improvement Work." (2) Landlord
-----------------------
and Tenant hereby covenant and agree that Rent pursuant to the Lease shall
commence for each phase of construction upon substantial completion of all
Tenant Improvement Work ("Substantial Completion") as defined pursuant to
----------------------
Section (L) below so that Tenant could obtain its Certificate of Occupancy and
occupy each phase of the Premises then intended for occupancy. For every day
after March 1, 2000 that such First Phase Premises are not Substantially
Complete, absent any delay on the part of the Tenant or any occurrence of Force
Majeure, Landlord shall pay to Tenant as a fixed and agreed upon sum and not as
a penalty, an amount equal to one (1) day's rent for the First Phase Premises
for each day after March 1, 2000 that the Tenant is unable to occupy the First
Phase Premises because the same is not Substantially Complete. Notwithstanding
the foregoing, there shall be no Force Majeure condition excusing Landlord from
its obligation to pay the damages specified herein if Landlord is delayed due to
<PAGE>
its inability to procure sufficient labor, either for its general contractor,
its subcontractors, its Construction Manager, or any other entity, required to
complete the First Phase or the Second Phase. Landlord shall pay to Tenant such
amounts in immediately available U.S. funds monthly at the end of each month
unless and until the First Phase Premises are Substantially Complete.
D. Working Drawings and Final Plans. Tenant shall cause its architects
--------------------------------
and/or engineers to prepare, and Tenant shall submit to Landlord, complete
preliminary architectural plans, construction drawings and mechanical,
electrical and plumbing drawings for the Premises (the "Working Drawings"),
----------------
including those base Building improvements (such as HVAC and sprinkler
distribution and the like) which are interior to the Premises or otherwise need
to be coordinated with Landlord's Work in order to be performed properly. Said
Working Drawings shall be submitted to Landlord in form sufficient for the
permitting and construction of the Premises, and the bidding of the Tenant
Improvement Work (that is, in such form so that, if approved by Landlord without
revision, the same would be sufficient for the permitting and construction of
the Premises, and the bidding of the Tenant Improvement Work). Within five (5)
business days, Landlord or its designated contractor shall provide Tenant with a
list of its objections, modifications, deletions or qualifications to the same.
Tenant shall cause Tenant's architect and engineer to prepare final drawings,
plans, and specifications (the "Final Plans"), based on the Working Drawings but
-----------
conforming to Landlord's objections, modifications, deletions or qualifications
which shall be commercially reasonable to the extent required hereunder, by the
date set forth on the attached construction schedule set forth in Exhibit E-1
-----------
hereto. No plans and specifications shall constitute the Final Plans hereunder
unless and until the same have been acknowledged, approved and agreed in writing
as to the exact description, detail and date of the Final Plans by both Landlord
and Tenant. Such acknowledgment shall be attached hereto as Exhibit E-3.
-----------
Landlord agrees to respond to Tenant within five (5) business days of Tenant's
written request for Landlord's approval. If Landlord fails to respond with the
five (5) business days period, Tenant may deliver a second request for approval;
if Landlord does not respond within five (5) business days of delivery of such
second notice, then Landlord's approval shall be deemed granted.
E. Construction. Following the preparation and approval of Tenant's
------------
Space Plans and the Working Drawings, Landlord agrees to build out the Premises
according to the Final Plans. All construction for the Premises shall be
awarded following a competitive bid format, with Trammell Crow Company serving
as construction manager ("Construction Manager"). The Construction Manager
--------------------
shall: (1) prepare a bid package approved by Landlord and Tenant; (2) solicit
bids from a minimum of three (3) qualified general contractors approved by
Landlord and Tenant; (3) prepare a bid analysis for review by Landlord and
Tenant; and (4) award the bid to the lowest qualified general contractor which
such contractor shall be subject to Tenant's reasonable approval. On behalf of
Landlord and Tenant, the Construction Manager shall supervise the construction
for the Premises.
