<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-25945
NETWORK ACCESS SOLUTIONS CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 54-1738938
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
100 CARPENTER DRIVE 20164
STERLING, VIRGINIA (Zip Code)
(Address of principal executive offices)
(703) 742-7700
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year--if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes___ No X
-
As of August 4, 1999, 45,017,469 shares of common stock ("Common Stock") of
the Registrant were outstanding.
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION ----
<C> <S> <C>
Item 1. Financial Statements:
Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited)...................................................... 3
Statements of Operations for the three and six months ended June
30, 1998 (unaudited) and 1999 (unaudited)........................ 4
Statements of Cash Flows for the six months ended June 30, 1998
(unaudited) and 1999 (unaudited)................................. 5
Notes to Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 23
Item 2. Changes in Securities............................................ 23
Item 3. Defaults Upon Senior Securities.................................. 24
Item 4. Submission of Matters to Vote of Security Holders................ 24
Item 5. Other Information................................................ 24
Item 6. Exhibits and Reports on Form 8-K................................. 24
Signatures................................................................ 26
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
----------------
<TABLE>
<CAPTION>
As of As of
December 31, 1998 June 30, 1999
ASSETS ----------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 5,518,117 $ 82,655,350
Accounts receivable, net of allowance for
doubtful accounts........................... 1,806,791 2,345,233
Prepaid and other current assets............. 105,693 547,321
Inventory.................................... 59,233 281,935
----------- ------------
Total current assets......................... 7,489,834 85,829,839
Property and equipment, net................... 5,030,793 27,857,807
Deposit....................................... 185,000 140,999
Income tax receivable......................... 100,865 27,600
Deferred tax asset............................ 121,586 121,586
----------- ------------
Total assets................................. $12,928,078 $113,977,831
=========== ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK, AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 2,525,102 $ 3,633,062
Accrued expenses............................. 750,308 2,565,680
Current portion of capital lease
obligations................................. 328,982 2,921,333
Current portion of deferred compensation
liability................................... 333,333 333,333
Other current liabilities.................... 67,201 44,173
Deferred revenue............................. -- 98,863
----------- ------------
Total current liabilities.................... 4,004,926 9,596,444
Long term portion of capital lease
obligations................................. 1,184,156 8,705,077
Note payable................................. 1,000,000 3,000,000
Long term portion of deferred compensation
liability................................... 166,667 --
----------- ------------
Total liabilities............................ 6,355,749 21,301,521
----------- ------------
Commitments and contingencies
Series A mandatorily redeemable preferred
stock, $.001 par value, 10,000,000 shares
authorized, issued and outstanding
(liquidation preference $10,519,452) as of
December 31, 1998, no shares issued and
outstanding as of June 30, 1999 (unaudited).. 5,640,651 --
----------- ------------
Stockholders' equity:
Common stock, $.001 par value, 150,000,000
shares authorized, 44,550,000 and 53,566,344
shares issued as of December 31, 1998 and
June 30, 1999 (unaudited), respectively..... 44,550 53,566
Additional paid-in capital................... 8,097,566 128,445,987
Deferred compensation on stock options....... (3,462,753) (19,208,883)
Accumulated deficit.......................... (1,847,685) (14,714,360)
Less treasury stock, at cost, 8,550,000
shares as of December 31, 1998 and June 30,
1999 (unaudited)............................ (1,900,000) (1,900,000)
----------- ------------
Total stockholders' equity................... 931,678 92,676,310
----------- ------------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity.... $12,928,078 $113,977,831
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
----------------
<TABLE>
<CAPTION>
For the Three Months
Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Product sales.......... $ 2,297,529 $ 2,912,869 $ 4,491,820 $ 6,867,979
Consulting services.... 461,613 665,320 778,973 1,367,328
Network services....... 81,870 165,475 122,710 284,524
------------ ------------ ------------ ------------
Total revenue......... 2,841,012 3,743,664 5,393,503 8,519,831
------------ ------------ ------------ ------------
Cost of revenue:
Product sales.......... 1,946,888 2,487,409 3,804,428 6,022,778
Consulting services.... 285,798 476,239 445,440 775,567
Network services....... 6,873 612,315 8,208 783,161
------------ ------------ ------------ ------------
Total cost of
revenue.............. 2,239,559 3,575,963 4,258,076 7,581,506
------------ ------------ ------------ ------------
Gross profit............ 601,453 167,701 1,135,427 938,325
Operating expenses:
Selling, general and
administrative........ 508,608 5,384,853 1,046,449 7,917,372
Amortization of
deferred compensation
on stock options...... -- 4,727,719 -- 5,268,188
Depreciation and
amortization.......... 8,580 698,473 12,870 885,183
------------ ------------ ------------ ------------
Income (loss) from
operations............. 84,265 (10,643,344) 76,108 (13,132,418)
Interest income......... -- 310,363 -- 364,675
Interest expense........ (14,146) (108,311) (26,834) (171,267)
------------ ------------ ------------ ------------
Income (loss) before
income taxes........... 70,119 (10,441,292) 49,274 (12,939,010)
Provision (benefit) for
income taxes........... 27,080 (72,335) 19,030 (72,335)
------------ ------------ ------------ ------------
Net income (loss)....... 43,039 (10,368,957) 30,244 (12,866,675)
Preferred stock
dividends.............. -- 142,466 -- 339,726
Preferred stock
accretion.............. -- 108,076 -- 257,719
------------ ------------ ------------ ------------
Net income (loss)
applicable to common
stockholders.......... $ 43,039 $(10,619,499) $ 30,244 $(13,464,120)
============ ============ ============ ============
Net income (loss) per
common share (basic and
diluted):
Net income (loss)...... $ 0.00 $ (0.27) $ 0.00 $ (0.34)
Preferred stock
dividends and
accretion............. -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income (loss)
applicable to common
stockholders.......... $ 0.00 $ (0.27) $ 0.00 $ (0.36)
============ ============ ============ ============
Weighted average common
shares outstanding
(basic and diluted).... 21,915,000 38,677,808 21,915,000 37,346,301
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
----------------
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 30,244 $(12,866,675)
Adjustment to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization expense.............. 8,580 885,183
Provision for doubtful accounts receivable......... -- 71,760
Amortization of deferred compensation on employee
stock options..................................... -- 5,268,188
Net changes in assets and liabilities:
Accounts receivable............................... (808,720) (610,202)
Prepaid and other current assets.................. -- (809,672)
Inventory......................................... (86,375) (54,899)
Deposits.......................................... -- (78,725)
Income tax receivable............................. -- 73,265
Deferred tax asset................................ (3,268) --
Accounts payable.................................. 696,035 999,256
Accrued expenses.................................. 141,264 639,552
Income tax payable................................ (132,064) --
Other current liabilities......................... (16,764) (23,028)
Deferred revenue.................................. -- 98,863
----------- ------------
Net cash used in operating activities............ (171,068) (6,407,134)
----------- ------------
Cash flows from investing activities:
Expenditures for networks.......................... -- (10,216,850)
Purchases of property and equipment................ (14,699) (2,037,085)
----------- ------------
Net cash used in investing activities............ (14,699) (12,253,935)
----------- ------------
Cash flows from financing activities:
Borrowings on notes payable........................ -- 12,000,000
Repayments of notes payable........................ (93,348) --
Principal payments on capital leases............... -- (196,813)
Issuance of common stock........................... -- 83,700,000
Issuance costs related to common stock offering.... -- (1,207,173)
Exercise of stock options.......................... -- 1,668,955
Repayment of deferred compensation liability....... -- (166,667)
----------- ------------
Net cash provided by (used in) financing
activities...................................... (93,348) 95,798,302
----------- ------------
Net increase (decrease) in cash and cash
equivalents........................................ (279,115) 77,137,233
Cash and cash equivalents at the beginning of
period............................................. 713,246 5,518,117
