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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 Commission File No. 000-25945
NETWORK ACCESS SOLUTIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 54-1738938
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Carpenter Drive, Sterling, Virginia 20164
(Address, including zip code, of principal executive offices)
Registrant's telephone number, including area code: (703) 742-7700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on March 15,
2000, as reported on The Nasdaq Stock Market, was $405,964,845.
The number of shares outstanding of the registrant's Common Stock on March
15, 2000, was 46,760,750.
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PART I
Item 1. Business.
We are a major provider of broadband network solutions to business customers.
We provide our data communications services using digital subscriber line, or
DSL, technology and generally market those services directly through our own
sales force. DSL technology allows our customers to access their corporate
networks and the Internet through high-speed, "always on" connections over
traditional copper telephone lines at speeds up to 7 megabits per second,
substantially higher than common dial-up modems. We have branded our DSL
service CopperNet, which we commercially launched in the northeast and mid-
Atlantic regions of the United States in January 1999. We expect to
commercially launch CopperNet in the southeastern and western regions of the
United States in 2000.
In seeking to solve the data communications needs of our business customers,
we offer them network services, telecommunications products and equipment made
by others and consulting services. Although nearly all of our revenue has
historically been derived from our product sales and consulting services, we
expect to continue to dedicate most of our financial and management resources
to further developing our network services business. Through this business,
which includes our CopperNet service offering, we provide MANs and WANs to our
customers. We also manage and monitor our customers' networks. Through our
product sales business, we sell telecommunications equipment that our customers
use to build, maintain and secure their networks. Through our consulting
services business, we design our customers' networks, install the related
equipment and provide services to help them secure their networks.
We currently offer our DSL-based networking solutions in the following nine
northeast and mid-Atlantic cities and their surrounding markets: Baltimore,
Boston, New York, Norfolk, Philadelphia, Pittsburgh, Richmond, Washington D.C.
and Wilmington. On February 8, 2000, in connection with the announcement of a
strategic summary operating agreement with SBC Telecom, Inc. and Telefonos de
Mexico, S.A. de D.V. and a $150 million preferred stock investment by SBC
Communications Inc. and Telmex Communications, LLC, we announced that we would
be extending our network deployment into the southeastern and western regions
of the United States. We refer to these SBC entities as SBC and these Telmex
entities as Telmex. We, along with SBC and Telmex, have initially targeted
deployment in the following 20 markets within these regions: Atlanta,
Charlotte, Denver, Greensboro, Jacksonville, Louisville, Memphis, Miami,
Minneapolis, Nashville, New Orleans, Orlando, Phoenix, Portland, Raleigh-
Durham, Salt Lake City, Seattle, Tampa, Tucson and West Palm Beach. We intend
to deploy our network in each of these markets in the second half of 2000.
Since we began offering our DSL-based service we have made substantial
progress in implementing our broadband network service platform. In April 1997,
we entered into our first interconnection agreement with Bell Atlantic, which
allowed us to use their copper telephone lines and to collocate our equipment
in telephone company offices known as "central offices." Central offices serve
as the central connection point for all copper telephone lines in a local area
and form the basis for our network and a telephone company's network.
As of December 31, 1999, we had installed our equipment in 362 central
offices within our northeast and mid-Atlantic markets, and we expect to have
installed our equipment in approximately 500 central offices by mid-2000, which
will essentially complete our current plans for the roll-out of our network in
these markets. We estimate that the central offices where we currently have
installed our equipment serve approximately 85% of the business users in these
areas. Upon the completion of our network deployment, we believe that the
central offices where we have installed our equipment will serve approximately
95% of the business users in these areas. As of December 31, 1999, we had
installed 2,910 lines in our northeast and mid-Atlantic regions.
We expect to have installed our equipment in approximately 400 central
offices in our new southeastern and western regions by the end of 2000 and in
approximately 500 central offices by mid-2001. We have obtained competitive
carrier certification in eight of the 17 southeastern and western states in
which we expect to eventually offer services, and have applied for competitive
carrier certification in the remaining nine states in which these markets are
located. To date, we have signed interconnection agreements with BellSouth, U S
WEST
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and GTE. Together, these three carriers serve as the traditional telephone
companies in substantially all of our 20 target markets in the southeastern and
western regions.
We have designed our network to support our customers' changing data
networking needs. Our network supports newer, evolving technologies designed to
transmit both data and voice. Unlike traditional telecommunications networks,
these newer technologies transmit data in small bundles, or packets, of
information from multiple users over the same lines, and are referred to as
packet-based technologies. These packet-based technologies generally allow for
a more efficient use of a network. Our CopperNet service is compatible with
Internet protocol, or IP, and packet-based communications systems such as
asynchronous transfer mode, or ATM, and frame relay. This same architecture
also supports the traditional technologies that carry most of today's voice
telephone conversations. This network design allows us to offer businesses and
their telecommuters cost-effective solutions for accessing the Internet, as
well as other emerging applications and services of corporate networks, such as
video and audio conferencing, application and Web hosting, multimedia and e-
commerce. We create city-wide MANs and connect them to our private, leased,
high-speed fiber optic network, or backbone. This network design enables us to
provide our customers seamless connections to remote offices or employees in
other locations, including other cities. Our network provides dedicated
connections to our customers, enabling them to operate as if they were using
their own private network. These virtual private networks, or VPNs, have
capacity, speed, reliability and level of service designed to meet our
customers' needs.
Industry Overview
We believe that a substantial business opportunity exists because of the
concurrence of several factors.
Growing Demand for High-Speed Data Communications and Networking
Solutions. Many businesses and other organizations are finding it extremely
expensive and time-consuming to manage the complex elements of their networks.
Businesses are implementing internal networks using Internet technology, or
intranets, and remote local area networks, or LANs, to enable employees to work
from remote locations and from home, and to create private networks that
connect corporate networks in multiple locations. Gartner Group estimates that
the U.S. market for packet-based, VPN and Internet data services will grow from
$3.4 billion in 1997 to $14.5 billion in 2003, a compounded annual growth rate
of 34%. Business demand for Internet access, e-mail, video and audio services,
web and application hosting and e-commerce is also increasing.
This demand in turn drives the need for high-speed, high-capacity
communications to support these applications. As businesses grow to take
advantage of the extended power presented by their networks and the Internet,
they will need extensive network management and security solutions designed to
protect their internal data. International Data Corporation, or IDC, estimates
that the U.S. market for network operations outsourcing services will more than
double from $4.0 billion in 1997 to $9.1 billion in 2002, a compounded annual
growth rate of 18%.
High-speed data communications have become important to businesses in part
due to the dramatic increase in Internet usage. According to IDC, the number of
Internet users worldwide reached approximately 69 million in 1997 and is
forecasted to grow to approximately 320 million by 2002. IDC also estimates
that the value of goods and services sold worldwide through the Internet will
increase from $12 billion in 1997 to over $400 billion in 2002. To remain
competitive, businesses increasingly need high-speed connections to maintain
complex Web sites, access critical business information and communicate more
efficiently with employees, customers and business partners.
Data communications is the fastest growing segment of the telecommunications
industry. Gartner Group forecasts data traffic to grow over five times faster
than voice traffic through 2002. Furthermore, Gartner Group projects an
increase in the number of DSL lines in use from 3,000 in 1997, providing over
$1.8 million in revenue, to over 7.1 million lines providing over $18 billion
in revenue, in 2003, representing a 373% compounded annual growth rate in the
number of lines and a 531% compounded annual growth rate in revenue.
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Increasing Network Congestion. The growing use of bandwidth-intensive
applications is creating a number of challenges for the existing copper lines
of the public telephone network, and for public data networks and private
networks. These challenges affect the structure of the existing network and
limit the ability of businesses to take full advantage of the benefits of new
information technologies. Networks are becoming increasingly congested due to
the rapid growth in data traffic and the imbalance in capacity between LANs and
WANs.
High-speed local access technologies such as DSL will be deployed to help
solve the local access, or "last mile," bottleneck. The "last mile" is that
part of the network that runs from an end-user's location to the first central
office or nearest alternative service entry point into our network. Since the
break-up of AT&T, substantially all data services have been configured with a
local carrier, typically a regional Bell operating company like Bell Atlantic,
providing the last mile local access, and a long distance carrier like AT&T,
MCI WorldCom or Sprint providing the long distance portion. Although
competition in the long distance market has evolved, stimulating technological
development and causing price reductions, the local access markets have not
similarly developed. As a result, the traditional local access market remains
technologically behind the long distance market, with last mile access to major
public networks like the Internet and data networks remaining either very slow
or very expensive. In addition, expertise and networking solutions still will
be needed to remedy bottlenecks, other than the last-mile bottlenecks that
subsist throughout existing networks.
Commercial Availability of Low-Cost DSL Technology. The full potential of
Internet and remote LAN applications cannot be realized without removing the
performance bottlenecks of the local telephone networks. DSL technology is
designed to remove this performance bottleneck by increasing the data carrying
capacity of copper telephone lines from the 56 kilobits per second speeds
available with common dial-up modems and 128 kilobits per second speeds
available on integrated services digital network, or ISDN, lines to DSL speeds
of up to 7 megabits per second. Because DSL technology reuses existing copper
telephone lines, DSL requires a lower initial fixed investment than that needed
for existing alternative technologies, such as cable modems, fiber, wireless
and satellite communications systems. As a result, after the build-out of a
central office, subsequent investments in DSL technology for customers within
the area served by that central office are directly related to the number of
paying customers.
Needs of Small- and Medium-Sized Businesses. A significant number of small-
and medium-sized businesses have no practical alternative to low performance
dial-up or ISDN lines and lack the financial resources to afford traditional
high-cost alternatives, such as T-1 or T-3 lines. As a result, their employees
suffer productivity limitations associated with slow transmission speeds. In
addition, there is an increasing need by these businesses for integrated,
value-added applications and services, such as web and application hosting or
computer system back-up, that require an increasing amount of bandwidth
capacity.
Needs of Large Businesses to Improve Remote Worker Productivity. Many large
companies are supporting increasing numbers of remote offices and workers as a
means of dealing with transportation infrastructure constraints, skilled worker
unavailability and other workplace issues. These companies face the challenge
of finding a cost-effective way to make their remote workers as productive as
those who have access to all of the high performance communications and
networking resources available to workers located at corporate headquarters. A
high-speed network solution that encompasses access to the corporate LAN, the
corporate telephone system, the Internet, the corporate video conferencing
system, customers, suppliers, and partners permits a substantial increase in
remote office and worker productivity.
Significant and Growing Demand for Network-Enabled Broadband Applications and
Services. As applications become more advanced and necessary to conduct day-to-
day business, we expect that the demand for broadband capacity will rise
accordingly. Many companies lack the resources to develop, implement, manage
and continually enhance their business' hosting and information technology
applications needs. As a result, not only should the demand for bandwidth
capacity rise, but there should be strong demand for outsourcing many of these
applications so that companies are able to focus on their core competencies.
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Impact of the Telecommunications Act of 1996. The Telecommunications Act of
1996 (including its related regulations), which we refer to as 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;
. to provide competitive telecommunications companies with the operations
support services necessary for competitive telecommunications companies
to compete; and
. to permit competitive telecommunications companies to share access to
and provide service over traditional telephone companies' existing
copper telephone lines.
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.
Our Solution
We provide a full range of broadband network solutions to allow businesses to
outsource their Internet access, data transport, and other telecommunications
or data communications needs effectively. We market our services both directly
to businesses through our sales force and indirectly through other service
providers. Our network services include:
. High-speed, Last Mile Connectivity. CopperNet is designed to solve the
last mile challenge using DSL technology to convert standard copper
telephone lines into high-speed data connections. Our network is capable
of delivering data at speeds ranging incrementally from 128 kilobits per
second to 2 megabits per second symmetrically, where data travels at the
same speed to and from the customer, and up to 7 megabits per second
asymmetrically, where data travels faster to the customer than from the
customer. The highest CopperNet speeds allow our customers to transfer
data at rates faster than standard high-speed data connections, like T-1
lines and frame relay circuits. We provide packet-based connections like
other DSL providers, but because many of today's existing networks use
channelized technology, we also provide channelized connections, which
we believe no other major DSL provider currently offers. Thus, CopperNet
addresses both older channelized network requirements, like traditional
voice telephone networks, and the packet-based communications better
suited for newer, more efficient technologies such as ATM and frame
relay, both of which transmit data at high-speed and can accommodate
multiple types of media, including voice, video and data. In addition to
ATM and frame relay, CopperNet can also accommodate other technologies
based on IP, which is the set of standards that enables Internet
communications.
. Adaptable Network Design. The design of our network supports today's
bandwidth-intensive business requirements, such as corporate networks,
VPNs, office-to-office connectivity, telecommuting solutions,
collaborative computing of users in different areas, Internet/intranet
access, traditional voice, video conferencing, multimedia, e-mail, video
and audio transmission, web and
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application hosting and e-commerce. We have designed our network so that
we can individually configure a customer's features and speeds from our
network operations center, eliminating the need for customers to upgrade
their hardware or for us to visit their premises in order to enhance or
upgrade services.
. Metropolitan Area Network Solutions. We recognize that businesses with
city-wide locations, as well as remote users who telecommute, need to
communicate and share confidential information. We have constructed data
communications networks that cover an entire city-wide, or metropolitan,
area. These MANs provide high-capacity, secure, direct connections
between remote locations and provide cost effective private network
solutions to our customers with the capacity, speed, reliability and
level of service that they require.
. Wide Area Network Solutions. Many organizations have offices and
employees in multiple cities. By linking our MANs, we have constructed a
data communications network that covers an entire region in our
northeast and mid-Atlantic regions. This WAN provides high-capacity,
secure and reliable connections between geographically dispersed
locations. Because our WAN customers, like our MAN customers, are served
end-to-end on our CopperNet infrastructure, we are able to deliver a
wide area, private network to our customers with the capacity, speed,
reliability and level of service that they require. With our newly
announced network expansion and through the definitive operating
agreements we expect to sign with SBC and Telmex, we expect to be able
to offer a significantly expanded WAN solution, over either our own or
our partners' networks, to our customers.
. Network-Enabled Broadband Communications and Services. We believe that
providing high-speed access and data communications solutions will only
be part of the solution we provide to our customers. Because our
emphasis is on building customer relationships through our direct sales
force and working with them to provide the best communications
solutions, we believe that we will be able to identify further customer
needs and effectively market and sell new solutions to meet these needs.
For example, we currently provide remote online control, monitoring and
management of our customers' networks. In addition, we develop and
implement sophisticated network security solutions to protect our
customers' networks and vital data, including VPNs, encryption and
access authentication, risk assessment and audits, design consulting,
security testing through attempted breaches of security and analysis of
and response to breaches of security. In the future, we intend to offer
additional services that may include e-commerce, voice-over technology
(including IP, frame relay and ATM), web and application hosting, video
conferencing and server back-up services.
. SBC and Telmex Products and Services. Upon completion of a definitive
sales agreement with SBC and Telmex, we expect to be able to offer our
customers various SBC and Telmex data and voice telecommunications
services, which we expect to bundle with our other product offerings,
providing integrated communications solutions to our customers.
Our Strategy
Our goal is to be the premier provider of broadband network solutions in our
traditional and future markets. To achieve our goal, and to take advantage of
our market opportunity, we plan to implement a strategy consisting of the
following principal elements:
. Provide in-depth coverage in our traditional markets. Because DSL can
only be provided to each individual end-user from the central office or
alternative service entry point closest to that end-user, we must
collocate our equipment in many central offices in order to provide a
wide area of coverage of our markets. Thus, we have pursued a strategy
of providing services in a substantial majority of the central offices
in each of our target markets. Furthermore, our traditional focus on the
northeast and mid-Atlantic regions has enabled us to deploy our network
with speed and depth. We believe that
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our coverage within our traditional target markets is much deeper than
that of other providers of DSL-based broadband access, enabling us to
better serve our customers by providing them with access for
substantially all of their end-users.
. Expand our network coverage area. We have announced a significant
expansion of our network coverage area, which we will begin building out
in mid-2000. We expect to be able to initially deploy our network in all
20 southeastern and western markets in the second half of 2000. We
believe that the skills, processes and certain other resources that we
used to build out, provide service and obtain customers in our
traditional nine markets are directly transferable to developing these
additional 20 markets. We believe that by expanding our network coverage
area, and through our planned relationships with SBC and Telmex, we will
be able to offer our customers a seamless, integrated broadband
communications solution throughout a significant portion of the United
States.