F. Tenant Improvement Allowance. Landlord agrees to provide to Tenant an
----------------------------
allowance with respect to the Premises of Twenty Five Dollars ($25.00) per
rentable square foot (the "Tenant Improvement Allowance") (i.e., a total of
----------------------------
113,093 sf x $25.00 prsf = Two Million Eight Hundred Twenty Seven Three Hundred
Twenty Five Dollars ($2,827,325.00). Any unused portion of the Tenant
Improvement Allowance shall be applied against any move related costs including
any cabling requirements, antenna or signage costs, and any further remaining
allowances may be used to offset rent throughout the Term or any renewal term.
Provided Tenant uses The M Group as its architect to perform Tenant's Space
Plans, Working Drawings or Final Plans, except as to the network and/or
telecommunications operations center, Landlord's three percent (3%) construction
management fee shall be charged only against hard construction costs.
G. Delay in Preparation of Tenant's Space Plans. If a "Tenant Delay"(as
-------------------------------------------- ------------
defined below) occurs, and Substantial Completion of the Premises is delayed as
a result thereof, then Tenant shall pay to Landlord on the date Rent would have
commenced hereunder in the absence of such delay, a sum of money equivalent to
the Rent for the Premises for the period during which Tenant would have been
obligated to pay Rent to Landlord had not the Commencement Date been so delayed;
provided, however, that Landlord shall have notified Tenant in writing that a
- -------- -------
Tenant Delay has occurred, which such notice shall describe the nature of the
Tenant Delay, within five (5) business days following Landlord's learning about
<PAGE>
the Tenant Delay. Each Tenant Delay shall be offset against each day Landlord
fails to Substantially Complete Landlord's Work due to a Landlord Delay (as
defined below).
H. Changes to Tenant Plans. Tenant shall have the right to request
-----------------------
changes in the Final Plans and any such change shall be initiated by Tenant's
architect and approved by Landlord, which approval shall not be unreasonably
withheld, conditioned or delayed (except for changes which affect the structure
of the Building or the Building's systems, in which case Landlord may withhold
its consent in its sole discretion) and reasonably approved by the general
contractor. Further, if changes are made by Tenant to the Final Plans after
Landlord's approval, and should these changes to Tenant's Final Plans cause
Landlord to fail to achieve Substantial Completion of the Premises by the dates
specified herein or delay the Commencement Date, then Landlord shall have the
right to refuse to permit the making of such changes unless and until Tenant
shall have committed in writing, in a manner reasonably satisfactory to
Landlord, to pay to Landlord on the date Rent would have commenced hereunder in
the absence of such delay, a sum of money equivalent to the Rent for the
applicable phase of the Premises for the period during which Tenant would have
been obligated to pay Rent to Landlord had not this Lease Commencement Date been
so delayed.
I. Tenant's Work. Notwithstanding anything to the contrary in this
-------------
Exhibit E, Tenant shall be responsible for all work, construction and
- ---------
installation in the Premises which is not designated as Landlord's Work and
Tenant Improvement Work (including but not limited to all fixtures, furniture,
equipment and other office installations). Such work shall be referred to as
"Tenant's Work," and shall be at Tenant's sole cost and expense subject to the
- --------------
application of the Tenant Improvement Allowance. Tenant's Work shall be
considered an alteration for purposes of this Lease, and shall be subject to the
provisions of Section 6.1 thereof. Notwithstanding the foregoing, any plans
-----------
Tenant has attached hereto as Exhibit E-4 as of the date this Lease is executed
-----------
depicting such Tenant Work are hereby deemed approved by Landlord. Prior to
commencing any other Tenant's Work, Tenant shall submit drawings and
specifications for Tenant's Work to Landlord, showing all aspects of such work,
to Landlord for Landlord's review and approval, which approval as to non-
structural matters and matters not affecting the Building's systems shall not be
unreasonably withheld, conditioned or delayed. In order to perform the Tenant's
Work, upon Tenant's notice (reasonably sufficient to permit Landlord to
supervise Tenant's Work), Landlord shall grant Tenant, its contractors and
agents access to the extent permitted by law to the Building, loading dock, and
a dedicated elevator for freight use during the hours of 6:00 a.m. to 6:00 p.m.