----------- ------------
Cash and cash equivalents at the end of period...... $ 434,131 $ 82,655,350
=========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest......................................... $ 17,999 $ 78,510
Income taxes..................................... 79,700 --
Non-cash investing and financing activities:
Capital leases................................... -- 10,310,085
Preferred stock dividends........................ -- 339,726
Preferred stock accretion........................ -- 257,719
Expenditures for networks included in accounts
payable and accrued expenses.................... -- 438,925
Expenditures for offering costs included in
accrued expenses................................ -- 459,313
Conversion of notes payable into common stock.... -- 10,000,000
Conversion of redeemable preferred stock into
common stock.................................... -- 6,238,096
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
----------------
1. Business
The Company
Network Access Solutions Corporation (the Company), was originally
incorporated in the Commonwealth of Virginia on December 19, 1994. On August 3,
1998, the Company reincorporated in the State of Delaware. Prior to the
reincorporation, the Company had authorized 10,000 shares of common stock, of
which 7,803 shares were issued and outstanding. As of August 3, 1998, the
Company was recapitalized with authorized capital stock of 15,000,000 shares of
common stock, $.001 par value per share and 10,000,000 shares of preferred
stock, $.001 par value per share. On March 18, 1999, the Company increased the
authorized common stock to 50,000,000 shares with a par value of $.001 per
share. In conjunction with this reincorporation and recapitalization, the
Company changed from a July 31 year-end to a calendar year-end. On March 18,
1999, the Company and its Board of Directors declared a two for one stock
split, effected as a stock dividend, of its common stock. On May 7, 1999, the
Company and its Board of Directors declared a 2.25 for one stock split,
effected as a stock dividend, of its common stock. All share information has
been retroactively adjusted for all periods presented to reflect the new
capital structure and stock splits.
The Company is a provider of data communications solutions to businesses
through product sales, consulting services and network services, which includes
high speed data transmission services using digital subscriber line (DSL)
technology. Through its CuNet branded service, the Company offers its customers
high speed connectivity using DSL technology. As a complement to the Company's
CuNet service, the Company also offers its customers a complete suite of
networking solutions, including network integration, network management,
network security and professional services. In 1999, the Company began offering
CuNet in Boston, New York, Pittsburgh, Philadelphia, Baltimore, Washington,
D.C., Richmond and Norfolk. The Company sells its services directly and
indirectly to business customers. The Company sells its services to its
existing customer base through a direct sales force. The Company also sells its
services indirectly through its sales partners, including Internet service
providers, long distance and local carriers and other networking services
companies.
2. Summary of Significant Accounting Policies
Unaudited Interim Financial Statements
The unaudited balance sheets as of June 30, 1999, the unaudited statements of
operations for the three and six months ended June 30, 1998 and 1999 and the
unaudited statement of cash flows for the six months ended June 30, 1998 and
1999 have been prepared in accordance with generally accepted accounting
principles for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles, and it is suggested that these
financial statements be read in conjunction with the financial statements and
related notes included in the Company's registration statement on Form S-1
dated June 1, 1999. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended June 30, 1999
are not necessarily indicative of results that may be expected for the year
ending December 31, 1999.
Revenue Recognition
The Company derives revenue from the sale of products, consulting services
and network services. The Company recognizes revenue on the sale of its
products when a valid purchase order is received, shipment occurs, collection
is probable and no significant obligations remain related to the completion of
installation and performance of support services.
6
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
----------------
The Company provides consulting services, including network planning, design,
and integration services, under time-and-material type contracts and recognizes
revenue as services are performed and as costs are incurred.
The Company provides network services, including DSL-based services, under
monthly and fixed rate service contracts. Revenue on monthly contracts is
recognized when services are performed. Revenue on fixed rate service contracts
is recognized as costs are incurred over the related contract period which
generally does not exceed one year. Payments received in advance of providing
services are recorded as deferred revenue until the period in which such
services are provided. Revenue related to installation and activation fees are
recognized to the extent of direct costs incurred. Any excess installation and
activation fees over direct costs are deferred and amortized to revenue over a
one year service contract. Such revenue is not expected to significantly exceed
the direct costs. In certain situations, the Company will waive non-recurring
installation and activation fees in order to obtain a sale. The Company will
expense the related direct costs as incurred.
Property and Equipment
Property and equipment, consists of network costs associated with the
development and implementation of the DSL networks, office and computer
equipment, and furniture and fixtures. The costs associated with the DSL
network under development are comprised of collocation fees, equipment,
equipment held under capital leases, and equipment installation. These assets
are stated at cost. The Company leases certain of its equipment under capital
lease agreements. The capital lease assets are stated at the lower of the
present value of the net minimum lease payments or the fair value at the
inception of the lease, and are depreciated over the shorter of the estimated
useful life or the lease term. Depreciation of office and computer equipment
and furniture and fixtures is computed using the straight-line method,
generally over three to five years, based upon estimated useful lives,
commencing when the assets are placed in service. The depreciation of the DSL
network costs commences as individual network components are placed in service
and is 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.
Net Income (Loss) Per Share
The Company presents basic and diluted net income (loss) per share. Basic net
income (loss) per share is computed based on the weighted average number of
outstanding shares of common stock. Diluted net income (loss) per share adjusts
the weighted average for the potential dilution that could occur if stock
options, warrants or other convertible securities were exercised or converted
into common stock. Diluted loss per share for the year ended December 31, 1998,
is the same as basic loss per share because the effects of such items were
anti-dilutive.
Stock-Based Compensation
The Company measures compensation expense for its stock-based compensation
using the intrinsic value method and provides pro forma disclosures of net loss
as if the fair value method had been applied in measuring compensation expense.
Under the intrinsic value method of accounting for stock-based compensation,
when the exercise price of options granted to employees is less than the
estimated fair value of the underlying stock on the date of grant, deferred
compensation is recognized and is amortized to compensation expense over the
applicable vesting period.
7
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
----------------
Segment Reporting
The Company has determined its reportable segments based on the Company's
method of internal reporting, which disaggregates its business by product
category. The Company's reportable segments are: product sales, consulting
services and network services. The product sales segment provides sales of
selected equipment from manufacturing partners. Engineers select the right
manufacturer's product solution based upon customized dependable network
designs to improve the customers' operations and network efficiencies. The
consulting services segment provides nonrecurring service activation and
installation, network integration, on site network management, network security
consulting and professional services. In addition, the consulting services
segment provides maintenance and installation of equipment some of which may be
provided through third party providers under contract. The network services
segment provides local, metropolitan and wide area data communications to
customers. This segment also provides a wide variety of other services to
customers, including remote network management and monitoring, network
security, virtual private networks, electronic commerce and CuNet, the
Company's high speed continuously connected DSL access to telecommunications
networks. The Company's business is conducted principally in the eastern United
States. There are no foreign operations.
