<PAGE>
As filed with the Securities and Exchange Commission on May 12, 1999
Registration No. 333--74679
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 5 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 Amount Proposed Maximum Proposed Maximum Amount Of
Of Securities To Be To Be Offering Price Aggregate Registration Fee
Registered Registered Per Unit Offering Price (1) (2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.001....... 8,625,000 Shares $16.00 $138,000,000 $38,364
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act.
(2) Of this amount, 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--May 12, 1999
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7,500,000 Shares
[Network Access Solutions Logo Appears Here]
Common Stock
- --------------------------------------------------------------------------------
Network Access Solutions is offering 7,500,000 shares of its common stock. Of
those shares, we have reserved up to 430,108 shares to offer directly to SBC
Communications Inc. and up to 286,738 shares to offer directly to Telefonos de
Mexico, S.A. de C.V., or Telmex. These sales will be made on the same terms and
conditions available to the public, except that we will not pay underwriting
discounts or commissions on any shares they purchase.
This is our initial public offering. No public market currently exists for our
shares. We anticipate that the initial public offering price for our shares
will be between $14.00 and $16.00 per share.
We have applied to have our common stock quoted on the Nasdaq National Market
under the symbol "NASC."
Donaldson, Lufkin & Jenrette expects to deliver the shares of common stock to
purchasers on , 1999.
See "Risk Factors" beginning on page 10 to read about risks that you should
consider before purchasing any shares of our common stock.
-------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
--------------------------------------------------------------------
<S> <C> <C>
Public offering price, estimated: $ $
Underwriting fees:
Price of shares offered to SBC and Telmex:
Proceeds to Network Access Solutions, after expenses:
--------------------------------------------------------------------
</TABLE>
We have granted the underwriters the right to purchase an additional 791,667
shares of common stock from us and selling stockholders have granted the
underwriters the right to purchase an additional 333,333 shares of common stock
at the initial public offering price, less underwriting fees, to cover over-
allotments.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
J.P. Morgan & Co.
DLJdirect Inc.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 10
Use of Proceeds..................... 21
Dividend Policy..................... 21
Capitalization...................... 22
Dilution............................ 23
Selected Financial and Other Data... 24
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations......................... 26
Business............................ 40
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management........................ 63
Related Transactions and
Relationships.................... 70
Principal Stockholders............ 72
Description of our Capital Stock.. 74
Shares Eligible for Future Sale... 77
Underwriting...................... 80
Validity of the Shares............ 83
Experts........................... 83
Additional Information............ 83
Index to Financial Statements..... F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain important information regarding our business
and this offering. You should read this entire prospectus, including the "Risk
Factors" and the financial statements and all related notes before deciding to
purchase our common stock. Except as otherwise indicated, the information in
this prospectus assumes that:
. our common stock will be sold at $15.00 per share to the public, which is
the mid-point of the range shown on the cover page of this prospectus;
. the underwriters will not exercise their over-allotment option;
. $5.0 million of our redeemable preferred stock will be converted into
333,334 shares of our common stock at the public offering price with the
remaining shares and all accrued dividends cancelled without additional
payment to the holders of those shares; and
. $10.0 million of convertible notes will be converted into 666,666 shares
of our common stock at the public offering price.
Network Access Solutions
Our Business
We provide high speed, data transmission services using digital subscriber
line, or DSL, technology. As a complement to our DSL services, we offer
solutions to address the network requirements of businesses, which we call
networking solutions. Our network uses DSL technology to enable 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 Services
Through our CuNet, pronounced "CopperNet", branded service, our customers
access their corporate networks and the Internet through high speed, continuous
connections. 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 part of our networking solutions,
we design our customers' networks and install the related network equipment,
which we call network integration. We also manage our customers' networks,
ensure the security of their networks and provide related professional
services. We seek to combine, or bundle, our CuNet service and networking
solutions, so that we may serve as the single provider for many of the data
communications solutions that we believe businesses require. For the three
months ended March 31, 1999, approximately 97.5% of our revenue resulted from
product sales and consulting services, while revenue from network services,
which includes our CuNet services, accounted for approximately 2.5% of our
revenue.
Our History
We began our company in 1995 by providing data communications products and
related services for corporate networks. Shortly thereafter, we began offering
our customers additional services for their networks, including network
management, network security and related professional services. In early 1996,
we recognized the potential presented by the emergence of DSL technology and
began to
4
<PAGE>
pursue deployment of a series of city-wide networks that enable DSL services.
In April 1997, we entered into our first interconnection agreement with Bell
Atlantic, which allowed us to use their copper telephone lines and to place, or
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. Because DSL is a localized technology tied to
proximity of end users to central offices, we must collocate our equipment in
many central offices in order to provide depth of coverage. So far, we have
collocated our equipment in 51 central offices and expect to raise that number
to 360 by the end of this year.
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
close day-to-day working relationship with Bell Atlantic, which we believe will
allow us to provide responsive, consistent and high quality service in our
target markets.
Our Network
We have designed our network to support our customers' changing needs. Our
network supports newer, evolving technologies designed to transmit data, as
well as voice. Unlike traditional telecommunications networks, these newer
technologies transmit data in small bundles, or packets, of information from
multiple users over the same lines, and are referred to as packet-based
technologies. These packet-based transmission technologies generally allow for
a more efficient use of a network. Our network design also supports the
traditional technologies that carry most of today's telephone conversations.
These traditional technologies transmit individual voice and data calls over
individual lines, or channels, and are referred to as channelized technologies.
Our CuNet service is compatible with both channelized and packet-based
communications systems and offers businesses and their telecommuters cost
effective solutions for accessing the Internet and the emerging applications of
corporate networks, such as video and audio conferencing, multimedia and
electronic commerce.
We 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 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,
including other cities. Our network provides dedicated connections to our
customers which enable them to operate as if they were using their own private
network. These "virtual" private networks have the capacity, speed, reliability
and level of service that our customers require. We expect to extend our
network coverage to include Norfolk, Pittsburgh and Wilmington, Delaware by the
end of 1999.
Our Strategic Relationships and Investors
We have entered into, are continuing to explore, and expect to enter into,
strategic and commercial relationships with a variety of companies. For
example, we have a strategic relationship with Net2000 Communications, Inc.,
which has selected us as a preferred provider of channel-based DSL services in
the Bell Atlantic region. Similarly, we have a strategic relationship with DSL
Solutions, Inc. d/b/a DSL Networks, which has selected us as a preferred
provider of packet-based services in the Bell Atlantic region. We also have
strategic relationships with Comcast Telecommunications, Inc., Ascend
Communications, Inc. and Paradyne Corporation.
SBC Communications and Telmex have expressed to us their intention to
purchase up to $10.0 million of our common stock in this offering, although
they are not bound to do so.
5
<PAGE>
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 traditional telephone companies, long distance
carriers, Internet service providers and data service providers, which,
collectively, we call service providers;
. provide superior customer care;
. deliver our products and services through partners in multiple sales
channels;
. enhance and expand our network to meet the broadest array of business
requirements; and
. capitalize on the attractive features of DSL, namely:
. DSL's use of existing copper telephone wires that can be converted
into a sophisticated high speed data network through the addition of
DSL equipment; and
. a significant portion of our DSL expenditures are "success-based"
because we incur them only as we add customers or end users.
-------------------
We are a Delaware corporation. Our headquarters are located at 100 Carpenter
Drive, Sterling, Virginia 20164. Our telephone number is (703) 742-7700. We
have established a Web site at www.nas-corp.com. The information on our Web
site is not part of this prospectus.
We own applications for federal registration and claim rights in the
following trademarks: COPPERNET(TM), CU COPPERNET(TM) and CUNET(TM). This
prospectus also refers to trade names and trademarks of other companies.
6
<PAGE>
The Offering
<TABLE>
<C> <S>
Stock offered................................ 7,500,000 shares of common
stock.
Stock to be outstanding after this offering.. 44,500,000 shares of common
stock, or
45,291,667 shares of common
stock, assuming the
underwriters exercise their
over-allotment option in full.
Use of proceeds.............................. We expect to use the proceeds
from this offering, after
expenses, to finance capital
expenditures, to finance
operating losses that we
expect to incur as we expand
our customer base and network
and for general corporate
purposes. See "Use of
Proceeds."
Dividend policy.............................. We do not anticipate declaring
or paying dividends for the
foreseeable future. Instead,
for the foreseeable future, we
will retain our earnings, if
any, for the future operation
and expansion of our business.
Proposed Nasdaq National Market symbol....... NASC
</TABLE>
375,000 of the shares being offered have been reserved for purchase by our
directors, officers and employees and their business associates and related
persons. 430,108 of the shares being offered have been reserved for purchase by
SBC Communications and 286,738 of the shares being offered have been reserved
for purchase by Telmex, although neither SBC nor Telmex has an obligation to
buy these shares.
The shares of common stock to be outstanding after the offering are stated
as of April 30, 1999 and include shares of common stock to be issued upon
automatic conversion of preferred stock and convertible debt upon completion of
this offering, based upon an assumed initial public offering price of $15.00
per share. The shares of common stock outstanding exclude 11,250,000 shares of
common stock reserved for issuance under our stock option plans, of which
9,705,696 shares, including 2,112,814 shares which are fully vested, at a
weighted average exercise price of $0.09, were subject to outstanding options.
7
<PAGE>
Summary Financial And Other Data
We were incorporated on December 19, 1994, but did not begin operations
until after January 1, 1995. We present below summary financial and other data
for our company. The summary historical balance sheet data as of December 31,
1998 and the summary historical statement of operations and other data for each
of the three years ended December 31, 1998 have been derived from our audited
financial statements that are included elsewhere in this prospectus.
PricewaterhouseCoopers LLP has audited the financial statements as of and for
each of the three years in the period ended December 31, 1998. The summary
historical balance sheet data as of March 31, 1999 and the summary historical
statement of operations and other data for each of the three months ended March
31, 1998 and 1999 have been derived from our unaudited financial statements
that are included elsewhere in this prospectus. The summary financial data for
the year ended December 31, 1995 have been derived from our unaudited financial
statements that are not included in this prospectus. The unaudited financial
statements include, in the opinion of our management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of the information set forth. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
complete financial information included elsewhere in this prospectus. The
results of the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the full year.
<TABLE>
<CAPTION>
Three Months
Ended March
Year Ended December 31, 31,
-------------------------------------- ---------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product sales...................................... $ 1,891 $14,368 $ 8,150 $ 9,900 $2,194 $ 3,955
Consulting services................................ 36 114 791 1,428 317 702
Network services................................... -- -- 4 311 41 119
------- ------- ------- -------- ------ -------
Total revenue.................................... 1,927 14,482 8,945 11,639 2,552 4,776
------- ------- ------- -------- ------ -------
Cost of revenue:
Product sales...................................... 1,475 11,975 7,180 8,639 1,858 3,535
Consulting services................................ 15 91 231 761 160 299
Network services................................... -- -- 2 41 1 171
------- ------- ------- -------- ------ -------
Total cost of revenue............................ 1,490 12,066 7,413 9,441 2,019 4,005
------- ------- ------- -------- ------ -------
Operating expenses:
Selling, general and administrative................ 299 2,255 1,437 4,017 538 2,533
Amortization of deferred compensation on employee
stock options..................................... -- -- -- 219 -- 540
Depreciation and amortization...................... 9 7 12 130 4 187
------- ------- ------- -------- ------ -------
Total operating expenses......................... 308 2,262 1,449 4,366 542 3,260
------- ------- ------- -------- ------ -------
Income (loss) from operations........................ 129 154 83 (2,168) (9) (2,489)
Interest income (expense), net....................... -- (1) (5) 64 (12) (9)
------- ------- ------- -------- ------ -------
Income (loss) before income taxes.................... 129 153 78 (2,104) (21) (2,498)
Provision (benefit) for income taxes................. 39 63 36 (28) (8) --
------- ------- ------- -------- ------ -------
Net income (loss).................................... $ 90 $ 90 $ 42 $ (2,076) $ (13) $(2,498)
======= ======= ======= ======== ====== =======
Net income (loss) per common share (basic and
diluted)............................................ $ 0.00 $ 0.00 $ 0.00 $ (0.08) $(0.00) $ (0.07)
======= ======= ======= ======== ====== =======
Weighted average common shares outstanding (basic and
diluted)............................................ 21,915 21,915 21,915 27,302 21,915 36,000
======= ======= ======= ======== ====== =======
Pro forma net income (loss) per common share (basic
and diluted) (1).................................... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $(0.00) $ (0.07)
======= ======= ======= ======== ====== =======
Pro forma weighted average common shares outstanding
(basic and diluted) (1)............................. 21,915 21,915 21,915 27,302 21,915 37,000
======= ======= ======= ======== ====== =======
Other Data:
EBITDA (2)........................................... $ 138 $ 161 $ 95 $ (1,819) $ (5) $(1,762)
Capital expenditures................................. 18 30 122 1,156 1 4,966
Net cash provided by (used in) operating activities.. 3 (27) 805 (2,810) (273) 136
Net cash used in investing activities................ 18 30 122 1,341 1 4,966
Net cash provided by (used in) financing activities.. 42 55 9 8,956 54 (70)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1999
-----------------------------------------
Actual Pro Forma(3) Pro Forma
(unaudited) (in thousands) as Adjusted(4)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 618 $ 10,618 $114,243
Property and equipment, net......... 10,094 10,094 10,094
Total assets........................ 14,631 24,631 128,256
Total debt (including capital lease
obligations)....................... 2,618 2,618 2,618
Mandatorily redeemable preferred
stock.............................. 5,988 -- --
Total stockholders' equity (deficit)
................................... (1,372) 14,616 118,241
</TABLE>
- --------------------
(1) The "pro forma" summary statement of operations data as of March 31, 1999
reflects the following events as if such events had occurred as of January
1, 1999:
. the conversion of $5.0 million of our mandatorily redeemable preferred
stock into 333,334 shares of our common stock at the public offering
price and the cancellation without consideration of the remaining shares
of our preferred stock and all accrued dividends,
. the conversion of $5.0 million of 8% convertible notes issued on
March 31, 1999 into 333,333 shares of our common stock at the public
offering price and
. the conversion into 333,333 shares of our common stock at the public
offering price of $5.0 million of 8% convertible notes to be issued no
later than May 17, 1999 pursuant to the note purchase agreement entered
into on March 31, 1999. See "Related Transactions and Relationships."
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. We have
presented EBITDA to enhance your understanding of our operating results.
You should not construe it as an alternative to operating income as an
indicator of our operating performance or as an alternative to cash flows
from operating activities as a measure of liquidity determined in
accordance with GAAP. We may calculate EBITDA differently than other
companies. For further information, see our financial statements and
related notes elsewhere in this prospectus.
(3) The "pro forma" summary balance sheet data as of March 31, 1999 reflects
the events described in note 1 as if such events had occurred as of March
31, 1999.
(4) The "pro forma as adjusted" summary balance sheet data as of March 31, 1999
reflects the events described in note 3 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
9
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
consider carefully the following risks, together with all other information
included in this prospectus, before you decide to buy our common stock.
Because the focus of our company is changing to a high speed digital
communications service, our business is difficult to evaluate
We have refocused our company, through our CuNet services, on the provision
of DSL-based high speed digital communications services, which is a change from
our historical activities. We began in 1995 by helping our customers integrate
their network equipment and by providing them with related network services.
Because our business focus has now changed, and we expect to dedicate most of
our resources to develop our CuNet services, it is difficult to evaluate our
business.
Our financial results now and in the future are not, and will not be,
directly comparable to our prior financial results. Substantially all of our
revenue in 1995, 1996, 1997, 1998 and the first three months of 1999 was
derived from product sales and consulting services. Although in the short term
we expect to continue to derive the majority of our revenue from these
activities, we expect that over time our network services, which includes our
CuNet services, will constitute the more significant portion of our revenue.
Revenue from CuNet, which we began offering in January 1999, has been minimal.
As a result, not only have we changed the focus of our company, you also have
very limited historical financial information upon which to base your
evaluation of our performance and an investment in our common stock. We are
depending on the success of our CuNet services to achieve revenue growth. If
our business does not evolve as we expect, we will likely grow at a
significantly slower pace than would be the case if our CuNet services are
successful. If that situation arises, it is possible that the price of our
common stock may reflect the slower growth that might be expected with a
company that does not offer DSL-based services. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We have not tested our CuNet strategy so it is difficult to assess whether we
will be successful in this new and evolving market
The market for DSL-based services is in the early stages of development.
Although we have begun to deploy our CuNet services, we have not truly tested
our CuNet strategy. The combination of our unproven business strategy and the
highly competitive and quickly changing market in which we compete makes it
difficult for us to predict the extent to which CuNet will achieve market
acceptance. Various providers of high speed data communication services are
testing products from various suppliers for various applications, and suppliers
have not broadly adopted an industry standard. Critical issues concerning
commercial use of DSL for Internet and local area network access, including
security, reliability, ease and cost of access and quality of service, remain
unresolved and may affect the growth of this market. If the market for CuNet
fails to develop, grows more slowly than anticipated or becomes saturated with
competitors, our business will not produce the level of profitability we hope
to achieve.
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. We may never be able to deploy our
network as planned or achieve significant
10
<PAGE>
market acceptance, favorable operating results or profitability. Due to the so
far limited deployment of CuNet, we cannot guarantee that our network will be
able to connect and manage a substantial number of end users at high
transmission speeds. We may be unable to scale our network to service a
substantial number of end users while achieving high performance.
Our failure to achieve or sustain market acceptance at desired pricing levels
could impair our ability to achieve profitability or positive cash flow
Prices for data communication services have fallen historically, a trend we
expect will continue. Accordingly, we cannot predict to what extent we may need
to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.
We are an early stage company in a new and rapidly evolving market, subject to
a number of risks that may limit our revenue growth
Our failure to address the risks, expenses and difficulties we may encounter
as we expand our business in providing CuNet services, including those
frequently encountered by early stage companies in new and rapidly evolving
markets, may limit our revenue growth and make it difficult for us to compete
effectively with others. These risks include our ability to:
. rapidly expand the coverage of CuNet within our target markets;
. attract and retain customers;
. increase awareness of CuNet;
. respond to competitive developments;
. continue to attract, retain and motivate qualified persons;
. continue to upgrade our technologies;
. introduce and develop new technology for our network services; and
. effectively manage our expanding operations.
If we fail to manage these risks successfully, it would materially adversely
affect our financial performance.
Our failure to manage future growth will strain our resources and could impair
the expansion of our business
We plan a significant expansion of our CuNet operations. This rapid growth
will place a significant strain on our management, financial controls,
operations systems, personnel and other resources. If we fail to manage this
growth effectively, the expansion of our business could be impaired. We may be
unable to meet our customers' need for services and technical support or
provide the customer service they expect. To manage our growth effectively, we
must:
. improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
11
<PAGE>
. hire, train and manage sufficient additional qualified personnel;
. expand and upgrade our technologies; and
.manage multiple relationships with our customers, vendors and other third
parties.
If we fail to manage our growth effectively, it could adversely affect the
expansion of our customer base and service offerings and could result in a
lower level of profitability than we hope to achieve.
Bell Atlantic's expansion into the digital subscriber line business or
reluctance to cooperate with us could adversely affect our business
Bell Atlantic, as the dominant traditional telephone company operating in
our initial target market, is both an essential supplier of facilities and
services for CuNet and potentially a significant DSL competitor. Traditional
telephone companies, like Bell Atlantic, known as incumbent local exchange
carriers under the Telecommunications Act of 1996, or the 1996 Telecom Act,
pose a significant risk to the success of our business. Bell Atlantic has
existing networks in local areas and across metropolitan areas and has its own
Internet service provider businesses. It has also started residential sales of
DSL-based access services. We believe that Bell Atlantic could, if it chose,
deploy DSL services to businesses on a widespread basis.
Bell Atlantic is currently our sole supplier of copper telephone lines,
collocation space and support services for CuNet. Bell Atlantic may be
reluctant to cooperate with us in meeting our supply needs. For example, Bell
Atlantic may reject our collocation applications or delay providing us with the
collocation space we need in their central offices. We have experienced lengthy
delays between the time we apply for collocation space and the time that Bell
Atlantic actually permits us to place our equipment in this space. We face
competition for this space from other competitive telecommunications companies,
known as competitive local exchange carriers under the 1996 Telecom Act. Bell
Atlantic's position as both a DSL competitor and a supplier of numerous
essential inputs to our DSL offering also gives Bell Atlantic an incentive to
subsidize its own DSL offerings by failing to fully allocate to its DSL service
the costs it incurs in providing that service.
Our business could suffer if high quality copper lines are not available or
cost us more than we expect
We significantly depend on the quality of the copper telephone lines and
Bell Atlantic's maintenance of such lines. We cannot assure you that we will be
able to obtain the copper telephone lines and the services we require from Bell
Atlantic at quality levels, prices, terms and conditions satisfactory to us.
Our failure to do so would have a material adverse effect on our business,
prospects, financial condition and results of operations.
We depend on other carriers to provide fiber optic transmission facilities to
connect our equipment, which is critical to providing our CuNet services
We depend on the availability of fiber optic transmission facilities from
Bell Atlantic and other third parties to connect our equipment within and
between metropolitan areas. If these facilities are unavailable, we may not
have alternative means immediately available to connect our DSL equipment in
different locations. These fiber optic carriers include long distance carriers,
traditional telephone companies like Bell Atlantic and other competitive
telecommunications companies. Many of these entities are, or may become, our
DSL competitors. We have not established a history of
12
<PAGE>
obtaining transmission facilities in large volumes which we expect will be
necessary for the deployment of our network. We may be unable to negotiate or
renew favorable supply agreements. We depend on the timeliness of fiber optic
carriers to process our orders for customers who seek to use our services. We
have in the past experienced supply problems with some of our fiber optic
suppliers, and they may not be able to meet our needs on a timely basis in the
future.
We depend on third parties to provide the equipment, installation and field
service, which is critical to providing our CuNet services
We plan to purchase our equipment from many vendors, including Ascend 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
parties, we do not have guaranteed capacity or control over delivery schedules,
quality assurance, production yields and costs. If any of our vendors reduces
or interrupts its supply, or if any significant installer or field service
provider interrupts its service to us or fails to perform to required
specifications, this reduction or interruption would force us to seek
alternative vendors and providers which would disrupt our business. Our
suppliers may be unable to manufacture and deliver the amount or quality of
equipment we order, or the available supply may be insufficient to meet our
demand. Currently, the DSL modem and other equipment used for a single
connection over a copper telephone line must come from the same vendor since
there are no existing interoperability standards for the equipment used in our
higher speed services. If our competitors enter into exclusive or restrictive
arrangements with our suppliers or licensors, then these events may materially
and adversely affect the availability and pricing of the equipment we purchase
and the technology we license.
Our success depends on renewing our interconnection agreements with Bell
Atlantic
The success of our strategy depends on our ability to renew our
interconnection agreements with Bell Atlantic on a timely basis. Delays in
obtaining renewals could have a material adverse effect on our business,
prospects, financial condition and results of operations.
Interconnection agreements typically have limited terms of two to three
years. Our Bell Atlantic interconnection agreements have an initial term that
expire in March 2000 and January 2001. Existing or new agreements may not be
extended or negotiated on terms favorable to us. Interconnection agreements are
also subject to state telecommunications regulatory, FCC and judicial
oversight. These governmental bodies may modify the terms or prices of our
interconnection agreements in ways that adversely affect our business,
prospects, financial condition and results of operations.
Because two of our customers account for a high percentage of our revenue, the
loss of a significant customer could harm our business
To date, our largest customers have been AT&T and Zeneca Pharmaceuticals, a
division of Zeneca, Inc. AT&T and Zeneca accounted for 50.4% and 8.0%,
respectively, of our revenue in 1998 and 55.5% and 10.0%, respectively, of our
revenue in the three months ended March 31, 1999. Almost all of this revenue
was derived from product sales and consulting services. The loss of either
customer could adversely affect our business.
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<PAGE>
Our operating results are likely to fluctuate significantly, causing our stock
price to be volatile or to decline
The price at which our common stock will trade will depend upon many
factors, including our historical and anticipated quarterly and annual
operating results, variations between our actual results and analyst and
investor expectations, announcements by us or others and developments affecting
our business, investor perceptions of our company and comparable public
companies, changes in our industry and general market and economic conditions.
Some of these factors are beyond our control. As a result, our operating
results in one or more future periods could fail to meet or exceed the
expectations of securities analysts or investors. If this happens, the trading
price of our common stock would likely decline. You should be aware that the
stock market has from time to time experienced extreme price and volume
fluctuations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The 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, including through consolidation of our industry. Many
of our competitors are offering, or may soon offer, technologies and services
that will directly compete with some or all of our service offerings. Our
competitors use technologies for local access connections that include DSL,
wireless data, cable modems and integrated services digital network
technologies. Integrated services digital network is a technology that works
with the traditional telephone system to send voice and data over existing
copper telephone lines at speeds up to 128 kilobits per second. Some of our
competitors or potential competitors may have the financial resources to
withstand substantial price competition. Moreover, our competitors may be able
to negotiate contracts with suppliers of telecommunications services which are
more favorable than contracts negotiated by us.
Examples of competitive activity in our target markets include:
. Bell Atlantic and other traditional telephone companies present in our
target markets are conducting technical and market trials or have
entered into commercial development of DSL-based services.
. Many of the leading traditional long distance carriers, including AT&T,
MCI WorldCom and Sprint Corporation, are expanding their capabilities to
support high speed networking services.
. The newer long distance carriers, including The Williams Companies,
Inc., Qwest Communications International Inc. and Level 3
Communications, are building and managing high bandwidth, nationwide
packet-based networks and partnering with Internet service providers to
offer services directly to the public.
. Cable modem service providers, like At Home Corporation, are offering or
preparing to offer high speed Internet access over cable and fiber
networks to consumers and have positioned themselves to do the same for
businesses.
. Several new companies are emerging as wireless or satellite-based data
service providers.
. Some Internet service providers with significant and even nationwide
presences provide DSL-based Internet access to residential and business
customers.
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<PAGE>
. Other competitive telecommunications companies like us, including Covad
Communications Group, Inc., Rhythms NetConnections Inc. and NorthPoint
Communications Holdings, Inc., have begun offering DSL-based access
services, and have attracted marketing allies and product development
partners. Others are likely to do the same in the future.
We may not be able to continue to grow our business if we do not obtain
significant additional funds on acceptable terms by the end of 2000
If we have not completed our network rollout by the end of 2000, it is likely
that we would need significant additional capital to continue funding our
operating losses. If we fail to obtain this financing, our ability to grow our
business will be substantially impaired. In addition, we expect that we will
require significant additional capital to expand our network beyond our initial
target markets and into adjacent regions. Our actual funding requirements may
differ materially if the assumptions underlying our estimate turn out to be
incorrect or change as our business evolves. Therefore, you should consider
that our funding requirements may increase, perhaps substantially, if we are
unable to generate revenue in the amount and within the time frame we expect or
if we have unexpected cost increases. We may be unable to obtain the future
equity or debt financing that we require on acceptable terms or at all.
If we borrow significant funds in the future, it could limit our flexibility
If we decide to borrow significant funds in the future to fund our business,
the terms of those borrowings would likely contain restrictive covenants that
limit our ability to incur additional indebtedness, pay dividends or undertake
certain other transactions. These instruments could also require us to pledge
assets as security for the borrowings. If we were to leverage our business by
incurring significant debt, we may be required to devote a substantial portion
of our cash flow to service that indebtedness. This could require us to modify
our business plan, for example, by delaying the capital expenditures necessary
to complete our network. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Uncertain federal and state tax and surcharges on our services may increase our
payment obligations and have a material adverse effect on our business
Telecommunication service providers pay a variety of surcharges and fees on
their gross revenue from interstate and intrastate services. The surcharges and
fees we currently are required to pay may increase due to periodic revisions of
the applicable surcharges by federal and state regulators. A finding that we
misjudged the applicability of the surcharges and fees could increase our
payment obligations and have a material adverse effect on our business,
prospects, financial condition and results of operations.
Our services are subject to uncertain government regulation and changes in laws
or regulations could restrict the way we operate our business
Because many of the facilities and services we need in order to provide
CuNet are subject to regulation at the federal, state and local levels, changes
in applicable laws or regulations could have an adverse impact on our business.
For example, the FCC and state telecommunications regulators help determine the
terms under which collocation space is provided to us. They also oversee the
terms under which we gain access to a traditional telephone company's copper
telephone lines and transport facilities that we need in order to provide CuNet
services. Regulatory policies may also affect the terms under which Bell
Atlantic provides us with the operational support and management
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<PAGE>
of telephone line usage 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 traditional telephone companies like
Bell Atlantic to pursue litigation in courts, institute administrative
proceedings with the FCC and state telecommunications regulators and lobby the
U.S. Congress in an effort to affect the applicable laws and regulations in a
manner that would be more favorable to them and against our interests. Any
changes in our regulatory environment could create greater competitive
advantages for all or some of our competitors or could make it easier for
additional parties to provide DSL services.