and 8:00 a.m. to 1:00 p.m. on Saturday (except as to Tenant's move-in which
shall be over one or more weekends and the hours adjusted accordingly to
accommodate Tenant's scheduled move) and such additional time as may be
reasonably agreed between Landlord and Tenant subject to compliance with the
Building Rules and Regulations set forth in Exhibit F to the Lease, from the
---------
time the Lease is executed and further during the move-in phases related to the
Tenant Work or the Premises. Furthermore, Landlord, shall grant access to and
normal and customary use of reasonable temporary utilities including, but not
limited, to electricity, HVAC, plumbing and water, during such stated hours and
such additional time as may be agreed between Landlord and Tenant. Tenant
agrees that it will pay Landlord directly for the actual portion of utilities
used by Tenant in the Project to construct the Tenant Work within thirty (30)
days after written request accompanied by presentation and verification of
documented costs and charges for such utility usage. Tenant agrees that such
entry into the Premises shall be deemed to be under all of the terms, covenants,
conditions and provisions of the Lease, except that the covenant to pay periodic
Rent shall not apply until the Lease Commencement Date. Tenant acknowledges
that the Landlord Work and Tenant Improvement Work take precedence over the
completion of the Tenant's Work, but Landlord shall reasonably cooperate with
Tenant as to the scheduling and completion of the Tenant's Work.
J. Permits, Certificate of Occupancy. Except as provided below, Landlord
---------------------------------
shall obtain all necessary permits in connection with Landlord's Work and Tenant
Improvement Work. On or before the date Landlord tenders delivery of the
Premises to Tenant, Landlord agrees to obtain all final inspection approvals
which are required for Landlord to deliver the Premises to Tenant with
Landlord's Work completed, and to obtain all Certificates of Occupancy, pursuant
to Section (L) hereof, that can be obtained by Landlord prior to Tenant
-----------
installing its fixtures, furniture and equipment. Tenant shall be responsible
<PAGE>
for applying for and obtaining all permits required for Tenant to perform
Tenant's Work, and for obtaining the final fire inspection approval after
installation of Tenant's Work, if any.
K. Notice. Tenant and Landlord shall, by notice to the other in writing,
------
designate a single individual who Tenant or Landlord agrees shall be available
to meet and consult with the other at the Premises as Tenant's or Landlord's
representative respecting the matters which are the subject of this Exhibit and
who, as between Landlord and Tenant, shall have the power to legally bind Tenant
and Landlord, in making requests for changes, giving approval of plans or work,
giving directions to Tenant and Landlord or the like, under this Exhibit (each
of these representatives shall be a "Construction Representative"); provided,
---------------------------
however, that Landlord's Construction Representative shall not have authority to
approve changes without Landlord's prior approval.
L. Substantial Completion. For purposes of this Lease, "Substantially
---------------------- -------------
Complete" or "Substantial Completion" as to the Premises or the applicable phase
- -------- ----------------------
thereof means full completion, except for minor or insubstantial details of
construction, decoration or installation such that a Certificate of Occupancy
has been issued for Landlord's Work and Tenant Improvement Work to the extent
that the same can be issued prior to the completion of Tenant's Work, if any.
In the event that Landlord is unable to obtain a Certificate of Occupancy due to
unfinished Tenant's Work which is not delayed due to Landlord, Landlord shall be
deemed to have achieved Substantial Completion when Landlord obtains final and
complete trade inspections for all major trades. Landlord shall use
commercially reasonable efforts to give Tenant at least ten (10) business days
prior written notice of the date that the Premises, or the applicable phase
thereof, will be Substantially Complete.
M. Permits; Compliance with Laws. The Tenant's Space Plans shall be in a
-----------------------------
form in which building permits can be readily obtained and shall comply with all
applicable local, state and federal laws, ordinances, codes and regulations.
The architect shall certify to Landlord and Tenant that Tenant's Space Plans
comply with the Americans with Disabilities Act of 1990 ("ADA") and all other
---
applicable local, state and federal laws, ordinances, codes and regulations.
N. Default. The failure by Landlord or Tenant to comply with the
-------
provisions of this Exhibit E shall constitute a default by that respective
---------
entity under the Lease and the non-defaulting party shall have the benefit of
all remedies provided for in the Lease.