. Focus on small- and medium-sized business customers. We believe that
many small- and medium-sized businesses currently do not have a cost-
effective and integrated solution to their Internet access and data
transport needs. Many small- and medium-sized businesses want to provide
high-speed Internet access to their employees and connect multiple
branch offices in the same city or multiple cities through MAN or WAN
connections, but traditional data communications services are cost-
prohibitive for these businesses. Because our CopperNet solution is more
cost-effective than current solutions offered by traditional telephone
companies, such as T-1 or ISDN connections, we intend to focus on this
natural market for our services. In addition, we believe that our
marketing approach enables us to provide these customers with a more
effective and integrated solution to their data communications needs.
. Focus on selected large enterprise customers. We believe that many large
enterprise customers are unable to efficiently provide cost-effective
high-speed access to their remote workers. Many large businesses have
remote offices and workers that are not able to take advantage of the
full array of communications and networking resources available to
workers at the main office. Our extensive network coverage within our
traditional markets allows us to provide service to most remote workers
or office locations within those markets, and we expect to be able to
provide a similar level of service in our southeastern and western
markets by mid-2001. In addition, we believe that our planned expansion
into an additional 20 markets and our planned relationships with SBC and
Telmex will allow us to more effectively service large enterprise
customers with employees in many geographic locations.
. Enhance and expand our network to meet the broadest array of business
requirements. Our network design and technology is designed to provide
our customers with adaptable networking solutions that take advantage of
many technologies. Our network supports a broad array of business
requirements, such as corporate networks, VPNs, office-to-office
connectivity, telecommuting solutions, collaborative computing of users
in different areas, Internet/intranet access, video conferencing and
multimedia, e-mail, video and audio transmission, web and application
hosting and e-commerce. Our network provides solutions that can be
adapted to meet the needs of our customers and integrate technological
innovations as they are developed.
. Expand network-enabled features and applications. We seek to have our
network become a platform that facilitates the delivery of productivity-
enhancing features and applications to businesses and their employees.
We intend to either directly offer or jointly provide these services. We
expect that our planned relationships with SBC and Telmex, along with
Prodigy, an affiliate of both companies, will allow us to provide
additional services, such as enhanced Internet services and local and
long distance voice services, to our customers. One of our objectives in
providing these enhanced features and applications is to strengthen
customer loyalty and increase revenue per customer.
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. Provide superior customer care. We emphasize a comprehensive service
solution for our customers by developing a complete project
implementation plan for each installation and for the on-going
maintenance of their service. This is to ensure that each customer
receives the service for which it has contracted according to our
service level agreements. We manage all aspects of our customers'
connections to our network, including the design and installation of the
end-user's connection, equipment configuration and network monitoring on
a 24 hour a day, seven day a week basis. By providing our customers
regular reports on the performance of their services, we are able to
demonstrate to our customers our performance relative to our commitments
and how customers may benefit by acquiring additional networking
services from us.
. Deliver our products and services through different types of
marketing. We emphasize direct sales and marketing to small- and medium-
sized businesses and to selected large enterprises. We also sell our
services indirectly through our sales partners, including Internet
service providers, or ISPs, long distance and local carriers and other
networking service companies. Our sales force is supported by sales
engineers who are trained, certified experts in all our vendor-partners'
products and technologies, including Lucent Technologies, Inc. (through
its acquisition of Ascend), Cisco Systems, Inc., and Paradyne
Corporation. We intend to leverage our existing customer base through
selling them additional products and services. Some of our sales
partners include Verio, Inc., Intermedia Communications, Inc. and
Comcast Telecommunications, Inc. In addition, we expect that our planned
relationships with SBC and Telmex will offer us additional sales
channels through which we expect to be able to distribute our products
and services in both our traditional and future markets.
. 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 WAN technologies,
like high-speed T-1 lines and frame relay circuits, at approximately 30%
to 70% of the cost of such services. After we build out a central
office, our subsequent investments in DSL technology for the customers
within the area served by that central office are directly related to
the number of paying customers, making a significant portion of our
capital expenditures success-based.
. Accelerate growth through strategic acquisitions or relationships. As
part of our growth strategy, we intend to evaluate and consider
opportunities to pursue strategic acquisitions, investments and
relationships on an ongoing basis. We expect to focus our efforts on
companies with complementary service capabilities, talented personnel
with skills compatible with our business technologies that will permit
us to enhance or expand our business and/or additional applications that
will enable us to expand our network services. In addition, we may
selectively acquire or partner with companies that permit us to increase
our customer base.
. Leverage our relationships with SBC and Telmex. We have executed a
summary operating agreement, and we expect to enter into several
definitive agreements, with SBC and Telmex that will govern our joint
sales and marketing, network operations, systems integration and product
development efforts. By closely aligning our network architecture and
integrating our information systems with those of SBC and Telmex, we
expect to create a national broadband network. This offers us a time-to-
market advantage, as we anticipate that the combined networks will be
deployed in more locations, with greater coverage, more quickly, and
less expensively than if we were to build a nationwide network
ourselves. We intend, working with SBC and Telmex, and possibly with
other third parties, to provide DSL, certain other broadband services,
and traditional voice services on a nationwide basis to business and
residential customers. We intend to continue to market directly to our
traditional customer base, but will also jointly market products and
services with SBC and Telmex to both our traditional and non-traditional
customers, such as Fortune 50 and residential customers. In addition, we
believe that SBC could become a significant distribution channel for us
as it fulfills its out-of-region strategy of offering data and
communications services in additional markets.
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Our Service and Product Offerings
Network Services
CopperNet. In January 1999, we began commercially offering our CopperNet
services. CopperNet uses DSL technology to provide high-speed continuously
connected packet-based and channelized communications services. CopperNet
connects business users to our MANs and WAN using ATM, frame relay and DSL
technologies over traditional copper telephone lines. CopperNet customers are
able to connect to our regional networks to obtain high-capacity, secure and
reliable connections among geographically distant locations. Because our
customers are served end-to-end on our CopperNet network, we are better able to
deliver a true wide area VPN 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
CopperNet services, as of March 1, 2000:
<TABLE>
<CAPTION>
Speed Speed Retail List
to from Retail List Price for
End End Price for Monthly
Service(1) User(2) User(2) Activation(3) Service(3) Market/Usage
---------- ------- ------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Symmetrical:
CopperNet 128 128 Kbps 128 Kbps $270 $129 Integrated services digital
network replacement for
telecommuters.
CopperNet 256 256 Kbps 256 Kbps $270 $146 Small businesses with standard
e-mail and web usage.
CopperNet 384 384 Kbps 384 Kbps $270 $162 Higher bandwidth solution for
small- to medium-sized
businesses running moderately
visited web sites.
CopperNet 512 512 Kbps 512 Kbps $270 $185 Allows small- and medium-sized
businesses to meet most network
video and Internet needs.
CopperNet 768 768 Kbps 768 Kbps $270 $217 Supports high bandwidth
intensive applications such as
e-commerce, video conferencing,
frame relay and voice over
frame relay.
CopperNet 1.0 1.0 Mbps 1.0 Mbps $270 $239 Close to full T-1 for medium-
to-large sized businesses.
CopperNet 1.5 1.5 Mbps 1.5 Mbps $270 $294 Standard for large
organizations that require
high-capacity connections.
Applications include the
ability to integrate voice,
data and Internet services over
a single connection.
CopperNet 2.0 2.0 Mbps 2.0 Mbps $270 $348 Full motion video and
multimedia applications for
large businesses.
Asymmetrical:
CopperNet 1.5 1.5 Mbps 384 Kbps $270 $239 High-speed web access, e-mail
and file distribution.
CopperNet 4.0 4.0 Mbps 1.0 Mbps $270 $429 Very high-speed web access, e-
mail and file distribution.
CopperNet 7.0 7.0 Mbps 2.0 Mbps $270 $729 Bandwidth and capacity
sufficient to meet most
asymmetrical data communication
requirements.
</TABLE>
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(1) In each case, the range from the central office is 18,000 feet. However,
through our symmetrical CopperNet 128 application, there is no limitation
on range.
(2) "Kbps" means kilobits per second. "Mbps" means megabits per second.
(3) Represents price per line. Wholesale and volume discount prices are
available for network service providers.
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CopperNet Frame. CopperNet Frame provides seamless access to LANs and WANs
using ATM and DSL technologies to deliver a flexible suite of frame relay
services. The benefit to CopperNet Frame customers is the low cost and
simplicity of use when contrasted against T-1 and ISDN services provided by
traditional telephone companies and long distance carriers.
CopperNet Internet. CopperNet Internet is a suite of Internet services and
connectivity options designed specifically for business applications. Our
customers choose their DSL connectivity speed, ranging from 128 Kbps to 2 Mbps,
and we provide the necessary hardware, register our customers' chosen domain
name and configure and maintain our customers' e-mail service.
VPN Service. Our VPN service is a fully managed offering for organizations
with a remote or mobile workforce that needs reliable and secure access to the
corporate network. We provide a full service VPN solution that includes
necessary hardware, software and communications services for a single monthly
fee.
VPOP Service. Our virtual point of presence, or VPOP, service provides
network service providers access to our entire CopperNet network. With VPOP, a
network service provider can offer services throughout the entire CopperNet
network without additional investment in network communications infrastructure.
This service offers wholesale customers the opportunity to sell DSL circuits in
cities outside of the local service area in which they physically connect to
the CopperNet network. Wholesale and volume discount prices are available for
network service providers.
ROC Services. We offer remote online control, or ROC, services to meet our
customers' outsourced network requirements. From our network operations center
in Sterling, Virginia, we continuously monitor the integrity of our customers'
MANs and WANs, evaluate their network utilization, implement problem resolution
systems, provide network health and status monitoring and other customized
management solutions. We proactively monitor the performance of our customers'
network devices and perform trouble resolution to address network problems,
often before our customers' end-users become aware of them.
SOC Services. We offer secure online control, or SOC, services to meet our
customers' outsourced network security requirements. We provide proactive
network monitoring, intrusion detection and management of these network
security solutions on a 24 hour a day, seven day a week basis. We provide a
variety of security solutions including barriers, or firewalls, between
internal corporate networks and external networks like the Internet, VPN
service, encryption and access authentication solutions for customers looking
for the highest level of security on any network on which data is transported.
Value-Added Products and Services. We offer an array of network and broadband
enabled applications and features that take advantage of DSL's high-speed
connectivity. These applications extend the capabilities of small- and medium-
sized businesses and provide them access to expanded markets, resources, and
functionality.
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
network configuration in order to meet our customers' unique network management
requirements. We believe our strategy of providing these services will allow us
to address a larger market opportunity than that represented by CopperNet
alone.
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Consulting Services
We provide professional consulting and network integration services to
complement all of our network services. We also provide network design and
integration, network management, staging, installation, maintenance and
warranty services. Our consulting services include network security and
professional services such as:
. Risk assessments and audits. We work in conjunction with a customer's
engineering staff to determine if a network's critical components work
together, provide for overlapping network protection features and
adequate firewall security at the perimeter of a network. We also
determine whether an optimal defensive strategy exists and if it is
adhered to. We assess the effectiveness of a customer's reporting and
response mechanisms and determine vulnerabilities and other critical
issues.
. Network security architecture consulting. We provide expertise in
designing, implementing, modifying and protecting data networks of all
sizes.
. Controlled security breaches. We will conduct organized security
breaches with software tools and techniques designed to expose
unauthorized information security breaches. These controlled
penetrations are tailored to customer requirements. Following a security
breach, our engineers will interpret the outcome and present results to
both senior executives and lead engineers. We also take steps to ensure
that knowledge gained from a controlled security breach is not lost
during subsequent implementation and maintenance phases.
Product Sales
As part of our overall data communications solutions, we sell data
communications products, including the network components and security
components that our customers require in order to build, maintain and secure
their networks. We primarily provide equipment manufactured by Lucent, Cisco
and Paradyne. We do not manufacture any of this equipment ourselves. Our
engineers select product solutions to improve our customers' operations and
network efficiencies, and then help install and configure the equipment in our
customers' networks.
Customers
As of December 31, 1999, we had more than 1,492 customers. AT&T accounted for
50.4% and 30.7%, and AstraZeneca PLC (formerly Zeneca Group PLC), accounted for
8.0% and 9.2%, of our revenue for the years ended December 31, 1998 and 1999,
respectively.
Network services, which includes our CopperNet service, represented 2.6% and
10.4% of our revenue for the years ended December 31, 1998 and 1999,
respectively.
Sales and Marketing
We emphasize direct sales and marketing to small- and medium-sized businesses
and to selected large enterprises. We also sell our services indirectly through
our sales partners, including ISPs, long distance and local carriers and other
networking services companies, and, subject to entering into definitive
agreements with SBC and Telmex, we expect to sell indirectly through SBC,
Telmex and Prodigy.
Direct Sales. We market our full complement of products and services,
including our network services, consulting services and product sales, through
a sales force of 133 people at December 31, 1999. Our direct sales force is
supported by sales engineers who also seek to sell our consulting services and
network services. Our sales representatives focus on selling CopperNet
connectivity to small- and medium-sized businesses and our account executives
focus on selling CopperNet connectivity and consulting services and network
services to medium- and large-sized businesses. We target businesses that have
at least one of the following requirements: Internet connectivity, remote LAN
access, traditional voice and data applications or MAN or WAN frame relay.
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We also generate lead referrals for our direct sales forces through
telemarketing efforts. We intend to increase the size of our sales and
technical support force to sell and support our services as we expand our
business. By the end of 2000, we expect to have a sales force of approximately
400 people. We also seek to coordinate our direct sales and marketing efforts
with our vendor partners, including Lucent, Cisco and Paradyne. Our direct
sales process generally ranges from 30 to 60 days for small- and medium-sized
businesses, which generally require simple connectivity and networking
solutions. Larger businesses with more complex networking requirements often
require customized solutions. The large business sales process may take up to
six months and may involve:
. a significant technical evaluation;
. an initial trial rollout of our services; and
. a commitment of capital and other resources by the customer.
Indirect Sales. We sell our full complement of products and services,
including our network services, consulting services and products, through
network service providers, including ISPs, long distance and local carriers and
other networking services companies. These providers combine one or more of our
services with their own Internet, frame relay and voice services and resell
those bundled services to their existing and new customers. We address these
markets through sales and marketing personnel dedicated to this channel. We
intend to augment our CopperNet sales through partnerships with other service
providers which offer complementary services and can offer CopperNet as part of
a complete business solution. We also leverage our equipment vendors'
partnerships as sources for sales opportunities by offering joint technology
seminars, implementing marketing campaigns and sharing cross-selling
opportunities.
SBC and Telmex Sales. In connection with our recently announced summary
operating agreement with SBC and Telmex, we expect to enter into definitive
operating agreements with SBC and Telmex covering several areas of our
operations, including sales and marketing. We intend to continue to market
directly to our traditional customer base, but will also jointly market
products and services with SBC and Telmex to both our traditional and non-
traditional customers, such as Fortune 50 and residential customers. In
addition, we believe that SBC could become a significant distribution channel
for us as it fulfills its out-of-region strategy of offering data and
communications services in additional markets.
Preferred Stock Issuance and SBC and Telmex Agreement
On February 8, 2000, we announced strategic financing agreements with SBC and
Telmex in which those companies agreed to purchase a total of $150 million, $75
million each, of our Series B preferred stock for $100 per share. On March 7,
2000, we issued 1,500,000 shares of our Series B preferred stock to SBC and
Telmex. Our Series B preferred stock is non-voting and pays a 7.0% cumulative
dividend, which can be satisfied with either additional stock or cash. Each
share of Series B preferred stock is convertible at any time into 3.2258 shares
of our common stock, or a total of 4,838,700 common shares.
In conjunction with the financing agreements, we executed a summary operating
agreement with both SBC and Telmex, and we intend to execute several definitive
agreements with SBC and Telmex covering distinct operating areas in the first
half of 2000. In connection with the financing agreements, we announced that we
would be expanding our network into 20 additional markets in the southeastern
and western regions of the United States. We will use the proceeds from the
Series B preferred stock issuance to fund part of this expansion.
Pursuant to the financing agreements, we granted to each of SBC and Telmex a
right of first offer to purchase a percentage of any new securities we offer to
sell to any third parties. That percentage is equal to the percentage ownership
by each of SBC and Telmex in our common stock on a fully diluted basis prior to
the sale of the stock subject to the right of first offer.
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In connection with the financing agreements, each of Jonathan P. Aust, our
Chief Executive Officer, and Spectrum Equity Investors II, L.P., or Spectrum,
granted each of SBC and Telmex a right of first offer to purchase any shares
that either of the stockholders proposes to sell to any third party.
