<PAGE>
As filed with the Securities and Exchange Commission on April 23, 1999
Registration No. 333--74679
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
NETWORK ACCESS SOLUTIONS CORPORATION
(Exact name of registrant as specified in its charter)
100 Carpenter Drive
Sterling, Virginia 20164
(703) 742-7700
(Address of principal executive offices)
Delaware 4813 54-1738938
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or classification code number) identification
organization) number)
-------------------
Jonathan P. Aust
President and Chief Executive Officer
Network Access Solutions Corporation
100 Carpenter Drive
Sterling, Virginia 20164
(703) 742-7700
(Name, address, including zip code and telephone number, including area code
of agent for service)
-------------------
Copies to:
Edwin M. Martin, Jr., Esquire Scott M. Wornow, Esquire
Nancy A. Spangler, Esquire Paul, Hastings, Janofsky & Walker LLP
Piper & Marbury L.L.P. 399 Park Avenue, 31st Floor
1200 19th Street, N.W. New York, New York 10022
Washington, D.C. 20036 (212) 318-6000
(202) 861-3900
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Securities To Proposed Maximum Aggregate Amount of
Be Registered Offering Price (1) Registration Fee (2)
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<S> <C> <C>
Shares of Common Stock, par value
$.001................................ $100,000,000 $ 0
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act.
(2) A registration fee of $27,800 was paid at the time of the initial filing
of this registration statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--April 22, 1999
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Shares
[Network Access Solutions Logo Appears Here]
Common Stock
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Network Access Solutions is offering shares of its common stock. We are
selling all of the shares offered under this prospectus.
This is our initial public offering. No public market currently exists for our
shares. We anticipate that the initial public offering price for our shares
will be between $ and $ per share.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "NASC."
Donaldson, Lufkin & Jenrette expects to deliver the shares of common stock to
purchasers on , 1999.
See "Risk Factors" beginning on page 7 to read about risks that you should
consider before purchasing any shares of our common stock.
-------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
----------------------------------------------------
<S> <C> <C>
Public offering price (estimated): $ $
Underwriting fees:
Proceeds to Company (after expenses):
----------------------------------------------------
</TABLE>
We have granted the underwriters the right to purchase an additional shares
of common stock from us at the initial public offering price, less underwriting
fees, to cover over-allotments.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
J.P. Morgan & Co.
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
<PAGE>
[Graphic: Map of Bell Atlantic region showing network coverage]
[Graphic: Diagram of network]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 7
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial and Other Data... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................ 32
Management.......................... 54
Related Transactions................ 60
Principal Stockholders.............. 62
Description of our Capital Stock.... 63
Shares Eligible for Future Sale..... 66
Underwriting........................ 69
Validity of the Shares.............. 71
Experts............................. 71
Available Information............... 71
Index to Financial Statements....... F-1
</TABLE>
We use market data and industry forecasts throughout this prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of this information is not
guaranteed. Similarly, we believe that the surveys and market research we or
others have performed is reliable, but we have not independently verified this
information. Neither we nor any of the underwriters represents that any such
information is accurate.
We own applications for federal registration and claim rights in the
following trademarks: COPPERNET(TM), CU COPPERNET(TM) and CUNET(TM).
This prospectus also refers to trade names and trademarks of other
companies.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain important information regarding our business
and this offering. You should read this entire prospectus, including the "Risk
Factors" and the financial statements and all related notes before deciding to
purchase our common stock. All share information reflects a two for one
exchange of our common stock effective March 18, 1999. Except as otherwise
indicated, the information in this prospectus assumes that:
. our common stock will be sold at $ per share, which is the mid-point of
the range shown on the cover page of this prospectus;
. the underwriters will not exercise their over-allotment option;
. $5.0 million of our preferred stock will be converted into shares of
our common stock at the public offering price with the remaining shares
and all accrued dividends cancelled without additional payment to the
holders of those shares;
. a $5.0 million note payable will be converted into shares of our
common stock at the public offering price;
. two of our stockholders will purchase shares of our common stock at
the public offering price for $5.0 million; and
. we will complete a for one exchange of our common stock before this
offering.
Network Access Solutions
Our Business
We are a leading provider of digital subscriber line, or DSL, technology and
networking solutions to businesses. Through our CuNet, pronounced "CopperNet",
branded service, we offer customers high speed "always on" connections to
local, metropolitan and wide area telecommunications networks. CuNet allows our
customers to transmit data over standard copper telephone lines at speeds
substantially higher than common dial-up modems still used in most computers.
Our prices for CuNet are typically 30% to 70% of the costs our customers would
incur if they were to use traditional technologies that offer data transport
speeds comparable to DSL. As a complement to our CuNet service, we also offer
network integration, which includes design and installation, network
management, network security and professional services. We seek to combine, or
bundle, our CuNet service and networking solutions to allow us to be the single
provider for many of the data communications solutions that we believe
businesses require.
Our high-capacity network has been designed to support our customers' ever
changing needs. Our network supports both the traditional voice-based or
channelized technologies that carry most of today's telephone conversations, as
well as the newer data, or packet, -based technologies. These newer, packet-
based technologies transport packets of information from multiple users over
common lines, allowing for a more efficient use of a network. The DSL
technology used in our CuNet service offers businesses and their telecommuters
cost effective solutions for accessing the Internet and emerging applications,
such as video and audio conferencing, multimedia and electronic commerce.
We currently are targeting the Bell Atlantic region for our CuNet service.
We believe that we have formed a closer day-to-day working relationship with
Bell Atlantic than our competitors, which will allow us to provide more
responsive, consistent and higher quality service in our target markets. In
April 1997, we entered into our first interconnection agreement with Bell
Atlantic, which allowed
1
<PAGE>
us to use their copper telephone lines and to place, or collocate, our
equipment in their central offices. These offices serve as the central
connection point for all copper telephone lines in a local area.
We began CuNet service trials in November 1997 and currently offer CuNet
service in Boston, New York, Philadelphia, Baltimore, Washington, D.C. and
Richmond. We have formed networks in each of these cities and connect each of
them to our own private high speed fiber optic network, or backbone. This
network design enables us to provide our customers seamless connections to
remote offices or employees in other locations or cities, forming virtual
private networks, or VPNs, that have the capacity, speed, reliability and level
of service that our customers require. We expect to extend our network coverage
to include Norfolk, Pittsburgh and Wilmington, Delaware by the end of 1999. So
far, we have collocated our equipment in 51 central offices and we expect to
raise the number of central offices in which we have collocated equipment to
360 by the end of this year. As opportunities present themselves, we may expand
our network beyond our initial target markets and into adjacent regions. We
have recently entered into an interconnection agreement with Bell South.
We began our company in 1995 by providing data communications products and
services for corporate networks, serving as a premier partner for Paradyne
Corporation, Ascend Communications, Inc. and Cisco Systems, Inc. Shortly
thereafter, we began offering our customers further services for their networks
such as network management, network security and professional services. We have
built a significant presence in the Bell Atlantic region and currently have
over 400 networking solutions customers.
To reach our customers, we employ a direct sales force, which we expect to
grow to more than 140 people by the end of 1999. We also market our services
through sales partners in multiple channels including Internet service
providers, local and long distance carriers, and other networking services
companies.
Our Business Strategy
Our goal is to become the premier provider of data communications and
networking solutions in our target markets. We plan to:
. rapidly provide depth of coverage in our markets;
. capitalize on our core competency in direct sales and engineering support
to businesses;
. quickly design and deliver, or provision, reliable services by building
relationships with service providers;
. provide superior customer care;
. deliver our products and services through multiple sales channels;
. enhance and expand our network to meet the broadest array of business
requirements; and
. capitalize on the economics of DSL, which uses the existing copper
telephone network and does not require substantial outlays in advance of
connecting new customers.
2
<PAGE>
Our Management
Our senior management has extensive experience in network integration,
management and security and in providing professional services. Our Chief
Executive Officer, Jonathan P. Aust, was one of the principal architects of the
data network AT&T created to handle monetary transfers for the Federal Reserve
System. Other members of our senior management team have worked for well-known
telecommunications companies, including Level 3 Communications Inc. MCI
WorldCom Inc., AT&T and Cable and Wireless, USA.
--------------------
We are a Delaware corporation. We 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.
3
<PAGE>
The Offering
We present below a summary of this offering. of the shares being offered
have been reserved for purchase by our directors, officers and employees and
their business associates and related persons. After this offering, we will
also have outstanding options to purchase shares of our common stock,
including options to purchase shares that will be exercisable immediately
after this offering.
<TABLE>
<C> <S>
Stock offered................................ shares of common stock.
Stock to be outstanding after this offering.. shares of common stock, or
shares of common stock,
assuming the underwriters
exercise their over-allotment
option in full.
Use of proceeds.............................. We expect to use the proceeds
from this offering (after
expenses) to finance capital
expenditures, to finance
operating losses that we
expect to incur as we expand
our customer base and network
and for general corporate
purposes. See "Use of
Proceeds."
Dividend policy.............................. We do not anticipate declaring
or paying dividends for the
foreseeable future. Instead,
for the foreseeable future, we
will retain our earnings, if
any, for the future operation
and expansion of our business.
Proposed Nasdaq National Market symbol....... NASC
</TABLE>
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 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
financial data for the year ended December 31, 1995 have been derived from our
unaudited financial statements that are not included in this prospectus. The
unaudited financial statements include, in the opinion of our management, all
adjustments, consisting of normal, recurring adjustments, necessary for a fair
presentation of the information set forth. You should refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the more complete financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1996 1997 1998
(unaudited)
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product sales....................... $1,891 $14,368 $ 8,150 $ 9,900
Consulting services................. 36 114 791 1,428
Network services.................... -- -- 4 311
------ ------- ------- --------
Total Revenue..................... 1,927 14,482 8,945 11,639
Cost of revenue:
Product sales....................... 1,475 11,975 7,180 8,639
Consulting services................. 15 91 231 761
Network services.................... -- -- 2 41
------ ------- ------- --------
Total cost of revenue............. 1,490 12,066 7,413 9,441
Operating expenses:
Selling, general and
administrative..................... 299 2,255 1,437 4,017
Amortization of deferred
compensation....................... -- -- -- 219
Depreciation and amortization....... 9 7 12 130
------ ------- ------- --------
Total operating expenses.......... 308 2,262 1,449 4,366
------ ------- ------- --------
Income (loss) from operations......... 129 154 83 (2,168)
Interest income (expense), net........ -- (1) (5) 64
------ ------- ------- --------
Income (loss) before income taxes..... 129 153 78 (2,104)
Provision (benefit) for income taxes.. 39 63 36 (28)
------ ------- ------- --------
Net income (loss)..................... $ 90 $ 90 $ 42 $ (2,076)
====== ======= ======= ========
Net income (loss) per common share
(basic and diluted).................. $ 0.01 $ 0.01 $ 0.00 $ (0.22)
====== ======= ======= ========
Weighted average common shares
outstanding (basic and diluted)...... 9,740 9,740 9,740 12,134
====== ======= ======= ========
Pro forma net income (loss) per common
share (basic and diluted) (1)........
Pro forma weighted average common
shares outstanding (basic and
diluted) (1).........................
Other Data:
EBITDA (2)............................ $ 138 $ 161 $ 95 $ (1,819)
Capital expenditures.................. 18 30 122 1,156
Net cash provided by (used in)
operating activities................. 3 (27) 805 (2,810)
Net cash used in investing
activities........................... 18 30 122 1,341
Net cash provided by financing
activities........................... 42 55 9 8,956
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 5,518 $ 15,518 $
Property and equipment, net.............. 5,031 5,031
Total assets............................. 12,928 12,928
Total debt (including capital lease
obligations)............................ 2,513 2,513
Mandatorily redeemable preferred stock... 5,641 --
Total stockholders' equity .............. 932 16,573
</TABLE>
- --------------------
(1) The "pro forma" summary financial data as of December 31, 1998 reflects the
following events as if such events had occurred as of December 31, 1998 for
the pro forma balance sheet data: (i) the conversion of $5.0 million of our
mandatorily redeemable preferred stock into shares of our common stock
at the public offering price and the cancellation without consideration of
the remaining shares of our preferred stock and all accrued dividends, (ii)
the conversion of a $5.0 million 8% convertible note issued on March 31,
1999 into shares of our common stock at the public offering price and
(iii) the additional investment of $5.0 million to purchase shares of
our common stock at the public offering price pursuant to a note purchase
agreement entered into on March 31, 1999. See "Related Transactions and
Relationships."
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. We have
presented EBITDA to enhance your understanding of our operating results.
You should not construe it as an alternative to operating income as an
indicator of our operating performance or as an alternative to cash flows
from operating activities as a measure of liquidity determined in
accordance with GAAP. We may calculate EBITDA differently than other
companies. For further information, see our financial statements and
related notes elsewhere in this prospectus.
(3) The "pro forma as adjusted" summary financial data as of December 31, 1998
reflects the events described in note 1 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
6
<PAGE>
RISK FACTORS
You should consider carefully the following risks, together with all other
information included in this prospectus before you decide to buy our common
stock. The risks and uncertainties described below are not the only ones we
face. Please keep these risks in mind when reading any forward looking
statements appearing elsewhere in this prospectus. If any of the following
risks actually occur, our business, financial condition or results of
operations would likely suffer. The trading price of our common stock may
decline, and you could lose all or part of the money you paid to buy our common
stock.
Because the focus of our company is changing to a high speed digital
communications service, our business is difficult to evaluate
We have refocused our company, through our CuNet services, on the provision
of DSL-based high speed digital communications services, which is a change from
our historical activities. We began in 1995 by helping our customers integrate
their network equipment and by providing them with related network services.
Because our business focus has now changed, and we expect to dedicate most of
our resources to develop our nascent CuNet service, 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 and 1998 was derived from product integration and
networking solutions. Although in the short term we expect to continue to
derive the majority of our revenue from our networking solutions activities, we
expect that over time CuNet will constitute the more significant portion of our
total revenue. Revenue from CuNet, which we began offering in January 1999, has
been minimal. As a result, not only have we changed the focus of our company,
you also have very limited historical financial information upon which to base
your evaluation of our performance and an investment in our common stock. To
achieve the growth that we expect, we are depending on the success of our CuNet
services. If our business does not evolve as we expect, we will likely grow at
a significantly slower pace than would be the case if our CuNet services is
successful. If that situation arises, it is possible that the price of our
common stock may reflect the slower growth associated with a business that does
not offer DSL-based services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
We have not tested our CuNet strategy so it is difficult to assess whether we
will be successful in this new and evolving market
The market for CuNet is in the early stages of development and we have not
tested our CuNet strategy. The combination of our unproven business strategy
and the highly competitive and quickly changing market in which we compete
makes it difficult for us to predict the extent to which CuNet will achieve
market acceptance. Various providers of high speed digital communication
services are testing products from various suppliers for various applications,
and suppliers have not broadly adopted an industry standard. Critical issues
concerning commercial use of DSL for Internet and local area network access,
including security, reliability, ease and cost of access and quality of
service, remain unresolved and may impact the growth of this market. If the
market for CuNet fails to develop, grows more slowly than anticipated or
becomes saturated with competitors our business will not produce the level of
profitability we hope to achieve.
7
<PAGE>
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. We may never be able to deploy our
network as planned or achieve significant market acceptance, favorable
operating results or profitability. Due to the so far limited deployment of
CuNet, we cannot guarantee that our network will be able to connect and manage
a substantial number of end users at high transmission speeds. We may be unable
to scale our network to service a substantial number of end users while
achieving high performance.
We are an early stage company in a new and rapidly evolving market, subject to
greater risks than many of our competitors
You should consider the risks, expenses and difficulties we may encounter,
including those frequently encountered by early stage companies in new and
rapidly evolving markets. To overcome these risks, we must, among other things:
. rapidly expand the coverage of CuNet within our regions;
. attract and retain customers;
. increase awareness of CuNet;
. respond to competitive developments;
. continue to attract, retain and motivate qualified persons;
. continue to upgrade our technologies;
. introduce and develop new technology for our network services; and
. effectively manage our expanding operations.
Our failure to manage future growth will strain our resources and could impair
the expansion of our business
We plan a significant expansion of our CuNet operations.This rapid growth
will place a significant strain on our management, financial controls,
operations systems, personnel and other resources. If we fail to manage this
growth effectively, the expansion of our business could be impaired. We may be
unable to meet our customers' need for services and technical support or
provide the customer service they expect. To manage our growth effectively, we
must:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
. 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.
8
<PAGE>
Bell Atlantic's conduct could adversely affect our business
Bell Atlantic is both an essential supplier of facilities and services for
CuNet and potentially a significant DSL competitor. This conflict poses a
significant risk to the success of our business. Bell Atlantic has existing
metropolitan area networks and local telephone networks and its own Internet
service provider businesses, and has 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. To date, Bell Atlantic has not
pursued this opportunity.
Bell Atlantic may be reluctant to cooperate with us in supplying the copper
telephone lines, collocation space and operational support services we need in
order to provide CuNet service. For example, Bell Atlantic may reject our
collocation applications or delay providing us with the collocation space we
need in their central offices. We already have experienced rejections of some
of our applications to place equipment inside of Bell Atlantic central offices,
and in other cases 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. While to date we have been able to place our
equipment in 51 Bell Atlantic central offices, our plan calls for us to locate
our equipment in 360 central offices by the end of 1999. Bell Atlantic's
position as both a DSL competitor and a supplier of numerous essential inputs
to our DSL offerings also gives Bell Atlantic an incentive to subsidize its own
DSL offerings by failing to fully allocate to its DSL service the costs it
incurs in providing that service.
We depend on other carriers to provide fiber optic transmission facilities to
connect our equipment, which is critical to our CuNet business
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 of connecting our DSL equipment in different locations. These
fiber optic carriers include long distance carriers, incumbent carriers and
other competitive carriers. Many of these entities are, or may become, our DSL
competitors. We have not established a history of obtaining transmission
facilities in large volumes which we expect will be necessary for the
deployment of our intended service offerings. We may be unable to negotiate or
renew favorable supply agreements. We depend on the timeliness of fiber optic
carriers to process our orders for customers who seek to use our services. We
have in the past experienced supply problems with some of our fiber optic
suppliers, and they may not be able to meet our needs on a timely basis in the
future.
We depend on third parties to provide the equipment, installation and field
service, which is critical to our CuNet business
We plan to purchase our equipment from many vendors, including Ascend and
Paradyne. At peak demand times we intend to outsource some of the installation
and field service of our network to third parties. Because we depend on third
party vendors, we do not have guaranteed capacity or control over delivery
schedules, quality assurance, production yields and costs. If any of our
vendors reduces or interrupts its supply, or if any significant installer or
field service provider interrupts its service to us or fails to perform to
required specifications, this reduction or interruptions 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,
9
<PAGE>
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 suppliers or licensors enter into competition with us, or 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.
Because two of our networking solutions customers account for a high percentage
of our revenue, the loss of a significant customer could harm our business
To date, our largest customers have been AT&T and Zeneca Pharmaceuticals, a
division of Zeneca, Inc. AT&T and Zeneca accounted for 50.4% and 9.6%,
respectively, of our revenue in 1998. The loss of either customer could
adversely affect our business.
Our operating results are likely to fluctuate significantly, causing our stock
price to be volatile or to decline
Our operating results, and therefore our stock price, are likely to
fluctuate because of a number of factors. Our annual and quarterly operating
results may fluctuate significantly in the future due to numerous factors,
including:
. the rate at which we are able to attract and retain customers
. the prices our customers are willing to pay;
. the amount and timing of expenditures relating to the expansion of our
services and infrastructure, including the potentially lengthy sales
cycle for our CuNet service, which may last six months or longer;
. the timing and availability on reasonable terms of Bell Atlantic copper
telephone lines and central office collocation space;
. the timing and availability on reasonable terms of Bell Atlantic
operations support and management of telephone line usage, known as
spectrum management;
. the timing and availability on reasonable terms of transport facilities;
. the ability of our equipment and service suppliers to meet our needs;
. our ability to deploy our network on a timely basis;
. the success of our relationships with our partners and distributors;
. introduction of new services or technologies by our competitors;
. regulatory developments governing our industry, including potential new
or changed laws or regulations and interpretations of the 1996
Telecommunications, or Telecom, Act; and
. technical difficulties or network downtime.
Many 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.
10
<PAGE>
We expect our stock price to be volatile
The price at which our common stock will trade will depend upon many
factors, including our historical and anticipated quarterly and annual
operating results, variations between our actual results and analyst and
investor expectations, announcements by us or others and developments affecting
our business, investor perceptions of our company and comparable public
companies, changes in our industry and general market and economic conditions.
Some of these factors are beyond our control. You should be aware that the
stock market has from time to time experienced extreme price and volume
fluctuations.
The 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 DSL 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. 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 ISDN,
DSL, wireless data and cable modems. Some of our competitors or potential
competitors may have the financial resources to withstand substantial price
competition. Moreover, our competitors may be better situated to negotiate
contracts with suppliers of telecommunications services which are more
favorable than contracts negotiated by us.
. 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 carriers like us, including Covad Communications
Group, Inc., Rhythms NetConnections Inc. and NorthPoint Communications
Holdings, Inc., have begun offering DSL-based access services, and have
attracted marketing allies and product development partners. Others are
likely to do the same in the future.
We need significant additional funds to expand our business, which we may be
unable to obtain on acceptable terms.
We believe that the net proceeds from this offering, our existing cash and
cash equivalents, existing and anticipated equipment lease financings and
future revenue generated from operations,
11
<PAGE>
will be sufficient to fund our operating losses, capital expenditures, lease
payments and working capital requirements through the end of 2000. If we have
not completed our network rollout within that period it is likely that we would
need additional capital to continue funding operating losses. In addition, we
expect that we will require significant additional capital to expand our
network beyond our initial target markets and into adjacent regions. Our actual
funding requirements may differ materially if the assumptions underlying our
estimate turn out to be incorrect or change as our business evolves. Therefore,
you should consider that our funding requirements may increase, perhaps
substantially, if we are unable to generate revenue in the amount and within
the time frame we expect or if we have unexpected cost increases. We may be
unable to obtain the future equity or debt financing that we require on
acceptable terms or at all.
If we borrow significant amounts in the future, it could limit our flexibility
If we decide to borrow significant amounts in the future to fund our
business, the terms of those borrowings would likely contain restrictive
covenants that limit our ability to incur additional indebtedness and pay
dividends. These instruments could also require us to pledge assets as security
for the borrowings. If we were to leverage our business by incurring
significant debt, we may be required to devote a substantial portion of our
cash flow to service that indebtedness. This could require us to modify our
business plan, for example, by delaying the capital expenditures necessary to
complete our network. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Our services are subject to uncertain government regulation and changes in laws
or regulations could restrict the way we operate our business
Because many of the facilities and services we need in order to provide
CuNet are subject to regulation at the federal, state and/or local levels,
changes in applicable laws or regulations could have an adverse impact on our
business. For example, 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 an incumbent carrier's copper
telephone lines and transport facilities that we need in order to provide
CuNet. Regulatory policies likewise may affect the terms under which Bell
Atlantic provides us with back office support services -- such as operations
support services and spectrum management -- that are crucial to the success of
CuNet. Future federal or state regulations and legislation may be less
favorable to us than current regulations and legislation and therefor 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 incumbent
carriers like Bell Atlantic to pursue litigation in courts, institute
administrative proceedings with the FCC and state telecommunications regulators
and lobby the U.S. Congress in an effort to affect the applicable laws and
regulations in a manner that would be more favorable to them and against our
interests. Any changes in our regulatory environment could create greater
competitive advantages for all or some of our competitors or could make it
easier for additional parties to provide DSL services. For more details about
regulatory policies that affect our business, see "Business--Government
Regulation."
Uncertain federal and state tax and surcharges on our services may increase our
payment obligations
Telecommunications 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.
12
<PAGE>
A recent U.S. Supreme Court decision has raised questions about our ability to
obtain essential facilities from Bell Atlantic, which may hurt our business
A January 1999 decision by the U.S. Supreme Court could adversely affect our
business because it has raised questions about whether we will be able to
obtain certain facilities from Bell Atlantic that we need in order to provide
CuNet in the future. In that decision, the Supreme Court invalidated an FCC
rule which defines the particular parts of an incumbent carrier network that
must be provided to competitors like us, and it sent the matter back to the FCC
with instructions to consider further the question of which parts of incumbent
carrier networks must be provided to competitors. The FCC recently initiated a
proceeding to establish which network elements are required to be provided by
incumbent carriers to competitors. The FCC has stated that it plans to issue a
new decision on this matter in the summer of 1999. Until then, Bell Atlantic
and other incumbent carriers have committed to regulators in writing that they
will continue to provide competitors with the network elements that they were
required to provide under the FCC rule that the Supreme Court invalidated. We
would be adversely affected if the FCC were to exempt incumbent carriers from
the duty to provide any of the facilities we need in order to provide CuNet.
The data communications industry is undergoing rapid technological change and
new technologies may be superior to the technology we use
Our industry is subject to rapid and significant technological changes. DSL
technology does not presently have widely accepted standards and continues to
develop. Alternative technologies for providing high speed data communications
are available and may be superior to the technology we use. As a consequence:
. we will continue to rely on third parties, including some of our
competitors and potential competitors, to develop and provide us with
access to communications and networking technology;
. our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
. we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our current products and
technologies.
If we fail to adapt successfully to technological changes or obsolescence or
fail to obtain access to important technologies, our business, prospects,
financial condition and results of operations could be materially adversely
affected.
If we are unable to retain our key personnel, our business will suffer
Given our stage of development, we depend on our ability to retain and
motivate high quality personnel, especially our management. Our success depends
on Jonathan P. Aust, our Chief Executive Officer, and our other executive
officers and key employees. Members of our senior management team have worked
together for only a short period of time. We do not have "key person" life
insurance policies on any of our employees. Generally, members of our senior
management team can terminate their employment agreements with us on thirty
days notice. Any of our other employees may terminate his or her employment
with us at any time. Our future success depends on our continuing ability to
identify, hire, train and retain highly qualified technical, sales, 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
13
<PAGE>
competition for qualified personnel, particularly in software development,
network engineering and product management. We may be unable to continue to
employ our key personnel or to attract and retain qualified personnel in the
future. See "Business--Employees" and "Management."
A system failure could cause delays or interruptions of service to our
customers
The reliability of our services would be impaired by a natural disaster or
other unanticipated interruption of service at our owned or leased facilities.
If an incumbent carrier, competitive carrier 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
The steps we have taken may be inadequate to protect our technology or other
intellectual property. We currently have no patents or patent applications
pending. We also rely on unpatented trade secrets and know-how to maintain our
competitive position. We seek to protect this information by confidentiality
agreements with employees, consultants and others. These agreements may be
breached or terminated, leaving us with inadequate remedies. Our competitors
may learn or discover our trade secrets. Our competitors may independently
develop technologies that are substantially equivalent or superior to ours.
Third parties, including our competitors, may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we need to
conduct our business. Our management personnel were previously employees of
other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims.
Our principal stockholders and management own a significant percentage of our
company and will be able to exercise significant influence over our company
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
14
<PAGE>
ownership could have the effect of delaying or preventing a change in our
control or otherwise discouraging a potential acquirer from attempting to
obtain control of us, which in turn could have a material and adverse effect on
the market price of our common stock or prevent you from realizing a premium
over the market price for your shares of common stock. See "Principal
Stockholders" for information about the ownership of common stock by our
executive officers, directors and principal stockholders.
Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000
issue." The Year 2000 issue could result in system failures or miscalculations,
causing disruptions in our operations.
To the extent that Bell Atlantic or other third parties experience Year 2000
problems, our network and services could be adversely affected. We have not
been able to verify Bell Atlantic's Year 2000 compliance. We believe that our
other customers and vendors will not experience Year 2000 problems that would
materially and adversely affect our business, but we do not have any way of
verifying the information they have provided. Furthermore, the purchasing
patterns of our customers may be affected by Year 2000 issues as they expend
significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase our services. Any of these developments could have a material and
adverse effect on our business, operating results and financial condition. We
have not fully determined the risks associated with the reasonably worst-case
scenario and have not yet formulated a contingency plan to address Year 2000
issues. We do not expect to have a specific worst-case scenario contingency
plan in place in the future.
Our common stock has not been traded in the public market before this offering
Our common stock has not been traded in the public market before this
offering. We will apply to the Nasdaq National Market to list our common stock,
but we do not know whether active trading in our common stock will develop or
continue after this offering. We will determine the price you will pay for our
common stock through negotiations with the underwriters. You may not be able to
resell your shares at or above the price you will pay for our common stock. For
a description of the factors that will be taken into account to determine the
offering price, see "Underwriting--Pricing of this Offering."
You will incur immediate and substantial dilution of approximately $
per share.
The initial public offering price is substantially higher than the net
tangible book value of our outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
incur immediate and substantial dilution of $ in the net tangible book
value per share of the common stock in this offering.
15
<PAGE>
Future sales of our common stock in the public market could depress our stock
price
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for our common stock. The number
of shares of common stock available for sale in the public market will be
limited by lock-up agreements under which the holders of all of our outstanding
shares of common stock and options to purchase common stock will agree not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. However, Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion and at any time without
notice, release all or any portion of the shares subject to lock-up agreements.
In addition to the adverse effect a price decline could have on holders of
common stock, that decline would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.
After this offering, the holders of 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
also have the right to require us to include their shares in any future public
offerings of our equity securities. Within approximately 180 days after this
offering, we intend to file a registration statement under the Securities Act
to register 5,000,000 shares of common stock subject to outstanding stock
options or reserved for issuance under our stock incentive plan. See "Shares
Eligible for Future Sale."
Our certificate of incorporation and bylaws contain provisions that could delay
or prevent a change in control and therefore could hurt our stockholders
Provisions of our certificate of incorporation and bylaws could make it more
difficult for a third party to acquire control of our company, even if a change
in control would be beneficial to stockholders. Our certificate of
incorporation will provide for a classified board of directors and will allow
our board to issue, without stockholder approval, preferred stock with terms
set by the board. The preferred stock could be issued quickly with terms that
delay or prevent the change in control of our company or make removal of
management more difficult. Also, the issuance of preferred stock may cause the
market price of our common stock to decrease. See "Description of our Capital
Stock" for more information.
16
<PAGE>
This prospectus contains forward-looking statements which may not prove to be
accurate
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.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $ million in net proceeds
from this offering based upon an assumed initial public offering price of $
per share. 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 $40 million of the net proceeds from this
offering to finance capital expenditures.We expect to use the remaining net
proceeds to finance operating losses that we expect to incur as we expand our
customer base and network and for general corporate purposes. The actual amount
of net proceeds we spend on a particular use will depend on many factors,
including:
. our future revenue growth, if any;
. our future capital expenditures; and
. the amount of cash generated by our operations.
Many of these factors are beyond our control. Therefore, we will retain
broad discretion in the use of the net proceeds.
This use of proceeds does not reflect the underwriters' exercise of their
over-allotment option. We estimate that we will receive $ million in
additional net proceeds if the underwriters exercise their over-allotment
option in full.
Until we use the net proceeds of this offering, we intend to invest the net
proceeds in short-term investment-grade securities.
DIVIDEND POLICY
We have never declared or paid dividends. We do not anticipate declaring or
paying dividends for the foreseeable future. Instead, for the foreseeable
future, we will retain our earnings, if any, for the future operation and
expansion of our business.
18
<PAGE>
CAPITALIZATION
The following table shows our capitalization at December 31, 1998 on an
actual basis, a pro forma basis and pro forma as adjusted to give effect to
this offering and the application of the estimated net proceeds we will receive
in this offering. See "Use of Proceeds." You should also refer to our financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
(in thousands)
Pro Forma
Actual Pro Forma(1) as Adjusted(2)
<S> <C> <C> <C>
Cash and cash equivalents.................. $5,518 $ $
======
Long-term obligations:
Capital lease obligations (including
current portion)........................ 1,513
Note payable............................. 1,000
Deferred compensation (including current
portion)................................ 500
------
Total long-term obligations (including
current portion)...................... 3,013
------
Mandatorily redeemable preferred stock,
$0.001 par value, 10,000,000 shares autho-
rized, issued and outstanding (liquidation
preference $10,322,192) (actual); no
shares issued and outstanding (pro forma);
no shares issued and outstanding (pro
forma as adjusted)........................ 5,641
------
Stockholders' equity:
Common stock, $0.001 par value,
50,000,000 shares authorized, 19,800,000
shares issued (actual), shares is-
sued (pro forma); shares issued (pro
forma as
adjusted)............................... 20
Additional paid-in capital............... 8,116
Deferred compensation.................... (3,463)
Deficit.................................. (1,841)
Less treasury stock, at cost, 3,800,000
shares.................................. (1,900)
------
Total stockholders' equity............. 932
------
Total capitalization................. $9,586
======
</TABLE>
- ---------------------
(1) Reflects: (i) conversion of $5.0 million of our mandatorily redeemable
preferred stock into shares of our common stock at the public offering
price and the cancellation without consideration of the remaining shares of
our preferred stock and all accrued dividends as if such conversion and
cancellation had occurred as of December 31, 1998, (ii) conversion of a
$5.0 million 8% convertible note issued on March 31, 1999 into shares
of our common stock at the public offering price and (iii) the investment
of $5.0 million to purchase shares of our common stock at the public
offering price pursuant to a note purchase agreement entered into on March
31, 1999.
(2) Reflects the events described in note 1 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
19
<PAGE>
DILUTION
Our net tangible book value at December 31, 1998 was $ 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. Net pro
forma tangible book value per common share is determined by dividing our net
tangible book value by the number of shares of our common stock outstanding
after giving effect to this offering. Assuming no changes in our net tangible
book value, other than to give effect to the sale of the common stock offered
by this prospectus and the application of the net offering proceeds as
described under "Use of Proceeds," our pro forma net tangible book value at
December 31, 1998 would have been $ , or $ per common share.
This represents an immediate increase in pro forma net tangible book value
of $ per common share to existing stockholders, and an immediate dilution in
pro forma net tangible book value of $ per common share to new investors
purchasing our common stock in this offering. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share................ $
Net tangible book value per common share at December 31, 1998....... $
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>
The following table summarizes at December 31, 1998:
. the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price per share
paid to us for these shares, valuing these shares at the initial public
offering price;
. the number of shares of our common stock purchased by new investors, the
total consideration and the price per share paid by them for these
shares; and
. the percentage of shares of our common stock purchased by the existing
stockholders and new investors and the percentage of consideration paid
to us for these shares.
This table assumes that none of the stock options outstanding upon the
closing of this offering will be exercised. As of December 31, 1998, 3,151,500
shares of common stock were issuable upon exercise of outstanding stock options
at a weighted average exercise price of $0.20 per share. To the extent these
stock options are exercised, new investors will experience further dilution.
<TABLE>
<CAPTION>
Shares Total Average
Purchased Consideration Price Per
-------------- -------------- Common Share
Number Percent Amount Percent ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ % $ % $
New Investors........................
Total.............................. 100.0% $ 100.0% $
</TABLE>
20
<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 selected financial and other data
for our company. The historical balance sheet data as of December 31, 1997 and
1998 and the historical statement of operations and other data for each of the
three years ended December 31, 1998 have been derived from audited financial
statements that are included elsewhere in this prospectus. The balance sheet
data as of December 31, 1996 have been derived from audited financial
statements that are not included 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 financial data as of and for the year
ended December 31, 1995 have been derived from our unaudited financial
statements that are not included in this prospectus. The unaudited financial
statements include, in the opinion of our management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of the information set forth. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
complete financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1996 1997 1998
(unaudited)
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product sales.......................... $1,891 $14,368 $8,150 $ 9,900
Consulting services.................... 36 114 791 1,428
Network services....................... -- -- 4 311
------ ------- ------ --------
Total Revenue.......................... 1,927 14,482 8,945 11,639
Cost of revenue:
Product sales.......................... 1,475 11,975 7,180 8,639
Consulting services.................... 15 91 231 761
Network services....................... -- -- 2 41
------ ------- ------ --------
Total cost of revenue.................. 1,490 12,066 7,413 9,441
Operating expenses:
Selling, general and administrative.... 299 2,255 1,437 4,017
Amortization of deferred compensation.. -- -- -- 219
Depreciation and amortization.......... 9 7 12 130
------ ------- ------ --------
Total operating expenses............... 308 2,262 1,449 4,366
------ ------- ------ --------
Income (loss) from operations........... 129 154 83 (2,168)
Interest income (expense), net.......... -- (1) (5) 64
------ ------- ------ --------
Income (loss) before income taxes....... 129 153 78 (2,104)
Provision (benefit) for income taxes.... 39 63 36 (28)
------ ------- ------ --------
Net income (loss)....................... $ 90 $ 90 $ 42 $ (2,076)
====== ======= ====== ========
Net income (loss) per common share
(basic and diluted)..................... $ 0.01 $ 0.01 $ 0.00 $ (0.22)
====== ======= ====== ========
Weighted average common shares
outstanding (basic and diluted)........ 9,740 9,740 9,740 12,134
====== ======= ====== ========
Pro forma net income (loss) per common
share (basic and diluted) (1)..........
Pro forma weighted average common shares
outstanding (basic and diluted) (1)....
Other Data:
EBITDA (2).............................. $ 138 $ 161 $ 95 $ (1,819)
Capital expenditures.................... 18 30 122 1,156
Net cash provided by (used in) operating
activities............................. 3 (27) 805 (2,810)
Net cash used in investing activities... 18 30 122 1,341
Net cash provided by financing
activities............................. 42 55 9 8,956
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
1998
1995 1996 1997 -----------------------------------
Pro Forma
(unaudited) Actual Pro Forma(1) as Adjusted(3)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 24 $ 22 $ 713 $ 5,518 $15,518 $
Property and equipment,
net.................... 8 31 140 5,031 5,031
Total assets............ 458 5,352 1,865 12,928 12,928
Total debt (including
capital lease
obligations)........... 30 84 93 2,513 2,513
Mandatorily redeemable
preferred stock........ -- -- -- 5,641 --
Total stockholders'
equity................. 118 208 250 932 16,573
</TABLE>
- ---------------------
(1) The "pro forma" selected financial data as of December 31, 1998 reflects
the following events as if such events had occurred as of December 31, 1998
for the balance sheet data: (i) the conversion of $5.0 million of our
mandatorily redeemable preferred stock into shares of our common
stock at the public offering price and the cancellation without
consideration of the remaining shares of our preferred stock and all
accrued dividends, (ii) the conversion of a $5.0 million 8% convertible
note issued on March 31, 1999 into shares of our common stock at the
public offering price and (iii) the investment of $5.0 million to purchase
shares of our common stock at the public offering price pursuant to a
note purchase agreement entered into on March 31, 1999.
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. We have
presented EBITDA to enhance your understanding of our operating results.
You should not construe it as an alternative to operating income as an
indicator of our operating performance or as an alternative to cash flows
from operating activities as a measure of liquidity determined in
accordance with GAAP. We may calculate EBITDA differently than other
companies. For further information, see our financial statements and
related notes elsewhere in this prospectus.
(3) The "pro forma as adjusted" selected financial data as of December 31, 1998
reflects the events described in note 1 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
In 1995, we began operations by providing products and services for wide
area networks, serving as a premier partner for Paradyne, Ascend and Cisco.
Shortly thereafter, we began offering a complete suite of networking solutions
to businesses, including network integration, network management, network
security and professional services. From 1995 through 1998, our revenue was
derived primarily from the sale of data communications products, technical
consulting and network services. During this period, our revenues fluctuated,
our primary source of revenue was data communications product sales, and AT&T
accounted for 68.8%, 38.2% and 50.4% of our revenue in 1996, 1997 and 1998,
respectively.
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. We began CuNet service trials in November 1997 and began
offering CuNet, commercially in Philadelphia and Washington D.C. in January
1999. We currently offer CuNet in Boston, New York, Philadelphia, Baltimore,
Washington, D.C. and Richmond. We expect to extend our network coverage to
include Norfolk, Pittsburgh and Wilmington, Delaware by the end of 1999. We
have collocated our equipment in 51 Bell Atlantic central offices. We expect to
raise the number of central offices in which we have collocated our equipment
to 360 by the end of 1999. As opportunities present themselves, we may decide
to expand our network beyond our initial target markets and into adjacent
regions. We have recently entered into an interconnection agreement with Bell
South.
Since February 1997, we have invested increasing amounts in the development
and deployment of CuNet. The proceeds of our preferred and common stock
financing in August 1998 have been used to fund the deployment of our CuNet
services. We intend to substantially increase our operating expenses and
capital expenditures in an effort to expand rapidly our infrastructure and DSL-
based network services. We expect to incur substantial operating losses, net
losses and negative cash flow during the build-out of our network and our
initial penetration of each new market we enter. These losses are expected to
continue for at least the next two to three years. Although in the short term
we expect to derive the majority of our revenue from our networking solutions,
we expect that over time revenue from CuNet based services will constitute the
more significant portion of our total revenue.