O. No Liability. Notwithstanding the review and approval by Landlord of
------------
Tenant's Space Plans and specifications, Landlord shall have no responsibility
or liability in regard to the safety, sufficiency, adequacy or legality thereof
and Tenant shall be solely responsible for the compliance of such plans and
specifications with all applicable laws and regulations, the architectural
completeness and sufficiency thereof and other matters relating thereto, except
to the extent a valid construction permit is issued therefore.
P. Code Compliance. Landlord shall construct the base Building Landlord
---------------
Work so that it is in compliance with all applicable codes and laws, including
the ADA.
Q. Back-Up Generator. Landlord shall provide a location mutually
-----------------
acceptable to Landlord and Tenant for the location of a generator to be
installed by Tenant (the costs of which may be deducted from the Tenant
Improvement Allowance) to provide back up power and for any supplemental HVAC
equipment that will be required. The generator shall be reasonably screened and
buffered as required; the costs of which may be deducted from the Tenant
Improvement Allowance.
R. Network and/or Telecommunications Operations Center. Tenant shall
---------------------------------------------------
have an approximately nine thousand three hundred sixty two (9,362) square feet
network and/or telecommunications operations center in the Building that will
operate twenty four (24) hours per day, seven (7) days per week, that will be
contained within the Third Phase Premises. Landlord and Tenant shall work
together to achieve the most cost effective method to accommodate this need.
Tenant may utilize at no additional cost the base Building condenser water riser
system for its supplement HVAC equipment. Notwithstanding anything else in this
Lease, Tenant shall have the right, subject to Landlord's reasonable approval,
to choose its architect, engineer, consultants, general contractor and
subcontractors to perform this work.
<PAGE>
S. Landlord Delays or Tenant Delays. 1. As used herein, "Landlord Delay"
-------------------------------- --------------
shall mean a delay which is primarily attributable to one or more of the
following:
(a) Landlord's (for purposes of this Exhibit E, "Landlord" shall be
---------
deemed to include the Landlord, Landlord's Construction
Representative, Landlord's consultants, the general contractor
and the agents of all of these), (i) failure to comply with any
of the deadlines specified in this Work Agreement, (ii)
unjustifiably withholding, delaying or refusal to (A) fund, or
permit to be funded by Tenant, any draw request of the Tenant
Improvement Allowance, or (b) make any advance or grant any
approval requested by Tenant relating to the Tenant Space Plans,
Working Drawings or Final Plans, Landlord Work, Tenant
Improvement Work or Tenant Improvement Allowance as indicated by
Tenant prevailing in the dispute resolution process described in
Section (W) hereof, or (iii) Landlord's breach of its obligations
-----------
under the terms of this Work Agreement or the Lease;
(b) Landlord's request for changes or additions to the Final Plans
for the Tenant Improvement Work subsequent to the date of
Landlord's approval of the Final Plans and not related to Tenant
Final Plan changes;
(c) The gross negligence or willful misconduct of Landlord, in
connection with the Landlord Work, Tenant Improvement Work or
this Work Agreement;
(d) Landlord's unreasonable interference with the Tenant's schedule
for Tenant Work or the general contractor's schedule for the
Landlord Work or Tenant Improvement Work; or
(e) The time and delay incurred by the enforcement of the dispute
resolution process outlined in Section (W) to this Work
Agreement, to the extent that Tenant is the prevailing party
therein.
2. As used herein, "Tenant Delay" shall mean a delay which is primarily
------------
attributable to one or more of the following:
a. Tenant's (for purposes of this Exhibit E, "Tenant" shall
---------
be deemed to include the Tenant, Tenant's Construction Representative,
Tenant's consultants and the agents of all of these), (i) failure to
comply with any of the deadlines specified in this Work Agreement,
(ii) unjustifiably withholding, delaying or refusing to make any
approval sought by Landlord or (iii) breach of its obligations under
the terms of this Work Agreement or the Lease;
b. Tenant's request for changes or additions to the Final
Plans after Landlord's approval of same that cause Landlord to fail to
achieve Substantial Completion of the Premises by the dates specified
herein;
c. The gross negligence or willful misconduct of Tenant, in
connection with the submittal of Tenant's Space Plans and Working
Drawings, Tenant's Work or this Work Agreement;
d. Tenant's unreasonable interference with the Landlord's or
general contractor's schedule for Landlord Work or Tenant Improvement
Work;
e. The time and delay incurred by the enforcement of the
dispute resolution process outlined in Section (W) to this Work
Agreement, to the extent that Landlord is the prevailing party.