The summary operating agreement is designed to align and integrate certain
aspects of our, SBC's and Telmex's sales and marketing efforts, networks and
operations, systems and new product development and collocation. We expect to
execute definitive operating agreements which will further detail the scope and
nature of the relationships among the parties in these various operational
areas. The summary operating agreement is binding on the parties for one year.
The summary operating agreement provides that the term of each definitive
operating agreement will be five years from the date of execution, except that
any of these agreements may be terminated by SBC or Telmex within specified
periods if we are acquired by a third party or otherwise undergo a change in
control.
Other Key Strategic and Commercial Relationships
In addition to our relationships with SBC and Telmex, 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.
Lucent. Since 1995 we have sold data communications products and equipment
made by Ascend (which recently became a wholly owned subsidiary of Lucent).
Ascend has provided us with a capital lease facility and a credit facility for
working capital. In addition, we are continuing to explore opportunities to
participate in product development and the distribution of products and
services for their network of sales partners.
Cisco. In November 1999, we were awarded Cisco Powered Network, or CPN,
certification. The CPN certification represents our next step towards
introducing an enhanced business-class Internet access service that includes
Cisco routers as the customer premises equipment.
Paradyne. Since 1995 we have sold data communications products and equipment
made by Paradyne. In addition, we are continuing to explore opportunities to
participate in product development and the distribution of products and
services for their network of sales partners.
Turnstone. In December 1999, we entered into an agreement with Turnstone to
use their cross-connect hardware systems in our collocated central offices. The
agreement calls for Turnstone to be our exclusive loop management vendor.
Verio. In August 1999, we were named as Verio's preferred provider of DSL
service in Richmond, Virginia.
Intermedia. In August 1999, we entered into a reseller agreement to sell
frame relay services out of region. This allows us to expand our frame relay
service via a network-to-network interface, or NNI, which provides nationwide
frame relay coverage.
Comcast. In May 1999, we entered into a master service agreement with
Comcast to provide their business customers with CopperNet services across our
northeast service territory.
Customer Service
Network service providers and communications managers at businesses typically
have to assemble their digital communications networks using multiple vendors.
This leads to additional work and cost for the
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customer as well as complex coordination issues. We work with each customer to
develop project implementation plans. These plans include qualifying the
customer for our service offerings, placing orders for connection facilities,
coordinating the delivery of the connection, turn up and final installation. We
emphasize a comprehensive service solution for our customers and provide our
service according to a predetermined service level commitment with each
customer. Our comprehensive solution includes:
. Customer Line Installation. We work with each of our customers to
establish all connection and configuration requirements to connect the
customer's main location to our network. We order the copper telephone
line for our customers, manage the installation process, test the copper
telephone line once installed, assist our customers in configuring the
equipment that terminates the copper telephone line, and monitor the
copper telephone line from our network operations center.
. End-User Line Installation. We order all end-user connections from the
traditional telephone companies according to pre-determined technical
line specifications. We manage the traditional telephone company's
provisioning performance, test the installed line, and monitor the end-
user line from our network operations center.
. End-User Premises Wiring and Modem Configuration. We use both our own
and contracted installation crews to install any required inside wiring
at each end-user site. We rely on contracted crews to meet customers'
demands at peak times. Our installation crews configure and install end-
user equipment with information specific to each customer.
. Network Monitoring. We monitor our network from our network operations
center on a continuous end-to-end basis, which often enables us to
correct potential network problems before service to a customer or end-
user is affected. We also provide direct monitoring access of end-users
to our network service providers and enterprise customers.
. Customer Reporting. We communicate regularly with our customers about
the status of their service. We provide web-based tools to allow
individual network service providers and communications managers to
monitor their end-users directly, to place orders for new end-users, to
enter work orders on end-user lines and to communicate with us on an
ongoing basis.
. Customer Service and Technical Support. We provide service and technical
support 24 hours a day, 7 days a week to all our customers. We serve as
the sole contact for customers to whom we make direct sales. We also
provide the second level of support for our indirect customers. We have
developed and will continue to expand a database containing the
questions we have addressed and the answers we have provided in response
to past network issues. In this way, we are able to better respond to
future customer questions.
. Operating Support Systems. We have designed an integrated group of
customized applications around our current and planned business
processes. By customizing and integrating products from vendors such as
Daleen Technologies, Inc. for billing, Eftia OSS Solutions Inc. for
operating support systems and Hewlett-Packard Company for network
management, we believe we have designed a system that will facilitate
rapid service responsiveness and reduce the cost of customer support.
Upon execution of definitive agreements with SBC and Telmex, we expect
to upgrade our platform to provide integrated operating support systems.
Network Structure and Technology
Overview. We operate a series of MANs connected by our private, leased,
high-speed fiber optic backbone. Our network employs a structure designed to
deliver superior end-to-end capabilities, high-speed "last mile" connections
and efficient data traffic management. Our technologically advanced network
design
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has positioned us to deliver the high level of data communications services,
including Internet access, VPNs, video conferencing and a broad array of
multimedia services, increasingly demanded by businesses. We have planned for
growth by ensuring that our network is scalable, flexible and secure. We intend
to make seamless connections between our network and systems and those of SBC
and Telmex in order to provide our customers with integrated national
connectivity.
. Scalable. Our adaptable, hierarchical network structure allows us to
provide both channelized and packet-based services reliably and
incrementally, which enables us to match investment with demand. As new
CopperNet end-users are added to our network, our Traffic Management
group monitors network utilization, and installs more equipment and
network transmission circuits as necessary so that reliable performance
is maintained for all users as our network grows.
. Flexible. From our network operations center, we constantly monitor our
network, the network service providers' networks and our customers'
connections, and also perform network diagnostics and equipment
surveillance, and initialize our end-users' connections. Because our
network is centrally managed, we can identify and dynamically enhance
network quality, service and performance and address network problems
promptly, often without our end-users' becoming aware of the repairs.
This capability also allows us to control costs associated with on-site
network configuration and repair.
. Secure. With dedicated, direct access to our private network, our end-
users and businesses generally experience fewer network security risks
than users of common dial-up modems, ISDN lines or dedicated access to
the Internet because there is less risk of unauthorized access. Our
network is designed to ensure secure availability of all internal
applications and information for all end-users, whether they are within
the corporate headquarters or telecommuting from remote locations. Our
network provides a direct connection between discrete locations, which
reduces the possibility of unauthorized access and allows our customers
to safely perform their required tasks.
Components. Our components are integrated into networks across local,
metropolitan and wide areas that combine speed and balanced capacity in a
manner designed to deliver a high performance networking experience for our
customers.
. Customer Endpoint. We currently offer channelized and packet-based DSL
connections in our network. We provide our customers with a DSL modem as
part of our complete service offering, the cost of which is included in
the list price of the service. We configure and install these modems
with the end-user's computer and network equipment along with any
required on-site wiring needed to connect the modem and the telephone
line. Under FCC policies, a customer also is free to obtain compatible
modems from sources other than us.
. Copper Telephone Lines. We lease copper telephone lines, known as
unbundled network elements, which run from our network access points in
central offices to the customer endpoint under terms specified in
telecommunications regulations and our interconnection agreements. We
have worked closely with Bell Atlantic to define specifications that
provide for the quality of the copper telephone lines we receive,
thereby ensuring the transmission speed of end-user connections. We
expect to have the same working relationship with BellSouth and U S
WEST.
. Central Office Collocation Spaces. Through FCC and state
telecommunications regulatory policies as well as our interconnection
agreements, we secure collocation space in central offices from which we
desire to offer CopperNet. These collocation spaces are designed to
offer the same high reliability and availability standards as the
telephone companies' other central office spaces. At present, our
collocation spaces are either physical, SCOPE or virtual. With physical
collocation, we install and maintain our equipment in central offices
and have complete access to the space. With SCOPE collocation, we
install and maintain our equipment in central offices, but our access to
the space is non-exclusive. With virtual collocation, the telephone
company installs and maintains the equipment on our behalf, but we have
no access to the space. Approximately 98% of our central office
collocations are physical or SCOPE, and we expect over time to eliminate
virtual collocation.
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. Metropolitan Area Backbone. Our metropolitan area backbone is a private,
leased, high-speed, fiber optic network that connects our network access
points in central offices, node sites, and selected customer locations.
To date, we have leased fiber optic circuits capable of speeds of up to
45 megabits per second from Bell Atlantic, Level 3 Communications and
other providers for metropolitan area backbone services. We continue to
review alternative providers in an effort to reduce costs. We do not
have long-term lease agreements for these fiber optic circuits.
. Node Sites. A node site is a physical location where we connect
businesses and network service providers with our central offices within
a particular MAN. The node site houses our equipment to switch and
interconnect customer traffic to central offices within a region or
across our entire network. Our node sites are housed in a secured
facility in each of the nine metropolitan areas in which our network
currently operates.
. Wide Area Backbone. Our wide area backbone is a private, leased, high-
speed, fiber optic network that interconnects our node sites in various
metropolitan areas. To date, we have leased fiber optic circuits capable
of speeds of up to 155 megabits per second from Level 3 Communications,
Virginia Electric and Power Company and other providers. We do not have
long-term lease agreements for these fiber optic circuits. We intend to
upgrade our wide area backbone to higher capacities as necessary to
deliver the quality of service that our customers demand. We continue to
evaluate alternative providers of capacity in order to reduce costs.
. Network Operations Center. We manage our network from our network
operations center located in our corporate headquarters in Sterling,
Virginia. We provide end-to-end network management to our customers
using advanced network management tools on a 24 hour a day, seven day a
week basis. This enhances our ability to address performance or
connectivity issues before they affect the end-user experience. From our
network operations center, we can monitor our network, including the
equipment and circuits in our MANs and central offices, and our
customers' networks, including individual end-user lines and DSL modems.
Assuming execution of definitive agreements with SBC and Telmex, we
expect to be able to monitor our customers' connections to the networks
of SBC and Telmex in addition to our own network.
Competition
In each of our businesses, we face competition from many companies with
significantly greater financial resources, well-established brand names and
large, existing installed customer bases. We expect the level of competition to
intensify in the future. Some of the competitive factors we face in each of our
business segments include:
. reliability of service;
. diversity of product and service offerings;
. breadth of network coverage;
. price/performance;
. network security;
. infrastructure scaleability;
. ease of access and use;
. service bundling;
. sales relationships;
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. customer support;
. strategic relationships; and
. operating experience.
We believe that each potential customer presents a unique opportunity for
competition and presents competitive challenges specific to that customer. The
significance of the different competitive factors we face will vary with each
customer depending on the needs of the particular customer and the particular
competitor we face. For example, if we are competing for a customer against
another provider of product sales and consulting services, we expect to compare
favorably as to diversity of product and service offerings and operating
experience, but perhaps less favorably as to brand recognition and financial
resources. If we are 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 operating
experience, brand recognition and access to capital. If we are competing for a
customer against another provider of DSL, we expect to compare favorably as to
diversity of service offerings, sales relationships and operating experience,
but perhaps less favorably as to the geographic breadth of network coverage. We
expect to improve our competitive position relative to other DSL providers by
expanding the geographic breadth of our network through opportunistic growth of
our network and, in part, through strategic alliances like our new
relationships with SBC and Telmex.
We believe that our most direct competition for product sales and consulting
services will come from Bell Atlantic's network integration services division
and from other providers of network integration services like Tech Data
Corporation. Historically, these companies have been our principal competitors.
By focusing our business on broadband network solutions, we encounter a
different set of competitors for our network services. We believe that our most
direct competition for broadband network solutions will come from Bell Atlantic
and other traditional telephone companies and carriers operating in our target
markets. However, we also anticipate competition from service providers using
other technologies.
Bell Atlantic and Other Traditional Telephone Companies. Bell Atlantic and
the other traditional telephone companies present in our target markets are
conducting technical and/or market trials or have commenced commercial
deployment of DSL-based services. We recognize that each traditional telephone
company has the potential to quickly overcome many of the obstacles that we
believe have delayed widespread deployment of DSL services by traditional
telephone companies in the past. The traditional telephone companies currently
represent and will in the future increasingly represent strong competition in
all of our target markets. The traditional telephone companies have an
established brand name, a large number of existing customers and a reputation
for high quality in their service areas, possess sufficient capital to deploy
DSL equipment rapidly, have their own copper lines and can bundle digital data
services with their existing analog voice services to achieve economies of
scale in serving customers. In the absence of strong oversight by the FCC and
state telecommunications regulators, traditional telephone companies also have
an economic incentive to benefit their own DSL retail operations by providing
themselves with the copper telephone lines, collocation, support services and
other essential DSL service inputs on more favorable terms than they provide
these facilities and services to their DSL competitors, like us. These factors
give the traditional telephone companies a potential competitive advantage
compared with us. Accordingly, we may be unable to compete successfully against
Bell Atlantic, BellSouth, U S WEST 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 Group, Inc., Rhythms NetConnections, Inc. and NorthPoint
Communications Group, Inc.
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Other Service Providers and Technologies. Many of our competitors are
offering, or may soon offer, technologies and services that will compete with
some or all of our high-speed DSL offerings. These technologies include T-1,
ISDN, satellite, cable modems and analog modems and could be provided by the
following:
. Cable Modem Service Providers. Cable modem service providers, like
MediaOne, Excite@Home, through its @Home service offering, and their
cable partners, are offering or preparing to offer high-speed Internet
access over fiber and cable networks to consumers. At Home, through its
@Work service offering, has positioned itself to do the same for
businesses. Where deployed, these networks provide local access
services, in some cases at higher speeds than our CopperNet. They
typically offer these services at lower prices than our services, in
part by sharing the capacity available on their cable networks among
multiple end users.
. 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 MANs and WANs, and a full range of Internet services and
applications. We expect them to offer combined data, voice and video
services over these networks. These carriers have deployed large scale
networks, have large numbers of existing business and residential
customers and enjoy strong brand recognition, and, as a result,
represent significant competition. For instance, they have extensive
fiber networks in many metropolitan areas that primarily provide high-
speed data and voice communications to large companies. They could
deploy DSL services in combination with their current fiber networks.
They also have interconnection agreements with many of the traditional
telephone companies and have secured collocation spaces from which they
could begin to offer competitive DSL services.
. New Long Distance Carriers. New long distance carriers, such as Williams
Communications, Qwest Communications International Inc. and Level 3
Communications, are building and managing high bandwidth, nationwide
packet-based technology networks for the WAN. These same providers are
acquiring or partnering with ISPs 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. ISPs provide Internet access to business and
residential customers. These companies generally provide Internet access
over the traditional telephone company's networks at ISDN speeds or
below. Some ISPs 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, Earthlink, 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, Globalstar Telecommunications Ltd. and others that
are planning or are in the process of building global satellite networks
that can be used to provide broadband voice and data services.
Relationship with Bell Atlantic and Other Traditional Telephone Companies
Our relationship with Bell Atlantic is critical to our current business. We
depend on Bell Atlantic for collocation facilities, copper telephone lines,
support services and some of the fiber optic transport that we use for
CopperNet in our traditional markets. Our interconnection agreements with Bell
Atlantic govern much of
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this critical relationship. We have signed interconnection agreements with Bell
Atlantic in each of the states covering our initial target markets. These
agreements cover a number of aspects, including:
. the price and terms to lease access to Bell Atlantic's copper lines;
. the special conditioning Bell Atlantic provides to enable the
transmission of DSL signals on these lines;
. the price and terms for collocation of our equipment in Bell Atlantic's
central offices;
. the price and terms to access Bell Atlantic's transport facilities;
. the terms to access conduits and other rights of way Bell Atlantic has
constructed for its own network facilities;
. the operational support systems and interfaces that we use to place
orders and trouble reports and monitor Bell Atlantic's response to our
requests;
. the dispute resolution process we and Bell Atlantic use to resolve
disagreements relating to the terms of the interconnection agreement;
and
. the term of the interconnection agreement, its transferability to
successors, its liability limits and other general aspects of our
relationship with Bell Atlantic.
Our interconnection agreements with Bell Atlantic for Delaware, Maryland, New
Jersey, Pennsylvania, Virginia and Washington, D.C. terminate upon 90 days
written notice by either party. We are presently negotiating new agreements
with Bell Atlantic for these areas. We expect the new agreements to have a two-
year term. Although we expect to arrive at new agreements, there is no
assurance that they will provide us with the same or more favorable terms. Our
interconnection agreements with Bell Atlantic for Massachusetts and New York
expire in January 2001. We plan to initiate negotiations with Bell Atlantic to
renew these agreements within the next several weeks. If an agreement expires,
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 expired agreement.
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.