3. Initial Public Offering
In June 1999, the Company completed an initial public offering (IPO) of
7,500,000 shares of common stock. Total proceeds to the Company were
approximately $82,000,000, net of underwriting discounts and commissions of
approximately $5,500,000 and offering costs of approximately $1,700,000.
Concurrent with the IPO, $5,000,000 of the Company's Series A Mandatorily
Redeemable Preferred Stock (Preferred Stock) was converted into 416,667 shares
of common stock at $12.00 per share, the public offering price, with the
remaining shares of Preferred Stock and all accrued dividends cancelled without
additional payment to the holders of those shares. Concurrent with the IPO,
$10,000,000 of the Company's 8% convertible notes (see Note 7) were converted
into 833,334 shares of common stock at $12.00 per share, the public offering
price.
4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
As of As of
December 31, 1998 June 30, 1999
----------------- -------------
(unaudited)
<S> <C> <C>
Network placed in service...................... $ -- $15,469,506
Network development in process................. 4,657,975 10,029,293
Office and computer equipment.................. 355,962 2,752,551
Furniture and fixtures......................... 159,728 634,513
Less accumulated depreciation.................. (142,872) (1,028,056)
---------- ------------
Property and equipment, net.................... $5,030,793 $27,857,807
========== ============
</TABLE>
The Company's networks include the acquisition of equipment under capital
leases, equipment, installation, and nonrecurring fees paid to obtain central
office space for location of certain equipment. When a portion of the Company's
networks has been completed and made available for use it is transferred from
network development in process to network placed in service. As of December 31,
1998 and June 30, 1999, the recorded cost of the network equipment under
capital leases was $1,513,138 and $11,736,340, respectively. Accumulated
amortization for this equipment under capital leases was $20,739 and $511,305
as of December 31, 1998 and June 30, 1999, respectively.
8
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
----------------
5. Stock-Based Compensation
On July 23, 1998, the Company adopted the 1998 Incentive Stock Plan (the
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards or any combination thereof may be granted to the Company's
employees and certain other persons in accordance with the Plan. The Board of
Directors, which administers the Plan, determines the number of options
granted, the vesting period and the exercise price. The Board of Directors may
terminate the Plan at any time. Options granted under the Plan are fully
exercisable into restricted shares of the Company's common stock upon award and
expire ten years after the date of grant. The restricted common stock generally
vests over a three or four year period. Subsequent to exercise, unvested shares
of restricted stock cannot be transferred while vested shares are subject to a
right of first refusal by the Company to repurchase the shares at fair value.
Upon voluntary termination unvested shares of restricted stock can be
repurchased at the lower of fair value or the exercise price. At December 31,
1998, 9,000,000 shares were reserved for issuance under the Plan. Effective
March 18, 1999 and April 1, 1999, the Company increased the number of shares of
common stock reserved for issuance under the Plan to 10,125,000 and 11,250,000,
respectively.
On April 1, 1999, the Company entered into a stock option agreement, which
granted to a board member an option to purchase 250,000 shares of the Company's
common stock at an exercise price of $6.67 per share. On June 3, 1999, the
board member exercised the stock option by paying $1,667,500 to the Company. In
addition the agreement stipulated that the board member will be issued an
additional option to purchase 407,500 shares of common stock at an exercise
price of $3.00 per share. These options immediately vested upon the Company's
IPO. As a result, the Company recognized $3,504,375 of compensation expense
during the three months ended June 30, 1999.
As of December 31, 1998 and June 30, 1999, a total of 7,090,875 and
10,352,338, respectively, of incentive stock options which were immediately
exercisable as of those dates had been granted at exercise prices ranging from
$.09 to $13.94 per share. Stock option activity was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Range of Average
Stock Exercise Exercise
Options Prices Price
---------- ------------- --------
<S> <C> <C> <C>
Options outstanding, December 31, 1998...... 7,090,875 $ 0.09 $0.09
Options granted, January 1999............... 559,575 $ 0.09 $0.09
Options granted, March 1999................. 1,350,000 $ 0.09 $0.09
Options granted, April 1999................. 437,875 $0.09 - 6.67 $3.84
Options granted, May 1999................... 479,900 $3.00 - 6.00 $5.78
Options granted, June 1999.................. 733,850 $3.00 - 13.94 $4.55
Options exercised........................... (266,343) $0.09 - 6.67 $6.27
Options cancelled........................... (33,394) $0.09 - 6.00 $0.67
---------- ------------- -----
Options outstanding, June 30, 1999.......... 10,352,338 $0.09 - 13.94 $0.67
========== ============= =====
</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 $9,070,236 for the three
months ended June 30, 1999 and $21,014,318 for the six months ended June 30,
1999. This amount was recorded as a reduction to stockholders' equity (deficit)
and is being amortized as a charge to operations over the vesting periods of
the underlying restricted common stock. The Company recognized stock
compensation expense related to these options of $4,727,719 for the three
months ended June 30, 1999 and $5,268,188 for the six months ended June 30,
1999. The Company did not record any deferred compensation or recognize any
stock compensation expense for the six months ended June 30, 1998.
9
<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>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ ----------------
(unaudited) (unaudited)
<S> <C> <C>
Net loss as reported...................... $(10,368,957) $(12,866,675)
Pro forma net loss........................ (11,094,758) (13,611,402)
Net loss per share as reported, basic and
diluted.................................. (0.27) (0.34)
Pro forma net loss per share, basic and
diluted.................................. (0.29) (0.36)
</TABLE>
The weighted-average fair value of options granted during the three months
ended June 30, 1999 and the six months ended June 30, 1999 were approximately
$6.69 and $6.46, respectively, based on the Black-Scholes option pricing model.
Upon termination, unvested shares of restricted stock are repurchased by the
Company at the lower of the exercise price or fair market value.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the six months ended June 30, 1999: Dividend
yield of 0%; expected volatility ranging from 0%-60%; risk-free interest rates
ranging from 5.21%-6.10%; and expected term of 5 years.
As of June 30, 1999, the weighted average remaining contractual life of the
options is 9.3 years.
10
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
----------------
6. Segment Information
The financial results of the Company's segments are presented on an accrual
basis. The Company evaluates the performance of its segments and allocates
resources to them based on gross profit. There are no intersegment revenues.
The table below presents information about the reported gross profit of the
Company's reportable segments for the three months ended June 30, 1998 and 1999
and the six months ended June 30, 1998 and 1999. Asset information is not
reported for the product sales and consulting services segments, as this data
is not considered by the Company in making its decisions. Asset data, which
represents DSL equipment, is only presented for the network services segment as
of June 30, 1999, as the Company only began to consider this data upon offering
CuNet which occurred during 1998.