We are subject to FCC regulation for our contractual, or interconnection,
arrangements with the traditional telephone companies in our markets, but the
scope of this regulation is uncertain because it is the subject of ongoing
court and administrative proceedings. Several parties have brought court
challenges to the FCC's interconnection rules, including the rules that
establish the terms under which a competitive telecommunications company may
use portions of a traditional telephone company's network. Although the Supreme
Court recently held that the FCC has the authority to adopt interconnection
rules and specifically upheld several of these rules, other rules are still
being considered by the courts and the FCC. If a rule that is beneficial to our
business is struck down by the courts, it could harm our ability to compete. In
particular, the courts have not yet resolved the lawfulness of the methodology
that the FCC established to determine the price that competitive
telecommunications companies would have to pay traditional telephone companies
for use of the traditional telephone companies' networks. The courts may
determine that the FCC's pricing rules are unlawful, which would require the
FCC to establish a new pricing methodology. If this occurs, the new pricing
methodology that the FCC adopts may result in our having to pay a higher price
to traditional telephone companies if we were to use a portion of their
networks in providing our services, and this could have a detrimental effect on
our business.
Recently, various traditional telephone companies have requested that the
FCC grant them regulatory relief in the provision of data transmission
services, including DSL services, which would allow the traditional telephone
companies to compete more directly with DSL providers like us. In response, the
FCC issued a decision that data services generally are telecommunications
services that, when provided by traditional telephone companies, are subject to
the FCC's interconnection rules, including the rule requiring that a
traditional telephone company's data services be subject to unbundling and
resale requirements. This issue is still pending before the FCC, and we cannot
be certain that the FCC will not reconsider its decision. We would expect that
an FCC decision in favor of the traditional telephone companies could have a
material adverse effect on our business, prospects, financial condition and
results of operations. Moreover, although the FCC recently adopted new rules
designed to provide greater access to central office space at less cost, these
new rules may benefit our competitors to a greater extent than they benefit us,
which could harm our competitiveness. For more details about regulatory
policies that affect our business, see "Business--Government Regulation."
A recent U.S. Supreme Court decision has raised questions about our ability to
obtain essential facilities from Bell Atlantic, which may hurt our business
A January 1999 decision by the U.S. Supreme Court could adversely affect our
business because it has raised questions about whether we will be able to
obtain certain facilities from Bell Atlantic that we need in order to provide
CuNet in the future. In that decision, the Supreme Court invalidated an FCC
rule which defines the particular parts of a traditional telephone company's
network that
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<PAGE>
must be provided to competitors like us, and it sent the matter back to the FCC
with instructions to consider further the question of which parts of a
traditional telephone company's network must be provided to competitors. The
FCC recently initiated a proceeding to establish which network elements are
required to be provided by incumbent carriers to competitors. The FCC has
stated that it plans to issue a new decision on this matter in the summer of
1999. We would be adversely affected if the FCC were to exempt traditional
telephone companies from the duty to provide any of the facilities we need in
order to provide CuNet.
The data communications industry is undergoing rapid technological change and
new technologies may be superior to the technology we use, which could
materially adversely affect our business
Our industry is subject to rapid and significant technological changes. DSL
technology does not presently have widely accepted standards and continues to
develop. Alternative technologies for providing high speed data communications
are available and may be superior to the technology we use. As a consequence:
. we will continue to rely on third parties, including some of our
competitors and potential competitors, to develop and provide us with
access to communications and networking technology;
. our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
. we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our current products and
technologies.
If we fail to adapt successfully to technological changes or obsolescence or
fail to obtain access to important technologies, our business, prospects,
financial condition and results of operations could be materially adversely
affected.
If we are unable to retain our key personnel, our business will suffer
Given our stage of development, we depend on our ability to retain and
motivate high quality personnel, especially our management. Our success depends
on Jonathan P. Aust, our President and Chief Executive Officer, and our other
executive officers and key employees. Members of our senior management team
have worked together for only a short period of time. We do not have "key
person" life insurance policies on any of our employees. Generally, members of
our senior management team can terminate their employment agreements with us on
thirty days notice. Any of our other employees may terminate his or her
employment with us at any time. Our future success depends on our continuing
ability to identify, hire, train and retain highly qualified technical, sales,
marketing and customer service personnel. The industry in which we compete has
a high level of employee mobility and aggressive recruiting of skilled
personnel. In particular, we face intense competition for qualified personnel,
particularly in software development, network engineering and product
management. We may be unable to continue to employ our key personnel or to
attract and retain qualified personnel in the future. See "Business--Employees"
and "Management."
A system failure could cause delays or interruptions of service to our
customers
The reliability of our services would be impaired by a natural disaster or
other unanticipated interruption of service at our owned or leased facilities.
If a traditional telephone company, competitive telecommunications company or
other service provider fails to provide the
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<PAGE>
communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, then this failure could interrupt
our services and have a material adverse effect on our business.
A breach of our network security could cause delays or interruptions of service
to our customers
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Unauthorized access could also potentially
jeopardize the security of confidential information stored in the computer
systems of our customers, which might cause us to be liable to our customers,
and might deter potential customers. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our customers and our customers' end users. Any of
these factors relating to network security could have a material adverse effect
on our business.
Our intellectual property protection may be inadequate to protect our
proprietary rights and we may be subject to infringement claims which could
materially adversely affect our business
The steps we have taken may be inadequate to protect our technology or other
intellectual property. Our inability to protect our proprietary rights could
have a material adverse effect on our business, prospects, financial condition
and results of operations. We currently have no patents or patent applications
pending. We also rely on unpatented trade secrets and know-how to maintain our
competitive position. We seek to protect this information by confidentiality
agreements with employees, consultants and others. These agreements may be
breached or terminated, leaving us with inadequate remedies. Our competitors
may learn or discover our trade secrets. Our competitors may independently
develop technologies that are substantially equivalent or superior to ours.
Third parties, including our competitors, may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we need to
conduct our business. Our management personnel were previously employees of
other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims. If such
claims materialize, it could materially adversely affect our business.
Our principal stockholders and management own a significant percentage of our
company and will be able to exercise significant influence over our company
which could have a material and adverse effect on the market price of our
common stock
Our executive officers, directors and principal stockholders together will
beneficially own 83.2% of our common stock after this offering, or 81.1% if the
underwriters exercise their over-allotment option in full. These stockholders
will be able to determine the composition of our board of directors, will
retain the voting power to approve all matters requiring stockholder approval,
including any merger, and will continue to have significant influence over our
affairs. This concentration of ownership could have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us, which in turn could have a
material and adverse effect on the market price of our common stock or prevent
you from realizing a premium over the market price for your shares of common
stock. See "Principal Stockholders" for information about the ownership of
common stock by our executive officers, directors and principal stockholders.
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Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000
issue." The Year 2000 issue could result in system failures or miscalculations,
causing disruptions in our operations.
To the extent that Bell Atlantic or other third parties experience Year 2000
problems, our network and services could be adversely affected. We have not
been able to verify Bell Atlantic's Year 2000 compliance. We do not have any
way to verify information that our customers and other vendors have provided on
their Year 2000 compliance. Furthermore, the purchasing patterns of our
customers may be affected by Year 2000 issues as they expend significant
resources to correct their current systems for Year 2000 compliance. These
expenditures may result in reduced funds available to purchase our services.
Any of these developments could have a material and adverse effect on our
business, operating results and financial condition.
The failure of an active trading market to develop for our common stock could
materially adversely affect your investment in our common stock
Our common stock has not been traded in the public market before this
offering. We have applied to the Nasdaq National Market to list our common
stock, but we do not know whether active trading in our common stock will
develop or continue after this offering. We will determine the price you will
pay for our common stock through negotiations with the underwriters. You may
not be able to resell your shares at or above the price you will pay for our
common stock. For a description of the factors that will be taken into account
to determine the offering price, see "Underwriting--Pricing of this Offering."
You will incur immediate and substantial dilution of approximately $12.34 per
share.
The initial public offering price is substantially higher than the net
tangible book value of our outstanding common stock immediately after this
offering. Accordingly, if you purchase common stock in this offering, you will
incur immediate and substantial dilution of $12.34 in the net tangible book
value per share of the common stock you purchase in this offering. As of March
31, 1999, 8,985,375 shares of common stock were issuable upon exercise of
outstanding stock options at a weighted average exercise price of $0.09 per
share. If all of these stock options are exercised, you will experience further
dilution in the amount of $0.43 per share. This dilution may cause the value of
your investment to decline.
Future sales of our common stock in the public market could depress our stock
price
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for our common stock. The number
of shares of common stock available for sale in the public market will be
limited by lock-up agreements under which certain holders of our outstanding
shares of common stock and options to purchase common stock will agree not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. However, Donaldson, Lufkin & Jenrette
Securities Corporation may, in its sole discretion and at any time without
notice,
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<PAGE>
release all or any portion of the shares subject to lock-up agreements. In
addition to the adverse effect a price decline could have on holders of common
stock, that decline would likely impede our ability to raise capital through
the issuance of additional shares of common stock or other equity securities.
After this offering, the holders of 23,050,000 shares of common stock will
have the right to require us to register the sale of their shares, subject to
limitations and to the lock-up agreements with the underwriters. These holders
and one of our directors also have the right to require us to include their
shares in any future public offerings of our equity securities. Within
approximately 180 days after this offering, we intend to file a registration
statement under the Securities Act to register 11,250,000 shares of common
stock subject to outstanding stock options or reserved for issuance under our
stock incentive plan. The sale of these additional shares into the public
market may further adversely affect the market price of our common stock. See
"Shares Eligible for Future Sale."
Our certificate of incorporation and bylaws contain provisions that could delay
or prevent a change in control and therefore could hurt our stockholders
Provisions of our certificate of incorporation and bylaws could make it more
difficult for a third party to acquire control of our company, even if a change
in control would be beneficial to stockholders. Our certificate of
incorporation will provide for a classified board of directors and will allow
our board to issue, without stockholder approval, preferred stock with terms
set by the board. The preferred stock could be issued quickly with terms that
delay or prevent the change in control of our company or make removal of
management more difficult. Also, the issuance of preferred stock may cause the
market price of our common stock to decrease. See "Description of our Capital
Stock" for more information.
This prospectus contains forward-looking statements which may not prove to be
accurate and such inaccuracy could materially and adversely affect the market
price of our common stock
This prospectus contains forward-looking statements and information relating
to our company. We generally identify forward-looking statements in this
prospectus using words like "believe," "intend," "expect," "may," "should,"
"plan," "project," "contemplate," "anticipate" or similar statements. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties and assumptions. Actual results may differ significantly from the
results discussed in these forward-looking statements.
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USE OF PROCEEDS
We estimate that we will receive approximately $103.6 million in net
proceeds from this offering based upon an assumed initial public offering price
of $15.00 per share. This amount reflects deductions from the gross proceeds of
the offering of:
. approximately $7.1 million, which will be retained by the underwriters
as discounts and commissions; and
. approximately $1.0 million, representing our estimated expenses for this
offering.
We expect to use approximately $40.0 million of the net proceeds from this
offering to finance capital expenditures. We expect to use the remaining net
proceeds to finance operating losses that we expect to incur as we expand our
customer base and network and for general corporate purposes. The actual amount
of net proceeds we spend on a particular use will depend on many factors,
including:
. our future revenue growth, if any;
. our future capital expenditures; and
. the amount of cash generated by our operations.
Many of these factors are beyond our control. Therefore, we will retain
broad discretion in the use of the net proceeds.
This use of proceeds does not reflect the underwriters' exercise of their
over-allotment option. We estimate that we will receive $11.0 million in
additional net proceeds if the underwriters exercise their over-allotment
option in full. We will not receive any of the proceeds from sales of shares by
selling stockholders as part of the over-allotment option.
Until we use the net proceeds of this offering, we intend to invest the net
proceeds in short-term investment-grade securities.
DIVIDEND POLICY
We have never declared or paid dividends. We do not anticipate declaring or
paying dividends for the foreseeable future. Instead, for the foreseeable
future, we will retain our earnings, if any, for the future operation and
expansion of our business.
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CAPITALIZATION
The following table shows our capitalization at March 31, 1999 on an actual
basis, a pro forma basis and pro forma as adjusted basis to give effect to this
offering and the application of the estimated net proceeds we will receive in
this offering. See "Use of Proceeds." You should also refer to our financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------
(in thousands)
Actual Pro Forma
(unaudited) Pro Forma(1) as Adjusted(2)
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 618 $10,618 $114,243
======= ======= ========
Long-term obligations:
Capital lease obligations (including
current portion).................... 1,618 1,618 1,618
Note payable......................... 1,000 1,000 1,000
Deferred compensation (including
current portion).................... 500 500 500
------- ------- --------
Total long-term obligations
(including current portion)....... 3,118 3,118 3,118
------- ------- --------
Mandatorily redeemable preferred stock,
$0.001 par value, 15,000,000 shares
authorized, issued and outstanding
(liquidation preference $10,519,452)
(actual); no shares issued and
outstanding (pro forma); no shares is-
sued and outstanding
(pro forma as adjusted)............... 5,988 -- --
------- ------- --------
Stockholders' equity (deficit):
Common stock, $0.001 par value,
150,000,000 shares authorized,
44,550,000 shares issued (actual),
45,550,000 shares issued (pro
forma); 53,050,000 shares issued
(pro forma as adjusted) (3)......... 45 46 53
Additional paid-in capital........... 19,694 35,681 139,299
Deferred compensation on employee
stock options....................... (14,866) (14,866) (14,866)
Accumulated deficit.................. (4,345) (4,345) (4,345)
Less treasury stock, at cost,
8,550,000 shares.................... (1,900) (1,900) (1,900)
------- ------- --------
Total stockholders' equity
(deficit)......................... (1,372) 14,616 118,241
------- ------- --------
Total capitalization............. $7,734 $17,734 $121,359
======= ======= ========
</TABLE>
- ---------------------
(1) Reflects:
. conversion of $5.0 million of our mandatorily redeemable preferred stock
into 333,334 shares of our common stock at the public offering price and
the cancellation without consideration of the remaining shares of our
preferred stock and all accrued dividends as if such conversion and
cancellation had occurred as of March 31, 1999;
. conversion of $5.0 million of 8% convertible notes issued on March 31,
1999 into 333,333 shares of our common stock at the public offering
price; and
. conversion into 333,333 shares of our common stock at the public offering
price of $5.0 million of convertible notes to be issued May 17, 1999
pursuant to the note purchase agreement entered into on March 31, 1999.
(2) Reflects the events described in note 1 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
(3) Excludes 8,985,375 shares of our common stock issuable upon exercise of
stock options outstanding on March 31, 1999 and 2,014,625 shares of our
common stock reserved for issuance under our stock incentive plan.
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DILUTION
As of March 31, 1999, our pro forma net tangible book value was
approximately $14,616,000, or $0.40 per common share, after giving effect to
the conversion of $5.0 million of redeemable preferred stock and our $10.0
million 8% convertible notes into common stock. Assuming no changes in our net
tangible book value, other than to give effect to the sale of the common stock
offered by this prospectus and the application of the net offering proceeds as
described under "Use of Proceeds," our pro forma net tangible book value at
March 31, 1999 would have been $118,240,080, or $2.66 per common share. Net
tangible book value is the amount of total tangible assets less total
liabilities. Net tangible book value per common share is net tangible book
value divided by the number of shares of common stock outstanding.
This represents an immediate increase in pro forma net tangible book value
of $2.26 per common share to existing stockholders, and an immediate dilution
in pro forma net tangible book value of $12.34 per common share to new
investors purchasing our common stock in this offering. The following table
illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share, excluding
SBC and Telmex................................................... $15.00
Pro forma net tangible book value per common share at March 31,
1999 after giving effect to the conversion of $5.0 million of
redeemable preferred stock and our $10.0 million 8% convertible
notes into common stock.......................................... $0.40
Increase per share attributable to new investors.................. 2.26
Pro forma net tangible book value per common share after this
offering after giving effect to the conversion of $5.0 million of
redeemable preferred stock and our $10.0 million 8% convertible
notes into common stock.......................................... 2.66
------
Dilution per common share to new investors, excluding SBC and
Telmex........................................................... $12.34
======
</TABLE>
The following table summarizes at March 31, 1999:
. the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price per share
paid to us for these shares, valuing these shares at the initial public
offering price, including consideration received for and common stock
issuable upon conversion of $5.0 million of redeemable preferred stock
and our $10.0 million 8% convertible notes;
. the number of shares of our common stock purchased by new investors, the
total consideration and the price per share paid by them for these
shares; and
. the percentage of shares of our common stock purchased by the existing
stockholders and new investors and the percentage of consideration paid
to us for these shares.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Per
------------------ -------------------- Common Share
Number Percent Amount Percent ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.... 45,550,000 85.9% $ 15,303,142 12.0% $ 0.34
New investors, including
SBC and Telmex........... 7,500,000 14.1 111,747,312 88.0 14.90
---------- ----- ------------ ----- ------
Total.................. 53,050,000 100.0% $127,050,454 100.0% $ 2.39
</TABLE>
These tables assume that none of the stock options outstanding upon the
closing of this offering will be exercised. As of March 31, 1999, 8,985,375
shares of common stock were issuable upon exercise of outstanding stock options
at a weighted average exercise price of $0.09 per share. If all of these stock
options are exercised, you will experience further dilution in the amount of
$0.43 per share.
23
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
We were incorporated on December 19, 1994, but did not begin operations
until after January 1, 1995. We present below summary financial and other data
for our company. The summary historical balance sheet data as of December 31,
1998 and the summary historical statement of operations and other data for each
of the three years ended December 31, 1998 have been derived from our audited
financial statements that are included elsewhere in this prospectus.
PricewaterhouseCoopers LLP has audited the financial statements as of and for
each of the three years in the period ended December 31, 1998. The summary
historical balance sheet data as of March 31, 1999 and the summary historical
statement of operations and other data for each of the three months ended March
31, 1998 and 1999 have been derived from our unaudited financial statements
that are included elsewhere in this prospectus. The summary financial data for
the year ended December 31, 1995 have been derived from our unaudited financial
statements that are not included in this prospectus. The unaudited financial
statements include, in the opinion of our management, all adjustments,
consisting of normal, recurring adjustments, necessary for a fair presentation
of the information set forth. You should refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the more
complete financial information included elsewhere in this prospectus. The
results of the three months ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the full year.
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
-------------------------------------- ----------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Product sales......... $ 1,891 $14,368 $ 8,150 $ 9,900 $ 2,194 $ 3,955
Consulting services... 36 114 791 1,428 317 702
Network services...... -- -- 4 311 41 119
------- ------- ------- -------- ------- -------
Total revenue....... 1,927 14,482 8,945 11,639 2,552 4,776
------- ------- ------- -------- ------- -------
Cost of revenue:
Product sales......... 1,475 11,975 7,180 8,639 1,858 3,535
Consulting services... 15 91 231 761 160 299
Network services...... -- -- 2 41 1 171
------- ------- ------- -------- ------- -------
Total cost of
revenue............ 1,490 12,066 7,413 9,441 2,019 4,005
------- ------- ------- -------- ------- -------
Operating expenses:
Selling, general and
administrative....... 299 2,255 1,437 4,017 538 2,533
Amortization of
deferred compensation
on employee stock
options.............. -- -- -- 219 -- 540
Depreciation and
amortization......... 9 7 12 130 4 187
------- ------- ------- -------- ------- -------
Total operating
expenses........... 308 2,262 1,449 4,366 542 3,260
------- ------- ------- -------- ------- -------
Income (loss) from
operations............. 129 154 83 (2,168) (9) (2,489)
Interest income
(expense), net......... -- (1) (5) 64 (12) (9)
------- ------- ------- -------- ------- -------
Income (loss) before
income taxes........... 129 153 78 (2,104) (21) (2,498)
Provision (benefit) for
income taxes........... 39 63 36 (28) (8) --
------- ------- ------- -------- ------- -------
Net income (loss)....... $ 90 $ 90 $ 42 $ (2,076) $ (13) $(2,498)
======= ======= ======= ======== ======= =======
Net income (loss) per
common share (basic and
diluted)............... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $ (0.00) $ (0.07)
======= ======= ======= ======== ======= =======
Weighted average common
shares outstanding
(basic and diluted).... 21,915 21,915 21,915 27,302 21,915 36,000
======= ======= ======= ======== ======= =======
Pro forma net income
(loss) per common share
(basic and
diluted) (1)........... $ 0.00 $ 0.00 $ 0.00 $ (0.08) $ (0.00) $ (0.07)
======= ======= ======= ======== ======= =======
Pro forma weighted
average common shares
outstanding (basic and
diluted) (1)........... 21,915 21,915 21,915 27,302 21,915 37,000
======= ======= ======= ======== ======= =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March
Year Ended December 31, 31,
------------------------------ -------------
1995 1996 1997 1998 1998 1999
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Other Data:
EBITDA (2)..................... $138 $161 $95 $(1,819) $ (5) $(1,762)
Capital expenditures........... 18 30 122 1,156 1 4,966
Net cash provided by (used in)
operating activities.......... 3 (27) 805 (2,810) (273) 136
Net cash used in investing
activities.................... 18 30 122 1,341 1 4,966
Net cash provided by (used in)
financing activities.......... 42 55 9 8,956 54 (70)
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31, 1999
--------------------------------- ---------------------------------------
Pro Forma
1995 1996 1997 1998 Actual Pro Forma(3) as Adjusted(4)
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 24 $ 22 $ 713 $ 5,518 $ 618 $10,618 $114,243
Property and equipment,
net.................... 8 31 140 5,031 10,094 10,094 10,094
Total assets............ 458 5,352 1,865 12,928 14,631 24,631 128,256
Total debt (including
capital lease
obligations)........... 30 84 93 2,513 2,618 2,618 2,618
Mandatorily redeemable
preferred stock........ -- -- -- 5,641 5,988 -- --
Total stockholders'
equity (deficit)....... 118 208 250 932 (1,372) 14,616 118,241
</TABLE>
- ------------------
(1) The "pro forma" selected statement of operations data as of March 31, 1999
reflects the following events as if such events had occurred as of January
1, 1999:
. the conversion of $5.0 million of our mandatorily redeemable preferred
stock into 333,334 shares of our common stock at the public offering
price and the cancellation without consideration of the remaining shares
of our preferred stock and all accrued dividends,
. the conversion of $5.0 million of 8% convertible notes issued on March
31, 1999 into 333,333 shares of our common stock at the public offering
price and
. the conversion into 333,333 shares of our common stock at the public
offering price of $5.0 million of 8% convertible notes to be issued no
later than May 17, 1999 pursuant to the note purchase agreement entered
into on March 31, 1999.
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. We have
presented EBITDA to enhance your understanding of our operating results.
You should not construe it as an alternative to operating income as an
indicator of our operating performance or as an alternative to cash flows
from operating activities as a measure of liquidity determined in
accordance with GAAP. We may calculate EBITDA differently than other
companies. For further information, see our financial statements and
related notes elsewhere in this prospectus.
(3) The "pro forma" selected balance sheet data as of March 31, 1999 reflects
the events described in note 1 as if such events had occurred as of March
31, 1999.
(4) The "pro forma as adjusted" selected balance sheet data as of March 31,
1999 reflects the events described in note 3 and the issuance of our common
stock in this offering and the application of the net offering proceeds as
described in "Use of Proceeds."
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In 1995, we began operations by providing data communications products and
consulting services for wide area networks. 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
product sales and consulting services. We have primarily depended on AT&T and
Zeneca for revenue, as AT&T has accounted for 68.8%, 38.2%, 50.4% and 55.5% of
total revenue for 1996, 1997, 1998 and the three months ended March 31, 1999,
respectively, while Zeneca has accounted for 10.3%, 8.0% and 10.0% of total
revenue for 1997, 1998 and the three months ended March 31, 1999, respectively.
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
commercially offering CuNet in Philadelphia and Washington D.C. in January
1999. We currently offer CuNet in Boston, New York, Philadelphia, Baltimore,
Washington, D.C. and Richmond. We expect to extend our network coverage to
include Norfolk, Pittsburgh and Wilmington, Delaware by the end of 1999. We
have collocated our equipment in 51 Bell Atlantic central offices and expect to
raise that number 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. Consistent with this strategy, we have
recently entered into an interconnection agreement with Bell South which
requires state regulatory approval before it becomes effective.
Since February 1997, we have invested increasing amounts in the development
and deployment of CuNet. The proceeds of a preferred and common stock financing
which we completed in August 1998 and the proceeds from our 8% convertible
promissory notes have been used to fund the deployment of our CuNet services.
We intend to substantially increase our operating expenses and capital
expenditures in an effort to expand rapidly our infrastructure and DSL-based
network services. We expect to incur substantial operating losses, net losses
and negative cash flow during the build-out of our network and our initial
penetration of each new market we enter. These losses are expected to continue
for at least the next two to three years. Although in the short term we expect
to derive the majority of our revenue from our product sales and related
consulting services, we expect that over time revenue from network services,
which includes our CuNet services, will constitute the more significant portion
of our total revenue. During the past several years, market prices for many
telecommunications services have been declining, which is a trend we believe
will likely continue. 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:
.the rate at which we are able to attract and retain customers;
.the prices our customers are willing to pay;
26
<PAGE>
. the amount and timing of expenditures relating to the expansion of our
services and infrastructure, including the potentially lengthy sales
cycle for our CuNet services, which may last six months or longer;
. the timing and availability on reasonable terms of Bell Atlantic copper
telephone lines and collocation space in central offices;
. the timing and availability on reasonable terms of Bell Atlantic
operations support and management of telephone line usage;
. the timing and availability on reasonable terms of fiber optic and other
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;
. the 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 Telecom
Act; and
. technical difficulties or network downtime.
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, 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.
27
<PAGE>
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 metropolitan area
network backbone, typically from a competitive telecommunications company
or a traditional telephone company, 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 the DSL equipment we use in the traditional telephone
company's central office locations and equipment installed on the
customer's premises. Currently, we generally use capital leases to
finance the acquisition of substantially all of this equipment, which we
depreciate over a range of two to five years.
Operating Expenses
Selling, general and administrative expenses
Our selling, general and administrative expenses include all employee-based
charges, including field technicians, engineering support, customer service and
technical support, information systems, billing and collections, general
management and overhead and administrative functions. Headcount in functional
areas, such as sales, customer service and operations will increase
significantly as we expand our network and as the number of customers
increases.
. Sales and marketing expenses. We distribute our products and services
through direct and indirect sales efforts, agents and telemarketing. Our
direct sales and marketing efforts focus on attracting and retaining
small, medium and large business customers in our target markets. We
enter into partnerships with other sales partners, including Internet
service providers, local and long distance service providers and other
networking services companies. These expenses have increased, and will
continue to increase, as we develop our CuNet services.
. General and administrative expenses. As we expand our network, we expect
the number of employees located in specific markets to grow. Certain
functions, such as customer service, network operations, finance, billing
and administrative services, are likely to remain centralized in order to
achieve economies of scale. We pay licensing fees for standard systems to
support our business processes, such as billing systems.
28
<PAGE>
Amortization of deferred compensation on employee stock options
We had outstanding incentive stock options to purchase a total of 7,090,875
shares as of December 31, 1998 and 8,985,375 shares as of March 31, 1999, at a
weighted average exercise price of $0.09 per share. At March 31, 1999, all of
these options were exercisable into restricted shares of our common stock which
generally vest over a three to four year period. We estimate that the fair
value of the underlying common stock on the date of grant was in excess of the
exercise price of the options. As a result, we recorded deferred compensation
of $3.7 million for the year ended December 31, 1998 and $11.9 million for the
three months ended March 31, 1999. We recorded this amount as a reduction to
stockholders' equity which will be amortized as a charge to operations over the
vesting periods. For the year ended December 31, 1998, we recognized $219,000
and the three months ended March 31, 1999, we recognized $540,000 of stock
compensation expense related to these options.
Depreciation and amortization
Depreciation expense arising from our network and equipment purchases for
our customers' premises will be significant and will increase as we deploy our
network. Collocation fees, build-out costs, including one-time installation and
activation fees, and other DSL-based equipment costs are capitalized and
amortized over a range of two to five years.
Interest Income (Expense), Net
Interest income (expense), net, primarily consists of interest income from
our cash and short-term investments less interest expense associated with our
debt and capital leases. As our capital expenditures increase, we anticipate
that our interest expense associated with our capital leases will increase.