As we expand into other regions that are served by traditional telephone
companies other than Bell Atlantic, we will need interconnection agreements
with those incumbent carriers. We have entered into an interconnection
agreement with BellSouth with an initial term that expires December 1, 2000.
This agreement has been approved by the state public utility commissions in
Alabama, Florida, Georgia, Kentucky, Louisiana and South Carolina. We plan to
submit the agreement for approval to state public utility commissions in North
Carolina and Tennessee as well. More recently, we have entered into an
interconnection agreement with U S WEST covering the States of Arizona,
Colorado, Iowa, Minnesota, New Mexico, Oregon, Utah and Washington. Each of the
agreements must be approved by the public utility commission of the state to
which it applies. We also have interconnection agreements with GTE (covering
the States of Alabama, Florida, Kentucky, North Carolina, Oregon, Pennsylvania,
South Carolina, Virginia and Washington) and with Sprint Corporation (covering
New Jersey). Similar to our relationship with Bell Atlantic, we expect that our
relationship with BellSouth and U S WEST and the services they provide to us
will become critical to our business.
19
<PAGE>
As we expand our existing SBC and Telmex relationships through negotiation
and execution of the definitive operating and related agreements, these
relationships could become critical to our business.
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 and other
traditional telephone companies in order to provide CopperNet are regulated
extensively by the FCC and state telecommunications regulatory agencies. To a
lesser extent, the FCC and state telecommunications regulators exercise direct
regulatory control over the terms under which we provide CopperNet to the
public. Municipalities also regulate limited aspects of our telecommunications
business by imposing zoning requirements, permit or right-of-way procedures or
fees, among other regulations. The FCC and state regulatory agencies generally
have the authority to condition, modify, cancel, terminate or revoke operating
authority for failure to comply with applicable laws, rules, regulations or
policies. Fines or other penalties also may be imposed for such violations. We
believe that we operate our business in compliance with applicable laws and
regulations of the various jurisdictions in which we operate and that we
possess the approvals necessary to conduct our current operations. However, we
cannot assure you that regulators or third parties would not raise issues
regarding our compliance or non-compliance with applicable laws and
regulations.
Federal Regulation. The 1996 Telecom Act substantially departs from prior
legislation in the telecommunications industry by establishing competition as a
national policy in all telecommunications markets. This legislation removes
many state regulatory barriers to competition in telecommunications markets
dominated by incumbent carriers and preempts, after notice and an opportunity
to comment, laws restricting competition in those markets. Among other things,
the 1996 Telecom Act also greatly expands the interconnection requirements
applicable to traditional telephone companies. It requires the traditional
telephone companies to:
. provide collocation, which allows competitive telecommunications
companies to install and maintain their own network termination
equipment in telephone company central offices;
. unbundle and provide access to components of their service networks to
other providers of telecommunications services;
. establish "wholesale" rates for the services they offer at retail to
promote resale by competitive telecommunications companies; and
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Traditional telephone companies also are required by the 1996 Telecom Act to
negotiate an interconnection agreement in good faith with carriers requesting
any or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state telecommunications regulatory agency.
The FCC and state telecommunications regulators also are instructed by the
1996 Telecom Act to perform certain duties to implement the regulatory policy
changes prescribed by the 1996 Telecom Act. The outcome of various ongoing
proceedings to carry out these responsibilities, or judicial appeals of these
proceedings, could materially affect our business, operating results and
financial condition.
In July 1997, the United States Court of Appeals for the Eighth Circuit
overruled some of the rules initially adopted by the FCC to implement the 1996
Telecom Act, including rules:
. providing the detailed standard that state telecommunication regulators
must use in prescribing the price that traditional telephone companies
charge for collocation and for the copper telephone lines
20
<PAGE>
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 Circuit's holding invalidating the
FCC's "pick-and-choose" rule. However, the Supreme Court found that the FCC had
violated the 1996 Telecom Act in defining the individual network elements
incumbent carriers must make available to competitive telecommunications
companies, and required the FCC to reconsider its delineation of these
elements. It sent the matter back to the FCC with instructions to consider
further the question of which parts of a traditional telephone company's
network must be provided to competitors. The FCC released an order on November
5, 1999 that sought to follow the Supreme Court's instructions in delineating
the particular network elements that traditional telephone companies must make
available to competitors. The FCC's November decision reaffirms its earlier
holding that traditional telephone companies must make available the particular
inputs that we need in order to provide our CopperNet services (including, but
not limited to, copper telephone lines, transmission facilities between local
telephone company offices and various back-office support services). In
addition, the FCC's November order requires, upon the request of competitive
telecommunications companies like us, that traditional telephone companies
provide competitive carriers with certain other inputs (such as "subloops" and
in some cases packet switching) that may prove useful as we expand our
CopperNet service, especially into more suburban areas.
The Supreme Court's determination in its January 1999 order that the FCC
rather than state telecommunications regulators has jurisdiction to determine
pricing methodology also could be beneficial to us since the FCC has adopted a
pricing standard that appears to be more beneficial to competitive
telecommunications companies in some respects than the pricing standards that
some state telecommunications regulators have employed. However, it remains
unclear whether the particular pricing methodology prescribed by the FCC will
go into effect because some parties have challenged the lawfulness of that
methodology in the U.S. Court of Appeals for the Eighth Circuit, and that
litigation is still pending.
In an order released March 31, 1999, the FCC adopted new regulations that are
designed to clarify the obligations of a traditional telephone company in
providing space inside its offices to competitors like us so that they can
access the telephone company's copper telephone lines and connect those lines
to the competitor's electronic equipment located inside that telephone company
office. Another rule adopted in that order is intended to help ensure that the
customers of companies who provide services like CopperNet do not receive
harmful interference from other users of the traditional telephone company
network on which the service is provided. Several traditional telephone
companies appealed the FCC order adopting these rules to the U.S. Court of
Appeals for the District of Columbia Circuit, and on March 17, 2000, the Court
vacated limited portions of the order on grounds that it contained certain
definitions that are impermissibly broad. The Court remanded those aspects of
the order to the FCC for further consideration. The FCC will be instituting
proceedings to comply with the Court's mandate. The impact of the Court's
decision on our company is unclear since we have no way to determine what
action the FCC will take in response to the Court's mandate.
An FCC order released on December 9, 1999 is designed to make it easier for
companies like us to market high-speed data services like CopperNet to
residential customers for accessing the Internet. Under this "line-sharing"
order, traditional telephone companies are required to let a competitor use the
same copper
21
<PAGE>
telephone line for providing the customer with data service that the telephone
company uses for providing the same customer with local telephone service. At
present, the traditional telephone companies provide residential customers with
local phone service and high-speed Internet access service over a single phone
line, but the traditional telephone companies require competitors like us to
lease a separate phone line to provide high-speed Internet access to any
residential customer when that customer obtains local phone service from the
traditional local telephone company. The FCC's December 9, 1999 order requires
that a traditional telephone company permit companies like us to provide high-
speed Internet access service to a customer over the same line that the
telephone company uses to provide local phone service to that customer. One
goal of the order is to make it easier for companies like us to compete with
the traditional local telephone companies in the residential high-speed
Internet access market by permitting competitors to reduce significantly their
costs to serve this market. However, it is not yet clear that the FCC's order
will achieve its intended objective since the traditional local telephone
companies have not yet put in place the policies and procedures necessary to
implement the order. Moreover, some traditional telephone companies have
appealed the order, and we have no way of determining whether the FCC's
requirements will be affirmed.
The FCC made another potentially favorable ruling for our industry in another
recent case. That case involved the question of whether a telecommunications
service like CopperNet that provides high-speed dedicated access to the
Internet is an interstate service or an intrastate service. An interstate
service must be provided subject to FCC regulatory controls, whereas an
intrastate service must be provided subject to regulatory controls of the
telecommunications regulatory agency of the state where the service is offered.
In its decision, the FCC held that such services are jurisdictionally
interstate and therefore must be provided on terms and conditions set by the
FCC rather than state telecommunications regulators. This ruling is potentially
advantageous to us because it reduces the number of telecommunications
regulatory agencies that control the terms under which we provide CopperNet. It
also is potentially advantageous because FCC regulatory controls in many
respects are less burdensome than state regulatory controls. For example, the
1996 Telecom Act authorizes the FCC to forbear from regulating the terms under
which carriers classified as "non-dominant" provide interstate
telecommunications service. The FCC has exercised its forbearance authority by
exempting non-dominant carriers like us from filing a tariff setting forth the
terms under which they provide any interstate access service. Since we believe
CopperNet is interstate special access, we provide the service to existing
customers pursuant to contract rather than tariff.
On May 8, 1997, in compliance with the requirements of the 1996 Telecom Act,
the FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to underserved
individuals and customers in high-cost or low-income areas, and to companies
that provide telecommunications services for schools and libraries and to rural
health care providers. We are required to contribute to the universal service
fund and are also required to contribute to state universal service funds. The
new universal service rules are administered jointly by the FCC, the fund
administrator, and state regulatory authorities, many of which are still in the
process of establishing their administrative rules. We cannot determine the net
revenue effect of these regulations at this time.
On November 2, 1999, the FCC held that a statute requiring that traditional
local telephone companies offer their retail services at a wholesale price to
competitors like us does not apply when these telephone companies provide a
discounted DSL service directed to ISPs. In that case, while competitors may
purchase the traditional telephone companies' ISP-directed DSL offering on the
same terms as the ISPs, the FCC ruled that competitors have no legal right to a
wholesale discount off the price paid by ISPs. This ruling could adversely
affect us if it gives ISPs an economic incentive to meet all of their DSL needs
by subscribing to the traditional telephone companies' ISP-directed discounted
DSL offerings rather than by subscribing to DSL services offered by competitors
like us.
In response to petitions by several traditional telephone companies
requesting that the FCC substantially deregulate the retail price they charge
for various types of telecommunications services, including high-speed data
services like CopperNet, the FCC recently issued a decision that establishes a
procedure by
22
<PAGE>
which traditional telephone companies may apply for certain pricing
flexibility. We cannot yet determine the extent to which traditional telephone
companies will use this procedure or the impact of any pricing flexibility that
the FCC awards to any given company under this new procedure. The ultimate
impact of the FCC's order also is uncertain because the order has been appealed
to the U.S. Court of Appeals. If the FCC were to substantially eliminate price
regulation of the high-speed data services that traditional telephone companies
provide in competition with CopperNet, our business could be adversely
affected.
Late last December, the FCC approved Bell Atlantic's application for
authority to provide long distance telephone service to customers in New York.
The agency based its decision to grant this application on its finding that
Bell Atlantic is providing services and facilities to competitors like us on
terms that comply with the 1996 Telecom Act and the FCC's rules. The agency
made this finding even though many Bell Atlantic competitors, including us, had
urged the FCC to find that Bell Atlantic is not yet complying with these
requirements. Although not certain, the FCC's finding that Bell Atlantic
provides facilities and service to competitors in compliance with existing
regulatory requirements could reduce Bell Atlantic's incentive to improve its
provisioning of services and facilities to competitors.
The FCC's December order approving Bell Atlantic's application to provide
long distance telephone service in New York contains one feature that is
designed to help ensure that Bell Atlantic provides competitors with facilities
and services they need to provide advanced services like CopperNet on fair
terms. More specifically, the order accepted Bell Atlantic's commitment to
provide advanced services through an affiliate rather than through Bell
Atlantic's New York telephone company and to provide advanced service
competitors with facilities and services on the same terms that it provides
such facilities and services to its advanced services affiliate. Even more
recently, Bell Atlantic has told the FCC that, in return for FCC approval of
Bell Atlantic's pending application for authority to merge with GTE, it would
be willing to provide advanced services in all states through an advanced
services affiliate subject to the same non-discriminatory treatment that it
committed to as part of its application for authority to provide long distance
telephone service in New York. It remains to be seen whether Bell Atlantic's
provision of advanced services through an advanced services affiliate will help
ensure that the Bell Atlantic telephone companies provide needed facilities and
services to competitors on non-discriminatory terms.
Apart from Bell Atlantic's voluntary offer to provide advanced services
through an advanced services affiliate rather than through its telephone
companies, the FCC has also proposed to permit all other traditional telephone
companies to provide advanced services like CopperNet through separate
affiliates on a deregulated basis. However, the agency has not yet implemented
its proposal in this regard. Under the FCC's proposal, the affiliates would
provide advanced services free of the requirements relating to interconnection,
unbundling, resale and collocation imposed by the 1996 Telecom Act.
In addition to regulatory policies set by the FCC, a variety of bills have
been introduced in Congress that, if enacted, could affect competition in the
advanced services market. Of most significance are several bills sponsored by
key members of the House and Senate that would make it easier for the regional
Bell operating companies to discriminate against their competitors in the
advanced services market. It is unclear whether any of these bills will become
law.
State Regulation. While it is clear from the January 1999 Supreme Court
decision that the FCC has broad authority to implement provisions in the 1996
Telecom Act that are intended to open all telecommunications markets to
competition, state telecommunications regulators also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's jurisdiction to prescribe the methodology traditional
telephone companies must use in setting the price of copper telephone wires and
other network elements, the FCC has exercised that jurisdiction by adopting a
pricing standard and has given state regulators substantial authority to apply
that standard in order to determine actual prices. Many states have set only
temporary prices for some network elements that are critical to the provision
of DSL services because they have not yet completed the regulatory proceedings
necessary to determine permanent prices. Other states
23
<PAGE>
have begun proceedings to set new permanent prices based on more current data.
The results of these proceedings will determine the price we pay for, and
whether it is economically attractive for us to use, these network elements and
services.
The 1996 Telecom Act also gives state telecommunications regulators broad
authority to approve or reject interconnection agreements that competitive
telecommunications companies enter with traditional telephone companies and
broad authority to resolve disputes that arise under these interconnection
agreements. Under the 1996 Telecom Act, if we request, traditional telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to unbundled network elements. A
separate agreement is signed for each of the states in which we operate. During
these negotiations either the traditional telephone company or we may submit
disputes to the state regulatory commissions for mediation and, after the
expiration of the statutory negotiation period provided in the 1996 Telecom
Act, we may submit outstanding disputes to the states for arbitration. The 1996
Telecom Act also allows state regulators to supplement FCC regulations as long
as the state regulations are not inconsistent with FCC requirements.
In addition, CopperNet may, as to some future customers, be classified as
intrastate service subject to state regulation. All of the states in which we
operate, or will operate, require some degree of state regulatory commission
approval to provide certain intrastate services. We have obtained non-expiring
state authorizations to provide intrastate services from the state regulatory
agency in all states where we currently provide CopperNet service. We also have
obtained non-expiring certificates to provide intrastate service in many of the
states where we may provide CopperNet service in the future (Alabama, Colorado,
Florida, Georgia, Iowa, Kentucky, South Carolina and Washington). Our
applications for certificates to provide intrastate services are pending in
several other states (Arizona, Connecticut, Louisiana, Minnesota, Nebraska, New
Mexico, North Carolina, Oregon, Tennessee and Utah). 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. The statutes of three states where
we provide CopperNet service--Delaware, New Jersey and New York--require that
we obtain approval from the public utility commission in those states to issue
new securities.
It is possible that laws and regulations could be adopted that address other
matters that affect our business. We are unable to predict what laws or
regulations may be adopted in the future, to what extent existing laws and
regulations may be found applicable to our business, or the impact such new or
existing laws or regulations may have on our business. In addition, laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, thereby decreasing demand for our services.
Local Government Regulation. In certain instances, we may be required to
obtain various permits and authorizations from municipalities in which we
operate our own facilities. The extent to which such actions by local
governments pose barriers to entry for competitive telecommunications companies
that may be preempted by the FCC is the subject of litigation. Although our
network consists primarily of unbundled network elements of the traditional
telephone companies, in certain instances we may deploy our own facilities and
therefore may need to obtain certain municipal permits or other authorizations.
The actions of municipal governments in imposing conditions on the grant of
permits or other authorizations or their failure to act in granting such
permits or other authorizations could have a material adverse effect on our
business, operating results and financial condition.
Intellectual Property
We regard our products, services and technology as proprietary and attempt to
protect them with 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
24
<PAGE>
enter into confidentiality agreements with our employees and consultants, and
generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently. We own federal trademarks for the marks CuNet and COPPERNET for
use with "communications services, namely, high-speed electronic data
transmission services." We also have pending applications for the mark CU
COPPERNET. We expect to seek registration of our copyrights in software and
other intellectual property to the extent possible. There is no assurance that
we will obtain any significant copyright protection for our systems that would
protect our intellectual property from competition. Currently, we have not
filed any patent applications. We intend to prepare applications and to seek
patent protection for our systems and services to the extent possible. There is
no assurance that we will obtain any patents or that any such patents would
protect our intellectual property from competition that could seek to design
around or invalidate such patents. In addition, effective patent, copyright,
trademark and trade secret protection may be unavailable or limited in certain
foreign countries, and the global nature of the Internet makes it virtually
impossible to control the ultimate destination of our proprietary information.