<TABLE>
<CAPTION>
Product Consulting Network Reconciling
Sales Services Services Items Total
------- ---------- -------- ----------- -------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
For the three months ended
June 30, 1998:
Revenue................... $2,297 $ 462 $ 82 $ -- $ 2,841
====== ====== ======= ====== =======
Gross profit.............. $ 350 $ 177 $ 75 $ -- $ 602(1)
====== ====== ======= ====== =======
As of and for the three
months ended June 30,
1999:
Revenue................... $2,913 $ 665 $ 166 $ -- $ 3,744
====== ====== ======= ====== =======
Gross profit (loss)....... $ 425 $ 189 $ (446) $ -- $ 168(1)
====== ====== ======= ====== =======
Property and equipment,
net...................... $ -- $ -- $24,885 $2,973 $27,858
====== ====== ======= ====== =======
For the six months ended
June 30, 1998:
Revenue................... $4,492 $ 779 $ 122 $ -- $ 5,393
====== ====== ======= ====== =======
Gross profit.............. $ 688 $ 333 $ 114 $ -- $ 1,135(1)
====== ====== ======= ====== =======
As of and for the six
months ended June 30,
1999:
Revenue................... $6,868 $1,367 $ 285 $ -- $ 8,520
====== ====== ======= ====== =======
Gross profit (loss)....... $ 845 $ 591 $ (498) $ -- $ 938(1)
====== ====== ======= ====== =======
Property and equipment,
net...................... $ -- $ -- $24,885 $2,973 $27,858
====== ====== ======= ====== =======
</TABLE>
Note 1: Adjustments that are made to the total of the segments gross profit
in order to arrive at income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1998 1999 1998 1999
-------- -------- -------- --------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C>
Gross profit........................... $ 602 $ 168 $ 1,135 $ 938
Operating expenses:
Selling, general and administrative... 509 5,385 1,046 7,917
Amortization of deferred
compensation......................... -- 4,728 -- 5,268
Depreciation and amortization......... 9 698 13 885
-------- -------- -------- --------
Income (loss) from operations.......... 84 (10,643) 76 (13,132)
Interest income....................... -- 310 -- 364
Interest expense...................... (14) (108) (27) (171)
-------- -------- -------- --------
Income (loss) before income taxes...... $ 70 $(10,441) $ 49 $(12,939)
======== ======== ======== ========
</TABLE>
11
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
----------------
7. Debt
On March 31, 1999, the Company entered into a financing agreement whereby the
certain holders of its preferred stock agreed to invest an additional
$10,000,000 in the Company. Under the agreement, the Company received
$5,000,000 on April 1, 1999 and an additional $5,000,000 on May 11, 1999 by
issuing 8% convertible notes. Concurrent with the IPO, these notes, including
principal and interest, were converted into 833,334 shares of common stock.
On May 4, 1999, the Company amended its financing agreements with Ascend
Communications, Inc. (Ascend) increasing the Company's total available
financing from $40,000,000 to $100,000,000. The amendment increased the
Company's line of credit available for leasing of equipment purchases from
$30,000,000 to $95,000,000. The amendment also reduced the line of credit
available for working capital loans from $10,000,000 to $5,000,000 and relieved
the Company's obligation to repay these loans upon the Company's IPO. As of
June 30, 1999 the Company's total obligation under the agreement for leased
equipment and for working capital loans was $3,469,449 and $3,000,000,
respectively.
8. Commitments
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.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the related
notes included elsewhere in this Form 10-Q and the financial statements and
related notes and Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our registration statement on Form S-1
dated June 1, 1999 (File No. 333-74679). This discussion contains forward-
looking statements the accuracy of which involves risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-
looking statements for many reasons including, but not limited to, those
discussed herein and in our registration statement. See "Forward-Looking
Statements."
Overview
In 1995, we began operations by selling data communications products made by
others and providing consulting services for wide area networks. Shortly
thereafter, we began offering a complete suite of solutions to the data
communications problems of businesses. We provide network integration services,
where we design our customers' networks and sell and install related network
equipment. We also manage our customers' networks, ensure the security of their
networks and provide related professional services. From 1995 through 1998, our
revenue was derived primarily from product sales and consulting services. We
have primarily depended on AT&T and Zeneca for revenue. AT&T has accounted for
44.8% and 49.0% of total revenue for the six months ended June 30, 1999 and
1998, respectively, while Zeneca has accounted for 8.9% and 12.8% of total
revenue for the six months ended June 30, 1999 and 1998, respectively. Zeneca
has ordered CuNet services. To date, AT&T has not been a CuNet customer.
In 1996, we began to pursue deployment of a series of city-wide networks that
enable DSL services. In February 1997, we began developing technical standards
for delivery of DSL-based services within our target markets through a joint
effort with Bell Atlantic. In April 1997, we entered into our first
interconnection agreement with Bell Atlantic, which allowed us to use their
copper telephone lines and to collocate our equipment in telephone company
offices known as "central offices." Central offices serve as the central
connection point for all copper telephone lines in a local area and form the
basis for our network and the telephone company's network. We began CuNet
service trials in November 1997 and began commercially offering CuNet in
Philadelphia and Washington, D.C. in January 1999. We currently offer CuNet in
Boston, New York, Philadelphia, Pittsburgh, Baltimore, Washington, D.C.,
Richmond and Norfolk. We expect to extend our network coverage to include
Wilmington, Delaware by the end of 1999. As of June 30, 1999, we have completed
collocating our equipment in 126 Bell Atlantic central offices and expect to
raise that number to approximately 360 by the end of 1999.
We currently are targeting the Bell Atlantic region for our CuNet service. We
believe that our focus on the Bell Atlantic region has allowed us to form a
relationship with Bell Atlantic which we believe will allow us to provide
responsive, consistent and high quality service in our target markets. As
opportunities present themselves, we may decide to expand our network beyond
our initial target markets and into adjacent regions. Consistent with this
strategy, we have entered into an interconnection agreement with Bell South
which requires state regulatory approval before it becomes effective.
Since February 1997, we have invested increasing amounts in the development
and deployment of CuNet. We have funded the deployment of our CuNet services
through proceeds received from a preferred and common stock financing in August
1998, issuance of promissory notes which were converted into common stock
during the three months ended June 30, 1999, capital lease financing and our
initial public offering. We intend to substantially increase our operating
expenses and capital expenditures in an effort to expand rapidly our
infrastructure and DSL-based network services. We expect to incur substantial
operating losses, net losses and negative cash flow during the build-out of our
network and our initial penetration of each new market we enter. These losses
are expected to continue for at least the next two to three years. Although in
the short term we expect to derive the majority of our revenue from our product
sales and related consulting services, we expect that over time revenue from
network services, which includes our CuNet services, will constitute the
13
<PAGE>
more significant portion of our total revenue. During the past several years,
market prices for many telecommunications services have been declining, which
is a trend we believe will likely continue. This decline will force us to
continue to price our services competitively in relation to those of the
traditional telephone companies and other competitors in our markets which may
affect our future revenue growth.
As we develop our CuNet services, our annual and quarterly operating results
may fluctuate significantly due to delays in the deployment of our network.
Because of the complexity of the process of building our network, we expect to
experience delays of one form or another. Delays could result from the timing
and availability on reasonable terms of Bell Atlantic copper telephone lines,
collocation space, operations support and management of telephone line usage.
Delays could also result from the timing and availability on reasonable terms
of fiber optic and other transport facilities, equipment and services from our
suppliers.
Revenue
Revenue consists of:
. Product sales. We sell, install and configure selected equipment from
our manufacturing partners. Our engineers select the right
manufacturer's product solution to improve our customers' operations and
network efficiencies. Our engineers refer to a standard network design
that they seek to customize to fit the needs of each customer.