29
<PAGE>
Results of Operations
The following table presents our results of operations data and the
components of net income (loss) in dollars and as a percentage of our revenue:
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
------------------------ ---------------
1996 1997 1998 1998 1999
(unaudited)
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales..................... $14,368 $8,150 $9,900 $2,194 $ 3,955
Consulting services............... 114 791 1,428 317 702
Network services.................. -- 4 311 41 119
------- ------ ------- ------ -------
Total revenue................... 14,482 8,945 11,639 2,552 4,776
------- ------ ------- ------ -------
Cost of revenue:
Product sales..................... 11,975 7,180 8,639 1,858 3,535
Consulting services............... 91 231 761 160 299
Network services.................. -- 2 41 1 171
------- ------ ------- ------ -------
Total cost of revenue............... 12,066 7,413 9,441 2,019 4,005
------- ------ ------- ------ -------
Gross profit........................ 2,416 1,532 2,198 533 771
------- ------ ------- ------ -------
Operating expenses:
Selling, general and
administrative................... 2,255 1,437 4,017 538 2,533
Amortization of deferred
compensation on employee stock
options.......................... -- -- 219 -- 540
Depreciation and amortization..... 7 12 130 4 187
------- ------ ------- ------ -------
Total operating expenses........ 2,262 1,449 4,366 542 3,260
------- ------ ------- ------ -------
Income (loss) from operations....... 154 83 (2,168) (9) (2,489)
Interest income (expense), net...... (1) (5) 64 (12) (9)
Provision (benefit) for income
taxes.............................. 63 36 (28) (8) --
------- ------ ------- ------ -------
Net income (loss)................... $ 90 $ 42 $(2,076) $ (13) $(2,498)
======= ====== ======= ====== =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Three Months
Year Ended Ended March
December 31, 31,
------------------- ---------------
1996 1997 1998 1998 1999
(unaudited)
(percent of revenue)
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales.................... 99.2% 91.1% 85.1% 86.0% 82.8%
Consulting services.............. 0.8 8.8 12.3 12.4 14.7
Network services................. -- 0.1 2.6 1.6 2.5
----- ----- ----- ------ ------
Total revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ------ ------
Cost of revenue:
Product sales.................... 82.7 80.3 74.2 72.8 74.0
Consulting services.............. 0.6 2.6 6.5 6.3 6.3
Network services................. -- 0 0.4 0 3.6
----- ----- ----- ------ ------
Total cost of revenue.............. 83.3 82.9 81.1 79.1 83.9
----- ----- ----- ------ ------
Gross profit....................... 16.7 17.1 18.9 20.9 16.1
----- ----- ----- ------ ------
Operating expenses:
Selling, general and
administrative.................. 15.6 16.1 34.5 21.1 53.0
Amortization of deferred
compensation on employee stock
options......................... -- -- 1.9 -- 11.3
Depreciation and amortization.... 0.0 0.1 1.1 0.2 3.9
----- ----- ----- ------ ------
Total operating expenses....... 15.6 16.2 37.5 21.3 68.2
----- ----- ----- ------ ------
Income (loss) from operations...... 1.1 0.9 (18.6) (0.4) (52.1)
Interest income (expense), net..... 0 0 0.6 (0.5) (0.2)
Provision (benefit) for income
taxes............................. 0.4 0.4 (0.2) (0.3) --
----- ----- ----- ------ ------
Net income (loss).................. 0.7% 0.5% (17.8)% (0.6)% (52.3)%
===== ===== ===== ====== ======
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Revenue. We recognized $4.8 million in revenue for the three months ended
March 31, 1999, as compared to $2.6 million for the three months ended March
31, 1998, an increase of $2.2 million, or 84.6%. Revenue increased as a result
of a $1.8 million increase in product sales, primarily from one of our largest
customers, AT&T, from an increase in consulting services of $400,000
attributable to increases in maintenance and consulting contracts, and from
growth in network services revenue of $78,000 arising from the introduction of
broader network service offerings in late 1998. We are uncertain whether the
increase in revenue from AT&T will continue.
Cost of revenue. Cost of revenue was $4.0 million for the three months ended
March 31, 1999, as compared to $2.0 million for the three months ended March
31, 1998, an increase of $2.0 million, or 100.0%. The increase was attributable
to growth in cost related to an increase in product sales of $1.7 million,
growth in cost related to additional consulting services of $119,000 and from
growth in cost of network services of $171,000 attributable to expenses
incurred to continue to develop and operate our CuNet and other networking
services.
Gross profit. Gross profit was $0.8 million and 16.1% of revenue for the
three months ended March 31, 1999, as compared to $0.5 million and 20.9% of
revenue for the three months ended March 31, 1998. Gross profit as a percentage
of revenue decreased primarily as a result of increased operating expenses
related to the continued expansion of our network. We did not yet realize
revenue from our customer base to offset the increase in our expenses.
31
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.5 million and 53.0% of revenue for the three
months ended March 31, 1999, as compared to $0.5 million and 21.1% of revenue
for the three months ended March 31, 1998, an increase of $2.0 million, or
400.0%. This increase as a percentage of revenue was primarily due to increased
staffing and other expenses incurred to develop and operate our CuNet network
and other networking solutions.
Amortization of deferred compensation on employee stock options.
Amortization of deferred compensation was $540,000 for the three months ended
March 31, 1999. We had no amortization of deferred compensation for the three
months ended March 31, 1998.
Depreciation and amortization expense. Depreciation and amortization expense
was $187,000 and 3.9% of revenue for the three months ended March 31, 1999, as
compared to $4,000 and less than 0.2% of revenue for the three months ended
March 31, 1998, an increase of $183,000. This increase was primarily due to
investments in our CuNet network, computer equipment and software, office
furnishings and leasehold improvements.
Income (loss) from operations. Our loss from operations was $2.5 million for
the three months ended March 31, 1999, as compared to loss from operations of
$9,000 for the three months ended March 31, 1998. The loss for the three months
ended March 31, 1999 was primarily due to increased staffing and other
operating expenses we incurred in support of our CuNet network and other
networking solutions.
Interest income (expense), net. For the three months ended March 31, 1999,
we recorded net interest expense of $9,000, consisting of interest income of
$54,000 which was primarily attributable to interest income earned from the
proceeds of our issuance of $10.0 million of preferred and common stock in
August 1998, offset by $63,000 in interest expense, compared to $12,000 of
interest expense for the three months ended March 31, 1998. The increase in
interest expense is primarily due to interest on deferred compensation
liabilities and notes payable.
Provision (benefit) for income taxes. We had no benefit or provision for
income taxes for the three months ended March 31, 1999. We had a benefit for
income taxes of $8,000 for the three months ended March 31, 1998.
Net income (loss). For the foregoing reasons, our net loss was $2.5 million
for the three months ended March 31, 1999, as compared to net loss of $13,000
for the three months ended March 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. We recognized $11.6 million in revenue for the year ended December
31, 1998, as compared to $8.9 million for the year ended December 31, 1997, an
increase of $2.7 million, or 30.3%. Revenue increased as a result of a $1.8
million increase in product sales, primarily from one of our largest customers,
AT&T, from an increase in consulting services of $0.6 million attributable to
increases in maintenance and consulting contracts, and from growth in network
services revenue of $0.3 million arising from the introduction of broader
network service offerings in late 1997.
Cost of revenue. Cost of revenue was $9.4 million for the year ended
December 31, 1998, as compared to $7.4 million for the year ended December 31,
1997, an increase of $2.0 million, or 27.0%. The increase was attributable to
growth in cost related to an increase in product sales of
32
<PAGE>
$1.5 million, growth in cost related to additional consulting services of
$0.5 million and from growth in the cost of network services of $39,000
attributable to expenses incurred to develop and operate our CuNet and other
networking services.
Gross profit. Gross profit was $2.2 million and 18.9% of revenue for the
year ended December 31, 1998, as compared to $1.5 million and 17.1% of revenue
for the year ended December 31, 1997. The increase in gross profit as a per-
centage of revenue was attributable to higher product sales, increased revenue
from consulting services and the introduction of broader network service offer-
ings in late 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.0 million and 34.5% of revenue for the year
ended December 31, 1998, as compared to $1.4 million and 16.1% of revenue for
the year ended December 31, 1997, an increase of $2.6 million, or 186%. This
increase as a percentage of revenue was primarily due to increased staffing and
other expenses incurred to develop our CuNet network and other networking
solutions.
Amortization of deferred compensation on employee stock
options. Amortization of deferred compensation was $219,000 for the year ended
December 31, 1998. We had no amortization of deferred compensation for the year
ended December 31, 1997.
Depreciation and amortization expense. Depreciation and amortization expense
was $130,000 and 1.1% of revenue for the year ended December 31, 1998, as
compared to $12,000 and less than 1% of revenue for the year ended December 31,
1997, an increase of $118,000. This increase was primarily due to investments
in computer equipment and software, office furnishings and leasehold
improvements.
Income (loss) from operations. Our loss from operations was $2.2 million for
the year ended December 31, 1998, as compared to income from operations of
$83,000 for the year ended December 31, 1997. The loss in 1998 was primarily
due to increased staffing and other operating expenses we incurred in support
of our CuNet network and other networking solutions.
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
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38.6%. This decrease in revenue was primarily due to a decrease in product
sales of $6.2 million to one of our largest customers, AT&T, which had
purchased a significant amount of equipment from us in the last half of 1996,
offset by an increase in consulting services of $0.7 million attributable to
new maintenance and consulting service offerings.
Cost of revenue. Cost of revenue was $7.4 million for the year ended
December 31, 1997, as compared to $12.1 million for the year ended December 31,
1996, a decrease of $4.7 million, or 38.8%, resulting from the decline in
product sales, and offset by the increase in consulting services.
Gross profit. Gross profit was $1.5 million and 17.1% of revenue for the
year ended December 31, 1997, as compared to $2.4 million and 16.7% of revenue
for the year ended December 31, 1996. The increase in gross profit as a
percentage of revenue was the result of the increase in consulting services,
which has a higher gross profit percentage as compared to product sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1.4 million and 16.1% of revenue for the year
ended December 31, 1997, as compared to $2.3 million and 15.6% of revenue for
the year ended December 31, 1996. This decrease in expenses was primarily due
to decreased bonus and commissions compensation in 1997 attributable to lower
revenue. The increase as a percentage of revenue was the result of a decrease
in product sales, without a related reduction in selling, general and
administrative expenses.
Depreciation and amortization expense. Depreciation and amortization expense
was $12,000 and less than 1% of revenue for the year ended December 31, 1997,
as compared to $7,000 and less than 1% of revenue for the year ended December
31, 1996, an increase of $5,000, or 71.4%. This increase was primarily due to
investments in computer equipment and software, office furnishings and
leasehold improvements.
Income (loss) from operations. Our income from operations was $83,000 for
the year ended December 31, 1997, as compared to an income from operations of
$154,000 for the year ended December 31, 1996, a decrease of $71,000, or 46.1%.
This decrease was primarily due to the decline 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%.
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Liquidity and Capital Resources
While we do not require significant capital expenditures for our product
sales and consulting service segments, the development and expansion of our
CuNet network requires significant capital expenditures. The principal capital
expenditures which we expect to incur during our CuNet rollout include the
procurement, design and construction of our collocation spaces and the
deployment of DSL-based equipment in Bell Atlantic central offices and
connection sites. Capital expenditures were $4.7 million for 1998 and $5.2
million for the three months ended March 31, 1999. At this time, our only
material purchase commitment is to purchase software and services for
approximately $1.0 million. We expect our capital expenditures to be
substantially higher for the rest of 1999 and for future periods, primarily due
to continued collocation construction and the purchase of telecommunications
equipment for expansion of our network. Our capital expenditures will depend in
part upon obtaining adequate volume commitments or demand from our CuNet
customers. Based on our present plans, we anticipate capital expenditures
during the balance of 1999 to range from $40.0 million to $55.0 million for the
expansion of our network to approximately 360 central offices, a portion of
which will be financed in the form of capital leases. The rollout of 360
central offices will allow us to provide DSL services throughout our initial
target markets at capacity levels anticipated by our business plan. We will
continue to expand our CuNet related capital expenditures and our number of
central offices as necessary to provide additional CuNet service capacity.
Based on our present plans we anticipate capital expenditures during the year
2000 of between $60.0 million and $70.0 million, a portion of which will be
financed in the form of capital leases, for the expansion of our network to
over 430 central offices.
We have financed our operations to date primarily through a private
placement in August 1998 of preferred and common stock totaling $10.0 million,
the use of capital equipment leases totaling $1.7 million and borrowings of
$3.0 million from Ascend Communications. As of March 31, 1999, we had an
accumulated deficit of $4.3 million, and cash and cash equivalents of $0.6
million.
On March 18, 1999 we amended our certificate of incorporation to modify the
terms of the preferred stock. In the event of an initial public offering in
which we receive a market valuation in excess of $200.0 million, the terms of
the preferred stock provide that 50% of the shares of our preferred stock
outstanding and all accrued dividends will be cancelled without additional
payment to the holders of those shares and the remaining preferred stock will
be automatically converted into 333,334 shares of our common stock.
On March 31, 1999, we entered into a financing agreement whereby two holders
of our redeemable preferred stock agreed to invest an additional $10.0 million.
Under this agreement, we received the first $5.0 million on April 1, 1999 by
issuing 8% convertible notes with a maturity date of December 31, 1999. We
subsequently amended our financing agreement and no later than May 17, 1999, we
expect these holders to purchase an additional $5.0 million in 8% convertible
notes on the same terms. The principal of and interest on the notes will be
converted into shares of our common stock upon our completion of an initial
public offering with an aggregate offering price to the public of not less than
$25.0 million based on a pre-money valuation of at least $200.0 million.
The 8% convertible notes will be converted into an aggregate of 666,666
shares of our common stock at the public offering price.
We estimate that we will receive approximately $103.6 million in net
proceeds from this offering. We expect to use approximately $40.0 million of
the net proceeds to finance capital
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expenditures which includes $8.6 million and $21.3 million of estimated
expenditures for installation and collocation fees, respectively. We do not
expect to use any proceeds to purchase DSL equipment since these purchases will
be acquired through capital leases. We expect to use the remaining net proceeds
to finance operating losses that we expect to incur as we expand our customer
base and network and for general corporate purposes. We have no immediate plans
to retire any debt with the proceeds of the offering.
Net cash used in operating activities was $27,000 in 1996 and $2.8 million
in 1998. Net cash provided by operations was $806,000 in 1997 and $136,000 for
the three months ended March 31, 1999. The change in operating cash flow from
1997 to 1998 was primarily the result of operating losses attributable to the
expansion of our historic business and the development of our CuNet services,
but also the result of an increase in accounts receivable accompanied by a
decrease in accounts payable. The net cash provided from operations during the
three months ended March 31, 1999, was primarily the result of an increase in
accounts payable exceeding the net loss for the period and an increase in
accounts receivable. The net cash used in investing activities was $30,000 in
1996, $122,000 in 1997, $1.3 million in 1998 and $5.0 million for the three
months ended March 31, 1999. The increase in 1998 and for the three months
ended March 31, 1999, was primarily due to the deployment of equipment for our
CuNet services. Net cash provided by financing activities was $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. Net cash used in financing activities was
$70,000 in the three months ended March 31, 1999 resulting from principal
payments on capital leases.
Ascend has provided us with a $30.0 million capital lease facility to fund
acquisitions of certain Ascend equipment, under which $1.2 million was
outstanding as of March 31, 1999. Upon the completion of this offering, the
capital lease facility will be increased to $95.0 million. Ascend has also
provided a $5.0 million line of credit, under which $1.0 million was
outstanding as of March 31, 1999. We borrowed an additional $2.0 million under
the line of credit on May 4, 1999. We can draw on the $5.0 million line of
credit in $1.0 million increments up to a maximum of $5.0 million. We are
required to make interest only payments at an annual rate of 8.25% on the
amounts advanced for the first nine months from the date of the advance. For
the next 33 months, we are required to make principal and interest payments in
accordance with a 60 month amortization schedule using an interest rate of
8.25% for the first 18 months and a rate equal to the prevailing high yield
bond index for the next 15 months. The remaining unpaid interest is due 42
months after the related advance. The terms of our capital leases range from
three to six years. In addition, we have an arrangement with Paradyne to lease
up to $4.0 million of equipment, subject to vender approval.
As of March 31, 1999, we had not entered into any financial instruments that
expose us to material market risk.
We believe that the net proceeds from this offering, our existing cash and
cash equivalents, existing and anticipated equipment lease financings and
future revenue generated from operations, will be sufficient to fund our
operating losses, capital expenditures, lease payments and working capital
requirements through the end of 2000. We expect our operating losses and
capital expenditures to increase substantially primarily due to our network
expansion. We expect that additional financing would be required in the future
if we were to expand beyond our initial target markets. We may attempt to
finance such an expansion of our operations through a combination of commercial
bank borrowings, leasing, vendor financing or the private or public sale of
equity or debt
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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.
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.
We intend to market CuNet to our existing base of network integration,
network management and network security customers and to market our network
integration, network management, network security services to new CuNet
customers. In working with our existing customer base, we have found that we
can sell a customer an initial product or service, and, based on the insights
gained and relationships built from the initial sale, expand the relationship
to provide comprehensive solutions to the customer's networking needs, thereby
improving the likelihood that we will retain these customers.
Impact of the Year 2000 Issue
Our Year 2000 plan applies to two areas: internal business systems and
compliance by external providers. We have completed our Year 2000 compliance
testing for all of our internal information technology systems and our other
systems and believe that our internal business systems are Year 2000 compliant.
Because our systems were implemented within the last two years, we do not
anticipate significant Year 2000 issues to arise, 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.
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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. Our complete internal review of and planning for Year 2000
issues is anticipated to be completed by July 1999.
Financial Information
The preceding discussion and analysis is based on our financial statements
and the related notes and should be read in conjunction with the financial
statements and the related notes included in this prospectus.
Forward-looking Statements
This prospectus includes forward-looking statements. These forward-looking
statements address, among other things:
. our CuNet deployment plans and strategies;
. development and management of our business;
. our ability to attract, retain and motivate qualified personnel;
. our ability to attract and retain customers;
. the extent of acceptance of our services;
. the market opportunity and trends in the markets for our services;
. our ability to upgrade our technologies;
. prices of telecommunication services;
. the nature of regulatory requirements that apply to us;
. our ability to obtain and maintain any required governmental
authorizations;
. our future capital expenditures and needs;
. our ability to obtain and maintain financing on commercially reasonable
terms;
. our ability to implement a Year 2000 readiness program; and
. the extent and nature of competition.
These statements may be found in this section, in the sections of this
prospectus entitled "Summary," "Risk Factors," "Use of Proceeds" and "Business"
and in this prospectus generally.
We have based these forward-looking statements on our current expectations
and projections about future events. However, our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of risks facing us, including risks stated in "Risk Factors," or faulty
assumptions on our part. For example, assumptions that could cause actual
results to vary materially from future results include, but are not limited to:
. our ability to successfully market our services to current and new
customers;
. our ability to generate customer demand for our services in our target
markets;
. market pricing for our services and for competing services;
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. 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 provider of high speed DSL connections and networking solutions to
businesses. We formed Network Access Solutions in 1995 and began providing data
communications products and services for corporate networks. We recognized that
businesses were finding it extremely expensive and time consuming to manage and
secure the complex elements of their networks. To exploit this opportunity, we
began offering our customers additional services 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 features of DSL technology.
To exploit this opportunity, we began developing technical standards and
processes for delivery of DSL-based services to our customers. We seek to
bundle CuNet and our networking solutions to provide a comprehensive solution
to our customers. Although in the short term we expect to continue to derive
the majority of our revenue from product sales and consulting services, we
expect that over time, network services, which includes our CuNet services,
will constitute the more significant portion of our total revenue. For the
three months ended March 31, 1999, approximately 97.5% of our revenue resulted
from product sales and consulting services, while revenue from network
services, which includes our CuNet services, accounted for approximately 2.5%
of our revenue.
Industry Overview
We believe that a substantial business opportunity exists because of the
concurrence of several factors:
Growing demand for high speed data communications and networking
solutions. Businesses and other organizations are finding it extremely
expensive and time-consuming to manage the complex elements of their networks.
Businesses are implementing internal networks using Internet technology, 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%.
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.
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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 lines to DSL speeds of up to 7
megabits per second. Because DSL technology reuses existing copper telephone
lines, DSL requires a lower initial fixed investment than that needed for
existing alternative technologies, such as cable modems, fiber, wireless and
satellite communications systems. Subsequent investments in DSL technology are
directly related to the number of paying customers.
Impact of the 1996 Telecom Act. The 1996 Telecom Act allows competitive
telecommunications companies like us to take advantage of traditional telephone
companies' existing copper telephone line networks rather than constructing a
competing infrastructure at significant cost. The 1996 Telecom Act requires
traditional telephone companies:
. to allow competitive telecommunications companies to lease copper lines
on a line by line basis;
. to permit competitive telecommunications companies to collocate their
equipment, including DSL equipment, in traditional telephone companies'
central offices, which enables competitive telecommunications companies
to access end users through existing telephone line connections; and
. to provide competitive telecommunications companies with the operations
support services necessary for competitive telecommunications companies
to compete.
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The 1996 Telecom Act creates an incentive for some traditional telephone
companies, including Bell Atlantic, to cooperate with competitive
telecommunications companies because the incumbent carriers cannot provide long
distance service in the regions where they provide local exchange service until
the FCC determines that the traditional telephone company has satisfied
specific statutory criteria for opening its local markets to competition.
The NAS Solution
We offer high speed packet-based and channelized data communications
services using a combination of DSL and other technologies 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 businesses through our direct sales force and indirectly through
network service providers and sales partners. To date, our product sales and
consulting services 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 channelized technology, we also provide channelized connections, which we
believe no other major DSL provider currently offers. Thus, CuNet addresses
both older channelized data network requirements, like traditional voice
telephone networks, and the packet-based communications better suited for
newer, more efficient technologies such as asynchronous transfer mode, Frame
Relay and Internet Protocol, the set of standards that enable Internet
communications. Asynchronous transfer mode and Frame Relay are different
communications technologies, but both transmit data at high speed and can
accommodate multiple types of media, including voice, video and data.
Adaptable Network Design. The design of our network supports today's
bandwidth-intensive business requirements, such as corporate networks, virtual
private networks, office-to-office connectivity, telecommuting solutions,
collaborative computing of users in different areas, Internet/intranet access,
traditional voice, video conferencing and multimedia, e-mail, video and audio
transmission, web hosting and electronic commerce. We have designed our network
so that we can individually configure a customer's features and speeds from our
network operations center, eliminating the need for customers to upgrade their
hardware or for us to visit their premises in order to enhance or upgrade
services.
Metropolitan Area Network Solutions. We recognize that businesses with city-
wide locations, as well as remote users who telecommute, need to communicate
and share confidential information. We have constructed data communications
networks that cover an entire metropolitan area which are known as
"metropolitan area networks." Our metropolitan area networks provide high
capacity, secure, direct connections between these remote locations and provide
cost effective private network solutions to our customers with the capacity,
speed, reliability and level of service that they require.
Wide Area Network Solutions. We recognize that many organizations have
offices and employees in multiple cities. By linking our metropolitan area
networks, we have constructed a data communications network that covers an
entire region or other wide area, which is known as a "wide
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area network." Our wide area network provides high capacity, secure and
reliable connections between geographically dispersed locations. Because our
wide area network customers, like our metropolitan area network customers, are
served end-to-end on our CuNet infrastructure, we are able to deliver a wide
area, private network to our customers with the capacity, speed, reliability
and level of service that they require. For example, our wide area network
enables our network service provider customers to expand their geographic reach
into areas where they lack a physical point of presence through virtual points
of presence, or VPOPs.
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 networks across local, metropolitan and wide areas. We provide
remote online control, monitoring and management. We also develop and implement
sophisticated network security solutions to protect our customers' networks and
vital data, including virtual private networks, encryption and access
authentication, risk assessment and audits, design consulting, security testing
through attempted breaches of security and analysis of and response to breaches
of securities. We maintain and manage our customers' networks and security
systems 24 hours a day, seven days a week from our network operations center in
Sterling, Virginia.
The NAS Strategy
Our goal is to become the premier provider of data communications and
networking solutions in the markets in which we focus. We plan to:
. Rapidly provide depth of coverage in our markets. Because DSL is a
localized technology tied to the proximity of end users to central
offices, we must collocate our equipment in many central offices in order
to provide depth of coverage. Thus, we are pursuing a strategy of
providing services in a substantial majority of the central offices in
each target market that we enter. Our initial focus on the Bell Atlantic
region will enable us to deploy our network with speed and depth. When
deployed, we believe our pervasive coverage of these markets will enable
us to better serve our end user business customers and network service
providers which are increasingly seeking a single service provider in
multiple metropolitan areas. Our depth of service will enable us to
provide our customers with a total business solution by providing them
with access for substantially all of their end users within our target
markets. As opportunities present themselves, we may decide to expand our
network beyond our initial target markets and into adjacent regions. As
part of this strategy, we have recently entered into an interconnection
agreement with Bell South, which requires state regulatory approval
before it becomes effective.
. Capitalize on core competency in direct sales and engineering support to
businesses. Through our direct sales force, we have been marketing,
selling and supporting comprehensive 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. We believe we have developed strong operational
relationships with our service providers, including Bell Atlantic, Level
3 Communications and MCI WorldCom. Because of these relationships, we
believe we can manage these service providers to deliver the highest
quality network to our customers in the shortest possible time. In
February 1997, we began a joint operational relationship with Bell
Atlantic and have developed technical standards specifying the
provisioning and telephone line qualities necessary to deliver
dependable, high quality DSL circuits within the Bell Atlantic region. We
believe we have gained a competitive advantage through our close
operational relationships with Bell Atlantic, the dominant traditional
telephone company in our initial target markets, and our other service
providers. We believe these relationships will enable us to continue to
enhance and maintain our network and provide high quality solutions on a
timely basis.
. Provide superior customer care. We emphasize a one-stop total service
solution for our customers by developing a complete project
implementation plan for each installation and for the on-going
maintenance of their service. This is to ensure that each customer
receives the service for which they have contracted according to our
service level commitments. We manage all aspects of our customers'
connections to our network, including the design and installation of the
end-user's connection, equipment configuration and network monitoring on
a 24 hour a day, seven day a week basis. By providing our customers
regular reports on the performance of their services, we are able to
demonstrate to our customers our performance relative to our commitments
and how customers may benefit by acquiring additional networking services
from us.
. Deliver our products and services through 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. We have recently teamed with
Net2000 Communications to be their preferred provider of channelized
services in the Bell Atlantic region and to jointly offer our CuNet
services with their voice-based services and formed a strategic
relationship with DSL Networks as a preferred provider of our packet-
based services in the Bell Atlantic region.
. Enhance and expand our network to meet the broadest array of business
requirements. Our network design and technology is designed to provide
our customers with adaptable networking solutions that take advantage of
many technologies. Our network supports a broad array of business
requirements, such as corporate networks, virtual private networks,
office-to-office connectivity, telecommuting solutions, collaborative
computing of users in different areas, Internet/intranet access, video
conferencing and multimedia, e-mail, video and audio transmission, Web
hosting and electronic commerce. Our network provides a solution that can
be adapted to meet the needs of our customers and integrate technological
innovations as they are developed.
. Capitalize on economics of DSL. DSL technology requires a lower initial
fixed investment than that needed for existing alternative technologies
because DSL uses existing copper telephone lines. Thus, we are able to
offer businesses services comparable to traditional wide area networking
technologies, like high speed T1 lines and Frame Relay circuits, at
approximately 30% to 70% of the cost of such services. Our subsequent
investments in DSL technology are directly related to the number of
paying customers, making a significant
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<PAGE>
portion of our capital expenditures success-based. We estimate that
approximately two-thirds of our cumulative capital expenditures over the
next five years will be for DSL equipment that is directly related to our
end user subscription rate.
Product and Service Offerings
We offer our customers CuNet services in our target markets and networking
solutions, including 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 product sales and consulting services.
For the three months ended March 31, 1999, approximately 97.5% of our revenue
resulted from product sales and consulting services, while revenue from network
services, which includes our CuNet services, accounted for approximately 2.5%
of our revenue. Although in the short term we expect to continue to derive the
majority of our revenue from product sales and consulting services, we expect
that over time our network services, which includes our CuNet services, will
constitute the more significant portion of our total revenue. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CuNet Services
CuNet. In January, 1999, we began commercially offering our CuNet services.
CuNet uses DSL technology to provide high speed continuously connected packet-
based and channelized communications services. CuNet connects business users to
our metropolitan area networks and wide area network using ATM, Frame Relay and
DSL technologies over traditional copper telephone lines. CuNet customers are
able to connect to our regional network either within a city or between our
cities, to obtain high capacity, secure and reliable connections between
geographically dispersed locations. Because our customers are served end-to-end
on our CuNet network, we are able to deliver a true wide area, virtual private
network with the capacity, speed, reliability and level of service that they
require.
The chart below shows the service, speed, retail price (which includes
equipment installed at the customer's location), range and performance of our
CuNet services, as of April 30, 1999:
<TABLE>
<CAPTION>
Retail List Range from
Speed to Speed Retail List Price Central
End From End Price for for Monthly Office
Service user(2) user(2) Activation(1) Service(1) (feet) Market/Usage
- --------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <S>
Symmetrical:
CuNet 128 128 Kbps 128 Kbps $270 $129 18,000 Integrated services digital network
replacement for telecommuters.
CuNet 256 256 Kbps 256 Kbps $270 $146 18,000 Small businesses with standard e-
mail and web usage.
CuNet 384 384 Kbps 384 Kbps $270 $162 18,000 Higher bandwidth solution for small
to medium sized businesses running
moderately-visited web sites.
CuNet 512 512 Kbps 512 Kbps $270 $185 18,000 Allows small and medium businesses
to meet most network video and
Internet needs.
CuNet 768 768 Kbps 768 Kbps $270 $217 18,000 Supports high bandwidth intensive
applications such as electronic
commerce, video conferencing, Frame
Relay and voice over Frame Relay.
CuNet 1.0 1.0 Mbps 1.0 Mbps $270 $239 18,000 Close to full T1 for medium to
large sized businesses.