There can be no assurance that the steps we have taken will prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation of this type could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, operating results and financial condition. In addition,
some of our information, including our competitive carrier status in individual
states and our interconnection agreements, is a matter of public record and can
be readily obtained by our competitors and potential competitors, possibly to
our detriment.
Employees
As of December 31, 1999, we employed 383 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 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.
25
<PAGE>
Item 2. 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.
In addition, we have established branch offices in Wilmington, Delaware;
Columbia and Monkton, Maryland; Boston and Woburn, Massachusetts; East
Brunswick and Morristown, New Jersey; New York and Uniondale, New York;
Malvern and Pittsburgh, Pennsylvania; and Richmond and Virginia Beach,
Virginia.
On October 27, 1999, we executed a lease for approximately 113,000 square
feet in Herndon, Virginia. We have begun to move our headquarters to this
location, and we expect to complete the move in May 2000.
We also lease collocation space in central offices from Bell Atlantic where
we operate or plan to operate under the terms of our interconnection
agreements with Bell Atlantic and regulations imposed by state
telecommunications regulators and the FCC. While the terms of these leases are
perpetual, the productive use of our collocation facilities is subject to the
terms of our interconnection agreements that have initial terms that expire in
2000 and 2001. We will increase our collocation space as we expand our
network.
Item 3. 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 telecommuni-cations 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, financial
condition, results of operations and cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
Inapplicable.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Stock Data. Our common stock trades on The Nasdaq Stock MarketSM under the
symbol "NASC." As of March 15, 2000, there were 91 record holders and
approximately 7,020 beneficial holders of our common stock. The following
table sets forth, for the periods indicated, the high and low closing prices
for our common stock:
<TABLE>
<CAPTION>
1999
-------------
Quarter High Low
------- ------ ------
<S> <C> <C>
Second........................ $13.94 $ 8.63
Third......................... $18.00 $10.00
Fourth........................ $36.50 $12.25
</TABLE>
On March 23, 2000, the last reported sales price of our common stock on The
Nasdaq Stock Market was $30.00.
We have never paid cash dividends. It is our present policy to retain
earnings to finance the growth and development of its business, and therefore
we do not anticipate paying cash dividends on its common stock in the
foreseeable future.
Additional Investor Relations Information. All of our current required
filings with the Securities and Exchange Commission, as well as press releases
and other investor relations information, may be found at http://www.nas-
corp.com on the Internet's world wide web. For those without Internet access,
the same information may be obtained without charge by request to us addressed
to: Investor Relations, Network Access Solutions Corporation, 100 Carpenter
Drive, Suite 206, Sterling, VA 20164.
Transfer Agent. Our transfer agent is American Stock Transfer & Trust
Company, 40 Wall Street, New York, NY 10005, telephone (808) 937-5449.
Annual Meeting. Our next Annual Meeting of Stockholders is scheduled to be
held at 9:00 a.m. on Tuesday, June 6, 2000, at our new headquarters facility,
located at Three Dulles Tech Center, 13650 Dulles Technology Drive, Herndon,
Virginia.
Use of Proceeds. In June 1999, we commenced and completed a firm commitment
underwritten initial public offering of 7,500,000 shares of our common stock.
The shares were registered with the Securities and Exchange Commission
pursuant to a registration statement on Form S-1 (No. 333-74679), which was
declared effective on June 3, 1999. After deducting underwriting discounts and
commissions of $5.5 million and expenses of $1.8 million, we received net
proceeds of $81.8 million.
As of December 31, 1999, we have used approximately $37.3 million of these
net proceeds. Of this amount, approximately $21.0 million was used to finance
capital expenditures for central office installation and collocation fees,
approximately $11.0 million was used to finance operating losses and
approximately $4.1 million was used to finance capital expenditures for
property and equipment. We have invested the remaining net proceeds from our
initial public offering in short- and long-term investments in order to meet
anticipated cash needs for future working capital. We invested our available
cash principally in high-quality corporate issuers and in debt instruments of
the U.S. Government and its agencies.
27
<PAGE>
Item 6. Selected Financial and Other Data.
We present below summary financial and other data for our company. The
summary historical statement of operations and other data for each of the three
years in the period ended December 31, 1999 have been derived from our audited
financial statements that are included elsewhere in this Form 10-K. The
statement of operations and other data for the year ended December 31, 1996
have been derived from audited financial statements that were included in our
prior public filings. The summary balance sheet data as of December 31, 1998
and 1999 has been derived from our audited financial statements that are
included elsewhere in this Form 10-K. The balance sheet data as of December 31,
1996 and 1997 has been derived from audited financial statements that were
included in our prior public filings. PricewaterhouseCoopers LLP has audited
the financial statements as of and for each of these years. The summary
financial data as of and for the year ended December 31, 1995 have been derived
from our unaudited financial statements that are not included in this Form 10-
K. 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.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------ -------- ---------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Product sales.............. $1,891 $14,368 $8,150 $ 9,900 $ 13,025
Consulting services........ 36 114 791 1,428 2,593
Network services........... -- -- 4 311 1,821
------ ------- ------ -------- ---------
Total revenue............ 1,927 14,482 8,945 11,639 17,439
------ ------- ------ -------- ---------
Cost of revenue:
Product sales.............. 1,475 11,975 7,180 8,639 11,334
Consulting services........ 15 91 231 761 1,693
Network services........... -- -- 2 41 4,813
------ ------- ------ -------- ---------
Total cost of revenue.... 1,490 12,066 7,413 9,441 17,840
------ ------- ------ -------- ---------
Gross profit (loss).......... 437 2,416 1,532 2,198 (401)
------ ------- ------ -------- ---------
Operating expenses:
Selling, general and
administrative............ 299 2,255 1,437 4,017 27,670
Amortization of deferred
compensation on
stock options............. -- -- -- 219 8,165
Depreciation and
amortization.............. 9 7 12 130 5,195
------ ------- ------ -------- ---------
Total operating
expenses................ 308 2,262 1,449 4,366 41,030
------ ------- ------ -------- ---------
Income (loss) from
operations.................. 129 154 83 (2,168) (41,431)
Interest income (expense),
net......................... -- (1) (5) 64 1,072
------ ------- ------ -------- ---------
Income (loss) before income
taxes....................... 129 153 78 (2,104) (40,359)
Provision (benefit) for
income taxes................ 39 63 36 (28) (71)
------ ------- ------ -------- ---------
Net income (loss)............ 90 90 42 (2,076) (40,288)
Preferred stock dividends and
accretion................... -- -- -- 567 597
------ ------- ------ -------- ---------
Net income (loss) applicable
to common stockholders ..... $ 90 $ 90 $ 42 $ (2,643) $ (40,885)
====== ======= ====== ======== =========
Net income (loss) per common
share applicable to common
stockholders (basic and
diluted).................... $ 0.00 $ 0.00 $ 0.00 $ (0.10) $ (0.99)
====== ======= ====== ======== =========
Weighted average common
shares outstanding (basic
and diluted)................ 21,915 21,915 21,915 27,302 41,259
====== ======= ====== ======== =========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
----------- ---- ----- ------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Other Data:
EBITDA(1)......................... $138 $161 $ 95 $(1,819) $(28,071)
Capital expenditures.............. 18 30 122 5,021 55,262
Net cash provided by (used in)
operating activities............. 3 (27) 805 (2,810) (20,184)
Net cash used in investing
activities....................... (18) (30) (122) (1,341) (61,435)
Net cash provided by financing
activities....................... 42 55 9 8,956 94,341
</TABLE>
- --------
(1) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. We have
presented EBITDA to enhance your understanding of our operating results.
You should not construe it as an alternative to operating income as an
indicator of our operating performance or as an alternative to cash flows
from operating activities as a measure of liquidity determined in
accordance with generally accepted accounting principles. We may calculate
EBITDA differently than other companies. For further information, see our
financial statements and related notes elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------
1995 1996 1997 1998 1999
----------- ------ ------ ------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-
term investments.................. $ 24 $ 22 $ 713 $ 5,518 $ 42,816
Property and equipment, net........ 8 31 140 5,031 55,098
Total assets....................... 458 5,352 1,865 12,928 104,620
Total debt (including capital lease
obligations)...................... 30 84 93 2,513 23,814
Mandatorily redeemable preferred
stock............................. -- -- -- 5,641 --
Total stockholders' equity (2) .... 118 208 250 932 68,009
</TABLE>
- --------
(2) Excludes 11,014,379 shares of our common stock issuable upon exercise of
stock options outstanding on December 31, 1999.
29
<PAGE>
Quarterly Results of Operations
The following table presents our quarterly results of operations data and the
components of net income (loss) for 1998 and 1999. In the opinion of
management, this information has been prepared substantially on the same basis
as the financial statements appearing elsewhere in this Form 10-K, and all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with our financial statements and
related notes thereto appearing elsewhere in this Form 10-K. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
<TABLE>
<CAPTION>
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands, unaudited)
Revenue:
Product sales.......... $2,194 $2,297 $2,902 $ 2,507 $ 3,955 $ 2,913 $ 3,113 $ 3,044
Consulting services.... 317 462 274 375 702 665 526 700
Network services....... 41 82 87 101 119 166 529 1,007
------ ------ ------ ------- ------- -------- -------- --------
Total revenue.......... 2,552 2,841 3,263 2,983 4,776 3,744 4,168 4,751
------ ------ ------ ------- ------- -------- -------- --------
Cost of revenue:
Product sales.......... 1,858 1,947 2,549 2,285 3,535 2,488 2,683 2,628
Consulting services.... 160 285 152 164 299 476 402 516
Network services....... 1 7 7 26 171 612 1,359 2,671
------ ------ ------ ------- ------- -------- -------- --------
Total cost of revenue.. 2,019 2,239 2,708 2,475 4,005 3,576 4,444 5,815
------ ------ ------ ------- ------- -------- -------- --------
Gross profit (loss)..... 533 602 555 508 771 168 (276) (1,064)
Operating expenses:
Selling, general and
administrative........ 538 509 1,357 1,613 2,533 5,385 8,809 10,943
Amortization of
deferred compensation
on stock options...... -- -- 47 172 540 4,728 1,431 1,466
Depreciation and
amortization.......... 4 9 48 69 187 698 1,612 2,698
------ ------ ------ ------- ------- -------- -------- --------
Total operating
expenses.............. 542 518 1,452 1,854 3,260 10,811 11,852 15,107
------ ------ ------ ------- ------- -------- -------- --------
Income (loss) from
operations............. (9) 84 (897) (1,346) (2,489) (10,643) (12,128) (16,171)
Interest income
(expense), net......... (12) (14) 25 65 (9) 202 559 320
------ ------ ------ ------- ------- -------- -------- --------
Income (loss) before
taxes.................. (21) 70 (872) (1,281) (2,498) (10,441) (11,569) (15,851)
Provision (benefit) for
income taxes........... (8) 27 (47) -- -- (72) 1 --
------ ------ ------ ------- ------- -------- -------- --------
Net income (loss)....... $ (13) $ 43 $ (825) $(1,281) $(2,498) $(10,369) $(11,570) $(15,851)
====== ====== ====== ======= ======= ======== ======== ========
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Financial
Statements and Notes. Historical results and percentage relationships among any
amounts in the Financial Statements are not necessarily indicative of trends in
operating results for any future period.
Overview
We began operations in 1995 by selling data communications products made by
others and providing consulting services for WANs. Shortly thereafter, we began
offering a wide range of networking solutions for the data communications needs
of businesses. We provide network integration services, where we design our
customers' networks and sell and install related network equipment. We also
manage our customers' networks, ensure the security of their networks and
provide related professional services. From 1995 through 1998, our revenue was
derived primarily from product sales and consulting services. Historically, we
have primarily depended on AT&T and AstraZeneca for revenue from our product
sales and consulting services operations. AT&T accounted for 30.7% and 50.4% of
total revenue for the years ended December 31, 1999 and 1998, respectively,
while AstraZeneca accounted for 8.0% and 9.2% of total revenue for the years
ended December 31, 1999 and 1998, respectively.
30
<PAGE>
In 1996, we began to pursue deployment of a series of city-wide networks that
enable DSL services. In February 1997, we began developing technical standards
for delivery of DSL-based services within our target markets through a joint
effort with Bell Atlantic. In April 1997, we entered into our first
interconnection agreement with Bell Atlantic, which allowed us to use their
copper telephone lines and to collocate our equipment in telephone company
offices known as "central offices." Central offices serve as the central
connection point for all copper telephone lines in a local area and form the
basis for our network and a telephone company's network. We began CopperNet
service trials in November 1997 and began commercially offering our CopperNet
service in Philadelphia and Washington, D.C. in January 1999.
We currently offer our DSL-based networking solutions in the following nine
northeast and mid-Atlantic cities and their surrounding markets: Baltimore,
Boston, New York, Norfolk, Philadelphia, Pittsburgh, Richmond, Washington D.C.
and Wilmington. On February 8, 2000, in connection with the announcement of a
$150 million Series B preferred stock investment by, and a strategic summary
operating agreement with SBC and Telmex, we announced that we would be
extending our network deployment into the southeastern and western regions of
the United States. We, along with SBC and Telmex, have initially targeted
deployment in the following 20 markets within these regions: Atlanta,
Charlotte, Denver, Greensboro, Jacksonville, Louisville, Memphis, Miami,
Minneapolis, Nashville, New Orleans, Orlando, Phoenix, Portland, Raleigh-
Durham, Salt Lake City, Seattle, Tampa, Tucson and West Palm Beach. We intend
to deploy our network in each of these markets in the second half of 2000.
As of December 31, 1999, we had installed our equipment in 362 central
offices within our northeast and mid-Atlantic markets, and we expect to have
installed our equipment in approximately 500 central offices by mid-2000, which
will essentially complete our current plans for the roll-out of our network in
these markets. We estimate that the central offices where we currently have
installed our equipment serve approximately 85% of the business users in these
areas. Upon the completion of our network deployment, we believe that the
central offices where we have installed our equipment will serve approximately
95% of the business users in these areas. As of December 31, 1999, we had
installed 2,910 lines in our northeast and mid-Atlantic regions.
We expect to have installed our equipment in approximately 400 central
offices in our new southeastern and western regions by the end of 2000 and in
approximately 500 central offices by mid-2001. We have obtained competitive
carrier certification in eight of the 17 southeastern and western states in
which we expect to eventually offer services, and have applied for competitive
carrier certification in the remaining nine states in which these markets are
located. To date, we have signed interconnection agreements with BellSouth, U S
WEST and GTE. Together, these three carriers serve as the traditional telephone
companies in substantially all of our 20 target markets in the southeastern and
western regions.
Since February 1997, we have invested increasing amounts in the development
and deployment of our CopperNet service. We have funded the deployment of our
CopperNet services through proceeds received from a preferred and common stock
financing in August 1998, issuance of promissory notes that were converted into
common stock during the three months ended June 30, 1999, capital lease
financing, our initial public offering and the proceeds recently received from
a sale of preferred stock to SBC and Telmex. We intend to increase our
operating expenses and capital expenditures substantially in an effort to
rapidly expand our equipment and human resource-related infrastructure and DSL-
based network services. We expect to incur substantial operating losses, net
losses and negative cash flow during the build-out of our network and our
initial penetration of each new market we enter. Although in the short term we
expect to derive the majority of our revenue from our product sales and related
consulting services, we expect that over time revenue from network services,
which includes our CopperNet services, will constitute the more significant
portion of our total revenue.
Revenue
Revenue consists of:
. Network services. We charge monthly service fees for access to our
CopperNet local, metropolitan and wide area networks. We also provide
a wide variety of network services to customers, including remote
network management and monitoring, network security, dedicated
private connections to our network, Internet access, e-commerce and
other data applications.
31
<PAGE>
Some of these services are delivered to customers using resources
from third-party providers under contract to us.
. Consulting services. We bill our customers for network design and
integration, on-site network management, staging, installation,
maintenance and warranty services, 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.
. Product sales. As part of our overall data communications solutions,
we sell data communications products, including the network
components and security components that our customers require in
order to build, maintain and secure their networks. We sell, install
and configure selected equipment from our manufacturing partners. Our
engineers select product solutions to improve our customers'
operations and network efficiencies. Our engineers refer to a
standard network design that they seek to customize to fit the needs
of each customer.