. Consulting services. We bill customers for nonrecurring service
activation and installation charges. We also bill our customers for
network integration, on site network management, network security and
professional services based on time and materials for contracted
services. In addition, we derive revenue from the maintenance and
installation of equipment. Some of these services may be provided
through third party providers under contract to us.
. Network services. We charge monthly service fees for access to our CuNet
local, metropolitan and wide area networks. We also provide a wide
variety of network services to customers, including remote network
management and monitoring, network security, dedicated private
connections to our network, Internet access, electronic commerce and
other data applications. Some of these services are delivered to
customers using resources from third party providers under contract to
us.
Cost of Revenue
Product sales. We purchase equipment from various vendors whose technology
and hardware solutions we recommend to our customers. We do not manufacture any
of this equipment.
Consulting services. Consulting services cost of revenue consists of charges
for hardware maintenance, installation and certain contract services which we
purchase from third parties.
Network services. Our network service costs generally comprise non- employee-
based charges such as:
. CuNet service fees. We pay a monthly service fee for each copper line
and for each collocation arrangement, as well as usage fees for the
support services we obtain from the traditional telephone companies we
work with in order to serve our CuNet customers. Sometimes, we must pay
these companies to perform special work, such as preparing a telephone
line to use DSL technology, when such work is required in order to serve
a particular client.
. Other access costs and levied line expense. We pay installation charges
and monthly fees to competitive telecommunications companies or
traditional telephone companies for other types of access, other than
through our CuNet network, which we provide to customers as part of our
network services.
. Backbone connectivity charges. We incur charges for our fiber optic
network, or backbone, within a metropolitan area, typically from a
competitive telecommunications company or a traditional telephone
company, and for the backbone interconnecting our networks in different
metropolitan areas from a long distance carrier. We pay these carriers a
one-time installation and activation fee and a monthly service fee for
these leased network connections.
14
<PAGE>
. Network operations expenses. We incur various recurring costs at our
network operations center. These costs include data connections,
engineering supplies and certain utility costs.
. Equipment operating lease expenses. In the future, we may decide to
enter into operating leases for some or all of the equipment we use in
our network, including the DSL equipment we use in the traditional
telephone company's central office locations and equipment installed on
the customer's premises. Currently, we generally use capital leases to
finance the acquisition of substantially all of this equipment, which we
depreciate over a range of two to five years.
Operating Expenses
Selling, general and administrative expenses
Our selling, general and administrative expenses include all employee-based
charges, including field technicians, engineering support, customer service and
technical support, information systems, billing and collections, general
management and overhead and administrative functions. Headcount in functional
areas, such as sales, customer service and operations will increase
significantly as we expand our network and as the number of customers
increases.
. Sales and marketing expenses. We distribute our products and services
through direct and indirect sales efforts, agents and telemarketing. Our
direct sales and marketing efforts focus on attracting and retaining
small, medium and large business customers in our target markets. We
enter into partnerships with other sales partners, including Internet
service providers, local and long distance 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 billing systems.
Amortization of deferred compensation on stock options
We had outstanding incentive stock options to purchase a total of 7,090,875
shares as of December 31, 1998 and 10,352,338 shares as of June 30, 1999, at
weighted average exercise prices of $0.09 and $0.67 per share, respectively. At
June 30, 1999, all of these options were exercisable into restricted shares of
our common stock which generally vest over a three to four year period. In
certain instances, we estimated 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 $21.0 million for the six
months ended June 30, 1999. We recorded this amount as a reduction to
stockholders' equity which will be amortized as a charge to operations over the
vesting periods. For the six months ended June 30, 1999, we recognized $5.3
million of stock compensation expense related to these options. No deferred
compensation was recorded for the comparable period in 1998 because there were
no stock options issued during this period.
On April 1, 1999, we entered into a stock option agreement, which granted to
one of our directors an option to purchase 250,000 shares of our common stock
at an exercise price of $6.67 per share. On June 3, 1999, this director
exercised this option. In addition the agreement stipulated that this director
will be issued an additional option to purchase 407,500 shares of common stock
at an exercise price of $3.00 per share. These options immediately vested upon
our initial public offering. As a result we recognized approximately $3.5
million of compensation expense during the three months ended June 30, 1999.
Depreciation and amortization
Depreciation expense arising from our network and equipment purchases for our
customers' premises will be significant and will increase as we deploy our
network. Collocation fees, build-out costs, including one-time
15
<PAGE>
installation and activation fees, and other DSL-based equipment costs are
capitalized and amortized over a range of two to five years.
Interest Income (Expense), Net
Interest income (expense), net, primarily consists of interest income from
our cash and short-term investments less interest expense associated with our
debt and capital leases. As our capital expenditures increase, we anticipate
that our interest expense associated with our capital leases will increase.
Results of Operations
The following table presents our results of operations data and the
components of net income (loss) in dollars and as a percentage of our revenue:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1998 1999 1998 1999
--------- --------- -------- --------
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenue:
Product sales....................... $ 2,297 $ 2,913 $ 4,492 $ 6,868
Consulting services................. 462 665 779 1,367
Network services.................... 82 166 122 285
--------- --------- -------- --------
Total revenue...................... 2,841 3,744 5,393 8,520
--------- --------- -------- --------
Cost of revenue:
Product sales....................... 1,947 2,488 3,804 6,023
Consulting services................. 285 476 446 776
Network services.................... 7 612 8 783
--------- --------- -------- --------
Total cost of revenue.............. 2,239 3,576 4,258 7,582
--------- --------- -------- --------
Gross profit......................... 602 168 1,135 938
--------- --------- -------- --------
Operating expenses:
Selling, general and
administrative..................... 509 5,385 1,046 7,917
Amortization of deferred
compensation on stock options...... -- 4,728 -- 5,268
Depreciation and amortization....... 9 698 13 885
--------- --------- -------- --------
Total operating expenses........... 518 10,811 1,059 14,070
--------- --------- -------- --------
Income (loss) from operations....... 84 (10,643) 76 (13,132)
Interest income (expense), net...... (14) 202 (27) 193
Provision (benefit) for income
taxes.............................. (27) 72 (19) 72
--------- --------- -------- --------
Net income (loss)................... $ 43 $ (10,369) $ 30 $(12,867)
========= ========= ======== ========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1998 1999 1998 1999
--------- --------- -------- --------
(unaudited)
(percent of revenue)
<S> <C> <C> <C> <C>
Revenue:
Product sales...................... 80.8% 77.8 % 83.3% 80.6 %
Consulting services................ 16.3 17.8 14.4 16.0
Network services................... 2.9 4.4 2.3 3.4
-------- --------- ------- --------
Total revenue.................... 100.0% 100.0 % 100.0% 100.0 %
-------- --------- ------- --------
Cost of revenue:
Product sales...................... 68.5 66.4 70.5 70.7
Consulting services................ 10.0 12.8 8.3 9.1
Network services................... 0.3 16.3 0.2 9.2
-------- --------- ------- --------
Total cost of revenue............ 78.8 95.5 79.0 89.0
-------- --------- ------- --------
Gross profit......................... 21.2 4.5 21.0 11.0
-------- --------- ------- --------
Operating expenses:
Selling, general and
administrative.................... 17.9 143.8 19.4 92.9
Amortization of deferred
compensation on stock options..... -- 126.3 -- 61.8
Depreciation and amortization...... 0.3 18.6 0.2 10.4
-------- --------- ------- --------
Total operating expenses......... 18.2 288.7 19.6 165.1
-------- --------- ------- --------
Income (loss) from operations........ 3.0 (284.2) 1.4 (154.1)
Interest income (expense), net....... (0.5) 5.4 (0.5) 2.3
Provision (benefit) for income
taxes............................... (1.0) 1.9 (0.3) 0.8
-------- --------- ------- --------
Net income (loss).................... 1.5% (276.9)% 0.6% (151.0)%
======== ========= ======= ========
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenue. We recognized $3.7 million in revenue for the three months ended
June 30, 1999, as compared to $2.8 million for the three months ended June 30,
1998, an increase of $903,000, or 32.2%. Revenue increased as a result of a
$615,000 increase in product sales, primarily from one of our largest
customers, AT&T, from an increase in consulting services of $204,000
attributable to increases in maintenance and consulting contracts and from
growth in network services revenue of $84,000 arising from the introduction of
broader network service offerings in late 1998. We are uncertain whether the
increase in revenue from AT&T will continue.