As we develop our CuNet services, our annual and quarterly operating results
may fluctuate significantly. Some of the factors which may cause those
fluctuations and create uncertainty include the timing and availability of Bell
Atlantic copper telephone lines, central office collocation space, operations
support services and spectrum management service. In addition, our future
growth and results of operations will be affected by our ability to obtain on
reasonable terms fiber optic transport facilities, by changes in laws or
regulations and by the length of the CuNet sales cycle. For a discussion of
these factors, see "Risk Factors."
REVENUE
Revenue consists of:
. Product sales. We sell, install and configure selected equipment from our
manufacturing partners. Our engineers select the right manufacturer's
product solution based upon customized dependable network designs to
improve our customers' operations and network efficiencies.
23
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. Consulting services. We bill customers for nonrecurring service
activation and installation charges. We also bill our customers for
network integration, on site network management, network security and
professional services based on time and materials for contracted
services. In addition, we derive revenue from the maintenance and
installation of equipment. Some of these services may be provided through
third party providers under contract to us.
. Network services. We charge monthly service fees for access to our CuNet
local, metropolitan and wide area networks. We also provide a wide
variety of network services to customers, including remote network
management and monitoring, network security, virtual private networks,
Internet access, electronic commerce and other data applications. Some of
these services are delivered to customers using resources from third
party providers under contract to us.
COST OF REVENUE
PRODUCT SALES
We purchase equipment from various vendors whose technology and hardware
solutions we recommend to our customers. We do not manufacture any of this
equipment.
CONSULTING SERVICES
Consulting services cost of revenue consists of charges for hardware
maintenance, installation and certain contract services which we purchase from
third parties.
NETWORK SERVICES
Our network service costs generally comprise non-employee-based charges such
as:
. CuNet service fees. We pay a monthly service fee for each copper line and
for each collocation arrangement, as well as usage fees, for the back
office services we obtain from the incumbent carriers we work with in
order to serve our CuNet customers. Sometimes, we must pay these
incumbent carriers to perform special work, such as line conditioning,
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 carriers or incumbent carriers for other
types of access, other than through our CuNet network, which we provide
to customers as part of our network services.
. Backbone connectivity charges. We incur charges for our metropolitan area
network backbone, typically from a competitive carrier or an incumbent
carrier, and for wide area network backbone 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 DSL equipment switches 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.
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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 sales, sales partners in multiple channels, agents and
telemarketing. Our sales and marketing efforts focus on attracting and
retaining small, medium and large business customers in our target
markets. We enter into partnerships with other sales partners, including
Internet service providers, long distance and local carriers and other
networking services companies. These expenses have increased, and will
continue to increase, as we develop our CuNet services.
. General and administrative expenses. As we expand our network, we expect
the number of employees located in specific markets to grow. Certain
functions, such as customer service, network operations, finance, billing
and administrative services, are likely to remain centralized in order to
achieve economies of scale. We pay licensing fees for standard systems to
support our business processes such as operating support systems, or OSS,
and billing systems.
Amortization of deferred compensation
As of December 31, 1998, we had granted a total of 3,151,500 incentive stock
options at an exercise price of $.20 per share. At December 31, 1998, all of
these options were exercisable into restricted shares of our common stock which
generally vest over a three to four year period. We estimate that the fair
value of the underlying common stock on the date of grant was in excess of the
exercise price of the options. As a result, we recorded deferred compensation
of $3.7 million for the year ended December 31, 1998. We recorded this amount
as a reduction to stockholders' equity which will be amortized as a charge to
operations over the vesting periods. For the year ended December 31, 1998, we
recognized $219,000 of stock compensation expense related to these options.
Depreciation and amortization
Depreciation expense arising from our network and customer premise equipment
purchases will be significant and will increase as we deploy our network.
Collocation fees, build-out costs, including one-time installation and
activation fees, and other DSL-based equipment costs are capitalized and
amortized over a range of two to five years.
Interest Income (Expense), Net
Interest income (expense), net, primarily consists of interest income from
our cash and short-term investments less interest expense associated with our
debt and capital leases. As our capital expenditures increase, we anticipate
that our interest expense associated with our capital leases will increase.
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Results of Operations
The following table presents our results of operations data and the
components of net income (loss) as a percentage of our revenue:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
------------------------ -------------------
1996 1997 1998 1996 1997 1998
(percent of
(dollars in thousands) revenue)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales................ $14,368 $8,150 $9,900 99.2% 91.1% 85.1%
Consulting services.......... 114 791 1,428 0.8 8.8 12.3
Network services............. -- 4 311 -- 0.1 2.6
------- ------ ------- ----- ----- -----
Total revenue.............. 14,482 8,945 11,639 100.0% 100.0% 100.0%
Cost of revenue:
Product sales................ 11,975 7,180 8,639 82.7 80.3 74.2
Consulting services.......... 91 231 761 0.6 2.6 6.5
Network services............. -- 2 41 -- 0 0.4
------- ------ ------- ----- ----- -----
Total cost of revenue.......... 12,066 7,413 9,441 83.3 82.9 81.1
------- ------ ------- ----- ----- -----
Gross profit................... 2,416 1,532 2,198 16.7 17.1 18.9
------- ------ ------- ----- ----- -----
Operating expenses:
Selling, general and
administrative.............. 2,255 1,437 4,017 15.6 16.1 34.5
Amortization of deferred
compensation................ -- -- 219 -- -- 1.9
Depreciation and
amortization................ 7 12 130 0.0 0.1 1.1
------- ------ ------- ----- ----- -----
Total operating expenses... 2,262 1,449 4,366 15.6 16.2 37.5
------- ------ ------- ----- ----- -----
Income (loss) from operations.. 154 83 (2,168) 1.1 0.9 (18.6)
Interest income (expense),
net........................... (1) (5) 64 0 0 0.6
Provision (benefit) for income
taxes......................... 63 36 (28) 0.4 0.4 (0.2)
------- ------ ------- ----- ----- -----
Net income (loss).............. $ 90 $ 42 $(2,076) 0.7% 0.5% (17.8)%
======= ====== ======= ===== ===== =====
</TABLE>
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 Network services cost of $39,000 attributable to expenses incurred to
develop and operate our CuNet and other networking services.
Gross profit. Gross profit was $2.2 million and 18.9% of revenue for the
year ended December 31, 1998, as compared to $1.5 million and 17.1% of revenue
for the year ended December 31, 1997, an increase of $0.7 million or 47.0%. The
increase in gross profit was attributable to higher
26
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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 was primarily due to increased staffing and other expenses incurred to
develop our CuNet network and other networking solutions.
Amortization of deferred compensation. Amortization of deferred compensation
was $219,000 for the year ended December 31, 1998. We had no amortization of
deferred compensation for the year ended December 31, 1997.
Depreciation and amortization expense. Depreciation and amortization expense
was $130,000 and 1.1% of revenue for the year ended December 31, 1998, as
compared to $12,000 and less than 1% of revenue for the year ended December 31,
1997, an increase of $118,000. This increase was primarily due to investments
in computer equipment and software, office furnishings and leasehold
improvements.
Income (loss) from operations. Our loss from operations was $2.2 million for
the year ended December 31, 1998, as compared to income from operations of
$83,000 for the year ended December 31, 1997. The loss in 1998 was primarily
due to increased staffing and other operating expenses we incurred in support
of our CuNet network and other networking solutions.
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 $5.5 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.
27
<PAGE>
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, a decrease of $0.9 million, or 37.5%, as
a result of the decrease in product sales and the increase in Consulting
services.
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, a decrease of $0.9 million, or 39.1%. This
decrease was primarily due to decreased bonus and commissions compensation in
1997 attributable to lower revenue.
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%.
LIQUIDITY AND CAPITAL RESOURCES
While our networking solutions activities do not require significant capital
expenditures, the development and expansion of our CuNet network does require
significant capital expenditures. The principal capital expenditures which we
expect to incur during our CuNet rollout include the procurement, design and
construction of our collocation spaces and the deployment of DSL-based
equipment in Bell Atlantic central offices and connection sites. Capital
expenditures were $4.7 million for 1998. At this time, our only material
purchase commitment is a commitment to purchase software and services for
approximately $1.0 million. We expect our capital expenditures to be
substantially higher for the rest of 1999 and for future periods, primarily due
to continued collocation construction and the purchase of telecommunications
equipment for expansion of our network. Our capital expenditures will depend in
part upon obtaining adequate volume commitments or demand
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from our CuNet customers. Based on our present plans we anticipate capital
expenditures during the balance of 1999 of between $40 million and $55 million
for the expansion of our network to approximately 360 central offices, a
portion of which will be financed in the form of capital leases.
We have financed our operations to date primarily through a private
placement of preferred and common stock totaling $10.0 million, the use of
capital equipment leases totaling $1.5 million and borrowings of $1.0 million
from Ascend Communications and the issuance of $5.0 million of convertible
notes on March 31, 1999. As of December 31, 1998, we had an accumulated deficit
of $1.6 million, and cash and cash equivalents of $5.5 million.
Net cash used in operating activities was $27,000 in 1996 and $2.8 million
in 1998, while net cash provided by operations in 1997 was $806,000. The change
in operating cash flow from 1997 to 1998 was primarily the result of operating
losses attributable to the expansion of our historic business and the
development of our CuNet services, but also the result of an increase in
accounts receivable accompanied by a decrease in accounts payable. The net cash
used in investing activities was $30,000 in 1996, $122,000 in 1997 and $1.3
million in 1998. The increase in 1998 was for the initial deployment of
equipment for our CuNet services. Net cash provided by financing activities was
$54,000 in 1996, $9,000 in 1997 and $9.0 million in 1998, of which $8.0 million
was the net result of the preferred and common stock financing and the
repurchase of common stock from existing stockholders.
Ascend has provided us with a $30 million capital lease facility to fund
acquisitions of certain Ascend equipment, under which $1.4 million was
outstanding as of December 31, 1998 and a $10 million line of credit, under
which $1.0 million was outstanding as of December 31, 1998. We can draw on the
line of credit in $1.0 million increments up to a maximum of $5.0 million. We
may draw down the remaining $5.0 million, also in $1.0 million increments, upon
(1) completing the drawdown under the capital lease facility of in excess of
$15.0 million for acquisitions of equipment from Ascend, and (2) demonstrating
that at least 70% of this equipment is being used by us to generate revenue. 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 thirty-three months we are required to make principal and interest
payments in accordance with a sixty month amortization schedule using an
interest rate of 8.25% for the first eighteen months and a rate equal to the
prevailing high yield bond index for the next fifteen months. The remaining
unpaid interest is due forty-two months after the related advance. In addition,
we have an arrangement with Paradyne Corporation to lease up to $4.0 million of
equipment, subject to vender approval.
We believe that the net proceeds from this offering, our existing cash and
cash equivalents, existing and anticipated equipment lease financings and
future revenue generated from operations, will be sufficient to fund our
operating losses, capital expenditures, lease payments and working capital
requirements through the end of 2000. We expect our operating losses and
capital expenditures to increase substantially primarily due to our network
expansion. We expect that additional financing would be required in the future
if we were to expand beyond our initial target markets. We may attempt to
finance such an expansion of our operations through a combination of commercial
bank borrowings, leasing, vendor financing or the private or public sale of
equity or debt securities. While we would probably not have sufficient capital
to complete our CuNet rollout if we do not complete this offering, we would be
able to continue to offer networking solutions over other forms of access.
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<PAGE>
Our capital requirements may vary based upon the timing and success of our
CuNet rollout, as a result of regulatory, technological and competitive
developments or if:
. demand for our services or cash flow from operations is more or less
than expected;
. our development plans or projections change or prove to be inaccurate;
. we engage in any acquisitions; or
. we accelerate deployment of our network or otherwise alter the schedule
or targets of our CuNet rollout plan.
Equity or debt financing may not be available to us on favorable terms or at
all. See "Risk Factors--We may need significant additional funds to expand our
business which we may be unable to obtain."
Impact of the Year 2000 Issue
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external providers. We have completed our Year 2000 compliance
testing for all of our internal systems and believe that our internal business
systems are Year 2000 compliant. Because we are a young company, we believe we
have been able to build or acquire our business systems with the Year 2000
issue in mind in a more effective manner than many older companies. Therefore,
there have been few Year 2000 changes required to our existing systems and
applications.
We have substantially completed a compliance check of our significant
external providers, except for Bell Atlantic. Based on responses from these
third parties other than Bell Atlantic, we believe that they will not
experience Year 2000 problems that would materially adversely affect our
business. We have not been able to conduct a compliance check of Bell Atlantic
nor assess its Year 2000 compliance. To the extent that Bell Atlantic or other
third parties experience Year 2000 problems, our network and services could be
adversely affected. Furthermore, the purchasing patterns of our customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available for our services. Any of these developments
could have a material and adverse effect on our business, prospects, operating
results and financial condition.
Except for our uncertainties regarding Bell Atlantic's Year 2000 compliance,
we do not believe the risks from Year 2000 are significant. We expect to have
contingency plans in place to deal with potential Year 2000 disruptions by July
1999, but we have not formulated a contingency plan to address the 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 CuNet deployment plans and strategies;
. development and management of our business;
. our ability to attract, retain and motivate qualified personnel;
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. 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.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
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BUSINESS
We are a leading provider of DSL technology and networking solutions to
businesses. We formed Network Access Solutions in 1995 and began providing data
communications products and services for corporate networks. We served as a
premier partner for Paradyne, Ascend and Cisco, helping to sell and integrate
their equipment into our customers' networks. We recognized that businesses
were finding it extremely expensive and time consuming to manage and secure the
complex elements of their networks. To exploit this opportunity, we began
offering our customers further services for their networks such as network
integration, network management, network security and professional services.
In early 1996, we recognized the opportunity presented by the Convergence of
three factors:
.the accelerating growth in the data communications requirements of
businesses;
.deregulation of the local telephone network by the 1996 Telecom Act;
and
.the compelling capabilities and economics of DSL technology.
To exploit this opportunity, we began developing technical standards and
processes for delivery of DSL-based services to our customers. In April 1997,
we entered into our first interconnection agreement with Bell Atlantic. In
November 1997, we began CuNet service trials. Although in the short term we
expect to continue to derive the majority of our revenue from our networking
solutions activities, we expect that over time CuNet will constitute the more
significant portion of our total revenue. We currently offer CuNet in Boston,
New York, Philadelphia, Baltimore, Washington, D.C. and Richmond. We expect to
extend our network coverage to include Norfolk, Pittsburgh, and Wilmington,
Delaware by the end of 1999. We have over 400 customers for our networking
solutions, including business customers and network service providers. We seek
to bundle CuNet and our networking solutions to provide a comprehensive
solution to our customers.
INDUSTRY OVERVIEW
We believe that a substantial business opportunity has been created by the
concurrence of several factors: the growing demand for high speed data
communications and networking solutions; the increasing network congestion; the
commercial availability of low cost DSL technology; and the passage of the 1996
Telecom Act.
Growing demand for high speed data communications and enterprise
solutions. Businesses and other organizations are finding it extremely
expensive and time-consuming to manage the complex elements of their networks.
Businesses are implementing internal networks using Internet technology, called
intranets, and remote local area networks to enable employees to work from
remote locations and home, and to create private networks that connect
corporate networks in multiple locations. Gartner Group, a leading industry
analyst, estimates that the U.S. market for packet-based, virtual private
network and Internet data services will grow from $3.4 billion in 1997 to $18.5
billion in 2002, a compounded annual growth rate of 40.3%. Business demand for
Internet access, e-mail, video and audio services, Web hosting and electronic
commerce, is also increasing.
This demand in turn drives the need for high speed, high capacity
communications to support these applications. As businesses grow to take
advantage of the extended power presented by their networks and the Internet,
they will need extensive network management and security solutions designed to
protect their internal data. International Data Corporation, 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 17.6%.
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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 1,500, providing $360,000 in
revenue, in 1997, to over 3.1 million lines and $3.5 billion in revenue in
2002, representing a 361% compounded annual growth rate in the number of lines
and a 526% compounded annual growth rate in revenue.
Increasing network congestion. The growing use of capacity intensive
applications is creating a number of challenges for the existing copper lines
of the public telephone network, and for public data networks and private
networks. These challenges affect the structure of the existing network and
limit the ability of businesses to take full advantage of the benefits of new
information technologies. Networks are becoming increasingly congested due to
the rapid growth in data traffic and the imbalance in capacity between local
and wide area networks. While high speed local access technologies such as DSL
will be deployed to help solve the local access bottleneck, expertise and
networking solutions will be needed to remedy the other bottlenecks throughout
existing networks.
The "last mile" is defined as that part of the network that runs from an end
user's location to the first central office or nearest service entry point into
the network. Since the break-up of AT&T, substantially all data services have
been configured with a local carrier, typically a regional Bell operating
company like Bell Atlantic, providing the last mile local access, and a long
distance carrier like AT&T, MCI WorldCom or Sprint providing the long distance
portion. While competition in the long distance market has evolved quickly and
caused price reductions, the local access markets have not similarly developed.
As a result, the local access market remains technologically behind the long
distance market, with last mile access to major public networks like the
Internet and data networks remaining either very slow or very expensive.
Commercial availability of low cost DSL technology. The full potential of
Internet and remote local area network applications cannot be realized without
removing the performance bottlenecks of the local telephone networks. DSL
technology removes this performance bottleneck by increasing the data carrying
capacity of copper telephone lines from the 56 kilobits per second speeds
available with common dial-up modems and 128 kilobits per second speeds
available on integrated services digital network, or 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. Subsequent investments in DSL technology
are directly related to the number of paying customers.
Impact of the 1996 Telecom Act. The 1996 Telecom Act allows competitive
carriers like us to take advantage of incumbent carriers' copper telephone line
networks rather than constructing a competing infrastructure at significant
cost. The 1996 Telecom Act requires incumbent carriers:
. to allow competitive carriers like us to lease copper lines on a line by
line basis;
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. to permit competitive carriers to collocate their equipment, including
DSL equipment, in incumbent carriers' central offices, which enables
competitive carriers to access end users through existing telephone line
connections; and
. to provide competitive carriers with the operations support services
necessary for competitive carriers to provide competitive
telecommunications service.
The 1996 Telecom Act creates an incentive for some incumbent carriers,
including Bell Atlantic, to cooperate with competitive carriers because the
incumbent carriers cannot provide long distance service in the regions where
they provide local exchange service until the FCC determines that the incumbent
carrier has satisfied specific statutory criteria for opening its local markets
to competition.
THE NAS SOLUTION
We offer high speed channelized and packet-based data communications
services using a combination of DSL and data switching technologies, like Frame
Relay and Asynchronous Transfer Mode, or ATM, and a complete package of
networking solutions to businesses, including network integration, network
management and network security. Our services are offered either by themselves
or together with other services. We market our services both directly to
enterprises through our direct sales force and indirectly through network
service providers and sales partners. To date, our networking solutions have
generated almost all of our revenue.
High Speed, "Last Mile" Connectivity. CuNet solves the last mile challenge
using DSL technology to convert standard copper telephone lines into high speed
data connections. Our network is capable of delivering data at speeds ranging
incrementally from 128 kilobits per second to 2 megabits per second
symmetrically, where data travels at the same speed to and from the customer,
and up to 7 megabits per second asymmetrically, where data travels faster to
the customer than from the customer. The highest CuNet speeds allow our
customers to transfer data at rates faster than standard high speed data
connections, like T1 lines and Frame Relay circuits. We provide packet-based
connections like other DSL providers. Because many of today's existing networks
use a channelized architecture, we also provide channelized connections, which
we believe no other major DSL provider currently offers. Thus, CuNet addresses
both older channelized data network requirements, like traditional voice
telephone networks, and the packet-based communications better suited for
newer, more efficient technologies such as ATM, Frame Relay and Internet
Protocol, the set of standards that enable Internet communications.
Adaptable Network Architecture. Our architecture supports today's bandwidth-
intensive business requirements, such as corporate networks, virtual private
networks, office-to-office connectivity, telecommuting solutions, collaborative
computing of users in different areas, Internet/intranet access, traditional
voice, video conferencing and multimedia, e-mail, video and audio transmission,
web hosting and electronic commerce. We have designed our network so that we
can individually configure a customer's features and speeds from our network
operations center, eliminating the need for customers to upgrade their hardware
or for us to visit their premises in order to enhance or upgrade services.
Metropolitan Area Network Solutions. We recognize that businesses with city-
wide locations, as well as remote users who telecommute, need to communicate
and share confidential information. We are using our extensive metropolitan
area networks, or MANs, to provide high capacity, secure, direct connections
between these remote locations and to provide cost effective private network
solutions to our customers with the capacity, speed, reliability and level of
service that they require.
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Wide Area Network Solutions. We recognize that many organizations have
offices and employees in multiple cities. We provide high capacity, secure and
reliable connections between these geographically dispersed locations through
our wide area network, or WAN. Because our wide area network customers, like
our metropolitan area network customers, are served end-to-end on our CuNet
infrastructure, we are able to deliver a wide area, private network to our
customers with the capacity, speed, reliability and level of service that they
require. For example, our wide area network enables our network service
provider customers to expand their geographic reach into areas where they lack
a physical point of presence through virtual points of presence, or VPOPs.
Single Source Networking Solutions. We provide comprehensive networking
solutions to businesses that are increasingly outsourcing their information
systems and network integration, network management and network security. Our
engineers consult with our customers to design, install and integrate all
aspects of their local, metropolitan and wide area networks. We provide remote
online control, monitoring and management. We also develop and implement
sophisticated network security solutions to protect our customers' networks and
vital data, including virtual private networks, encryption and access
authentication, risk assessment and audits, network security architecture
consulting, controlled penetrations and security incident analysis and
response. We maintain and manage our customers' networks and security systems
24 hours a day, seven days a week from our network operations center in
Sterling, Virginia.
The NAS Strategy
Our goal is to become the premier provider of data communications and
networking solutions in the markets in which we focus. The following are key
elements of our strategy:
. Rapidly provide depth of coverage in our markets. Because DSL is a
localized technology tied to the proximity of end users to central
offices, we must collocate our equipment in many central offices in order
to provide depth of coverage. Thus, we are pursuing a strategy of
providing services in a substantial majority of the central offices in
each target market that we enter. Our initial focus on the Bell Atlantic
region will enable us to deploy our network with speed and depth. When
deployed, we believe our pervasive coverage of these markets will enable
us to better serve our end user business customers and network service
providers which are increasingly seeking a single service provider in
multiple metropolitan areas. Our depth of service will enable us to
provide our customers with a total business solution by providing them
with access for substantially all of their end users within our target
markets. As opportunities present themselves, we may decide to expand
our network beyond our initial target markets and into adjacent regions.
We have recently entered into an interconnection agreement with Bell South.
. Capitalize on core competency in direct sales and engineering support to
businesses. Through our direct sales force, we have been marketing,
selling and supporting comprehensive networking solutions to businesses
since early 1995 and have provided networking solutions to over 475
customers. Our experienced direct sales force has been supported by
engineers who are trained, certified experts in all our vendor-partners'
products and technologies, including Ascend, Paradyne, Lucent
Technologies, Inc. and Cisco. We intend to market CuNet to our existing
base of network integration, network management and network security
customers and to market our network integration, network management,
network security services to new CuNet customers. In working with our
existing customer base, we have found that we can sell a customer an
initial product or service, and, based on the insights gained and
relationships built from the initial sale, expand the relationship to
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provide comprehensive solutions to the customer's networking needs,
thereby improving the likelihood that we will retain these customers.
. Quickly provision reliable services by building relationships with
service providers. Because we have developed strong operational
relationships with our service providers, including Bell Atlantic, Level
3 Communications and MCI WorldCom, we believe we can manage these service
providers to deliver the highest quality network provisioning to our
customers in the shortest possible time. In February 1997, we began a
joint operational relationship with Bell Atlantic and have developed
technical standards specifying the provisioning and telephone line
qualities necessary to deliver dependable, high quality DSL circuits
within the Bell Atlantic region. We believe we have gained a competitive
advantage through our close operational relationships with Bell Atlantic,
the dominant incumbent carrier in our initial target markets, and our
other service providers. We believe these relationships will enable us to
continue to enhance and maintain our network and provide high quality
solutions on a timely basis.
. Provide superior customer care. We emphasize a one-stop total service
solution for our customers by developing a complete project
implementation plan for each installation and for the on-going
maintenance of their service. This is to ensure that each customer
receives the service for which they have contracted according to our
service level commitments. We manage all aspects of our customers'
connections to our network, including the design and installation of the
end-user's connection, equipment configuration and network monitoring on
a 24 hour a day, seven days 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 multiple sales channels. We
market our products and services directly and indirectly to small, medium
and large business customers using sales partners in multiple channels.
CuNet's adaptability enables us to deploy services for all market
segments, including end users and wholesale customers. We will continue
to take advantage of our existing customer base through our direct sales
force, which we expect to grow to more than 140 people by the end of
1999. We also sell our services indirectly through our sales partners,
including Internet service providers, long distance and local carriers
and other networking services companies.
. Enhance and expand our network to meet the broadest array of business
requirements. Our network architecture and technology is designed to
provide our customers with adaptable, hybrid networking solutions. Our
network supports a broad array of business requirements, such as
corporate networks, virtual private networks, office-to-office
connectivity, telecommuting solutions, collaborative computing of users
in different areas, Internet/intranet access, video conferencing and
multimedia, e-mail, video and audio transmission, Web hosting and
electronic commerce. Our network provides a robust solution that can be
adapted to meet the needs of our customers and integrate technological
innovations as they are developed.
. Capitalize on economics of DSL. DSL technology requires a lower initial
fixed investment than that needed for existing alternative technologies
because DSL uses existing copper telephone lines. Thus, we are able to
offer businesses services comparable to traditional wide area networking
technologies, like high speed T1 lines and Frame Relay circuits, at
approximately 30% to 70% of the cost of such services. Our subsequent
investments in DSL technology are directly related to the number of
paying customers, making a significant portion of our capital
expenditures success-based. We estimate that approximately two-thirds
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of our cumulative capital expenditures over the next five years will be
for DSL equipment that is directly related to our end user subscription
rate.
Product and Service Offerings
We offer our customers CuNet service in our target markets and networking
solutions. These networking solutions include network management services --
which we have branded ROC, for remote online control, and SOC, for secure
online control -- network security services and professional services and
allow us to be the single provider of the networking solutions businesses
require. Historically, almost all of our revenue has been derived from our
networking solutions. Although in the short term we expect to continue to
derive the majority of our revenue from networking solutions, we expect that
over time CuNet based services will constitute the more significant portion of
our total revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CuNet Services
CuNet. In January, 1999, we began commercially offering our CuNet services.
CuNet uses DSL technology to provide high speed "always on" channelized and
packet-based communications services. CuNet connects business users to our
metropolitan area networks and wide area network using ATM, Frame Relay and
DSL technologies over traditional copper telephone lines. CuNet customers are
able to connect to our regional wide area network either within a city or
between our cities, to obtain high capacity, secure and reliable connections
between geographically
dispersed locations. Because our customers are served end-to-end on our CuNet
infrastructure, we are able to deliver a true wide area, virtual private
network with the capacity, speed, reliability and level of service that they
require.
The chart below shows the service, speed, retail price (which includes
customer premise equipment), range and performance of our CuNet services, as
of March 1999:
<TABLE>
<CAPTION>
Retail List Range from
Speed to Speed Retail List Price Central
End From End Price for for Monthly Office
Service user(2) user(2) Activation(1) Service(1) (feet) Market/Usage
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
Symmetrical:
CuNet 128 128 Kbps 128 Kbps $270 $129 18,000 ISDN replacement for telecommuters.
CuNet 256 256 Kbps 256 Kbps $270 $146 18,000 Small businesses with standard e-mail and web usage.
CuNet 384 384 Kbps 384 Kbps $270 $162 18,000 Higher bandwidth solution for small to medium sized
businesses running moderately-visited web sites.
CuNet 512 512 Kbps 512 Kbps $270 $185 18,000 Allows small and medium businesses to meet most
MAN/WAN/video and Internet needs.
CuNet 768 768 Kbps 768 Kbps $270 $217 18,000 Supports high bandwidth intensive applications such
as electronic commerce, video conferencing, Frame
Relay and voice over Frame Relay.
CuNet 1.0 1.0 Mbps 1.0 Mbps $270 $239 18,000 Close to full T1 for medium to large sized
businesses.
CuNet 1.5 1.5 Mbps 1.5 Mbps $270 $294 18,000 Standard for large organizations that require high
capacity connections. Applications include the
ability to integrate voice, data and Internet
services over a single connection.
CuNet 2.0 2.0 Mbps 2.0 Mbps $270 $348 18,000 Full motion video and multimedia applications for
large businesses.
<CAPTION>
Asymmetrical:
<C> <C> <C> <C> <C> <C> <S>
CuNet 1.5 1.5 Mbps 384 Kbps $270 $239 18,000 High speed web access, e-mail and file distribution.
CuNet 4.0 4.0 Mbps 1.0 Mbps $270 $429 18,000 Very high speed web access, e-mail and file
distribution.
CuNet 7.0 7.0 Mbps 2.0 Mbps $270 $729 18,000 Bandwidth and capacity sufficient to meet most
asymmetrical data communication requirements.
</TABLE>
- --------------------
(1) Wholesale and volume discount prices are available for network service
providers.
(2) "Kbps" means kilobits per second. "Mbps" means megabits per second.
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CuNet Frame. CuNet 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 CuNet Frame customers is the low cost and
simplicity of use when contrasted against traditional incumbent carrier or long
distance carrier Frame Relay services.
VPOP. Our virtual point of presence service provides network service
providers access to our entire CuNet network. With VPOP, a network service
provider can offer services throughout the entire CuNet network without
additional investment in network communications infrastructure. This service
offers wholesale customers the opportunity to sell DSL circuits in cities
outside of the local serving area in which they physically connect to the CuNet
network. Wholesale and volume discount prices are available for network service
providers.
Networking Solutions
We began our company in 1995 by providing products and services for
corporate networks. We served as a premier partner for Paradyne, Ascend and
Cisco, helping to sell and integrate their equipment into our customers'
networks. We recognized that businesses were finding it extremely expensive and
time consuming to manage and secure the complex elements of their networks. To
exploit this opportunity, we began offering our customers further services for
their networks such as network integration, network management, network
security and professional services. Since that time, we have offered a
comprehensive suite of networking solutions to over 400 customers.
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 customer premises equipment vendors, long
distance carriers and local exchange carriers, a help desk for network
administrators, monitoring and coordinated maintenance of network services,
network performance analysis and capacity planning, network monitoring and
enterprise network analysis.
We provide a wide variety of network management solutions customizable to
any requirement in order to meet our customers' unique management requirements
arising from their network configuration. We believe our strategy of providing
these services will allow us to address a larger market opportunity than that
represented by CuNet alone.
ROC Services. We offer remote online control, or ROC, services to meet our
customers' outsourced network requirements. From our network operations center
in Sterling, Virginia, we continuously monitor the integrity of our customers'
metropolitan and wide area networks, evaluate their network utilization,
implement problem resolution systems, provide network health and status
monitoring and other customized management offerings. We proactively monitor
the performance of our customers' network devices and perform trouble
resolution to address network problems, often before our customer's end users
become aware of them.
SOC Services. We offer secure online control, or SOC, services to meet our
customers' outsourced network security requirements. We provide proactive
network monitoring, intrusion detection and management of these network
security solutions on a 24 hour a day, seven days a week basis. We provide a
variety of security solutions including barriers, or firewalls, between
internal corporate networks and external networks like the Internet, virtual
private network service, encryption and access authentication solutions for
customers looking for the highest level of security on any network on which
data is transported.
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Network Security 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 "defense in-depth" strategy exists and if it
is adhered to. We assess the effectiveness of a customer's reporting and
response mechanisms and determine vulnerabilities and other critical
issues.
. Network security architecture consulting. We provide expertise in
designing, implementing, modifying and protecting data networks of all
sizes.
. Controlled penetrations. We will conduct organized attacks with original
software tools and techniques designed to expose information security
breaches. These controlled penetrations are tailored to customer
requirements. Following a penetration, our engineers will interpret the
outcome and present results to both senior executives and lead engineers.
We also take steps to ensure that knowledge gained from a controlled
penetration is not lost during subsequent implementation and maintenance
phases.
. Incident forensics and response. Our engineers have rigorous training in
investigating, analyzing and responding to security breaches after they
occur and are well versed in the rules of evidence necessary to present
their findings in judicial proceedings on behalf of our customers.
Professional Services.
We provide professional consulting and network integration services to
complement our CuNet, ROC, SOC and network security services. We provide
network design, network evaluation, project and program management, staging,
installation, maintenance and warranty services.
Customers
We have over 400 customers, including over 45 CuNet customers. Our largest
customers in 1998 were AT&T and Zeneca Pharmaceuticals, a division of Zeneca,
Inc. AT&T and Zeneca which accounted for 50.4% and 9.6%, respectively, of our
revenue in that year. The loss of either of these customers would have a
material adverse effect on our business. At the end of 1998, AT&T accounted for
47% of our accounts receivable. Some of our networking solutions customers
include the following:
<TABLE>
<S> <C>
American International Group, Inc. Manugistics Group, Inc.
Ascend Communications, Inc. National Rural Telecommunications Cooperative
AT&T Corp. Network Solutions, Inc.
Cisco Systems, Inc. Paradyne Corporation
Lockheed Martin Corporation University of Virginia
Lucent Technologies Inc. Zeneca Pharmaceuticals
</TABLE>
Sales and Marketing
We market our products and services directly and indirectly to small, medium
and large business customers using multiple sales channels. We take advantage
of our existing customer base through our direct sales force. We also sell our
services indirectly through our sales partners, including Internet service
providers, long distance and local carriers and other networking services
companies.
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Direct Sales. We market our full complement of products and services through
a direct sales force of 35 people which we expect to grow to over 140 people by
the end of 1999. Our direct sales force is supported by sales engineers who
also seek to sell our networking services. Our sales representatives focus on
selling connectivity to small and medium businesses while our account
executives focus on selling connectivity and networking solutions to medium and
large businesses. We target enterprises that have at least one of the following
requirements: Internet connectivity, remote local area network access,
traditional voice and data applications and metropolitan or wide area network
Frame Relay. We also generate lead referrals for our direct sales forces
through telemarketing efforts. Our sales force seeks to deal directly with the
chief information officer or telecommunications manager responsible for access
in the target account. Our sales force is located in each of our target
markets. We intend to increase the size of our sales and technical support
force to sell and support these services as we expand our business. We also
seek to coordinate our direct sales and marketing efforts with our vendor
partners, including Ascend, Paradyne and Cisco. Our direct sales process
generally ranges from 30 to 60 days for small and medium businesses, which
generally require simple connectivity and networking solutions. Larger
businesses with more complex networking requirements often require customized
solutions. The large business sales process may take up to six months and may
involve:
. A significant technical evaluation;
. An initial trial roll-out of our services; and
. A commitment of capital and other resources by the customer.
Indirect Sales. We sell our services through network service providers,
including Internet service providers, long distance and local carriers and
other networking services companies. These providers combine one or more of our
services with their own Internet, Frame Relay and voice services and resell
those bundled services to their existing and new customers. We address these
markets through sales and marketing personnel dedicated to this channel. We
intend to augment our CuNet sales through partnerships with other service
providers which offer complementary services and can offer CuNet as part of a
complete business solution. For example, we have recently entered into an
agreement with an Internet service provider to provide for the purchase,
marketing and resale of our network security services, primarily to the
Internet service provider's small business and enterprise customers. We also
leverage our equipment vendors' partnerships as sources for sales opportunities
by offering joint technology seminars, implementing marketing campaigns and
sharing cross-selling opportunities.
Customer Service
Network service providers and enterprise communications managers typically
have to assemble their digital communications networks using multiple vendors.
This leads to additional work and cost as well as complex coordination issues.
We work with each customer to develop a project implementation plan. This plan
includes qualifying the customer for our service offerings, placing orders for
connection facilities, coordinating the delivery of the connection, turn up and
final installation. We emphasize a one-stop total service solution for our
customers. We provide our service according to a predetermined service level
commitment with each customer. Our comprehensive solution includes:
. Customer Line Installation. We work with each customer to establish all
connection and configuration requirements to connect the customer's main
location to our network. We order the circuit for our customer, manage
the installation process, test the circuit once installed, assist the
customer in configuring the router or switch that terminates the circuit,
and monitor the circuit from our network operations center.
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. End User Line Installation. We order all end user connections from the
incumbent carriers according to pre-determined technical line
specifications. We manage the incumbent carrier's 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 enterprise communications managers to
monitor their end users directly, to place orders for new end users, to
enter work orders on end user lines and to communicate with us on an
ongoing basis.
. Customer Service and Technical Support. We provide service and technical
support 24 hours a day, seven days a week to all our customers. The
network service provider and communications managers serve as the initial
contact for end users and we provide the second level of support. We have
developed and will continue to expand a database containing the questions
we have addressed and the answers we have provided in response to past
network issues. In this way, we are able to better respond to future
customer questions.
. Operating Support Systems. We have designed an integrated group of
customized applications around our current and planned business
processes. By customizing and integrating products from vendors such as
Daleen Technologies, Inc. for billing, Eftia OSS Solutions Inc. for
operating support systems and Hewlett-Packard Company for network
management, we have designed a system that will facilitate rapid service
responsiveness and reduce the cost of customer support. Our "NAS Total
System Solution" seamlessly integrates all of our business functions,
including sales, ordering, provisioning, customer support, maintenance
and repair, billing, accounting and decision support, ensuring that every
function has accurate, up-to-date information and the tools necessary to
efficiently complete their work.
Network Structure and Technology
Overview. We own and operate a series of metropolitan area networks
connected by our private high speed fiber optic backbone. Our network employs a
structure designed to deliver superior end-to-end capabilities, high speed
"last mile" connections and intelligent data traffic management. Our
technologically advanced network design has positioned us to deliver the high
level of data communications services, including Internet access, virtual
private networks, video conferencing and a broad array of multimedia services,
increasingly demanded by businesses. We have planned for growth by ensuring
that our network is scalable, intelligent and secure.
. Scalable. Our adaptable, hierarchical network architecture allows us to
provide both channelized and packet-based services reliably and
incrementally, which enables us to match investment with demand. As new
CuNet end users are added to our network, capacity is
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automatically added so that the same reliable performance is achieved for
all users as our network grows.
. Intelligent. From our network operations center, we are able to
constantly monitor our network, the network service providers' networks
and our customers' connections, as well as perform network diagnostics
and equipment surveillance, and initialize our end users' connections.
Because our network is centrally managed, we can identify and dynamically
enhance network quality, service and performance and address network
problems promptly, often without our end users becoming aware of the
repairs. This capability also allows us to control costs associated with
on-site network configuration and repair.
. Secure. With dedicated, direct access to our private network, our end
users and enterprises 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 provide enhanced security to ensure secure availability of
all internal applications and information for all end users, whether they
are within the corporate headquarters or telecommuting from remote
locations. Our network structure connects end users at fixed locations to
a single enterprise, which reduces the possibility of unauthorized access
and allows our customers to safely perform all of their required tasks.
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Components. Our network has many components that are integrated into local,
metropolitan and wide area networks 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
access connections in our network. We offer to provide the customer with
a DSL modem, as part of our complete service offering. We configure and
install these modems with the end user's computer, local area network or
enterprise network equipment along with any required on-site wiring
needed to connect the modem and the telephone line.
. Copper Telephone Lines. We lease copper telephone lines, known as
unbundled network elements, which run from our network access points in
central offices to the customer endpoint under terms specified in
telecommunications regulations and our interconnection agreements. We
have worked closely with Bell Atlantic to define specifications that
ensure the quality of the copper telephone lines we receive, thereby
ensuring the transmission speed of end user connections.
. Central Office Collocation Spaces. Through FCC and state
telecommunications regulatory policies as well as our interconnection
agreements with Bell Atlantic, we secure collocation space in central
offices from which we desire to offer CuNet. These collocation spaces are
designed to offer the same high reliability and availability standards as
Bell Atlantic's other central office space. At present, our collocation
spaces are either physical, virtual or SCOPE, which is secured
collocation in an open physical environment. With physical collocation,
we install and maintain our equipment in Bell Atlantic's central offices
and have complete access to the space. With SCOPE collocation, we install
and maintain our equipment in Bell Atlantic's central offices, but our
access to the space is non-exclusive. With virtual collocation, Bell
Atlantic installs and maintains the equipment on our behalf, but we have
no access to the space.
. Metropolitan Area Backbone. Our metropolitan area backbone is a fiber
optic network that connects our network access points in central offices
to our node sites and our node sites to our customer locations. To date,
we have leased fiber optic circuits capable of speeds of up to 45
megabits per second from Bell Atlantic, MCI WorldCom and Level 3
Communications for metropolitan area backbone services, but we continue
to review alternative providers in an effort to reduce costs. We depend
on these providers to enable us to connect our DSL equipment in different
central offices.
. Node Sites. A node site is a physical location where we connect all of
our central offices within a particular metropolitan area network to
businesses and network service providers. The node site houses our
equipment to switch and interconnect customer traffic from central
offices within a region or across our entire network. Our node sites are
housed in a secured facility in each metropolitan area. We currently have
a node site in Boston, New York, Philadelphia, Baltimore, Washington,
D.C. and Richmond. We expect to establish node sites in Pittsburgh,
Norfolk and Wilmington, Delaware by the end of 1999.