CuNet 1.5 1.5 Mbps 1.5 Mbps $270 $294 18,000 Standard for large organizations
that require high capacity
connections. Applications include
the ability to integrate voice,
data and Internet services over a
single connection.
CuNet 2.0 2.0 Mbps 2.0 Mbps $270 $348 18,000 Full motion video and multimedia
applications for large businesses.
</TABLE>
45
<PAGE>
<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
- ---------------------------------------------------------------------------------------------
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.
CuNet Frame. CuNet Frame provides access to a seamless local and long
distance network using asynchronous transfer mode and DSL technologies to
deliver a flexible suite of Frame Relay services. The benefit to CuNet Frame
customers is the low cost and simplicity of use when contrasted against
traditional telephone company or long distance carrier Frame Relay services.
VPOP. Our virtual point of presence service provides network service
providers access to our entire CuNet network. With VPOP, a network service
provider can offer services throughout the entire CuNet network without
additional investment in network communications infrastructure. This service
offers wholesale customers the opportunity to sell DSL circuits in cities
outside of the local serving area in which they physically connect to the CuNet
network. Wholesale and volume discount prices are available for network service
providers.
Networking Solutions
We began our company in 1995 by providing data communications products and
consulting services for corporate networks. We recognized that businesses were
finding it extremely expensive and time consuming to manage and secure the
complex elements of their networks. To exploit this opportunity, we began
offering our customers further services for their networks such as network
integration, network management, network security and professional services.
Network Management Services.
We provide our customers the opportunity to outsource network management
services that are difficult or costly for them to manage internally. For
example, we provide a single point of contact for vendor
management/coordination, including vendors for equipment on the customers'
premises, long distance carriers and traditional telephone companies, a help
desk for network administrators, monitoring and coordinated maintenance of
network services, analysis of network performance and capacity planning and
network monitoring.
We provide a wide variety of network management solutions customizable to
any requirement in order to meet our customers' unique management requirements
arising from their network configuration. We believe our strategy of providing
these services will allow us to address a larger market opportunity than that
represented by CuNet alone.
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<PAGE>
ROC Services. We offer remote online control, or ROC, services to meet our
customers' outsourced network requirements. From our network operations center
in Sterling, Virginia, we continuously monitor the integrity of our customers'
metropolitan and wide area networks, evaluate their network utilization,
implement problem resolution systems, provide network health and status
monitoring and other customized management offerings. We proactively monitor
the performance of our customers' network devices and perform trouble
resolution to address network problems, often before our customer's end users
become aware of them.
SOC Services. We offer secure online control, or SOC, services to meet our
customers' outsourced network security requirements. We provide proactive
network monitoring, intrusion detection and management of these network
security solutions on a 24 hour a day, seven day a week basis. We provide a
variety of security solutions including barriers, or firewalls, between
internal corporate networks and external networks like the Internet, virtual
private network service, encryption and access authentication solutions for
customers looking for the highest level of security on any network on which
data is transported.
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 defensive strategy exists and if it is
adhered to. We assess the effectiveness of a customer's reporting and
response mechanisms and determine vulnerabilities and other critical
issues.
. Network security architecture consulting. We provide expertise in
designing, implementing, modifying and protecting data networks of all
sizes.
. Controlled penetrations. We will conduct organized attacks with original
software tools and techniques designed to expose information security
breaches. These controlled penetrations are tailored to customer
requirements. Following a penetration, our engineers will interpret the
outcome and present results to both senior executives and lead engineers.
We also take steps to ensure that knowledge gained from a controlled
penetration is not lost during subsequent implementation and maintenance
phases.
. Incident forensics and response. Our engineers have rigorous training in
investigating, analyzing and responding to security breaches after they
occur and are well versed in the rules of evidence necessary to present
their findings in judicial proceedings on behalf of our customers.
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. AT&T and
Zeneca Pharmaceuticals, a division of Zeneca, Inc., accounted for 50.4% and
8.0%, respectively, of our revenue in 1998, almost all of which arose from
product sales and consulting services. For the three
47
<PAGE>
months ended March 31, 1999, AT&T and Zeneca accounted for 55.5% and 10.0% of
our revenue, respectively. 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. Lucent Technologies Inc.
Ascend Communications, Inc. Manugistics Group, Inc.
AT&T Corp. National Rural Telecommunications Cooperative
Conectiv, Inc. Sallie Mae
ICI Americas University of Virginia
Lehigh Portland Cement
Company SEI Investments Company
Lockheed Martin Corporation Zeneca Pharmaceuticals
</TABLE>
Sales and Marketing
We market our 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.
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
48
<PAGE>
leverage our equipment vendors' partnerships as sources for sales opportunities
by offering joint technology seminars, implementing marketing campaigns and
sharing cross-selling opportunities.
Key Strategic and Commercial Relationships
We have entered into, are continuing to explore, and expect to enter into,
additional strategic and commercial relationships. We believe that these
relationships are valuable because they provide additional marketing and
distribution, network resources, technology and geographic expansion
opportunities. In some cases, these relationships involve capital investment,
product development or targeted numbers of new lines or customers. Our
strategic and commercial relationships include SBC Communications, Telmex,
Net2000 Communications, Comcast, DSL Networks, Ascend and Paradyne.
SBC Communications. SBC Communications has indicated an interest in
purchasing in the offering $6.0 million of our common stock at 93% of the
initial public offering price, or 430,108 shares assuming an initial public
offering price of $15.00 per share, although it has no obligation to purchase
these shares. We plan to work together to explore opportunities to benefit our
customers.
Telmex. Telmex has indicated an interest to purchase $4.0 million of our
common stock at 93% of the initial public offering price, or 286,738 shares
assuming an initial public offering price of $15.00 per share, although it has
no obligation to purchase these shares.
Net2000 Communications. In May 1999, we entered into a master service
agreement with Net2000 Communications, a leading voice-services competitive
telecommunications company within the Bell Atlantic region, to provide Net2000
with CuNet services. We are continuing to explore integration of our sales and
marketing efforts in an effort to bring a bundled voice and data product to our
mutual customers.
Comcast. In May 1999, we entered into a master service agreement with
Comcast Telecommunications, Inc., a wholly-owned subsidiary of Comcast
Corporation, which provides voice and data services to business customers, to
provide Comcast with CuNet services. We are continuing to explore extending
their network beyond the reach of Comcast's existing residential cable network
and to business customers.
DSL Networks. In May 1999, we entered into a preferred partnership
arrangement with DSL Networks. Under the agreement, DSL Networks will provide
us with all of the benefits customarily extended to a preferred partner as well
as the first right to supply DSL circuits sold by DSL Networks in the Bell
Atlantic region. Our first right to supply means that when DSL Networks is
providing DSL services in the Bell Atlantic region, we will have the first
opportunity to provide the circuit to DSL Networks. This preferred partnership
has a term of three years.
Ascend. Since 1995, we have sold data communications products and equipment
made by Ascend. Ascend has provided us with a capital lease facility in the
amount of $30.0 million, which will be increased to $95.0 million after this
offering. Ascend has also provided us with a $5.0 million credit facility for
working capital. In addition, we are continuing to explore opportunities to
participate in product development and the distribution of products and
services for their network of sales partners.
Paradyne. Since 1995, we have sold data communications products and
equipment made by Paradyne. Paradyne has provided us with the ability to lease
up to $4.0 million of equipment. In addition, we are continuing to explore
opportunities to participate in product development and the distribution of
products and services for their network of sales partners.
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<PAGE>
Customer Service
Network service providers and communications managers at businesses
typically have to assemble their digital communications networks using multiple
vendors. This leads to additional work and cost as well as complex coordination
issues. We work with each customer to develop a project implementation plan.
This plan includes qualifying the customer for our service offerings, placing
orders for connection facilities, coordinating the delivery of the connection,
turn up and final installation. We emphasize a one-stop total service solution
for our customers. We provide our service according to a predetermined service
level commitment with each customer. Our comprehensive solution includes:
. Customer Line Installation. We work with each customer to establish all
connection and configuration requirements to connect the customer's main
location to our network. We order the copper telephone line for our
customer, manage the installation process, test the copper telephone line
once installed, assist the customer in configuring the equipment that
terminates the copper telephone line, and monitor the copper telephone
line from our network operations center.
. End User Line Installation. We order all end user connections from the
traditional telephone companies according to pre-determined technical
line specifications. We manage the traditional telephone companies'
performance, test the installed line, and monitor the end user line from
our network operations center.
. End User Premises Wiring and Modem Configuration. We use both our own and
contracted installation crews to install any required inside wiring at
each end user site. We rely on contracted crews to meet customers'
demands at peak times. Our installation crews configure and install end
user equipment with information specific to each customer.
. Network Monitoring. We monitor our network from our network operations
center on a continuous end-to-end basis, which often enables us to
correct potential network problems before service to a customer or end
user is affected. We also provide direct monitoring access of end users
to our network service providers and enterprise customers.
. Customer Reporting. We communicate regularly with our customers about the
status of their service. We provide web-based tools to allow individual
network service providers and communications managers to monitor their
end users directly, to place orders for new end users, to enter work
orders on end user lines and to communicate with us on an ongoing basis.
. Customer Service and Technical Support. We provide service and technical
support 24 hours a day, seven days a week to all our customers. The
network service provider and communications managers serve as the initial
contact for end users and we provide the second level of support. We have
developed and will continue to expand a database containing the questions
we have addressed and the answers we have provided in response to past
network issues. In this way, we are able to better respond to future
customer questions.
. Operating Support Systems. We have designed an integrated group of
customized applications around our current and planned business
processes. By customizing and integrating products from vendors such as
Daleen Technologies, Inc. for billing, Eftia OSS Solutions Inc. for
operating support systems and Hewlett-Packard Company for network
management, we have designed a system that will facilitate rapid service
responsiveness and reduce the cost of customer support. Our "NAS Total
System Solution" seamlessly integrates all of our business functions,
including sales, ordering, provisioning, customer support, maintenance
and repair, billing, accounting and decision support, ensuring that every
function has accurate, up-to-date information and the tools necessary to
efficiently complete their work.
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Network Structure and Technology
Overview. We 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 structure allows us to
provide both channelized and packet-based services reliably and
incrementally, which enables us to match investment with demand. As new
CuNet end users are added to our network, capacity is automatically added
so that the same reliable performance is achieved for all users as our
network grows.
. Intelligent. From our network operations center, we are able to
constantly monitor our network, the network service providers' networks
and our customers' connections, as well as perform network diagnostics
and equipment surveillance, and initialize our end users' connections.
Because our network is centrally managed, we can identify and dynamically
enhance network quality, service and performance and address network
problems promptly, often without our end users becoming aware of the
repairs. This capability also allows us to control costs associated with
on-site network configuration and repair.
. Secure. With dedicated, direct access to our private network, our end
users and businesses experience fewer network security risks than users
of common dial-up modems, integrated services digital network lines or
dedicated access to the Internet because there is less risk of
unauthorized access. Our network is designed to provide enhanced security
to ensure secure availability of all internal applications and
information for all end users, whether they are within the corporate
headquarters or telecommuting from remote locations. Our network
structure connects end users at fixed locations to a single business,
which reduces the possibility of unauthorized access and allows our
customers to safely perform all of their required tasks.
Components. Our components are integrated into networks across local,
metropolitan and wide areas that combine speed and balanced capacity in a
manner designed to deliver a high performance networking experience for our
customers.
. Customer Endpoint. We currently offer channelized and packet-based DSL
connections in our network. We offer to provide the customer with a DSL
modem as part of our complete service offering, the cost of which is
included in the list price of the service. We configure and install these
modems with the end user's computer and network equipment along with any
required on site wiring needed to connect the modem and the telephone
line. Under FCC policies, a customer also is free to obtain compatible
modems from sources other than us.
. Copper Telephone Lines. We lease copper telephone lines, known as
unbundled network elements, which run from our network access points in
central offices to the customer endpoint under terms specified in
telecommunications regulations and our interconnection agreements. We
have worked closely with Bell Atlantic to define specifications that
ensure the quality of the copper telephone lines we receive, thereby
ensuring the transmission speed of end user connections.
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<PAGE>
. 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 do not
have long term lease agreements for these fiber optic circuits. If these
circuits are not available, we will need to seek alternative sources for
the fiber optics to connect our DSL equipment in different central
offices, which could delay our network rollout.
. Node Sites. A node site is a physical location where we connect all of
our central offices within a particular metropolitan area network to
businesses and network service providers. The node site houses our
equipment to switch and interconnect customer traffic from central
offices within a region or across our entire network. Our node sites are
housed in a secured facility in each metropolitan area. We currently have
a node site in Boston, New York, Philadelphia, Baltimore, Washington,
D.C. and Richmond. We expect to establish node sites in Pittsburgh,
Norfolk and Wilmington, Delaware by the end of 1999.
. Wide Area Backbone. Our wide area backbone is a fiber optic network that
interconnects our node sites in various metropolitan areas. To date, we
have leased fiber optic circuits capable of speeds of up to 155 megabits
per second from Level 3 Communications, MCI WorldCom and Virginia
Electric and Power Company. We do not have long term lease agreements for
these fiber optic circuits. We intend to upgrade our wide area backbone
to higher capacities as necessary to deliver the quality of service that
our customers demand. We continue to evaluate alternative providers of
capacity in order to reduce costs. If these circuits are not available,
we will need to seek alternative sources for the fiber optics to connect
our node sites in different cities, which could delay our network
rollout.
. Network Operations Center. We manage our network from our network
operations center located in our corporate headquarters in Sterling,
Virginia. We provide end-to-end network management to our customers using
advanced network management tools on a 24 hour a day, seven day a week
basis. This enhances our ability to address performance or connectivity
issues before they affect the end user experience. From our network
operations center, we can monitor our network, including the equipment
and circuits in our metropolitan area networks and central offices, and
our customers' networks, including individual end user lines and DSL
modems. See "--Network Management Services."
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CuNet Rollout. We currently offer CuNet in Boston, New York, Philadelphia,
Baltimore, Washington, D.C. and Richmond and have collocated our equipment in
51 central offices. We intend to build networks and offer services in
Pittsburgh, Norfolk and Wilmington, Delaware by the end of September 1999. We
plan to offer services in these nine target markets through the 360 central
offices in which we expect to collocate our equipment by the end of 1999. To
the extent opportunities present themselves, we may decide to expand our
network beyond our initial target markets and into adjacent regions. As part of
this strategy, we have recently entered into an interconnection agreement with
Bell South, which requires state regulatory approval before it becomes
effective.
Research and Development. We are also pursuing a program of ongoing network
development. Our engineering efforts focus on the design and development of new
technologies and services to increase the speed, efficiency, reliability and
security of our network and to facilitate the development of network
applications by third parties that will increase the use of our network.
Currently, Ascend provides the packet-based DSL modem and other equipment used
in CuNet and Paradyne provides the channelized DSL modem and equipment used in
CuNet. Other major DSL providers could enter into exclusive arrangements with
our equipment providers that may materially and adversely affect the
availability and pricing of the equipment.
Competition
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 a unique opportunity for
competition and presents competitive challenges specific to that customer. The
significance of the different competitive factors we face will vary with each
customer depending on the needs of the particular customer and the particular
competitor we face. For example, if we are competing for a customer against a
traditional telephone company, we expect to compare favorably as to client
support, transmission speed and price/performance, but perhaps less favorably
as to brand recognition, access to capital and operating experience. If we are
competing for a customer against another provider of DSL, we expect to compare
favorably as to diversity of service offerings, sales relationships and
operating experience, but perhaps less favorably as to the geographic breadth
of network coverage. We expect to improve our competitive position relative to
other DSL providers by expanding the geographic breadth of our network through
opportunistic growth of our network and, in part, through
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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 Traditional Telephone Companies. Bell Atlantic and
the other traditional telephone companies present in our target markets are
conducting technical and/or market trials or have entered into commercial
deployment of DSL-based services. We recognize that each traditional telephone
company has the potential to quickly overcome many of the obstacles that we
believe have delayed widespread deployment of DSL services by traditional
telephone companies in the past. The traditional telephone companies currently
represent and will in the future increasingly represent strong competition in
all of our target markets. The traditional telephone companies have an
established brand name, a large number of existing customers and a reputation
for high quality in their service areas, possess sufficient capital to deploy
DSL equipment rapidly, have their own copper lines and can bundle digital data
services with their existing analog voice services to achieve economies of
scale in serving customers. In the absence of strong oversight by the FCC and
state telecommunications regulators, traditional telephone companies also have
an economic incentive to benefit their own DSL retail operations by providing
themselves with the copper telephone lines, collocation, support services and
other essential DSL service inputs on more favorable terms than they provide
these facilities and services to their DSL competitors, like us. These factors
give the traditional telephone companies a potential competitive advantage
compared with us. Accordingly, we may be unable to compete successfully against
Bell Atlantic or the other traditional telephone companies, and any failure to
do so would materially and adversely affect our business, operating results and
financial condition.
Other Major DSL Providers. Other competitive telecommunications companies
plan to offer or have begun offering DSL-based access services in our targeted
markets, and others are likely to do so in the future. Competitive
telecommunications companies that provide DSL service include Covad
Communications, Rhythms NetConnections and NorthPoint Communications.
Other Service Providers. Many of our competitors are offering, or may soon
offer, technologies and services that will compete with some or all of our high
speed DSL offerings. These technologies include T1, integrated services digital
network, satellite, cable modems and analog modems and could be provided by the
following:
. Cable Modem Service Providers. Cable modem service providers, like
MediaOne Group, Inc., At Home, through its @Home service offering, and
their cable partners, are offering or preparing to offer high speed
Internet access over fiber and cable networks to consumers. At Home,
through its @Work service offering, has positioned itself to do the same
for businesses. Where deployed, these networks provide local access
services, in some cases at higher speeds than our CuNet. They typically
offer these services at lower prices than our services, in part by
sharing the capacity available on their cable networks among multiple end
users.
. Traditional Long Distance Carriers. Many of the leading traditional long
distance carriers, like AT&T, Sprint and MCI WorldCom, are expanding
their capabilities to support high speed, end-to-end networking services.
Increasingly, their services include high speed local access combined
with metropolitan and wide area networks, and a full range of Internet
services and applications. We expect them to offer combined data, voice
and video services over these networks. These carriers have deployed
large scale networks, have large numbers of existing business and
residential customers and enjoy strong brand recognition, and, as a
result, represent significant competition. For instance, they have
extensive fiber networks in many metropolitan areas that primarily
provide high speed data and voice communications to
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large companies. They could deploy DSL services in combination with their
current fiber networks. They also have interconnection agreements with
many of the traditional telephone companies and have secured collocation
spaces from which they could begin to offer competitive DSL services.
. New Long Distance Carriers. New long distance carriers, such as Williams,
Qwest Communications and Level 3 Communications, are building and
managing high bandwidth, nationwide packet-based technology networks for
the wide area network. These same providers are acquiring or partnering
with Internet service providers to offer services directly to business
customers. These companies could extend their existing networks to
include fiber optic networks within metropolitan areas and high speed
services using DSL technology, either alone, or in partnership with
others.
. Internet Service Providers. Internet service providers provide Internet
access to business and residential customers. These companies generally
provide Internet access over the traditional telephone company's networks
at integrated services digital network speeds or below. Some Internet
service providers have begun offering DSL-based access using DSL services
offered by the traditional telephone company or other DSL-based
competitive telecommunications companies. Some Internet service providers
such as Concentric Network Corporation, Mindspring Enterprises, Inc.,
PSINet and Verio Inc. have significant and even nationwide marketing
presences and combine these with strategic or commercial alliances with
DSL-based competitive telecommunications companies.
. Wireless and Satellite Data Service Providers. Several new companies are
emerging as wireless and satellite-based data service providers over a
variety of frequency bands. Companies such as Teligent, Inc., Advanced
Radio Telecom Corp. and WinStar Communications, Inc., hold point-to-point
microwave licenses to provide fixed wireless services such as voice, data
and videoconferencing. We also may face competition from satellite-based
systems such as Motorola Satellite Systems, Inc., Hughes Space
Communications, Iridium World Communications, Ltd., Globalstar and others
which are planning or are in the process of building global satellite
networks which can be used to provide broadband voice and data services.
Relationship with Bell Atlantic
Our relationship with Bell Atlantic is critical to our business. We depend
on Bell Atlantic for collocation facilities, copper telephone lines, support
services and some of the fiber optic transport that we use for CuNet. Our
interconnection agreements with Bell Atlantic govern much of this critical
relationship. We have signed interconnection agreements with Bell Atlantic in
each of the states covering our initial target markets. These agreements cover
a number of aspects including:
. the price and terms to lease access to Bell Atlantic's copper lines;
. 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;
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. the dispute resolution process we and Bell Atlantic use to resolve
disagreements on the terms of the interconnection agreement; and
. the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with Bell Atlantic.
Our interconnection agreements have an initial term that expires in March
2000, in the case of Baltimore, Philadelphia, Pittsburgh, Norfolk, Richmond,
Wilmington, Delaware and Washington, D.C., and January 2001 in the case of
Boston and New York. Thereafter, the agreements will continue until terminated
by either party upon ninety days prior notice. If an agreement is terminated,
our service arrangements will continue without interruption under:
. terms of a new agreement;
. terms imposed by a state commission;
. tariff terms generally applicable to competitive carriers and other
carriers; or
. if none of these are available, on a month-to-month basis under the
terms of the initial agreement.
Thus, we may be required to renegotiate our agreements in the future. Although
we expect to renew our interconnection agreements, there can be no assurance
that we can extend or renegotiate agreements on favorable terms.
Additionally, the FCC, state telecommunications regulators and the courts
have authority to interpret our interconnection agreements and to resolve
disputes in the event of a disagreement between us and Bell Atlantic. There can
be no assurance that these bodies will not interpret the terms or prices of our
interconnection agreements in ways that could adversely affect our business,
operating results and financial condition.
If we expand into adjacent regions which are served by traditional telephone
companies other than Bell Atlantic, we will need to enter into interconnection
agreements with those incumbent carriers. We have recently entered into an
interconnection agreement with Bell South. However, that agreement will become
effective only after it is approved by the state regulatory agencies where Bell
South operates as the traditional telephone company. While we anticipate such
approval in the summer of 1999, we cannot assure you that it will be approved
then, or ever.
Government Regulation
The following summary of regulatory developments and legislation describes
material telecommunications regulations and legislation directly affecting our
industry.
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
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that we operate our business in compliance with applicable laws and regulations
of the various jurisdictions in which we operate and that we possess the
approvals necessary to conduct our current operations.
Federal Regulation. The 1996 Telecom Act substantially departs from prior
legislation in the telecommunications industry by establishing competition as a
national policy in all telecommunications markets. This Act removes many state
regulatory barriers to competition in telecommunications markets dominated by
incumbent carriers and preempts, after notice and an opportunity to comment,
laws restricting competition in those markets. Among other things, the Act also
greatly expands the interconnection requirements applicable to traditional
telephone companies. It requires the traditional telephone companies to:
. provide collocation, which allows competitive telecommunications
companies to install and maintain their own network termination equipment
in traditional telephone company central offices;
. unbundle and provide access to components of their service networks to
other providers of telecommunications services;
. establish "wholesale" rates for the services they offer at retail to
promote resale by competitive telecommunications companies; and
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Traditional telephone companies are required by the 1996 Telecom Act to
negotiate an interconnection agreement in good faith with carriers requesting
any or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state telecommunications regulatory agency.
The FCC and state telecommunications regulators also are instructed by the
1996 Telecom Act to perform certain duties to implement the regulatory policy
changes prescribed by the 1996 Telecom Act. The outcome of various ongoing
proceedings to carry out these responsibilities, or judicial appeals of these
proceedings, could materially affect our business, operating results and
financial condition.
In October 1996, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the 1996
Telecom Act, including rules:
. providing the detailed standard that state telecommunication regulators
must use in prescribing the price that traditional telephone companies
charge for collocation and for the copper telephone lines and other
network elements that competitive telecommunications companies must
obtain from traditional telephone companies in order to provide service
and
. giving competitive telecommunications companies the right to "pick-and-
choose" interconnection provisions by requiring that a traditional
telephone company enter into an interconnection agreement with the
competitive telecommunications companies that combines provisions from a
variety of interconnection agreements between that traditional telephone
company and other competitive telecommunications companies.
The FCC and others appealed this decision to the U.S. Supreme Court. In
January 1999, the U.S. Supreme Court reversed much of the Eighth Circuit's
decision, finding that the FCC has broad authority to interpret the 1996
Telecom Act and issue rules for its implementation, including authority to
establish the methodology that state telecommunication regulators must use in
setting the price that incumbent carriers charge competitive telecommunications
companies for collocation, copper telephone lines and other network elements.
The Supreme Court also reversed the Eighth
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Circuit's holding invalidating the FCC's "pick-and-choose" rule. However, the
Supreme Court found that the FCC had violated the 1996 Telecom Act in defining
the individual network elements incumbent carriers must make available to
competitive telecommunications companies, and required the FCC to reconsider
its delineation of these elements. It sent the matter back to the FCC with
instructions to consider further the question of which parts of a traditional
telephone company's network must be provided to competitors. The FCC recently
initiated a proceeding to establish which network elements are required to be
provided by incumbent carriers to competitors. The FCC has stated that it plans
to issue a new decision on this matter in the summer of 1999. We would be
adversely affected if the FCC were to exempt traditional telephone companies
from the duty to provide any of the facilities we need in order to provide our
CuNet services.
The Supreme Court's order is potentially beneficial to us in several
important respects. For example, the Supreme Court's decision requiring that
the Eighth Circuit reinstate the FCC's "pick-and-choose" rule could help us
obtain the benefit of specific provisions from interconnection agreements
between Bell Atlantic and other competitive telecommunications companies who
had more bargaining leverage than we had at the time we negotiated our
interconnection agreements. However, the Eighth Circuit has not yet reinstated
the FCC's "pick and choose" rule, and we cannot predict when it will do so. The
Supreme Court's determination that the FCC rather than state telecommunications
regulators has jurisdiction to determine pricing methodology also could be
beneficial to us since the FCC has adopted a pricing standard that appears to
be more beneficial to competitive telecommunications companies in some respects
than the pricing standards that some state telecommunications regulators have
employed. However, it remains unclear whether the particular pricing
methodology prescribed by the FCC will go into effect because some parties have
challenged the lawfulness of that methodology in the U.S. Court of Appeals for
the Eighth Circuit, and that litigation is still pending.
In an order released March 31, 1999, the FCC adopted several new regulations
that potentially could have a positive impact on our business. In particular,
several new FCC rules require traditional telephone companies to provide
collocation arrangements in a manner that potentially will be less costly than
the manner in which such arrangements are provided at present. Another new rule
is intended to reduce the number of situations in which incumbent carriers deny
collocation applications based on a claim that there is no space available.
Still another is intended to help ensure that the customers of companies who
provide services like CuNet do not receive harmful interference from other
users of the traditional telephone company network on which the service is
provided. It remains to be seen whether the FCC's new rules will accomplish
their intended objectives since they will not go into effect until late May
1999 at the earliest. Nor can we predict whether any of these new rules will be
appealed and, if so, whether the appeals will be successful.
The FCC made another potentially favorable ruling for our industry in
another recent case. That case involved the question of whether a
telecommunications service like CuNet that provides high speed dedicated access
to the Internet is an interstate service or an intrastate service. An
interstate service must be provided subject to FCC regulatory controls, whereas
an intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is offered.
In its decision, the FCC held that such services are jurisdictionally
interstate and therefore must be provided on terms and conditions set by the
FCC. This ruling is potentially advantageous to us because it reduces the
number of telecommunications regulatory agencies that control the terms under
which we provide CuNet. It also is potentially advantageous because FCC
regulatory controls in many respects are less burdensome than state regulatory
controls. For example, the 1996 Telecom Act authorizes the FCC to forbear from
regulating the terms under
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which carriers classified as "non-dominant" provide interstate
telecommunications service. The FCC has exercised its forbearance authority by
issuing rulings that exempt non-dominant domestic carriers like us from
obtaining a certificate from the FCC prior to providing any interstate service
or from filing a tariff setting forth the terms under which they provide any
interstate access service. Because we believe that CuNet constitutes interstate
service, we believe that we do not need an FCC certificate to provide CuNet.
Moreover, since we believe CuNet is special access, we provide the service to
existing customers pursuant to contract rather than tariff.
The FCC is considering whether to adopt some regulations that could
adversely affect us. In particular, we could be hurt by adoption of a proposal
that would exempt incumbent carriers from some existing FCC regulations
designed to help ensure that the price incumbent carriers charge for their own
retail DSL service offering recovers the actual costs they incur in providing
that service. We also could be hurt by adoption of a proposal to let incumbent
carriers provide DSL services through an affiliate of the incumbent carrier
unless the FCC requires that the traditional telephone company provide copper
telephone lines, collocation and back-office support services to its affiliates
on terms that are no more favorable than the terms available to competitive
telecommunications companies like us.