Cost of revenue. Cost of revenue was $3.6 million for the three months ended
June 30, 1999, as compared to $2.2 million for the three months ended June 30,
1998, an increase of $1.4 million, or 63.6%. The increase was attributable to
growth in cost of network services of $605,000 attributable to expenses
incurred to continue to develop and operate our CuNet and other networking
services, growth in cost related to an increase in product sales of $540,000
and from growth in cost related to additional consulting services of $190,000.
Gross profit. Gross profit was $168,000 and 4.5% of revenue for the three
months ended June 30, 1999, as compared to $601,000 and 21.2% of revenue for
the three months ended June 30, 1998. Gross profit as a percentage of revenue
decreased primarily as a result of increased operating expenses related to the
continued expansion of our network. As a result of this expansion of our
network, expenses have exceeded our revenue realized from our customer base.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $5.4 million and 143.8% of revenue for the three
months ended June 30, 1999, as compared to $509,000 and 17.9% of revenue for
the three months ended June 30, 1998, an increase of $4.9 million, or 962.7%.
This increase as a
17
<PAGE>
percentage of revenue was primarily due to increased staffing and other
expenses incurred to develop and operate our CuNet network and other networking
solutions.
Amortization of deferred compensation on stock options. Amortization of
deferred compensation was $4.7 million for the three months ended June 30,
1999. We had no amortization of deferred compensation for the three months
ended June 30, 1998.
Depreciation and amortization expense. Depreciation and amortization expense
was $698,000 and 18.6% of revenue for the three months ended June 30, 1999, as
compared to $9,000 and less than 0.3% of revenue for the three months ended
June 30, 1998, an increase of $689,000. This increase was primarily due to
investments in our CuNet network, computer equipment and software, office
furnishings and leasehold improvements.
Income (loss) from operations. Our loss from operations was $10.6 million for
the three months ended June 30, 1999, as compared to income from operations of
$84,000 for the three months ended June 30, 1998. The loss for the three months
ended June 30, 1999 was primarily due to increased staffing, amortization of
deferred compensation and other operating expenses we incurred in support of
our CuNet network.
Interest income (expense), net. For the three months ended June 30, 1999, we
recorded net interest income of $202,000, consisting of interest income of
$310,000 which was primarily attributable to interest income earned from the
net proceeds of our initial public offering of $82.0 million in June 1999,
offset by $108,000 in interest expense, compared to $14,000 of interest expense
for the three months ended June 30, 1998. The increase in interest expense is
primarily due to interest on notes payable and capital leases which commenced
during 1999.
Provision (benefit) for income taxes. We had a benefit for income taxes of
$72,000 for the three months ended June 30, 1999, as compared to a provision
for income taxes of $27,000 for the three months ended June 30, 1998.
Net income (loss). For the foregoing reasons, our net loss was $10.4 million
for the three months ended June 30, 1999, as compared to net income of $43,000
for the three months ended June 30, 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue. We recognized $8.5 million in revenue for the six months ended June
30, 1999, as compared to $5.4 million for the six months ended June 30, 1998,
an increase of $3.1 million, or 57.4%. Revenue increased as a result of a $2.4
million increase in product sales, primarily from one of our largest customers,
AT&T, from an increase in consulting services of $588,000 attributable to
increases in maintenance and consulting contracts and from growth in network
services revenue of $162,000 arising from the introduction of broader network
service offerings in late 1998. We are uncertain whether the increase in
revenue from AT&T will continue.
Cost of revenue. Cost of revenue was $7.6 million for the six months ended
June 30, 1999, as compared to $4.3 million for the six months ended June 30,
1998, an increase of $3.3 million, or 76.7%. The increase was attributable to
growth in cost related to an increase in product sales of $2.2 million, growth
in cost of network services of $775,000 attributable to expenses incurred to
continue to develop and operate our CuNet and other networking services and
growth in cost related to additional consulting services of $330,000.
Gross profit. Gross profit was $938,000 and 11.0% of revenue for the six
months ended June 30, 1999, as compared to $1.1 million and 21.0% of revenue
for the six months ended June 30, 1998. Gross profit as a percentage of revenue
decreased primarily as a result of increased operating expenses related to the
continued expansion of our network. As a result of this expansion of our
network, expenses have exceeded our revenue realized from our customer base.
18
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses were $7.9 million and 92.9% of revenue for the six
months ended June 30, 1999, as compared to $1.0 million and 19.4% of revenue
for the six months ended June 30, 1998, an increase of $6.9 million, or 690%.
This increase as a percentage of revenue was primarily due to increased
staffing and other expenses incurred to develop and operate our CuNet network
and other networking solutions.
Amortization of deferred compensation on stock options. Amortization of
deferred compensation was $5.3 million for the six months ended June 30, 1999.
We had no amortization of deferred compensation for the six months ended June
30, 1998.
Depreciation and amortization expense. Depreciation and amortization expense
was $885,000 and 10.4% of revenue for the six months ended June 30, 1999, as
compared to $13,000 and less than 0.2% of revenue for the six months ended June
30, 1998, an increase of $872,000. This increase was primarily due to
investments in our CuNet network, computer equipment and software, office
furnishings and leasehold improvements.
Income (loss) from operations. Our loss from operations was $13.1 million for
the six months ended June 30, 1999, as compared to income from operations of
$76,000 for the six months ended June 30, 1998. The loss for the six months
ended June 30, 1999 was primarily due to increased staffing, amortization of
deferred compensation and other operating expenses we incurred in support of
our CuNet network.
Interest income (expense), net. For the six months ended June 30, 1999, we
recorded net interest income of $193,000, consisting of interest income of
$365,000 which was primarily attributable to interest income earned from the
net proceeds of our initial public offering of $82.0 million in June 1999,
offset by $171,000 in interest expense, compared to $27,000 of interest expense
for the six months ended June 30, 1998. The increase in interest expense is
primarily due to interest on notes payable and capital leases which commenced
during 1999.