. Wide Area Backbone. Our wide area backbone is a fiber optic network that
interconnects our node sites in various metropolitan areas. To date, we
have leased fiber optic circuits capable of speeds of up to 155 megabits
per second from Level 3 Communications, MCI WorldCom and Virginia Electric
and Power Company. We intend to upgrade our wide area backbone to higher
capacities as necessary to deliver the quality of service that our customers
demand. We continue to evaluate alternative providers of capacity in order
to reduce costs. We depend on these providers to enable us to connect our
node sites in different cities.
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. Network Operations Center. We manage our network from our network
operations center. We provide end-to-end network management to our
customers using advanced network management tools on a 24 hour a day,
seven days 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. Our network operations center is located in our corporate
headquarters in Sterling, Virginia. See "--Network Management Services."
CuNet Rollout. We currently offer CuNet in Boston, New York, Philadelphia,
Baltimore, Washington, D.C. and Richmond and have collocated our equipment in
51 central offices. We intend to build networks and offer services in
Pittsburgh, Norfolk and Wilmington, Delaware by the end of September 1999. We
plan to offer services in these nine target markets through 360 central offices
by the end of 1999. To the extent opportunities present themselves, we may
decide to expand our network beyond our initial target markets and into
adjacent regions We have recently entered into our first interconnection
agreement with Bell South.
Research and Development. We are also pursuing a program of ongoing network
development. Our engineering efforts focus on the design and development of new
technologies and services to increase the speed, efficiency, reliability and
security of our network and to facilitate the development of network
applications by third parties that will increase the use of our network.
Competition
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 include:
. transmission speed;
. reliability of service;
. diversity of 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 an opportunity for
competition and presents competitive challenges unique 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 an
incumbent carrier, we expect to compare favorably as to client support,
transmission speed and price/performance, but perhaps unfavorably 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 unfavorably as to the geographic breadth of network
coverage. We expect to improve our
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competitive position relative to other PSL 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 will come from Bell Atlantic and other incumbent carriers 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 Incumbent Carriers. Bell Atlantic and the other
incumbent carriers present in our target markets are conducting technical
and/or market trials or have entered into commercial deployment of DSL-based
services. We recognize that each incumbent carrier has the potential to quickly
overcome many of the obstacles that we believe have delayed widespread
deployment of DSL services by incumbent carriers in the past. The incumbent
carriers currently represent and will in the future increasingly represent
strong competition in all of our target markets. The incumbent carriers 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, incumbent carriers also have an economic
incentive to benefit their own DSL retail operations by providing themselves
with the copper telephone lines, collocation, operational 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 incumbent carriers a potential competitive advantage compared with us.
Accordingly, we may be unable to compete successfully against Bell Atlantic or
the other incumbent carriers, and any failure to do so would materially and
adversely affect our business, operating results and financial condition.
Other Major DSL Providers. Other competitive carriers 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 carriers who provide DSL service
include Covad Communications, Rhythms NetConnections and NorthPoint
Communications.
Other Service Providers. Many of our competitors are offering, or may soon
offer, technologies and services that will compete with some or all of our high
speed DSL offerings. These technologies include T1, ISDN, satellite, cable
modems and analog modems and could be provided by the following:
. Cable Modem Service Providers. Cable modem service providers, like
MediaOne Group, Inc., At Home, through its @Home service offering, and
their cable partners, are offering or preparing to offer high speed
Internet access over fiber and cable networks to consumers. At Home,
through its @Work service offering, has positioned itself to do the same
for businesses. Where deployed, these networks provide local access
services, in some cases at higher speeds than our CuNet. They typically
offer these services at lower prices than our services, in part by
sharing the capacity available on their cable networks among multiple end
users.
. 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
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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 incumbent carriers and have
secured collocation spaces from which they could begin to offer
competitive DSL services.
. New Long Distance Carriers. New long distance carriers, such as Williams,
Qwest Communications and Level 3 Communications, are building and
managing high bandwidth, nationwide packet-based technology networks for
the wide area network. These same providers are acquiring or partnering
with Internet service providers to offer services directly to business
customers. These companies could extend their existing networks to
include fiber optic networks within Metropolitan areas and high speed
services using DSL technology, either alone, or in partnership with
others.
. Internet Service Providers. Internet service providers provide Internet
access to business and residential customers. These companies generally
provide Internet access over the incumbent carrier's circuit switched
networks at ISDN speeds or below. Some Internet service providers have
begun offering DSL-based access using DSL services offered by the
incumbent carrier or other DSL-based competitive carriers. 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 carriers.
. Wireless and Satellite Data Service Providers. Several new companies are
emerging as wireless and satellite-based data service providers over a
variety of frequency bands. Companies such as Teligent, Inc., Advanced
Radio Telecom Corp. and WinStar Communications, Inc., hold point-to-point
microwave licenses to provide fixed wireless services such as voice, data
and videoconferencing. We also may face competition from satellite-based
systems such as Motorola Satellite Systems, Inc., Hughes Space
Communications, Iridium World Communications, Ltd., Globalstar and others
which are planning or are in the process of building global satellite
networks which can be used to provide broadband voice and data services.
Relationship with Bell Atlantic
Our relationship with Bell Atlantic is critical to our business. We depend
on Bell Atlantic for collocation facilities, copper telephone lines, back-
office support services and some of the fiber optic transport that we use for
CuNet. Our interconnection agreements with Bell Atlantic govern much of this
critical relationship. We have signed interconnection agreements with Bell
Atlantic in each of the states covering our initial target markets. These
agreements cover a number of aspects including:
. the price and terms to lease access to Bell Atlantic's copper lines;
. the special conditioning Bell Atlantic provides to enable the
transmission of DSL signals on these lines;
. the price and terms for collocation of our equipment in Bell Atlantic's
central offices;
. the price and terms to access Bell Atlantic's transport facilities;
. the terms to access conduits and other rights of way Bell Atlantic has
constructed for its own network facilities;
. the operational support systems and interfaces that we use to place
orders and trouble reports and monitor Bell Atlantic's response to our
requests;
. the dispute resolution process we and Bell Atlantic use to resolve
disagreements on the terms of the interconnection agreement; and
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. the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with Bell Atlantic.
Our interconnection agreements have an initial term that expires in March
2000, in the case of Baltimore, Philadelphia, Pittsburgh, Norfolk, Richmond,
Wilmington, Delaware and Washington, D.C., and January 2001 in the case of
Boston and New York. Thereafter, the agreements will continue until terminated
by either party upon ninety days prior notice. If an agreement is terminated,
our service arrangements will continue without interruption under
. terms of a new agreement,
. terms imposed by a state commission,
. tariff terms generally applicable to competitive carriers and other
carriers or
. if none of these are available, on a month-to-month basis under the
terms of the initial agreement.
Thus, we may be required to renegotiate our agreements in the future. Although
we expect to renew our interconnection agreements, there can be no assurance
that we can extend or renegotiate agreements on favorable terms.
Additionally, the FCC, state telecommunications regulators and the courts
have authority to interpret our interconnection agreements and to resolve
disputes in the event of a disagreement between us and Bell Atlantic. There can
be no assurance that these bodies will not interpret the terms or prices of our
interconnection agreements in ways that could adversely affect our business,
operating results and financial condition.
If we expand into adjacent regions which are served by incumbent carriers
other than Bell Atlantic, we will need to enter into interconnection agreements
with those incumbent carriers. We have recently entered into an interconnection
agreement with BellSouth. However, that agreement will become effective only
after it is approved by the state regulatory agencies where BellSouth operates
as the incumbent carrier. While we anticipate such approval this summer, we
cannot provide assurance of approval then, or ever.
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 CuNet are regulated extensively by the FCC and state telecommunications
regulatory agencies. To a lesser extent, the FCC and state telecommunications
regulators exercise direct regulatory control over the terms under which we
provide CuNet to the public. Municipalities also regulate limited aspects of
our telecommunications business by imposing zoning requirements, permit or
right-of-way procedures or fees, among other regulations. The FCC and state
regulatory agencies generally have the authority to condition, modify, cancel,
terminate or revoke operating authority for failure to comply with applicable
laws, or rules, regulations or policies. Fines or other penalties also may be
imposed for such violations. We cannot assure you that regulators or third
parties would not raise issues regarding our compliance or non-compliance with
applicable laws and regulations. We believe that we operate our business in
compliance with applicable laws and regulations of the various jurisdictions in
which we operate and that we possess the approvals necessary to conduct our
current operations.
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Federal Regulation. The 1996 Telecom Act substantially departs from prior
legislation in the telecommunications industry by establishing competition as a
national policy in all telecommunications markets. This Act removes many state
regulatory barriers to competition in telecommunications markets dominated by
incumbent carriers and preempts, after notice and an opportunity to comment,
laws restricting competition in those markets. Among other things, the Act also
greatly expands the interconnection requirements applicable to incumbent
carriers. It requires the incumbent carriers to:
. provide collocation, which allows competitive carriers to install and
maintain their own network termination equipment in incumbent carrier
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 carriers; and
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Incumbent carriers are required by the 1996 Telecom Act to negotiate an
interconnection agreement in good faith with carriers requesting any or all of
the above arrangements. If a requesting carrier cannot reach an agreement
within the prescribed time, either carrier may request binding arbitration by
the state telecommunications regulatory agency.
The FCC and state telecommunications regulators also are instructed by the
1996 Telecom Act to perform certain duties to implement the regulatory policy
changes prescribed by the 1996 Telecom Act. The outcome of various ongoing
proceedings to carry out these responsibilities, or judicial appeals of these
proceedings, could materially affect our business, operating results and
financial condition.
In October 1996, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the 1996
Telecom Act, including rules:
. providing the detailed standard that state telecommunication regulators
must use in prescribing the price that incumbent carriers charge for
collocation and for the copper telephone lines and other network elements
that competitive carriers must obtain from incumbent carriers in order to
provide service and
. giving competitive carriers the right to "pick-and-choose"
interconnection provisions by requiring that an incumbent carrier enter
into an interconnection agreement with the competitive carrier that
combines provisions from a variety of interconnection agreements between
that incumbent carrier and other competitive carriers.
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 carriers 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
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the 1996 Telecom Act in defining the individual network elements incumbent
carriers must make available to competitive carriers, and required the FCC to
reconsider its delineation of these elements.
The Supreme Court's order is potentially beneficial to us in several
important respects. For example, the Supreme Court's decision requiring that
the Eighth Circuit reinstate the FCC's "pick-and-choose" rule could help us
obtain the benefit of specific provisions from interconnection agreements
between Bell Atlantic and other competitive carriers who had more bargaining
leverage than we had at the time we negotiated our interconnection agreements.
However, the Eighth Circuit has not yet reinstated the FCC's "pick and choose"
rule, and we cannot predict when it will do so. The Supreme Court's
determination that the FCC rather than state telecommunications regulators has
jurisdiction to determine pricing methodology also could be beneficial to us
since the FCC has adopted a pricing standard that appears to be more beneficial
to competitive carriers 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.
Although the Supreme Court's decision is potentially beneficial to us in
several respects, it also has created uncertainty by mandating that the FCC
commence a new rulemaking proceeding to determine which network components the
incumbent carriers must make available to competitors. The FCC recently
commenced this proceeding. We are reasonably confident that the FCC will not
change, in a way that would be materially adverse to our business, the
requirement that incumbent carriers make available the specific components we
need in order to provide CuNet, but we cannot guarantee this outcome. A
decision by the FCC to exempt incumbent carriers from the obligation to provide
us with any of the facilities and services we need in order to provide CuNet
could materially harm us.
In an order released March 31, 1999, the FCC adopted several new regulations
that potentially could have a positive impact on our business. In particular,
several new FCC rules require incumbent carriers to provide collocation
arrangements in a manner that potentially will be less costly than the manner
in which such arrangements are provided at present. Another new rule is
intended to reduce the number of situations in which incumbent carriers deny
collocation applications based on a claim that there is no space available.
Still another is intended to help ensure that the customers of companies who
provide services like CuNet do not receive harmful interference from other
users of the incumbent carrier network on which the service is provided. It
remains to be seen whether the FCC's new rules will accomplish their intended
objectives since they will not go into effect until late May 1999 at the
earliest. Nor can we predict whether any of these new rules will be appealed
and, if so, whether the appeals will be successful.
The FCC made another potentially favorable ruling for our industry in
another recent case. That case involved the question of whether a
telecommunications service like CuNet that provides high speed dedicated access
to the Internet is an interstate service or an intrastate service. An
interstate service must be provided subject to FCC regulatory controls, whereas
an intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is offered.
In its decision, the FCC held that such services are jurisdictionally
interstate and therefore must be provided on terms and conditions set by the
FCC. This ruling is potentially advantageous to us because it reduces the
number of telecommunications regulatory agencies that control the terms under
which we provide CuNet. It also is potentially advantageous because FCC
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regulatory controls in many respects are less burdensome than state regulatory
controls. For example, the 1996 Telecom Act authorizes the FCC to forbear from
regulating the terms under which carriers classified as "non-dominant" provide
interstate telecommunications service. The FCC has exercised its forbearance
authority by issuing rulings that exempt non-dominant domestic carriers like us
from obtaining a certificate from the FCC prior to providing any interstate
service or from filing a tariff setting forth the terms under which they
provide any interstate access service. Because we believe that CuNet
constitutes interstate service, we believe that we do not need an FCC
certificate to provide CuNet. Moreover, since we believe CuNet is special
access, we provide the service to existing customers pursuant to contract
rather than tariff.
The FCC is considering whether to adopt some regulations that could
adversely affect us. In particular, we could be hurt by adoption of a proposal
that would exempt incumbent carriers from some existing FCC regulations
designed to help ensure that the price incumbent carriers charge for their own
retail DSL service offering recovers the actual costs they incur in providing
that service. We also could be hurt by adoption of a proposal to let incumbent
carriers provide DSL services through an affiliate of the incumbent carrier
unless the FCC requires that the incumbent carrier provide copper telephone
lines, collocation and back-office support services to its affiliates on terms
that are no more favorable than the terms available to competitive carriers
like us.
On May 8, 1997, in compliance with the requirements of the 1996 Telecom Act,
the FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to under-served
individuals and customers in high-cost or low-income areas, and to companies
that provide telecommunications services for schools and libraries and to rural
health care providers. We are required to contribute to the universal service
fund and are also may be required to contribute to state universal service
funds. The new universal service rules are administered jointly by the FCC, the
fund administrator, and state regulatory authorities, many of which are still
in the process of establishing their administrative rules. We cannot determine
the net revenue effect of these regulations at this time.
State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the 1996
Telecom Act that are intended to open all telecommunications markets to
competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's jurisdiction to prescribe the methodology incumbent
carriers must use in setting the price of local 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. 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
carriers enter with incumbent carriers and broad authority to resolve disputes
that arise under these interconnection agreements. Under the 1996 Telecom Act,
if we request, incumbent carriers 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 incumbent carrier 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
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submit outstanding disputes to the states for arbitration. The 1996 Telecom Act
also allows state regulators to supplement FCC regulations as long as the state
regulations are not inconsistent with FCC requirements.
In addition, CuNet may, as to some future customers, be classified as
intrastate services subject to state regulation. All of the states where we
operate, or will operate, require some degree of state regulatory commission
approval to provide certain intrastate services. We have obtained state
authorizations to provide all types of intrastate services in seven of our
initial nine target markets, and our applications for certificates to provide
intrastate services in the remaining two markets are pending. In most states,
intrastate tariffs are also required for various intrastate services, although
non-dominant carriers like us are not typically subject to price or rate of
return regulation for tariffed intrastate services. Actions by state
telecommunications regulation agencies could cause us to incur substantial
legal and administrative expenses.
It is possible that laws and regulations could be adopted which address
other matters that affect our business. We are unable to predict what laws or
regulations may be adopted in the future, to what extent existing laws and
regulations may be found applicable to our business, or the impact such new or
existing laws or regulations may have on our business. In addition, laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, thereby decreasing demand for our services.
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 such pose barriers to entry for competitive carriers that may be
preempted by the FCC is the subject of litigation. Although our network
consists primarily of unbundled network elements of the incumbent carriers, 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 it with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. There can be no assurance these methods will be
sufficient to protect our technology and intellectual property. We also
generally enter into confidentiality agreements with our employees and
consultants, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, or to develop similar
technology independently. Currently, we are the owner of three trademark
registration applications, but have not filed to register any copyrights. We
expect to seek registration of our copyrights in software and other
intellectual property to the extent possible. There is no assurance that we
will obtain any significant copyright protection for our systems which would
protect our intellectual property from competition. Currently, we have not
filed any patent applications. We intend to prepare applications and to seek
patent protection for our systems and services to the extent possible. There is
no assurance that we will obtain any patents or that any such patents would
protect our intellectual property from competition which could seek to design
around or invalidate such patents. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in
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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 April 15, 1999, we employed 106 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 expire in 2004. We
have established branch offices in Philadelphia and Richmond and plan to
establish additional branch offices in Boston and New York to cover our nine
initial target markets.
We also lease collocation space in central offices from Bell Atlantic where
we operate or plan to operate under the terms of our interconnection agreements
with Bell Atlantic and regulations imposed by state public utility commissions
and the FCC. While the terms of these leases are perpetual, the productive use
of our collocation facilities is subject to the terms of our interconnection
agreements which have initial terms that expire in 2000 and 2001. See "--
Relationship with Bell Atlantic." We will increase our collocation space as we
expand our network.
Legal Proceedings
We are not currently involved in any legal proceedings that we believe could
have a material adverse effect on our business, financial position, results of
operations or cash flows. We are, however, subject to state public utility
commission, 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 carrier 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
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these bodies or the legal outcomes of other contested interconnection
agreements that are similar to our agreements. The results of any of these
proceedings could have a material adverse effect on our business, operating
results and financial condition.
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MANAGEMENT
Our Directors and Executive Officers
The following table shows information about our directors and executive
officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jonathan P. Aust........... 41 President, Chief Executive Officer and Chairman
of the Board of Directors
Christopher J. Melnick..... 33 Chief Operating Officer and Director
Scott G. Yancey, Jr. ...... 46 Chief Financial Officer and Director
James A. Aust.............. 37 Vice President, Engineering
John J. Hackett............ 45 Vice President, Sales and Marketing
Brion B. Applegate......... 45 Director
Dennis R. Patrick.......... 47 Director
</TABLE>
Jonathan P. Aust has been our Chief Executive Officer since founding Network
Access Solutions, with his wife Longma, in December 1994. In August 1998, Mr.
Aust also became our President and Chairman of the Board of Directors. Mr. Aust
was the National Account Manager for AT&T Paradyne responsible for the Federal
Reserve System from October 1987 to December 1994. From June 1982 to October
1987, Mr. Aust held numerous engineer and sales positions at Paradyne
Corporation, a manufacturer of data communications equipment.
Christopher J. Melnick has been our Chief Operating Officer since joining us
in July 1998 and a Director since August 1998. Mr. Melnick was the Vice
President and General Manager for the Southeast Region of Level 3
Communications from March 1998 to July 1998. Mr. Melnick was the Vice President
of Telcom Access Sales for the Washington, Baltimore and Richmond markets of
WorldCom from December 1996 to March 1998. Mr. Melnick was the Vice President
of Sales for MFS Telcom from September 1995 to December 1996 and Sales manager
for Washington, D.C. and Baltimore MFS Telcom from June 1994 to September 1995.
Mr. Melnick was a Senior Account Executive for MFS Telcom from April 1992 to
June 1994.
Scott G. Yancey, Jr. has been our Chief Financial Officer since joining us
in July 1998 and a Director since August 1998. Mr. Yancey was the Chief
Financial Officer and General Manager of the data division of Cable & Wireless
USA, a telecommunications service provider, from July 1982 to May 1998.
James A. Aust has been our Vice President of Engineering since joining us in
July 1995. Mr. Aust was a Consultant Systems Engineer for AT&T from May 1990 to
July 1994. In this role, Mr. Aust was responsible for network design and
implementation issues for key accounts and worked closely with hardware and
software developers at Bell Laboratories, defining products and feature sets to
fulfill customer networking requirements. Mr. Aust also served on the AT&T
Engineering Council which was responsible for formulating methods and
procedures for AT&T's System Engineering from August 1988 to May 1990.
John J. Hackett has been our Vice President, Sales and Marketing since
joining us in February 1999. Mr. Hackett was the Division President of MCI
WorldCom and MFS Telcom from September 1993 to February 1999 responsible for
Sales and Customer Support.
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.
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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.
Jonathan P. Aust and James A. Aust are brothers.
Our board of directors is comprised of five directors and will be divided
into three classes, as nearly equal in number as possible. At each annual
meeting of stockholders, the successors to the class of directors whose term
expires at that meeting will be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year after their year of
election. Our executive officers are chosen by our board of directors and serve
at its discretion.
Board Committees
Our board of directors established a compensation committee in August 1998.
The compensation committee consists of Jonathan P. Aust, Mr. Applegate and Mr.
Patrick. Mr. Aust is our President, Chief Executive Officer and Chairman of the
Board of Directors. Mr. Applegate is a Managing General Partner of Spectrum
Equity Investors. The compensation committee determines the compensation of our
President and Chief Executive Officer and administers our stock plans and
generally reviews our compensation plans to ensure that they meet our
objectives. 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 will 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.
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 options to acquire 111,111 shares of our common stock
exercisable at a price of $15 per share to Mr. Patrick. After our initial
public offering Mr. Patrick will receive an option to purchase an additional
number of shares of common stock at an exercise price equal to 25% of the
public offering price, such that the aggregate difference between
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<PAGE>
the public offering price and the exercise price of the initial options and
additional options granted to Mr. Patrick equals $5,000,000. Mr. Patrick's
options will vest immediately after our initial public offering. See "--1998
Stock Incentive Plan."
Executive Compensation
The following table summarizes the compensation paid to our chief executive
officer and executive officers whose total salary and bonus exceeded $100,000
during 1998, whom we identify as "named executive officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Securities
----------------------- Underlying
Name and Principal Position Salary Bonus Other Options
<S> <C> <C> <C> <C>
Jonathan P. Aust.......................... $120,606 $135,000 -- --
President and Chief Executive Officer
Christopher J. Melnick.................... 101,308 -- -- 1,400,000
Chief Operating Officer
James A. Aust............................. 97,417 25,000 -- 130,000
Vice President, Engineering
</TABLE>
The salary paid to Mr. Melnick is from July 1998, the date of his
employment.
Options Grants in 1998
The following table shows information about our grants of options to
purchase our common stock made to the named executive officers during 1998:
<TABLE>
<CAPTION>
Potential Realizable
Value
at Assumed Annual
Rates
Of Stock Price
Appreciation for
Individual Grants Option Term (5)
------------------------------------------------------------- -------------------------------------
Number of Percent of Based on
Securities Total Options Market Price Initial
Underlying Granted to Exercise or at Grant Public
Options Employees Base Price Date Expiration Offering
Name Granted (1) in 1998 (2) ($/share) ($/share)(3) Date (4) 0% 5% 10% Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust... -- --% $ -- $-- -- $ -- $ -- $ -- $ --
Christopher J. Melnick.. 1,400,000 44.4 0.20 0.50 7/23/08 420,000 860,226 1,535,620
James A. Aust...... 130,000 4.1 0.20 4.70 11/1/08 585,000 969,255 1,558,777
</TABLE>
- ---------------------
(1) All options were granted under our 1998 stock incentive plan. All options
were incentive stock options which vest over time. Generally, these options
vest in quarterly installments over 36 to 42 months. All of these options
immediately vest in the event of a change in control of our company. If a
majority of our stockholders elect to sell all or part of our company, then
the option holder is required to sell an equivalent percentage of the
shares underlying the option.
(2) Based on options to purchase 3,151,500 shares of our common stock granted
to employees in 1998.
(3) We believe that these options were granted at an exercise price that
equaled the fair market value of the underlying common stock on the date of
grant. However, in preparing for this offering, we revisited the valuation
of these options and determined that they did have a compensatory element.
We now value these options on the basis of the price paid for our common
stock in August 1998, an independent valuation, a treasury stock
transaction with our founders, our general financial condition, discussions
with our underwriters and information relating to other companies in our
industry.
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<PAGE>
(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 executive officers named above 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.. 116,666 1,283,334
James A. Aust........... -- 130,000
</TABLE>
- ---------------------
(1) Calculated on the basis of $ per share, the initial public offering price
of our common stock, less the exercise price payable for those shares,
multiplied by the number of shares underlying the option.
(2) The options are exercisable in full into restricted stock which is subject
to vesting and forfeiture.
No compensation intended to serve as incentive for performance to occur over
a period longer than one year was paid pursuant to a long-term incentive plan
during the last year to any of the executive officers named above.
Employment Arrangements
We have entered into an employment agreement with each of our executive
officers. Each agreement has an initial term of four years, subject to earlier
termination upon 30 days prior notice. The term of each agreement is
automatically extended for additional one year terms unless we or the executive
elects to terminate the agreement within 30 days before the end of the current
term. Under these agreements, these executives receive an initial annual base
salary that will be increased by at least 5% each year, based upon performance
objectives set by our board of directors. These executives also receive an
annual bonus of up to 20% of the executive's then current salary. The bonus is
payable in cash, stock or a combination of both at the election of our board of
directors. The executives have received options to acquire shares of our common
stock which vest in quarterly installments over either three or four years from
the date of grant. The following table shows information about the compensation
arrangements we have with our executive officers:
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<PAGE>
<TABLE>
<CAPTION>
Options Granted
Current Annual Base Salary Maximum Annual Bonus (Shares)
<S> <C> <C> <C>
Jonathan P. Aust........ $240,000 20% --
Christopher J. Melnick.. 200,000 20 1,400,000
Scott G. Yancey, Jr..... 200,000 20 1,000,000
John J. Hackett......... 175,000 20 600,000
James A. Aust........... 125,000 20 130,000
</TABLE>
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 require all of our other employees to sign agreements which prohibit the
employee from directly or indirectly competing with us while they are employed
by us and generally for a period of one year. We require all of our employees
to sign agreements which prohibit the disclosure of our confidential or
proprietary information.
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<PAGE>
1998 Stock Incentive Plan
Our stock incentive plan authorizes the grant of:
. stock options;
. stock appreciation rights;
. stock awards;
. phantom stock; and
. performance awards.
The compensation committee of our board of directors administers our stock
incentive plan. The committee has sole power and authority, consistent with the
provisions of our stock incentive plan, to determine which eligible
participants will receive awards, the form of the awards and the number of
shares of our common stock covered by each award. The committee may impose
terms, limits, restrictions and conditions upon awards, and may modify, amend,
extend or renew awards, to accelerate or change the exercise timing of awards
or to waive any restrictions or conditions to an award.
The maximum number of shares available for issuance under our stock
incentive plan is 5,000,000. As of April 15, 1999, we had issued no shares of
our common stock in connection with awards granted, we had granted awards with
respect to 4,104,611 shares of our common stock and 395,389 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 the shares of our common stock will be determined by the
committee.
Phantom Stock. The committee may grant stock equivalent rights, or phantom
stock, which entitle the recipient to receive credits which are ultimately
payable in the form of cash, shares of our common stock or a combination of
both. Phantom stock does not entitle the holder to any rights as a stockholder.
Performance Awards. The committee may grant performance awards to
participants entitling the participants to receive cash, shares of our common
stock, or a combination of both, upon the achievement of performance goals and
other conditions determined by the committee. The performance goals may be
based on our operating income, or on one or more other business criteria
selected by the committee.
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<PAGE>
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 9,800,000 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
8,300,600 shares of our common stock in exchange for an aggregate purchase
price of $8,474,150. Spectrum now beneficially owns 51.9% of our common stock.
Brion B. Applegate, a Managing General Partner of Spectrum, is a member of our
board of directors. We also issued to FBR Technology Venture Partners, LLC
1,500,000 shares of our Series A Preferred Stock and 1,470,000 shares of our
common stock in exchange for an aggregate purchase price of $1,500,735. FBR now
owns 9.2% of our common stock.
In March 1999, we amended our certificate of incorporation to modify the
terms of our outstanding preferred stock. The terms of our preferred stock now
provide that immediately after this offering:
. 50% of our preferred stock outstanding will be cancelled and cease to
exist without compensation or recourse;,
. the remaining shares of preferred stock will be automatically converted
into 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
. no dividends on the preferred stock whether accrued or unaccrued through
the date of the offering will be payable.
On March 31, 1999, we entered into a Note Purchase Agreement with Spectrum
and FBR. Pursuant to this agreement, Spectrum purchased a convertible note in
the principal amount of $4,250,000 and FBR purchased a convertible note in the
principal amount of $750,000. The notes bear interest at a rate of 8% per
annum. If a third party investor purchases more than $10,000,000 of our capital
stock before our offering, the notes will convert into the same type of
security that we issue to that third party investor. If we do not receive an
investment from a third party before our offering, the notes will convert into
the number of shares of our common stock equal to the outstanding principal
amount of the note, plus accrued interest, divided by the per share public
offering price. Under certain circumstances, Spectrum has agreed to purchase an
additional number of shares of common stock equal to $4,250,000 divided by the
per share public offering price and FBR has agreed to purchase an additional
number of shares of common stock equal to $750,000 divided by the per share
public offering price.
These investors have registration rights for the shares of common stock they
hold but have agreed not to sell any shares of our common stock for 180 days
after this offering. See "Description of our Capital Stock--Registration
Rights" and "Shares Eligible for Future Sale--Lock-up Agreements."
Following the sale of our preferred stock in August 1998, we repurchased
some of the shares of our common stock held by James A. Aust, Jonathan P. Aust,
Longma M. and Stephen C. Aust, all of whom own more than 5% of our common
stock. We purchased 600,000 shares of our common stock for an aggregate
purchase price of $300,000 from James A. Aust. We purchased 868,422 shares of
our common stock for an aggregate purchase price of $434,211 from Jonathan P.
Aust. We purchased 1,771,578 shares of our common stock for an aggregate
purchase price of $885,789 from
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<PAGE>
Longma M. Aust. We purchased 560,000 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.
We have entered into employment agreements with each of our senior executive
officers. For details of these agreements, see "Management--Employment
Arrangements." We have granted options to acquire shares of our common stock to
some of our executive officers and directors. See "Management--Directors'
Compensation" and "Management--Executive Compensation."
We believe that the transactions discussed above were made on terms no less
favorable to us than would have been obtained from unaffiliated third parties.
We have adopted a policy that requires all future transactions between us and
our officers, directors and affiliates to be on terms no less favorable than
could be obtained from unrelated third parties. These transactions must be
approved by a majority of the disinterested members of our board of directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of April 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.
The following assumes the conversion of our outstanding preferred stock
immediately after this offering. An asterisk indicates ownership of less than
1%.
As of April 15, 1999 there were 16,000,000 shares of our common stock
outstanding. After this offering, shares of our common stock will be
outstanding or shares if the underwriters exercise their over-allotment
option in full.
<TABLE>
<CAPTION>
Percent of Total
-------------------------------------------
Shares Shares
Beneficially Before Beneficially After
Name of Beneficial Owner Owned (1) Offering Owned (1) Offering
<S> <C> <C> <C> <C>
Jonathan P. Aust (2)............... 4,172,000 26.1% 4,172,000 %
Christopher J. Melnick (3)......... 350,000 2.1 350,000
James A. Aust (4).................. 816,250 5.1 816,250
Brion B. Applegate (5) ............ 8,300,600 51.9
245 Lytton Avenue
Palo Alto, California 94301
Dennis R. Patrick (6)............. 111,111 0.7
Spectrum Equity Investors II, L.P.
(5) .............................. 8,300,600 51.9
245 Lytton Avenue
Palo Alto, California 94301
FBR Technology Venture Partners, 1,470,000
LP................................ 9.2
1001 19th Street
Arlington, Virginia 22209
Stephen C. Aust ................... 868,000 5.4 868,000
All executive officers and direc-
tors as a
group (6 persons) (7)............. 13,999,961 83.7
</TABLE>
- ---------------------
(1) The number of shares beneficially owned includes outstanding shares of our
common stock held by that person and shares of our common stock issuable
upon exercise of stock options exercisable within 60 days of April 15,
1999. The address of Messrs. Jonathan P. Aust, James A. Aust, Stephen C.
Aust, Melnick and Patrick is 100 Carpenter Drive, Sterling, Virginia 20164.
(2) Includes 2,816,738 shares held by Longma M. Aust, Mr. Aust's wife.
(3) Includes 350,000 shares issuable upon exercise of options to acquire our
common stock.
(4) Includes 16,250 shares issuable upon exercise of options to acquire our
common stock.
(5) Spectrum Equity Investors II, L.P. is under common control with SEA 1998
II, L.P. and, therefore, beneficial ownership of the shares of our common
stock owned by SEA is attributed to Spectrum. Mr. Applegate is a Managing
General Partner of Spectrum and, therefore, beneficial ownership of the
shares of our common stock owned by Spectrum is attributed to
Mr. Applegate.
(6) Includes 111,111 shares issuable upon exercise of options to acquire our
common stock.
(7) Includes 727,361 shares issuable upon exercise of options to acquire our
common stock that are held by Messrs. James A. Aust, Melnick, Patrick and
Yancey.
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<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. As of April 15, 1999, there were 16,000,000 shares of our
common stock outstanding, held by 13 holders of record. As of April 15, 1999,
there were 10,000,000 shares of our preferred stock, stated value $1.00,
outstanding, held of record by four holders of record. After this offering, we
will not have any outstanding shares of preferred stock.
After this offering, we will have outstanding shares of common stock if
the underwriters do not exercise their over-allotment option, or shares of
common stock if the underwriters exercise their over-allotment option in full.
The following is a description of our capital stock.
Common Stock
We are authorized to issue 50,000,000 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. Our counsel, Piper & Marbury L.L.P.,
has advised us that the outstanding shares of our common stock are, and the
shares of common stock offered in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of our common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred stock that we
may designate and issue in the future.
Preferred Stock
At April 15, 1999, we had outstanding 10,000,000 shares of our preferred
stock, stated value $1.00. The holders of our outstanding preferred stock are
entitled to receive dividends at a rate of 8% of the stated value per year.
Upon the closing of our public offering, $5.0 million of our preferred stock
will be converted into shares of our common stock at the public offering
price with the remaining shares of preferred stock and all accrued dividends
cancelled without additional payment to the holders of the preferred stock.
Our certificate of incorporation will allow us to issue without stockholder
approval preferred stock having rights senior to those of our common stock.
After this offering, no shares of preferred stock will be outstanding. Our
board of directors will be authorized, without further stockholder approval, to
issue up to 5,000,000 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.
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
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<PAGE>
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 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 of these shares request registration. We
are not required to effect more than three of these requested registrations.
Subject to limitations, these holders may require us to file an unlimited
number of registration statements on Form S-3 when we are eligible to use Form
S-3, generally one year after this offering. If we propose to register our
securities under the Securities Act after this offering, these stockholders and
Mr. Patrick will be entitled to notice of the registration and to include their
shares in the registration provided that the underwriters for the proposed
offering will have the right to limit the number of shares included in the
registration. We must pay all expenses in connection with these registrations,
other than underwriters' discounts and commissions.
Limitation Of Liability
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption
of stock; or
. for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our board of directors. The indemnification provided under our
certificate of incorporation and bylaws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided
that the payment of these expenses incurred by a director or officer in advance
of the final disposition of a proceeding may be made only upon delivery to us
of an undertaking by or on behalf of the director or officer to repay all
amounts so paid in advance if it is ultimately determined that the director or
officer is not entitled to be indemnified. If we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
claimant may at any time thereafter bring an action to recover the unpaid
amount of the claim and, if successful the director or officer will be entitled
to be paid the expense of prosecuting the action to recover these unpaid
amounts.
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<PAGE>
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling
one of these capacities, and related expenses, whether or not we would have the
power to indemnify the person against the claim under the provisions of the
Delaware General Corporation Law. We intend to purchase director and officer
liability insurance on behalf of our directors and officers.
Possible Anti-Takeover Effects
Our certificate of incorporation and bylaws will contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by our
board of directors. In addition, provisions of Delaware law may hinder or delay
an attempted takeover of our company other than through negotiation with our
board of directors. These provisions could have the effect of discouraging
attempts to acquire us or remove incumbent management even if some or a
majority of our stockholders believe this action to be in their best interest,
including attempts that might result in the stockholders' receiving a premium
over the market price for the shares of our common stock held by the
stockholders.
Classified Board of Directors; Removal, Vacancies. Our certificate of
incorporation will provide that our board of directors will be divided into
three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
stockholders to change the composition of the board of directors in a
relatively short period of time. Our certificate of incorporation will provide
that directors may be removed only for cause. In addition, vacancies and newly
created directorships resulting from any increase in the size of our board of
directors may be filled only by the affirmative vote of a majority of the
directors then in office, a quorum, or by a sole remaining director. These
provisions would prevent stockholders from removing incumbent directors without
cause and filling the resulting vacancies with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our bylaws will establish an advance notice procedure
with regard to the nomination, other than by the board of directors, of
candidates for election to our board of directors and with regard to certain
matters to be brought before an annual meeting of our stockholders. For
nominations and other business to be brought properly before an annual meeting
by a stockholder, the stockholder must deliver notice to us not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting. Separate provisions based on public notice by us specify
how this advance notice requirement operates if the date of the annual meeting
is advanced by more than 30 days or delayed by more than 60 days from the
anniversary date. The stockholder's notice must set forth specified information
regarding the stockholder and its holdings, as well as certain background
information regarding any director nominee, together with the person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected, and a brief description of any business desired to be
brought before the meeting, the reasons for conducting the business at the
meeting and any material interest of the stockholder in the business proposed.
In the case of a special meeting of stockholders called for the purpose of
electing directors, 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
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<PAGE>
disapprove stockholder nominations for the election of directors or any other
business desired by stockholders to be conducted at an annual meeting, our
bylaws:
. may have the effect of precluding a nomination for the election of
directors or precluding the conduct of certain business at a particular
annual meeting if the proper procedures are not followed; or
. may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of Network Access Solutions, even if the conduct of this
solicitation or such attempt might be beneficial to Network Access
Solutions and our stockholders.
Special Stockholders' Meetings. Our certificate of incorporation and bylaws
will provide that, special meetings of stockholders, unless otherwise
prescribed by statute, may be called only:
. by the board of directors or by our chairman or president; or
. by the holders of at least majority of our securities outstanding and
entitled to vote generally in the election of directors.
Section 203 of Delaware Law. In addition to these provisions of our
certificate of incorporation and bylaws, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law. Section 203 prohibits
publicly held Delaware corporations from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of a corporation's voting stock. These
provisions could have the effect of delaying, deferring or preventing a change
in control of our company or reducing the price that certain investors might be
willing to pay in the future for shares of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have shares of common stock outstanding.
If the underwriters exercise their over-allotment option in full, we will have
shares of common stock outstanding. All of the shares we sell in this
offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by our affiliates,
as that term is defined in Rule 144, may generally only be sold in compliance
with the limitations of Rule 144 described below.
The remaining shares of common stock outstanding after this offering will
not be freely tradeable under the terms of the Securities Act. Of the
outstanding shares that will not be freely tradeable after this offering,
transfer of shares will be further limited by lock-up agreements as
described below.
Before this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time.
Sales of substantial amounts of our common stock in the public market could
66
<PAGE>
adversely affect prevailing market prices and could impair our future ability
to raise capital through the sale of our equity securities.
Rule 144
In general, under Rule 144, a stockholder who owns restricted shares that
have been outstanding for at least one year is entitled to sell, within any
three-month period, a number of these restricted shares that does not exceed
the greater of:
. one percent of the then outstanding shares of our common stock, or
approximately shares immediately after this offering; or
. the average weekly trading volume in our common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement,
to sell shares of common stock which are not restricted securities.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The
one- and two-year holding periods described above do not begin to run until the
full purchase price is paid by the person acquiring the restricted shares from
us or an affiliate of ours.
Registration Rights
We have entered into an investor rights agreement with some of our
stockholders, who will own an aggregate of shares of our common stock
after this offering. These stockholders and Mr. Patrick have certain
registration rights. See "Description of our Capital Stock--Registration
Rights."
Common Stock and Options Issuable under our Stock Incentive Plan
We intend to file one or more registration statements under the Securities
Act within 180 days after this offering to register up to 4,500,000 shares of
our common stock underlying outstanding stock options or reserved for issuance
under our 1998 stock incentive plan. We expect these registration statements
will become effective upon filing, and shares covered by these registration
statements will be eligible for sale in the public market immediately after the
effective dates of these registration statements, subject to the lock-up
agreements with the underwriters.
Lock-up Agreements
Our officers, directors and our other stockholders, who will hold an
aggregate of shares of common stock after this offering, have agreed that
they will not, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, offer, sell, pledge or otherwise dispose of
any shares of our capital stock or any securities convertible into or
exercisable or exchangeable for, or any rights to acquire or purchase, any of
our capital stock or publicly announce an intention to effect any of these
transactions, for a period of 180 days after the date of the underwriting
agreement, other than shares of common stock transferred in connection with a
pledge agreement or disposed of as
67
<PAGE>
bona fide gifts approved by Donaldson, Lufkin & Jenrette Securities
Corporation. The stockholders who are parties to our investor rights agreement
are required by the terms of the investor rights agreement to enter into these
lock-up agreements. Donaldson, Lufkin & Jenrette Securities Corporation has
advised us that it has no current intention to consent to any disposition of
shares covered by these lock-up agreements, but will consider each request for
its consent at the time and under the circumstances of the request.