T. Access. [Intentionally Deleted.]
------
<PAGE>
U. Adjustment of Tenant Improvement Allowance. At such time as the exact
------------------------------------------
square footage of the Premises is determined in accordance with Section 2.1 of
the Lease, then in that event the Tenant Improvement Allowance shall be adjusted
to reflect the correct amounts based upon the re-computed and agreed upon
rentable square footage of the Premises.
V. Time for Performance. Wherever in this Work Agreement a date for
--------------------
performance falls on a Saturday, Sunday or legal holiday, the time for
performance shall be extended until the following business day.
W. Disputes. In the event that either party shall have any claim or
--------
dispute under this Exhibit E, both parties agree that such claim or dispute
---------
shall be decided by arbitration in accordance with the Construction Industry
Rules of the American Arbitration Association. Both parties irrevocably submit
to such arbitration. Both parties further agree that any decision so rendered
through that arbitration shall be final and binding on both parties hereto and
may be entered in any court of competent jurisdiction.
List of Exhibits
----------------
Exhibit E-1 Schedule
- -----------
Exhibit E-2 Completed Shell Definitions
- -----------
Exhibit E-3 Written Confirmation of Tenant's Final Plans
- -----------
Exhibit E-4 Tenant's Work
- -----------
<PAGE>
EXHIBIT E-1
-----------
<TABLE>
<CAPTION>
First Phase Second Phase
---------------------------------------
Tenant Executes Lease Document Oct 27,1999 Oct 27, 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Tenant to submit approved Space Plan to Landlord for Nov 5, 1999 Dec 6, 1999
review.
Tenant to submit completed load letter to Landlord. Nov 5, 1999 Dec 6, 1999
Landlord to complete review and approve or disapprove Nov 9, 1999 Dec 9, 1999
Tenant Space Plan
Tenant to submit approved Construction Drawings and Nov 19, 1999 Dec 20, 1999
Specifications to Landlord for review.
Landlord to complete review and approve or disapprove Nov 23, 1999 Dec 23, 1999
Tenant Construction Drawings and Specifications.
Landlord to submit for Building Permit. Nov 23, 1999 Dec 23, 1999
Landlord to send construction bid packages to general Nov 23, 1999 Dec 23, 1999
contractors.
General contractors' bids due Dec 14, 1999 Jan 13, 2000
Construction Bid acceptance date (LL awards to low, Dec 17, 1999 Jan 17, 2000
qualified general contractor)
Construction Start Date Dec 20, 1999 Jan 19, 2000
Building Permit approved by Fairfax County Jan 3, 2000 Feb 2, 2000
General contractor to submit for sprinkler & fire alarm ____________ _____________
Permits.
Fairfax County approves sprinkler & fire alarm permits ____________ _____________
Target Date for Substantial Completion March 1, 2000 April 1, 2000
</TABLE>
<PAGE>
EXHIBIT E-2
COMPLETED SHELL DEFINITIONS
---------------------------
<PAGE>
EXHIBIT E-3
WRITTEN CONFIRMATION OF TENANT'S FINAL PLANS
--------------------------------------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT E-4
TENANT'S WORK
-------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT F
BUILDING RULES AND REGULATIONS
------------------------------
1. Sidewalks, doorways, vestibules, halls, stairways, and other similar areas
shall not be used for the disposal of trash, be obstructed by Tenant or be used
by Tenant for any purpose other than ingress and egress to and from the Premises
and for going from one part of the Building to another part of the Building.
2. Plumbing fixtures and appliances shall be used only for the purposes for
which designed, and no sweepings, rubbish, rags, or other unsuitable material
shall be thrown or placed therein. Damage resulting to any such fixtures or
appliances from misuse by Tenant shall be paid by such Tenant and Landlord shall
not in any case be responsible therefor.
3. Signs, advertisements, or notices visible in or from public corridors or
from outside the Building shall be subject to Landlord's prior written approval.