On May 8, 1997, in compliance with the requirements of the 1996 Telecom Act,
the FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to under-served
individuals and customers in high-cost or low-income areas, and to companies
that provide telecommunications services for schools and libraries and to rural
health care providers. We are required to contribute to the universal service
fund and are also may be required to contribute to state universal service
funds. The new universal service rules are administered jointly by the FCC, the
fund administrator, and state regulatory authorities, many of which are still
in the process of establishing their administrative rules. We cannot determine
the net revenue effect of these regulations at this time.
State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the 1996
Telecom Act that are intended to open all telecommunications markets to
competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's jurisdiction to prescribe the methodology traditional
telephone companies must use in setting the price of local telephone wires and
other network elements, the FCC has exercised that jurisdiction by adopting a
pricing standard and has given state regulators substantial authority to apply
that standard in order to determine actual prices. Many states have set only
temporary prices for some network elements that are critical to the provision
of DSL services because they have not yet completed the regulatory proceedings
necessary to determine permanent prices. The results of these proceedings will
determine the price we pay for, and whether it is economically attractive for
us to use, these network elements and services.
The 1996 Telecom Act also gives state telecommunications regulators broad
authority to approve or reject interconnection agreements that competitive
telecommunications companies enter with traditional telephone companies and
broad authority to resolve disputes that arise under these interconnection
agreements. Under the 1996 Telecom Act, if we request, traditional telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to unbundled network elements. A
separate agreement is signed for each of the states in which we operate. During
these negotiations either the traditional telephone company or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the
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statutory negotiation period provided in the 1996 Telecom Act, we may submit
outstanding disputes to the states for arbitration. The 1996 Telecom Act also
allows state regulators to supplement FCC regulations as long as the state
regulations are not inconsistent with FCC requirements.
In addition, CuNet may, as to some future customers, be classified as
intrastate services subject to state regulation. All of the states where we
operate, or will operate, require some degree of state regulatory commission
approval to provide certain intrastate services. We have obtained state
authorizations to provide all types of intrastate services in seven of our
initial nine target markets, and our applications for certificates to provide
intrastate services in the remaining two markets are pending. In most states,
intrastate tariffs are also required for various intrastate services, although
non-dominant carriers like us are not typically subject to price or rate of
return regulation for tariffed intrastate services. Actions by state
telecommunications regulation agencies could cause us to incur substantial
legal and administrative expenses.
It is possible that laws and regulations could be adopted which address
other matters that affect our business. We are unable to predict what laws or
regulations may be adopted in the future, to what extent existing laws and
regulations may be found applicable to our business, or the impact such new or
existing laws or regulations may have on our business. In addition, laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, thereby decreasing demand for our services.
Recently, various regional Bell operating companies have filed petitions
with the FCC requesting regulatory relief in connection with the provision of
data services, including DSL services. In response to these petitions, the FCC
issued a decision that data services generally are telecommunications services
that, when provided by traditional telephone companies, are subject to the
FCC's interconnection rules, including the rule requiring that traditional
telephone companies' data services be subject to unbundling and resale
requirements under the 1996 Telecom Act. However, several traditional telephone
companies recently have asked the FCC to reconsider certain aspects of its
decision in this regard, including the FCC's ruling that data services are
subject to the mandatory resale provisions of the 1996 Telecom Act. The FCC has
also initiated a proceeding to determine whether traditional telephone
companies will be able to avoid certain of their obligations by providing data
services through "truly" separate affiliates, whether the FCC will specifically
require traditional telephone companies to unbundle their DSL equipment and
resell DSL services, and whether the FCC will grant the regional Bell operating
companies relief in local access and transport areas for the provision of data
services. A decision by the FCC on these issues is expected shortly. In
addition, various regional Bell operating companies have requested relief from
dominant carrier regulation for their data services in certain regions. The
effect that these proceedings will have on our ability to obtain facilities and
services from traditional telephone companies and on the competition that we
will face from traditional telephone companies cannot be predicted.
Local Government Regulation. In certain instances, we may be required to
obtain various permits and authorizations from municipalities in which we
operate our own facilities. The extent to which such actions by local
governments pose barriers to entry for competitive telecommunications companies
that may be preempted by the FCC is the subject of litigation. Although our
network consists primarily of unbundled network elements of the traditional
telephone companies, in certain instances we may deploy our own facilities and
therefore may need to obtain certain municipal permits or other authorizations.
The actions of municipal governments in imposing conditions on the grant of
permits or other authorizations or their failure to act in granting such
permits or other authorizations could have a material adverse effect on our
business, operating results and financial condition.
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Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. There can be no assurance these methods will be
sufficient to protect our technology and intellectual property. We also
generally enter into confidentiality agreements with our employees and
consultants, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, or to develop similar
technology independently. Currently, we are the owner of three trademark
registration applications, but have not filed to register any copyrights. We
expect to seek registration of our copyrights in software and other
intellectual property to the extent possible. There is no assurance that we
will obtain any significant copyright protection for our systems which would
protect our intellectual property from competition. Currently, we have not
filed any patent applications. We intend to prepare applications and to seek
patent protection for our systems and services to the extent possible. There is
no assurance that we will obtain any patents or that any such patents would
protect our intellectual property from competition which could seek to design
around or invalidate such patents. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain
foreign countries, and the global nature of the Internet makes it virtually
impossible to control the ultimate destination of our proprietary information.
There can be no assurance that the steps we have taken will prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our
business, operating results and financial condition. In addition, some of our
information, including our competitive carrier status in individual states and
our interconnection agreements, is a matter of public record and can be readily
obtained by our competitors and potential competitors, possibly to our
detriment.
Employees
As of May 12, 1999, we employed 141 individuals in engineering, sales,
marketing, customer support and related activities and general and
administrative functions. None of these employees is 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.
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We also lease collocation space in central offices from Bell Atlantic where
we operate or plan to operate under the terms of our interconnection agreements
with Bell Atlantic and regulations imposed by state telecommunications
regulators and the FCC. While the terms of these leases are perpetual, the
productive use of our collocation facilities is subject to the terms of our
interconnection agreements which have initial terms that expire in 2000 and
2001. See "--Relationship with Bell Atlantic." We will increase our collocation
space as we expand our network.
Legal Proceedings
We are not currently involved in any legal proceedings that we believe could
have a material adverse effect on our business, financial position, results of
operations or cash flows. We are, however, subject to state telecommunications
regulators, FCC and court decisions as they relate to the interpretation and
implementation of the 1996 Telecom Act, the Federal Communications Act of 1934,
as amended, various state telecommunications statutes and regulations, the
interpretation of competitive telecommunications company interconnection
agreements in general and our interconnection agreements in particular. In some
cases, we may be deemed to be bound by the results of ongoing proceedings of
these bodies or the legal outcomes of other contested interconnection
agreements that are similar to our agreements. The results of any of these
proceedings could have a material adverse effect on our business, operating
results and financial condition.
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MANAGEMENT
Our Directors and Executive Officers
The following table shows information about our directors and executive
officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jonathan P. Aust........... 41 President, Chief Executive Officer and Chairman
of the Board of Directors
Christopher J. Melnick..... 33 Chief Operating Officer and Director
Scott G. Yancey, Jr. ...... 46 Chief Financial Officer and Director
James A. Aust.............. 37 Vice President, Engineering
John J. Hackett............ 45 Vice President, Sales and Marketing
Brion B. Applegate......... 45 Director
Dennis R. Patrick.......... 47 Director
</TABLE>
Jonathan P. Aust has been our Chief Executive Officer since founding Network
Access Solutions, with his wife Longma, in December 1994. In August 1998, Mr.
Aust also became our President and Chairman of the Board of Directors. Mr. Aust
was the National Account Manager for AT&T Paradyne responsible for the Federal
Reserve System from October 1987 to December 1994. From June 1982 to October
1987, Mr. Aust held numerous engineer and sales positions at Paradyne
Corporation, a manufacturer of data communications equipment.
Christopher J. Melnick has been our Chief Operating Officer since joining us
in July 1998 and a Director since August 1998. Mr. Melnick was the Vice
President and General Manager for the Southeast Region of Level 3
Communications from March 1998 to July 1998. Mr. Melnick was the Vice President
of Telcom Access Sales for the Washington, Baltimore and Richmond markets of
WorldCom from December 1996 to March 1998. Mr. Melnick was the Vice President
of Sales for MFS Telcom from September 1995 to December 1996 and Sales Manager
for Washington, D.C. and Baltimore MFS Telcom from June 1994 to September 1995.
Mr. Melnick was a Senior Account Executive for MFS Telcom from April 1992 to
June 1994.
Scott G. Yancey, Jr. has been our Chief Financial Officer since joining us
in July 1998 and a Director since August 1998. Mr. Yancey was the Chief
Financial Officer and General Manager of the data division of Cable & Wireless
USA, a telecommunications service provider, from July 1982 to May 1998.
James A. Aust has been our Vice President of Engineering since joining us in
July 1995. Mr. Aust was a Consultant Systems Engineer for AT&T from May 1990 to
July 1994. In this role, Mr. Aust was responsible for network design and
implementation issues for key accounts and worked closely with hardware and
software developers at Bell Laboratories, defining products and feature sets to
fulfill customer networking requirements. Mr. Aust also served on the AT&T
Engineering Council which was responsible for formulating methods and
procedures for AT&T's System Engineering from August 1988 to May 1990.
John J. Hackett has been our Vice President, Sales and Marketing since
joining us in February 1999. Mr. Hackett was the Division President of MCI
WorldCom and MFS Telcom from September 1993 to February 1999 responsible for
Sales and Customer Support.
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.
Our executive officers are elected by our board of directors and serve at
its discretion. Jonathan P. Aust and James A. Aust are brothers. There are no
other family relationships among our officers and directors.
Our certificate of incorporation and bylaws will provide for a classified
board of directors consisting of three classes of directors, each serving
staggered three-year terms. As a result, a portion of our board of directors
will be elected each year. To implement the classified structure, prior to
consummation of the offering, two of the nominees to the board will be elected
to a one-year term, two will be elected to two-year terms and one will be
elected to a three-year term. Thereafter, directors will be elected for three-
year terms. Messrs. Yancey and Melnick will be Class I directors with terms
expiring at the 2000 annual meeting of stockholders, Messrs. Applegate and
Patrick will be Class II directors, with terms expiring at the 2001 annual
meeting of stockholders, and Mr. Aust will be a Class III director, with a term
expiring at the 2002 annual meeting of stockholders.
Board Committees
Our board of directors established an audit committee in April 1999. The
audit committee consists of Messrs. Applegate and Patrick. The responsibilities
of the audit committee include:
. recommending to our board of directors the independent public
accountants to conduct the annual audit of our books and records;
. reviewing the proposed scope of the audit;
. approving the audit fees to be paid;
. reviewing accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
. reviewing and approving transactions between us and our directors,
officers and affiliates.
Our board of directors established a compensation committee in August 1998.
The compensation committee consists of Jonathan P. Aust, Mr. Applegate and Mr.
Patrick. The compensation committee determines the compensation of our
executive officers and administers our stock plans and generally reviews our
compensation plans to ensure that they meet our objectives. Mr. Aust will not
participate in decisions regarding his own compensation.
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Compensation Committee Interlocks and Insider Participation
During 1998, members of our compensation committee were Messrs. Jonathan P.
Aust and Applegate. None of our executive officers has served as a member of
the compensation committee or other committee serving an equivalent function of
any other entity, whose executive officers served as a director of or member of
our compensation committee. Mr. Aust is our President and Chief Executive
Officer. Mr. Applegate is the Managing General Partner of Spectrum Equity
Investors, which is a holder of our redeemable preferred stock and common
stock. See "Related Transactions and Relationships" for a description of
transaction between our company and Mr. Aust and our company and Spectrum
Equity Investors.
Directors' Compensation
Our directors have received no compensation for serving as directors. We
reimburse our directors for reasonable expenses they incur to attend board and
committee meetings. Our non-employee directors are eligible to receive grants
of options to acquire our common stock under our stock incentive plan. In April
1999, we granted an option to acquire 250,000 shares of our common stock
exercisable at a price of $6.67 per share to Mr. Patrick. After this offering,
Mr. Patrick will receive an option to purchase an additional number of shares
of common stock at an exercise price equal to 25% of the public offering price,
such that the aggregate difference between the public offering price and the
exercise price of the initial options and additional options granted to Mr.
Patrick equals $5.0 million. Mr. Patrick's options will vest immediately upon
the completion of this offering. Assuming an initial public offering price of
$15.00 per share, Mr. Patrick's option will be exercisable for an additional
259,259 shares of our common stock at an exercise price of $3.75 per share.
Executive Compensation
The following table summarizes the compensation paid to our chief executive
officer, executive officers and two other individuals whose total salary and
bonus exceeded $100,000 during 1998, whom we identify as "named executive
officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation ------------
------------------------- Securities
Name and Principal Underlying All Other
Position Salary Bonus Other Options Compensation
<S> <C> <C> <C> <C> <C>
Jonathan P. Aust.......... $122,992 $135,000 -- -- --
President and Chief
Executive Officer
Christopher J. Melnick.... 101,308 -- -- 3,150,000 --
Chief Operating Officer
James A. Aust............. 99,750 25,000 -- 292,500 --
Vice President, Engi-
neering
William H. Farrer......... 65,000 112,500 $85,601 -- $84,500
Sales Manager
Gerald A. Buhl............ 33,750 2,500 119,171 -- --
Account Executive
</TABLE>
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<PAGE>
The salary paid to Mr. Melnick is from July 1998, the date of his
employment. The other compensation paid to Mr. Farrer represents $85,601 of
sales commissions and $84,500, representing the fair market value of 585,000
shares of our common stock issued at $0.25 per share in exchange for past
services rendered. The other compensation paid to Mr. Buhl represents sales
commissions.
Options Grants in 1998
The following table shows information about our grants of options to
purchase our common stock made to the named executive officers during 1998:
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates Of Stock Price
Individual Grants Appreciation for Option Term (5)
------------------------------------------------------------ ---------------------------------------
Number of
Securities Percent of Based on
Underlying Total Options Market Price Initial
Options Granted to Exercise or at Grant Public
Granted Employees Base Price Date Expiration Offering
Name (1) in 1998 (2) ($/share) ($/share)(3) Date (4) 0% 5% 10% Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust.. -- --% $ -- $-- -- $ -- $ -- $ -- $ --
Christopher J. Melnick.. 3,150,000 44.4 0.09 0.22 7/23/08 409,500 845,324 1,513,964 46,966,500
James A. Aust..... 292,500 4.1 0.09 2.09 11/1/08 585,000 969,459 1,559,295 4,361,175
William H. Farrer.. 112,500 1.6 0.09 2.09 11/1/08 225,000 372,869 599,729 1,677,375
Gerald A. Buhl.... 18,000 0.0 0.09 2.09 11/1/08 36,000 59,659 95,957 268,380
</TABLE>
- ---------------------
(1) All options were granted under our 1998 stock incentive plan. All options
were incentive stock options which vest over time. Generally, these options
vest in quarterly installments over 36 to 42 months. All of these options
immediately vest in the event of a change in control of our company. If a
majority of our stockholders elect to sell all or part of our company, then
the option holder is required to sell an equivalent percentage of the
shares underlying the option.
(2) Based on options to purchase 7,090,875 shares of our common stock granted
to employees in 1998.
(3) We believe that these options were granted at an exercise price that
equaled the fair market value of the underlying common stock on the date of
grant. However, in preparing for this offering, we revisited the valuation
of these options and determined that they did have a compensatory element.
We now value these options on the basis of the price paid for our common
stock in August 1998, an independent valuation, a treasury stock
transaction with our founders, our general financial condition, discussions
with our underwriters and information relating to other companies in our
industry.
(4) The options have ten year terms, subject to earlier termination upon death,
disability or termination of employment.
(5) We recommend caution in interpreting the financial significance of the
figures representing the potential realizable value of the stock options.
They are calculated by multiplying the number of options granted by the
difference between a future hypothetical stock price and the option
exercise price and are shown pursuant to rules of the SEC. They assume the
fair value of common stock appreciates 5% or 10% each year, compounded
annually, for ten years (the term of each option). They are not intended to
forecast possible future appreciation, if any, of our stock price or to
establish a present value of options. Also, if appreciation does occur at
the 5% or 10% per year rate, the amounts shown would not be realized by the
recipients until the year 2008. Depending on inflation rates, these amounts
may be worth significantly less in 2008, in real terms, than their value
today.
None of the named executive officers exercised any stock options during
1998.
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<PAGE>
Year-End Option Values
The following table shows information about unexercised options held by the
named executive officers at December 31, 1998:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying in-the-Money
Unexercised Options at Options at
December 31, 1998 December 31, 1998(1)
---------------------------- ----------------------------
Exercisable Unexercisable(2) Exercisable Unexercisable(2)
<S> <C> <C> <C> <C>
Jonathan P. Aust........ -- -- -- --
Christopher J. Melnick.. 262,499 2,887,502 $3,913,860 $43,052,654
James A. Aust........... -- 292,500 -- 4,361,175
William H. Farrer....... -- 112,500 -- 1,677,370
Gerald A. Buhl.......... -- 18,000 -- 268,380
</TABLE>
- ---------------------
(1) Calculated on the basis of $15.00 per share, the assumed initial public
offering price of our common stock, less the exercise price payable for
those shares, multiplied by the number of shares underlying the option.
(2) Upon award, the options are immediately exercisable into shares of common
stock which have certain transfer, vesting and forfeiture restrictions.
Upon exercise, unvested common stock cannot be transferred and, until
vested, is subject to repurchase by us in the event the named executive
officer terminates his employment.
No compensation intended to serve as incentive for performance to occur over
a period longer than one year was paid pursuant to a long-term incentive plan
during the last year to any of the executive officers named above.
Employment Arrangements
We have entered into an employment agreement with each of our executive
officers. Each agreement has an initial term of four years, subject to earlier
termination upon 30 days prior notice. The term of each agreement is
automatically extended for additional one year terms unless we or the executive
elects to terminate the agreement within 30 days before the end of the current
term. Under these agreements, these executives receive an initial annual base
salary that will be increased by at least 5% each year, based upon performance
objectives set by our board of directors. These executives also receive an
annual bonus of up to 20% of the executive's then current salary. The bonus is
payable in cash, stock or a combination of both at the election of our board of
directors. The executives have received options to acquire shares of our common
stock which vest in quarterly installments over either three or four years from
the date of grant. The following table shows information about the compensation
arrangements we have with our executive officers:
<TABLE>
<CAPTION>
Options Granted
Current Annual Base Salary Maximum Annual Bonus (Shares)
<S> <C> <C> <C>
Jonathan P. Aust........ $240,000 20% --
Christopher J. Melnick.. 200,000 20 3,150,000
Scott G. Yancey, Jr..... 200,000 20 2,250,000
John J. Hackett......... 175,000 20 1,350,000
James A. Aust........... 125,000 20 292,500
</TABLE>
Our board of directors has approved an increase in the annual base salary of
Jonathan P. Aust to $450,000, effective on June 1, 1999. Mr. Aust's annual
bonus and any salary increase will be determined by our compensation committee
on an annual basis.
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<PAGE>
If, during the term of one of these employment agreements, we terminate the
executive's employment without cause or the executive terminates his employment
for good reason, then the executive will be entitled to receive his base
salary, bonus and all employee benefits for a period of one year from the date
of the termination of employment.
Under the terms of these agreements, these executives have agreed to
preserve the confidentiality and the proprietary nature of all information
relating to our business during the term of the agreement and after the
agreement ends indefinitely. In addition, each of these executives has agreed
to non-competition and non-solicitation provisions that will be in effect
during the term of his agreement and for one year after the agreement ends.
We 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.
1998 Stock Incentive Plan
Our stock incentive plan authorizes the grant of:
. stock options;
. stock appreciation rights;
. stock awards;
. phantom stock; and
. performance awards.
The compensation committee of our board of directors administers our stock
incentive plan. The committee has sole power and authority, consistent with the
provisions of our stock incentive plan, to determine which eligible
participants will receive awards, the form of the awards and the number of
shares of our common stock covered by each award. The committee may impose
terms, limits, restrictions and conditions upon awards, and may modify, amend,
extend or renew awards, to accelerate or change the exercise timing of awards
or to waive any restrictions or conditions to an award.
The maximum number of shares available for issuance under our stock
incentive plan is 11,250,000. As of April 30, 1999, we had issued no shares of
our common stock in connection with awards granted, we had granted or committed
to grant awards with respect to 9,705,696 shares of our common stock and
1,544,304 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
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<PAGE>
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 22,050,000 shares of common stock in exchange
for $10,004,900. Pursuant to this agreement, we issued to Spectrum Equity
Investors II, L.P. and its affiliates 8,470,000 shares of our preferred stock
and 18,676,350 shares of our common stock in exchange for an aggregate purchase
price of $8,474,150. Spectrum now beneficially owns 51.9% of our common stock.
Brion B. Applegate, a Managing General Partner of Spectrum, is a member of our
board of directors. We also issued to FBR Technology Venture Partners, LLC
1,500,000 shares of our Series A Preferred Stock and 3,307,500 shares of our
common stock in exchange for an aggregate purchase price of $1,500,735. FBR now
owns 9.2% of our common stock.
In March 1999, we amended our certificate of incorporation to modify the
terms of our outstanding preferred stock. The terms of our preferred stock now
provide that upon completing this offering:
. 50% of our redeemable preferred stock outstanding will be cancelled and
cease to exist without compensation or recourse;
. the remaining shares of preferred stock will be automatically converted
into 333,334 shares of our common stock, which is based on the preferred
stock aggregate per share stated value of $5,000,000 divided by the
assumed public offering price of $15.00 per share; and
. no dividends on the preferred stock whether accrued or unaccrued will be
payable.
On March 31, 1999, we entered into a Note Purchase Agreement with Spectrum
and FBR. Pursuant to this agreement, Spectrum purchased a convertible note in
the principal amount of $4,250,000 and FBR purchased a convertible note in the
principal amount of $750,000. The notes bear interest at a rate of 8% per
annum. The principal of and interest on the notes will be converted into shares
of our common stock upon our completion of an initial public offering with an
aggregate offering price to the public of not less than $25,000,000 based upon
a pre-money valuation of our company of at least $200,000,000.
The notes will convert into an aggregate of 333,333 shares of our common
stock at the closing of the offering. We have amended our Note Purchase
Agreement to provide that Spectrum will purchase an additional convertible note
in the principal amount of $4,250,000 and FBR will purchase an additional
convertible note in the principal amount of $750,000 no later than May 17,
1999. These notes will convert into an aggregate of 333,333 shares of our
common stock at the closing of the offering.
These investors have registration rights for the shares of common stock they
hold but have agreed not to sell any shares of our common stock for 180 days
after this offering. See "Description of our Capital Stock--Registration
Rights" and "Shares Eligible for Future Sale--Lock-up Agreements."
Following the sale of our preferred stock in August 1998, we repurchased
some of the shares of our common stock held by James A. Aust, Jonathan P. Aust,
Longma M. Aust and Stephen C. Aust. We repurchased 1,350,000 shares of our
common stock for an aggregate purchase price of $300,000 from James A. Aust. We
repurchased 1,953,950 shares of our common stock for an aggregate purchase
price of $434,211 from Jonathan P. Aust. We repurchased 3,986,051 shares of our
common
70
<PAGE>
stock for an aggregate purchase price of $885,789 from Longma M. Aust. We
repurchased 1,260,000 shares of our common stock for an aggregate purchase
price of $280,000 from Stephen C. Aust. Jonathan P. Aust and Longma M. Aust are
husband and wife. James A. Aust, Jonathan P. Aust and Stephen C. Aust are
brothers.
In July 1998, we issued an option to purchase 2,250,000 shares of our common
stock at an exercise price of $0.09 per share to Mr. Yancey, our Chief
Financial Officer. In August 1998, we issued 585,000 shares of our common stock
to Mr. Farrer, one of our sales managers, in exchange for past services
rendered valued at a price of $0.22 per share. In March 1999, we issued an
option to purchase 1,350,000 shares of our common stock at an exercise price of
$0.09 per share to Mr. Hackett, our Vice-President, Sales and Marketing. We
have also granted options to acquire shares of our common stock to Messrs.
Patrick, James A. Aust, Buhl, Farrer and Melnick that are described under
"Management--Directors' Compensation" and "Management--Executive Compensation."
We have entered into employment agreements with each of our senior executive
officers. For details of these agreements, see "Management--Employment
Arrangements."
We believe that the transactions discussed above were made on terms no less
favorable to us than would have been obtained from unaffiliated third parties.
We have adopted a policy that requires all future transactions between us and
our officers, directors and affiliates to be on terms no less favorable than
could be obtained from unrelated third parties. These transactions must be
approved by a majority of the disinterested members of our board of directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of April 30, 1999 and that will be owned after
this offering by:
. all persons known to us to beneficially own more that 5% of our common
stock;
. each director and named executive officer; and
. all directors and executive officers as a group.
The following assumes the conversion of our outstanding preferred stock and
the conversion of our outstanding convertible notes at the closing of this
offering. An asterisk indicates ownership of less than 1%.
As of April 30, 1999, there were 36,000,000 shares of our common stock
outstanding. After this offering, 44,500,000 shares of our common stock will be
outstanding or 45,291,667 shares if the underwriters exercise their over-
allotment option in full.
<TABLE>
<CAPTION>
Before Offering After Offering
-------------------- --------------------
Shares Shares
Beneficially Beneficially
Name of Beneficial Owner Owned (1) Percent Owned (1) Percent
- ------------------------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
Jonathan P. Aust (2)................. 9,387,000 26.1% 9,387,000 21.1%
Christopher J. Melnick (3)........... 787,500 2.1 787,500 1.7
James A. Aust (4).................... 1,836,563 5.1 1,836,563 4.1
William H. Farrer (5)................ 599,063 1.7 599,063 1.3
Gerald A. Buhl (6)................... 2,250 * 2,250 *
Brion B. Applegate (7) .............. 18,676,350 51.9 19,525,349 43.9
245 Lytton Avenue
Palo Alto, California 94301
Dennis R. Patrick (8)................ 250,000 * 509,259 1.1
Scott G. Yancey, Jr. (9)............. 562,500 1.5 562,500 1.2
Spectrum Equity Investors II, L.P.
(7) ................................ 18,676,350 51.9 19,525,349 43.9
245 Lytton Avenue
Palo Alto, California 94301
FBR Technology Venture Partners, LP.. 3,307,500 9.2 3,457,500 7.8
1001 19th Street
Arlington, Virginia 22209
Stephen C. Aust (10) ................ 1,953,000 5.4 1,953,000 4.4
All named executive officers and di-
rectors as a
group (8 persons) (11).............. 32,101,226 85.3 33,209,484 71.6
</TABLE>
- ---------------------
(1) The number of shares beneficially owned includes outstanding shares of our
common stock held by that person and shares of our common stock issuable
upon exercise of stock options exercisable within 60 days of April 30,
1999. The address of Messrs. Jonathan P. Aust, James A. Aust, Stephen C.
Aust, Buhl, Farrer, Melnick, Patrick and Yancey is 100 Carpenter Drive,
Sterling, Virginia 20164.
(2) Includes 374,999 shares held by the Jonathan P. Aust Grantor Retained
Annuity Trust, 5,962,660 shares held by Longma M. Aust, Mr. Aust's wife,
and 375,001 shares held by the Longma M. Aust Grantor Retained Annuity
Trust.
(3) Includes 787,500 shares issuable upon exercise of options to acquire our
common stock.
(4) Includes 36,563 shares issuable upon exercise of options to acquire our
common stock and 162,000 shares held by the James Arthur Aust Grantor
Retained Annuity Trust.
(5) Includes 14,603 shares issuable upon exercise of options to acquire our
common stock.
(6) Includes 2,250 shares issuable upon exercise of options to acquire our
common stock.
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<PAGE>
(7) Spectrum Equity Investors II, L.P. is under common control with SEA 1998
II, L.P. and, therefore, beneficial ownership of the shares of our common
stock owned by SEA is attributed to Spectrum. Mr. Applegate is a Managing
General Partner of Spectrum and, therefore, beneficial ownership of the
shares of our common stock owned by Spectrum is attributed to
Mr. Applegate.
(8) Includes 250,000 shares issuable upon exercise of options to acquire our
common stock and 259,259 shares issuable upon exercise of options to be
granted upon the closing of this offering.
(9) Includes 562,500 shares issuable upon exercise of options to acquire our
common stock.
(10) Includes 108,000 shares held by the Stephen C. Aust Grantor Retained
Annuity Trust.
(11) Includes 1,653,416 shares issuable upon exercise of options to acquire our
common stock that are held before the offering by Messrs. James A. Aust,
Buhl, Farrer, Melnick, Patrick and Yancey and an additional 259,259 shares
issuable upon exercise of options to be granted to Mr. Patrick upon the
closing of the offering.