Cost of Revenue
Cost of revenue consists of:
Network services. Our network service costs generally consist of non-
employee-based charges such as:
. CopperNet service fees. We pay a monthly service fee for each
copper line and for each collocation arrangement, as well as usage
fees for the support services we obtain from the traditional
telephone companies we work with in order to serve our CopperNet
customers. Sometimes, we must pay these companies to perform
special work, such as preparing a telephone line to use DSL
technology, when such work is required in order to serve a
particular client.
. Other access costs and levied line expense. We pay installation
charges and monthly fees to competitive telecommunications
companies or traditional telephone companies for other types of
access, other than through our CopperNet network, which we provide
to customers as part of our network services.
. Backbone connectivity charges. We incur charges for our fiber
optic network, or backbone, within a metropolitan area, typically
from a competitive telecommunications company or a traditional
telephone company, and for the backbone interconnecting our
networks in different metropolitan areas from a long distance
carrier. We pay these carriers a one-time installation and
activation fee and a monthly service fee for these leased network
connections.
. Network operations expenses. We incur various recurring costs at
our network operations center. These costs include data
connections, engineering supplies and certain utility costs.
. Equipment operating lease expenses. In the future, we may decide
to enter into operating leases for some or all of the equipment we
use in our network, including the DSL equipment 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.
Consulting services. Consulting services cost of revenue consists of charges
for hardware maintenance, installation and certain contract services that we
purchase from third parties.
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.
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
32
<PAGE>
collections, general management and overhead and administrative functions. We
expect that 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 force focuses on selling CopperNet connectivity to
small- and medium-sized businesses and consulting services and
network services to medium- and large-sized businesses. We indirectly
sell our full complement of products and services, including our
network services, consulting services and products, through network
service providers, including ISPs, long distance and local carriers
and other networking services companies. Our sales and marketing
expenses have increased, and will continue to increase, as we develop
our CopperNet services.
. General and administrative expenses. As we expand our network, we
expect the number of employees located in specific markets to grow.
Certain functions, such as customer service, network operations,
finance, billing and administrative services, are likely to remain
centralized in order to achieve economies of scale. We pay licensing
fees for standard systems to support our business processes, such as
billing systems.
Amortization of deferred compensation on stock options
We had outstanding stock options to purchase a total of 7,090,875 and
11,014,379 shares of common stock as of December 31, 1998 and 1999,
respectively, at weighted average exercise prices of $0.09 and $1.73 per share,
respectively. At December 31, 1999, all of these options were exercisable into
restricted shares of our common stock that generally vest over a three- to
four-year period. In certain instances, we determined the fair value of the
underlying common stock on the date of grant was in excess of the exercise
price of the options. As a result, we recorded deferred compensation of $3.7
million and $23.1 million for the years ended December 31, 1998 and 1999,
respectively. We recorded this amount as a reduction to stockholders' equity
that is amortized as a charge to operations over the vesting periods. For the
years ended December 31, 1998 and 1999, we recognized $219,000 and $8.2 million
of stock compensation expense, respectively, related to these options.
On April 1, 1999, we entered into a stock option agreement that granted to
one of our directors an option to purchase 250,000 shares of our common stock
at an exercise price of $6.67 per share. On June 3,
1999, this director exercised this option. In addition, the agreement
stipulated that this director will be issued an additional option to purchase
407,500 shares of common stock at an exercise price of $3.00 per share. These
options immediately vested upon our initial public offering. As a result, we
recognized approximately $3.5 million of compensation expense during the year
ended December 31, 1999 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 cash equivalents less interest expense associated with our debt
and capital leases. As our capital expenditures increase, we anticipate that
our interest expense associated with our capital leases will increase.
Results of Operations
The following tables present our results of operations data and the
components of net income (loss) in dollars and as a percentage of our revenue.
33
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
(in thousands)
<S> <C> <C> <C>
Revenue:
Product sales.......................... $ 8,150 $ 9,900 $ 13,025
Consulting services.................... 791 1,428 2,593
Network services....................... 4 311 1,821
--------- ---------- -----------
Total revenue........................ 8,945 11,639 17,439
--------- ---------- -----------
Cost of revenue:
Product sales.......................... 7,180 8,639 11,334
Consulting services.................... 231 761 1,693
Network services....................... 2 41 4,813
--------- ---------- -----------
Total cost of revenue................ 7,413 9,441 17,840
--------- ---------- -----------
Gross profit (loss).................. 1,532 2,198 (401)
--------- ---------- -----------
Operating expenses:
Selling, general and administrative.... 1,437 4,017 27,670
Amortization of deferred compensation
on stock options...................... -- 219 8,165
Depreciation and amortization.......... 12 130 5,195
--------- ---------- -----------
Total operating expenses............. 1,449 4,366 41,030
--------- ---------- -----------
Income (loss) from operations............ 83 (2,168) (41,431)
Interest income (expense), net........... (5) 64 1,072
--------- ---------- -----------
Income (loss) before income taxes........ 78 (2,104) (40,359)
Provision (benefit) for income taxes..... 36 (28) (71)
--------- ---------- -----------
Net income (loss)........................ $ 42 $ (2,076) $ (40,288)
========= ========== ===========
<CAPTION>
For the years ended December 31,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
(percentage of revenue)
<S> <C> <C> <C>
Revenue:
Product sales.......................... 91.1% 85.1% 74.7%
Consulting services.................... 8.8 12.3 14.9
Network services....................... 0.1 2.6 10.4
--------- ---------- -----------
Total revenue........................ 100.0% 100.0% 100.0%
--------- ---------- -----------
Cost of revenue:
Product sales.......................... 80.3 74.2 65.0
Consulting services.................... 2.6 6.5 9.7
Network services....................... -- 0.4 27.6
--------- ---------- -----------
Total cost of revenue................ 82.9 81.1 102.3
--------- ---------- -----------
Gross profit (loss).................. 17.1 18.9 (2.3)
--------- ---------- -----------
Operating expenses:
Selling, general and administrative.... 16.1 34.5 158.7
Amortization of deferred compensation
on stock options...................... -- 1.9 46.8
Depreciation and amortization.......... 0.1 1.1 29.8
--------- ---------- -----------
Total operating expenses............. 16.2 37.5 235.3
--------- ---------- -----------
Income (loss) from operations............ 0.9 (18.6) (237.6)
Interest income (expense), net........... -- 0.6 6.2
--------- ---------- -----------
Income (loss) before income taxes........ 0.9 (18.0) (231.4)
Provision (benefit) for income taxes..... 0.4 (0.2) (0.4)
--------- ---------- -----------
Net income (loss)........................ 0.5% (17.8)% (231.0)%
========= ========== ===========
</TABLE>
34
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. We recognized $17.4 million in revenue for the year ended December
31, 1999, as compared to $11.6 million for the year ended December 31, 1998, an
increase of $5.8 million. This increase was principally attributable to a $3.1
million increase in product sales, primarily from one of our largest customers,
AT&T. Network services revenue increased by $1.5 million as a result of the
introduction of our DSL-enabled network service offerings in early 1999.
Consulting services increased by $1.2 million, which was attributable to
increases in maintenance and consulting contracts.
Cost of revenue. Cost of revenue was $17.8 million for the year ended December
31, 1999, as compared to $9.4 million for the year ended December 31, 1998, an
increase of $8.4 million. The increase was principally attributable to growth
in cost of network services of $4.8 million associated with expenses incurred
to continue to develop and operate our CopperNet and other networking services
and an increase in our product sales of $2.7 million. These were accompanied by
a growth in cost related to additional consulting services of $932,000.
Gross profit (loss). Gross loss was $401,000 and 2.3% of revenue for the year
ended December 31, 1999, as compared to gross profit of $2.2 million and 18.9%
of revenue for the year ended December 31, 1998, a decrease of $2.6 million.
This loss was primarily a result of increased network services costs related to
the continued expansion of our network. As a result of the expansion of our
network, expenses have exceeded our revenue realized from our customer base.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $27.7 million and 158.7% of revenue for the year
ended December 31, 1999, as compared to $4.0 million and 34.5% of revenue for
the year ended December 31, 1998, an increase of $23.7 million. This increase
as a percentage of revenue was primarily due to increased staffing and other
expenses incurred to develop, operate and sell our CopperNet network and other
networking solutions.
Amortization of deferred compensation on stock options. Amortization of
deferred compensation was $8.2 million for the year ended December 31, 1999, as
compared to $219,000 for the year ended December 31, 1998, an increase of $8.0
million. This increase is attributable to the increase in the unamortized
deferred compensation from $3.5 million to $18.4 million as of December 31,
1998 and 1999, respectively, which is principally due to the granting of stock
options to key employees, and the related amortization of this balance over the
remaining vesting period for these options.
Depreciation and amortization expense. Depreciation and amortization expense
was $5.2 million and 29.8% of revenue for the year ended December 31, 1999, as
compared to $130,000 and 1.1% of revenue for the year ended December 31, 1998,
an increase of $5.1 million. This increase was primarily due to investments in
our CopperNet network, computer equipment and software, office furnishings and
leasehold improvements.
Loss from operations. Our loss from operations was $41.4 million for the year
ended December 31, 1999, as compared to $2.2 million for the year ended
December 31, 1998, an increase of $39.2 million. The increased loss for the
year ended December 31, 1999 was primarily due to increased staffing,
amortization of deferred compensation and other operating expenses we incurred
in connection with the expansion and support of our CopperNet network.
Interest income (expense), net. For the year ended December 31, 1999, we
recorded net interest income of $1.1 million, consisting of interest income of
$2.1 million and interest expense of $(1.0) million. For the year ended
December 31, 1998 we recorded net interest income of $64,000, consisting of
interest income of $145,000 and interest expense of $(81,000). The increase in
interest income was primarily attributable to interest earned from the net
proceeds of $81.8 million from our initial public offering in June 1999. The
increase in interest expense is primarily due to interest on notes payable and
capital leases that commenced during 1999.
Benefit for income taxes. We had a benefit for income taxes of $71,000 for
the year ended December 31, 1999, as compared to a benefit of $28,000 for the
year ended December 31, 1998.
35
<PAGE>
Net loss. For the foregoing reasons, our net loss was $40.3 million for the
year ended December 31, 1999, as compared to a net loss of $2.1 million for the
year ended December 31, 1998, an increase of $38.2 million.
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. 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. The increase was attributable to growth in cost
related to an increase in product sales of $1.5 million, growth in cost related
to additional consulting services of $0.5 million and from growth in the cost
of network services of $39,000 attributable to expenses incurred to develop and
operate our CopperNet and other networking services.
Gross profit. Gross profit was $2.2 million and 18.9% of revenue for the year
ended December 31, 1998, as compared to $1.5 million and 17.1% of revenue for
the year ended December 31, 1997, an increase of $0.7 million. The increase in
gross profit as a percentage of revenue was attributable to the costs
associated with higher product sales and consulting services and the
introduction of broader network service offerings in late 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $4.0 million and 34.5% of revenue for the year
ended December 31, 1998, as compared to $1.4 million and 16.1% of revenue for
the year ended December 31, 1997, an increase of $2.6 million. This increase as
a percentage of revenue was primarily due to increased staffing and other
expenses incurred to develop our CopperNet network and other networking
solutions.
Amortization of deferred compensation on stock options. Amortization of
deferred compensation was $219,000 for the year ended December 31, 1998, which
was primarily attributable to the granting of stock options to key employees
and the amortization of the resulting deferred compensation over the remaining
vesting period of these options. 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, a decrease of $2.3 million. The
loss in 1998 was primarily due to increased staffing and other operating
expenses we incurred in support of our CopperNet network and other networking
solutions.
Interest income (expense), net. For the year ended December 31, 1998, we
recorded net interest income of $64,000, consisting of interest income of
$145,000, which was primarily attributable to interest income earned from the
proceeds of our issuance of $10.0 million of preferred and common stock in
August 1998, interest expense of $81,000, 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.
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.
36
<PAGE>
Liquidity and Capital Resources
Although we do not require significant capital expenditures for our product
sales and consulting services segments, the development and expansion of our
CopperNet network requires significant capital expenditures. The principal
capital expenditures that we expect to incur during our CopperNet rollout
include the procurement, design and construction of our collocation spaces and
the deployment of DSL-based equipment in central offices and connection sites.
Capital expenditures were $5.0 million and $55.3 million for the years ended
1998 and 1999, respectively. During the year 2000 and for future periods, we
expect our capital expenditures to increase substantially primarily due to:
. continued collocation construction in the Bell Atlantic and new collocation
construction in the U S WEST and Bell South regions;
. procurement of software systems; and
. the purchase of telecommunications equipment for expansion of our network.
Our capital expenditures will depend in part upon obtaining adequate demand
for our services from our CopperNet customers. We anticipate capital
expenditures during 2000 to range from $110.0 million to $125.0 million for
the expansion of our network from 362 central offices at December 31, 1999 to
approximately 900 central offices by the end of 2000.
Initial Public Offering. The net proceeds from our initial public offering,
completed in June 1999, were approximately $81.8 million. As of December 31,
1999, we have used approximately $37.3 million of these net proceeds. Of this
amount, approximately $21.0 million was used to finance capital expenditures
for central office installation and collocation fees, approximately $11.0
million was used to finance operating losses and approximately $4.1 million
was used to finance capital expenditures for property and equipment. We expect
to use approximately one half of the remaining net proceeds to finance
operating losses that we expect to incur as we expand our customer base and
network. We expect to use the remaining net proceeds from our initial public
offering to finance additional capital expenditures for central office
installation and collocation fees and to make payments under lease commitments
and for general corporate purposes.
Borrowings and Sale of Preferred Stock. In February 2000, we borrowed $15
million from each of SBC and Telmex until we received regulatory approvals for
the issuance of our Series B preferred stock on March 7, 2000. The loans bore
interest at a rate of prime plus 2% during the time they were outstanding, and
we repaid both loans plus accrued interest in full upon consummation of the
Series B preferred stock sale on March 7, 2000. The net proceeds from our sale
of Series B preferred stock in March 2000 were approximately $149.0 million.
Of this amount, approximately one half will be used to finance capital
expenditures for central office installation and collocation fees, software
systems, other capital equipment and certain operating costs related to
expansion of our network into new regions beyond our original target markets.
We expect to use the remaining net proceeds from our sale of Series B
preferred stock to finance operating losses that we expect to incur as we
expand our customer base and network, to make payments under lease commitments
and for general corporate purposes.
Following-On Offering. In December 1999, we filed a registration statement
with the SEC to register shares of common stock for sale in an underwritten
public offering. We currently expect to sell 4,800,177 shares in the public
offering, subject to adjustment if additional stockholders decide to sell in
the offering. In addition, we expect to grant to the underwriters the option
to purchase up to an additional 750,000 shares from us to cover over-
allotments. We expect to use the net proceeds from our sale of common stock to
finance capital expenditures, to finance operating losses that we expect to
incur as we expand our customer base and network, to finance any strategic
acquisitions we decide to make and for general corporate purposes.
Operating Activities. Net cash used in operating activities was $2.8
million in 1998 and $20.2 million in 1999. Net cash provided by operating
activities was $805,000 in 1997. The increase in cash used in operating
activities of $17.4 million from 1998 to 1999 was primarily the result of an
increase in operating losses of $38.2 million attributable to the expansion of
our network and the development of our CopperNet services, but also the result
of increases in accounts receivable and other current assets. These increases
were offset by increases in non-cash expenses for amortization of deferred
compensation of $8.0 million and depreciation of
37
<PAGE>
$5.1 million accompanied by increases in accounts payable and accrued
liabilities. 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 CopperNet services, but also the result of
an increase in accounts receivable accompanied by a decrease in accounts
payable.
Investing Activities. Net cash used in investing activities was $122,000 in
1997, $1.3 million in 1998 and $61.4 million in 1999. The increase in cash used
for investing activities during 1999 of $60.1 million was primarily due to an
increase in the deployment of equipment for our CopperNet services of $27.7
million and an increase in purchases of property and equipment of $6.3 million.
These were accompanied by a net increase
in the purchase of short-term investments of $24.6 million. The increase in
cash used for investing activities during 1998 of $1.2 million was primarily
due to an increase in the deployment of equipment for our CopperNet services of
$641,000 accompanied by an increase in purchases of property and equipment of
$394,000.