Provision (benefit) for income taxes. We had a benefit for income taxes of
$72,000 for the six months ended June 30, 1999, as compared to a provision for
income taxes of $19,000 for the six months ended June 30, 1998.
Net income (loss). For the foregoing reasons, our net loss was $12.9 million
for the six months ended June 30, 1999, as compared to net income of $30,000
for the six months ended June 30, 1998.
Liquidity and Capital Resources
While we do not require significant capital expenditures for our product
sales and consulting services segments, the development and expansion of our
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 $5.0 million for 1998 and $23.0
million for the six months ended June 30, 1999. At this time, our only material
purchase commitment is to purchase software and services for approximately $1.0
million. We expect our capital expenditures to be substantially higher for the
rest of 1999 and for future periods, primarily due to continued collocation
construction and the purchase of telecommunications equipment for expansion of
our network. Our capital expenditures will depend in part upon obtaining
adequate volume commitments or demand from our CuNet customers. Based on our
present plans, we anticipate capital expenditures during the balance of 1999 to
range from $30.0 million to $40.0 million for the expansion of our network to
approximately 360 central offices. The rollout of 360 central offices will
allow us to provide DSL services throughout our initial target markets at
capacity levels anticipated by our business plan. We will continue to expand
our CuNet related capital expenditures and our number of central offices as
necessary to provide additional CuNet service capacity. Based on our present
plans we anticipate capital expenditures by the end of the year 2000 of between
$65.0 million and $75.0 million, for the expansion of our network to
approximately 500 central offices.
19
<PAGE>
The net proceeds from our initial public offering were approximately $82.0
million. We expect to use approximately $30.0 million of the net proceeds to
finance capital expenditures for central office installation and collocation
fees. We expect that the remaining portion of our capital expenditures,
including DSL equipment, will be financed using capital leases. We expect to
use the remaining net proceeds from our initial public offering to finance
operating losses that we expect to incur as we expand our customer base and
network, to make payments under lease commitments and for general corporate
purposes.
Net cash used in operating activities was $6.8 million and $171,000 for the
six months ended June 30, 1999 and June 30, 1998, respectively. The net cash
used in operations for the six months ended June 30, 1999 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 and other current assets. These were offset by
increases in non-cash expenses for amortization of deferred compensation of
$5.3 million and depreciation of $885,000 accompanied by increases in accounts
payable and accrued liabilities. The net cash used for operations during the
six months ended June 30, 1998, was primarily the result of an increase in
accounts receivable, partially offset by a increase in accounts payable. The
net cash used in investing activities was $12.3 million and $15,000 for the six
months ended June 30, 1999 and June 30, 1998, respectively. The increase for
the six months ended June 30, 1999, was primarily due to the deployment of
equipment for our CuNet services of $10.2 million accompanied by purchases of
property and equipment of $2.0 million. Net cash provided by financing
activities was $96.2 million for the six months ended June 30, 1999. This
increase was primarily the result of proceeds from our initial public offering
of $83.7 million partially offset by issuance costs paid of $1.2 million and
proceeds from the issuance of notes payable of $12.0 million. Notes payable of
$10.0 million were converted into common stock upon our initial public
offering. Net cash used by financing activities for the six months ended June
30, 1998 was $93,000.
Ascend has provided us with a $95.0 million capital lease facility to fund
acquisitions of certain Ascend equipment, under which $3.5 million was
outstanding as of June 30, 1999. The terms of our capital leases range from
three to six years. These leases require monthly lease payments and have an
implicit interest rate of 9.5%. Ascend has the right to withdraw or suspend
further advances to us if our interconnection agreements with Bell Atlantic are
not renewed or are terminated, or if certain key employees terminate their
employment with us without competent replacement in the reasonable commercial
judgement of Ascend. In addition, we have an arrangement with Paradyne to lease
up to $4.0 million of equipment, subject to vendor approval. Under the terms of
the Paradyne master lease agreement, payments are due monthly for a lease
period of 48 months, with a one dollar purchase option at lease expiration. The
rental payments for each and every lease schedule under this master equipment
lease is calculated and fixed at an interest rate of two hundred basis points
above the prime interest rate as published in The Wall Street Journal on the
first business day of the calendar quarter in which the lessor receives a
request from the lessee to prepare a new lease schedule. As of June 30, 1999
approximately $404,000 was outstanding under the Paradyne master lease
agreement.
Ascend has also provided a $5.0 million line of credit for working capital
loans, under which $3.0 million was outstanding as of June 30, 1999. We can
draw on the $5.0 million line of credit in $1.0 million increments up to a
maximum of $5.0 million. We are required to make interest only payments at an
annual rate of 8.25% on the amounts advanced for the first nine months from the
date of the advance. For the next 33 months, we are required to make principal
and interest payments in accordance with a 60 month amortization schedule using
an interest rate of 8.25% for the first 18 months and a rate equal to the
prevailing high yield bond index for the next 15 months. The remaining unpaid
interest is due 42 months after the related advance. This facility is subject
to the same right to withdraw and suspend further advances to us as noted above
with respect to the capital lease facility.
As of June 30, 1999, we had not entered into any financial instruments that
expose us to material market risk.
We believe that our existing cash and cash equivalents, existing and
anticipated equipment lease financings and future revenue generated from
operations, will be sufficient to fund our operating losses, capital
20
<PAGE>
expenditures, lease payments and working capital requirements through the end
of 2000. We expect our operating losses and capital expenditures to increase
substantially primarily due to our network expansion. We expect that additional
financing would be required in the future if we were to expand beyond our
initial target markets. We may attempt to finance such an expansion of our
operations through a combination of commercial bank borrowings, leasing, vendor
financing or the private or public sale of equity or debt securities. If we
were to leverage our business by incurring significant debt, we may be required
to devote a substantial portion of our cash flow to service that indebtedness.
This cash flow would otherwise be available to finance the deployment of our
network. If we are forced to use our cash flow in this manner, we may be forced
to delay the capital expenditures necessary to complete our network. Any delay
in the deployment of our network could have a material adverse effect on our
business.
Our capital requirements may vary based upon the timing and success of our
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.
Impact of the Year 2000 Issue
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external providers. We have completed our Year 2000 compliance
testing for all of our internal information technology systems and our other
systems and believe that our internal business systems are Year 2000 compliant.
Because our systems were implemented within the last two years, we do not
anticipate significant Year 2000 issues to arise with our internal business
systems, although we cannot be certain about this. Therefore, there have been
few Year 2000 changes required to our existing systems and applications.
However, because our systems will be interconnected with those of traditional
telephone companies, which operate their traditional telephone systems, and
other service providers, any disruption of operations in the computer programs
of these service providers would likely have an impact on our systems.
In the provision of our DSL services, we use third party equipment and
software and interact with traditional telephone companies that have equipment
and software that may not be Year 2000 compliant. We have substantially
completed a compliance check of our significant external providers, except for
Bell Atlantic. Based on responses from these third parties other than Bell
Atlantic, we believe that they will not experience Year 2000 problems that
would materially adversely affect our business. However, we do not have any way
to verify information that our customers and other vendors have provided. We
have not been able to conduct a compliance check of Bell Atlantic nor assess
its Year 2000 compliance. To the extent that Bell Atlantic or other third
parties experience Year 2000 problems, our network and services could be
adversely affected. Furthermore, the purchasing patterns of our customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available for our services. Any of these developments
could have a material and adverse effect on our business, prospects, operating
results and financial condition.