Messrs. Jonathan P. Aust, James A. Aust, Stephen C. Aust and Spectrum Equity
Investors have granted the underwriters an option to purchase 133,333, 16,667,
16,667, and 166,667 shares of common stock, respectively, as part of the
underwriters' over-allotment option. If this option is exercised in full, after
this offering these stockholders would have the following beneficial ownership
interests:
<TABLE>
<CAPTION>
Shares
Beneficially
Name of Beneficial Owner Owned Percent
- ------------------------ ------------ -------
<S> <C> <C>
Jonathan P. Aust........................................... 9,253,667 20.8%
James A. Aust.............................................. 1,819,896 4.1
Stephen C. Aust............................................ 1,936,333 4.4
Spectrum Equity Investors.................................. 19,358,682 43.5
</TABLE>
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<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common stock,
par value $0.001 per share, and 15,000,000 shares of preferred stock, par value
$0.001 per share. As of April 30, 1999, there were 36,000,000 shares of our
common stock outstanding, held by 13 holders of record. As of April 30, 1999,
there were 10,000,000 shares of our preferred stock, stated value $1.00,
outstanding, held of record by four holders of record. After this offering, we
will not have any outstanding shares of preferred stock.
After this offering, we will have outstanding 44,500,000 shares of common
stock if the underwriters do not exercise their over-allotment option, or
45,291,667 shares of common stock if the underwriters exercise their over-
allotment option in full.
The following is a description of our capital stock.
Common Stock
We are authorized to issue 150,000,000 shares of common stock. Each
stockholder of record will be entitled to one vote for each outstanding share
of our common stock owned by that stockholder on every matter properly
submitted to the stockholders for their vote. After satisfaction of the
dividend rights of holders of preferred stock, holders of common stock are
entitled to any dividend declared by the board of directors out of funds
legally available for this purpose. After the payment of liquidation
preferences to holders of any outstanding preferred stock, holders of our
common stock are entitled to receive, on a pro rata basis, all our remaining
assets available for distribution to the stockholders in the event of our
liquidation, dissolution, or winding up. Holders of our common stock do not
have any preemptive right to become subscribers or purchasers of additional
shares of any class of our capital stock. In the opinion of our counsel, Piper
& Marbury L.L.P., the shares of common stock offered in this offering will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences
and privileges of holders of our common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock that we may designate and issue in the future.
Preferred Stock
At April 30, 1999, we had outstanding 10,000,000 shares of our preferred
stock, stated value $1.00. The holders of our outstanding preferred stock are
entitled to receive dividends at a rate of 8% of the stated value per year.
Upon the closing of our public offering, $5.0 million of our preferred stock
will be converted into 333,334 shares of our common stock at the public
offering price with the remaining shares of preferred stock and all accrued
dividends cancelled without additional payment to the holders of the preferred
stock.
Our certificate of incorporation will allow us to issue without stockholder
approval preferred stock having rights senior to those of our common stock.
After this offering, no shares of preferred stock will be outstanding. Our
board of directors will be authorized, without further stockholder approval, to
issue up to 15,000,000 shares of preferred stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, and to fix the number of shares constituting any
series and the designations of these series.
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 23,050,000 shares of our common stock can require
us to register the sale of their shares under the Securities Act. Subject to
limitations and the lock-up agreements with the underwriters, we must register
the sale of these shares if at any time after six months following this
offering, the holders of at least 4,610,000 of these shares request
registration. We are not required to effect more than three of these requested
registrations. Subject to limitations, these holders may require us to file an
unlimited number of registration statements on Form S-3 when we are eligible to
use Form S-3, generally one year after this offering. If we propose to register
our securities under the Securities Act after this offering, these stockholders
and Mr. Patrick will be entitled to notice of the registration and to include
their shares in the registration provided that the underwriters for the
proposed offering will have the right to limit the number of shares included in
the registration. We must pay all expenses in connection with these
registrations, other than underwriters' discounts and commissions.
Limitation Of Liability
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption
of stock; or
. for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
General Corporation Law, except that we will indemnify a director or officer in
connection with an action initiated by that person only if the action was
authorized by our board of directors. The indemnification provided under our
certificate of incorporation and bylaws includes the right to be paid expenses
in advance of any proceeding for which indemnification may be had, provided
that the payment of these expenses incurred by a director or officer in advance
of the final disposition of a proceeding may be made only upon delivery to us
of an undertaking by or on behalf of the director or officer to repay all
amounts so paid in advance if it is ultimately determined that the director or
officer is not entitled to be indemnified. If we do not pay a claim for
indemnification within 60 days after we have received a written claim, the
claimant may at any time thereafter bring an action to recover the unpaid
amount of the claim 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
76
<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
American Stock Transfer & Trust Company is the transfer agent and registrar
for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 44,500,000 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 45,291,667 shares of common stock outstanding. All of the shares
we sell in this offering will be freely tradeable without restriction or
further registration under the Securities Act, except that any shares purchased
by our affiliates, as that term is defined in Rule 144, may generally only be
sold in compliance with the limitations of Rule 144 described below.
The remaining shares of common stock outstanding after this offering will
not be freely tradeable under the terms of the Securities Act. Transfer of
38,383,513 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
77
<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 23,050,000 shares of our common
stock after this offering. These stockholders and Mr. Patrick have certain
registration rights. See "Description of our Capital Stock--Registration
Rights."
Common Stock and Options Issuable under our Stock Incentive Plan
We intend to file one or more registration statements under the Securities
Act within 180 days after this offering to register up to 11,250,000 shares of
our common stock underlying outstanding stock options or reserved for issuance
under our 1998 stock incentive plan. We expect these registration statements
will become effective upon filing, and shares covered by these registration
statements will be eligible for sale in the public market immediately after the
effective dates of these registration statements, subject to the lock-up
agreements with the underwriters.
Lock-up Agreements
Other than with respect to up to 333,333 shares to be sold by selling
stockholders if the underwriters exercise their over-allotment option, our
officers, directors, certain of our other stockholders, SBC and Telmex, who
will hold an aggregate of approximately 37,892,772 shares of common stock after
this offering, have agreed that they will not, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, offer, sell,
pledge or otherwise dispose of any shares of our capital stock or any
securities convertible into or exercisable or exchangeable for, or any rights
to acquire or purchase, any of our capital stock or publicly announce an
intention to effect
78
<PAGE>
any of these transactions, for a period of 180 days after the date of the
underwriting agreement, other than shares of common stock transferred in
connection with a pledge agreement or disposed of as bona fide gifts approved
by Donaldson, Lufkin & Jenrette Securities Corporation. The stockholders who
are parties to our investor rights agreement are required by the terms of the
investor rights agreement to enter into these lock-up agreements. Donaldson,
Lufkin & Jenrette Securities Corporation has advised us that it has no current
intention to consent to any disposition of shares covered by these lock-up
agreements, but will consider each request for its consent at the time and
under the circumstances of the request.
79
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc.,
J.P. Morgan Securities Inc. and DLJdirect Inc. have severally agreed to
purchase the number of shares of our common stock shown opposite their names
below:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Underwriters:
Donaldson, Lufkin & Jenrette Securities Corporation...........
Bear, Stearns & Co. Inc. .....................................
J.P. Morgan Securities Inc. ..................................
DLJdirect Inc. ...............................................
---------
Total......................................................... 7,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations, the receipt of a
"comfort letter" from our accountants, the listing of our common stock on the
Nasdaq National Market and no occurrence of an event that would have a material
adverse effect on us. The underwriters are obligated to purchase and accept
delivery of all the shares, other than those covered by the over-allotment
option described below, if they purchase any of our shares.
The underwriters propose to initially offer some of our shares directly to
the public at the initial public offering price shown on the cover page of this
prospectus and some of the shares to dealers at the initial public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to other dealers. After the initial offering of the shares to
the public, the representatives of the underwriters may change the public
offering price and such concessions. The underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The following table shows the underwriting fees we and the selling
stockholders will pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of our common stock.
<TABLE>
<CAPTION>
Paid by Paid by
Network Access Solutions Selling Stockholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
<S> <C> <C> <C> <C>
Per share................... $ $ $ $
Total....................... $ $ $ $
</TABLE>
We will pay the offering expenses, estimated to be $1,000,000.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 791,667 additional shares and
certain stockholders have granted to the underwriters an option, exercisable
for 30 days from the date of this prospectus, to purchase up to
80
<PAGE>
333,333 additional shares, all at the initial public offering price less the
underwriting fees. The underwriters may exercise their option solely to cover
over-allotments, if any, made in connection with this offering. To the extent
that the underwriters exercise their option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to that underwriter's initial purchase commitment.
We and the selling stockholders have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act or to contribute to payments that the underwriters may be required to make
in respect of those liabilities.
Network Access Solutions, our executive officers, directors and stockholders
have agreed that, other than with respect to sales by the selling stockholders
upon exercise of the underwriters' over-allotment option, for a period of 180
days from the date of this prospectus, we and they will not, without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation do
either of the following:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of our common
stock.
Either of the foregoing transaction restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or such other securities, in cash or otherwise.We may, however, issue stock
options under our stock incentive plan and issue shares of our common stock in
connection with the exercise of any options or warrants outstanding on the date
of the underwriting agreement.
At our request, the underwriters have reserved up to 5% of the shares
offered by this prospectus for sale at the initial public offering price to our
employees, officers, directors and other individuals associated with us and
members of their families. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase or confirm for purchase, orally or in writing, such reserved shares.
Any reserved shares not purchased or confirmed for purchase will be offered by
the underwriters to the general public on the same basis as the other shares
offered by this prospectus.
At our request, the underwriters have reserved up to $6.0 million of common
stock to be issued by us and offered for sale to SBC Communications at the
initial public offering price, less any underwriting discount or commission
applicable to shares sold to the public. In addition, at our request, the
underwriters have reserved up to $4.0 million of common stock to be issued by
us and offered for sale to Telmex at the initial public offering price, less
any underwriting discount or commission applicable to shares sold to the
public. Each of SBC and Telmex have expressed to us their intention to purchase
these shares, but are under no obligation to do so. We have assumed in this
prospectus that we will sell 430,108 shares of our common stock to SBC and
286,738 shares of our common stock to Telmex, based upon an assumed price of
$13.95 per share, our assumed initial public offering price of $15.00 per share
less any underwriting discount or commission applicable to share sold to the
public, with aggregate net proceeds to us of $10.0 million. The sale of shares
of common stock to SBC and Telmex will be made on the same terms and conditions
available to the public, except that:
81
<PAGE>
. they will purchase the shares at the initial public offering price less
any underwriting discount or commission applicable to shares sold to the
public;
. they have agreed not to sell any shares of common stock that they may
acquire in the offering for a period of 180 days after this offering;
. they have each agreed not to acquire more than 10% of our voting stock
for a period of 270 days after this offering; and
. no underwriting discount or commissions will be paid on the shares sold
to SBC or Telmex.
Application has been made to list the common stock on the Nasdaq National
Market under the symbol "NASC." In order to meet the requirements for listing
the common stock on the Nasdaq National Market, the underwriters have
undertaken to sell lots of 100 or more shares to a minimum of 400 beneficial
owners.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rules and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or a solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
Stabilization
In connection with this offering, any of the underwriters may decide to
engage in transactions that stabilize, maintain or otherwise affect the price
of our common stock. Specifically, the underwriters may overallot this
offering, creating a syndicate short position. In addition, the underwriters
may bid for and purchase shares of our common stock in the open market to cover
syndicate short positions or to stabilize the price of our common stock. These
activities may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
Pricing of this Offering
Prior to this offering, there has been no established public market for our
common stock. The initial public offering price for the shares of our common
stock offered by this prospectus will be determined by negotiation between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. our history of and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
82
<PAGE>
. 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.
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.
83
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999
(unaudited)............................................................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and
1998 and for the three months ended March 31, 1998 (unaudited) and 1999
(unaudited)............................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the years ended
December 31, 1996, 1997 and 1998 and for the three months ended March 31,
1999 (unaudited) ......................................................... F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and
1998 and for the three months ended March 31, 1998 (unaudited) and 1999
(unaudited) .............................................................. F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
Network Access Solutions Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Network Access
Solutions Corporation (the Company) at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 18, 1999, except for the
second paragraph of Note 12 for
which the date is May 11, 1999,
the third and fourth paragraphs
for which the date is April 1,
1999 and the fifth, sixth and
seventh paragraphs for which the
dates are May 4, May 6 and May 7,
1999, respectively.
F-2
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
---------------------
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
---------------------- -----------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents................ $ 713,246 $ 5,518,117 $ 617,671
Accounts receivable, net of allowance
for doubtful accounts................... 765,325 1,806,791 2,715,741
Prepaid and other current assets......... -- 105,693 426,242
Inventory................................ 47,547 59,233 123,360
---------- ----------- -----------
Total current assets................... 1,526,118 7,489,834 3,883,014
Property and equipment, net............... 140,177 5,030,793 10,093,757
Deferred offering costs................... -- -- 246,314
Deposit................................... -- 185,000 185,000
Income tax receivable..................... -- 100,865 100,865
Deferred tax asset........................ 198,732 121,586 121,586
---------- ----------- -----------
Total assets........................... $1,865,027 $12,928,078 $14,630,536
========== =========== ===========
LIABILITIES, MANDATORILY REDEEMABLE
PREFERRED STOCK,
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... $ 796,945 $ 2,525,102 $ 5,830,303
Accrued expenses......................... 92,502 750,308 858,460
Current portion of deferred compensation
liability............................... -- 333,333 333,333
Current portion of capital lease
obligations............................. -- 328,982 406,025
Note payable............................. 93,348 -- --
Income tax payable....................... 132,064 -- --
Other current liabilities................ -- 67,201 62,507
Deferred revenue......................... -- -- 146,029
---------- ----------- -----------
Total current liabilities.............. 1,114,859 4,004,926 7,636,657
Long term portion of capital lease
obligations............................. -- 1,184,156 1,212,133
Note payable............................. -- 1,000,000 1,000,000
Long term portion of deferred
compensation liability.................. 500,000 166,667 166,667
---------- ----------- -----------
Total liabilities...................... 1,614,859 6,355,749 10,015,456
---------- ----------- -----------
Commitments and contingencies
Series A mandatorily redeemable preferred
stock, $.001 par value, 10,000,000 shares
authorized, issued and outstanding
(liquidation preference $10,519,452 (un-
audited)),
as of December 31, 1998 and March 31,
1999 (unaudited)......................... -- 5,640,651 5,987,554
---------- ----------- -----------
Stockholders' equity (deficit):
Common stock, $.001 par value,
150,000,000 shares authorized,
21,915,000, 44,550,000 and 44,550,000
(unaudited) shares issued as of Decem-
ber 31, 1997, December 31, 1998 and
March 31, 1999, respectively............ 21,915 44,550 44,550
Additional paid-in capital............... -- 8,097,566 19,694,745
Deferred compensation on employee stock
options................................. -- (3,462,753) (14,866,366)
Retained earnings (deficit).............. 228,253 (1,847,685) (4,345,403)
Less treasury stock, at cost, 8,550,000
shares as of December 31, 1998 and
March 31, 1999 (unaudited).............. -- (1,900,000) (1,900,000)
---------- ----------- -----------
Total stockholders' equity (deficit)... 250,168 931,678 (1,372,474)
---------- ----------- -----------
Total liabilities, mandatorily redeem-
able preferred stock and
stockholders' equity (deficit)........ $1,865,027 $12,928,078 $14,630,536
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF OPERATIONS
---------------------
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
------------------------------------ -----------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
(unaudited)
Revenue:
Product sales......... $14,368,264 $8,149,680 $ 9,899,623 $2,194,291 $ 3,955,110
Consulting services... 114,119 791,280 1,428,531 317,360 702,008
Network services...... -- 3,856 310,921 40,840 119,049
----------- ---------- ----------- ---------- -----------
Total revenue 14,482,383 8,944,816 11,639,075 2,552,491 4,776,167
----------- ---------- ----------- ---------- -----------
Cost of revenue:
Product sales......... 11,975,534 7,180,064 8,639,337 1,857,540 3,535,369
Consulting services... 90,851 230,565 761,315 159,642 299,328
Network services...... -- 2,406 40,738 1,335 170,846
----------- ---------- ----------- ---------- -----------
Total cost of
revenue 12,066,385 7,413,035 9,441,390 2,018,517 4,005,543
----------- ---------- ----------- ---------- -----------
Gross profit........... 2,415,998 1,531,781 2,197,685 533,974 770,624
Operating expenses:
Selling, general and
administrative ...... 2,255,231 1,436,513 4,017,057 537,841 2,532,519
Amortization of
deferred compensation
on employee stock
options.............. -- -- 218,997 -- 540,469
Depreciation and
amortization......... 7,256 12,298 130,004 4,290 186,710
----------- ---------- ----------- ---------- -----------
Income (loss) from
operations............ 153,511 82,970 (2,168,373) (8,157) (2,489,074)
Interest income........ -- -- 145,468 -- 54,312
Interest expense....... (868) (5,144) (81,006) (12,688) (62,956)
----------- ---------- ----------- ---------- -----------
Income (loss) before
income taxes.......... 152,643 77,826 (2,103,911) (20,845) (2,497,718)
Provision (benefit) for
income taxes.......... 62,460 35,674 (27,973) (8,050) --
----------- ---------- ----------- ---------- -----------
Net income (loss)...... 90,183 42,152 (2,075,938) (12,795) (2,497,718)
Preferred stock
dividends............. -- -- 322,192 -- 197,260
Preferred stock
accretion............. -- -- 244,417 -- 149,643
----------- ---------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders......... $ 90,183 $ 42,152 $(2,642,547) $ (12,795) $(2,844,621)
=========== ========== =========== ========== ===========
Net income (loss) per
common share (basic
and diluted):
Net income (loss)..... $ 0.00 $ 0.00 $ (0.08) $ (0.00) $ (0.07)
Preferred stock
dividends and
accretion............ -- -- (0.02) -- (0.01)
----------- ---------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders......... $ 0.00 $ 0.00 $ (0.10) $ (0.00) $ (0.08)
=========== ========== =========== ========== ===========
Weighted average common
shares outstanding
(basic and diluted)... 21,915,000 21,915,000 27,302,144 21,915,000 36,000,000
=========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the years ended December 31, 1996, 1997 and 1998 and the three months ended
March 31, 1999 (unaudited)
---------------------
<TABLE>
<CAPTION>
Deferred
Common Stock Additional Compensation Retained Treasury Stock
------------------ Paid- on Employee Earnings ---------------------
Shares Amount in Capital Stock Options (Deficit) Shares Amount Total
---------- ------- ----------- ------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... 21,915,000 $21,915 $ -- $ -- $ 95,918 -- $ -- $ 117,833
Net income.............. -- -- -- -- 90,183 -- -- 90,183
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, December 31,
1996................... 21,915,000 21,915 -- -- 186,101 -- -- 208,016
Net income.............. -- -- -- -- 42,152 -- -- 42,152
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, December 31,
1997................... 21,915,000 21,915 -- -- 228,253 -- -- 250,168
Sale of common stock,
net of direct issuance
costs of $27,341....... 22,050,000 22,050 4,853,010 -- -- -- -- 4,875,060
Purchase of treasury
stock at cost.......... -- -- -- -- -- 8,550,000 (1,900,000) (1,900,000)
Shares issued to
employee for service... 585,000 585 129,415 -- -- -- -- 130,000
Accrual of preferred
stock dividends........ -- -- (322,192) -- -- -- -- (322,192)
Accretion of preferred
stock.................. -- -- (244,417) -- -- -- -- (244,417)
Deferred compensation... -- -- 3,681,750 (3,681,750) -- -- -- --
Amortization of deferred
compensation........... -- -- -- 218,997 -- -- -- 218,997
Net loss................ -- -- -- -- (2,075,938) -- -- (2,075,938)
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, December 31,
1998................... 44,550,000 44,550 8,097,566 (3,462,753) (1,847,685) 8,550,000 (1,900,000) 931,678
Accrual of preferred
stock dividends
(unaudited)............ -- -- (197,260) -- -- -- -- (197,260)
Accretion of preferred
stock (unaudited)...... -- -- (149,643) -- -- -- -- (149,643)
Deferred compensation
(unaudited)............ -- -- 11,944,082 (11,944,082) -- -- -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- 540,469 -- -- -- 540,469
Net loss (unaudited).... -- -- -- -- (2,497,718) -- -- (2,497,718)
---------- ------- ----------- ------------ ----------- --------- ----------- -----------
Balance, March 31, 1999
(unaudited)............ 44,550,000 $44,550 $19,694,745 $(14,866,366) $(4,345,403) 8,550,000 $(1,900,000) $(1,372,474)
========== ======= =========== ============ =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CASH FLOWS
---------------------
<TABLE>
<CAPTION>
For the Three Months
For the Years Ended December 31, Ended March 31,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
(unaudited)
Cash flows from
operating activities:
Net income (loss)...... $ 90,183 $ 42,152 $(2,075,938) $ (12,795) $(2,497,718)
Adjustment to reconcile
net income (loss) to
net cash (used in)
provided by operating
activities:
Depreciation and
amortization
expense............. 7,256 12,298 130,004 4,290 186,710
Provision for
doubtful accounts
receivable.......... -- 23,826 28,133 -- 43,439
Benefit (provision)
for deferred income
taxes............... (62,337) (118,274) 77,146 -- --
Shares issued to
employee for
services............ -- -- 130,000 -- --
Amortization of
deferred
compensation on
employee stock
options............. -- -- 218,997 -- 540,469
Net changes in assets
and liabilities:
Accounts
receivable........ (4,435,883) 4,072,345 (1,069,599) (880,858) (952,389)
Inventory.......... (347,870) 300,678 (11,686) 36,046 (64,127)
Income tax
receivable........ -- -- (100,865) (6,073) --
Prepaid and other
current assets.... (10,000) 10,000 (105,693) -- (320,549)
Accounts payable... 4,138,912 (3,612,797) (139,113) 571,189 2,950,183
Accrued expenses... 241,254 (148,752) 173,795 147,419 108,152
Deferred
compensation
liability......... 208,333 291,667 -- -- --
Income tax
payable........... -- -- (132,064) (132,064) --
Deferred revenue... -- -- -- -- 146,029
Other current
liabilities....... 142,948 (68,195) 67,201 -- (4,694)
----------- ----------- ----------- --------- -----------
Net cash (used in)
provided by oper-
ating activi-
ties............. (27,204) 804,948 (2,809,682) (272,846) 135,505
----------- ----------- ----------- --------- -----------
Cash flows from
investing activities:
Expenditures for
network under
development........... -- -- (640,511) -- (4,291,325)
Purchases of property
and equipment......... (29,792) (121,915) (515,690) (1,103) (674,996)
Deposit for software
and services ......... -- -- (185,000) -- --
----------- ----------- ----------- --------- -----------
Net cash used in
investing
activities....... (29,792) (121,915) (1,341,201) (1,103) (4,966,321)
----------- ----------- ----------- --------- -----------
Cash flows from
financing activities:
Borrowings on notes
payable............... 1,500,000 1,500,000 2,406,652 281,143 --
Repayments of notes
payable............... (1,445,458) (1,491,291) (1,500,000) (226,739) --
Principal payments on
capital leases........ -- -- -- -- (69,630)
Issuance of common
stock................. -- -- 4,902,401 -- --
Issuance of redeemable
preferred stock....... -- -- 5,102,499 -- --
Issuance costs related
to preferred and
common stock
offering.............. -- -- (55,798) -- --
Deferred offering
costs................. -- -- -- -- --
Treasury stock
acquired.............. -- -- (1,900,000) -- --
----------- ----------- ----------- --------- -----------
Net cash provided
by (used in)
financing
activities....... 54,542 8,709 8,955,754 54,404 (69,630)
----------- ----------- ----------- --------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (2,454) 691,742 4,804,871 (219,545) (4,900,446)
Cash and cash
equivalents at the
beginning of period.... 23,958 21,504 713,246 713,246 5,518,117
----------- ----------- ----------- --------- -----------
Cash and cash
equivalents at the end
of period.............. $ 21,504 $ 713,246 $ 5,518,117 $ 493,701 $ 617,671
=========== =========== =========== ========= ===========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for:
Interest............. $ 868 $ 5,142 $ 27,948 $ 12,688 $ 22,637
Income taxes......... -- 222,143 153,343 130,087 --
Non-cash investing and
financing activities:
Capital leases....... -- -- 1,513,138 -- 174,649
Preferred stock
dividends........... -- -- 322,192 -- 197,260
Preferred stock
accretion........... -- -- 244,417 -- 149,643
Shares issued to
employee for
service............. -- -- 130,000 -- --
Expenditures for
network under
development included
in accounts payable
and accrued
expenses............ -- -- 2,351,281 -- 108,704
Expenditures for
offering costs
included in accounts
payable............. -- -- -- -- 246,314
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
---------------------
1. Business
The Company
Network Access Solutions Corporation (the Company), was originally
incorporated in the Commonwealth of Virginia on December 19, 1994. On August 3,
1998, the Company reincorporated in the State of Delaware. Prior to the
reincorporation, the Company had authorized 10,000 shares of common stock, of
which 7,803 shares were issued and outstanding. As of August 3, 1998, the
Company was recapitalized with authorized capital stock of 15,000,000 shares of
common stock, $.001 par value per share and 10,000,000 shares of preferred
stock, $.001 par value per share. On March 18, 1999, the Company increased the
authorized common stock to 50,000,000 shares with a par value of $.001 per
share. In conjunction with this reincorporation and recapitalization, the
Company changed from a July 31 year-end to a calendar year-end. On March 18,
1999, the Company and its Board of Directors declared a two for one stock
split, effected as a stock dividend, of its common stock. On May 7, 1999, the
Company and its Board of Directors declared a 2.25 for one stock split,
effected as a stock dividend, of its common stock. All share information has
been retroactively adjusted for all periods presented to reflect the new
capital structure and stock splits.
The Company is a provider of high speed data communications and networking
solutions to businesses. Through its CuNet branded service, the Company offers
its customers high speed connectivity using DSL technology. As a complement to
the Company's CuNet service, the Company also offers its customers a complete
suite of networking solutions, including network integration, network
management, network security and professional services. In 1999, the Company
began offering CuNet in Boston, New York, Philadelphia, Baltimore, Washington,
D.C. and Richmond. The Company will sell its services directly and indirectly
to small, medium and large businesses. The Company sells its services to its
existing customer base through a direct sales force. The Company also sells its
services indirectly through its sales partners, including Internet service
providers, long distance and local carriers and other networking services
companies.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The estimates involve judgments with
respect to, among other things, various future factors which are difficult to
predict and are beyond the control of the Company. Therefore, actual amounts
could differ from these estimates.
Unaudited Interim Financial Statements
The unaudited consolidated balance sheet as of March 31, 1999, the unaudited
statements of operations and cash flows for the three months ended March 31,
1998 and 1999 and the statement of
F-7
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
changes in stockholders equity for the three months ended March 31, 1999, have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of results that may be expected
for the year ending December 31, 1999.
Revenue Recognition
The Company's revenue is derived from the sale of products, consulting
services and network services. The Company recognizes revenue on the sale of
its products when a valid purchase order is received, shipment occurs,
collection is probable and no significant obligations remain related to the
completion of installation and performance of support services.
The Company provides consulting services, including network planning,
design, and integration services, under time-and-material type contracts and
recognizes revenue as services are performed and as costs are incurred.
The Company provides network services under fixed rate service contracts
with an average contractual period of one year. Revenue on fixed rates service
contracts is recognized as costs are incurred over the related contract period.
The Company annually evaluates performance under these contracts. Contract
losses are immediately recorded to operations and accrued liabilities when
identified.
Revenue from digital subscriber line services are recognized when the
services are provided. Payments received in advance of providing services are
recorded as deferred revenue until the period in which such services are
provided. Revenue related to installation and activation fees are recognized to
the extent of direct costs incurred. Any excess installation and activation
fees over direct costs are deferred and amortized to revenue over a one year
service contract. Such revenue is not expected to significantly exceed the
direct costs. In certain situations, the Company will waive non-recurring
installation and activation fees in order to obtain a sale. The Company will
expense the related direct costs as incurred.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held in a money market account at a
national financial institution. The Company has not experienced any losses on
its cash and cash equivalents.
F-8
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The Company grants uncollateralized credit in the form of accounts
receivable to its customers. As of December 31, 1998, AT&T, Corp. (AT&T)
comprised 47% of accounts receivable. The customers with concentrations of
revenue greater than 10% of total revenue are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
-------------------------------- -----------------------------
Customer 1996 1997 1998 1998 1999
- ------------------------ ---------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
AT&T.................... $9,978,104 $3,421,878 $5,869,901 $1,342,016 $2,651,468
Zeneca, Inc............. -- 921,356 933,556 481,976 476,316
Network Monitoring and
Repair, Inc............ -- 1,301,440 -- -- --
---------- ---------- ---------- -------------- --------------
$9,978,104 $5,644,674 $6,803,457 $1,823,992 $3,127,784
========== ========== ========== ============== ==============
</TABLE>
Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Inventory
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method. Inventories consist primarily of components,
subassemblies and finished products held for sale.
Property and Equipment
Property and equipment, consists of network costs associated with the
development and implementation of the DSL networks, office and computer
equipment, and furniture and fixtures. The costs associated with the DSL
network under development are comprised of collocation fees, equipment,
equipment held under capital leases, and equipment installation. These assets
are stated at cost. The Company leases certain of its equipment under capital
lease agreements. The capital lease assets are stated at the lower of the
present value of the net minimum lease payments or the fair value at the
inception of the lease, and are depreciated over the shorter of the estimated
useful life or the lease term. Depreciation of office and computer equipment
and furniture and fixtures is computed using the straight-line method,
generally over three to five years, based upon estimated useful lives,
commencing when the assets are placed in service. The depreciation of the DSL
network costs will commence as individual network components are placed in
service and will be depreciated over two to five years. Expenditures for
maintenance and repairs are expensed as incurred. When assets are retired or
disposed, the cost and related accumulated depreciation are removed from the
accounts, and any resulting gain or loss is recognized in operations for the
period.