Financing Activities. Net cash provided by financing activities was $9,000
in 1997, $9.0 million in 1998 and $94.3 million in 1999. The increase in cash
provided by financing activities of $85.3 million during 1999 was primarily the
result our initial public offering of $83.7 million partially offset by
issuance costs paid of $1.9 million and borrowings on notes payable of $12.0
million. The increase in cash provided by financing activities of $9.0 million
during 1998 was primarily the result of preferred and common stock financing of
$9.9 million offset by the repurchase of common stock from existing
shareholders of $1.9 million.
Debt and Capital Lease Arrangements. We currently have debt and capital
lease facilities available to us of approximately $125.0 million. Of this
amount, Lucent (through its acquisition of Ascend) has provided us with a $95.0
million capital lease facility to fund acquisitions of certain Lucent
equipment, under which $9.7 million was outstanding as of December 31, 1999.
The terms of our capital leases range from three to four years. These leases
require monthly lease payments and have an interest rate of 9.5%. Lucent has
the right to withdraw or suspend further advances to us if our interconnection
agreements with Bell Atlantic are not renewed or are terminated, or if certain
key employees terminate their employment with us without competent replacement
in the reasonable commercial judgment of Lucent.
In addition, we have arrangements with other vendors that permit us to
finance up to $25.0 million of equipment and other assets and $5.0 million of
working capital. An aggregate of $23.8 million was outstanding under these
arrangements as of December 31, 1999.
Liquidity Requirements. We believe that our existing cash and cash
equivalents, including the net proceeds of approximately $149.0 million we
received from SBC and Telmex, existing equipment lease financings and
anticipated future revenue generated from operations will be sufficient to
complete the current planned build-out of our network in the northeast area
mid-Atlantic regions and to begin expansion into the BellSouth and U S WEST
territories during 2000 and to fund our operating losses, capital expenditures,
lease payments and working capital requirements into the first quarter of 2001.
Taking into account our estimated net proceeds from our contemplated offering,
we believe that we will have sufficient financing to fund our operations into
the third quarter of 2001.
We expect our operating losses and capital expenditures to increase
substantially primarily due to our network expansion into new markets. We
expect that additional financing will be required for us to complete our
planned network roll-out in the BellSouth & U S WEST regions. We may seek to
finance such future operations through a combination of commercial bank
borrowings, leasing, vendor financing or the private or public sale of equity
or debt securities. If we were to leverage our business by incurring
significant debt, we may be required to devote a substantial portion of our
cash flow to service that indebtedness. This cash flow would otherwise be
available to finance the deployment of our network. If we are forced to use our
cash flow in this manner, we may be forced to delay the capital expenditures
necessary to complete our network. Equity or debt financing may not be
available to us on favorable terms or at all. Any delay in the deployment of
our network could have a material adverse effect on our business.
38
<PAGE>
Our capital requirements may vary based upon the timing and success of our
CopperNet roll-out, as a result of regulatory, technological and competitive
developments or if:
. demand for our services or cash flow from operations is more or less
than expected;
. our development plans or projections change or prove to be
inaccurate;
. we accelerate deployment of our network or otherwise alter the
schedule or targets of our CopperNet roll-out plan; or
. we engage in any strategic acquisitions or relationships.
Impact of the Year 2000 Issue
During 1999, we completed any required modifications to our critical systems
and applications relating to year 2000 issues. We also completed our survey of
our significant third-party service and product partners to assess our
vulnerability if these companies were to fail to remediate their year 2000
issues. The responses received indicated that our third-party service and
product partners were aware of the year 2000 issue and were implementing all
necessary changes prior to the end of calendar year 1999. We also formulated
contingency plans to ensure that business-critical processes were protected
from disruption and will continue to function during and after the year 2000
and to ensure that our ability to produce an acceptable level of products and
services is safeguarded in the event of failures of external systems and
services. During 1999, we did not incur any material costs in connection with
identifying, evaluating or remediating year 2000 issues.
Our business and operations experienced no material adverse effects from the
calendar change to the year 2000 or from the leap year that occurred in 2000,
and we have not been notified of any disruptions to or failures in the systems
of any of our suppliers.
We will continue to monitor our information technology and non-information
technology systems and those of third parties with whom we conduct business
throughout the year 2000 to ensure that any latent year 2000 issues that may
arise are addressed promptly. Although we do not anticipate any additional
expenditures relating to year 2000 compliance, we cannot provide any assurance
as to the magnitude of any future costs until significant time has passed.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for our fiscal
year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. We believe the adoption of
SFAS No. 133 and SFAS No. 137 will not have a material impact on the financial
statements.
Forward-looking Statements
Many statements made in this Form 10-K are forward-looking statements
relating to future events and our future performance within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding our
expectations, beliefs, intentions or future strategies that are signified by
the words "expects," "anticipates," "intends," "believes," or similar
language. These forward-looking statements address, among other things:
. our CopperNet deployment plans and strategies;
. development and management of our business;
. our planned relationships with SBC and Telmex;
. 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;
39
<PAGE>
. 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; and
. the extent and nature of competition.
These statements may be found in this section, and in this Form 10-K
generally.
We have based these forward-looking statements on our current expectations
and projections about future events based on information available to us on
this date, and we assume no obligation to update any forward-looking
statements. However, our actual results could differ materially from those
anticipated in these forward-looking statements as a result of risks facing us
or faulty assumptions on our part. These include, but are not limited to:
. the nature of our ongoing relationship with Bell Atlantic;
. our success in maintaining the continuity of our interconnection
agreements;
. our ability to keep pace with technological innovations within the
telecommunications industry;
. our ability to hire and retain key personnel;
. our ability to protect our proprietary rights;
. our ability to successfully market our services to current and new
customers;
. our ability to generate customer demand for our services in our target
markets;
. market pricing for our services and for competing services;
. the extent of increasing competition;
. our ability to acquire funds to expand our network;
. the ability of our equipment and service suppliers to meet our needs;
. trends in regulatory, legislative and judicial developments; and
. our ability to manage growth of our operations.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Form 10-K may not occur.
40
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to certain financial market risks, the most predominant
being fluctuations in interest rates. We monitor interest rate fluctuations as
an integral part of our overall risk management program, which recognizes the
unpredictability of financial markets and seeks to reduce the potentially
adverse effect on our results of operations. We do not believe that we are
currently exposed to material financial market risks.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Report of Independent Accountants....................................... 42
Balance Sheets as of December 31, 1998 and 1999......................... 43
Statements of Operations and Other Comprehensive Income (Loss) for the
years ended December 31, 1997, 1998 and 1999........................... 44
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999....................................... 45
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999................................................................... 46
Notes to Financial Statements........................................... 47
Schedule:
Report of Independent Accountants on Financial Statement Schedule ...... 60
</TABLE>
<TABLE>
<S> <C>
Schedule II--Valuation and Qualifying Accounts............................ 61
</TABLE>
Schedules not listed above have been omitted because they are not applicable
or the information required to be set forth therein is included in the
financial statements or notes thereto.
41
<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 and other comprehensive income (loss), changes in stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Network Access Solutions Corporation (the Company) at December 31,
1998 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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 7, 2000
42
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 5,518,117 $ 18,240,096
Short-term investments............................ -- 24,575,893
Accounts receivable, net of allowance for doubtful
accounts of $51,959 and $376,399 as of December
31, 1998 and 1999, respectively.................. 1,806,791 3,257,204
Inventory......................................... 59,233 440,770
Prepaid and other current assets.................. 105,693 927,218
----------- ------------
Total current assets............................ 7,489,834 47,441,181
Property and equipment, net......................... 5,030,793 55,097,670
Restricted cash..................................... -- 1,600,000
Deferred offering costs............................. -- 259,272
Deposit............................................. 185,000 72,554
Income tax receivable............................... 100,865 27,600
Deferred tax asset.................................. 121,586 121,586
----------- ------------
Total assets.................................... $12,928,078 $104,619,863
=========== ============
LIABILITIES, PREFERRED STOCK, AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.................................. $ 2,525,102 $ 8,221,681
Accrued expenses.................................. 750,308 4,118,746
Current portion of deferred compensation
liability........................................ 333,333 166,667
Current portion of capital lease obligations...... 328,982 5,630,429
Current portion of note payable................... -- 478,925
Other current liabilities......................... 67,201 247,678
Deferred revenue.................................. -- 42,788
----------- ------------
Total current liabilities....................... 4,004,926 18,906,914
Long term portion of capital lease obligations...... 1,184,156 15,251,100
Long-term portion of note payable................... 1,000,000 2,453,211
Long term portion of deferred compensation
liability.......................................... 166,667 --
----------- ------------
Total liabilities............................... 6,355,749 36,611,225
----------- ------------
Commitments and contingencies
Series A mandatorily redeemable preferred stock..... 5,640,651 --
----------- ------------
Stockholders' equity:
Common stock, $.001 par value, 150,000,000 shares
authorized, 44,550,000 and 53,831,997 shares
issued and outstanding as of December 31, 1998
and 1999, respectively........................... 44,550 53,832
Additional paid-in capital........................ 8,097,566 130,431,898
Accumulated other comprehensive loss.............. -- (51,960)
Deferred compensation on stock options............ (3,462,753) (18,389,540)
Retained earnings (deficit)....................... (1,847,685) (42,135,592)
Less treasury stock, at cost, 8,550,000 shares as
of December 31, 1999 and 1998, respectively...... (1,900,000) (1,900,000)
----------- ------------
Total stockholders' equity...................... 931,678 68,008,638
----------- ------------
Total liabilities, preferred stock and
stockholders' equity........................... $12,928,078 $104,619,863
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenue:
Product sales........................ $ 8,149,680 $ 9,899,623 $ 13,025,582
Consulting services.................. 791,280 1,428,531 2,593,028
Network services..................... 3,856 310,921 1,820,519
----------- ----------- ------------
Total revenue...................... 8,944,816 11,639,075 17,439,129
----------- ----------- ------------
Cost of revenue:
Product sales........................ 7,180,064 8,639,337 11,334,352
Consulting services.................. 230,565 761,315 1,693,209
Network services..................... 2,406 40,738 4,812,522
----------- ----------- ------------
Total cost of revenue.............. 7,413,035 9,441,390 17,840,083
----------- ----------- ------------
Gross profit (loss).................... 1,531,781 2,197,685 (400,954)
Operating expenses:
Selling, general and administrative.. 1,436,513 4,017,057 27,669,535
Amortization of deferred compensation
on stock options.................... -- 218,997 8,165,293
Depreciation and amortization........ 12,298 130,004 5,195,282
----------- ----------- ------------
Income (loss) from operations.......... 82,970 (2,168,373) (41,431,064)
Interest income........................ -- 145,468 2,094,719
Interest expense....................... (5,144) (81,006) (1,022,854)
----------- ----------- ------------
Income (loss) before income taxes...... 77,826 (2,103,911) (40,359,199)
Provision (benefit) for income taxes... 35,674 (27,973) (71,292)
----------- ----------- ------------
Net income (loss)...................... 42,152 (2,075,938) (40,287,907)
Preferred stock dividends.............. -- 322,192 339,726
Preferred stock accretion.............. -- 244,417 257,719
----------- ----------- ------------
Net income (loss) applicable to
common stockholders................. $ 42,152 $(2,642,547) $(40,885,352)
=========== =========== ============
Net income (loss) per common share
applicable to common stockholders
(basic and diluted)................. $ 0.00 $ (0.10) $ (0.99)
=========== =========== ============
Weighted average common shares
outstanding (basic and diluted)....... 21,915,000 27,302,144 41,258,618
=========== =========== ============
Comprehensive income (loss):
Net income (loss)...................... $ 42,152 $(2,075,938) $(40,287,907)
Other comprehensive loss:
Unrealized loss on securities
available for sale.................. -- -- (51,960)
----------- ----------- ------------
Total comprehensive income (loss)...... $ 42,152 $(2,075,938) $(40,339,867)
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Other Deferred
Common Stock Additional Compre- Compensation Retained Treasury Stock
------------------ Paid-in hensive on Stock Earnings ---------------------
Shares Amount Capital loss Options (Deficit) Shares Amount Total
---------- ------- ------------ -------- ------------ ------------ --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1997........... 21,915,000 $21,915 $ -- $ -- $ -- $ 228,253 -- $ -- $ 250,168
Sale of common
stock, net of
direct issuance
costs of
$27,341........ 22,050,000 22,050 4,853,010 -- -- -- -- -- 4,875,060
Purchase of
treasury stock
at cost........ -- -- -- -- -- -- 8,550,000 (1,900,000) (1,900,000)
Shares issued to
employee for
service........ 585,000 585 129,415 -- -- -- -- -- 130,000
Accrual of
preferred stock
dividends...... -- -- (322,192) -- -- -- -- -- (322,192)
Accretion of
preferred
stock.......... -- -- (244,417) -- -- -- -- -- (244,417)
Deferred
compensation... -- -- 3,681,750 -- (3,681,750) -- -- -- --
Amortization of
deferred
compensation... -- -- -- -- 218,997 -- -- -- 218,997
Net loss........ -- -- -- -- -- (2,075,938) -- -- (2,075,938)
---------- ------- ------------ -------- ------------ ------------ --------- ----------- -----------
Balance,
December 31,
1998........... 44,550,000 44,550 8,097,566 -- (3,462,753) (1,847,685) 8,550,000 (1,900,000) 931,678
Sale of common
stock, net of
direct issuance
costs of
$1,846,100..... 7,500,000 7,500 81,846,400 -- -- -- -- -- 81,853,900
Conversion of
convertible
notes payable.. 833,334 833 9,999,167 -- -- -- -- -- 10,000,000
Conversion of
preferred
stock.......... 416,667 417 4,999,583 -- -- -- -- -- 5,000,000
Cancellation of
preferred
stock.......... -- -- 1,238,096 -- -- -- -- -- 1,238,096
Exercise of
stock options.. 531,996 532 1,756,451 -- -- -- -- -- 1,756,983
Accrual of
preferred stock
dividends...... -- -- (339,726) -- -- -- -- -- (339,726)
Accretion of
preferred
stock.......... -- -- (257,719) -- -- -- -- -- (257,719)
Deferred
compensation... -- -- 23,092,080 -- (23,092,080) -- -- -- --
Amortization of
deferred
compensation... -- -- -- -- 8,165,293 -- -- -- 8,165,293
Net unrealized
loss on short-
term
investments
available for
sale........... -- -- -- (51,960) -- -- -- -- (51,960)
Net loss........ -- -- -- -- -- (40,287,907) -- -- (40,287,907)
---------- ------- ------------ -------- ------------ ------------ --------- ----------- -----------
Balance,
December 31,
1999........... 53,831,997 $53,832 $130,431,898 $(51,960) $(18,389,540) $(42,135,592) 8,550,000 $(1,900,000) $68,008,638
========== ======= ============ ======== ============ ============ ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................... $ 42,152 $(2,075,938) $(40,287,907)
Adjustment to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization
expense.............................. 12,298 130,004 5,195,282
Provision for doubtful accounts
receivable........................... 23,826 28,133 324,441
Deferred income taxes................. (118,274) 77,146 --
Shares issued to employee for
services............................. -- 130,000 --
Amortization of deferred compensation
on stock options..................... -- 218,997 8,165,293
Net changes in assets and
liabilities:
Accounts receivable.................. 4,072,345 (1,069,599) (1,774,854)
Inventory............................ 300,678 (11,686) (381,537)
Income tax receivable................ -- (127,073) 73,265
Prepaid and other current assets..... 10,000 (105,693) (821,525)
Deposits............................. -- -- 112,445
Deferred tax asset................... -- 26,208 --
Accounts payable..................... (3,612,797) (139,113) 6,153,050
Accrued expenses..................... (148,752) 173,795 3,168,438
Deferred compensation................ 291,667 -- (333,333)
Income tax payable................... -- (132,064) --
Deferred revenue..................... -- -- 42,788
Other current liabilities............ (68,195) 67,201 180,478
----------- ----------- ------------
Net cash provided by(used in)
operating activities............... 804,948 (2,809,682) (20,183,676)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of short-term investments... -- -- (24,627,853)
Expenditures for network under
development.......................... -- (640,511) (28,384,550)
Purchases of property and equipment... (121,915) (515,690) (6,822,909)
Restricted cash....................... -- -- (1,600,000)
Deposit for software and services..... -- (185,000) --
----------- ----------- ------------
Net cash used in investing
activities......................... (121,915) (1,341,201) (61,435,312)
----------- ----------- ------------
Cash flows from financing activities:
Borrowings on notes payable........... 1,500,000 2,406,652 12,000,000
Borrowings on sale/leaseback.......... -- -- 530,000
Repayments of notes payable........... (1,491,291) (1,500,000) (67,864)
Principal payments on capital leases.. -- -- (1,672,781)
Issuance of common stock.............. -- 4,902,401 83,700,000
Issuance of redeemable preferred
stock................................ -- 5,102,499 --
Issuance costs related to preferred
and common stock offerings........... -- (55,798) (1,905,371)
Exercise of stock options............. -- -- 1,756,983
Treasury stock acquired............... -- (1,900,000) --
----------- ----------- ------------
Net cash provided by financing
activities......................... 8,709 8,955,754 94,340,967
----------- ----------- ------------
Net increase in cash and cash
equivalents........................... 691,742 4,804,871 12,721,979
Cash and cash equivalents at the
beginning of the period............... 21,504 713,246 5,518,117
----------- ----------- ------------
Cash and cash equivalents at the end of
the period............................ $ 713,246 $ 5,518,117 $ 18,240,096
=========== =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest.............................. $ 5,142 $ 27,948 $ 1,027,452
Income taxes.......................... 222,143 153,343 --
Non-cash investing and financing
activities:
Capital leases........................ -- 1,513,138 20,511,172
Preferred stock dividends............. -- 322,192 339,726
Preferred stock accretion............. -- 244,417 257,719
Shares issued to employee for
services............................. -- 130,000 --
Expenditures for network included in
accounts payable..................... -- 2,351,281 1,894,810
Expenditures for deferred offering
costs included in accrued expenses... -- -- 200,000
Conversion of notes payable into
common stock......................... -- -- 10,000,000
Conversion of redeemable preferred
stock into common stock.............. -- -- 6,238,096
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
NETWORK ACCESS SOLUTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Business
Network Access Solutions Corporation, or the Company, was originally
incorporated in the Commonwealth of Virginia on December 19, 1994. On August 3,
1998, the Company reincorporated in the State of Delaware. Prior to the
reincorporation, the Company had authorized 10,000 shares of common stock, of
which 7,803 shares were issued and outstanding. As of August 3, 1998, the
Company was recapitalized with authorized capital stock of 15,000,000 shares of
common stock, $.001 par value per share and 10,000,000 shares of preferred
stock, $.001 par value per share. On March 18, 1999, the Company increased the
authorized common stock to 50,000,000 shares with a par value of $.001 per
share. In conjunction with this reincorporation and recapitalization, the
Company changed from a July 31 year-end to a calendar year-end. On March 18,
1999, the Company and its Board of Directors declared a two for one stock
split, effected as a stock dividend, of its common stock. On May 7, 1999, the
Company and its Board of Directors declared a 2.25 for one stock split,
effected as a stock dividend, of its common stock. All share information has
been retroactively adjusted for all periods presented to reflect the new
capital structure and stock splits.