Without Landlord's prior consent, which consent shall not be unreasonably
withheld, no curtains or other window treatments shall be placed between the
glass and the Building standard window treatments.
4. With respect to work being performed by Tenant in the Premises, Tenant
shall refer all contractors, contractors' representatives, and installation
technicians rendering any service to Tenant to Landlord for Landlord's
supervision and approval before the performance of any contractual services.
This provision shall apply to all work performed in the Building, including, but
not limited to, installations of telephones, telegraph equipment, electrical
devices and attachments, and any and all installations of every nature affecting
floors, walls, woodwork, trim, windows, ceilings, equipment, and other physical
portions of the Building.
5. Movement in or out of the Building of furniture, office equipment, safes
and other heavy equipment, or the dispatch or receipt by Tenant of any bulky
material or merchandise, or materials which require use of elevators or
stairways or movement through the Building entrances or lobby, shall be
restricted to such hours as Landlord reasonably designates. All such movement
shall be under the supervision of Landlord and in the manner reasonably agreed
between Tenant and Landlord by prearrangement before performance. Such
prearrangement, to be initiated by Tenant, will include reasonable determination
by Landlord as to the time, method, and routing of such movement and as to
limitations for safety or other concerns. Tenant assumes all risks of damage to
articles moved and injury to persons engaged or not engaged in such movement.
Tenant shall be liable to personnel of Landlord damaged or injured as a result
of acts in connection with carrying out this service for Tenant, and Landlord
shall not be liable for the acts of any person engaged in, or any damage or loss
to any property or persons resulting from any act in connection with, such
service performed for Tenant.
6. Building management shall have the right and authority to prescribe the
maximum weight and position of safes and other heavy equipment which may
overstress any portion of a floor. All damages done to the Building by taking
in or putting out any property of Tenant, or done by Tenant's property while in
the Building, shall be repaired at the expense of Tenant, unless caused by
Landlord's gross negligence or willful misconduct.
7. Corridor doors, when not in use, shall be kept closed.
8. Tenant space visible from a public area must be kept neat and clean.
9. Should Tenant require telegraphic, telephonic, annunciator, or other
communication services, Landlord will direct the electricians as to where and
how wires are to be introduced and placed, and none shall be introduced or
placed except as Landlord shall reasonably direct. Electric current shall not
be used for power or heating without Landlord's prior written permission, which
consent shall not be unreasonably withheld.
10. No animals shall be brought into or kept in, on, or about the Building.
<PAGE>
11. Passenger elevators are to be used only for the movement of persons, unless
an exception is approved by the Building management office.
12. Tenant shall not tamper with or attempt to adjust temperature control
thermostats in the Premises. Landlord shall adjust thermostats as required to
maintain the Building standard temperature. Landlord requests that all window
blinds remain down and tilted at a 45 degree angle toward the street to help
maintain comfortable room temperatures and conserve energy.
13. Tenant will comply with all reasonable security procedures provided to
Tenant in writing during business hours and after hours and on weekends.
14. Tenants are requested to lock all office doors leading to corridors and to
turn out all lights at the close of their working day.
15. All requests for overtime air conditioning or heating must be submitted in
writing to the Building management office by 4:00 p.m. on the preceding Business
Day.
16. No flammable or explosive fluids or materials shall be kept or used within
the Building except in areas approved by Landlord, and Tenant shall comply with
all applicable building and fire codes relating thereto.
17. Tenant may not place any items on the balconies of the Building without
obtaining Landlord's prior written consent.
18. No smoking shall be permitted in the Premises. Smoking shall only be
permitted in the areas expressly designated by Landlord from time to time.
19. Subject to the terms of the Lease, Landlord reserves the right to rescind
any of these rules and regulations and to make such other and further reasonable
and non-discriminatory rules and regulations as in its good faith judgment shall
from time to time be needed for the safety, protection, care and cleanliness of
the Property, the operation thereof, the preservation of good order therein, and
the protection and comfort of the tenants and their agents, employees, and
invitees, provided such rules and regulations do not materially increase
Tenant's obligations or liabilities under the Lease and which rules and
regulations, when made and written notice thereof is given to Tenant, shall be
binding upon Tenant in like manner as if originally herein prescribed.