68
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc.
and J.P. Morgan Securities Inc. have severally agreed to purchase the number of
shares of our common stock shown opposite their names below:
<TABLE>
<CAPTION>
Number of
Shares
<S> <C>
Underwriters:
Donaldson, Lufkin & Jenrette Securities Corporation...........
Bear, Stearns & Co. Inc. .....................................
J.P. Morgan Securities Inc. ..................................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations, the receipt of a
"comfort letter" from our accountants, the listing of our common stock on the
Nasdaq National Market and no occurrence of an event that would have a material
adverse effect on us. The underwriters are obligated to purchase and accept
delivery of all the shares, other than those covered by the over-allotment
option described below, if they purchase any of our shares.
The underwriters propose to initially offer some of our shares directly to
the public at the initial public offering price shown on the cover page of this
prospectus and some of the shares to dealers at the initial public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to other dealers. After the initial offering of the shares to
the public, the representatives of the underwriters may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
The following table shows the underwriting fees we will pay to the
underwriters in connection with this offering. These amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares of our common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
<S> <C> <C>
Per share....................................... $ $
Total........................................... $ $
</TABLE>
We will pay the offering expenses, estimated to be $ .
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares at the initial
public offering price less the underwriting fees. The underwriters may exercise
their option solely to cover over-allotments, if any,
69
<PAGE>
made in connection with this offering. To the extent that the underwriters
exercise their option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitment.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
Network Access Solutions, our executive officers, directors and stockholders
have agreed that, for a period of 180 days from the date of this prospectus, we
and they will not, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation do either of the following:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of our common
stock.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise.
At our request, the underwriters have reserved up to percent of the
shares offered by this prospectus for sale at the initial public offering price
to our employees, officers, directors and other individuals associated with us
and members of their families. The number of shares of common stock available
for sale to the general public will be reduced to the extent these individuals
purchase or confirm for purchase, orally or in writing, such reserved shares.
Any reserved shares not purchased or confirmed for purchase will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
Application has been made to list the common stock on the Nasdaq National
Market under the symbol "NASC." In order to meet the requirements for listing
the common stock on the Nasdaq National Market, the underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial
owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
Stabilization
In connection with this offering, any of the underwriters may decide to
engage in transactions that stabilize, maintain or otherwise affect the price
of our common stock. Specifically, the
70
<PAGE>
underwriters may overallot this offering, creating a syndicate short position.
In addition, the underwriters may bid for and purchase shares of our common
stock in the open market to cover syndicate short positions or to stabilize the
price of our common stock. These activities may stabilize or maintain the
market price of our common stock above independent market levels. The
underwriters are not required to engage in these activities and may end any of
these activities at any time.
Pricing of this Offering
Prior to this offering, there has been no established public market for our
common stock. The initial public offering price for the shares of our common
stock offered by this prospectus will be determined by negotiation between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. our history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. the general conditions of the securities market at the time of the
offering.
VALIDITY OF THE SHARES
Piper & Marbury L.L.P., Washington, D.C., will pass upon the validity of the
shares of common stock on our behalf. Paul, Hastings, Janofsky & Walker LLP,
New York, New York, will pass upon legal matters for the underwriters.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information which we believe is material to
an investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about
Network Access Solutions, our common stock and this offering, including the
full texts of the exhibits, some of which have been summarized in this
prospectus. After this offering, we will be subject to the informational
requirements of the Securities Exchange Act. We will be required to file annual
and quarterly reports, proxy statements and other information with the SEC.
71
<PAGE>
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.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1997 and 1998........................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998..................................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1997 and for 1998..................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998..................................................................... 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 the third paragraph
of Note 11 for which the date is March 31,
1999 and except for the first paragraph of Note 9 and the fourth and fifth
paragraphs of Note 11 for which the date
is April 1, 1999
F-2
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
as of December 31, 1997 and 1998
---------------------
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 713,246 $ 5,518,117
Accounts receivable, net of allowance for doubtful
accounts............................................. 765,325 1,806,791
Prepaid and other current assets...................... -- 105,693
Inventory............................................. 47,547 59,233
---------- -----------
Total current assets................................ 1,526,118 7,489,834
Property and equipment, net............................ 140,177 5,030,793
Deposit................................................ -- 185,000
Income tax receivable.................................. -- 100,865
Deferred tax asset..................................... 198,732 121,586
---------- -----------
Total assets........................................ $1,865,027 $12,928,078
========== ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 796,945 $ 2,525,102
Accrued expenses...................................... 92,502 750,308
Current portion of deferred compensation liability.... -- 333,333
Current portion of capital lease obligations.......... -- 328,982
Note payable.......................................... 93,348 --
Income tax payable.................................... 132,064 --
Other current liabilities............................. -- 67,201
---------- -----------
Total current liabilities........................... 1,114,859 4,004,926
Long term portion of capital lease obligations........ -- 1,184,156
Note payable.......................................... -- 1,000,000
Long term portion of deferred compensation
liability............................................ 500,000 166,667
---------- -----------
Total liabilities................................... 1,614,859 6,355,749
---------- -----------
Commitments and contingencies
Series A mandatorily redeemable preferred stock, $.001
par value,
10,000,000 shares authorized, issued and outstanding
(liquidation
preference $10,322,192), as of December 31, 1998.... -- 5,640,651
---------- -----------
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 shares au-
thorized,
9,740,000 and 19,800,000 shares issued as of Decem-
ber 31, 1997
and December 31, 1998, respectively.................. 9,740 19,800
Additional paid-in capital............................ 5,751 8,115,892
Deferred compensation................................. -- (3,462,753)
Retained earnings (deficit)........................... 234,677 (1,841,261)
Less treasury stock, at cost, 3,800,000 shares as of
December 31, 1998.................................... -- (1,900,000)
---------- -----------
Total stockholders' equity ......................... 250,168 931,678
---------- -----------
Total liabilities, mandatorily redeemable preferred
stock, and
stockholders' equity............................... $1,865,027 $12,928,078
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1997 and 1998
---------------------
<TABLE>
<CAPTION>
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Revenue:
Product sales.......................... $14,368,264 $8,149,680 $ 9,899,623
Consulting services.................... 114,119 791,280 1,428,531
Network services....................... -- 3,856 310,921
----------- ---------- -----------
Total revenue 14,482,383 8,944,816 11,639,075
Cost of revenue:
Product sales.......................... 11,975,534 7,180,064 8,639,337
Consulting services.................... 90,851 230,565 761,315
Network services....................... -- 2,406 40,738
----------- ---------- -----------
Total cost of revenue 12,066,385 7,413,035 9,441,390
----------- ---------- -----------
Gross profit............................ 2,415,998 1,531,781 2,197,685
Operating expenses:
Selling, general and administrative ... 2,255,231 1,436,513 4,017,057
Amortization of deferred compensation.. -- -- 218,997
Depreciation and amortization.......... 7,256 12,298 130,004
----------- ---------- -----------
Income (loss) from operations........... 153,511 82,970 (2,168,373)
Interest income......................... -- -- 145,468
Interest expense........................ (868) (5,144) (81,006)
----------- ---------- -----------
Income (loss) before income taxes....... 152,643 77,826 (2,103,911)
Provision (benefit) for income taxes.... 62,460 35,674 (27,973)
----------- ---------- -----------
Net income (loss)....................... 90,183 42,152 (2,075,938)
Preferred stock dividends............... -- -- 322,192
Preferred stock accretion............... -- -- 244,417
----------- ---------- -----------
Net income (loss) applicable to common
stockholders.......................... $ 90,183 $ 42,152 $(2,642,547)
=========== ========== ===========
Net income (loss) per common share
(basic and diluted):
Net income (loss)...................... $ 0.01 $ 0.00 $ (0.17)
Preferred stock dividends and
accretion............................. -- -- (0.05)
----------- ---------- -----------
Net income (loss) applicable to common
stockholders.......................... $ 0.01 $ 0.00 $ (0.22)
=========== ========== ===========
Weighted average common shares
outstanding (basic and diluted)........ 9,740,000 9,740,000 12,134,286
=========== ========== ===========
</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
---------------------
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
------------------ Paid- Deferred Earnings ---------------------
Shares Amount in Capital Compensation (Deficit) Shares Amount Total
---------- ------- ---------- ------------ ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... 9,740,000 $ 9,740 $ 5,751 $ -- $ 102,342 -- $ -- $ 117,833
Net income.............. -- -- -- -- 90,183 -- -- 90,183
---------- ------- ---------- ----------- ----------- --------- ----------- ----------
Balance, December 31,
1996................... 9,740,000 9,740 5,751 -- 192,525 -- -- 208,016
Net income.............. -- -- -- -- 42,152 -- -- 42,152
---------- ------- ---------- ----------- ----------- --------- ----------- ----------
Balance, December 31,
1997................... 9,740,000 9,740 5,751 -- 234,677 -- -- 250,168
Sale of common stock,
net of direct issuance
costs of $27,341....... 9,800,000 9,800 4,865,260 -- -- -- -- 4,875,060
Purchase of treasury
stock at cost.......... -- -- -- -- -- 3,800,000 (1,900,000) (1,900,000)
Shares issued to
employee for service... 260,000 260 129,740 -- -- -- -- 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................... 19,800,000 $19,800 $8,115,892 $(3,462,753) $(1,841,261) 3,800,000 $(1,900,000) $ 931,678
========== ======= ========== =========== =========== ========= =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1997 and 1998
---------------------
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 90,183 $ 42,152 $(2,075,938)
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
Provision for doubtful accounts
receivable......................... -- 23,826 28,133
Benefit (provision) for deferred
income taxes....................... (62,337) (118,274) 77,146
Shares issued to employee for
services........................... -- -- 130,000
Amortization of deferred
compensation....................... -- -- 218,997
Net changes in assets and
liabilities:
Accounts receivable............... (4,435,883) 4,072,345 (1,069,599)
Inventory......................... (347,870) 300,678 (11,686)
Income tax receivable............. -- -- (100,865)
Prepaid and other current assets.. (10,000) 10,000 (105,693)
Accounts payable.................. 4,138,912 (3,612,797) (139,113)
Accrued expenses.................. 241,254 (148,752) 173,795
Deferred compensation liability... 208,333 291,667 --
Income tax payable................ -- -- (132,064)
Other current liabilities......... 142,948 (68,195) 67,201
----------- ----------- -----------
Net cash (used in) provided by
operating
activities...................... (27,204) 804,948 (2,809,682)
----------- ----------- -----------
Cash flows from investing activities:
Expenditures for network under
development.......................... -- -- (640,511)
Purchases of property and equipment... (29,792) (121,915) (515,690)
Deposit for software and services .... -- -- (185,000)
----------- ----------- -----------
Net cash used in investing
activities...................... (29,792) (121,915) (1,341,201)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings on notes payable........... 1,500,000 1,500,000 2,406,652
Repayments of notes payable........... (1,445,458) (1,491,291) (1,500,000)
Issuance of common stock.............. -- -- 4,902,401
Issuance of redeemable preferred
stock................................ -- -- 5,102,499
Issuance costs related to preferred
and common stock offering............ -- -- (55,798)
Treasury stock acquired............... -- -- (1,900,000)
----------- ----------- -----------
Net cash provided by financing
activities...................... 54,542 8,709 8,955,754
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents...................... (2,454) 691,742 4,804,871
Cash and cash equivalents at the
beginning of period................... 23,958 21,504 713,246
----------- ----------- -----------
Cash and cash equivalents at the end of
period................................ $ 21,504 $ 713,246 $ 5,518,117
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest............................ $ 868 $ 5,142 $ 27,948
Income taxes........................ $ -- $ 222,143 $ 153,343
Non-cash investing and financing
activities:
Capital leases...................... $ -- $ -- $ 1,513,138
Preferred stock dividends........... $ -- $ -- $ 322,192
Preferred stock accretion........... $ -- $ -- $ 244,417
Shares issued to employee for
service............................ $ -- $ -- $ 130,000
Expenditures for network under
development included in accounts
payable and accrued expenses....... $ -- $ -- $ 2,351,281
</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. All share information
has been retroactively adjusted for all periods presented to reflect the new
capital structure and stock split.
The Company is a regionally-focused data communications and enterprise
networking company. Through its CuNet branded service, the Company will offer
its customers high speed connectivity in the Bell Atlantic region using DSL
technology. As a complement to the Company's CuNet service, the Company also
offers its customers a complete suite of value-added enterprise networking
solutions, including network integration, network management, network security
and professional services. In 1999, the Company began offering CuNet in Boston,
New York, Philadelphia, Baltimore, Washington, D.C. and Richmond. The Company
will sell its services directly and indirectly to small, medium and large
businesses. The Company sells its services to its existing customer base
through a direct sales force. The Company also sells its services indirectly
through its wholesale and channel partners, including internet service
providers, inter-exchange carriers, other CLECs and systems integrators.
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.
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
F-7
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
received, shipment occurs, collection is probable and no significant
obligations remain related to the completion of installation and performance of
support services.
The Company provides consulting services, including network planning,
design, and integration services, under time-and-material type contracts and
recognizes revenue as services are performed and as costs are incurred.
The Company provides network services under fixed rate service contracts
with an average contractual period of one year. Revenue on fixed rates service
contracts is recognized as costs are incurred over the related contract period.
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 for the years ended December 31,
1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Customer 1996 1997 1998
------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
AT&T....................................... $9,978,104 $3,421,878 $5,869,901
Zeneca, Inc................................ -- 921,356 1,119,856
Network Monitoring and Repair, Inc......... -- 1,301,440 --
---------- ---------- ----------
$9,978,104 $5,644,674 $6,989,757
========== ========== ==========
</TABLE>
Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method. Inventories consist primarily of components,
subassemblies and finished products held for sale.
Property and Equipment
Property and equipment, consists of network costs associated with the
development and implementation of the DSL networks, office and computer
equipment, and furniture and fixtures. The costs associated with the DSL
network under development are comprised of collocation fees, equipment,
equipment held under capital leases, and equipment installation. These assets
are stated at cost. The Company leases certain of its equipment under capital
lease agreements. The capital lease assets are stated at the lower of the
present value of the net minimum lease payments or the fair
F-8
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
value at the inception of the lease, and are depreciated over the shorter of
the estimated useful life or the lease term. Depreciation of office and
computer equipment and furniture and fixtures is computed using the straight-
line method, generally over three to five years, based upon estimated useful
lives, commencing when the assets are placed in service. The depreciation of
the DSL network costs will commence as individual network components are placed
in service and will be depreciated over two to five years. Expenditures for
maintenance and repairs are expensed as incurred. When assets are retired or
disposed, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in operations for the
period.
Income Taxes
The Company accounts for income taxes by utilizing the liability method.
Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the
Company's current provision (benefit) for federal and state income taxes and
the change in net deferred tax assets and liabilities during the period.
Fair Value Information
The carrying amount of current assets and current liabilities approximates
fair value because of the short maturity of these instruments. The fair value
of redeemable preferred stock is estimated by discounting the remaining cash
flows at the current interest rates. As of December 31, 1998, the carrying
amount of these financial instruments approximates fair value.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets. This valuation consists of a comparison of the carrying value of the
assets with the assets' expected future cash flow undiscounted and without
interest costs. If the carrying value of an asset exceeds the expected future
cash flows, an impairment exists. An impairment loss is measured by the amount
by which the carrying value of the asset exceeds future discounted cash flows.
No impairment losses have been recognized to date.
Net Income (Loss) Per Share
The Company presents basic and diluted net income (loss) per share. Basic
net income (loss) per share is computed based on the weighted average number of
outstanding shares of common stock. Diluted net income (loss) per share adjusts
the weighted average for the potential dilution that could occur if stock
options, warrants or other convertible securities were exercised or converted
into
F-9
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
common stock. Diluted loss per share for the year ended December 31, 1998, is
the same as basic loss per share because the effects of such items were anti-
dilutive.
Stock-Based Compensation
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Under the intrinsic value method of accounting
for stock-based compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the underlying stock on the
date of grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131 (SFAS 131), Disclosures About Segments of an Enterprise and Related
Information. SFAS 131 requires companies to disclose information about their
segments. The Company has determined that its network product, service and
consulting business activities are not organized on the basis of differences in
related products and services and therefore, operates on an enterprise-wide or
single reportable segment. The Company provides its enterprise and carrier
customers a full selection of data networking solutions, including, in the
future, DSL technology. The Company's revenues for the year ended December 31,
1998, were principally derived from the sale of products and services to
customers in the Bell Atlantic region. The Company entered into its first
interconnection agreement with Bell Atlantic in April 1997 and began
constructing a high-speed data communications network and related services
using DSL technology. The Company expects to derive future revenues from the
operation of its network in the eastern United States.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Currently the Company does not utilize derivative
instruments, therefore the adoption of SFAS 133 is not expected to have a
significant effect on the Company's results of operations or its financial
position. The Company will adopt SFAS 133 for the year ending December 31,
2000.
F-10
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
3. Property and Equipment
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
DSL network development in process..................... $ -- $4,657,975
Office and computer equipment.......................... 133,419 355,962
Furniture and fixtures................................. 19,626 159,728
Less accumulated depreciation.......................... (12,868) (142,872)
-------- ----------
Property and equipment, net............................ $140,177 $5,030,793
======== ==========
</TABLE>
The DSL network development in process includes the acquisition of equipment
under capital leases, equipment, installation, and collocation fees.
Collocation fees represent nonrecurring fees paid to obtain central office
space for location of certain Company equipment. As of December 31, 1998, the
recorded cost of the network equipment under capital leases was $1,513,138.
Accumulated amortization for this equipment under capital leases was $20,739.
For the years December 31, 1996, 1997 and 1998, depreciation expense charged
to operations amounted to $7,256, $12,298, and $130,004, respectively.
4. Notes Payable
On October 16, 1998, the Company entered into a $10,000,000 line of credit
agreement with Ascend Communications, Inc. (Ascend). Under the terms of the
line of credit, the Company can draw on the line of credit in $1,000,000
increments up to a maximum of $5,000,000. The Company may 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 the supplier and
(ii) demonstrating that at least 70% of such equipment is being used by the
Company to generate revenue. The Company is required to make interest only
payments at an annual rate of 8.25% on the amounts advanced for the first nine
months from the date of the advance. For the next thirty-three months the
Company is required to make principal and interest payments in accordance with
a sixty month amortization schedule using an interest rate of 8.25% for the
first eighteen months and a rate equal to the prevailing high yield bond index
for the next fifteen months. The remaining unpaid interest is due forty-two
months after the related advance. The credit agreement requires immediate
repayment in the event of an initial public offering or debt offering in excess
of $40,000,000 or a change in control, as defined. At December 31, 1998,
$1,000,000 was outstanding under this agreement.
The Company had a $1,500,000 line of credit agreement with a bank which
matured on November 30, 1998, was repaid and not renewed. Interest on
outstanding borrowings accrued at the bank's prime rate of interest plus three-
quarters of a percent (9.25% during 1998). At December 31, 1997, there was
$93,348, of outstanding borrowings under this agreement.
F-11
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
5. Deferred Compensation
The Company has an unfunded deferred compensation plan for certain key
executives. Under the plan, executives deferred a portion of their compensation
by electing future payments in three equal installments in June 1999, December
1999 and June 2000. At December 31, 1997 and 1998, the deferred compensation
liability was $500,000, respectively. Interest accrues on deferred amounts on a
quarterly basis at a rate determined by management which is currently 6% based
on the rate of interest for 3-year Federal treasury notes. Accrued interest
related to these amounts was $17,500 and $47,500 at December 31, 1997 and 1998,
respectively.
6. Commitments and Contingencies
Leases
The Company leases and subleases office space in Virginia and Pennsylvania
and collocation space in central offices under the terms of the interconnection
agreements with Bell Atlantic and other vendors. Commitments for minimum rental
payments under noncancelable leases and subleases at December 31, 1998 are as
follows: $329,311 in 1999, and $331,382 in 2000, $255,853 in 2001, and $9,212
in 2002.
Rent expense for the years ended December 31, 1996, 1997 and 1998, was
$46,742, $80,103 and $113,600, respectively.
During 1998, the Company entered into capital leases related to the
acquisition of equipment for the development of the DSL network. The present
value of future minimum capital lease payments as of December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
----------------------------------------------------------------- ----------
<S> <C>
1999............................................................. $ 461,370
2000............................................................. 501,064
2001............................................................. 500,521
2002............................................................. 330,892
2003............................................................. 21,875
----------
1,815,722
Less amounts representing interest............................... 302,584
----------
Present value of net minimum lease payments...................... 1,513,138
Less current portion of capital lease obligations................ 328,982
----------
Long term portion of capital lease obligations................... $1,184,156
==========
</TABLE>
The Company has entered into a master lease agreement with Ascend to finance
purchases of up to $30,000,000 through capital lease agreements. The Company
has an arrangement with Paradyne Corporation whereby the Company can finance
DSL equipment purchases of up to $4,000,000 subject to vendor approval.
F-12
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
Purchase commitments
On November 24, 1998 the Company entered into an agreement with a software
and service provider to support its DSL services. The Company's majority
shareholder is also a shareholder of this software and service provider. Under
the terms of the agreement, software licensing and service fees will
approximate $1,023,700 which are payable through a $185,000 deposit which was
made upon signing the agreement, $402,700 due upon project completion, and
$436,000 payable within twenty-four months of project completion. Amounts not
paid within 30 days of project completion accrue interest at a rate of 10%. The
agreement requires immediate payment if the Company obtains $40,000,000 in
funding and requires accelerated payment, based on a formula, if the Company
receives funding in excess of $10,000,000. The Company commenced implementing
the software and support service in 1999.
Employment agreements
The Company has entered into an employment agreement with each of its
executive officers. Each agreement has an initial term of four years, subject
to earlier termination upon 30 days prior notice. These agreements are
automatically extended for additional one year terms unless the Company or the
employee elects to terminate the agreement within 30 days before the end of the
current term. Under these agreements, these employees will receive an initial
annual base salary that 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 flow.
7. Income Taxes
The provision (benefit) for income taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
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>
F-13
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
Deferred tax assets are comprised of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
-------- ---------
<S> <C> <C>
Deferred compensation................................... $193,100 $ 349,956
Accrued interest........................................ 5,632 19,149
Bad debt expense........................................ -- 20,066
Depreciation expense.................................... -- (2,083)
Net operating loss...................................... -- 444,160
Valuation allowance..................................... -- (709,662)
-------- ---------
Net deferred tax asset.................................. $198,732 $ 121,586
======== =========
</TABLE>
As of December 31, 1998, a valuation allowance was established to reduce
total deferred tax assets to an amount that management believes will more
likely than not be realized, based on income taxes paid in the loss carryback
period net of refundable taxes.
A reconciliation between income taxes from operations computed using the
federal statutory income tax rate and the Company's effective tax rate for the
years ended December 31, is as follows:
<TABLE>
<CAPTION>
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>
8. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Mandatorily Redeemable Preferred Stock
On August 6, 1998, the Company issued 10,000,000 shares of Series A
mandatorily redeemable preferred stock (Preferred Stock) and 9,800,000 shares
of common stock for total proceeds of $10,004,900, excluding direct issuance
costs of $55,798. The Company has allocated $5,074,042 and $4,875,060 of the
net proceeds to the Preferred Stock and common stock, respectively, based on
the Company's estimate of fair value of the Preferred Stock and common stock.
The Preferred Stock has a par value of $.001 per share, a stated value of $1.00
per share (Stated Value) and a cumulative dividend of 8% of the Stated Value
per annum, compounded annually. The Company may not declare or pay any
distributions by dividend or otherwise, payable other than in common stock,
until the holders of the Preferred Stock first receive a distribution equal to
the cumulative dividend due for each outstanding share of Preferred Stock.
Dividends continue to accrue until redemption. The Preferred Stock is
redeemable, at the option of the holder, at the earlier of the closing of a
public offering or the sixth anniversary of the initial Preferred Stock
issuance at a redemption price equal to
F-14
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
--------------------
$1.00 per share plus any accrued and unpaid dividends. For the year ended
December 31, 1998, the Company has accrued preferred stock dividends of
$322,192 and increased the preferred stock carrying value by $244,417 for
accretion to the redemption price.
In the event of a liquidation, dissolution, or winding up of the Company,
the holders of the Preferred Stock are entitled to a liquidation preference
equal to $1.00 per share plus any accrued and unpaid dividends. No dividends
have been declared through December 31, 1998. The Preferred Stock does not
provide its holders with voting rights, however, the Company must receive
approval from the holders of two-thirds of Preferred Stock to (i) authorize,
create or issue, or increase the authorized or issued amount of any class of
equity which is senior or equal to the Preferred Stock, (ii) reclassify or
modify any class of equity such that it ranks senior or equal to the Preferred
Stock, or (iii) amend, alter or repeal any of the provisions applicable to the
Preferred Stock so as to adversely change the dividend, liquidation and
redemption terms.
On March 18, 1999, the Company's certificate of incorporation was amended
to modify the terms of the Preferred Stock. In the event of an initial public
offering in which the Company receives a market valuation in excess of
$200,000,000, the terms of the Preferred Stock provide that (i) 50% of the
Preferred Stock outstanding will be cancelled and cease to exist without
compensation or recourse, (ii) the remaining shares of Preferred Stock will be
automatically converted into common stock based on the Preferred Stock
aggregate per share stated value of $5,000,000 divided by the per share public
offering price and (iii) no dividends on the Preferred Stock whether accrued
or unaccrued through the date of the offering will be payable.
The Preferred Stock activity for the year ended December 31, 1998 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
========== ==========
</TABLE>
Stock Repurchase
On August 6, 1998, the Company repurchased 3,800,000 shares of common stock
for $1,900,000 from certain founders of the Company. This repurchase was
accounted for at cost.
9. Stock-Based Compensation
On July 23, 1998, the Company adopted the 1998 Incentive Stock Plan (the
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted or
F-15
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
unrestricted stock awards, phantom stock, performance awards or any combination
thereof may be granted to the Company's employees and certain other persons in
accordance with the Plan. The Board of Directors, which administers the Plan,
determines the number of options granted, the vesting period and the exercise
price. The Board of Directors may terminate the Plan at any time. Options
granted under the Plan are fully exercisable into restricted shares of the
Company's common stock upon award and expire ten years after the date of grant.
The restricted common stock generally vests over a three or four year period.
Subsequent to exercise, unvested shares of restricted stock cannot be
transferred while vested shares are subject to a right of first refusal by the
Company to repurchase the shares at fair value. Upon voluntary termination
unvested shares of restricted stock can be repurchased at the lower of fair
value or the exercise price. At December 31, 1998, 4,000,000 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 employee stock option plan to 4,500,000 and 5,000,000,
respectively.
As of December 31, 1998, a total of 3,151,500 incentive stock options had
been granted at an exercise price of $.20 per share. All of the options issued
were exercisable at December 31, 1998. Stock option activity for the year ended
December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Average
Stock Exercise Exercise
Options Price Price
--------- -------- --------
<S> <C> <C> <C>
Options outstanding, December 31, 1997........... -- $-- $--
Options granted, July 1998....................... 2,400,000 .20 .20
Options granted, August 1998..................... 100,000 .20 .20
Options granted, November 1998................... 651,500 .20 .20
Options exercised................................ -- -- --
Options cancelled................................ -- -- --
--------- ---- ----
Options outstanding, December 31, 1998........... 3,151,500 $.20 $.20
========= ==== ====
</TABLE>
The Company has estimated the fair value of the underlying common stock on
the date of grant was in excess of the exercise price of the options. As a
result, the Company recorded deferred compensation of $3,681,750 for the year
ended December 31, 1998. This amount was recorded as a reduction to
stockholders' equity and is being amortized as a charge to operations over the
vesting periods of the underlying restricted common stock. For the year ended
December 31, 1998, the Company recognized $218,997 of stock compensation
expense related to these options.
F-16
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption
of a fair value-based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method for
options granted to employees and disclose pro forma net loss and loss per
share. Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been as follows:
<TABLE>
<S> <C>
Net loss as reported.............................................. $(2,075,938)
Pro forma net loss................................................ (2,088,416)
Net loss per share as reported, basic and diluted................. (0.17)
Pro forma net loss per share, basic and diluted................... (0.17)
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1998 was approximately $2.34 based on the Black-Scholes option
pricing model. Upon termination, unvested shares of restricted stock are
repurchased by the Company at the lower of the exercise price or fair market
value.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998: Dividend
yield of 0%; expected volatility of 0%; risk-free interest rate of 5.21%; and,
expected term of 5 years.
As of December 31, 1998, the weighted average remaining contractual life of
the options is 9.8 years.
10. Employee Benefit Plan
On September 16, 1998, the Company adopted the Network Access Solution, Inc.
401(k) Profit Sharing Plan and Trust (the Plan). As allowed under Section
401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary
deductions for eligible employees. Participants must be at least 21 years of
age and may make voluntary contributions to the Plan of up to 15% of their
compensation not to exceed the federally determined maximum allowable
contribution. The Company is not obligated to make contributions or to match
participant contributions. Participants vest in Company contributions' until
after 3 years of employment. The Company did not make contributions to the Plan
during 1998.
11. Subsequent Events
The Company intends to file a Registration Statement with the Securities and
Exchange Commission for an initial public offering of its common stock.
On January 14, 1999, the Company granted certain employees options to
purchase an aggregate of 848,700 shares of common stock at an exercise price of
$.20 per share of which 248,700 and 600,000 of the options have measurement
dates of January 14, 1999 and March 1, 1999, respectively.
F-17
<PAGE>
Deferred compensation and compensation charges will be recorded in connection
with these grants and amortized over the vesting period of the restricted
stock.
On March 31, 1999, the Company entered into a financing agreement whereby
the majority holders of the Preferred Stock agreed to invest an additional
$10,000,000 in the Company. Under the agreement, the Company received
$5,000,000 by issuing an 8% convertible note with a maturity date of December
31, 1999 and will receive a remaining $5,000,000 as either common or preferred
stock depending upon the occurrence of a triggering event. The principal and
interest of the note will convert, and the remaining investment of $5,000,000
will be received by the Company, upon earlier of the following triggering
events; (i) the Company completes a sale of capital stock to private investors
with proceeds of at least $10,000,000, (ii) the Company completes an initial
public offering with an aggregate offering price to the public of not less than
$25,000,000 based on a pre-money Company valuation of at least $200,000,000,
(iii) the Company takes possession of at least 125 Bell Atlantic central
offices for the purpose of installing the Company's digital subscriber line
access multiplexing equipment or (iv) on December 31, 1999. For items (i) and
(ii) above, the conversion rate is based on the price per share of the equity
instrument offered to the private or public investors. For items (iii) or (iv),
the conversion rate is equal to the fair value of the common stock based on an
independent appraisal.
On April 1, 1999, the Company entered into a lease for additional office
space in Sterling, Virginia. The lease requires total payments of $2,478,223
over the lease term of five years.
On April 1, 1999, the Company granted a board member an option to purchase
111,111 shares of the Company's common stock at an exercise price of $15.00 per
share. The option vests over a three year period, except that in the event of
an initial public offering the option will vest immediately. The stock option
agreement stipulates that in the event of an initial public offering, the board
member will be issued an additional option, with no vesting period, to acquire
a number of shares of common stock at an exercise price per share to be
determined using a formula based on the public offering price.
[Graphic: Diagram of networking solutions]
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
, 1999
[LOGO OF NAS]
Shares of Common Stock
-------------------
P R O S P E C T U S
-------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
J.P. Morgan & Co.
---------------------
DLJdirect Inc.
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the contained herein or the affairs of the Company have not
changed since the date hereof.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering and when selling
previously unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
offered hereby, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the National Association Securities Dealers, Inc. filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $27,800
National Association of Securities Dealers, Inc. filing fee...... 12,000
Nasdaq National Market listing fee............................... *
Transfer agent's and registrar's fees............................ *
Printing expenses................................................ *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky filing fees and expenses................................ *
Miscellaneous expenses........................................... *
-------
Total.......................................................... *
=======
</TABLE>
- ---------------------
* To be filed by amendment.
14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance
that protects its officers, directors, employees and agents against any
liabilities incurred in connection with their service in such positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its directors and officers, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act.
II-1
<PAGE>
15. Recent Sales of Unregistered Securities
The following information relates to securities issued or sold by the
Registrant within the last three years. During that time, the Registrant has
issued unregistered securities in the transactions described below. Securities
issued in such transactions were offered and sold in reliance upon the
exemption from registration under Section 4(2) of the Securities Act, relating
to sales by an issuer not involving any public offering, or under Rule 701
under the Securities Act. The sales of securities were made without the use of
an underwriter and the certificates evidencing the shares bear a restrictive
legend permitting the transfer thereof only upon registration of the shares or
an exemption under the Act.
(1) In August 1998 the Registrant issued 260,000 shares of Common Stock to an
employee at a price of $0.50 per share in exchange for services rendered.
(2) In August 1998 the Registrant issued 9,800,000 shares of Common Stock to a
group of four accredited investors at a purchase price of $0.0005 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 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) Between July 1998 and April 1999, the Registrant issued options exercisable
for an aggregate of 4,000,200 shares of Common Stock at an exercise price
of $0.20 per share.
(5) In April 1999 the Registrant issued options to one of its directors
exercisable for an aggregate of 111,111 shares of Common Stock at an
exercise price of $15 per share, subject to adjustment.
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** Opinion of Piper & Marbury L.L.P., regarding legality of
securities being registered
10.1+** Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2+** Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc.
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.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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 Note Purchase Agreement dated March 31, 1999, by and between the
Company, Spectrum Equity Investors II, L.P. and FBR Technology
Venture Partners L.P.
10.24 Convertible Note dated March 31, 1999, by and between the Company
and Spectrum Equity Investors II, L.P.
10.25 Convertible Note dated March 31, 1999, by and between the Company
and FBR Technology Venture Partners L.P.
10.26** Nonqualified Stock Option Grant Agreement dated April , 1999, by
and between the Company and Dennis R. Patrick
10.27** Deed of Lease dated March , 1999, by and between the Company and
TransDulles Center, Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
11.1* Statement of computation of loss per share
23.1 Consent of PricewaterhouseCoopers, LLP
23.2** Consent of Piper & Marbury L.L.P. (included as part of Exhibit
5.1)
24.1* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Information will be omitted from this exhibit pursuant to a request for
confidential treatment to be filed with the Securities and Exchange
Commission.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be shown in
the schedules is not applicable or is included elsewhere in our financial
statements or the notes thereto.
17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Certificate of Incorporation or
Bylaws or the Delaware General Corporation Law or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted form the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(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 23rd day of April, 1999.
NETWORK ACCESS SOLUTIONS CORPORATION
/s/ Jonathan P. Aust
By: _________________________________
Jonathan P. Aust
President, Chief Executive Officer
and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Name Title Date
/s/ Jonathan P. Aust President, Chief April 23, 1999
- ------------------------------------- Executive Officer
Jonathan P. Aust and Chairman of the
Board of Directors
(Principal Executive
Officer)
/s/ Scott G. Yancey, Jr. Chief Financial April 23, 1999
- ------------------------------------- Officer and Director
Scott G. Yancey, Jr. (Principal
Accounting and
Financial Officer)
* Chief Operating April 23, 1999
- ------------------------------------- Officer and Director
Christopher J. Melnick
* Director April 23, 1999
- -------------------------------------
Brion B. Applegate
/s/ Dennis R. Patrick Director April 23, 1999
- -------------------------------------
Dennis R. Patrick
*By: /s/ Jonathan P. Aust
- -------------------------------------
Jonathan P. Aust
Attorney-in-Fact
II-5
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1** Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Amended and Restated By-Laws of the Company
4.1* Specimen stock certificate for shares of Common Stock of the
Company
5.1** Opinion of Piper & Marbury L.L.P., regarding legality of
securities being registered
10.1+** Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2+** Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc.
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.
10.5* Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1* First Lease Amendment dated June 26, 1998, by and between the
Company and
Sterling/Gunston LLC
10.5.2* Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6* Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7* Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8* Employment Agreement dated as of August 16, 1998, by and between
the Company and
Jonathan P. Aust
10.9* Employment Agreement dated as of July 13, 1998, by and between the
Company and
Christopher J. Melnick
10.10* Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11* Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12* Employment Agreement dated as of March 1, 1999, by and between the
Company and
John J. Hackett
10.13* 1998 Stock Incentive Plan, as amended
10.14* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
10.16* Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17 Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
Jonathan P. Aust
10.19* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
James A. Aust
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.20* Repurchase Agreement dated August 6, 1998, by and between the
Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and
Stephen C. Aust
10.21 Investor Rights Agreement dated August 6, 1998, by and between the
Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P.,
FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC,
as amended
10.22 Series A Preferred Stock Purchase Agreement dated August 6, 1998,
by and between the Company, Spectrum Equity Investors II, L.P.,
SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2
Venture Partners, LLC
10.23 Note Purchase Agreement dated March 31, 1999, by and between the
Company, Spectrum Equity Investors II, L.P. and FBR Technology
Venture Partners L.P.
10.24 Convertible Note dated March 31, 1999, by and between the Company
and Spectrum Equity Investors II, L.P.
10.25 Convertible Note dated March 31, 1999, by and between the Company
and FBR Technology Venture Partners L.P.
10.26** Nonqualified Stock Option Grant Agreement dated April , 1999, by
and between the Company and Dennis R. Patrick
10.27** Deed of Lease dated March , 1999, by and between the Company and
TransDulles Center, Inc.
11.1* Statement of computation of loss per share
23.1 Consent of PricewaterhouseCoopers, LLP
23.2** Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
hereto)
24.1* Power of Attorney (included in signature pages)
27* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
+ Information will be omitted from this exhibit pursuant to request for
confidential agreement to be filed with the Securities and Exchange
Commission.
II-7
<PAGE>
Exhibit 3.1
NETWORK ACCESS SOLUTIONS CORPORATION
(A DELAWARE CORPORATION)
Amended and Restated
Certificate of Incorporation
Network Access Solutions Corporation (the "Corporation"), organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
The date of incorporation of the Corporation is July 13, 1998.
At a meeting of the Board of Directors of the Corporation a resolution
was duly adopted, pursuant to Section 242 of the General Corporation Law of the
State of Delaware, setting forth an amended and restated Certificate of
Incorporation of the Corporation and declaring said amendment and restatement to
be advisable. The stockholders of the Corporation duly approved said proposed
amendment and restatement by written consent in accordance with Sections 228 and
242 Of the General Corporation Law of the State of Delaware, and written notice
of such consent has been given to all stockholders who have not consented in
writing to said amendment and restatement. The resolution setting forth the
amendment is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation be
and hereby is amended and restated as follows:
FIRST: The name of the corporation (which is hereinafter called the
"Corporation") is:
Network Access Solutions Corporation
SECOND: The registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent in the State of Delaware at such address is The Corporation Trust Company.
THIRD: The nature of the business of the Corporation is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware and to possess and exercise all of the
powers and privileges granted under such law and the other laws of the State of
Delaware.
<PAGE>
FOURTH: Authorized Capital. The total number of shares of all
------------------
classes of stock which the Corporation shall have authority to issue is sixty
million (60,000,000) shares, of which (i) fifty million (50,000,000) shall be
shares of common stock, par value one tenth of one cent ($0.001) per share (the
"Common Stock"), the aggregate par value of which is fifty thousand dollars and
no cents ($50,000.00), and (ii) ten million (10,000,000) shall be shares of
preferred stock, par value one tenth of one cent ($0.001) per share (the
"Preferred Stock"), the aggregate par value of which is ten thousand dollars and
no cents ($10,000.00).
A. Common Stock
------------
(1) The voting, dividend and liquidation rights of holders of shares
of Common Stock are subject to, and qualified by, the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of
Directors.
(2) Subject to the voting rights of holders of shares of the Preferred
Stock, the holders of the Common Stock are entitled to one vote for each share
held at all meetings of stockholders (and written actions in lieu of meetings).
There shall be no cumulative voting and at any meeting held for the purpose of
electing directors, the presence in person or by proxy of the holders or a
majority of the shares of Common Stock then outstanding shall constitute a
quorum of the Common Stock for the purpose of electing directors by holders of
Common Stock.
(3) Dividends may be declared and paid on the Common Stock from funds
lawfully available therefor as, if and when determined by the Board of Directors
and subject to any preferential dividend rights of any then outstanding
Preferred Stock.
(4) Upon voluntary or involuntary liquidation, sale, merger,
consolidation, dissolution or winding up of the Corporation, holders of shares
of Common Stock will be entitled to receive all assets of the Corporation
available for distribution to its stockholders, subject to any preferential
rights of any then outstanding Preferred Stock.
(5) The Common Stock is nonredeemable.
B. Preferred Stock
---------------
The powers, designation, numbers, preferences, privileges, restrictions
and rights granted to or imposed on any class or series of any Preferred Stock
shall be as set forth in the resolution or resolutions providing for the
issuance of such Preferred Stock as adopted by the Board of Directors.