Income Taxes
The Company accounts for income taxes by utilizing the liability method.
Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are
F-9
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
expected to affect taxable income. Valuation allowances are established when
necessary to reduce net deferred tax assets to the amount expected to be
realized. The provision for income taxes consists of the Company's current
provision (benefit) for federal and state income taxes and the change in net
deferred tax assets and liabilities during the period.
Fair Value Information
The carrying amount of current assets and current liabilities approximates
fair value because of the short maturity of these instruments. The fair value
of redeemable preferred stock is estimated by discounting the remaining cash
flows at the current interest rates. As of December 31, 1998, the carrying
amount of these financial instruments approximates fair value.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of its long-lived
assets. This valuation consists of a comparison of the carrying value of the
assets with the assets' expected future cash flow undiscounted and without
interest costs. If the carrying value of an asset exceeds the expected future
cash flows, an impairment exists. An impairment loss is measured by the amount
by which the carrying value of the asset exceeds future discounted cash flows.
No impairment losses have been recognized to date.
Net Income (Loss) Per Share
The Company presents basic and diluted net income (loss) per share. Basic
net income (loss) per share is computed based on the weighted average number of
outstanding shares of common stock. Diluted net income (loss) per share adjusts
the weighted average for the potential dilution that could occur if stock
options, warrants or other convertible securities were exercised or converted
into common stock. Diluted loss per share for the year ended December 31, 1998,
is the same as basic loss per share because the effects of such items were
anti-dilutive.
Stock-Based Compensation
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Under the intrinsic value method of accounting
for stock-based compensation, when the exercise price of options granted to
employees is less than the estimated fair value of the underlying stock on the
date of grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 supercedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing
F-10
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
performance as the source of the Company's reportable segments. SFAS No. 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position but did affect the disclosure of segment
information.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 is effective for fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Company). SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether
a derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. Currently the Company does not utilize derivative
instruments, therefore the adoption of SFAS 133 is not expected to have a
significant effect on the Company's results of operations or its financial
position. The Company will adopt SFAS 133 for the year ending December 31,
2000.
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
-------------------- -----------
1997 1998 1999
-------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
DSL network development in process........... $ -- $4,657,975 $ 9,232,653
Office and computer equipment................ 133,419 355,962 906,155
Furniture and fixtures....................... 19,626 159,728 284,531
Less accumulated depreciation................ (12,868) (142,872) (329,582)
-------- ---------- -----------
Property and equipment, net.................. $140,177 $5,030,793 $10,093,757
======== ========== ===========
</TABLE>
The DSL network development in process includes the acquisition of equipment
under capital leases, equipment, installation, and collocation fees.
Collocation fees represent nonrecurring fees paid to obtain central office
space for location of certain Company equipment. As of December 31, 1998 and
March 31, 1999, the recorded cost of the network equipment under capital leases
was $1,513,138 and $1,687,787 (unaudited), respectively. Accumulated
amortization for this equipment under capital leases was $20,739 and $121,434
as of December 31, 1998 and March 31, 1999, respectively.
For the years December 31, 1996, 1997 and 1998, depreciation expense charged
to operations amounted to $7,256, $12,298, and $130,004, respectively.
4. Notes Payable
On October 16, 1998, the Company entered into a $10,000,000 line of credit
agreement with Ascend Communications, Inc. (Ascend). Under the terms of the
line of credit, the Company can draw on the line of credit in $1,000,000
increments up to a maximum of $5,000,000. The Company may
F-11
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
draw down the remaining $5,000,000, also in $1,000,000 increments, upon (i)
completing the purchase or lease of equipment in excess of $15,000,000 from
Ascend and (ii) demonstrating that at least 70% of such equipment is being used
by the Company to generate revenue. The Company is required to make interest
only payments at an annual rate of 8.25% on the amounts advanced for the first
nine months from the date of the advance. For the next thirty-three months the
Company is required to make principal and interest payments in accordance with
a sixty month amortization schedule using an interest rate of 8.25% for the
first eighteen months and a rate equal to the prevailing high yield bond index
for the next fifteen months. The remaining unpaid interest is due forty-two
months after the related advance. The credit agreement requires immediate
repayment in the event of an initial public offering or debt offering in excess
of $40,000,000 or a change in control, as defined. At December 31, 1998 and
March 31, 1999, $1,000,000 was outstanding under this agreement.
The Company had a $1,500,000 line of credit agreement with a bank which
matured on November 30, 1998, was repaid and not renewed. Interest on
outstanding borrowings accrued at the bank's prime rate of interest plus three-
quarters of a percent (9.25% during 1998). At December 31, 1997, there was
$93,348, of outstanding borrowings under this agreement.
5. Deferred Compensation Liability
The Company has an unfunded deferred compensation plan for certain key
executives. Under the plan, executives deferred a portion of their compensation
by electing future payments in three equal installments in June 1999, December
1999 and June 2000. At December 31, 1997 and 1998, the deferred compensation
liability was $500,000, respectively. Interest accrues on deferred amounts on a
quarterly basis at a rate determined by management which is currently 6% based
on the rate of interest for 3-year Federal treasury notes. Accrued interest
related to these amounts was $17,500 and $47,500 at December 31, 1997 and 1998,
respectively.
6. Commitments and Contingencies
Leases
The Company leases and subleases office space in Virginia and Pennsylvania
and collocation space in central offices under the terms of the interconnection
agreements with Bell Atlantic and other vendors. Commitments for minimum rental
payments under noncancelable leases and subleases at December 31, 1998 are as
follows: $329,311 in 1999, and $331,382 in 2000, $255,853 in 2001, and $9,212
in 2002.
Rent expense for the years ended December 31, 1996, 1997 and 1998, was
$46,742, $80,103 and $113,600, respectively.
F-12
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
During 1998, the Company entered into capital leases related to the
acquisition of equipment for the development of the DSL network. The present
value of future minimum capital lease payments as of December 31, 1998, is as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
----------------------------------------------------------------- ----------
<S> <C>
1999............................................................. $ 461,370
2000............................................................. 501,064
2001............................................................. 500,521
2002............................................................. 330,892
2003............................................................. 21,875
----------
1,815,722
Less amounts representing interest............................... 302,584
----------
Present value of net minimum lease payments...................... 1,513,138
Less current portion of capital lease obligations................ 328,982
----------
Long term portion of capital lease obligations................... $1,184,156
==========
</TABLE>
The Company has entered into a master lease agreement with Ascend to finance
purchases of up to $30,000,000 through capital lease agreements. The Company
has an arrangement with Paradyne Corporation whereby the Company can finance
DSL equipment purchases of up to $4,000,000 subject to vendor approval.
Purchase commitments
On November 24, 1998 the Company entered into an agreement with a software
and service provider to support its DSL services. The Company's majority
shareholder is also a shareholder of this software and service provider. Under
the terms of the agreement, software licensing and service fees will
approximate $1,023,700 which are payable through a $185,000 deposit which was
made upon signing the agreement, $402,700 due upon project completion, and
$436,000 payable within twenty-four months of project completion. Amounts not
paid within 30 days of project completion accrue interest at a rate of 10%. The
agreement requires immediate payment if the Company obtains $40,000,000 in
funding and requires accelerated payment, based on a formula, if the Company
receives funding in excess of $10,000,000. The Company commenced implementing
the software and support service in 1999.
Employment agreements
The Company has entered into an employment agreement with each of its
executive officers. Each agreement has an initial term of four years, subject
to earlier termination upon 30 days prior notice. These agreements are
automatically extended for additional one year terms unless the Company or the
employee elects to terminate the agreement within 30 days before the end of the
current term. Under these agreements, these employees will receive an initial
annual base salary that
F-13
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
will be increased by at least 5% each year, based upon performance objectives
set by the Board of Directors. The employees will also receive an annual bonus
of up to 20% of the executives' then current salary. The bonus is payable in
cash, stock or a combination of both at the election of the board of directors.
Other Matter
The Company is not currently involved in any legal proceedings that it
believes could have a material adverse effect on its business, financial
position, results of operation or cash flows.
7. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current tax (benefit) provision................. $142,918 $153,948 $(105,119)
Deferred tax provision (benefit)................ (80,458) (118,274) 77,146
-------- -------- ---------
Total (benefit) provision for income taxes...... $ 62,460 $ 35,674 $ (27,973)
======== ======== =========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
As of December 31,
------------------
1997 1998
-------- ---------
<S> <C> <C>
Deferred compensation...................................... $193,100 $ 349,956
Accrued interest........................................... 5,632 19,149
Bad debt expense........................................... -- 20,066
Depreciation expense....................................... -- (2,083)
Net operating loss......................................... -- 444,160
Valuation allowance........................................ -- (709,662)
-------- ---------
Net deferred tax asset..................................... $198,732 $ 121,586
======== =========
</TABLE>
As of December 31, 1998, a valuation allowance was established to reduce
total deferred tax assets to an amount that management believes will more
likely than not be realized, based on income taxes paid in the loss carryback
period net of refundable taxes.
A reconciliation between income taxes from operations computed using the
federal statutory income tax rate and the Company's effective tax rate is as
follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1996 1997 1998
----- ---- -----
<S> <C> <C> <C>
Federal statutory rate.................................... 34.0% 34.0% (34.0)%
State income taxes, net of federal provision (benefit).... 4.9 5.4 (2.7)
Increase to valuation allowance........................... -- -- 33.7
Business meals, entertainment, penalties and other........ 2.0 6.4 1.5
----- ---- -----
40.9% 45.8% (1.5)%
===== ==== =====
</TABLE>
F-14
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
8. Mandatorily Redeemable Preferred Stock and Stockholders' Equity
Mandatorily Redeemable Preferred Stock
On August 6, 1998, the Company issued 10,000,000 shares of Series A
mandatorily redeemable preferred stock (Preferred Stock) and 22,050,000 shares
of common stock for total proceeds of $10,004,900, excluding direct issuance
costs of $55,798. The Company has allocated $5,074,042 and $4,875,060 of the
net proceeds to the Preferred Stock and common stock, respectively, based on
the Company's estimate of fair value of the Preferred Stock and common stock.
The Preferred Stock has a par value of $.001 per share, a stated value of $1.00
per share (Stated Value) and a cumulative dividend of 8% of the Stated Value
per annum, compounded annually. The Company may not declare or pay any
distributions by dividend or otherwise, payable other than in common stock,
until the holders of the Preferred Stock first receive a distribution equal to
the cumulative dividend due for each outstanding share of Preferred Stock.
Dividends continue to accrue until redemption. The Preferred Stock is
redeemable, at the option of the holder, at the earlier of the closing of a
public offering or the sixth anniversary of the initial Preferred Stock
issuance at a redemption price equal to $1.00 per share plus any accrued and
unpaid dividends. For the year ended December 31, 1998, the Company has accrued
preferred stock dividends of $322,192 and increased the preferred stock
carrying value by $244,417 for accretion to the redemption price.
In the event of a liquidation, dissolution, or winding up of the Company,
the holders of the Preferred Stock are entitled to a liquidation preference
equal to $1.00 per share plus any accrued and unpaid dividends. No dividends
have been declared through December 31, 1998. The Preferred Stock does not
provide its holders with voting rights, however, the Company must receive
approval from the holders of two-thirds of Preferred Stock to (i) authorize,
create or issue, or increase the authorized or issued amount of any class of
equity which is senior or equal to the Preferred Stock, (ii) reclassify or
modify any class of equity such that it ranks senior or equal to the Preferred
Stock, or (iii) amend, alter or repeal any of the provisions applicable to the
Preferred Stock so as to adversely change the dividend, liquidation and
redemption terms.
On March 18, 1999, the Company's certificate of incorporation was amended to
modify the terms of the Preferred Stock. In the event of an initial public
offering in which the Company receives a market valuation in excess of
$200,000,000, the terms of the Preferred Stock provide that (i) 50% of the
Preferred Stock outstanding will be cancelled and cease to exist without
compensation or recourse, (ii) the remaining shares of Preferred Stock will be
automatically converted into common stock based on the Preferred Stock
aggregate per share stated value of $5,000,000 divided by the per share public
offering price and (iii) no dividends on the Preferred Stock whether accrued or
unaccrued through the date of the offering will be payable.
F-15
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The Preferred Stock activity is summarized as follows:
<TABLE>
<CAPTION>
Shares Amount
---------- ----------
<S> <C> <C>
Balance, December 31, 1997............................ -- $ --
Issuance of shares.................................... 10,000,000 5,102,499
Issuance costs........................................ -- (28,457)
Accrued dividends..................................... -- 322,192
Accretion to redemption price......................... -- 244,417
---------- ----------
Balance, December 31, 1998............................ 10,000,000 5,640,651
Accrued dividends (unaudited)......................... -- 197,260
Accretion to redemption price (unaudited)............. -- 149,643
---------- ----------
Balance, March 31, 1999 (unaudited)................... 10,000,000 $5,987,554
========== ==========
</TABLE>
Stock Repurchase
On August 6, 1998, the Company repurchased 8,550,000 shares of common stock
for $1,900,000 from certain founders of the Company. This repurchase was
accounted for at cost.
9. Stock-Based Compensation
On July 23, 1998, the Company adopted the 1998 Incentive Stock Plan (the
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted or unrestricted stock awards, phantom stock,
performance awards or any combination thereof may be granted to the Company's
employees and certain other persons in accordance with the Plan. The Board of
Directors, which administers the Plan, determines the number of options
granted, the vesting period and the exercise price. The Board of Directors may
terminate the Plan at any time. Options granted under the Plan are fully
exercisable into restricted shares of the Company's common stock upon award
and expire ten years after the date of grant. The restricted common stock
generally vests over a three or four year period. Subsequent to exercise,
unvested shares of restricted stock cannot be transferred while vested shares
are subject to a right of first refusal by the Company to repurchase the
shares at fair value. Upon voluntary termination unvested shares of restricted
stock can be repurchased at the lower of fair value or the exercise price. At
December 31, 1998, 9,000,000 shares were reserved for issuance under the Plan.
Effective March 18, 1999 and April 1, 1999, the Company increased the number
of shares of common stock reserved for issuance under the Plan to 10,125,000
and 11,250,000, respectively.
F-16
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
As of December 31, 1998 and March 31, 1999, a total of 7,090,875 and
8,985,375 incentive stock options which were immediately exercisable as of
those dates had been granted at an exercise price of $.09 per share. Stock
option activity was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Average
Stock Exercise Exercise
Options Price Price
--------- -------- --------
<S> <C> <C> <C>
Options outstanding, December 31, 1997........ -- $-- $--
Options granted, July 1998.................... 5,400,000 .09 .09
Options granted, August 1998.................. 225,000 .09 .09
Options granted, November 1998................ 1,465,875 .09 .09
Options exercised............................. -- -- --
Options cancelled............................. -- -- --
--------- ---- ----
Options outstanding, December 31, 1998........ 7,090,875 .09 .09
Options granted, January 1999 (unaudited)..... 559,575 .09 .09
Options granted, March 1999 (unaudited)....... 1,350,000 .09 .09
Options exercised (unaudited)................. -- -- --
Options cancelled (unaudited)................. (15,075) .09 .09
--------- ---- ----
Options outstanding, March 31, 1999
(unaudited).................................. 8,985,375 $.09 $.09
========= ==== ====
</TABLE>
The Company has estimated the fair value of the underlying common stock on
the date of grant was in excess of the exercise price of the options. As a
result, the Company recorded deferred compensation of $3,681,750 and
$11,944,082 (unaudited) for the year ended December 31, 1998 and for the three
months ended March 31, 1999, respectively. This amount was recorded as a
reduction to stockholders' equity (deficit) and is being amortized as a charge
to operations over the vesting periods of the underlying restricted common
stock. For the year ended December 31, 1998 and the three months ended March
31, 1999, the Company recognized $218,997 and $540,469 (unaudited),
respectively, of stock compensation expense related to these options.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption
of a fair value-based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method for
options granted to employees and disclose pro forma net loss and loss per
share. Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net loss and loss
per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1998 March 31, 1999
----------------- ------------------
(unaudited)
<S> <C> <C>
Net loss as reported..................... $(2,075,938) $(2,497,718)
Pro forma net loss....................... (2,100,700) (2,508,081)
Net loss per share as reported, basic and
diluted................................. (0.08) (0.07)
Pro forma net loss per share, basic and
diluted................................. (0.08) (0.07)
</TABLE>
F-17
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The weighted-average fair value of options granted during the year ended
December 31, 1998 was approximately $1.04 based on the Black-Scholes option
pricing model. Upon termination, unvested shares of restricted stock are
repurchased by the Company at the lower of the exercise price or fair market
value.
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998: Dividend
yield of 0%; expected volatility of 0%; risk-free interest rate of 5.21%; and,
expected term of 5 years.
As of December 31, 1998, the weighted average remaining contractual life of
the options is 9.8 years.
10. Employee Benefit Plan
On September 16, 1998, the Company adopted the Network Access Solution, Inc.
401(k) Profit Sharing Plan and Trust (the Plan). As allowed under Section
401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary
deductions for eligible employees. Participants must be at least 21 years of
age and may make voluntary contributions to the Plan of up to 15% of their
compensation not to exceed the federally determined maximum allowable
contribution. The Company is not obligated to make contributions or to match
participant contributions. Participants vest in Company contributions' until
after three years of employment. The Company did not make contributions to the
Plan during 1998.
11. Segment Information
The Company has determined its reportable segments based on the Company's
method of internal reporting, which disaggregates its business by product
category. The Company's reportable segments are: product sales, consulting
services and network services. The product sales segment provides sales of
selected equipment from manufacturing partners. Engineers select the right
manufacturer's product solution based upon customized dependable network
designs to improve the customers' operations and network efficiencies. The
consulting services segment provides nonrecurring service activation and
installation, network integration, on site network management, network security
consulting and professional services. In addition, the consulting services
segment provides maintenance and installation of equipment some of which may be
provided through third party providers under contract. The network services
segment provides local, metropolitan and wide area data communications to
customers. This segment also provides a wide variety of other services to
customers, including remote network management and monitoring, network
security, virtual private networks, electronic commerce and CuNet, our high
speed continuously connected DSL access to telecommunications networks. The
Company's business is conducted principally in the eastern United States. There
are no foreign operations.
F-18
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
The financial results of the Company's segments are presented on an accrual
basis. The Company evaluates the performance of its segments and allocates
resources to them based on gross profit. There are no intersegment revenues.
The table below presents information about the reported gross profit of the
Company's reportable segments for the years ended December 31, 1996, 1997 and
1998 and for the three months ended March 31, 1999. Asset information is not
reported for the product sales and consulting services segments, as this data
is not considered by the Company in making its decisions. Asset data, which
representation DSL equipment, is only presented for the network services
segment as of December 1998 and March 1999, as the Company only began to
consider this data upon offering CuNet which occurred during 1998.
<TABLE>
<CAPTION>
Product Consulting Network Reconciling
Sales Services Services Items Total
------- ---------- -------- ----------- -------
(Dollars in thousands)
For the year ended December 31, 1996:
<S> <C> <C> <C> <C> <C>
Revenue................... $14,368 $ 114 $ -- $-- $14,482
======= ====== ====== ==== =======
Gross profit.............. $ 2,393 $ 23 $ -- $-- $ 2,416 (1)
======= ====== ====== ==== =======
For the year ended December 31, 1997:
Revenue................... $ 8,150 $ 791 $ 4 $-- $ 8,945
======= ====== ====== ==== =======
Gross profit.............. $ 970 $ 561 $ 1 -- $ 1,532 (1)
======= ====== ====== ==== =======
As of and for the year ended
December 31, 1998:
Revenue................... $ 9,900 $1,428 $ 311 $-- $11,639
======= ====== ====== ==== =======
Gross profit.............. $ 1,260 $ 668 $ 270 $-- $ 2,198 (1)
======= ====== ====== ==== =======
Property and equipment,
net...................... $ -- $ -- $4,652 $379 $ 5,031
======= ====== ====== ==== =======
As of and for the three months ended
March 31, 1999 (unaudited):
Revenue................... $ 3,955 $ 702 $ 120 $-- $ 4,777
======= ====== ====== ==== =======
Gross profit (loss)....... $ 420 $ 402 $ (51) $-- $ 771 (1)
======= ====== ====== ==== =======
Property and equipment,
net...................... $ -- $ -- $9,264 $830 $10,094
======= ====== ====== ==== =======
</TABLE>
F-19
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
Note 1: Adjustments that are made to the total of the segments gross profit
in order to arrive at income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
For the
three
For the years ended months
December 31, ended March 31,
----------------------- -------------------
1996 1997 1998 1999
------ ------ ------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Gross profit...................... $2,416 $1,532 $ 5,031 $ 771
Operating expenses:
Selling, general and
administrative................. 2,255 1,437 4,017 2,533
Amortization of deferred
compensation................... -- -- 219 540
Depreciation and amortization... 7 12 130 187
------ ------ ------- -------
Income (loss) from operations..... 154 83 (2,168) (2,489)
Interest income.................. -- -- 145 54
Interest expense................. (1) (5) (81) (63)
------ ------ ------- -------
Income (loss) before income
taxes........................... $ 153 $ 78 $(2,104) $(2,498)
====== ====== ======= =======
</TABLE>
12. Subsequent Events
The Company filed a Registration Statement with the Securities and Exchange
Commission for an initial public offering of its common stock.
On March 31, 1999, the Company entered into a financing agreement whereby
the majority holders of the Preferred Stock agreed to invest an additional
$10,000,000 in the Company. Under the agreement, the Company received
$5,000,000 on April 1, 1999, by issuing an 8% convertible note with a maturity
date of December 31, 1999. The financing agreement originally provided for an
additional equity investment of $5,000,000, but was subsequently amended. On
May 11, 1999, the Company amended its financing agreement whereby the Company
issued an additional $5,000,000 of 8% convertible notes rather than receiving
the $5,000,000 as an equity investment. The terms of these convertible notes
were amended such that the principal of and interest on the notes will convert
if the Company completes an initial public offering with an aggregate offering
price to the public of not less than $25,000,000 based on a pre-money Company
valuation of at least $200,000,000.
On April 1, 1999, the Company entered into a lease for additional office
space in Sterling, Virginia. The lease requires total payments of $2,478,223
over the lease term of five years.
On April 1, 1999, the Company granted a board member an option to purchase
250,000 shares of the Company's common stock at an exercise price of $6.67 per
share. The option vests over a three year period, except that in the event of
an initial public offering the option will vest immediately. The stock option
agreement also stipulates that in the event of an initial public offering, the
board member will be issued an additional option, with no vesting period, to
acquire a number of shares of common stock at an exercise price per share to be
determined using a formula based on the public offering price.
F-20
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
On May 4, 1999, the Company amended its line of credit agreement with
Ascend. The amendment reduced the line of credit to $5,000,000 and relieved the
Company's obligation to repay the line of credit in the event of an initial
public offering. On May 4, 1999, the Company borrowed an additional $2,000,000
under this line of credit. On May 4, 1999 the Company amended its master lease
agreement with Ascend to finance up to an additional $65,000,000 of equipment
purchases through capital lease agreements, contingent upon the Company's
successful completion of a $50,000,000 offering of its common stock.
In May 1999, the Company entered into letter agreements with SBC
Communications Inc. (SBC) and Telefonos de Mexico, S.A. de C.V. (Telmex),
whereby the Company offered Telmex and SBC shares of its common stock for cash
with an aggregate value of $10,000,000. SBC and Telmex are not obligated to
purchase these shares.
F-21
<PAGE>
[Graphic: Diagram of networking solutions]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[LOGO OF NETWORK ACCESS SOLUTIONS CORPORATION]
7,500,000 Shares of Common Stock
-------------------
P R O S P E C T U S
-------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
J.P. Morgan & Co.
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the contained herein or the affairs of the Company have not
changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering and when selling
previously unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities
offered hereby, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Securities and Exchange Commission
registration fee, the National Association Securities Dealers, Inc. filing fee
and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 37,853
National Association of Securities Dealers, Inc. filing
fee......................................................... 14,116
Nasdaq National Market listing fee.......................... 95,000
Transfer agent's and registrar's fees....................... 10,000
*Printing expenses........................................... 300,000
*Legal fees and expenses..................................... 300,000
*Accounting fees and expenses................................ 150,000
*Blue Sky filing fees and expenses........................... 10,000
*Miscellaneous expenses...................................... 83,031
----------
Total...................................................... $1,000,000
==========
</TABLE>
- ---------------------
* Estimated.
14. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Bylaws include provisions to require the Registrant to indemnify
its directors and officers to the fullest extent permitted by Section 145,
including circumstances in which indemnification is otherwise discretionary.
Section 145 also empowers the Registrant to purchase and maintain insurance
that protects its officers, directors, employees and agents against any
liabilities incurred in connection with their service in such positions.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its directors and officers, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act.
II-1
<PAGE>
15. Recent Sales of Unregistered Securities
The following information relates to securities issued or sold by the
Registrant within the last three years. During that time, the Registrant has
issued unregistered securities in the transactions described below. Securities
issued in such transactions were offered and sold in reliance upon the
exemption from registration under Section 4(2) of the Securities Act, relating
to sales by an issuer not involving any public offering, or under Rule 701
under the Securities Act on the basis that these options were offered and sold
either pursuant to a written compensatory benefit plan or pursuant to written
contracts relating to compensation. The sales of securities were made without
the use of an underwriter and the certificates evidencing the shares bear a
restrictive legend permitting the transfer thereof only upon registration of
the shares or an exemption under the Act.
(1) In August 1998 the Registrant issued 585,000 shares of Common Stock in a
private placement to an employee at a price of $0.22 per share in exchange
for services rendered.
(2) In August 1998 the Registrant issued 22,050,000 shares of Common Stock in a
private placement to a group of four accredited investors at a purchase
price of $0.0002 per share for an aggregate price of $4,900.
(3) In August 1998 the Registrant issued 10,000,000 shares of Series A
Preferred Stock in a private placement to a group of four accredited
investors, at a purchase price of $1.00 per share for an aggregate price of
$10,000,000.
(4) In March 1999 the Registrant issued in a private placement to two of its
existing accredited stockholders $5,000,000 aggregate principal amount of
notes convertible into shares of Common Stock based upon the Registrant's
initial public offering price.
(5) Between July 1998 and April 1999, the Registrant issued options to its
employees and directors exercisable for an aggregate of 9,000,450 shares of
Common Stock at an exercise price of $0.09 per share pursuant to its 1998
Stock Incentive Plan.
(6) In April 1999 the Registrant issued options to one of its directors
exercisable for an aggregate of 250,000 shares of Common Stock at an
exercise price of $6.67 per share, subject to adjustment pursuant to its
1998 Stock Incentive Plan.
16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen stock certificate for shares of Common Stock of the
Company
5.1* Form of opinion of Piper & Marbury L.L.P., regarding legality of
securities being registered
10.1+* Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2+* Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3* Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.4* Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5* Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1* First Lease Amendment dated June 26, 1998, by and between the
Company and Sterling/Gunston LLC
10.5.2* Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6* Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7* Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8* Employment Agreement dated as of August 16, 1998, by and between
the Company and
Jonathan P. Aust
10.9* Employment Agreement dated as of July 13, 1998, by and between the
Company and
Christopher J. Melnick
10.10* Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11* Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12* Employment Agreement dated as of March 1, 1999, by and between the
Company and John J. Hackett
10.13* 1998 Stock Incentive Plan, as amended
10.14* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
10.16* Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17* Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
Jonathan P. Aust
10.19* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
James A. Aust
10.20* Repurchase Agreement dated August 6, 1998, by and between the
Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and
Stephen L. Aust
10.21* Investor Rights Agreement dated August 6, 1998, by and between the
Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P.,
FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC,
as amended
10.22* Series A Preferred Stock Purchase Agreement dated August 6, 1998,
by and between the Company, Spectrum Equity Investors II, L.P.,
SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2
Venture Partners, LLC
10.23 Amended and Restated Note Purchase Agreement dated as of March 31,
1999 and amended as of May 11, 1999, by and between the Company,
Spectrum Equity Investors II, L.P. and FBR Technology Venture
Partners L.P.
10.24 Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and Spectrum Equity Investors II, L.P.
10.25 Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and FBR Technology Venture Partners
L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.26 Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
and between the Company and Dennis R. Patrick
10.27* Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.28 Letter Agreement dated May 6, 1999, by and between the Company and
SBC Communications, Inc.
10.29 Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de G.V.
11.1* Statement of computation of loss per share
23.1 Consent of PricewaterhouseCoopers, LLP
23.2* Consent of Piper & Marbury L.L.P. (included as part of Exhibit
5.1)
24.1* Power of Attorney
27* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
+ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be shown in
the schedules is not applicable or is included elsewhere in our financial
statements or the notes thereto.
17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Certificate of Incorporation or
Bylaws or the Delaware General Corporation Law or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted form the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
II-4
<PAGE>
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Sterling, Virginia, on
the 12th day of May, 1999.