<PAGE>
EXHIBIT G
PROPOSED TENANT SIGNAGE
-----------------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT H
CLEANING SPECIFICATIONS
-----------------------
<PAGE>
EXHIBIT I
PARKING AREA
------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registation Statement on Form S-1 of our
report dated March 18, 1999, except for Note 1 for which the date is May 7,
1999, relating to the financial statements of Network Access Solutions
Corporation, which appear in such Registration Statement. We also consent to the
references to us under the headings "Experts," "Summary Financial and Other
Data," and "Selected Financial And Other Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
McLean, Virginia
December 22, 1999
<PAGE>
Exhibit 24.1
Power of Attorney
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Jonathan B. Aust, Scott G. Yancey, Jr., Worth MacMurray, and
each of them, as his true and lawful attorney-in-fact and agent, each with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, with full power to act alone, to sign any or
all documents (including both pre- and post-effective amendments to the
Registration Statement on Form S-1) and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as each said attorney-in-fact and agent might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or any substitute or substitutes for any of them, may lawfully do
or cause to be done by virtue hereof.
Date: 12/21/99 /s/ Jonathan P. Aust
---------------------- --------------------------------------
Jonathan P. Aust
President, Chief Executive Officer and
Chairman of the Board of Directors
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Jonathan B. Aust, Scott G. Yancey, Jr., Worth MacMurray, and
each of them, as his true and lawful attorney-in-fact and agent, each with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, with full power to act alone, to sign any or
all documents (including both pre- and post-effective amendments to the
Registration Statement on Form S-1) and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as each said attorney-in-fact and agent might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or any substitute or substitutes for any of them, may lawfully do
or cause to be done by virtue hereof.
Date: 12/21/99 /s/ Scott G. Yancey, Jr.
---------------------- --------------------------------------
Scott G. Yancey, Jr.
Chief Financial Officer and Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Jonathan B. Aust, Scott G. Yancey, Jr., Worth MacMurray, and
each of them, as his true and lawful attorney-in-fact and agent, each with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, with full power to act alone, to sign any or
all documents (including both pre- and post-effective amendments to the
Registration Statement on Form S-1) and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as each said attorney-in-fact and agent might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or any substitute or substitutes for any of them, may lawfully do
or cause to be done by virtue hereof.
Date: 12/21/99 /s/ Christopher J. Melnick
---------------------- --------------------------------------
Christopher J. Melnick
Chief Operating Officer and Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Jonathan B. Aust, Scott G. Yancey, Jr., Worth MacMurray, and
each of them, as his true and lawful attorney-in-fact and agent, each with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, with full power to act alone, to sign any or
all documents (including both pre- and post-effective amendments to the
Registration Statement on Form S-1) and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as each said attorney-in-fact and agent might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or any substitute or substitutes for any of them, may lawfully do
or cause to be done by virtue hereof.
Date: 12/21/99 /s/ Brion B. Applegate
---------------------- --------------------------------------
Brion B. Applegate
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Jonathan B. Aust, Scott G. Yancey, Jr., Worth MacMurray, and
each of them, as his true and lawful attorney-in-fact and agent, each with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, with full power to act alone, to sign any or
all documents (including both pre- and post-effective amendments to the
Registration Statement on Form S-1) and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as each said attorney-in-fact and agent might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or any substitute or substitutes for any of them, may lawfully do
or cause to be done by virtue hereof.
Date: 12/21/99 /s/ Dennis R. Patrick
---------------------- --------------------------------------
Dennis R. Patrick
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Jonathan B. Aust, Scott G. Yancey, Jr., Worth MacMurray, and
each of them, as his true and lawful attorney-in-fact and agent, each with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, with full power to act alone, to sign any or
all documents (including both pre- and post-effective amendments to the
Registration Statement on Form S-1) and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as each said attorney-in-fact and agent might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or any substitute or substitutes for any of them, may lawfully do
or cause to be done by virtue hereof.
Date: 12/21/99 /s/ Worth D. MacMurray
---------------------- --------------------------------------
Worth D. MacMurray
Vice President, Legal and Strategic Projects
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NETWORK
ACCESS SOLUTIONS CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<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> 67,514
<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>