FIFTH: Except as otherwise provided in this Certificate of
Incorporation or a certificate of designation relating to the rights of the
holders of any class or series of Preferred Stock, voting separately by class or
series, to elect additional directors under specified circumstances, the number
of directors of the Corporation shall be as fixed from time to time by or
pursuant to the By-laws of the Corporation (the "By-Laws"). No director of the
Corporation need be a Stockholder.
2
<PAGE>
The Board of Directors shall be classified with respect to the time for
which they severally hold office into three separate classes, Class I, Class II
and Class III, which shall be as nearly equal in number as possible, and shall
be adjusted from time to time in the manner specified in the By-Laws of the
Corporation to maintain such proportionality. Each initial director in Class I
shall hold office for a term expiring at the 2002 annual meeting of the
stockholders. Each initial director in Class II shall hold office initially for
a term expiring at the 2001 annual meeting of stockholders. Each initial
director in Class III shall hold office for a term expiring at the 2000 annual
meeting of stockholders. Notwithstanding the foregoing provisions of this FIFTH
Article, each director shall serve until such director's successor is duly
elected and qualified or until such director's earlier death, resignation or
removal. Any one or more or all of the directors may be removed, only for cause,
by the holders of a majority of the shares then entitled to vote at an election
of directors. At each annual meeting of stockholders, the successors to the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election and until their successors have
been duly elected and qualified or until any such director's earlier death,
resignation or removal.
Vacancies and newly created directorships resulting from any increase
in the authorized number 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.
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized:
(a) To make, alter or repeal By-Laws of the Corporation.
(b) To authorize and cause to be executed mortgages and liens upon the
real and personal property of the Corporation.
(c) To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
(d) To designate one or more committees, each committee to consist of
one or more of the directors of the Corporation. The Board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. The By-Laws
may provide, that, in the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of
Directors, or in the By-Laws of the Corporation, shall have and may exercise
all the powers and authority of the Board of Directors in the management of
the business and affairs of the Corporation, and may authorize the seal of
the Corporation to be affixed to all papers which may require it; but no
3
<PAGE>
such committee shall have the power or authority in reference to amending
the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange
of all or substantially all of the Corporation's property and assets,
recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the By-Laws of the Corporation;
and, unless the resolution or By-Laws expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
(e) When and as authorized by the stockholders in accordance with
statute, to sell, lease, exchange or otherwise dispose of all or
substantially all of the property and assets of the Corporation, including
its good will and its corporate franchises, upon such terms and conditions
and for such consideration, which may consist in whole or in part of money
or property including shares of stock in, and/or other securities of, any
other corporation or corporations, as its Board of Directors shall deem
expedient and for the best interests of the Corporation.
(f) To fix, determine and vary from time to time the amount to be
maintained as surplus and the amount or amounts to be set apart as working
capital.
(g) To authorize the payment of compensation to the directors for
services to the Corporation, including fees for attendance at meetings of
the Board of Directors, of the Executive Committee, and of other committees,
and to determine the amount of such compensation and fees.
(h) To authorize the issuance from time to time of shares of its stock
of any class whether now or hereafter authorized, or securities convertible
into shares of its stock of any class or classes, whether now or hereafter
authorized, for such consideration as may be deemed advisable by the Board
of Directors and without any action by the stockholders.
EIGHTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provisions contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the By-Laws of the Corporation. Elections of
directors need not be by written ballot unless the By-Laws of the Corporation
shall so provide.
Subject to the provisions of the Delaware Corporation Law, special
meetings of stockholders may only be called by the Board of Directors, chairman
or president of the Corporation or by the secretary of the Corporation upon a
written request of stockholders owning at least a majority of the issued and
outstanding capital stock of the Corporation entitled to vote generally in the
election of directors.
NINTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct
4
<PAGE>
or a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is amended
after approval of this article to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the
stockholders of the corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
TENTH: The corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as amended from time to
time, indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
corporation, or is or was serving, or has agreed to serve, at the request of the
corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom.
Indemnification may include payment by the corporation of expenses in
defending an action or proceeding in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by the person indemnified to
repay such payment if it is ultimately determined that such person is not
entitled to indemnification under this TENTH Article, which undertaking may be
accepted without reference to the financial ability of such person to make such
repayment.
The corporation shall not indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person unless the initiation thereof was approved by the Board of Directors
of the corporation.
The indemnification rights provided in this TENTH Article (i) shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any law, agreement or vote of stockholders or disinterested
directors or otherwise, and (ii) shall inure to the benefit of the heirs,
executors and administrators of such persons. The corporation may, to the extent
authorized from time to time by its Board of Directors, grant indemnification
rights to other employees or agents of the corporation or other persons serving
the corporation and such rights may be equivalent to, or greater or less than,
those set forth in this TENTH Article.
ELEVENTH: The Corporation reserves the right to amend, alter, change
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and the Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
5
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Amended and Restated Certificate of Incorporation to be
signed by its President this ____ day of April, 1999.
________________________
Jonathan Aust, President
6
<PAGE>
CERTIFICATE OF DESIGNATION
OF THE
NUMBER, VOTING POWERS, PREFERENCES AND RIGHTS
AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
OF THE
SERIES A PREFERRED STOCK
OF
NETWORK ACCESS SOLUTIONS, INC.
Pursuant to Section 151(g) of the
Delaware General Corporation Law
The undersigned being duly elected President of Network Access Solutions,
Inc., a Delaware corporation (the "Corporation"), does hereby certify that:
A. The name of the corporation is Network Access Solutions, Inc.
B. The Certificate of Incorporation of the Corporation (the "Certificate
of Incorporation") authorizes the issuance of 10,000,000 shares of Preferred
Stock of par value $.001 and expressly vests in the Board of Directors of the
Corporation (the "Board") the authority to issue any and all shares of Preferred
Stock in one or more classes or series and further authorizes the Board, by
resolution or resolutions, to establish the powers, designations, numbers,
preferences, rights and restrictions of each class or series to be issued.
C. The Board, pursuant to authority expressly vested in it in the
Certificate of Incorporation, and in accordance with Section 141(f) of the
General Corporation Law of the State of Delaware, has adopted the following
resolution creating a Series A Preferred Stock of the Corporation:
RESOLVED, that the Board does hereby authorize the issuance of 10,000,000
shares of Series A Preferred Stock (the "Series A Preferred Stock"), with the
preferences, privileges, restrictions and rights granted or imposed thereon as
follows:
Section 1. Designation and Amount.
----------------------
The shares of such series shall be designated as the "Series A Preferred
Stock" (the "Series A Preferred Stock") and the number of shares initially
constituting such series shall be 10,000,000, which number may be decreased (but
not increased) by the Board of Directors without a vote of stockholders;
provided, however, that such number may not be decreased below the number of
- -------- -------
then currently outstanding shares of Series A Preferred Stock. The "Stated
Value" per share of the Series A Preferred Stock shall be equal to $1.00.
<PAGE>
Section 2. Dividends and Distributions.
---------------------------
(a) The holders of shares of Series A Preferred Stock, in preference
to and in priority over the holders of shares of any stock of the Corporation
ranking junior to the Series A Preferred Stock with respect to the payment of
dividends or the distribution of assets, whether upon liquidation, dissolution,
winding up or otherwise ("Junior Stock"), shall be entitled to receive, when and
as declared by the Board of Directors, out of funds legally available for the
payment of dividends, dividends on the Series A Preferred Stock, which shall
accrue on a daily basis (computed on the basis of a 360-day year of twelve 30-
day months) at the rate per annum of 8.0%, compounded annually, on the Stated
Value (plus all accrued or accumulated but unpaid dividends) of each share of
Series A Preferred Stock from the date of original issuance thereof until the
redemption of the Series A Preferred Stock pursuant to Section 3 hereof.
(b) Dividends shall accrue and be cumulative whether or not they have
been declared and whether or not there are profits, surplus or other funds of
the Corporation legally available for the payment of dividends. Dividends shall
be paid in cash to the record holders of the Series A Preferred Stock and shall
be calculated on the basis of the actual number of days elapsed from but
excluding the issuance date of the Series A Preferred Stock to and including the
redemption date.
(c) Each fractional share of Series A Preferred Stock outstanding shall
be entitled to a ratably proportionate amount of all dividends accruing with
respect to each outstanding share of Series A Preferred Stock, and all such
dividends with respect to such outstanding fractional shares shall be fully
cumulative and shall accrue, whether or not declared, and shall be payable in
the same manner and at such times as provided herein with respect to dividends
on each outstanding share of Series A Preferred Stock.
(d) All dividends paid with respect to shares of Series A Preferred
Stock pursuant to Section 2(a) shall be paid pro rata to the holders entitled
thereto.
(e) So long as any shares of Series A Preferred Stock are outstanding:
(i) No dividend or other distribution shall be declared or paid, or
set apart for payment on or in respect of, any Junior Stock, either directly or
indirectly, whether in cash, obligations, shares of the Corporation or other
property (other than dividends or distributions payable in shares of Junior
Stock or in rights to purchase Junior Stock), nor shall any Junior Stock, or any
warrants, rights, calls or options exercisable for or convertible into any
Junior Stock, be redeemed, purchased, retired or otherwise acquired for any
consideration (or any money be paid to a sinking fund or otherwise set apart for
the purchase or redemption of any such Junior Stock or any warrants, rights,
calls or options exercisable for or convertible into any Junior Stock), unless
as of such date the Corporation has paid all dividends accrued and payable to
date on the Series A Preferred Stock in full and paid all amounts due in respect
of its redemption obligations under Section 3; provided that notwithstanding the
--------
foregoing, the Corporation may effect purchases or redemptions pursuant to
employee stock subscription
-8-
<PAGE>
agreements with officers and key employees of the Corporation and its
subsidiaries that have been approved by the Board of Directors.
(ii) No shares of Series A Preferred Stock shall be redeemed,
purchased or otherwise acquired for any consideration (or any money be paid to a
sinking fund or otherwise set apart for the purchase or redemption of any such
Series A Preferred Stock) by the Corporation except in accordance with Section 3
hereof.
Section 3. Redemption.
----------
(a) If at any time after the earlier of (i) the closing of the
Corporation's sale of its Common Stock in a public offering pursuant to a
registration statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, or (ii) the sixth anniversary of the
initial issuance by the Corporation of shares of Series A Preferred Stock, the
holders of a majority of the outstanding shares of the Series A Preferred Stock
so request in writing (a "Qualifying Request"), the Corporation shall redeem, at
the applicable Redemption Price (as determined below), all shares of the Series
A Preferred Stock then outstanding as determined in accordance with the terms
and provisions set forth below. Upon receipt of a Qualifying Request, the
Corporation shall give notice pursuant to this Section 3 to all holders of the
then outstanding Series A Preferred Stock at the address of each such holder
appearing on the books of the Corporation or given by such holder to the
Corporation for the purpose of notice. Each holder of Series A Preferred Stock
shall submit to the Corporation or its designee any or all shares of Series A
Preferred Stock held by such holder in response to a Redemption Notice (defined
below), and the Corporation shall redeem on the Redemption Date (as defined
below) all shares of Series A Preferred Stock. If the funds of the Corporation
legally available for redemption of shares of Series A Preferred Stock on the
Redemption Date are insufficient to redeem the total number of shares of Series
A Preferred Stock, those funds which are legally available will be used to first
redeem as many shares of Series A Preferred Stock, on a pro rata basis, as may
be lawfully redeemed. The shares of Series A Preferred Stock that were submitted
for redemption but not so redeemed shall remain outstanding and entitled to all
the rights and preferences provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Series A Preferred Stock, such funds will immediately be used to
redeem the balance of the shares which the Corporation has become obliged to
redeem on the Redemption Date (or such lesser maximum amount that shall be
lawful at such time), but which it has not redeemed.
(b) Notice. Upon receipt of a Qualifying Request, the Corporation
------
shall give, not less than 60 days prior to the Redemption Date, written notice
(the "Redemption Notice") to all holders of the Series A Preferred Stock.
Subject to the possible restrictions contained in the prior paragraph, all of
the Series A Preferred Stock shall be redeemed on the date specified in the
Redemption Notice (the "Redemption Date") at the applicable Redemption Price,
which shall equal the Stated Value, adjusted for any stock split, combination or
similar recapitalization with respect to such shares, plus all accrued or
accumulated but unpaid dividends on the Series A Preferred Stock (the
"Redemption Price"). The Redemption Notice shall further require each holder to
surrender to the Corporation on or before the Redemption Date, at the place
designated
-9-
<PAGE>
in the Redemption Notice, such holder's certificate or certificates representing
its shares of Series A Preferred Stock. On or prior to the Redemption Date, each
holder of shares of Series A Preferred Stock shall surrender the certificate or
certificates evidencing such shares to the Corporation, at the place designated
in the Redemption Notice and shall thereupon be entitled to receive payment of
the appropriate Redemption Price. The Corporation shall be under no obligation
to redeem shares of Series A Preferred Stock for which no stock certificate or
affidavit of lost stock certificate is surrendered on or prior to such
Redemption Date.
(c) Cessation of Rights. Subject to the last sentence of subsection
-------------------
(a) hereof, from and after the applicable Redemption Date, unless there shall
have been a default in payment of the appropriate Redemption Price, all rights
of the holders of shares of the Series A Preferred Stock submitted for
redemption in response to a Redemption Notice (except the right to receive the
Redemption Price without interest upon surrender of their certificate or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be outstanding for any purpose whatsoever. The shares of Series A
Preferred Stock not redeemed shall remain outstanding and entitled to all rights
and preferences provided herein.
(d) Deposit of Redemption Price. Two days prior to the Redemption
---------------------------
Date, the Corporation shall deposit in cash the Redemption Price of all
outstanding shares of the Series A Preferred Stock, with a bank or trust
corporation having aggregate capital and surplus in excess of $50,000,000 as a
trust fund for the benefit of the respective holders of the shares designated
for redemption and not yet redeemed. Simultaneously, the Corporation shall
deposit irrevocable instructions and authority to such bank or trust corporation
to pay, on and after the Redemption Date, the Redemption Price of the Series A
Preferred Stock to the holders thereof upon surrender of their certificates.
The balance of any monies deposited by the Corporation pursuant to this Section
3(d) remaining unclaimed at the expiration of six (6) months following the
Redemption Date shall thereafter be returned to the Corporation, provided that
the stockholder to which such monies would be payable hereunder shall be
entitled, upon proof of its ownership of the Series A Preferred Stock and
payment of any bond requested by the Corporation, to receive such monies but
without interest from the Redemption Date.
Section 4. Reacquired Shares.
-----------------
Any shares of Series A Preferred Stock redeemed, purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof, and, if necessary to provide
for the lawful redemption or purchase of such shares, the capital represented by
such shares shall be reduced in accordance with the General Corporation Law of
the State of Delaware. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock, par value $.001 per share, of
the Corporation and may be reissued as part of another series of Preferred
Stock, par value $.001 per share, of the Corporation.
-10-
<PAGE>
Section 5. Liquidation, Dissolution or Winding Up.
--------------------------------------
(a) If the Corporation shall adopt a plan of liquidation or of
dissolution, or commence a voluntary case under the Federal bankruptcy laws or
any other applicable state of Federal bankruptcy, insolvency or similar law, or
consent to the entry of an order for relief in any involuntary case under any
such law or to the appointment of a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or similar official of the Corporation) or of any
substantial part of its property, or make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its debts generally as they
become due, or if a decree or order for relief in respect of the Corporation
shall be entered by a court having jurisdiction in the premises in an
involuntary case under the Federal bankruptcy laws or any other applicable
Federal or state bankruptcy, insolvency or similar law, or appointing a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Corporation or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 90 consecutive days and on
account of such event the Corporation shall liquidate, dissolve or wind up, or
upon any other liquidation, dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of Junior Stock, unless
prior thereto, the holders of shares of Series A Preferred Stock shall have
received in cash the Stated Value per share (adjusted for any stock split,
combination or similar recapitalization with respect to such shares) in respect
of all outstanding shares plus all accrued or accumulated but unpaid dividends
thereon to and including the date fixed for such liquidation.
(b) No payment on account of any such liquidation, dissolution or
winding-up of the Corporation shall be paid to any holder of shares of Series A
Preferred Stock unless there shall be paid at the same time to all holders of
shares of Series A Preferred Stock proportionate amounts determined ratably in
proportion to the full amounts to which the holders of all outstanding shares of
Series A Preferred Stock are respectively entitled with respect to such
distribution.
(c) After payment of the full amount of the liquidation preference to
which the holders of shares of Series A Preferred Stock are entitled under
Section 5(a), such holders will not be entitled to any further participation in
any distribution of assets of the Corporation.
(d) Written notice of any liquidation, dissolution or winding-up of the
Corporation, stating the payment date or dates when and the place or places
where the amounts distributable in such circumstances shall be payable, shall be
given by first class mail, postage prepaid, not less than fifteen (15) days
prior to any payment date stated therein, to the holders of record of the shares
of Series A Preferred Stock at their respective addresses as the same shall
appear in the records of the Corporation.
(e) Any voluntary sale, conveyance, exchange or transfer of all or
substantially all of the property or assets of the Corporation, the
consolidation or merger of the Corporation with or into one or more other
corporations, sale of a majority of the voting stock of the Corporation or other
similar transaction in which the holders of capital stock of the Corporation
entitled to vote in the election of directors prior to the consummation of such
event
-11-
<PAGE>
own less than 50% of the capital stock of the surviving corporation entitled to
vote in the election of directors (a "Change in Control") shall be deemed to be
a liquidation, winding-up or dissolution of the Corporation, unless waived by
the holders of at least 66-2/3% of the Series A Preferred Stock then
outstanding. The only amounts payable to the holders of the Series A Preferred
Stock upon any such Change in Control in respect of the Series A Preferred Stock
shall be the liquidation preference set forth in Section 5(a).
Section 6. Voting.
------
Holders of shares of Series A Preferred Stock shall have no voting rights
except as follows:
(a) to the extent required by law; and
(b) that so long as any of the Series A Preferred Stock is outstanding,
the Corporation will not (i) authorize, create or issue, or increase the
authorized or issued amount of, any class or series of stock (or any security
convertible or exchangeable therefor) ranking senior to or pari passu with the
Series A Preferred Stock with respect to dividends or liquidation preference or
(ii) reclassify or modify any Junior Stock such that it ranks senior to or pari
passu with the Series A Preferred Stock with respect to dividends or liquidation
preference or (iii) amend, alter or repeal any of the provisions applicable to
the Series A Preferred Stock set forth in its Certificate of Incorporation so as
to change adversely (x) the dividend payable thereon, (y) the amount payable
thereon upon liquidation or redemption or (z) the mandatory redemption
provisions applicable thereto without in each instance the affirmative vote or
consent of the holders of at least 66-2/3% of the shares of Series A Preferred
Stock then outstanding, voting as a separate class (given in person or by proxy,
either in writing or by resolution adopted at a special meeting called for the
purpose). For purposes of this Section 6(b) each share of Series A Preferred
Stock shall have one vote, and each fractional share shall have a corresponding
fractional vote.
[signature on following page]
-12-
<PAGE>
IN WITNESS WHEREOF, Network Access Solutions, Inc. has caused this
Certificate of Designation to be executed in its name and on its behalf by its
President on August 6, 1998.
NETWORK ACCESS SOLUTIONS, INC.
By: /s/ Longma Aust
------------------
Longma Aust, President
-13-
<PAGE>
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF DESIGNATION
OF
NETWORK ACCESS SOLUTIONS CORPORATION
Pursuant to Section 242
of the General Corporation Law of
the State of Delaware
---------------------
Network Access Solutions Corporation (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, does hereby certify as follows:
FIRST: The Corporation desires to amend certain provisions contained in
its charter. Therefore, pursuant to Section 242 of the General Corporation Law
of the State of Delaware, this Certificate of Amendment amends certain
provisions contained in the Certificate of Incorporation of the Corporation.
SECOND: The name of the Corporation is Network Access Solutions
Corporation.
THIRD: The Certificate of Designation filed on August 6, 1998 is hereby
amended from and after the date of acceptance by the Secretary of State of the
State of Delaware as follows:
The following paragraphs shall be inserted as a new Section 7 at the
end of the Certificate of Designation dated August 6, 1998 setting forth the
terms of the Series A Preferred Stock:
"Section 7. Cancellation and Conversion.
---------------------------
(a) Notwithstanding anything contained herein to the contrary, upon the
closing date of a Termination IPO (as defined below), 50% of the shares of
Series A Preferred Stock outstanding shall immediately be cancelled and cease to
exist, such cancellation to be pro rata among all holders of the Series A
Preferred Stock. A "Termination IPO" shall mean the first sale of the
Corporation's Common Stock in a firm commitment underwritten public offering
that is (i) pursuant to a registration statement filed under the Securities Act
1933, as amended, and (ii) based on a pre-money valuation of the Corporation in
excess of $200,000,000.
(b) Notwithstanding any contained herein to the contrary, upon the
closing date of a Termination IPO, the 50% of the outstanding shares of Series A
Preferred Stock not cancelled pursuant to Section 7(a) above shall automatically
convert to shares of Common Stock in the manner provided herein.
(i) Each share of Series A Preferred Stock to be converted
pursuant to this Section 7(b) shall convert into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Stated
Value of such shares of Series A Preferred Stock by the IPO Price (as defined
below). The "IPO Price" shall mean initial per share price to the public
specified in the final prospectus with respect to the Termination IPO.
<PAGE>
(ii) All certificates evidencing shares of Series A Preferred
Stock to be converted pursuant to this Section 7(b) (such stock, the "Conversion
Stock") will be required to be surrendered in connection with the mandatory
conversion described herein and such certificates shall, from and after the date
such certificates are so required to be surrendered, be deemed to have been
retired and canceled and the shares of Series A Preferred Stock represented
thereby converted into Common Stock for all purposes, notwithstanding the
failure of the holder or holders thereof to surrender such certificates. The
Corporation shall, as soon as practicable after the date of conversion, issue
and deliver at the office of the transfer agent for the shares of Conversion
Stock (or at the principal office of the Corporation if the Corporation serves
as its own transfer agent) to such holder of shares of Conversion Stock, or to
his or its nominee, a certificate or certificates for the number of shares of
Common Stock to which such holder shall be entitled, together with cash in lieu
of any fraction of a share. The Corporation may thereafter take such appropriate
action as may be necessary to reduce the authorized number of shares of Series A
Preferred Stock accordingly.
(iii) The Corporation shall, at all times when any share of
the Series A Preferred Stock shall be outstanding, reserve and keep available
out of its authorized but unissued stock, for the purpose of effecting the
conversion of the shares of Series A Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient to
effect the conversion of 50% of the then outstanding shares of Series A
Preferred Stock. If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of 50% of the then
outstanding shares of the Series A Preferred Stock, in addition to such other
remedies as shall be available to the holder of such shares of Series A
Preferred Stock, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes.
(iv) The Corporation shall pay all taxes (other than taxes
based upon income) and other governmental charges that may be imposed with
respect to the issue or delivery of shares of Common Stock upon conversion of
shares of Series A Preferred Stock under this Section 7(b), excluding any tax or
other charge imposed in connection with any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series A Preferred Stock so converted were registered.
(v) No fractional shares of Common Stock shall be issued upon
conversion of shares of Series A Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Corporation shall
pay cash equal to such fraction multiplied by the IPO
-15-
<PAGE>
Price. Whether fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of Series A Preferred
Stock the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
(c) No dividends, whether accrued or unaccrued, on the shares of Series
A Preferred Stock will be payable upon a cancellation or conversion of such
shares pursuant to this Section 7."
FOURTH: This amendment was approved by the Directors of the Corporation
on March 17, 1999 and declared by the Directors of the Corporation as advisable.
The Directors of the Corporation directed that this amendment to the Certificate
of Incorporation be submitted to the Corporation's stockholders for approval.
FIFTH: By Written Consent in lieu of a Special Meeting of the
Corporation's stockholders, dated March 17, 1999, this amendment was approved.
SIXTH: Pursuant to the authorization of the Directors of the
Corporation, this amendment to the Certificate of Incorporation may be executed
by the President or any Vice President of the Corporation and may be attested by
the Secretary or any Assistant Secretary of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by Jonathan Aust, President, this 17th day of March, 1999.
/s/ Jonathan Aust
------------------------
Jonathan Aust, President
-16-
<PAGE>
THE UNDERSIGNED, the President of Network Access Solutions Corporation,
who executed on behalf of the Corporation, acknowledges the foregoing
Certificate of Amendment to Certificate of Incorporation to be the corporate act
of said Corporation and hereby certifies that to the best of his knowledge,
information and belief the matters set forth therein with respect to the
authorization and approval thereof are true in all material respects under the
penalties of perjury.
/s/ Jonathan Aust
------------------------
Jonathan Aust, President
-17-
<PAGE>
Exhibit 3.2
NETWORK ACCESS SOLUTIONS CORPORATION
(a Delaware Corporation)
AMENDED AND RESTATED BY-LAWS
----------------------------
ARTICLE I
OFFICES
Section 1.1 The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 1.2 The corporation may also have offices at such other
places both within and without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 All meetings of the stockholders shall be held at such
time and place, within or without the State of Delaware, as shall be stated in
the notice of the meeting or in a duly executed waiver of notice thereof.
Section 2.2 A meeting of stockholders shall be held in each year for
the election of directors at such time and place as the board of directors shall
determine. Any other proper business, notice of which was given in the notice
of the meeting or in a duly executed waiver of notice thereof, may be transacted
at the annual meeting. Elections of directors shall be by written ballot or
unanimous written consent, unless otherwise provided in the certificate of
incorporation.
Section 2.3 Unless otherwise provided by law, written notice of the
annual meeting shall be given to each stockholder entitled to vote thereat not
less than ten nor more than sixty days before the date of the meeting.
Section 2.4 The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every election of
directors, a complete list of the stockholders entitled to vote at said
election, arranged in alphabetical order, showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder during ordinary
business hours, for a period of at least ten days prior to the election, either
at a place within the city, town or village where the election is to be held and
which place shall be specified in the notice of the meeting, or, if not
specified, at the place
-1-
<PAGE>
where said meeting is to be held, and the list shall be produced and kept at the
time and place of election during the whole time thereof, and subject to the
inspection of any stockholder who may be present.
Section 2.5 Subject to the provisions of the Delaware Corporation
Law, special meetings of stockholders may only be called by the board of
directors, chairman or president of the corporation or by the secretary of the
corporation upon a written request of stockholders owning at least a majority of
the issued and outstanding capital stock of the corporation entitled to vote
generally in the election of directors. Such request shall state the purpose or
purposes of the proposed meeting.
Notice of any meeting need not be given to any person who may become a
shareholder of record after the mailing of such notice and before the meeting,
or to any shareholder who attends such meeting, in person or by proxy, or to any
shareholder who, in person or by proxy, submits a signed waiver of notice either
before or after such meeting. Notice of any adjourned meeting of shareholders
need not be given, unless otherwise required by statute.
Section 2.6 Unless otherwise provided by law, written notice of a
special meeting of stockholders, stating the time, place and object thereof,
shall be given to each stockholder entitled to vote thereat, not less than ten
nor more than sixty days before the date fixed for the meeting.
Section 2.7 Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 2.8 The holders of record of a majority of the stock issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy at the commencement of such meeting, shall constitute a quorum at all
meetings of the stockholders for the transaction of business except as otherwise
provided by statute or by the certificate of incorporation. If, however, such
quorum shall not be present or represented at any meeting of the stockholders, a
majority of the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally notified. The withdrawal of any
shareholder after the commencement of a meeting shall have no effect on the
existence of a quorum, after a quorum has been established at such meeting.
-2-
<PAGE>
Section 2.9 When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required in which case
such express provision shall govern and control the decision of such question.
Section 2.10 Each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of the
capital stock having voting power held by such stockholder, but no proxy shall
be voted on after three years from its date, unless the proxy provides for a
longer period, and, except where the transfer books of the corporation have been
closed or a date has been fixed as a record date for the determination of its
stockholders entitled to vote, no share of stock shall be voted on at any
election for directors which has been transferred on the books of the
corporation within twenty days next preceding such election of directors. Such
proxy shall be exhibited to the Secretary at the meeting and shall be filed with
the records of the corporation.
Section 2.11 Any action required to be taken at any annual or special
meeting of stockholders, or any action which may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Section 2.12 For any stockholder proposal to be presented in
connection with an annual meeting of stockholders of the corporation, including
any proposal relating to the nomination of a director to be elected to the board
of directors of the corporation, the stockholders must have given timely notice
thereof in writing to the secretary of the corporation. To be timely, a
stockholder's notice shall be delivered to the secretary not less than 60 days
nor more than 90 days prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made. Such stockholder's notice shall set
forth (a) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written
-3-
<PAGE>
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of such business, the reasons
for conducting such business at the meeting and any material interest in such
business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the stockholder giving the notice and
the beneficial owner, if any, on whose behalf the nomination or proposal is
made, (i) the name and address of such stockholder, as they appear on the
corporation's books, and of such beneficial owner and (ii) the class and number
of shares of stock of the corporation which are owned beneficially and of record
by such stockholder and such beneficial owner. In the case of a special meeting
of stockholders called for the purpose of electing directors, a stockholder's
notice shall be delivered to the secretary not less than 10 days after the day
on which public announcement of the special meeting is made to nominate a
director to be elected to the board of directors; provided, however, that such
stockholder's notice complies with this Section 2.12.
ARTICLE III
DIRECTORS
Section 3.1 The number of directors which shall constitute the whole
board of directors shall be determined by resolution of the board of directors,
but in no event shall be less than one. The number of directors may be decreased
at any time and from time to time by a majority of the directors then in office,
but only to eliminate vacancies existing by reason of the death, resignation,
removal or expiration of the term of one or more directors. Unless otherwise
provided in the Certificate of Incorporation, the board of directors shall
divide the directors into three classes, which shall be as equal in number as
possible; and, when the number of directors is changed, shall determine the
class or classes to which the increased or decreased number of directors shall
be apportioned, which shall be done so as to maintain as equal a number of
directors in each class as possible; provided, however, that no decrease in the
number of directors shall affect the term of any director then in office.
Directors need not be stockholders of the corporation.
Section 3.2 Vacancies and newly created directorships resulting from
any increase in the authorized number 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.
Section 3.3 The number of directors may be increased at any time and
from time to time by a majority of the directors then in office.
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Section 3.4 The directors shall be elected at the annual meeting of
stockholders by such stockholders as have the right to vote on such election.
At each annual meeting of stockholders, directors elected to succeed those whose
terms are expiring shall be elected for a term of office expiring at the annual
meeting of stockholders held in the third year following their election and
until their respective successors are elected and qualified, or until such
director's earlier death, resignation or removal.
Section 3.5 The business of the corporation shall be managed by its
board of directors which may exercise all such powers of the corporation and do
all such lawful acts and things as are not by statute or by the certificate of
incorporation or by these by-laws directed or required to be exercised or done
by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 3.6 The board of directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 3.7 Regular meetings of the board of directors may be held
without notice at such time and at such place as shall from time to time be
determined by the board; provided, however, that in case the board shall fix or
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change the time or place of any regular meeting, notice of such action shall be
given to each director who shall not have been present at the meeting at which
such action was taken within the time limited, and in the manner set forth in
Section 3.8 of this Article III, with respect to special meetings, unless such
notice shall be waived in the manner set forth in Section 3.10 of this Article
III.
Section 3.8 Special meetings of the board may be called by the
president on two days notice to each director; special meetings shall be called
by the president or secretary in like manner and on like notice on the written
request of any director.
Section 3.9 At all meetings of the board a majority of directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of directors, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 3.10 Notice of any meeting shall not be required to be given
to any director who shall attend such meeting without protesting prior thereto
or a its commencement, the lack of notice to him, or who submits a signed waiver
of notice, whether before or after the meeting. Notice of any adjourned meeting
shall not be required to be given.
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Section 3.11 Unless otherwise restricted by the certificate of
incorporation or these by-laws, any action required or permitted to be taken at
any meeting of the board of directors or of any committee thereof may be taken
without a meeting, if all members of the board or of such committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the board or committee.
COMMITTEES OF DIRECTORS
Section 3.12 The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee to
consist of one or more of the directors of the corporation. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors, shall have and may exercise all the powers and authority of
the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution or amending the by-laws of the corporation; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Section 3.13 Each committee shall keep regular minutes of its
meetings and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
Section 3.14 The board of directors shall have the authority to fix
the compensation of directors.
PARTICIPATION IN MEETING BY TELEPHONE
Section 3.15 Members of the board of directors or any committee
designated by such board may participate in a meeting of the board or of a
committee of the board by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
subsection shall constitute presence in person at such meeting.
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ARTICLE IV
NOTICES
Section 4.1 Notices to directors and stockholders shall be in writing
and delivered personally or mailed to the directors or stockholders at their
addresses appearing on the books of the corporation. Notice by mail shall be
deemed to be given at the time when the same shall be mailed. Notice to
directors may also be given by telegram.
Section 4.2 Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or by these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular, or special meeting of the stockholders, directors, or members of a
committee of directors need be specified in any written waiver of notice.
ARTICLE V
OFFICERS
Section 5.1 The officers of the corporation shall be chosen by the
board of directors and shall be a president, a vice-president, a secretary and a
treasurer. The board of directors may also choose additional vice-presidents,
and one or more assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
otherwise provides.
Section 5.2 The board of directors at its first meeting after each
annual meeting of stockholders shall choose a president, one or more vice-
presidents, a secretary and a treasurer.
Section 5.3 The board of directors may appoint such other officers
and agents as it shall deem necessary who shall hold their offices for such
terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board.
Section 5.4 The salaries of all officers and agents of the
corporation shall be fixed by the board of directors.
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Section 5.5 The officers of the corporation shall hold office until
their successors are chosen and qualified. Any officer elected or appointed by
the board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
THE PRESIDENT
Section 5.6 The president shall be the chief executive officer of the
corporation, shall preside at all meetings of the stockholders and the board of
directors, shall have general and active management of the business of the
corporation and shall see that all orders and resolutions of the board of
directors are carried into effect.
Section 5.7 He shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the board of
directors to some other officer or agent of the corporation.
THE VICE-PRESIDENTS
Section 5.8 The vice-president, or if there shall be more than one,
the vice-presidents in the order determined by the board of directors, shall, in
the absence or disability of the president, perform the duties and exercise the
powers of the president and shall perform such other duties and have such other
powers as the board of directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 5.9 The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other duties as may be prescribed by the board of directors or
president, under whose supervision he shall be. He shall have custody of the
corporate seal of the corporation and he, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and when so affixed,
it may be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by his
signature.
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Section 5.10 The assistant secretary, or if there be more than one,
the assistant secretaries in the order determined by the board of directors,
shall, in the absence or disability of the secretary, perform the duties and
exercise the powers of the secretary and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 5.11 The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
Section 5.12 He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors at
its regular meetings or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
Section 5.13 If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
Section 5.14 The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the board of directors,
shall, in the absence or disability of the treasurer, perform the duties and
exercise the powers of the treasurer and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 6.1 Every holder of stock in the corporation shall be
entitled to have a certificate signed by, or in the name of the corporation by,
the chairman or vice-chairman of the board of directors, or president or a vice-
president and the treasurer or an assistant treasurer, or the secretary or an
assistant secretary of the corporation, certifying the number of shares owned by
him in the corporation.
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<PAGE>
LOST CERTIFICATES
Section 6.2 The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost or destroyed. When authorizing such issue of a
new certificate or certificates, the board of directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
give the corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed upon the issuance of such new
certificate.
FIXING RECORD DATE
Section 6.3 (a) In order that the corporation may determine the
stockholders entitled to notice or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action.
(b) If no record date is fixed:
(1) The record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held.
(2) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(3) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
(c) A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
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REGISTERED STOCKHOLDERS
Section 6.4 Prior to due presentment for transfer of any share or
shares, the corporation shall treat the registered owner thereof as the person
exclusively entitled to vote, to receive notifications and to all other benefits
of ownership with respect to such share or shares, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 7.1 Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the board of directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the certificate of incorporation.
Section 7.2 Before payment of any dividend, there may be set aside
out of any funds of the corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 7.3 The board of directors shall present at each annual
meeting, and at any special meeting of the stockholders when called for by vote
of the stockholders, a full and clear statement of the business and condition of
the corporation.
CHECKS
Section 7.4 All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other persons as
the board of directors may from time to time designate.
FISCAL YEAR
Section 7.5 The fiscal year of the corporation shall be the calendar
year.
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ARTICLE VIII
AMENDMENTS
Section 8.1 These by-laws may be altered or repealed at any regular
meeting of the stockholders or of the board of directors or at any special
meeting of the stockholders or of the board of directors if notice of such
alteration or repeal be contained in the notice of such special meeting.
ARTICLE IX
INDEMNIFICATION
Section 9.1 The corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 9.2 The corporation shall indemnify any person who was or is
a party, or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 9.3 To the extent that a director, officer, employee or agent
of the corporation has been successful on the merits or otherwise in defense of
any action, suit
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or proceeding referred to in sections 9.1 or 9.2 of this Article, or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 9.4 Any indemnification under sections 9.1 or 9.2 of this
Article (unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in such section. Such
determination shall be made:
1. By the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or
2. If such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or
3. By the stockholders.
Section 9.5 Expenses incurred in defending a civil or criminal
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director, officer, employee or agent to repay
such amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this Article. Such expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the board of directors deems appropriate.
Section 9.6 The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
Section 9.7 The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article.
Section 9.8 The indemnification and advancement of expenses provided
by or granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer,
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employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
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EXHIBIT 10.17
NETWORK ACCESS SOLUTIONS, INC. 1998 STOCK INCENTIVE PLAN
INCENTIVE STOCK OPTION GRANT AGREEMENT
This Grant Agreement (the "Agreement") is entered into this first day of
November, 1998, by and between NETWORK ACCESS SOLUTIONS, INC., 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, Inc. 1998
Stock Incentive Plan (the "Plan"), an incentive stock option to purchase shares
of Common Stock, par value of $0.001 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 Date (or on the day prior to
the fifth (5th) anniversary of its Grant Date if the Grantee owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Corporation or of any of its subsidiaries on the Grant Date).
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%
<PAGE>
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. 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 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:
(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
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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.
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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 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
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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 therefore 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
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<PAGE>
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 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 or "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" 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 judgement 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
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<PAGE>
the Grantee ceases, by reason of Disability, to be an employee 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 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
-5-
<PAGE>
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 those set forth in this
Section 5.1, then the Grantee's options shall be 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.
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
-6-
<PAGE>
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 Qualified Nature of Option. The Option is intended to qualify
---------------------------------------
as an incentive stock option ("Incentive Stock Option") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to
the fullest extent permitted within the limit set forth under Section 422(d) of
the Code and this Agreement shall be so construed. The aggregate fair market
value (determined as of the Grant Date) of shares of Stock with respect to which
all Incentive Stock Options first become exercisable by the Grantee in any
calendar year under the Plan or any other plan of the Corporation (and its
parent and subsidiary corporations, as may exist from time to time) may not
exceed $100,000 or such other amount as may be permitted from time to time under
Section 422 of the Code. To the extent that such aggregate fair market value
shall exceed $100,000 or other applicable amount in any calendar year, such
stock options shall be treated as nonqualified stock options with respect to the
amount of aggregate fair market value thereof that exceed the Section 422(d)
limit. For this purpose, the Incentive Stock Options will be taken into account
in the order in which they were granted. In such case, the Corporation may
designate the shares of Stock that are to be treated as stock acquired pursuant
to the exercise of an Incentive Stock Option and the shares of Stock that are to
be treated as stock acquired pursuant to a nonqualified stock option by issuing
separate certificates for such shares and identifying the certificates as such
in the stock transfer records of the Company.
Section 7.4 Notice of Disqualifying Disposition. If the Grantee makes a
------------------------------------------------
disposition (as that term is defined in Section 424(c) of the Code) of any
shares of Stock acquired pursuant to the exercise of this Option within two (2)
years of the Grant Date or within one (1) year after the shares of Stock are
transferred to the Grantee, the Grantee shall notify the Administrator of such
disposition in writing within thirty (30) days of the disposition.
Section 7.5 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 7.6 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, the disposition (as that
term is defined in Section 424(c) of the Code) of shares of Stock acquired
pursuant to 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 7.7 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
-7-
<PAGE>
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 7.8 Non-transferability of Option. The Option shall be non-
------------------------------------------
transferable 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 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 7.9 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 tot he 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 of, 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 7.10 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 7.11 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 7.12 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 7.13 Headings. The headings in the Agreement are for reference
----------------------
purposes only and shall not affect the meaning or interpretation of the
Agreement.
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<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, INC.
/s/ Amy Shank By: /s/ Scott Yancey
_____________________ __________________________
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
/s/ John A. Vinson /s/ John J. Hackett
___________________________ __________________________
Date: 3/30/99
___________________
Enclosure: Network Access Solutions, Inc. 1998 Stock Incentive Plan
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<PAGE>
SCHEDULE A
Stock Option Granted to: John Hackett
Grant Date: January 24, 1999
Number of Shares: 300,000
Exercise Price Per Share: $0.40
Expiration Date: January 24, 2009
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<PAGE>
EXHIBIT 10.21
NETWORK ACCESS SOLUTIONS, INC.