Our aggregate historical and future costs for Year 2000 analysis, planning
and remediation have not been material and we do not expect them to be material
in the future. However, we cannot assure you that these costs will not be
greater than we currently expect. If these costs increase significantly, our
business, prospects, operating results and financial condition could be
adversely affected. We have not yet formulated a contingency plan to address
the most reasonably likely worst case Year 2000 scenario. We expect to complete
our internal review of and planning for Year 2000 issues, including our most
reasonably likely worst case year 2000 contingency plans, by September 1999.
21
<PAGE>
Financial Information
The preceding discussion and analysis is based on our financial statements
and the related notes and should be read in conjunction with the financial
statements and the related notes included in this Form 10-Q.
Forward-looking Statements
The statements contained in this report that are not historical facts are
"forward-looking statements" (as such term is defined in Section 27A of the
Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934),
which can be identified by the use of forward-looking terminology such as
"estimate," "project," "anticipate," "expect," "intend," "believe," or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. These forward-
looking statements address, among other things:
. our CuNet deployment plans and strategies;
. development and management of our business;
. our ability to attract, retain and motivate qualified personnel;
. our ability to attract and retain customers;
. the extent of acceptance of our services;
. the market opportunity and trends in the markets for our services;
. our ability to upgrade our technologies;
. prices of telecommunication services;
. the nature of regulatory requirements that apply to us;
. our ability to obtain and maintain any required governmental
authorizations;
. our future capital expenditures and needs;
. our ability to obtain and maintain financing on commercially reasonable
terms;
. our ability to implement a Year 2000 readiness program; and
. the extent and nature of competition.
We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, or faulty assumptions on our part. For example,
assumptions that could cause actual results to vary materially from future
results include, but are not limited to:
. 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.
All written and oral forward-looking statements made in connection with this
report on Form 10-Q which are attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the "Risk Factors" and
other cautionary statements included in our registration statement on Form S-1
(File No. 333-74679). We disclaim any obligation to update information
contained in any forward-looking statement.
22
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
The following information relates to securities issued or sold by us within
the period covered by this Form 10-Q. During that time, we issued unregistered
securities in the transactions described below. Securities issued in such
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act, relating to sales by an
issuer not involving any public offering, or under Rule 701 under the
Securities Act on the basis that these options were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to compensation. The sales of securities were made without
the use of an underwriter and the certificates evidencing the shares bear a
restrictive legend permitting the transfer thereof only upon registration of
the shares or an exemption under the Act.
(1) Between April 1, 1999 and June 30, 1999, we issued options to our employees
exercisable for an aggregate of 994,125 shares of Common Stock at exercise
prices ranging from $.09 to $13.94 per share pursuant to our 1998 Stock
Incentive Plan.
(2) In April 1999, we issued options to one of our directors exercisable for an
aggregate of 250,000 shares of Common Stock at an exercise price of $6.67
per share, pursuant to our 1998 Stock Incentive Plan. In June 1999, this
director exercised this option. In June 1999, we issued an additional
option to this director exercisable for an aggregate of 407,500 shares of
Common Stock at an exercise price of $3.00 per share, in accordance with
the terms of the original option and pursuant to our 1998 Stock Incentive
Plan.
(3) In May 1999, we issued in a private placement to two of our existing
accredited stockholders $10,000,000 aggregate principal amount of notes
convertible into shares of Common Stock based upon our initial public
offering price.
Report of Offering of Securities and Use of Proceeds Therefrom
In June 1999, we commenced and completed a firm commitment underwritten
initial public offering of 7,500,000 shares of our common stock. The shares
were registered with the Securities and Exchange Commission pursuant to a
registration statement on Form S-1 (No. 333-74679), which was declared
effective on June 3, 1999. The public offering was underwritten by a syndicate
of underwriters led by Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co. Inc., J.P. Morgan Securities Inc. and DLJdirect Inc., as
their representatives. After deducting underwriting discounts and commissions
of $5.5 million and expenses of $1.7 million, we received net proceeds of $82.0
million.
As of June 30, 1999, we had invested the net proceeds from our initial public
offering in short- and long-term investments in order to meet anticipated cash
needs for future working capital. We invested our available cash principally in
high-quality corporate issuers and in debt instruments of the U.S. Government
and its agencies. This use of proceeds from the offering reflects an increase
in offering expenses of approximately $700,000, but otherwise does not
represent a material change in the use of proceeds described in the
registration statement. None of the net proceeds of the offering were paid
directly or indirectly to any of our directors or officers, or their
associates, or persons owning 10 percent or more of any class of our equity
securities.
23
<PAGE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
(a) On April 1, 1999 and May 7, 1999, our stockholders approved certain
actions by written consent (the "Consents").
(b) None
(c) The following actions were approved by the stockholders pursuant to the
Consents:
(i) an increase in the number of authorized shares of Common Stock
reserved for issuance pursuant to our 1998 Stock Incentive Plan to an
aggregate of 11,250,000 shares of Common Stock; and
(ii) an amendment and restatement of our Certificate of Incorporation to,
among other things, incorporate changes reflected in prior amendments to
our Certificate of Incorporation and add certain provisions, including the
creation of a classified board of directors, to enhance the continuity and
stability in the composition of our board of directors and its policies.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1* Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen stock certificate for shares of Common Stock of the
Company
10.1*+ Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2*+ Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3* Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
10.4* Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5* Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1* First Lease Amendment dated June 26, 1998, by and between the
Company and Sterling/Gunston LLC
10.5.2* Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6* Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7* Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.8* Employment Agreement dated as of August 16, 1998, by and between
the Company and Jonathan P. Aust
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
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 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 1, 1999, by
and between the Company and Dennis R. Patrick
10.27* Letter Agreement Dated May 6, 1999, by and between the Company and
SBC Communications, Inc.
10.28* Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de C.V.
10.29* Letter Agreement dated May 10, 1999, by and between the Company
and DSL Solutions Inc. d/b/a DSL Networks
27 Financial Data Schedule
</TABLE>
- --------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (No. 333-74679).
+ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
25
<PAGE>
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Network Access Solutions Corporation
/s/ Scott G. Yancey, Jr.
By: _________________________________
Name: Scott G. Yancey, Jr.
Title: Chief Financial Officer
(Principal Accounting and
Financial Officer)
Dated: August 9, 1999
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 82,655
<SECURITIES> 0
<RECEIVABLES> 2,469
<ALLOWANCES> (124)
<INVENTORY> 282
<CURRENT-ASSETS> 85,830
<PP&E> 28,886
<DEPRECIATION> (1,028)
<TOTAL-ASSETS> 113,978
<CURRENT-LIABILITIES> 9,596
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 92,622
<TOTAL-LIABILITY-AND-EQUITY> 113,978
<SALES> 3,744
<TOTAL-REVENUES> 3,744
<CGS> 3,576
<TOTAL-COSTS> 3,576
<OTHER-EXPENSES> 10,811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108
<INCOME-PRETAX> (10,441)
<INCOME-TAX> (72)
<INCOME-CONTINUING> (10,369)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,369)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