NETWORK ACCESS SOLUTIONS CORPORATION
/s/ Jonathan P. Aust
By: _________________________________
Jonathan P. Aust
President, Chief Executive Officer
and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Name Title Date
/s/ Jonathan P. Aust President, Chief
- ------------------------------------- Executive Officer May 12,
Jonathan P. Aust and Chairman of the 1999
Board of Directors
(Principal Executive
Officer)
* Chief Financial
- ------------------------------------- Officer and Director May 12,
Scott G. Yancey, Jr. (Principal 1999
Accounting and
Financial Officer)
* Chief Operating
- ------------------------------------- Officer and Director May 12,
Christopher J. Melnick 1999
* Director
- ------------------------------------- May 12,
Brion B. Applegate 1999
Director
- -------------------------------------
Dennis R. Patrick
*By: /s/ Jonathan P. Aust
- -------------------------------------
Jonathan P. Aust
Attorney-in-Fact
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen stock certificate for shares of Common Stock of the
Company
5.1* Form of opinion of Piper & Marbury L.L.P., regarding legality of
securities being registered
10.1+* Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2+* Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3* Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
10.4* Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5* Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1* First Lease Amendment dated June 26, 1998, by and between the
Company and
Sterling/Gunston LLC
10.5.2* Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6* Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7* Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8* Employment Agreement dated as of August 16, 1998, by and between
the Company and
Jonathan P. Aust
10.9* Employment Agreement dated as of July 13, 1998, by and between the
Company and
Christopher J. Melnick
10.10* Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11* Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12* Employment Agreement dated as of March 1, 1999, by and between the
Company and
John J. Hackett
10.13* 1998 Stock Incentive Plan, as amended
10.14* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15* Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
10.16* Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17* Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
Jonathan P. Aust
10.19* Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and
James A. Aust
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.20* Repurchase Agreement dated August 6, 1998, by and between the
Company and Longma M. Aust, Jonathan P. Aust, James A. Aust and
Stephen C. Aust
10.21* Investor Rights Agreement dated August 6, 1998, by and between the
Company, Spectrum Equity Investors II, L.P., SEA 1998 II, L.P.,
FBR Technology Venture Partners L.P. and W2 Venture Partners, LLC,
as amended
10.22* Series A Preferred Stock Purchase Agreement dated August 6, 1998,
by and between the Company, Spectrum Equity Investors II, L.P.,
SEA 1998 II, L.P., FBR Technology Venture Partners L.P. and W2
Venture Partners, LLC
10.23 Amended and Restated Note Purchase Agreement dated as of March 31,
1999 and amended as of May 11, 1999, by and between the Company,
Spectrum Equity Investors II, L.P. and FBR Technology Venture
Partners L.P.
10.24 Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and Spectrum Equity Investors II, L.P.
10.25 Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and FBR Technology Venture Partners
L.P.
10.26 Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
and between the Company and Dennis R. Patrick
10.27* Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.28 Letter Agreement dated May 6, 1999, by and between the Company and
SBC Communications, Inc.
10.29 Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de G.V.
11.1* Statement of computation of loss per share
23.1 Consent of PricewaterhouseCoopers, LLP
23.2* Consent of Piper & Marbury L.L.P. (included as part of Exhibit 5.1
hereto)
24.1* Power of Attorney (included in signature pages)
27* Financial Data Schedule
</TABLE>
- ---------------------
* Previously filed.
+ Information has been omitted from this exhibit pursuant to a request for
confidential treatment filed with the Securities and Exchange Commission.
II-8
<PAGE>
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 one
hundred and sixty-five million (165,000,000) shares, of which (i) one hundred
and fifty million (150,000,000) 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 one hundred and fifty thousand dollars and no cents
($150,000.00), and (ii) fifteen million (15,000,000) 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 fifteen thousand dollars
and no cents ($15,000.00).
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 7th day of May, 1999.
/s/ Jonathan Aust
________________________
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 10.23
AMENDED AND RESTATED NOTE PURCHASE AGREEMENT
--------------------------------------------
This AMENDED AND RESTATED 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 and amended as
of May 11, 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, providing for loans to 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 principal 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 (in accordance with the allocation set forth on
Exhibit A) an additional $5,000,000 no later than May 17, 1999 in
consideration for the issuance of Notes in the form attached hereto as
Exhibit B.
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 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.
<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 conversion of
the Notes, whether or not such securities are currently authorized.
6. Miscellaneous. This Agreement amends and restates in its entirety that
-------------
certain Note Purchase Agreement dated as of March 31, 1999 between the Company
and the Purchasers. 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.
[signatures on next page]
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
NETWORK ACCESS SOLUTIONS CORPORATION
By: /s/Jonathan P. Aust
________________________________
Its: CEO
________________________________
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/ Gene Reichers
_________________________________
Its: Managing Director
_________________________________
-3-
<PAGE>
EXHIBIT A
---------
<TABLE>
<CAPTION>
Initial Subsequent
Purchaser Investment 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>
<PAGE>
EXHIBIT B
---------
Form of Convertible Promissory Note
-----------------------------------
<PAGE>
CONVERTIBLE NOTE
----------------
$[_________] May ___, 1999
FOR VALUE RECEIVED, the undersigned, Network Access Solutions
Corporation, a Delaware corporation organized and existing under
the laws of the State of Delaware (the "Company"), hereby promises to pay to the
order of [______________________] (hereinafter, the "Holder"), at
[________________________], or at such other place or to such other party as the
holder of this Note may from time to time designate in writing, the principal
sum of [__________________ ($______________)] 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 Amended and Restated 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 May ___, 2004 (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) The then-outstanding principal and interest amount (the
"Conversion 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
<PAGE>
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.
(b) 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.
-2-
<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:________________________(SEAL)
Name:______________________
Title:_____________________
-3-
<PAGE>
EXHIBIT 10.24
AMENDED AND RESTATED 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
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
Amended and Restated 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 March 31, 2004 (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) The then-outstanding principal and interest amount (the
"Conversion 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
<PAGE>
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.
(b) 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.
2
<PAGE>
9. Miscellaneous. This Note amends and restates the prior
-------------
Convertible Note dated March 31, 1999 issued by the Company to the Holder. 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
/s/ Scott G. Yancey, Jr. By: /s/ Jonathan P. Aust (SEAL)
- ------------------------ ---------------------
Name: Jonathan P. Aust
-------------------
Title: President and Chief Executive Officer
-------------------------------------
3
<PAGE>
EXHIBIT 10.25
AMENDED AND RESTATED 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 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 Amended and Restated 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 March 31, 2004 (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) The then-outstanding principal and interest amount (the
"Conversion 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
<PAGE>
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.
(b) 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.
2
<PAGE>
9. Miscellaneous. This Note amends and restates the prior
-------------
Convertible Note dated March 31, 1999 issued by the Company to the Holder. 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
/s/ Scott G. Yancey, Jr. By: /s/ Jonathan P. Aust (SEAL)
- ------------------------ -----------------------
Name: Jonathan P. Aust
--------------------
Title: President and Chief Executive Officer
-------------------------------------
3
<PAGE>
Exhibit 10.26
NETWORK ACCESS SOLUTIONS, INC.
1998 STOCK INCENTIVE PLAN
NONQUALIFIED STOCK OPTION GRANT AGREEMENT
This Grant Agreement (the "Agreement") is entered into as of the 1st day of
April, 1999, by and between NETWORK ACCESS SOLUTIONS CORPORATION a Delaware
corporation (the "Corporation"), and Dennis Patrick ("Grantee"), 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"), a nonqualified stock option to purchase
shares of Common Stock, par value of $0.01 per share, of the Corporation
("Stock"), subject to the provisions of this Agreement (the "Option"). Unless
stated otherwise herein, capitalized terms in this Agreement shall have the same
meaning as defined in the Plan. Schedule A, attached hereto and incorporated
herein, sets forth the following terms of the Option:
(i) the date the Administrator approved the Option (the "Grant Date");
(ii) the number of shares of Stock which the Grantee may purchase under
the Option;
(iii) the exercise price per share (the "Exercise Price"); and
(iv) the date as of which the Option shall expire (the "Expiration Date"),
at 5:00 p.m. Eastern Time, unless terminated earlier pursuant to
other provisions of this Agreement.
In addition, upon an initial public offering of the Company's Common Stock,
the Company will grant to the Grantee and adjustment option (the "Adjustment
Option") to be determined in accordance with the formula (the "Formula") set
forth on Schedule A. It is expressly agreed that upon such offering, the
Schedule A initially attached hereto shall be replaced by a Schedule A that
reflects the actual number of shares subject to the Option and the Adjustment
Option and their respective Exercise Prices, the number of shares and Exercise
Price of the Adjustment Option to be determined by application of the Formula.
The Company will provide the replacement Schedule A within 7 days of the closing
of the initial public offering. Except as set forth above, for the purposes of
this Agreement the Adjustment Option shall be subject to terms of this Agreement
in the same manner as if it was the Option and shall be considered the "Option"
hereunder.
<PAGE>
ARTICLE 2
VESTING
Section 2.1 Vesting Schedule. 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 three- (3-) year period as
follows: the Grantee shall become vested in 8.25% of the total shares of Stock
subject to the Option every third (3rd) month after the Grant Date, on the date
in each such month that corresponds with the Grant Date (each referred to as a
"Vesting Date"), during the thirty-six (36) month period immediately following
the Grant Date, so that the Grantee shall be vested in 100% of the shares of
Stock subject to the Option on the third (3rd) anniversary of the Grant Date;
provided, however, that the Grantee must be continuously a member of the
Corporation's Board of Directors at all times from the Grant Date through the
specified Vesting Date for such vesting to occur.
Section 2.2 Acceleration of Vesting. Following the Corporation's initial
------------------------------------
public offering of its common stock, unless the Option has earlier terminated
pursuant to the provisions of the Agreement, vesting of the Option shall be
accelerated so that all unvested shares of Stock subject to the Option shall
become one hundred percent (100%) vested in the Grantee upon a Change of
Control. For purposes of this Agreement, the term "Change of Control" shall
mean (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, other than a sale of common stock to
professional investors in a private placement, (iii) the dissolution or
liquidation of the Corporation, or (iv) any merger, share exchange,
consolidation or other reorganization or business combination of the Corporation
if immediately after such transaction 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.
ARTICLE 3
EXERCISE OF OPTION
Section 3.1 Exercisability of Option. Pursuant to the terms of the
-------------------------------------
Agreement, the Option may be exercised at any time, and from time to time, with
respect to the number of shares subject to the Option.
Section 3.2 Stock Restriction Agreement. The Administrator in its sole
----------------------------------------
discretion may require as a condition precedent to the exercise of the Option
granted pursuant to Section 1.1, that the Grantee or such other person
exercising the Option be, or shall execute and become, a party to a Stock
Restriction Agreement in substantially the form attached to this Agreement as
Exhibit A.
Section 3.3 Manner of Exercise. The Option may be exercised, in whole or
------------------------------
in part, by delivering written notice to the Administrator in such form as the
Administrator may require from time to time; provided, however, that the Option
may not be exercised at any one time as to fewer than one hundred (100) shares
(or such number of shares as to
-2-
<PAGE>
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
-----------------------------------------------------------------
exercise of the Option, in whole or in part, in accordance with the terms of the
Agreement and upon payment of the Exercise Price for the shares of Stock as to
which the Option is exercised and delivery of such executed Stock Restriction
Agreement as may be required by the Administrator pursuant to Section 3.2, the
Corporation shall issue to the Grantee or such other person exercising the
Option, as the case may be, the number of shares of Stock so paid for, in the
form of fully paid and nonassessable Stock and, except as otherwise provided in
the Stock Restriction Agreement, shall deliver certificates therefor as soon as
practicable thereafter. The stock certificates for any shares of Stock issued
hereunder shall, unless such shares are registered or an exemption from
registration is available under applicable federal and state law, bear a legend
restricting transferability of such shares and referencing the Stock Restriction
Agreement, if applicable.
-3-
<PAGE>
ARTICLE 4
TERMINATION OF OPTION
Section 4.1 Termination, In General. The Option granted hereby shall
------------------------------------
terminate and be of no force or effect after the Expiration Date set forth on
Schedule A, unless terminated prior to such time as provided below.
Section 4.2 Termination of Service as a Member of the Board of Directors.
-------------------------------------------------------------------------
Unless the Option has earlier terminated pursuant to the provisions of the
Agreement, the Option shall terminate in its entirety, regardless of whether the
Option is vested in whole or in part, thirty (30) days after the date the
Grantee is no longer serving as a member of the Corporation's Board of Directors
for any reason.
ARTICLE 5
DRAG-ALONG RIGHTS
Section 5.1 Drag-Along Rights. If at any time any stockholder of the
------------------------------
Corporation or group of stockholders owning a majority or more of the voting
capital stock of the Corporation proposes to enter into any transaction
involving (i) the sale of all or substantially all of the assets of the
Corporation; (ii) the sale of more than fifty percent (50%) of the outstanding
common stock of the Corporation in a non-public sale; (iii) any merger, share
exchange, consolidation or other reorganization or business combination of the
Corporation, if immediately after such transaction either (A) persons who were
directors of the Corporation immediately prior to such transaction do not
constitute at least a majority of the directors of the surviving entity, or (B)
persons who hold a majority of the voting capital stock of the surviving entity
are not persons who held a majority of the voting capital stock of the
Corporation immediately prior to such transaction; or (iv) the dissolution or
liquidation of the Corporation, the Corporation and/or the transferring
stockholders may require the Grantee to participate in such transaction by
giving the Grantee written notice thereof at least ten (10) days in advance of
the date of the transaction or the date that tender is required, as the case may
be. Upon receipt of such notice, the Grantee shall sell, assign, tender or
transfer the same percentage of shares subject to the Option as the percentage
of the shares of Stock proposed to be sold, assigned, tendered or transferred by
the transferring stockholders collectively, upon the same terms and conditions
applicable to the transferring stockholders and at a price equal to the
difference between the Exercise Price per share under the Option and the price
per share of Stock the transferring stockholders will receive pursuant to the
terms of the transaction. If the Grantee has options to purchase Stock of the
Corporation other than the Option hereunder, and such options are subject to
terms similar to those set forth in this Section 5.1, then the Grantee's options
shall be 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.
-4-
<PAGE>
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. No modifications to the
---------------------------------------------
Option shall be made in order to facilitate any business combination unless
agreed to in writing by the Grantee.
Section 6.3 Adjustments for Unusual Events. The Administrator is
-------------------------------------------
authorized to make, in its discretion and without the consent of the Grantee,
adjustments in the terms and conditions of, and the criteria included in, the
Option in recognition of unusual or nonrecurring events affecting the
Corporation, or the financial statements of the Corporation or any Subsidiary,
or of changes in applicable laws, regulations, or accounting principles,
whenever the Administrator determines that such adjustments are appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Option or the Plan.
Section 6.4 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 No Rights of Stockholder. The Grantee shall not have any of
-------------------------------------
the rights of a stockholder with respect to the shares of Stock that may be
issued upon the exercise of the Option until such shares of Stock have been
issued to him upon the due exercise of the Option. No adjustment shall be made
for dividends or distributions or other rights for which the record date is
prior to the date such certificate or certificates are issued.
Section 7.2 Nonqualified Nature of Option. The Option is intended to be a
------------------------------------------
stock option that does not qualify as an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and
this Agreement shall be so construed.
-5-
<PAGE>
Section 7.3 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 7.4 Withholding of Taxes. The Corporation or any Affiliate shall
---------------------------------
have the right to deduct from any compensation or any other payment of any kind
(including withholding the issuance of shares of Stock) due the Grantee the
amount of any foreign, federal, state or local taxes required by law to be
withheld as the result of the exercise of the Option or the lapsing of any
restriction with respect to any shares of Stock acquired on exercise of the
Option; provided, however, that the value of the shares of Stock withheld may
not exceed the statutory minimum withholding amount required by law. In lieu of
such deduction, the Administrator may require the Grantee to make a cash payment
to the Corporation or an Affiliate equal to the amount required to be withheld.
If the Grantee does not make such payment when requested, the Corporation may
refuse to issue any Stock certificate under the Plan until arrangements
satisfactory to the Administrator for such payment have been made.
Section 7.5 Grantee. Whenever the word "Grantee" is used in any provision
--------------------
of this Agreement under circumstances where the provision should logically be
construed to apply to the estate, personal representative or beneficiary to whom
this Option may be transferred by will or by the laws of descent and
distribution, the word "Grantee" shall be deemed to include such person.
Section 7.6 Nontransferability of Option. The Option shall be
-----------------------------------------
nontransferable otherwise than by will or the laws of descent and distribution
and during the lifetime of the Grantee, the Option may be exercised only by the
Grantee or, during the period the 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 7.7 Notices. All notices and other communications made or given
--------------------
pursuant to the Agreement shall be in writing and shall be sufficiently made or
given if hand delivered or mailed by certified mail, addressed to the Grantee at
the address contained in the records of the Corporation, or addressed to the
Administrator, care of the Corporation for the attention of its Secretary at its
principal office or, if the receiving party consents in advance, transmitted and
received via telecopy or via such other electronic transmission mechanism as may
be available to the parties.
Section 7.8 Entire Agreement; Modification. The Agreement contains the
-------------------------------------------
entire agreement between the parties with respect to the subject matter
contained herein
-6-
<PAGE>
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 7.9 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 7.10 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 7.11 Headings. The headings in the Agreement are for reference
----------------------
purposes only and shall not affect the meaning or interpretation of the
Agreement.
{signatures on next page}
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer as of the date first above written.
ATTEST: NETWORK ACCESS SOLUTIONS
CORPORATION
/s/ Illegible 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/ Dennis R. Patrick
__________________________ ______________________________________
Date: 4/21/99
_______________________________
Enclosure: Network Access Solutions, Inc. 1998 Stock Incentive Plan
-7-
<PAGE>
SCHEDULE A
Stock Option Granted to: Dennis Patrick
Grant Date: April 1, 1999
Number of Shares: 111,111
Exercise Price Per Share: $15.00
Expiration Date: April 1, 2009
Adjustment Option:
Upon on initial public offering of the Corporation's Common Stock pursuant to an
effective registration statement (the "IPO"), the Grantee will be issued an
additional option (the "Adjustment Option") to purchase shares of the
Corporation's Common Stock. The number of shares subject to the Adjustment
Option and the Exercise Price of such option shall be calculated in accordance
with the formulas set forth below.
Number of Shares: The number of shares ("X") will be determinable at the time
of the Corporation's IPO as follows:
X = Adjustment Amount * 1.33333
---------------------------
Y
Where "Y" equals the Corporation's "initial price per share to the public" of
its Common Stock in the IPO as set forth on the cover page of the final
prospectus for the IPO (the "Price to the Public") and the "Adjustment Amount"
is to be calculated in accordance with the following formula:
Adjustment Amount = $5,000,000 - (111,111*(Y-$15.00))
Exercise Price Per Share: 25% of the IPO Price to the Public.
Except as set forth above, the Adjustment Option shall be identical in terms to
the Option.
-8-
<PAGE>
Administrator of 1998 Stock Incentive Plan
c/o Office of the Corporate Secretary
Network Access Solutions Corporation
100 Carpenter Drive, Suite 206
Sterling, VA 20164
Gentlemen:
I hereby exercise the Option granted to me on ____________________, ______,
by NETWORK ACCESS SOLUTIONS CORPORATION (the "Company"), subject to all the
terms and provisions thereof and of the NETWORK ACCESS SOLUTIONS, INC. 1998
STOCK INCENTIVE PLAN (the "Plan"), and notify you of my desire to purchase
____________ shares of Common Stock of the Company at a price of $___________
per share pursuant to the exercise of said Option. This will confirm my
understanding with respect to the shares to be issued to me by reason of this
exercise of the Option (the shares to be issued pursuant hereto shall be
collectively referred to hereinafter as the "Shares") as follows:
(a) I am acquiring the Shares for my own account for investment with
no present intention of dividing my interest with others or of reselling or
otherwise disposing of any of the Shares.
(b) The Shares are being issued without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon one or more
exemptions contained in the Act, and such reliance is based in part on the above
representation.
(c) The certificates for the Shares to be issued to me will bear a
legend substantially as follows:
"The securities represented by this stock certificate have not
been registered under the Securities Act of 1933 (the "Act") or applicable
state securities laws (the "State Acts"), and shall not be sold, pledged,
hypothecated, donated, or otherwise transferred (whether or not for
consideration) by the holder except upon the issuance to the Company of a
favorable opinion of its counsel and/or submission to the Company of such
other evidence as may be satisfactory to counsel for the Company, to the
effect that any such transfer shall not be in violation of the Act and the
State Acts.
The transfer of any interest in the securities represented by
this certificate is subject to a Stock Restriction Agreement, dated
_____________ [DATE OF STOCK RESTRICTION AGREEMENT], by and among NETWORK
-------------------------------------
ACCESS SOLUTIONS CORPORATION, a Virginia corporation and the holder of the
certificate, and no such transfer may be made without compliance with that
Agreement. A copy of that Agreement is available for inspection by any
shareholder of the Corporation at the office of the Corporation upon
appropriate request and without charge."
Appropriate stop transfer instructions will be issued by the issuer to its
transfer agent.
-9-
<PAGE>
(d) Since the Shares have not been registered under the Act, they must
be held indefinitely until an exemption from the registration requirements of
the Act is available or they are subsequently registered, in which event the
representation in Paragraph (a) hereof shall terminate. As a condition to any
transfer of the shares, I understand that the issuer will require an opinion of
counsel satisfactory to the issuer to the effect that such transfer does not
require registration under the Act or any state securities law.
(e) The issuer is not obligated to comply with the registration
requirements of the Act or with the requirements for an exemption under
Regulation A under the Act for my benefit.
(f) I am a party to a Stock Restriction Agreement with the Issuer,
pursuant to which I have agreed to certain restrictions on the transferability
of the Shares and other matters relating thereto.
Total Amount Enclosed: $__________
Date:___________________ ______________________________________
(Optionee)
Received by NETWORK ACCESS SOLUTIONS
CORPORATION on
___________________________, ______
By: ______________________________
-10-
<PAGE>
EXHIBIT 10.28
NETWORK ACCESS
SOLUTIONS CORPORATION
100 Carpenter Drive
Sterling, VA 20164
May 6, 1999
VIA FACSIMILE
SBC Communications, Inc.
175 East Houston
San Antonio, TX 78205
Attn: Ms. Keli Flynn
Re: Investment in Network Access
-----------------------------
Solutions Corporation
---------------------
Dear Ms. Flynn:
This letter sets forth our understanding concerning the potential
investment in Network Access Solutions Corporation (the "Company") by SBC
Communications, Inc. ("SBC"). The Company has agreed to sell, at the request of
SBC, to SBC up to $6.0 million of the Company's common stock, $.001 par value
(the "Common Stock") at the initial public offering of the Company's Common
Stock (the "IPO"), at the "Public Offering Price" less the "Underwriting Fees,"
as each appears on the Company's final prospectus for its IPO (the "Purchase
Price"). SBC has expressed to the Company its intention to purchase such shares
of Common Stock, although SBC is under no obligation to do so.
The maximum number of shares of Common Stock that the Company will sell to
SBC pursuant to this agreement will be equal to $6.0 million divided by the
Purchase Price. All shares purchased by SBC hereunder will be subject to the
same terms and conditions available to the public, except that (i) there will be
no underwriting discount or commission on the shares sold to SBC and (ii) SBC
will be subject to a Lock-up Provision and a Standstill Provision, each as set
forth below.
Lock-up Provision
- -----------------
SBC agrees that it will not (i) 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 Common Stock that SBC acquires at the
IPO or (ii) enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of any Common
Stock acquired by SBC at the IPO, for a period of 180 days after the date of the
closing of the IPO without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation.
<PAGE>
SBC Communications, Inc.
May 6, 1999
Page 2
Standstill Provision
- ---------------------
Without the prior written consent of the Company, SBC agrees that it will not
acquire any shares of the Company's Voting Securities (as defined below) in the
open market or otherwise if and to the extent such acquisition results in SBC
holding greater than 10% of the total Voting Securities of the Company. "Voting
Securities" shall mean shares of the Common Stock of the Company and any other
securities of the Company convertible into Common Stock but shall not include
securities exercisable for Common Stock. SBC will not be obligated to dispose
of any Voting Securities if the aggregate percentage of the total Voting
Securities beneficially owned by SBC is increased as a result of a
recapitalization, reclassification or other restructuring of the Company or a
repurchase of securities by the Company or any other action taken by the
Company. The restrictions set forth in this Standstill Provision shall
terminate on the date that is nine months after the closing of the IPO.
If this letter accurately sets forth our understanding concerning this
transaction, please have the enclosed copy of this letter signed by an
authorized representative of SBC and return it to me via facsimile at (703) 742-
7706 and via first class mail. Please contact me with any questions.
Sincerely,
NETWORK ACCESS SOLUTIONS CORPORATION
By: /s/ Jonathan P. Aust
---------------------------------
Jonathan P. Aust
President and Chief Executive Officer
Accepted and Agreed to:
SBC COMMUNICATIONS, INC.
By: /s/ James S. Kahan
-------------------------
Name: James S. Kahan
-----------------------
Its: Senior Vice President
------------------------
Date: 6 May 1999
-----------------------
<PAGE>
EXHIBIT 10.29
NETWORK ACCESS
SOLUTIONS CORPORATION
100 Carpenter Drive
Sterling, VA 20164
May 7, 1999
VIA FACSIMILE
Telefonos de Mexico, S.A. de C.V. (Telmex)
Parque Via 199-1102
06599 Mexico, D.F.
Attn: Mr. Robert Issac
Re: Investment in Network Access
-----------------------------
Solutions Corporation
---------------------
Dear Mr. Issac:
This letter sets forth our understanding concerning the potential
investment in Network Access Solutions Corporation (the "Company") by Telefonos
de Mexico S.A. de C.V. or any of its subsidiaries ("Telmex"). The Company has
agreed to sell, at the request of Telmex, to Telmex up to $4.0 million of the
Company's common stock, $.001 par value (the "Common Stock") at the initial
public offering of the Company's Common Stock (the "IPO"), at the "Public
Offering Price" less the "Underwriting Fees," as each appears on the Company's
final prospectus for its IPO (the "Purchase Price"). Telmex has expressed to
the Company its intention to purchase such shares of Common Stock, although
Telmex is under no obligation to do so.
The maximum number of shares of Common Stock that the Company will sell to
Telmex pursuant to this agreement will be equal to $4.0 million divided by the
Purchase Price. All shares purchased by Telmex hereunder will be subject to the
same terms and conditions available to the public, except that (i) there will be
no underwriting discount or commission on the shares sold to Telmex and (ii)
Telmex will be subject to a Lock-up Provision and a Standstill Provision, each
as set forth below.
Lock-up Provision
- -----------------
Telmex agrees that it will not (i) 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 Common Stock that Telmex
acquires at the IPO or (ii) enter into any swap or other arrangement that
transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock acquired by Telmex at the IPO, for a period of 180
days after the date of the closing of the IPO without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation.
<PAGE>
06599 Mexico, D.F.
May 7, 1999
Page 2
Standstill Provision
- --------------------
Without the prior written consent of the Company, Telmex agrees that it will
not acquire any shares of the Company's Voting Securities (as defined below) in
the open market or otherwise if and to the extent such acquisition results in
Telmex holding greater than 10% of the total Voting Securities of the Company.
"Voting Securities" shall mean shares of the Common Stock of the Company and any
other securities of the Company convertible into Common Stock but shall not
include securities exercisable for Common Stock. Telmex will not be obligated
to dispose of any Voting Securities if the aggregate percentage of the total
Voting Securities beneficially owned by Telmex is increased as a result of a
recapitalization, reclassification or other restructuring of the Company or a
repurchase of securities by the Company or any other action taken by the
Company. The restrictions set forth in this Standstill Provision shall
terminate on the date that is nine months after the closing of the IPO.
If this letter accurately sets forth our understanding concerning this
transaction, please have the enclosed copy of this letter signed by an
authorized representative of Telmex and return it to me via facsimile at (703)
742-7706 and via first class mail. Please contact me with any questions.
Sincerely,
NETWORK ACCESS SOLUTIONS CORPORATION
By: /s/ Jonathan P. Aust
---------------------------------
Jonathan P. Aust
President and Chief Executive Officer
Accepted and Agreed to:
Telefonos de Mexico S.A. de C.V.
By: /s/ Adolfo Cerezo P.
----------------------------
Name: Adolfo Cerezo P.
--------------------------
Its: Chief Financial Officer
---------------------------
Date: May 9, 1999
--------------------------
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our report dated March 18, 1999, except for the information in the second
paragraph of Note 12 for which the date is May 11, 1999, the third and fourth
paragraphs for which the date is April 1, 1999, and the fifth, sixth and seventh
paragraphs for which the dates are May 4, 1999, May 6, 1999 and May 7, 1999,
respectively, relating to the financial statements of Network Access Solutions
Corporation. We also consent to the references to our firm under the captions
"Experts," "Summary Financial And Other Data," and "Selected Financial And Other
Data."
/s/ PricewaterhouseCoopers, LLP
- --------------------------------
McLean, Virginia
May 12, 1999