INVESTOR RIGHTS AGREEMENT
AUGUST 6, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. DEFINITIONS............................................................ 1
2. REGISTRATION........................................................... 2
2.1. Requested Registration........................................... 2
2.2. Company Registration............................................. 3
2.3. Form S-3 Registration............................................ 4
2.4. Expenses of Registration......................................... 5
2.5. Registration Procedures.......................................... 5
2.6. Indemnification and Contribution................................. 6
2.7. Information by Holder............................................ 8
2.8. Termination of the Company's Obligations......................... 8
2.9. Rule 144 Reporting............................................... 9
2.10. Transfer of Registration Rights.................................. 9
2.11. Limitations on Subsequent Registration Rights.................... 10
2.12. "Market Stand-Off" Agreement..................................... 10
3. RIGHT OF FIRST OFFER AND ANTIDILUTION PROTECTION....................... 10
3.1. Right of First Offer............................................. 10
3.2. Antidilution Protection.......................................... 12
4. OTHER RIGHTS AND OBLIGATIONS........................................... 14
4.1. Reports.......................................................... 14
4.2. Annual Plan...................................................... 14
4.3. Termination of Reports; Public Filings........................... 14
4.4. Transfers to Competitors......................................... 14
5. PUT RIGHT.............................................................. 15
6. MISCELLANEOUS.......................................................... 18
6.1. Governing Law.................................................... 18
6.2. Successors and Assigns........................................... 18
6.3. Notices.......................................................... 18
6.4. Amendments and Waivers........................................... 18
6.5. Delays or Omissions.............................................. 18
6.6. Legal Fees....................................................... 19
6.7. Titles and Subtitles............................................. 19
6.8. Counterparts..................................................... 19
6.9. Severability..................................................... 19
6.10. Entire Agreement................................................. 19
6.11. Effect of Change in Capital Structure............................ 19
</TABLE>
i
<PAGE>
INVESTOR RIGHTS AGREEMENT
This Investor Rights Agreement (this "Agreement") is made this 6th day of
August 1998 (the "Effective Date"), by and among Network Access Solutions, Inc.,
a Delaware corporation (the "Company"), and the other signatories hereto
("Holders").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties agree as follows:
1. DEFINITIONS
(a) The term "Act" means the Securities Act of 1933, as amended.
(b) The term "Affiliate" means, with respect to any other Person, a
Person directly or indirectly controlling, controlled by, or under common
control with, such Person. For the purposes of such definitions, "control" when
used with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
(c) The term "Common Stock" means the Common Stock of the Company, par
value $.001 per share.
(d) The term "Holder" means any holder of outstanding Registrable
Securities or any person or entity to which the rights provided for in this
Agreement shall have been properly assigned in accordance with specific terms
hereof.
(e) The term "Initiating Holders" means any Holder or Holders of at
least 20% of the Registrable Securities then outstanding.
(f) The term "Person" means any individual, partnership, limited
liability company, corporation, joint venture, trust, unincorporated
organization, or any other entity, or a government or any department, agency or
political subdivision thereof.
(g) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Act and the declaration or ordering of the effectiveness of
such registration statement.
(h) The term "Registrable Securities" means: (i) any shares of Common
Stock issued to the Holders pursuant to the Series A Preferred Stock Purchase
Agreement dated as of even date herewith and (ii) any other Common Stock issued
as a dividend or other distribution with respect to, or in exchange for or in
replacement of, the aforementioned Common Stock.
(i) The term "SEC" means the Securities and Exchange Commission.
1
<PAGE>
2. REGISTRATION
2.1. Requested Registration
----------------------
(a) Requested Registration. If at any time after six months after the
----------------------
initial public offering of the Company's Common Stock pursuant to a registration
statement filed with the SEC under the Act ("IPO"), the Company shall receive
from the Initiating Holder(s) a written request that the Company effect a
registration and any related qualification or compliance (collectively, a
"Registration") with respect to Registrable Securities, the Company will:
1. promptly give written notice of the proposed registration,
qualification or compliance to all Holders; and
2. as soon as practicable, use its diligent best efforts to
effect such Registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
the applicable blue sky or other state securities laws of such jurisdictions in
the United States as Holders shall reasonably request, and appropriate
compliance with applicable regulations issued under the Act and any other
governmental requirements or regulations) and as would permit or facilitate the
sale and distribution of all or such portion of such Holder's or Holders'
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any other Holder or Holders
joining in such request as are specified in a written notice given within 30
days after receipt of such written notice from the Company, except that the
Company shall not be obligated to take any action to effect any such
Registration pursuant to this Section 2.1 after the Company has effected three
Registrations pursuant to request under this subsection 2.1(a) and such
registrations have been declared or ordered effective. In no event shall the
Company be required to qualify generally to do business as a foreign corporation
in any jurisdiction where it is not at the time so qualified or to execute or
file a general consent to service of process in any such jurisdiction where it
has not theretofore done so or to take any action that would subject it to
general service of process or taxation in any such jurisdiction where it is not
then subject.
Subject to the foregoing provisions, the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable, but in any event within 90 days after receipt
of the request or requests of the Initiating Holders.
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of a firm commitment
underwritten offering, they shall so advise the Company. The Company and the
Initiating Holders shall mutually agree upon and shall designate the underwriter
or underwriters to be retained in connection therewith as a part of their
request made pursuant to Section 2.1(a). The Company shall include such
information in the written notice referred to in Section 2.1(a)(1). In such
event, the right of any Holder to registration pursuant to this Section 2.1
shall be conditioned upon such Holder's participation in such underwritten
offering and the inclusion of such Holder's Registrable Securities in the
underwritten offering (unless otherwise mutually agreed by at least a majority
of the Initiating Holders and such Holder) to the extent provided herein. The
Company shall (together with all Holders proposing to distribute their
securities through such underwritten
2
<PAGE>
offering) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting. Notwithstanding any
other provision of this Section 2.1, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, any securities to be sold on behalf of the Company
and any securities of the Company (other than Registrable Securities) held by
officers or directors and by other shareholders shall be excluded from such
registration to the extent so required by such limitation, and if a limitation
of the number of shares is still required, then the underwriter may limit the
number of Registrable Securities to be included in the registration. All Holders
proposing to sell shares in such offering shall share pro rata based on the
number of Registrable Securities held in the number of shares to be excluded
from such offering. If any Holder disapproves of the terms of the underwritten
offering, it may elect to withdraw therefrom by written notice to the Company,
the underwriter and the Initiating Holders. The Registrable Securities so
withdrawn shall also be withdrawn from registration.
(c) Subject to the foregoing limitations set forth in Section 2.1(b),
the Company shall have the right to include in any offering effected pursuant to
this Section 2.1 securities to be sold on behalf of the Company.
(d) If the Company shall furnish to the Holders a certificate signed
by the President of the Company stating that, in the good faith judgment of the
Board of Directors of the Company, effecting the registration at such time would
have a material adverse effect on the Company or would require disclosure of any
corporate development not otherwise required to be disclosed, the Company shall
have the right to defer the filing of the registration statement for a period of
not more than 90 days after the receipt of the request of the Holders under this
Section 2.1, except that the Company shall not utilize this right more than once
in any 12 month period.
2.2. Company Registration
--------------------
(a) Notice of Registration. If at any time or from time to time, the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder or holders (other than a
registration on Form S-8, Form S-4 or a "universal" shelf on Form S-3 or any
successors to such forms), the Company will:
1. promptly give to each Holder written notice thereof which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under applicable blue sky or other state
securities laws;
2. use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), and in any
underwritten offering involved therein, all the Registrable Securities specified
in a written request or requests, made within 30 days after receipt of such
written notice from the Company, by any Holder or Holders, except as set forth
in Section 2.2(b) below.
Except as provided in Section 2.11 hereof, the Company represents that
it has not and covenants that it will not enter into any agreement with any
Holder or other shareholder of
3
<PAGE>
the Company giving such shareholder or Holder any right to restrict the
Company's registration of its securities pursuant to Section 2.2 hereof or
otherwise.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwritten offering,
the Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.2(a)(1). In such event the right of any Holder to
registration pursuant to this Section 2.2 shall be conditioned upon such
Holder's participation in such underwritten offering and the inclusion of such
Holder's Registrable Securities in the underwritten offering to the extent
provided herein. All Holders proposing to distribute their securities through
such underwritten offering shall (together with the Company and other holders
distributing their securities through such underwritten offering) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwritten offering by the Company. Notwithstanding any
other provision of this Section 2.2, if the underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the securities of the Company (other than Registrable Securities)
held by officers or directors and by other shareholders shall be excluded from
such registration to the extent so required by such limitation, and if a
limitation of the number of shares is still required, then the underwriter may
limit the number of Registrable Securities to be included in the registration.
All Holders proposing to sell shares in such offering shall share pro rata based
on the number of Registrable Securities held in the number of shares to be
excluded from such offering. If any Holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the underwriter. The Registrable Securities so withdrawn shall also
be withdrawn from registration.
2.3. Form S-3 Registration. In case the Company shall receive from the
---------------------
Holder(s) of Registrable Securities a written request or requests that the
Company effect a registration on Form S-3 (or any substantially equivalent
registration form under the Act subsequently adopted by the SEC that permits
inclusion or incorporation by reference to other documents filed by the Company
with the SEC) with respect to Registrable Securities having an expected
aggregate offering price to the public in excess of $500,000, net of
underwriting discounts and commissions, the Company will:
(a) promptly give written notice of the proposed Registration to all
other Holders; and
(b) as soon as practicable, effect such Registration as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Holder's or Holders' Registrable Securities as are
specified in such request, together will all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request given within 30 days after receipt of such written notice from
the Company, except that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 2.3:
1. if Form S-3 is not available for such offering by the
Holders; or
4
<PAGE>
2. if the Company shall furnish to the Holders a certificate
signed by the President of the Company stating that, in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such Form S-3 registration to be effected
at such time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement for a period of not more than 90
days after receipt of the request of the Holder or Holders under this Section
2.3, except that the Company shall not utilize this right more than once in any
12 month period.
Subject to the foregoing, the Company shall file a registration statement
covering the Registrable Securities and other securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Holders. Registrations effected pursuant to this Section 2.3 shall not be
counted as demands for registration or registrations effected pursuant to
Section 2.1 or 2.2, respectively.
2.4. Expenses of Registration. The Company shall bear all expenses incurred
------------------------
in connection with a Registration pursuant to Sections 2.1, 2.2 and 2.3,
respectively, including without limitation, all registration, filing and
qualification fees, printing expenses, fees and disbursements of counsel for the
Company and expenses of any audits incidental to or required by such
registration, except that:
(a) The Company shall not be required to pay underwriters' discounts,
commissions, or stock transfer taxes relating to Registrable Securities; and
(b) The Company shall not be required to pay the fees or expenses of
more than one counsel to the Holders.
2.5. Registration Procedures. In the case of each Registration effected by
-----------------------
the Company pursuant to Section 2, the Company will keep each Holder
participating therein advised in writing as to the initiation of each
Registration and as to the completion thereof. At its expense (except as
otherwise provided in Section 2.4 above) the Company will use its best efforts
to:
(a) keep such registration, qualification or compliance pursuant to
Sections 2.1, 2.2 or 2.3 effective for a period of 180 days or until the Holder
or Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs;
(b) furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(c) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement within the time period referred to in Section 2.5(a);
5
<PAGE>
(d) notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Act, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing; and
(e) furnish, at the request of any Holder requesting registration of
Registrable Securities pursuant to this Section 2, on the date that such
Registrable Securities are delivered to the underwriters for sale in connection
with a registration pursuant to this Section 2, if such securities are being
sold through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration, in form and
substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders whose
Registrable Securities are included in such registration statement and (ii) if
such securities are being sold through underwriters, a letter dated such date,
from the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters.
2.6. Indemnification and Contribution
--------------------------------
(a) The Company will indemnify each Holder of Registrable Securities
with respect to which a Registration has been effected pursuant to this Section
2, each of its officers and directors, and each Person controlling such Holder,
and each underwriter, if any, of such Registrable Securities and each Person who
controls any such underwriter, against all claims, losses, damages, costs,
expenses and liabilities of any nature whatsoever (or actions in respect
thereof) ("Losses") arising out of or based upon any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document (including any
related registration, statement, notification or the like) incident to any such
Registration, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or any state
securities law or of any rule or regulation promulgated under the Act, the
Exchange Act or any state securities law applicable to the Company and relating
to action or inaction required of the Company in connection with any such
Registration, and will reimburse each such Holder, each of its officers and
directors, and each Person controlling such Holder, and each such underwriter
and each Person who controls any such underwriter, for any legal and other
expenses reasonably incurred in connection with investigating or defending
against any such Loss, except that the Company will not be liable in any such
case to the extent that any such Loss arises out of or is based on any untrue
statement or omission based upon written information furnished to the Company by
any Holder or underwriter and stated to be specifically for use therein; and
except that the indemnity agreement contained in this Section 2.6(a) shall not
apply to any amounts paid in settlement of any such
6
<PAGE>
Loss if such settlement is effected without the consent of the Company, which
consent will not be unreasonably withheld.
(b) Each Holder will, if Registrable Securities held by or issuable to
such Holder are included in the securities as to which such Registration is
being effected, indemnify the Company, each of its directors and officers, each
underwriter, if any, of the Company's securities covered by such a registration
statement, each Person who controls the Company or any such underwriter within
the meaning of the Act, and each other Holder, each of such other Holder's
officers and directors and each Person controlling such other Holder, against
all Losses arising out of or based upon any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
Registration, or based upon any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company, such other
Holders, such directors, officers, Persons or underwriters and any such
controlling Persons for any legal and other expenses reasonably incurred in
connection with investigating or defending any such Loss, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by such Holder
and stated to be specifically for use therein; provided, however, that the
-------- -------
indemnity agreement contained in this Section 2.6(b) shall not apply to amounts
paid in settlement of any such Loss if such settlement is effected without the
consent of the Holder, which consent shall not be unreasonably withheld; and
provided further, that in no event shall any indemnity under this Section 2.6(b)
- -------- -------
exceed the gross proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 2.6 (the
"Indemnified Party"), shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at its own
expense (except as set forth below). Failure of the Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 2.6, unless the failure or delay in giving notice
has a material adverse impact on the ability of the Indemnifying Party to defend
against such claim. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement that does not include as an
unconditional term thereof, the giving by all claimants or plaintiffs of a
release from all liability in respect to such claim or litigation. If any such
Indemnified Party shall have been advised by counsel chosen by it that there may
be one or more legal defenses available to such Indemnified Party that are
different from or additional to those available to the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense of such action
on behalf of such Indemnified Party and will reimburse such Indemnified Party
and any Person controlling such Indemnified Party for the reasonable fees and
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<PAGE>
expenses of any counsel retained by the Indemnified Party, it being understood
that the Indemnifying Party shall not, in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys for all of the
Indemnified Parties or controlling Persons, which firm shall be designated in
writing by the Indemnified Parties to the Indemnifying Party.
(d) If the indemnification provided for in this Section 2.6 is
unavailable to an Indemnified Party in respect of any Losses (other than in
accordance with its terms) or is insufficient to hold such Indemnified Party
harmless, then each applicable Indemnified Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party, on the one
hand, and such Indemnified Party, on the other hand, in connection with the
actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such
Indemnifying Party, on the one hand, and Indemnified Party, on the other hand,
shall be determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact, has been taken by, or
relates to information supplied by, such Indemnifying Party or Indemnified
Party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent any such action, statement or omission. The
amount paid or payable by a party as a result of any Losses shall be deemed to
include any legal or other fees or expenses incurred by such party in connection
with any investigation or proceeding. The parties hereto agree that it would
not be just and equitable if contribution pursuant to this Section 2.6(d) were
determined by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred hereinabove.
Notwithstanding the provision of this Section 2.6(d), an Indemnifying Party that
is a selling Holder of Registrable Securities shall not be required to
contribute any amount which, when added to any amounts payable by such party
pursuant to Section 2.6(b), is in excess of the amount of the net proceeds
received by such party from the sale of the Registrable Securities sold by such
Indemnifying Party. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
2.7. Information by Holder. The Holder or Holders of Registrable Securities
---------------------
included in any registration shall furnish to the Company such information
regarding such Holder or Holders and the distribution proposed by such Holder or
Holders as the Company may reasonably request in writing and as shall be
required in connection with any Registration referred to in Section 2.
2.8. Termination of the Company's Obligations. The Company shall have no
----------------------------------------
obligations pursuant to Sections 2.1, 2.2 or 2.3 with respect to any request
made by any Holder after the later of (i) five years following the effective
date of the Company's sale of its Common Stock in a firm commitment underwritten
public offering pursuant to a registration statement filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, having an
aggregate offering price to the public of not less than $25,000,000, based on a
pre-money valuation of at least $100,000,000 (the "Qualified IPO") or (ii) at
such time
8
<PAGE>
following the Qualified IPO as such Holder may sell all of such Holder's
Registrable Securities in a single transaction pursuant to Rule 144 (or such
successor rule as may be adopted).
2.9. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the SEC which may permit the sale of
Registrable Securities or securities convertible into or exercisable for
Registrable Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after 90 days after the
effective date of the first registration statement filed by the Company that
involves an underwritten sale of securities of the Company to the general
public;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the underwritten
offering of its common stock to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act at any time
after it has become subject to such reporting requirements; and
(d) furnish to each Holder so long as such Holder owns Registrable
Securities or securities convertible into or exercisable for Registrable
Securities forthwith upon written request a written statement by the Company
that it has complied with the reporting requirements of such Rule 144 (at any
time after ninety days after the effective date of such first registration
statement filed by the Company), and of the Act and the Exchange Act (at any
time after it has become subject to such reporting requirements), a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents so filed by the Company as may be reasonably requested to avail
the Holder of any rule or regulation of the SEC permitting the selling of any
such securities without registration.
2.10. Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted by the Company under Sections 2.1, 2.2 and 2.3 may
be assigned by any Holder to any transferee or assignee of at least 500,000
Registrable Securities (as adjusted for stock splits, combinations and the like)
or securities convertible into Registrable Securities (or all of such Holder's
Registrable Securities if such Holder holds less than such amount), provided
--------
that such transfer may otherwise be and is effected in accordance with
applicable securities laws and as otherwise required by this Agreement, and
provided further that the Company is given written notice by such Holder at the
- -------- -------
time of or within reasonable time after such transfer, stating the name and
address of such transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned and the transferee
or assignee agrees in writing to be bound by this Agreement. The foregoing
minimum share limitation shall not apply to transfers by a Holder (i) to
constituent affiliates, or constituent former or current partners or members of
the Holder (including spouses and ancestors, lineal descendants and siblings of
such
9
<PAGE>
partners or spouses who acquire Registrable Securities by gift, will or
intestate succession) if all such transferees or assignees agree in writing to
be bound by the terms of this Agreement and appoint a single representative as
their attorney-in-fact for the purpose of receiving any notices once exercising
their rights under this Section 2 or (ii) to an entity controlling, controlled
by or under common control with the transferor.
2.11. Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders (as determined pursuant to Section 6.4), enter into any agreement
with any holder or prospective holder of any securities of the Company which
would give such holder registration rights, provided that the Company may grant
subordinate registration rights to future equity investors in the Company
without such consent. Any right given by the Company to any holder or
prospective holder of the Company's securities in connection with the
registration of securities shall be conditioned such that it shall be consistent
with the provisions of this Section 2 and with the rights of the Holders
provided in this Agreement.
2.12. "Market Stand-Off" Agreement. Each Holder hereby agrees that during
---------------------------
the 180 day period following the effective date of the Qualified IPO, it shall
not, to the extent requested by the Company and the Company's underwriters,
sell, offer to sell, or otherwise transfer or dispose of any Common Stock of the
Company held by it at any time during such period except Common Stock included
in such registration; provided that the foregoing obligation shall be
--------
conditioned upon all of the Company's then-current officers, directors, and 5%
stockholders agreeing to the same restrictions; and provided further that any
-------- -------
waiver of the foregoing restriction by the Company or the Company's underwriters
shall apply to all Persons subject to such restrictions pro rata based on the
number of shares of Common Stock owned. To enforce the foregoing covenant, the
Company may impose stop-transfer instructions with respect to the Registrable
Securities of the Holder (and the shares or securities of every other Person
subject to the foregoing restriction) until the end of such period. Each Holder
agrees to execute the form of such market stand-off agreement as may be
reasonably requested by the underwriters.
3. RIGHT OF FIRST OFFER AND ANTIDILUTION PROTECTION
3.1. Right of First Offer. Subject to the terms and conditions specified in
--------------------
this Section 3.1, the Company hereby grants to each Holder, a right of first
offer with respect to future sales by the Company of its New Securities (as
defined in Section 3.1(d)(i)) after the date hereof. For purposes of this
Section 3.1, the term Holder includes any partners, shareholders or affiliates
of the Holder. The Holder shall be entitled to apportion the right of first
offer hereby granted among itself and its partners, shareholders and affiliates
in such proportions as it deems appropriate.
(a) In the event the Company proposes to issue New Securities, it
shall give each Holder written notice (the "Notice") of its intention stating:
(i) a description of the New Securities it proposes to issue, (ii) the number of
shares of New Securities it proposes to offer, (iii) the price per share at
which, and other terms on which, it proposes to offer such New Securities, and
(iv) the number of shares that the Holder has the right to purchase under this
Section 3.1, based on the Holder's Percentage (as defined in Section
3.1(d)(ii)).
10
<PAGE>
(b) Within 30 days after the Notice is given (in accordance with
Section 5.3), the Holder may elect to purchase, at the price specified in the
Notice, up to the number of shares of the New Securities proposed to be issued
equal to the Holder's Percentage. An election to purchase shall be made in
writing and must be given to the Company within such 30-day period (in
accordance with Section 5.3). The closing of the sale of New Securities by the
Company to the participating Holder upon exercise of its rights under this
Section 3.1 shall take place simultaneously with the closing of the sale of New
Securities to third parties.
(c) The Company shall have 90 days after the last date on which the
Holder's right of first offer lapsed to enter into an agreement (pursuant to
which the sale of New Securities covered thereby shall be closed, if at all,
within 45 days from the execution thereof) to sell the New Securities which the
Holder did not elect to purchase under this Section 3.1, at or above the price
and upon terms not materially more favorable to the purchasers of such
securities than the terms specified in the initial Notice given in connection
with such sale. In the event the Company has not entered into an agreement to
sell the New Securities within such 90 day period (or sold and issued New
Securities in accordance with the foregoing within 45 days from the date of such
agreement), the Company shall not thereafter issue or sell any New Securities
without first offering such New Securities to the Holder in the manner provided
in this Section 3.1.
(d) (i) "New Securities" shall mean any shares of, or securities
convertible into or exercisable for any shares of, any class of the Company's
capital stock; provided that "New Securities" does not include: (A) securities
issued pursuant to the acquisition of another business entity by the Company by
merger, purchase of substantially all of the assets of such entity, or other
reorganization whereby the Company owns not less than a majority of the voting
power of such entity; (B) shares of the Company's Common Stock, options or
warrants to purchase shares of the Company's Common Stock, and the shares of
Common Stock issuable upon exercise of such options or warrants, issued pursuant
to any arrangement approved by the Board of Directors to employees, officers and
directors of, or consultants, advisors or other Persons performing services for,
the Company; (C) shares of the Company's Common Stock or warrants or options for
the purchase of shares of the Company's Common Stock issued by the Company to a
commercial bank or equipment lessor in connection with any loan or lease
financing transaction approved by the Board of Directors of the Company; (D)
shares of the Company's Common Stock issued to a corporate partner in a
transaction approved by the Board of Directors of the Company in which there is
a substantial commercial aspect to the transactions and in which there is no
other financial investor involved; (E) shares of the Company's Common Stock
issued in connection with any stock split, stock dividend or recapitalization of
the Company; (F) shares of the Company's Common Stock issued upon exercise of
warrants, options or convertible securities if the issuance of such warrants,
options or convertible securities was a result of the exercise of the right of
first offer granted under this Section 3.1 or was subject to the right of first
offer granted under this Section 3.1; or (G) shares of Common Stock issued in
the Qualified IPO.
(ii) The applicable "Percentage" for each Holder shall be the number
of shares of New Securities calculated by dividing (A) the total number of
shares of Common Stock owned by the Holder (assuming conversion of all
outstanding convertible securities and exercise of all outstanding options and
warrants) by (B) the total number of shares of Common
11
<PAGE>
Stock outstanding at the time the Notice is given (assuming conversion of all
outstanding convertible securities and exercise of all outstanding options and
warrants).
(e) The right of first offer granted under this Section may be
assigned by the Holder to a transferee or assignee of the Holder's securities of
the Company. In the event that the Holder shall assign its right of first offer
pursuant to this Section 3.1 in connection with the transfer of less than all of
its securities of the Company, the Holder shall also retain its right of first
offer to the extent then applicable under this Section 3.1.
(f) The Right of First Offer described by this Section 3.1 shall
expire upon the closing of a Qualified IPO.
3.2. Antidilution Protection
-----------------------
(a) If the Company issues New Securities for no consideration or for
a consideration per share (as determined below) less than $1.00 (as adjusted for
any stock splits, combinations, recapitalizations or similar events, the
"Adjustment Price") (such issuance, a "Dilutive Issuance"), then the Company
shall offer to sell to each Holder such number of shares of Common Stock ("Make
Whole Shares"), at a price per share equal to the par value thereof, equal to
(x) the number of shares of Common Stock held by such Holder immediately prior
to the Dilutive Issuance, divided by (y) the Adjustment Factor (as defined
below), less (z) the number of shares of Common Stock held by such Holder
immediately prior to the Dilutive Issuance. The "Adjustment Factor" shall be
calculated as follows:
Adjustment Factor = CSE + (consideration per share for all New Securities in
the aggregate/Adjustment Price)
--------------------------------------------------------
CSE + number of New Securities issued
where (A) "CSE" shall mean the aggregate number of shares of Common Stock,
options and warrants to acquire Common Stock and securities convertible into
Common Stock that are outstanding immediately prior to the Dilutive Issuance and
(B) the "consideration per share" is determined in accordance with Section
3.2(b).
Such offer, if applicable, shall be included in the Notice referenced
in Section 3.1(a). The closing of the sale of the Make Whole Shares shall occur
concurrently with the closing of the Dilutive Issuance.
(b) For purposes of Section 3.2(a), the "consideration per share" of
New Securities shall be determined as follows:
(i) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Company for any underwriting or otherwise in connection with
the issuance and sale thereof.
(ii) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be
12
<PAGE>
deemed to be the fair value thereof as determined by the Board of Directors in
good faith irrespective of any accounting treatment.
(iii) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock or options to purchase or rights to subscribe
for such convertible or exchangeable securities (which are not excluded from the
definition of New Securities), the following provisions shall apply:
1) The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued and for a consideration equal to the consideration
(determined in the manner provided above), if any, received by the Company upon
the issuance of such options or rights plus the minimum purchase price provided
in such options or rights for the Common Stock covered thereby.
2) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Company for
any such securities and related options or rights (excluding any cash received
on account of accrued interest or accrued dividends), plus the additional
consideration, if any, to be received by the Company upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner above).
3) All Common Stock deemed issued pursuant to this Section
3.2(b)(iii) shall be considered issued only at the time of its deemed issuance
and any actual issuance of such stock shall not be an actual issuance or a
deemed issuance of the Company's Common Stock under the provisions of Section
3.2.
(c) In the event of any change in the number of shares of Common
Stock deliverable or any increase in the consideration payable to the Company
upon exercise of the options or rights or upon conversion of or in exchange for
the convertible or exchangeable securities referenced in Section 3.2(b)(iii),
including, but not limited to, a change resulting from the antidilution
provisions thereof, the number of shares of Common Stock to be offered to the
Holders hereunder shall be recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance of Common Stock or any payment
of such consideration upon the exercise of any such options or rights or the
conversion or exchange of such securities.
(d) The antidilution rights provided in Section 3.2 shall expire upon
the closing of a Qualified IPO.
13
<PAGE>
4. OTHER RIGHTS AND OBLIGATIONS
4.1. Reports
-------
(a) For fiscal years ending after the date of this Agreement, the
Company agrees to deliver to each Holder, as soon as practicable after the end
of each fiscal year, and in any event within 90 days thereafter, a consolidated
balance sheet of the Company as of the end of such fiscal year and a
consolidated statement of operations and a consolidated statement of sources and
application of funds of the Company for such year, prepared in accordance with
generally accepted accounting principles consistently applied and setting forth
in each case in comparative form the figures for the two previous fiscal years,
all in reasonable detail and audited by independent public accountants selected
by the Company;
(b) For quarters ending after the date of this Agreement, the Company
agrees to deliver to each Holder who then holds (together with its Affiliates)
securities representing at least 3% of the fully diluted equity of the Company,
computed on a fully diluted basis ("Qualified Holders"), within 45 days after
the end of each quarter, an unaudited consolidated profit or loss statement for
such quarter and an unaudited consolidated balance sheet as of the end of each
quarter, in the form provided to the Company's management; and
(c) For months ending after the date of this Agreement, the Company
agrees to deliver to each Qualified Holder within 45 days after the end of each
month, (i) an unaudited consolidated profit or loss statement for such month and
an unaudited balance sheet as of the end of such month and (ii) reports
detailing the size and status of customer contracts.
4.2. Annual Plan. No later than 45 days prior to the beginning of each
-----------
fiscal year of the Company, the Company shall submit to each Qualified Holder an
annual plan for such year approved by the Board of Directors of the Company
which shall include quarterly capital and operating expense budgets, cash flow
statements, projected balance sheets, profit and loss projections and sales
projections for each month and for the end of such year and the succeeding two
years itemized in such detail as the Board may reasonably determine. If the
annual plan is modified by the Board of Directors to reflect changes as a result
of operating results and other events that occur during the year covered by the
annual plan, copies of such modification shall be promptly submitted to each
Qualified Holder.
4.3. Termination of Reports; Public Filings. The Company shall deliver the
--------------------------------------
reports specified in Sections 4.1 and 4.2 to each applicable Holder until the
earlier of such time as (i) such Holder is no longer a shareholder or Qualified
Holder, as applicable, (ii) the closing of a Qualified IPO, or (iii) the Company
otherwise becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended.
4.4. Transfers to Competitors. Prior to the Qualified IPO, without the
------------------------
written consent of the Holders pursuant to Section 6.4 hereof, no Holder shall
transfer any Registrable Securities to any Person who the Board of Directors of
the Company determines in good faith to be a potential or actual competitor to
the Company or its subsidiaries; provided, however, that the foregoing shall not
-------- -------
prohibit a Holder from transferring Registrable Securities in connection with
14
<PAGE>
the consolidation or merger of the Company with or into one or more other
corporations or other similar event in which the holders of capital stock of the
Company entitled to vote in the election of directors prior to the consummation
of such event own less than 50% of the capital stock of the surviving
corporation entitled to vote in the election of directors.
5. PUT RIGHT
(a) Put Right. At any time during the one-year period after the sixth
---------
anniversary of the date hereof, in the event the Common Stock is not then traded
on any national securities exchange or the Nasdaq National Market (or any
successor thereof), each Holder, with the consent of Holders holding at least a
majority of the Registrable Securities then outstanding (the "Majority
Holders"), shall have the right (the "Put Right") to sell to the Company, and
upon the exercise of the Put Right the Company shall have the obligation to
purchase, all (and not less than all) of the shares of Registrable Securities
then held by the Holders exercising the Put Right on the terms and conditions
hereafter provided in this section. All Holders intending to exercise a Put
Right shall deliver written notice thereof to the Company (the "Put Notice"),
which Put Notice shall be effective only if consented to or joined in by the
Majority Holders (which may include for such purpose the Holder(s) intending to
exercise its Put Right).
(b) Participation by Other Holders. The Company shall within 10 days
------------------------------
of its receipt of the Put Notice deliver to each Holder (other than the Holder
initially delivering the Put Notice) written notice of its receipt of such Put
Notice (the "Company Notices"). Each Holder shall have the right to participate
in the exercise of the Put Right by delivering notice thereof (a "Participation
Notice") to the Company on or before the 30th day following the Company's
delivery of the Company Notice (such 30th day being referred to as the
"Determination Date"). Each Holder electing to exercise its Put Right hereunder
(each a "Participating Holder") shall exercise its rights with respect to all
(and not less than all) of its Registrable Securities. Each Holder that does
not elect to participate in the exercise of the Put Right by delivering a
Participation Notice shall thereafter be precluded from exercising its Put Right
until the earlier of (i) 180 days after the Determination Date and (ii) the 30th
day following the determination of the Put Price with respect to the then
pending exercise of the Put Rights. No Participating Holder may rescind its
election to exercise its Put Rights, and each Participating Holder shall be
obligated to sell its Registrable Securities in accordance with this section
unless (i) such rescission is consented to by the Majority Holders (which may
include for such purpose the Holder intending to rescind its exercise of its Put
Right) or (ii) the Company fails to purchase such Participating Holder's
Registrable Securities in accordance with this section on the date of the Put
Closing.
(c) Put Price. The purchase price to be paid by the Company for the
---------
Registrable Securities shall be the "fair market value" thereof as of the
Determination Date
(d) Fair Market Value. The fair market value of the Registrable
-----------------
Securities means the product of (i) the total consideration that would be
received by a holder of one share of Common Stock upon the sale of all of the
Company's issued and outstanding equity securities in a single transaction or
series of related transactions to a buyer willing to pay the highest purchase
price that would be received in an auction conducted by a nationally recognized
investment banking firm that has experience valuing network businesses and other
businesses of the type
15
<PAGE>
then engaged in by the Company, which buyer is under no compulsion to buy and
the holders of such equity securities are under no compulsion to sell, all
parties having reasonable knowledge of all relevant facts, with no discount
being applied for any other reason and (ii) the percentage equity ownership of
the Company represented by the Registrable Securities, calculated on a fully
diluted basis.
(e) Determination of Fair Market Value. The fair market value of the
----------------------------------
Registrable Securities shall be that which is negotiated by the Company and a
majority in interest of the Participating Holders (as measured by their relative
holdings of Registrable Securities) (the "Majority Participating Holders"). If
the Company and the Majority Participating Holders fail to agree on the fair
market value within 30 days of the Determination Date, then, at the election of
the Majority Participating Holders, either (i) the Majority Participating
Holders shall then have the right to require a sale of the Company by asset
sale, merger or otherwise (a "Sale of the Company") in accordance with the
provisions of Section 5(g) and (h) hereof by delivering to the Company an Exit
Instruction Notice or (ii) the Company and the Majority Participating Holders
shall attempt to agree upon an appraiser to determine the fair market value,
which appraiser shall be a nationally recognized investment banking firm that
has experience valuing network businesses and other businesses of the type then
engaged in by the Company (the firm or firms engaged to determine the fair
market value hereunder having such qualifications being referred to as an
"Appraiser"). If, within the ten day period after the expiration of such 30 day
period, the Company and the Majority Participating Holders agree upon an
Appraiser to determine the fair market value in accordance with Section 5.4
above, then such Appraiser shall make such determination within 30 days after
the date of such Appraiser's engagement, and such determination shall govern.
If the Company and the Majority Participating Holder do not, within such 10 day
period, agree as to a single Appraiser, or if the Appraiser appointed as
provided above fails to determine such fair market value within 30 days of the
date of such Appraiser's engagement, then each of the Company and the Majority
Participating Holder's engagement, then each of the Company and the Majority
Participating Holders, by notice to the other, shall appoint one Appraiser. If
either the Company or the Majority Participating Holders shall fail to appoint
such an Appraiser within 10 days after the lapse of such 10 or 30 day period, as
applicable, then the Appraiser appointed by the party that does so appoint an
Appraiser shall make the determination of such fair market value and such
determination shall govern. If two Appraisers are appointed and they agree upon
such fair market value, their joint determination shall govern. If said two
Appraisers cannot reach an agreement within 30 days after the appointment of the
last Appraiser to be appointed, the two Appraisers selected shall promptly
select a third Appraiser who shall within 15 days following such Appraiser's
appointment, select one of the two other appraisals as constituting fair market
value. All decision of the Appraiser(s) shall be rendered in writing and shall
be signed by the Appraiser(s). The fair market value determined as herein
provided shall be conclusive, final and binding on the parties and shall be
enforceable in any court having jurisdiction over a proceeding brought to seek
such enforcement. The cost of the fair market value determination shall not be
taken into account in determining fair market value and shall be borne by the
Company and the Participating Holders, with the Participating Holders bearing
such portion of such cost as equals their percentage equity ownership of the
Company on a fully diluted basis.
(f) Put Closing. The Company shall purchase from the Participating
-----------
Holders, and
16
<PAGE>
each Participating Holder shall sell to the Company (the "Put Closing"), all of
each Participating Holder's Registrable Securities at such time and place as may
be agreed upon by the Company and the Majority Participating Holders, but in no
event shall the Put Closing occur more than 120 days after the determination of
the fair market value in accordance herewith. In the absence of an agreement,
the Put Closing shall occur at the offices of the Company's principal outside
counsel. At the Put Closing, each Participating Holder shall deliver to the
Company certificates representing such Holder's Registrable Securities (free and
clear of all liens and encumbrances other than those granted in favor of and
held by the Company's creditors), and the Company shall pay to each
Participating Holder the purchase price therefor as provided herein by wire
transfer of immediately available funds. Upon the consummation of the Put
Closing as contemplated hereby, the Company's obligations under this Section 5
shall terminate.
(g) Remedies. If, for any reason, the Company fails to purchase all
--------
of the Registrable Securities of the Participating Holders as provided in this
section, then, in addition to whatever rights and remedies that may arise at law
or in equity as a result thereof, then (i) the Company shall pay each
Participating Holder on demand interest on the unpaid balance of the amount due
under clause (c) above (the "Put Price") at the rate of 15% per annum (or the
highest rate permitted under applicable law, if lower), until the unpaid balance
of the Put Price is paid in full and (ii) the Majority Holders shall have the
right, exercisable by giving notice hereof to the Company (such notice being
referred to as an "Exit Instruction Notice"), to require a Sale of the Company
yielding consideration to the Company or the stockholders consisting of at least
90% cash or readily marketable securities, whereupon the primary mandate and
duty of the Company's Board of Directors and stockholders shall be to effect a
sale of the Company. No Holder or any director or officer of the Company may
participate as a buyer (whether directly or indirectly as the holder of any
existing or prospective equity interest) in any such transaction without the
consent of the Majority Holders. If the Company fails to enter into one or more
definitive agreements with one or more third parties that are not affiliates of
the Company or any Holder contemplating a Sale of the Company on or before the
180th day following the delivery of the Exit Instruction Notice or if such
definitive agreements shall have been terminated, then, subject to obtaining any
required governmental consent with respect thereto, the Majority Holders shall
have all requisite right, power and authority, as the Company's agent, to bind
the Company and effect a Sale of the Company.
(h) Exit Transaction. In exercising its rights to effect a Sale of
----------------
the Company, the Majority Holders shall have full and plenary power and
authority, as the agent of the Company, to cause the Company to enter into a
transaction providing for a Sale of the Company (an "Exit Transaction") and to
take any and all such further action in connection therewith as the Majority
Holders may deem necessary or appropriate in order to consummate any such Exit
Transaction. The Major Holders, in exercising their rights under this section
shall have complete discretion over the terms and conditions of any Exit
Transactions effected thereby, including, without limitation, price, payment
terms, conditions to closing, representations, warranties, affirmative
covenants, negative covenants, indemnification, holdbacks and escrows. Without
limitation of the foregoing, the Majority Holders may execute on behalf of the
Company or such agreements, documents, applications, authorizations and
instruments (collectively, "Exit Documents") as they shall deem necessary or
appropriate in connection with any Exit Transaction, and each third party with
whom the Majority Holders contracts on behalf of the Company or any Subsidiary
may rely on the
17
<PAGE>
authority vested in the Majority Holders under this section for all purposes.
(i) Business Judgment Rule. In conducting an Exit Transaction, the
----------------------
Majority Holders shall be guided by corporate law principles and decisions
governing the sale of a Delaware corporation or its assets with a goal of
maximizing such corporation's value at a sale or liquidation for its
stockholders' benefit. Without limitation of the foregoing, the Majority
Holders shall enjoy the benefit of the business judgment rule and other
protections afforded directors under Delaware law with respect to all of their
decisions and actions in connection with any Exit Transaction to the maximum
extent permitted by law.
6. MISCELLANEOUS
6.1. Governing Law. This Agreement shall be governed in all respects by the
-------------
laws of the State of Delaware without regard to provisions regarding choice of
laws.
6.2. Successors and Assigns. Except as otherwise expressly provided herein,
----------------------
the provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto
whose rights or obligations hereunder are affected by such amendments.
6.3. Notices. Except as may be otherwise provided herein, all notices and
-------
other communications required or permitted hereunder shall be in writing and
shall be hand delivered or mailed by registered or certified first class mail,
postage prepaid, or by overnight courier addressed, (a) if to the Holders, to
each such Holder's address set forth on the signature page hereof, or to such
other address as such Holder or any of its successors or assigns shall have
furnished to the Company in writing, or (b) if to the Company, to its address
set forth below its signature hereto, or to such other address as the Company
shall have furnished to the Holders or their successors or assigns in writing.
Notices hand delivered or delivered by overnight courier shall be effective upon
delivery and notices sent by first class mail shall be effective three days
following deposit in the United States mail.
6.4. Amendments and Waivers. Any term of this Agreement may be amended and
----------------------
the observance of any term of the Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the Holders of at least a majority of the
Registrable Securities then outstanding, provided that any waivers or consents
in connection with Section 2 shall require the written consent of at least 66
2/3% of the Registrable Securities then outstanding.
6.5. Delays or Omissions. No delay or omission to exercise any right, power
-------------------
or remedy accruing to the Company or to the Holders, upon any breach or default
of any party hereto under this Agreement, shall impair any such right, power or
remedy of the Company, or the Holders nor shall it be construed to be a waiver
of any such breach or default, or an acquiescence therein, or of any similar
breach or default thereafter occurring; nor shall any waiver of any other breach
or default theretofore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of the Company or the Holders of
any breach or default under this Agreement or any waiver on the part of the
Company or the Holders
18
<PAGE>
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, or by law or otherwise afforded to the
Company or the Holders shall be cumulative and not alternative.
6.6. Legal Fees. In the event of any action at law, suit in equity or
----------
arbitration proceeding in relation to this Agreement, the prevailing party,
shall be paid its reasonable attorney's fees and expenses by the other party.
6.7. Titles and Subtitles. The titles of the sections and subsections of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
6.8. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.9. Severability. Should any provision of this Agreement be determined to
------------
be illegal or unenforceable, such determination shall not affect the remaining
provisions of this Agreement.
6.10. Entire Agreement. This Agreement and the exhibits hereto which are
----------------
hereby expressly incorporated herein by this reference constitute the entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof and supersede any prior agreement or understanding with
respect to the subjects hereof and thereof.
6.11. Effect of Change in Capital Structure. The parties' rights and
-------------------------------------
obligations under this Agreement shall apply as well to any securities of the
Company received from the Company as a result of any stock dividend, stock
split, reverse stock split, combination, reclassification or similar change in
the capital structure of the Company.
19
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year hereinabove first written.
COMPANY:
NETWORK ACCESS SOLUTIONS, INC.
100 Carpenter Drive
Suite 206
Sterling, Virginia 20164
/s/ Longma M. Aust
------------------------
Signature
Longma M. Aust
------------------------
Printed Name
President
------------------------
Title
For purposes of the notice provided for in
Section 6.3, with a copy to:
Piper & Marbury LLP
1200 19th Street, N.W.
Washington, D.C. 20036
Attention: Nancy Spangler, Esq.
20
<PAGE>
HOLDERS:
SPECTRUM EQUITY INVESTORS II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
Attention: Fred Wang
By: Spectrum Equity Associates II, L.P.
its Managing General Partner
/s/ Fred Wang
------------------------
Signature
Fred Wang
------------------------
Printed Name
Attorney-in-Fact
------------------------
Title
For purposes of the notice provided for in
Section 6.3, with a copy to:
Latham & Watkins
75 Willow Road
Menlo Park, California 94025
Attention: Ora T. Fisher, Esq.
SEA 1998 II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
Attention: Fred Wang
/s/ Randy Henderson
------------------------
Signature
Randy Henderson
------------------------
Printed Name
Vice President
------------------------
Title
21
<PAGE>
FBR TECHNOLOGY VENTURE PARTNERS L.P.
1001 19th Street
Arlington, VA 22209
Attention: Scott Frederick
By: FBR Venture Capital Managers Inc.
its General Partner
/s/ Gene Riechers
------------------------
Signature
Gene Riechers
------------------------
Printed Name
Managing Director
------------------------
Title
W2 VENTURE PARTNERS, LLC
3814 Shinglewood Court
Union City, CA 94587
Attention: Ed Wang
/s/ Ed Wang
------------------------
Signature
Ed Wang
------------------------
Printed Name
Member
------------------------
Title
22
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
AMENDMENT NO.1 TO
INVESTOR RIGHTS AGREEMENT
-------------------------
THIS AMENDMENT NO. 1 (the "Amendment No. 1") to that certain Investor
Rights Agreement dated as of August 6, 1998, by and between Network Access
Solutions Corporation, formerly known as Network Access Solutions, Inc., (the
"Company") and the other signatories thereto (such Investor Rights Agreement in
the form attached hereto as Exhibit A, the "Investor Rights Agreement"), is made
---------
effective as of the 17th day of March, 1999.
WHEREAS, the Company and the signatories to the Investor Rights
Agreement wish to provide that the Put Right set forth in Section 5 of the
Investor Rights Agreement be terminated immediately upon a qualified initial
public offering of shares of the Company's Common Stock.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Effective the date hereof, the following new Section 5(j) be
inserted at the end of Section 5 of the Investor Rights Agreement:
"(j) Notwithstanding anything contained herein to the contrary, the Put
Right set forth in this Section 5 shall terminate immediately upon the first
sale of the Company's Common Stock in a firm commitment underwritten public
offering that is (i) pursuant to a registration statement filed under the Act
and (ii) based on a pre-money valuation of the Company in excess of
$200,000,000."
2. Successors and Assigns. All covenants and agreements in this
----------------------
Amendment No. 1 by or on behalf of any of the parties hereto will bind and inure
to the benefit of their respective successors and assigns whether so expressed
or not.
3. Governing Law. This Amendment No. 1 shall be governed by and
-------------
construed under the laws of the State of Delaware.
4. Ratification of Agreement. Except as specifically set forth
-------------------------
herein, the Investor Rights Agreement shall remain in full force and effect.
5. Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Amendment No. 1 are for convenience of reference only and are not to be
considered in construing this Amendment No. 1.
6. Counterparts. This Amendment No. 1 may be executed in
------------
counterparts, each which shall be deemed an original, and all of which shall
constitute one and the same instrument.
Signatures on following pages
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as
of the day and year first above written.
COMPANY:
NETWORK ACCESS SOLUTIONS CORPORATION
100 Carpenter Drive
Sterling, Virginia 20164
/s/ Jonathon Aust
------------------
Signature
Jonathon Aust
-------------
Printed Name
President and Chief Executive Officer
-------------------------------------
Title
HOLDERS:
SPECTRUM EQUITY INVESTORS II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
By: Spectrum Equity Associates II, L.P.
its General Partner
/s/ Brion B. Applegate
-----------------------
Signature
Brion B. Applegate
------------------
Printed Name
Managing General Partner
------------------------
Title
<PAGE>
SEA 1998 II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
/s/ Randy Henderson
--------------------
Signature
Randy Henderson
---------------
Printed Name
Vice President
--------------
Title
FBR TECHNOLOGY VENTURE PARTNERS L.P.
1001 19th Street
Arlington, VA 22209
By: FBR Venture Capital Managers Inc.
its General Partner
--------------------------
Signature
-------------------
Printed Name
---------------------
Title
W2 VENTURE PARTNERS, LLC
3814 Shinglewood Court
Union City, CA 94587
--------------------------
Signature
----------------------
Printed Name
---------------
Title
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
AMENDMENT NO. 2 TO
INVESTOR RIGHTS AGREEMENT
-------------------------
THIS AMENDMENT NO. 2 (the "Amendment No. 2") to that certain Investor
Rights Agreement dated as of August 6, 1998, by and between Network Access
Solutions Corporation, formerly known as Network Access Solutions, Inc., (the
"Company") and the other signatories thereto (such Investor Rights Agreement, as
amended, the "Investor Rights Agreement"), is made effective as of the 31st
day of March, 1999.
WHEREAS, the Company now desires to enter into that certain Note
Purchase Agreement by and between the Company, Spectrum Equity Investors II,
L.P. ("Spectrum") and FBR Technology Venture Partners L.P. ("FBR") of even date
herewith (the "Purchase Agreement") pursuant to which the Company will issue
convertible promissory notes (the "Notes");
WHEREAS, pursuant to the terms of the Purchase Agreement and the Notes,
the Company may issue to Spectrum and FBR shares of the Common Stock of the
Company, par value $.001 per share (the "Common Stock"); and
WHEREAS, the Company and the signatories to the Investor Rights
Agreement wish to provide that any shares of Common Stock issued to Spectrum or
FBR in connection with the Purchase Agreement or the Notes shall be considered
"Registrable Securities" under the terms of the Investor Rights Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Effective the date hereof, Section 1(h) of the Investor Rights
Agreement is deleted in its entirety and the following Section 1(h) shall be
inserted in lieu thereof:
"(h) The term "Registrable Securities" means: (i) any shares of Common
Stock issued to the Holders pursuant to the Series A Preferred Stock Purchase
Agreement dated as of August 6, 1998, upon conversion of any shares of Series A
Preferred Stock, or pursuant to the Note Purchase Agreement dated as of March
31, 1999 or the Convertible Notes issued in connection therewith, and (ii) any
other Common Stock issued as a dividend or other distribution with respect to,
or in exchange for or in replacement of, the aforementioned Common Stock."
2. Successors and Assigns. All covenants and agreements in this
----------------------
Amendment No. 2 by or on behalf of any of the parties hereto will bind and inure
to the benefit of their respective successors and assigns whether so expressed
or not.
3. Governing Law. This Amendment No. 2 shall be governed by and
-------------
construed under the laws of the State of Delaware.
<PAGE>
4. Ratification of Agreement. Except as specifically set forth
-------------------------
herein, the Investor Rights Agreement shall remain in full force and effect.
5. Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Amendment No. 2 are for convenience of reference only and are not to be
considered in construing this Amendment No. 2.
6. Counterparts. This Amendment No. 2 may be executed in
------------
counterparts, each which shall be deemed an original, and all of which shall
constitute one and the same instrument.
{Signatures on following pages}
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as
of the day and year first above written.
COMPANY:
NETWORK ACCESS SOLUTIONS CORPORATION
100 Carpenter Drive
Sterling, Virginia 20164
/s/ Scott Yancey
----------------------------------------
Signature
Scott Yancey
----------------------------------------
Printed Name
Chief Financial Officer
----------------------------------------
Title
HOLDERS:
SPECTRUM EQUITY INVESTORS II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
By: Spectrum Equity Associates II, L.P.
its General Partner
/s/ Brion B. Applegate
----------------------------------------
Signature
Brion B. Applegate
----------------------------------------
Printed Name
Managing General Partner
----------------------------------------
Title
-3-
<PAGE>
SEA 1998 II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
/s/ Randy Henderson
----------------------------------------
Signature
Randy Henderson
----------------------------------------
Printed Name
Vice President
----------------------------------------
Title
FBR TECHNOLOGY VENTURE PARTNERS L.P.
1001 19th Street
Arlington, VA 22209
By: FBR Venture Capital Managers Inc.
its General Partner
/s/ Hooks K. Johnston
----------------------------------------
Signature
Hooks K. Johnston
----------------------------------------
Printed Name
Managing Director
----------------------------------------
Title
W2 VENTURE PARTNERS, LLC
3814 Shinglewood Court
Union City, CA 94587
----------------------------------------
Signature
----------------------------------------
Printed Name
----------------------------------------
Title
-4-
<PAGE>
Exhibit 10.22
SERIES A PREFERRED STOCK PURCHASE AGREEMENT
This Series A Preferred Stock Purchase Agreement (this "Agreement") is made
---------
this 6th day of August, 1998 by and among Network Access Solution, Inc., a
Delaware corporation ("Company"), and the purchasers listed on Schedule 1 hereto
------- ----------
(each, a "Purchaser," and collectively, the "Purchasers").
--------- ----------
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto agree as follows:
1. AUTHORIZATION AND SALE OF SHARES
1.1. Authorization. As of the Closing (as defined below) Company will have
-------------
authorized the issuance, pursuant to the terms and conditions of this Agreement,
of (a) 10,000,000 shares of Company's Series A Preferred Stock, $0.001 par value
per share (the "Preferred Shares"), having the rights, preferences, privileges
----------------
and restrictions set forth in the Certificate of Incorporation of Company
attached to this Agreement as Exhibit A (the "Certificate of Incorporation"),
----------------------------
and (b) 4,900,000 shares of Company's Common Stock, $0.001 par value per share
(the "Common Stock"), (the "Common Shares" and together with the Preferred
------------ -------------
Shares, the "Shares").
------
1.2. Agreement to Purchase and Sell. Subject to the terms and conditions
------------------------------
hereof and in reliance upon the representations and warranties made herein, on
the date of the Closing, Company will issue and sell to each Purchaser, and each
Purchaser agrees, jointly and not severally, to purchase from Company, that
number of Preferred Shares and Common Shares set forth opposite such Purchaser's
name on Schedule 1 hereto, at a price of $1.00 per Preferred Share and $.001 per
----------
Common Share, for an aggregate purchase price set forth on Schedule 1. The
----------
purchase price for the Shares shall be paid by wire transfer of funds to a
designated account of Company.
2. CLOSING; DELIVERY
2.1. The Closing. The purchase and sale of the Shares hereunder shall be
-----------
held at the offices of Piper & Marbury LLP, at 10:00 a.m. on August [5], 1998,
or at such other time and place as Company and the Purchasers may mutually agree
upon (the "Closing").
-------
2.2. Delivery. At the Closing, Company will deliver to each Purchaser
--------
certificates representing the Shares to be purchased by such Purchaser hereunder
against payment of the full purchase price therefor.
3. COMPANY REPRESENTATIONS AND WARRANTIES
Company hereby represents and warrants to each Purchaser that, except as
set forth in the Schedule of Exceptions ("Schedule of Exceptions") attached to
----------------------
this Agreement as Exhibit G (which Schedule of Exceptions shall be deemed to be
---------
representations and warranties to the Purchasers), the statements in the
following paragraphs of this Section 3 are all true and correct:
<PAGE>
3.1. Organization and Qualification. Company is a corporation duly
------------------------------
organized and legally existing under, and by virtue of, the laws of the State of
Delaware and has all requisite corporate power and authority to own its
properties and assets and to carry on its business as now conducted. Company is
qualified to do business as a foreign corporation in each jurisdiction where
failure to be so qualified would have a material adverse effect on the financial
condition, business, prospects or operations of the Company or on its ability to
execute and deliver this Agreement or to consummate the transactions
contemplated hereby. True and accurate copies of Company's (and its
predecessor's) Certificate of Incorporation and Bylaws, each as amended and in
effect at the Closing, have been delivered to the Purchasers.
3.2. Capitalization. Immediately prior to the Closing, the authorized
--------------
capital stock of Company will consist of the following:
(a) Common Stock. A total of 15,000,000 authorized shares of Common
------------
Stock ($0.001 par value) of which 5,000,000 shares are issued and outstanding.
(b) Preferred Stock. A total of 10,000,000 authorized shares of
---------------
Preferred Stock ($0.001 par value), of which 10,000,000 shares have been
designated Series A Preferred Stock, none of which are issued and outstanding
prior to the Closing. The rights, privileges and preferences of the Preferred
Stock are as stated in the Certificate of Incorporation.
(c) Options, Warrants, Reserved Shares. Except for the 2,000,000
----------------------------------
shares of Common Stock reserved for issuance under Company's 1998 Stock
Incentive Plan under which 1,295,000 options to purchase shares are outstanding,
there are no options, warrants, conversion privileges or other rights, or
agreements with respect to the issuance thereof, presently outstanding to
purchase any of the capital stock of Company. Except as set forth in stock
restriction agreements of the type described in Section 7.3 below and as
contemplated by this Agreement and the transactions contemplated hereby, there
are no rights of first refusal or other rights to purchase any capital stock of
Company or any securities convertible or exchangeable therefor (whether in favor
of Company or any other person), pursuant to any agreement or commitment of
Company.
(d) Outstanding Security Holders. Attached to this Agreement as
----------------------------
Exhibit C is a complete list of all outstanding stockholders, option holders and
- ---------
other security holders of Company as of the date set forth on such exhibit.
3.3. Subsidiaries. Company does not presently own or control, directly or
------------
indirectly, any interest in any other corporation, partnership, trust, joint
venture, association, or other entity.
3.4. Due Authorization. All corporate action on the part of Company, its
-----------------
officers, directors and stockholders necessary for the authorization, execution
and delivery of, and the performance of all obligations of Company under, this
Agreement, the Investor Rights Agreement attached to this Agreement as Exhibit D
---------
(the "Rights Agreement"), the Co-Sale Agreement attached to this Agreement as
----------------
Exhibit E (the "Co-Sale Agreement") and the Voting Agreement attached to this
- --------- -----------------
Agreement as Exhibit F (the "Voting Agreement"), and the authorization,
--------- ----------------
reservation for issuance, issuance and delivery of the Shares subject to this
Agreement has been taken. Each of this Agreement, the Rights Agreement, the Co-
Sale
2
<PAGE>
Agreement and the Voting Agreement is a valid and binding obligation of
Company enforceable in accordance with its respective terms, subject, as to
enforcement of remedies, to applicable bankruptcy, insolvency, moratorium,
reorganization and similar laws affecting creditors' rights generally and to
general equitable principles. None of the Shares are subject to any preemptive
rights or rights of first refusal.
3.5. Valid Issuance.
--------------
(a) The Shares, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration provided for herein, will be duly
authorized and validly issued, fully paid and non assessable. The Shares will
be free of restrictions on transfer other than restrictions on transfer under
this Agreement and the Rights Agreement and under applicable state and federal
securities laws.
(b) The outstanding shares of the capital stock of Company are duly
and validly issued, fully paid and non assessable, and such shares of such
capital stock, and any outstanding options and other securities of Company have
been issued in full compliance with the registration and prospectus delivery
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
--------------
and the registration and qualification requirements of all applicable state
securities laws, or in compliance with applicable exemptions therefrom, and all
other provisions of applicable federal and state securities laws, including,
without limitation, anti-fraud provisions.
3.6. Title to Properties and Assets.
------------------------------
Company has good and marketable title to its properties and assets
held in each case subject to no mortgage, pledge, lien, encumbrance, security
interest or charge of any kind except as provided in this Section 3.6. With
respect to any property and assets it licenses or leases, Company is in
compliance in all material respects with such licenses and leases and, to the
best of Company's knowledge, it has valid leasehold interests in such assets
free of any liens, encumbrances, security interests or claims of any party other
than the lessors of such property and assets. Company does not own any real
property.
3.7. Status of Proprietary Assets.
----------------------------
(a) Ownership. Company has full title and ownership of, or has
---------
license to, all patents, patent applications, trademarks, service marks, trade
names, copyrights, moral rights, maskworks, trade secrets, confidential and
proprietary information, compositions of matter, formulas, designs, proprietary
rights, know-how and processes, (all of the foregoing collectively hereinafter
referred to as the "Proprietary Assets") necessary and sufficient to enable it
------------------
to carry on, in all material respects, its respective business as now conducted
and, to the best of Company's knowledge, as presently proposed to be conducted
without any conflict with or infringement of the rights of others. To the best
of Company's knowledge, no third party has any ownership right, title, interest,
claim in or lien on any of Company's Proprietary Assets, and Company has taken,
and in the future Company will use its best efforts to take, all steps
reasonably necessary to preserve its legal rights in, and the secrecy of, all
its Proprietary Assets, except those for which disclosure is required for
legitimate business or legal reasons, including without limitation obtaining
customary confidentiality agreements and invention assignments from all
employees and consultants.
3
<PAGE>
(b) Licenses; Other Agreements. Except as set forth in the Schedule
--------------------------
of Exceptions, Company has not granted, and, to the best of Company's knowledge,
there are not outstanding, any options, licenses or agreements of any kind
relating to any Proprietary Asset of Company, nor is Company bound by or a party
to any option, license or agreement of any kind with respect to any of its
Proprietary Assets. Except as set forth in the Schedule of Exceptions, Company
is not obligated to pay any royalties or other payments to third parties with
respect to the marketing, sale, distribution, manufacture, license or use of any
Proprietary Asset or any other property or rights.
(c) No Infringement. To the best of Company's knowledge, Company has
---------------
not violated or infringed, and Company is not currently violating or infringing,
and Company has not received any communications alleging that Company (or any of
its respective employees or consultants) has violated or infringed or, by
conducting its respective business as presently proposed, would violate or
infringe, any Proprietary Asset of any other person or entity.
(d) No Breach by Employee. Company is not aware that any employee (or
---------------------
any person Company currently intends to hire) or consultant of Company is
obligated under any agreement (including licenses, covenants or commitments of
any nature) or subject to any judgment, decree or order of any court or
administrative agency, or any other restriction that would interfere with the
use of his or her best efforts to carry out his or her duties for Company or to
promote the interests of Company or that would conflict with Company's business
as presently proposed to be conducted. The carrying on of Company's business by
its respective employees and contractors and the conduct of its respective
business as presently proposed, will not, to the best of Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees (or persons Company currently intends to hire),
contractors, Company is now obligated. Company does not believe it is or will
be necessary to utilize any inventions of any employees of Company (or persons
currently intends to hire) made prior to their employment by Company. To
Company's knowledge, at no time during the conception of or reduction of any of
Company's Proprietary Assets to practice was any developer, inventor or other
contributor to such patents operating under any grants from any governmental
entity or agency or private source, performing research sponsored by any
governmental entity or agency or private source or subject to any employment
agreement or invention assignment or nondisclosure agreement or other obligation
with any third party that could adversely affect Company's rights in such
Proprietary Assets.
3.8. Material Contracts and Obligations. Included in the Schedule of
----------------------------------
Exceptions is a list of all agreements, contracts, leases, licenses,
instruments, commitments (oral or written), indebtedness, liabilities and other
obligations to which Company is a party or by which it is currently bound that
(a) are material to the operations of its business and properties as now
conducted and as presently proposed to be conducted; (b) involve any of the
officers, consultants, directors, employees or stockholders of Company; (c)
involve payment obligations in excess of $75,000 per annum; (d) obligate Company
to indemnify a third party; (e) restrict the ability of Company to engage in any
business; or (f) obligate Company to share, license or develop any product or
technology or provide any service with respect to any such product or technology
(collectively, "Material Agreements"). Copies of the Material Agreements have
-------------------
been made available for inspection by the Purchasers and their counsel. All
present employees have
4
<PAGE>
executed and all other employees of Company (or persons Company currently
intends to hire) have executed (or will execute) a "Proprietary Information and
Inventions Agreement" concerning non-disclosure of confidential information and
assignment of inventions to Company in a form satisfactory to and delivered to
the Purchasers and their counsel. Company has not breached, nor does Company
have any knowledge of any claim or threat that it has breached, any material
term or condition of (i) any Material Agreement, or (ii) any other agreement,
contract, lease, license, instrument or commitment that, individually or in the
aggregate, would have a material adverse effect on the business, properties,
financial condition, results of operations or affairs or prospects of Company.
Each Material Agreement is in full force and effect and, to Company's knowledge,
no other party to such Material Agreement is in default in any material respect
thereunder. Except as set forth in the Schedule of Exceptions, Company is not a
party to any agreement that restricts its ability to market or sell any of its
products (whether by territorial restriction or otherwise).
3.9. Litigation. There is no action, suit, proceeding, claim or
----------
arbitration or, to the best of Company's knowledge, investigation (collectively,
"Actions") pending (or, to the best of Company's knowledge, currently
-------
threatened) against Company, its activities, properties or assets or, to the
best of Company's knowledge, against any officer, director or employee (or any
person Company currently intends to hire) of Company in connection with such
officer's, director's, employee's or person's relationship with, or actions
taken on behalf of Company. To the best of Company's knowledge, there is no
factual or legal basis for any such Action that might result, individually or in
the aggregate, in any material adverse change in the business, properties,
assets, financial condition, affairs or prospects of Company. By way of example
but not by way of limitation, there are no Actions pending against Company, to
the best of Company's knowledge pending against any officer, director or
employee of Company or, to the best of Company's knowledge, threatened (or any
basis therefor known to Company) relating to the prior employment of any of
Company's employees (or persons Company currently intends to hire) or
consultants, their use in connection with Company's business of any information,
technology or techniques allegedly proprietary to any of their former employers
or, in the case of persons Company currently intends to hire, their current or
former employers, clients or other parties, or their obligations under any
agreements with such employers, clients or other parties. Company is not a party
to or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality, and there is no
Action by Company currently pending or which Company intends to initiate.
3.10. Governmental Consents. All consents, approvals, orders,
---------------------
authorizations or registrations, qualifications, designations, declarations or
filings with any federal or state governmental authority on the part of Company
required in connection with the consummation of the transactions contemplated
herein have been obtained. Based in part on the representations of the
Purchasers set forth in Section 4 below, the offer, sale and issuance of the
Shares in conformity with the terms of this Agreement are exempt from the
registration and prospectus delivery requirements of the Securities Act.
3.11. Compliance with Other Instruments. Company is not in, nor will the
---------------------------------
conduct of its business as proposed to be conducted result in, any violation,
breach or default of any term of its respective charter documents or, in any
material respect, any material term or provision of any mortgage, indenture,
contract, agreement or instrument to which Company is a party or by which
5
<PAGE>
it may be bound, or, to the best of its knowledge, of any provision of any
foreign or domestic state or federal judgment, decree, order, statute, rule or
regulation applicable to or binding upon Company. The execution, delivery and
performance of and compliance with this Agreement and the consummation of the
transactions contemplated hereby will not be in conflict with, require a consent
under, or constitute, with or without the passage of time or the giving of
notice or both, a default under the Certificate of Incorporation or Company's
Bylaws or a default in any material respect under any agreement or contract of
Company, or, to the best of Company's knowledge, a violation of any statutes,
laws, regulations or orders applicable to Company or the transactions
contemplated hereby, or an event which results in the creation of any material
lien, charge or encumbrance upon any asset of Company.
3.12. Permits. Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, taken as
a whole, and Company believes it can obtain, without undue burden or expense,
any similar authority for the conduct of its respective business as currently
proposed to be conducted. Company is not in default in any material respect
under any of such franchises, permits, licenses, or other similar authority.
Each of such franchises, permits licenses or similar authority is valid,
subsisting and in full force and effect and the consummation of the transactions
contemplated by this Agreement will not result in any breach, default,
impairment or forfeiture of any rights thereunder. Company has not received any
citations, complaints, consent orders, compliance schedules or other similar
enforcement orders or received any other notice from any governmental authority
or person regarding the violation of, or failure to comply with, any legal
requirements relating to Company.
3.13. Disclosure. No representation or warranty by Company in this
----------
Agreement or in any statement or certificate signed by any officer of Company
furnished or to be furnished to the Purchasers pursuant to this Agreement
contains or will contain any untrue statement of a material fact or omits or
will omit to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances in which
they are made, not misleading. Company's Business Plan and the financial and
other projections contained in the Business Plan delivered to Purchasers were
prepared in good faith; however, Company does not warrant that it will achieve
such projections.
3.14. Registration Rights. Except as provided in the Rights Agreement,
-------------------
Company has not granted or agreed to grant any person or entity any rights
(including piggyback registration rights) to have any securities of Company
registered with the United States Securities and Exchange Commission ("SEC") or
---
any other governmental authority.
3.15. Insurance. Company maintains insurance coverage to insure itself
---------
against risks of the kind customarily insured against and in amounts customarily
carried by companies similarly situated, engaged in similar businesses and
owning similar properties as Company. Such coverage is (i) with insurance
companies reasonably believed by Company to be financially sound and reputable;
(2) in full force and effect; (3) sufficient for compliance by the Company with
all material requirements of law and all material agreements to which Company is
a party; and (4) sufficient to provide adequate insurance coverage for the
business and assets of Company.
6
<PAGE>
3.16. Financial Statements. Company has made available to each Purchaser
--------------------
its unaudited consolidated financial statements (including balance sheet, income
statement and statement of cash flows) as of July 31, 1997 and for the fiscal
year then ended and its unaudited financial statements (including balance sheet
and income statement) as of June 30, 1998 and for the 11-month period then ended
(collectively, the "Financial Statements"). The Financial Statements have been
--------------------
prepared in accordance with generally accepted accounting principles ("GAAP")
----
applied on a consistent basis throughout the periods indicated, except, with
respect to any unaudited Financial Statements for any footnotes that may be
required by GAAP. The Financial Statements fairly present the consolidated
financial condition and operating results of Company as of the dates, and for
the periods, indicated therein, subject to normal year-end audit adjustments.
Except as set forth in the Financial Statements, Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to June 30, 1998 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under GAAP to be reflected in the Financial Statements, which, in
both cases, individually or in the aggregate are not material to the financial
condition or operating results of Company. Except as disclosed in the Financial
Statements, Company is not a guarantor or indemnitor of any indebtedness of any
other person or entity. Company maintains a system of accounting controls
sufficient to provide reasonable assurance that transactions are (i) executed
with management's authorization and (ii) recorded as necessary to permit
preparation of financial statements in accordance with GAAP.
3.17. Changes. Since June 30, 1998, there has not been:
-------
(a) any change in the assets, liabilities, financial condition or
operating results of Company from that reflected in the Financial Statements,
except changes in the ordinary course of business that have not been, in the
aggregate, materially adverse;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the business, properties,
prospects, or financial condition of Company (as such business is presently
conducted and as it is proposed to be conducted);
(c) any waiver or compromise by Company of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim, or encumbrance
or payment of any obligation by Company, except in the ordinary course of
business and that is not material to the business, properties, prospects or
financial condition of Company (as such business is presently conducted and as
it is proposed to be conducted);
(e) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
(f) any sale, assignment or transfer of any material assets or
property;
(g) any resignation or termination of employment of any officer or
key employee of Company; and Company, to the best of its knowledge, does not
know of any impending resignation or termination of employment of any such
officer or key employee;
7
<PAGE>
(h) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of Company;
(i) any mortgage, pledge, transfer of a security interest in, or
lien, created by Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(j) any loans or guarantees made by Company to or for the benefit of
its respective employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(k) any declaration, setting aside or payment or other distribution
in respect to any of Company's capital stock, or any direct or indirect
redemption, purchase, or other acquisition of any of such stock by Company;
(l) to the best knowledge of Company's Chief Executive Officer,
Chief Financial Officer and Chief Operating Officer after reasonable
investigation, any other event or condition of any character that might
materially and adversely affect the business, properties, prospects or financial
condition of Company (as such business is presently conducted and as it is
proposed to be conducted); or
(m) any arrangement or commitment by Company to do any of the things
described in this Section 3.17.
3.18. Tax Elections. Company has not elected pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"), to be treated as an "S"
----
corporation or a collapsible corporation pursuant to Section 341(f) or Section
1362(a) of the Code, nor has it made any other elections pursuant to the Code
(other than elections which relate solely to matters of accounting, depreciation
or amortization) which would have a material effect on the financial condition,
business (as now conducted or presently proposed to be conducted) or properties
of Company. Company has accurately prepared all United States income tax returns
and all state and municipal tax returns required to be filed by it, if any, has
paid all taxes, assessments, fees and charges when and as due under such returns
(subject to applicable extensions) and has made adequate provision for the
payment of all other taxes, assessments, fees and charges shown on such returns
or on assessments received by Company. To the best of Company's knowledge, no
deficiency assessment or proposed adjustment of Company's United States income
tax or state or municipal taxes is pending.
3.19. Interested Party Transactions. To the best knowledge of Company,
except for options to acquire securities of Company and employment agreements,
no officer or director of Company or any "affiliate" or "associate" (as those
terms are defined in Rule 405 promulgated under the Securities Act) of any such
person has had, either directly or indirectly, a material interest in: (i) any
person or entity which purchases from or sells, licenses or furnishes to Company
any goods, property, technology, intellectual or other property rights or
services; or (ii) any contract or agreement to which Company is a party or by
which it may be bound or affected.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
8
<PAGE>
Each Purchaser represents and warrants, severally, to Company as follows:
4.1. Authorization. All corporate action on the part of such Purchaser
-------------
necessary for the authorization, execution and delivery of, and the performance
of all obligations of such Purchaser under this Agreement, the Rights Agreement,
the Co-Sale Agreement and the Voting Agreement has been taken or will be taken
prior to the Closing. This Agreement, the Rights Agreement, the Co-Sale
Agreement and the Voting Agreement when executed and delivered by such Purchaser
will constitute valid and legally binding obligations of such Purchaser,
subject, as to enforcement of remedies, to applicable bankruptcy, insolvency,
moratorium, reorganization and similar laws affecting creditors' rights
generally and to general equitable principles.
4.2. Investigation. Such Purchaser has had an opportunity to discuss the
-------------
business, affairs and current prospects of Company with its officers and has had
access to information about Company that it has requested.
4.3. Purchase for Own Account. The Shares to be acquired by such Purchaser
------------------------
will be acquired for such Purchaser's own account, not as a nominee or agent,
and not with a view to or in connection with the sale or distribution of any
part thereof.
4.4. Exempt from Registration. Such Purchaser understands that the Shares
------------------------
to be purchased by it will not be registered under the Securities Act, on the
ground that the sale provided for in this Agreement is exempt from registration
under of the Securities Act, and that the reliance of Company on such exemption
is predicated in part on such Purchaser's representations set forth in this
Agreement.
4.5. Economic Risk. Such Purchaser is able to fend for itself in the
-------------
transactions contemplated by this Agreement and has the ability to bear the
economic risks of its investment pursuant to this Agreement for an indefinite
period.
4.6. Restricted Securities. Such Purchaser understands that the Shares to
---------------------
be purchased by it are restricted securities within the meaning of Rule 144
under the Securities Act and that the Shares to be purchased by it are not
registered and must be held indefinitely unless they are subsequently registered
or an exemption from such registration is available.
4.7. Restrictive Legends. Such Purchaser understands that each certificate
-------------------
representing the Shares and any other securities issued in respect of the Shares
upon any stock split, stock dividend, recapitalization, merger or similar event
(unless no longer required in the opinion of counsel for Company) shall be
stamped or otherwise imprinted with a legend substantially in the following form
(in addition to any legend that may now or hereafter be required by applicable
state law):
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF ANY STATE. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED
OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE
SECURITIES
9
<PAGE>
LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS
SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS
OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF
THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY
PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
The legend set forth above shall be removed by Company from any
certificate upon delivery to Company of an opinion by counsel, reasonably
satisfactory to Company, that a registration statement under the Securities Act
is at that time in effect with respect to the legended security or that such
security can be freely transferred in a public sale without such a registration
statement being in effect and that such transfer will not jeopardize the
exemption or exemptions from registration pursuant to which Company issued the
Shares. Company acknowledges that no such opinion shall be required in
connection with customary transfers of the Shares pursuant to Rule 144 under the
Securities Act.
4.8. Accredited Investor. Such Purchaser is an "accredited investor"
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act.
5. CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING
The obligation of each Purchaser to purchase the Shares at the Closing is
subject to the fulfillment, to the satisfaction of each Purchaser on or prior to
the Closing, of the following conditions:
5.1. Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by Company in Section 3 hereof shall be true and correct in all
material respects when made, and shall be true and correct in all material
respects as of the date of Closing with the same force and effect as if they had
been made on and as of such date, subject to changes contemplated by this
Agreement. Without limiting the foregoing, there shall not have occurred any
event or condition of any character that might materially and adversely affect
the business, properties, prospects or financial condition of Company (as such
business is presently conducted and as it is proposed to be conducted).
5.2. Performance of Obligations. Company shall have performed in all
--------------------------
material respects and complied in all material respects with all agreements,
obligations and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Closing and shall have
obtained all approvals, consents, waivers and qualifications necessary to
complete the purchase and sale described herein.
5.3. Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated hereby and all documents and
instruments incident to such transactions shall be reasonably satisfactory in
substance and form to such Purchaser, and such Purchaser shall have received all
such counterpart originals or certified or other copies of such
10
<PAGE>
documents as it may reasonably request.
5.4. Compliance Certificate. At the Closing, Company shall deliver to the
----------------------
Purchasers a certificate, dated the date of Closing, signed by Company's
President certifying that the conditions specified in Sections 5.1, 5.2 and 5.6
have been fulfilled.
5.5. Securities Exemptions. The offer and sale of the Shares to the
---------------------
Purchasers pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act and the registration and/or qualification
requirements of all applicable state securities laws.
5.6. Certificate of Incorporation. The Certificate of Incorporation shall
----------------------------
have been duly adopted by Company by all necessary corporate action of its Board
of Directors and stockholders and shall have been duly filed with and accepted
by the Secretary of State of the State of Delaware.
5.7. Opinion of Company's Counsel. The Purchasers shall have received from
----------------------------
counsel to Company an opinion addressed to the Purchasers, dated the date of
Closing, in form and substance reasonably acceptable to the Purchasers and their
counsel.
5.8. Board of Directors. Company's Board of Directors on the date of
------------------
Closing shall consist of Jon Aust, Scott Yancey, Chris Melnick, Fred Wang and
Brion Applegate.
5.9. Rights Agreement. The Rights Agreement shall have been executed and
----------------
delivered by the parties thereto.
5.10. Co-Sale Agreement. The Co-Sale Agreement shall have been executed
-----------------
and delivered by the parties thereto.
5.11. Voting Agreement. The Voting Agreement shall have been executed and
----------------
delivered by the parties thereto.
5.12. Non-Competition Agreement. The Company shall have entered into non-
-------------------------
competition agreements with each of its executive officers in a form reasonably
satisfactory to the Purchasers.
6. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING
The obligations of Company under this Agreement to each Purchaser are
subject to the fulfillment, to the satisfaction of Company, on or prior to the
Closing, of the following conditions:
6.1. Representations and Warranties Correct. The representations and
--------------------------------------
warranties made by each Purchaser in Section 4 hereof shall be true and correct
in all material respects when made and shall be true and correct in all material
respects as of the date of Closing with the same force and effect as if they had
been made on and as of such date.
6.2. Payment of Purchase Price. Such Purchaser shall have delivered to
-------------------------
Company the purchase price in accordance with the provisions of Section 2
hereof.
11
<PAGE>
6.3. Certificate of Incorporation. The Certificate of Incorporation shall
----------------------------
have been duly adopted by Company by all necessary corporate action of its Board
of Directors and stockholders, and shall have been duly filed with and accepted
by the Secretary of State of the State of Delaware.
6.4. Securities Exemptions. The offer and sale of the Shares to such
---------------------
Purchaser pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act, and the registration and/or qualification
requirements of all applicable state securities laws.
6.5. Consents. All approvals, consents, waivers and qualifications
--------
necessary for such Purchaser to complete the purchase and sale described herein
shall have been obtained.
7. COVENANTS OF COMPANY
7.1. Use of Proceeds. Company may apply up to $1,900,000 of the proceeds
---------------
from the sale of the Shares hereunder to redeem shares of its capital stock from
Jon Aust and his family members (in each case at a price of $1.00 per share) and
up to $100,000 to be paid as a bonus to William Farrer. The remainder of the
proceeds from such sale shall be used for working capital purposes.
7.2. Director and Officer Insurance. At such time as the Board of
------------------------------
Directors shall deem appropriate, Company shall obtain and cause to be
maintained in effect, with financially sound insurers, a policy of directors'
and officer's liability insurance covering members of Company's Board of
Directors reasonably acceptable to the Board of Directors.
7.3. Stock Incentive Plans. Except with the consent of Company's Board of
---------------------
Directors, Company shall not reserve shares of its capital stock for issuance in
connection with, or grant any awards of options or restricted stock to
directors, officers, employees or consultants of Company or its subsidiaries.
Except as set forth in the Schedule of Exceptions, each person who, pursuant to
any benefit, bonus or incentive plan of Company, holds now or at any time
hereafter any shares of Common Stock or other securities of Company or any
option, warrant or right to acquire such shares or other securities, has entered
into or will enter into an agreement granting Company (a) the right to
repurchase the shares (the "Repurchase Shares") subject to this repurchase or
cancellation right for the original purchase price, or to cancel the option,
warrant or right, in the event the holder's employment or services with Company
terminate for any reason, which repurchase or cancellation right shall lapse at
the rate of 1/16th per quarter, and (b) until the closing of Company's sale of
its Common Stock in a firm commitment underwritten public offering pursuant to a
registration statement filed with the Securities and Exchange Commission under
the Securities Act, with respect to any employee of Company or its subsidiaries,
(i) a right of first refusal with respect to all such shares or other securities
and (ii) a right to call any vested shares or other securities at their fair
market value in the event the holder's employment or services with Company or
its subsidiaries terminate for any reason. Company has furnished to the
Purchasers true and complete copies of the forms of all stock option or stock
restriction agreements.
7.4. Minute Books. As soon as reasonably practicable, Company shall update
------------
its minute books and the minute books of its predecessor entities to include a
complete summary
12
<PAGE>
of all meetings of directors and stockholders since the time of incorporation
and reflect all transactions referred to in such minutes accurately in all
material respects.
8. MISCELLANEOUS
8.1. Governing Law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Delaware without regard to provisions regarding choice
of laws.
8.2. Survival. The representations, warranties, covenants and agreements
--------
made herein shall survive until the third anniversary of the closing of the
transactions contemplated hereby.
8.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto whose rights or obligations hereunder are affected by such
amendments.
8.4. Entire Agreement. This Agreement and the schedule and exhibits hereto
----------------
which are hereby expressly incorporated herein by this reference constitute the
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof; provided, however, that nothing in this Agreement
-------- -------
shall be deemed to terminate or supersede the provisions of any confidentiality
and nondisclosure agreements executed by the parties hereto prior to the date
hereof, which agreements shall continue in full force and effect until
terminated in accordance with their respective terms.
8.5. Notices. Except as may be otherwise provided herein, all notices and
-------
other communications required or permitted hereunder shall be in writing and
shall be hand delivered or mailed by registered or certified first class mail,
postage prepaid, addressed, (a) if to a Purchaser, to such Purchaser's address
set forth above its signature hereto, or to such other address as such Purchaser
or any of its successors or assigns shall have furnished to Company in writing,
or (b) if to Company, to its address set forth below its signature hereto, or to
such other address as Company shall have furnished to such Purchaser or its
successors or assigns in writing. Notices hand delivered shall be effective upon
delivery and notices sent by first class mail shall be effective three days
following deposit in the United States mail.
8.6. Amendments and Waivers. Any term of this Agreement may be amended and
----------------------
the observance of any term of the Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of Company and the holders of 66-2/3% of the Preferred
Shares issued hereunder.
8.7. Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to Company or to a Purchaser, upon any breach or
default of any party hereto under this Agreement, shall impair any such right,
power or remedy of Company, or a Purchaser, nor shall it be construed to be a
waiver of any such breach or default, or an acquiescence therein, or of any
similar breach or default thereafter occurring; nor shall any waiver of any
other breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of Company or a
Purchaser of any breach or default under this Agreement or any waiver on the
part of Company or a Purchaser of any provisions or conditions of this
Agreement, must be in writing and shall be effective only to the extent
specifically set
13
<PAGE>
forth in such writing. All remedies, either under this Agreement, or by law or
otherwise afforded to Company or a Purchaser shall be cumulative and not
alternative.
8.8. Legal Fees. In the event of any action at law, suit in equity or
----------
arbitration proceeding in relation to this Agreement or any Shares or other
securities of Company issued or to be issued, the prevailing party, shall be
paid by the other party a reasonable sum for attorney's fees and expenses for
such prevailing party.
8.9. Finder's Fees. Each party (a) represents and warrants to the other
-------------
parties hereto that it has retained no finder or broker in connection with the
transactions contemplated by this Agreement, and (b) hereby agrees to indemnify
and to hold harmless the other parties hereto from and against any liability for
any commission or compensation in the nature of a finder's fee of any broker or
other person or firm (and the costs and expenses of defending against such
liability or asserted liability) for which the indemnifying party or any of its
employees or representatives are responsible.
8.10. Titles and Subtitles. The titles of the sections and paragraphs of
--------------------
this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
8.11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
8.12. Severability. Should any provision of this Agreement be determined to
------------
be illegal or unenforceable, such determination shall not affect the remaining
provisions of this Agreement.
8.13. Expenses. Company and each Purchaser shall each bear its respective
--------
expenses and legal fees incurred with respect to this Agreement and the
transactions contemplated hereby provided that Company shall pay the reasonable
fees and expenses of one counsel to the Purchasers not to exceed Fifty Thousand
Dollars ($50,000).
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year hereinabove first written.
NETWORK ACCESS SOLUTIONS, INC.
100 Carpenter Drive
Suite 206
Sterling, Virginia 20164
/s/ Longma M. Aust
----------------------------------
Signature
Longma M. Aust
----------------------------------
Printed Name
President
----------------------------------
Title
For purposes of the notice provided for in Section
8.5, with a copy to:
Piper & Marbury LLP
1200 19th Street, N.W.
Washington, D.C. 20036
Attention: Nancy Spangler, Esq.
SPECTRUM EQUITY INVESTORS II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
Attention: Fred Wang
By: Spectrum Equity Associates II, L.P.
its General Partner
/s/ Fred Wang
----------------------------------
Signature
Fred Wang
----------------------------------
Printed Name
Attorney-in-Fact
----------------------------------
Title
-15-
<PAGE>
For purposes of the notice provided for in Section
8.5, with a copy to:
Latham & Watkins
75 Willow Road
Menlo Park, California 94025
Attention: Ora T. Fisher, Esq.
SEA 1998 II, L.P.
245 Lytton Avenue
Palo Alto, CA 94301
Attention: Fred Wang
/s/ Randy Henderson
----------------------------------
Signature
Randy Henderson
----------------------------------
Printed Name
Vice President
----------------------------------
Title
FBR TECHNOLOGY VENTURE PARTNERS L.P.
1001 19th Street
Arlington, VA 22209
Attention: Scott Frederick
By: FBR Venture Capital Managers Inc.
its General Partner
/s/ Gene Riechers
----------------------------------
Signature
----------------------------------
Printed Name: Gene Reichers
----------------------------------
Title: Managing Director
-16-
<PAGE>
W2 VENTURE PARTNERS, LLC
3814 Shinglewood Court
Union City, CA 94587
Attention: Ed Wang
/s/ Ed Wang
----------------------------------
Signature
----------------------------------
Printed Name: Ed Wang
----------------------------------
Title: Member
-17-
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number Number Aggregate
Purchasers of Preferred Shares of Common Shares Purchase Price
- ---------- ------------------- ---------------- --------------
<S> <C> <C> <C>
Spectrum Equity Investors II, 8,373,020 4,102,770 $ 8,373,020.00
L.P. $ 4,102.77
SEA 1998 II, L.P. 96,980 47,530 $ 96,980.00
$ 47.53
FBR Technology Venture 1,500,000 735,000 $ 1,500,000.00
Partners L.P. $ 735.00
W2 Venture Partners, LLC 30,000 14,700 $ 30,000.00
$ 14.70
TOTAL 10,000,000 4,900,000 $10,000,000.00
$ 4,900.00
</TABLE>
-18-
<PAGE>
Exhibit 10.23
NOTE PURCHASE AGREEMENT
-----------------------
This NOTE PURCHASE AGREEMENT (the "Agreement") is made among NETWORK ACCESS
SOLUTIONS CORPORATION, a Delaware corporation (the "Company") and those
investors set forth on Exhibit A hereto (each a "Purchaser" and collectively,
the "Purchasers"), dated as of March 31, 1999. In consideration of the recitals
and the mutual covenants contained herein, the parties hereby agree as follows:
1. General. This Agreement sets forth the terms upon which the
-------
Purchasers will purchase convertible promissory notes in the form attached
hereto as Exhibit B (the "Notes") from the Company or invest in the Company,
providing for loans to the Company or an investment in the Company in an
aggregate amount of $10,000,000.
2. Purchase Price and Payment.
--------------------------
(a) The Notes. The Purchasers hereby purchase the Notes in the
---------
aggregate amount of $5,000,000 and in accordance with the allocation set forth
on Exhibit A.
(b) Subsequent Investment. Subject to the truth and accuracy of the
---------------------
representations and warranties set forth herein and if there are no Events of
Default (as defined in the Notes), the Purchasers hereby agree that they will
invest in the Company as set forth below upon the earliest to occur of a Third
Party Financing (as defined below), an IPO (as defined below), a CO Request (as
defined below) or December 31, 1999.
(i) A "Third Party Financing" shall mean the sale of at least
$10,000,000 in shares of the Company's capital stock by the Company to one or
more third party investors, including without limitation, a private equity
investment or a sale to a strategic investor (excluding the Purchasers). In an
investment in connection with a Third Party Financing, the Purchasers will
invest $5,000,000 in the Company (in accordance with the allocation set forth on
Exhibit A) by purchasing shares of the class or series of securities issued by
the Company in the Third Party Financing at the price per share at which such
securities were sold by the Company in such financing.
(ii) An "Initial Public Offering" shall mean the closing of
the initial public offering of the Company's Common Stock pursuant to a
registration statement declared effective by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"),
having an aggregate offering price to the public of not less than $25,000,000,
based on a pre-money valuation of at least $200,000,000. In an investment in
connection with an Initial Public Offering, the Purchasers will invest
$5,000,000 in the Company (in accordance with the allocation set forth on
Exhibit A) by purchasing shares of the Company's Common Stock at the initial per
share price to the public specified in the final prospectus with respect to the
Initial Public Offering.
(iii) A "CO Request" shall mean the election of the Company at
any
<PAGE>
time after the Company has taken possession of at least 125 Bell Atlantic
central offices for the purpose of installing the Company's digital subscriber
line access multiplexing equipment. In an investment in connection with a CO
Request, the Purchasers will invest $5,000,000 in the Company (in accordance
with the allocation set forth on Exhibit A) by purchasing shares of the
Company's Common Stock at Fair Market Value (as defined below) as determined by
a Qualified Appraiser (as defined below). "Fair Market Value" shall mean the
fair market value of a share of the Company's Common Stock as determined on the
basis of a sale of 100% of the Company taking into account all relevant factors
determinative of value. "Qualified Appraiser" shall mean, at the election of the
Holder, (i) Donaldson, Lufkin & Jenrette (ii) Bear, Stearns & Co. Inc. or (iii)
Salomon Smith Barney Inc.
(iv) In an investment upon December 31, 1999, the Purchasers
will invest $5,000,000 in the Company (in accordance with the allocation set
forth on Exhibit A) by purchasing shares of the Company's Common Stock at Fair
Market Value (as defined above) as determined by a Qualified Appraiser (as
defined above).
(v) Notwithstanding anything contained herein to the
contrary, the Purchasers shall have no obligation to make any subsequent
investment pursuant to this Section 2(b) upon and after a Change in Control (as
defined below). A "Change of Control" shall mean a sale or transfer of all or
substantially all of the property or assets of the Company, the consolidation or
merger of the Company with or into one or more companies or another similar
transaction in which the Company shall not be the surviving entity.
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Purchasers that: (i) the Company is a corporation
duly organized and validly existing under the laws of the State of Delaware with
full corporate power and authority to execute, deliver and perform this
Agreement and the Notes; (ii) other than the authorization and issuance of the
shares of capital stock upon the investments contemplated by Section 2(b) above
and the conversion of the Notes, this Agreement has been duly authorized by all
necessary corporate action of the Company and constitute legal, valid and
binding obligations of the Company enforceable against it in accordance with its
terms; (iii) neither the execution and delivery of this Agreement and the Notes
nor the completion of the transactions contemplated hereby or thereby will
contravene or violate (a) any provision of the organizational documents of the
Company, or (b) any law or order of any court or governmental agency applicable
to the Company; and (iv) any consents, approvals, authorizations or filings
required on the part of the Company in connection with the transactions
contemplated hereby have been obtained.
4. Representations and Warranties of the Purchasers. Each of the
------------------------------------------------
Purchasers severally and not jointly represents and warrants to, and agrees
with, the Company that: (i) this Agreement constitutes its legal, valid and
binding obligation enforceable against it in accordance with its terms; (ii) the
Note and any shares of the Company's capital stock (such shares, the "New
Shares") to be acquired by the Purchasers in connection with the transactions
contemplated hereby to be acquired by it will be acquired for investment for its
own account, not as a nominee or agent, and not with a view to the distribution
thereof; and (iii) such Purchaser acknowledges that the Note and the New Shares
have not been registered under the Act.
-2-
<PAGE>
5. Reservation of Shares. The Company agrees to use its best efforts to
---------------------
reserve an adequate number of shares of its capital stock for the investments
contemplated by Section 2(b) above and for conversion of the Notes, whether or
not such securities are currently authorized.
6. Miscellaneous. The representations, warranties and covenants of the
-------------
Company and the Purchasers contained herein or made pursuant to this Agreement
shall survive the execution and delivery hereof and delivery of the Notes. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement. This Agreement shall be governed
by and construed under the internal laws of the State of Delaware as applied to
agreements entered into and to be performed entirely within the State of
Delaware. This Agreement, together with the Notes, constitutes the entire
agreement of the parties with respect to its subject matter. Any term of this
Agreement may be amended and the observance of any term of this Agreement may be
waived (either generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Purchasers.
7. Legal Fees. The Company shall pay the reasonable and documented legal
----------
fees and expenses of one counsel to the Purchasers in connection with the
negotiation and documentation of the transactions contemplated hereby, up to a
maximum of $7,500.
{signatures on next page}
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first written above.
NETWORK ACCESS SOLUTIONS CORPORATION
By: /s/ Scott Yancey
--------------------------------------
Its: Chief Financial Officer
--------------------------------------
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P.
Its: General Partner
By: /s/ Brion B. Applegate
--------------------------------------
Its: Managing General Partner
--------------------------------------
FBR TECHNOLOGY VENTURE PARTNERS L.P.
By: FBR Venture Capital Managers, Inc.
Its: General Partner
By: /s/ Hooks K. Johnston
--------------------------------------
Managing Director
--------------------------------------
EXHIBIT A
---------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Purchaser Initial Investment Subsequent Investment
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Spectrum Equity Investors II, L.P. $4,250,000 $4,250,000
- -------------------------------------------------------------------------------------------------
FBR Technology Venture Partners L.P. $750,000 $750,000
- -------------------------------------------------------------------------------------------------
</TABLE>
-4-
<PAGE>
EXHIBIT B
---------
Form of Convertible Promissory Note
-----------------------------------
<PAGE>
CONVERTIBLE NOTE
----------------
$[_________] March [___], 1999
FOR VALUE RECEIVED, the undersigned, Network Access Solutions
Corporation, a Delaware corporationa corporation organized and existing under
the laws of the State of Delaware (the "Company"), hereby promises to pay to the
order of [______________________] (hereinafter, the "Holder"), at
[________________________], or at such other place or to such other party as the
holder of this Note may from time to time designate in writing, the principal
sum of [__________________ ($______________)] with simple interest on the
principal balance outstanding from time to time at the rate of interest (the
"Interest Rate") of 8% per annum. All payments hereunder shall be made in
lawful currency of the United States and in immediately available funds.
Interest shall be calculated on the basis of the actual number of days elapsed
over a 360-day year. This Convertible Note (the "Note") is being issued
pursuant to the terms and conditions of that certain Note Purchase Agreement of
even date herewith (the "Purchase Agreement").
1. Payments. Unless the entire principal and interest amount of this
--------
Note has been converted pursuant to the terms set forth in Section 4 below, the
entire unpaid amount of this Note, together with all accrued, but unpaid,
interest and all other fees, costs, and charges, if any, shall be due and
payable on December 31, 1999 (the "Maturity Date"). If any amounts due under
this Note are due on a day which is not a business day, then such amounts shall
be due on the next following day which is a regular business day.
2. Application of Payments. All payments on account of the
-----------------------
indebtedness evidenced by this Note prior to the Maturity Date shall be applied
first, to any and all costs, expenses, or charges then owed the Holder by the
Company pursuant to this Note, second, to accrued and unpaid interest hereunder,
and third, to the unpaid principal balance hereof.
3. Costs of Collections. If all sums due under this Note are not
--------------------
paid, in full, when due, the Company agrees to pay, in addition to the sums due
hereunder, all reasonable costs of collection (including reasonable attorneys'
fees and expenses), whether or not suit is brought.
4. Conversion.
----------
(a) If not converted sooner pursuant to Sections 4(b), 4(c) or
4(d), the entire then-outstanding principal and interest amount hereof shall
automatically convert into shares of the Company's capital stock upon a Third
Party Financing. A "Third Party Financing" shall mean the sale of at least
$10,000,000 in shares of the Company's capital stock by the Company to one or
more third party investors, including without limitation, a private equity
investment or a sale to a strategic investor (other than the Holder) prior to or
on the Maturity Date. Any amount converted pursuant to this Section 4(a),
Section 4(b), Section 4(c) or Section 4(d) shall be referred to herein as the
Conversion Amount. Upon a conversion pursuant to this Section 4(a), the
Conversion Amount shall be converted into such class or series of securities
issued by the Company in the Third Party Financing at the price per share at
which such securities were sold
<PAGE>
by the Company in such financing. In such conversion, the outstanding Conversion
Amount shall be converted automatically without any further action by the Holder
and whether or not this Note has been tendered to the Company and this Note
shall be deemed retired and canceled; provided, that the Company shall not be
--------
obligated to issue to the Holder certificates evidencing the shares of capital
stock issuable such conversion unless this Note has been tendered by the Holder
to the Company.
(b) If not converted sooner pursuant to Sections 4(a), 4(c) or 4(d),
at the election of the Holder, all or some of the then-outstanding principal and
interest amount hereof may be converted into shares of the Company's Common
Stock upon the initial public offering of the Company's Common Stock pursuant to
a registration statement declared effective by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"),
having an aggregate offering price to the public of not less than $25,000,000,
based on a pre-money valuation of at least $200,000,000. Upon such conversion,
the Conversion Amount shall be converted into such number of shares of the
Company's Common Stock as shall be equal to the Conversion Amount divided by the
initial per share price to the public specified in the final prospectus with
respect to the offering. Before the Holder shall be entitled to convert this
Note pursuant to this Section, the Holder shall surrender this Note duly
endorsed, at the office of the Company. The Company shall, promptly thereafter,
issue and deliver to Holder at the address specified by Holder, or to the
nominee or nominees of Holder, a certificate or certificates for the shares of
Common Stock to which Holder shall be entitled.
(c) If not converted sooner pursuant to Sections 4(a), 4(b) or
4(d), all of the then-outstanding principal and interest amount hereof shall be
converted into shares of the Company's Common Stock automatically upon a CO
Request. A "CO Request" shall mean at the election of the Company at any time
after the Company has taken possession of at least 125 Bell Atlantic central
offices for the purpose of installing the Company's digital subscriber line
access multiplexing equipment. Upon such conversion, the Conversion Amount shall
be converted into such number of shares of the Company's Common Stock as shall
be equal to the Conversion Amount divided by the Fair Market Value (as defined
below) as determined by a Qualified Appraiser (as defined below). "Fair Market
Value" shall mean the fair market value of a share of the Company's Common Stock
as determined on the basis of a sale of 100% of the Company taking into account
all relevant factors determinative of value. "Qualified Appraiser" shall mean,
at the election of the Holder, (i) Donaldson, Lufkin & Jenrette, (ii) Bear,
Stearns & Co. Inc. or (iii) Salomon Smith Barney Inc. In such conversion, the
outstanding Conversion Amount shall be converted automatically without any
further action by the Holder and whether or not this Note has been tendered to
the Company and this Note shall be deemed retired and canceled; provided, that
--------
the Company shall not be obligated to issue to the Holder evidencing the shares
of capital stock issuable such conversion unless this Note has been tendered by
the Holder to the Company.
(d) If not converted sooner pursuant to Sections 4(a), 4(b) or
4(c), all of the then-outstanding principal and interest amount hereof shall be
converted into shares of the Company's Common Stock automatically on December
31, 1999. Upon such conversion, the Conversion Amount shall be converted into
such number of shares of the Company's Common Stock as shall be equal to the
Conversion Amount divided by the Fair Market Value as
-2-
<PAGE>
determined by a Qualified Appraiser. In such conversion, the outstanding
Conversion Amount shall be converted automatically without any further action by
the Holder and whether or not this Note has been tendered to the Company and
this Note shall be deemed retired and canceled; provided, that the Company shall
--------
not be obligated to issue to the Holder certificates evidencing the shares of
capital stock issuable such conversion unless this Note has been tendered by the
Holder to the Company.
(e) No fractional shares of Common Stock shall be issued upon
conversion of this Note and the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole share.
5. Change of Control. All outstanding principal and interest amounts
-----------------
due hereunder shall become immediately due and payable without notice or demand
upon the occurrence of a Change of Control (as defined below). A "Change of
Control" shall mean a sale or transfer of all or substantially all of the
property or assets of the Company, the consolidation or merger of the Company
with or into one or more companies or another similar transaction in which the
Company shall not be the surviving entity.
6. Events of Default. This Note shall, at Holder's option, become
-----------------
immediately due and payable without notice or demand upon the occurrence of one
or more of any of the following events (herein, "Events of Default"): (a) the
Company shall fail to pay as and when due the principal and interest due on this
Note or any portion thereof, and such failure shall continue for a period of ten
days; (b) the Company shall be dissolved, make any assignment for the benefit of
creditors or commit any act of bankruptcy; (c) there shall be filed or brought
against the Company and either (i) adjudicated adversely to it, or (ii)
consented to or acquiesced in by it in any manner, or (iii) not dismissed within
90 days, any petition in bankruptcy or any insolvency, receivership,
trusteeship, reorganization, debt adjustment, arrangement, composition,
extension, debtor relief, relief, dissolution, liquidation, winding up or any
similar proceeding, or any proceeding in which its ability to discharge its
obligations as they become due, or its ability or right to continue in business
and in possession and management of its property as a going concern under the
control of its stockholders, is in issue; or (d) final judgment for the payment
of money shall be rendered against the Company and any judgment shall not be
discharged or appealed within 90 days with a stay of execution. Upon the
occurrence of any Event of Default, and at any time thereafter, Holder shall
have all of the rights and remedies provided herein and under applicable law.
7. Waivers. All parties to the transaction evidenced by this Note
-------
hereby jointly and severally waive all exemption rights, whether under any state
constitution, homestead exemption or otherwise, and also severally waive demand,
presentment for payment, notice of dishonor, valuation and appraisement and
expressly agree that the payment dates hereof may be extended from time to time
without in any way affecting the liability of the Company, any guarantor, surety
or endorser.
8. Assignment. This Note and the obligations hereunder may not be
----------
assigned by either party hereto without the consent of the other party. This
Note shall be binding upon the Company and its successors and assigns and shall
inure to the benefit of the Holder and its
-3-
<PAGE>
successors and assigns.
9. Miscellaneous. This Note shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware. In the event any one or
more of the provisions contained in this Note shall, for any reason, be held to
be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision of this
Note and this Note shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein. This Note may not be
changed orally, but only by an agreement in writing signed by the parties
against whom enforcement of any waiver, change, modification or discharge is
sought.
IN WITNESS WHEREOF, the Company has duly executed this Note as of the
day and year first above written.
ATTEST: COMPANY:
NETWORK ACCESS SOLUTIONS
CORPORATION
By:_______________________(SEAL)
- ----------------------------- Name:_____________________
Title:____________________
-4-
<PAGE>
Exhibit 10.24
CONVERTIBLE NOTE
----------------
$4,250,000 March 31, 1999
FOR VALUE RECEIVED, the undersigned, Network Access Solutions
Corporation, a Delaware corporationa corporation organized and existing under
the laws of the State of Delaware (the "Company"), hereby promises to pay to the
order of Spectrum Equity Investors II, L:P. (hereinafter, the "Holder"), at 245
Lytton Avenue, Palo Alto, California 94301, or at such other place or to such
other party as the holder of this Note may from time to time designate in
writing, the principal sum of Four Million Two Hundred Fifty Thousand Dollars
($4,250,000) with simple interest on the principal balance outstanding from time
to time at the rate of interest (the "Interest Rate") of 8% per annum. All
payments hereunder shall be made in lawful currency of the United States and in
immediately available funds. Interest shall be calculated on the basis of the
actual number of days elapsed over a 360-day year. This Convertible Note (the
"Note") is being issued pursuant to the terms and conditions of that certain
Note Purchase Agreement of even date herewith (the "Purchase Agreement").
1. Payments. Unless the entire principal and interest amount of this
--------
Note has been converted pursuant to the terms set forth in Section 4 below, the
entire unpaid amount of this Note, together with all accrued, but unpaid,
interest and all other fees, costs, and charges, if any, shall be due and
payable on December 31, 1999 (the "Maturity Date"). If any amounts due under
this Note are due on a day which is not a business day, then such amounts shall
be due on the next following day which is a regular business day.
2. Application of Payments. All payments on account of the
-----------------------
indebtedness evidenced by this Note prior to the Maturity Date shall be applied
first, to any and all costs, expenses, or charges then owed the Holder by the
Company pursuant to this Note, second, to accrued and unpaid interest hereunder,
and third, to the unpaid principal balance hereof.
3. Costs of Collections. If all sums due under this Note are not
--------------------
paid, in full, when due, the Company agrees to pay, in addition to the sums due
hereunder, all reasonable costs of collection (including reasonable attorneys'
fees and expenses), whether or not suit is brought.
4. Conversion.
----------
(a) If not converted sooner pursuant to Sections 4(b), 4(c) or
4(d), the entire then-outstanding principal and interest amount hereof shall
automatically convert into shares of the Company's capital stock upon a Third
Party Financing. A "Third Party Financing" shall mean the sale of at least
$10,000,000 in shares of the Company's capital stock by the Company to one or
more third party investors, including without limitation, a private equity
investment or a sale to a strategic investor (other than the Holder) prior to or
on the Maturity Date. Any amount converted pursuant to this Section 4(a),
Section 4(b), Section 4(c) or Section 4(d) shall be referred to herein as the
Conversion Amount. Upon a conversion pursuant to this Section 4(a), the
Conversion Amount shall be converted into such class or series of securities
issued by the Company in the Third Party Financing at the price per share at
which such securities were sold
<PAGE>
by the Company in such financing. In such conversion, the outstanding Conversion
Amount shall be converted automatically without any further action by the Holder
and whether or not this Note has been tendered to the Company and this Note
shall be deemed retired and canceled; provided, that the Company shall not be
--------
obligated to issue to the Holder certificates evidencing the shares of capital
stock issuable such conversion unless this Note has been tendered by the Holder
to the Company.
(b) If not converted sooner pursuant to Sections 4(a), 4(c) or 4(d),
at the election of the Holder, all or some of the then-outstanding principal and
interest amount hereof may be converted into shares of the Company's Common
Stock upon the initial public offering of the Company's Common Stock pursuant to
a registration statement declared effective by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"),
having an aggregate offering price to the public of not less than $25,000,000,
based on a pre-money valuation of at least $200,000,000. Upon such conversion,
the Conversion Amount shall be converted into such number of shares of the
Company's Common Stock as shall be equal to the Conversion Amount divided by the
initial per share price to the public specified in the final prospectus with
respect to the offering. Before the Holder shall be entitled to convert this
Note pursuant to this Section, the Holder shall surrender this Note duly
endorsed, at the office of the Company. The Company shall, promptly thereafter,
issue and deliver to Holder at the address specified by Holder, or to the
nominee or nominees of Holder, a certificate or certificates for the shares of
Common Stock to which Holder shall be entitled.
(c) If not converted sooner pursuant to Sections 4(a), 4(b) or 4(d),
all of the then-outstanding principal and interest amount hereof shall be
converted into shares of the Company's Common Stock automatically upon a CO
Request. A "CO Request" shall mean at the election of the Company at any time
after the Company has taken possession of at least 125 Bell Atlantic central
offices for the purpose of installing the Company's digital subscriber line
access multiplexing equipment. Upon such conversion, the Conversion Amount
shall be converted into such number of shares of the Company's Common Stock as
shall be equal to the Conversion Amount divided by the Fair Market Value (as
defined below) as determined by a Qualified Appraiser (as defined below). "Fair
Market Value" shall mean the fair market value of a share of the Company's
Common Stock as determined on the basis of a sale of 100% of the Company taking
into account all relevant factors determinative of value. "Qualified Appraiser"
shall mean, at the election of the Holder, (i) Donaldson, Lufkin & Jenrette,
(ii) Bear, Stearns & Co. Inc. or (iii) Salomon Smith Barney Inc. In such
conversion, the outstanding Conversion Amount shall be converted automatically
without any further action by the Holder and whether or not this Note has been
tendered to the Company and this Note shall be deemed retired and canceled;
provided, that the Company shall not be obligated to issue to the Holder
- --------
certificates evidencing the shares of capital stock issuable such conversion
unless this Note has been tendered by the Holder to the Company.
(d) If not converted sooner pursuant to Sections 4(a), 4(b) or 4(c),
all of the then-outstanding principal and interest amount hereof shall be
converted into shares of the Company's Common Stock automatically on December
31, 1999. Upon such conversion, the Conversion Amount shall be converted into
such number of shares of the Company's Common Stock as shall be equal to the
Conversion Amount divided by the Fair Market Value as determined by a Qualified
Appraiser. In such conversion, the outstanding Conversion Amount
-2-
<PAGE>
shall be converted automatically without any further action by the Holder and
whether or not this Note has been tendered to the Company and this Note shall be
deemed retired and canceled; provided, that the Company shall not be obligated
--------
to issue to the Holder certificates evidencing the shares of capital stock
issuable such conversion unless this Note has been tendered by the Holder to the
Company.
(e) No fractional shares of Common Stock shall be issued upon
conversion of this Note and the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole share.
5. Change of Control. All outstanding principal and interest amounts
-----------------
due hereunder shall become immediately due and payable without notice or demand
upon the occurrence of a Change of Control (as defined below). A "Change of
Control" shall mean a sale or transfer of all or substantially all of the
property or assets of the Company, the consolidation or merger of the Company
with or into one or more companies or another similar transaction in which the
Company shall not be the surviving entity.
6. Events of Default. This Note shall, at Holder's option, become
-----------------
immediately due and payable without notice or demand upon the occurrence of one
or more of any of the following events (herein, "Events of Default"): (a) the
Company shall fail to pay as and when due the principal and interest due on this
Note or any portion thereof, and such failure shall continue for a period of ten
days; (b) the Company shall be dissolved, make any assignment for the benefit of
creditors or commit any act of bankruptcy; (c) there shall be filed or brought
against the Company and either (i) adjudicated adversely to it, or (ii)
consented to or acquiesced in by it in any manner, or (iii) not dismissed within
90 days, any petition in bankruptcy or any insolvency, receivership,
trusteeship, reorganization, debt adjustment, arrangement, composition,
extension, debtor relief, relief, dissolution, liquidation, winding up or any
similar proceeding, or any proceeding in which its ability to discharge its
obligations as they become due, or its ability or right to continue in business
and in possession and management of its property as a going concern under the
control of its stockholders, is in issue; or (d) final judgment for the payment
of money shall be rendered against the Company and any judgment shall not be
discharged or appealed within 90 days with a stay of execution. Upon the
occurrence of any Event of Default, and at any time thereafter, Holder shall
have all of the rights and remedies provided herein and under applicable law.
7. Waivers. All parties to the transaction evidenced by this Note
-------
hereby jointly and severally waive all exemption rights, whether under any state
constitution, homestead exemption or otherwise, and also severally waive demand,
presentment for payment, notice of dishonor, valuation and appraisement and
expressly agree that the payment dates hereof may be extended from time to time
without in any way affecting the liability of the Company, any guarantor, surety
or endorser.
8. Assignment. This Note and the obligations hereunder may not be
----------
assigned by either party hereto without the consent of the other party. This
Note shall be binding upon the Company and its successors and assigns and shall
inure to the benefit of the Holder and its successors and assigns.
-3-
<PAGE>
9. Miscellaneous. This Note shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware. In the event any one or
more of the provisions contained in this Note shall, for any reason, be held to
be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision of this
Note and this Note shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein. This Note may not be
changed orally, but only by an agreement in writing signed by the parties
against whom enforcement of any waiver, change, modification or discharge is
sought.
IN WITNESS WHEREOF, the Company has duly executed this Note as of the
day and year first above written.
ATTEST: COMPANY:
NETWORK ACCESS SOLUTIONS
CORPORATION
- ----------------------- By: /s/ Scott Yancey (SEAL)
--------------------------
Name: Scott Yancey
--------------------------
Title: Chief Financial Officer
--------------------------
-4-
<PAGE>
Exhibit 10.25
CONVERTIBLE NOTE
----------------
$750,000 March 31, 1999
FOR VALUE RECEIVED, the undersigned, Network Access Solutions
Corporation, a Delaware corporationa corporation organized and existing under
the laws of the State of Delaware (the "Company"), hereby promises to pay to the
order of FBR Technology Venture Partners L.P. (hereinafter, the "Holder"), at
1001 19th Street, Arlington, Virginia 22209, or at such other place or to such
other party as the holder of this Note may from time to time designate in
writing, the principal sum of Seven Hundred Fifty Thousand Dollars ($750,000)
with simple interest on the principal balance outstanding from time to time at
the rate of interest (the "Interest Rate") of 8% per annum. All payments
hereunder shall be made in lawful currency of the United States and in
immediately available funds. Interest shall be calculated on the basis of the
actual number of days elapsed over a 360-day year. This Convertible Note (the
"Note") is being issued pursuant to the terms and conditions of that certain
Note Purchase Agreement of even date herewith (the "Purchase Agreement").
1. Payments. Unless the entire principal and interest amount of this
--------
Note has been converted pursuant to the terms set forth in Section 4 below, the
entire unpaid amount of this Note, together with all accrued, but unpaid,
interest and all other fees, costs, and charges, if any, shall be due and
payable on December 31, 1999 (the "Maturity Date"). If any amounts due under
this Note are due on a day which is not a business day, then such amounts shall
be due on the next following day which is a regular business day.
2. Application of Payments. All payments on account of the
-----------------------
indebtedness evidenced by this Note prior to the Maturity Date shall be applied
first, to any and all costs, expenses, or charges then owed the Holder by the
Company pursuant to this Note, second, to accrued and unpaid interest hereunder,
and third, to the unpaid principal balance hereof.
3. Costs of Collections. If all sums due under this Note are not
--------------------
paid, in full, when due, the Company agrees to pay, in addition to the sums due
hereunder, all reasonable costs of collection (including reasonable attorneys'
fees and expenses), whether or not suit is brought.
4. Conversion.
----------
(a) If not converted sooner pursuant to Sections 4(b), 4(c) or
4(d), the entire then-outstanding principal and interest amount hereof shall
automatically convert into shares of the Company's capital stock upon a Third
Party Financing. A "Third Party Financing" shall mean the sale of at least
$10,000,000 in shares of the Company's capital stock by the Company to one or
more third party investors, including without limitation, a private equity
investment or a sale to a strategic investor (other than the Holder) prior to or
on the Maturity Date. Any amount converted pursuant to this Section 4(a),
Section 4(b), Section 4(c) or Section 4(d) shall be referred to herein as the
Conversion Amount. Upon a conversion pursuant to this Section 4(a), the
Conversion Amount shall be converted into such class or series of securities
issued by the Company in the Third Party Financing at the price per share at
which such securities were sold
<PAGE>
by the Company in such financing. In such conversion, the outstanding Conversion
Amount shall be converted automatically without any further action by the Holder
and whether or not this Note has been tendered to the Company and this Note
shall be deemed retired and canceled; provided, that the Company shall not be
--------
obligated to issue to the Holder certificates evidencing the shares of capital
stock issuable such conversion unless this Note has been tendered by the Holder
to the Company.
(b) If not converted sooner pursuant to Sections 4(a), 4(c) or 4(d),
at the election of the Holder, all or some of the then-outstanding principal and
interest amount hereof may be converted into shares of the Company's Common
Stock upon the initial public offering of the Company's Common Stock pursuant to
a registration statement declared effective by the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"),
having an aggregate offering price to the public of not less than $25,000,000,
based on a pre-money valuation of at least $200,000,000. Upon such conversion,
the Conversion Amount shall be converted into such number of shares of the
Company's Common Stock as shall be equal to the Conversion Amount divided by the
initial per share price to the public specified in the final prospectus with
respect to the offering. Before the Holder shall be entitled to convert this
Note pursuant to this Section, the Holder shall surrender this Note duly
endorsed, at the office of the Company. The Company shall, promptly thereafter,
issue and deliver to Holder at the address specified by Holder, or to the
nominee or nominees of Holder, a certificate or certificates for the shares of
Common Stock to which Holder shall be entitled.
(c) If not converted sooner pursuant to Sections 4(a), 4(b) or 4(d),
all of the then-outstanding principal and interest amount hereof shall be
converted into shares of the Company's Common Stock automatically upon a CO
Request. A "CO Request" shall mean at the election of the Company at any time
after the Company has taken possession of at least 125 Bell Atlantic central
offices for the purpose of installing the Company's digital subscriber line
access multiplexing equipment. Upon such conversion, the Conversion Amount
shall be converted into such number of shares of the Company's Common Stock as
shall be equal to the Conversion Amount divided by the Fair Market Value (as
defined below) as determined by a Qualified Appraiser (as defined below). "Fair
Market Value" shall mean the fair market value of a share of the Company's
Common Stock as determined on the basis of a sale of 100% of the Company taking
into account all relevant factors determinative of value. "Qualified Appraiser"
shall mean, at the election of the Holder, (i) Donaldson, Lufkin & Jenrette,
(ii) Bear, Stearns & Co. Inc. or (iii) Salomon Smith Barney Inc. In such
conversion, the outstanding Conversion Amount shall be converted automatically
without any further action by the Holder and whether or not this Note has been
tendered to the Company and this Note shall be deemed retired and canceled;
provided, that the Company shall not be obligated to issue to the Holder
- --------
certificates evidencing the shares of capital stock issuable such conversion
unless this Note has been tendered by the Holder to the Company.
(d) If not converted sooner pursuant to Sections 4(a), 4(b) or 4(c),
all of the then-outstanding principal and interest amount hereof shall be
converted into shares of the Company's Common Stock automatically on December
31, 1999. Upon such conversion, the Conversion Amount shall be converted into
such number of shares of the Company's Common Stock as shall be equal to the
Conversion Amount divided by the Fair Market Value as determined by a Qualified
Appraiser. In such conversion, the outstanding Conversion Amount
-2-
<PAGE>
shall be converted automatically without any further action by the Holder and
whether or not this Note has been tendered to the Company and this Note shall be
deemed retired and canceled; provided, that the Company shall not be obligated
--------
to issue to the Holder certificates evidencing the shares of capital stock
issuable such conversion unless this Note has been tendered by the Holder to the
Company.
(e) No fractional shares of Common Stock shall be issued upon
conversion of this Note and the number of shares of Common Stock to be issued
shall be rounded up to the nearest whole share.
5. Change of Control. All outstanding principal and interest amounts
-----------------
due hereunder shall become immediately due and payable without notice or demand
upon the occurrence of a Change of Control (as defined below). A "Change of
Control" shall mean a sale or transfer of all or substantially all of the
property or assets of the Company, the consolidation or merger of the Company
with or into one or more companies or another similar transaction in which the
Company shall not be the surviving entity.
6. Events of Default. This Note shall, at Holder's option, become
-----------------
immediately due and payable without notice or demand upon the occurrence of one
or more of any of the following events (herein, "Events of Default"): (a) the
Company shall fail to pay as and when due the principal and interest due on this
Note or any portion thereof, and such failure shall continue for a period of ten
days; (b) the Company shall be dissolved, make any assignment for the benefit of
creditors or commit any act of bankruptcy; (c) there shall be filed or brought
against the Company and either (i) adjudicated adversely to it, or (ii)
consented to or acquiesced in by it in any manner, or (iii) not dismissed within
90 days, any petition in bankruptcy or any insolvency, receivership,
trusteeship, reorganization, debt adjustment, arrangement, composition,
extension, debtor relief, relief, dissolution, liquidation, winding up or any
similar proceeding, or any proceeding in which its ability to discharge its
obligations as they become due, or its ability or right to continue in business
and in possession and management of its property as a going concern under the
control of its stockholders, is in issue; or (d) final judgment for the payment
of money shall be rendered against the Company and any judgment shall not be
discharged or appealed within 90 days with a stay of execution. Upon the
occurrence of any Event of Default, and at any time thereafter, Holder shall
have all of the rights and remedies provided herein and under applicable law.
7. Waivers. All parties to the transaction evidenced by this Note
-------
hereby jointly and severally waive all exemption rights, whether under any state
constitution, homestead exemption or otherwise, and also severally waive demand,
presentment for payment, notice of dishonor, valuation and appraisement and
expressly agree that the payment dates hereof may be extended from time to time
without in any way affecting the liability of the Company, any guarantor, surety
or endorser.
8. Assignment. This Note and the obligations hereunder may not be
----------
assigned by either party hereto without the consent of the other party. This
Note shall be binding upon the Company and its successors and assigns and shall
inure to the benefit of the Holder and its successors and assigns.
-3-
<PAGE>
9. Miscellaneous. This Note shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware. In the event any one or
more of the provisions contained in this Note shall, for any reason, be held to
be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability shall not affect any other provision of this
Note and this Note shall be construed as if such invalid, illegal, or
unenforceable provision had never been contained herein. This Note may not be
changed orally, but only by an agreement in writing signed by the parties
against whom enforcement of any waiver, change, modification or discharge is
sought.
IN WITNESS WHEREOF, the Company has duly executed this Note as of the
day and year first above written.
ATTEST: COMPANY:
NETWORK ACCESS SOLUTIONS
CORPORATION
- ----------------------- By: /s/ Scott Yancey (SEAL)
---------------------------
Name: Scott Yancey
----------------------------
Title: Chief Financial Officer
----------------------------
-4-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our report dated March 18, 1999, except for the third paragraph of Note 11
for which the date is March 31, 1999 and except for the first paragraph of Note
9 and the fourth and fifth paragraphs of Note 11 for which the date is April 1,
1999, on our audits of the financial statements of Network Access Solutions
Corporation. We also consent to the references to our firm under the captions
"Experts," "Summary Financial And Other Data," and "Selected Financial And Other
Data."
/s/ PricewaterhouseCoopers, LLP
- --------------------------------
McLean, Virginia
April 23, 1999