The Company, which is a major provider of high-speed data communications
services and related applications, provides network services,
telecommunications products and equipment and consulting services to business
customers. Through its CopperNet branded service, the Company offers its
customers high-speed connectivity using Digital Subscriber Line (DSL)
technology. The Company provides metropolitan area and wide area network
services, manages and monitors its customers' networks, sells
telecommunications equipment, designs networks for its customers, installs the
equipment and provides related services. The Company currently offers its DSL-
based networking solutions in the following nine cities and their surrounding
markets: Baltimore, Boston, New York, Norfolk, Philadelphia, Pittsburgh,
Richmond, Washington, D.C., and Wilmington. The Company also intends to expand
its geographical coverage to the southeastern and western U.S. markets.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. The estimates involve judgments with respect to, among
other things, various future factors which are difficult to predict and are
beyond the control of the Company. Therefore, actual amounts could differ from
these estimates.
Revenue Recognition
The Company's revenue is derived from product sales, consulting services and
network services. The Company recognizes revenue on the sale of its products
when a valid purchase order is received, shipment occurs, collection is
probable and no significant obligations remain related to the completion of
installation and performance of support services.
The Company provides consulting services, including network planning, design,
and integration services, under time-and-material type contracts and recognizes
revenue as services are performed and as costs are incurred.
The Company provides network services, including DSL-based services, under
monthly and fixed rate service contracts. Revenue on monthly contracts is
recognized when services are performed. Revenue on fixed rate service contracts
is recognized as costs are incurred over the related contract period, which
generally does
47
<PAGE>
not exceed one year. Payments received in advance of providing services are
recorded as deferred revenue until the period in which such services are
provided. Revenue related to installation and activation fees are recognized to
the extent of direct costs incurred. Any excess installation and activation
fees over direct costs are deferred and amortized over the 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, short-term
investments and accounts receivable. Cash and cash equivalents are held in a
money market account at a national financial institution. Short-term
investments consist of marketable securities, which are principally composed of
debt securities with corporations and foreign governments. The Company has not
experienced any losses on its cash and cash equivalents.
The Company grants uncollateralized credit in the form of accounts receivable
to its customers. As of December 31, 1999, AstraZeneca, PLC comprised 12% of
accounts receivable. 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>
For the years ended December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
AT&T....................................... $3,421,878 $5,869,907 $5,358,165
AstraZeneca, PLC........................... 921,356 933,556 --
Network Monitoring and Repair, Inc......... 1,301,440 -- --
---------- ---------- ----------
$5,644,674 $6,803,463 $5,358,165
========== ========== ==========
</TABLE>
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Restricted Cash
Restricted cash is composed of amounts held in escrow to collateralize the
Company's operating lease commitments for its new headquarters in Herndon,
Virginia.
Short-term Investments
The Company's short-term investments consist of marketable securities that
include bonds with maturities of less than two years. The marketable securities
are classified as "available for sale" since management intends to hold the
investments for an indefinite period and may sell the investments prior to
their maturity. The investments are carried at aggregate fair value based
generally on quoted market prices. Gains and losses are determined based on the
specific identification method. Available-for-sale marketable securities that
are reasonably expected by management to be sold within one year from the
balance sheet date are classified as current assets.
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 composed of collocation fees, equipment,
equipment held under capital
48
<PAGE>
leases, and equipment installation. These assets are stated at cost. The
Company leases certain of its equipment under capital lease agreements. The
capital lease assets are stated at the lower of the present value of the net
minimum lease payments or the fair value at the inception of the lease, and are
depreciated over the shorter of the estimated useful life or the lease term.
Depreciation of office and computer equipment and furniture and fixtures is
computed using the straight-line method, generally over three to five years,
based upon estimated useful lives, commencing when the assets are placed in
service. The depreciation of the DSL network costs commences as individual
network components are placed in service and are depreciated over two to five
years. Expenditures for maintenance and repairs are expensed as incurred. When
assets are retired or disposed, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is recognized in
operations for the period.
Income Taxes
The Company accounts for income taxes by utilizing the liability method.
Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the
Company's current provision (benefit) for federal and state income taxes and
the change in net deferred tax assets and liabilities during the period.
Fair Value Information
The Company believes the carrying amount of certain of its financial
instruments, which include cash equivalents, accounts payable, capital leases
and notes payable, approximate 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, 1999,
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
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:
49
<PAGE>
network services, product sales and consulting services. The network services
segment provides local, metropolitan and wide area data communications services
to customers. This segment also provides a wide variety of other services to
customers, including remote network management and monitoring, network
security, virtual private networks, e-commerce and CopperNet, the Company's
high-speed, continuously connected DSL access to telecommunications networks.
The product sales segment provides sales of selected equipment from
manufacturing partners. Engineers select product solutions based upon
customized network designs to improve the customers' operations and network
efficiencies. The consulting services segment provides nonrecurring service
activation and installation, network integration, on site network management,
network security consulting and professional services. In addition, the
consulting services segment provides maintenance and installation of equipment,
some of which may be provided through third party providers under contract. The
Company's business is currently conducted principally in the eastern United
States. There are no foreign operations.
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the Company's
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company believes the
adoption of SFAS No. 133 and SFAS No. 137 will not have a material impact on
the financial statements.
3. Initial and Secondary Public Offerings
In June 1999, the Company completed an initial public offering (IPO) of
7,500,000 shares of common stock. Total proceeds to the Company were
$81,853,900, net of underwriting discounts and commissions of approximately
$5,500,000 and offering costs of $1,846,100. Concurrent with the IPO,
$5,000,000 of the Company's Series A Mandatorily Redeemable Preferred Stock
(Preferred Stock) was converted into 416,667 shares of common stock at $12.00
per share, the public offering price, with the remaining shares of Preferred
Stock and all accrued dividends and accretion amounting to $1,238,096 cancelled
without additional payment to the holders of those shares. In addition,
$10,000,000 of the Company's 8% convertible notes (see Note 6) were converted
into 833,334 shares of common stock at $12.00 per share, the public offering
price.
On December 22, 1999, the Company filed a registration statement on Form S-1
for the sale of shares of their common stock in a secondary public offering
that has not been completed. In connection with the preparation and filing of
this registration statement the Company incurred costs of $259,272, of which
$59,272 has been paid as of December 31, 1999. These offering costs have been
deferred on the balance sheet and will be offset against the proceeds and
reported as a reduction to stockholders' equity when the secondary offering
occurs.
4. Short-term Investments
As of December 31, 1999, the Company had invested in marketable securities
with original maturity dates exceeding 90 days. These marketable securities,
which principally consist of debt securities with corporations and foreign
governments, are due in one year or less and are considered "available for
sale" and, as such, are stated at fair value. The aggregate amortized cost of
these marketable securities was $24,627,853 at December 31, 1999. Given the
rise in interest rates from the purchase date of these securities the Company
has recorded an unrealized loss of $51,960 for the year ended December 31, 1999
to reduce the carrying value of these securities to fair value of $24,575,893
as of December 31, 1999. These net unrealized losses are reported as a part of
accumulated other comprehensive income (loss). Realized gains or losses from
the sale of marketable securities are based on the specific identification
method. There were no gross realized gains and gross realized losses on sales
of available for sale securities during the year ended December 31, 1999.
50
<PAGE>
5. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Network placed in service......................... $ -- $40,291,575
Network development in process.................... 4,657,975 12,790,617
Office and computer equipment..................... 355,962 5,925,278
Furniture and fixtures............................ 159,728 1,428,356
Less accumulated depreciation..................... (142,872) (5,338,156)
---------- -----------
Property and equipment, net....................... $5,030,793 $55,097,670
========== ===========
</TABLE>
The Company's network includes equipment under capital leases, equipment,
installation, and collocation fees. Collocation fees represent nonrecurring
fees paid to obtain central office space for location of certain equipment.
When a new portion of the Company's network has been completed and made
available for use, it is transferred from network development to network placed
in service. As of December 31, 1998 and 1999, the recorded cost of the network
equipment under capital leases was $1,513,138 and $22,939,012, respectively.
Accumulated amortization for this equipment under capital leases was $20,739
and $2,998,446 as of December 31, 1998 and 1999, respectively.
6. Note Payable
On October 16, 1998, the Company entered into a $10,000,000 line of credit
agreement and a $30,000,000 equipment financing agreement (see Note 8) with
Ascend Communications, Inc. (Ascend). Under the terms of the line of credit,
the Company could draw on the line of credit in $1,000,000 increments up to a
maximum of $5,000,000. The Company could draw the remaining $5,000,000, also in
$1,000,000 increments, upon (i) completing the purchase or lease of equipment
in excess of $15,000,000 from Ascend and (ii) demonstrating that at least 70%
of such equipment is being used by the Company to generate revenue. The Company
was required to make interest only payments at an annual rate of 8.25% on the
amounts advanced for the first nine months from the date of the advance. For
the next thirty-three months the Company was required to make principal and
interest payments in accordance with a sixty-month amortization schedule using
an interest rate of 8.25% for the first eighteen months at a rate equal to the
prevailing high yield bond index for the next fifteen months. The remaining
unpaid interest was due forty-two months after the related advance. The credit
agreement required immediate repayment in the event of an initial public
offering or debt offering in excess of $40,000,000 or a change in control, as
defined. At December 31, 1998, $1,000,000 was outstanding under this agreement.
On May 4, 1999, the Company amended its financing agreement with Ascend. The
amendment reduced the line of credit available for working capital loans from
$10,000,000 to $5,000,000 and relieved the Company's obligation to repay these
loans upon the Company's IPO. As of December 31, 1999, the Company's total
obligation under this agreement for working capital was $2,932,136.
Principal payments due under this note payable as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ ----------
<S> <C>
2000.......................................................... $ 478,925
2001.......................................................... 579,584
2002.......................................................... 1,873,627
----------
$2,932,136
==========
</TABLE>
51
<PAGE>
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).
On March 31, 1999, the Company entered into a financing agreement whereby
certain holders of its preferred stock agreed to invest an additional
$10,000,000 in the Company. Under the agreement, the Company received
$5,000,000 on April 1, 1999 and an additional $5,000,000 on May 11, 1999 by
issuing 8% convertible notes. Concurrent with the IPO, these notes, including
principal and accrued interest, were converted into 833,334 shares of common
stock.
7. 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, 1998 and 1999, the deferred compensation
liability was $500,000 and $166,667, 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 three-year Federal treasury
notes. Accrued interest related to these amounts was $47,500 and $25,833 at
December 31, 1998 and 1999, respectively.
8. Commitments and Contingencies
Leases
The Company leases or subleases office space in Maryland, Massachusetts, New
York, Pennsylvania and Virginia and collocation space in central offices under
the terms of the interconnection agreements with Bell Atlantic and other
vendors. On October 27, 1999, the Company executed a lease for space in
Herndon, Virginia. The Company entered into a Letter of Credit agreement, in
the amount of $1,600,000 with a financial institution, that will serve as
collateral for this lease. The Company has begun to move its headquarters to
this location in phases beginning in March 2000 and expects to complete the
move in May 2000. Commitments for minimum rental payments under noncancelable
leases and subleases at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ -----------
<S> <C>
2000...................................................... $ 3,802,796
2001...................................................... 4,455,402
2002...................................................... 4,305,924
2003...................................................... 4,332,981
2004...................................................... 4,062,804
Thereafter................................................ 17,412,974
-----------
Total minimum rental payments............................... $38,372,881
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$80,103, $113,600 and $1,580,211, respectively.
During 1998 and 1999, the Company entered into capital leases related to the
acquisition of equipment for the development of the DSL network. Initially, the
Company entered into a master lease agreement with Ascend to finance purchases
of up to $30,000,000 through capital lease agreements. During 1999, this
agreement was amended and increased to $95,000,000. In addition, the Company
has an arrangement with Paradyne Corporation whereby the Company can finance
DSL equipment purchases of up to $8,000,000 subject
52
<PAGE>
to vendor approval. During 1999, the Company entered into two sales leaseback
transactions with a vendor totaling $530,000. The leaseback transactions were
accounted for as capital leases. The present value of future minimum capital
lease payments as of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ -----------
<S> <C>
2000...................................................... $ 7,290,275
2001...................................................... 7,289,787
2002...................................................... 7,101,517
2003...................................................... 2,653,710
-----------
24,335,289
Less amounts representing interest.......................... 3,453,760
-----------
Present value of net minimum lease payments................. 20,881,529
Less current portion of capital lease obligations........... 5,630,429
-----------
Long-term portion of capital lease obligations.............. $15,251,100
===========
</TABLE>
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 single largest
shareholder is also a shareholder of this software and service provider. Under
the terms of the agreement, software licensing and service fees were $1,023,700
which were 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 Company commenced
implementing the software and support service in 1999. As of December 31, 1999,
all fees under this agreement had been paid.
Employment agreements
The Company has entered into an employment agreement with certain of its
executive officers. Each agreement has an initial term of four years, subject
to earlier termination upon 30 days prior notice. These agreements are
automatically extended for additional one year terms unless the Company or the
employee elects to terminate the agreement within 30 days before the end of the
current term. Under these agreements, these employees will receive an initial
annual base salary that will be increased by at least 5% each year, based upon
performance objectives set by the Board of Directors. The employees will also
receive an annual bonus of up to 20% of the executives' then current salary.
The bonus is payable in cash, stock or a combination of both at the election of
the board of directors.
9. Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
For the
years ended December 31,
------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Current tax (benefit) provision............. $ 153,948 $(105,119) $(71,292)
Deferred tax provision (benefit)............ (118,274) 77,146 --
--------- --------- --------
Total (benefit) provision for income
taxes.................................... $ 35,674 $ (27,973) $(71,292)
========= ========= ========
</TABLE>
53
<PAGE>
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
As of December 31,
--------------------------------
1997 1998 1999
-------- --------- ------------
<S> <C> <C> <C>
Deferred compensation..................... $193,100 $ 349,956 $ 64,367
Accrued interest.......................... 5,632 19,149 15,139
Accrued other expenses.................... -- -- 69,712
Bad debt expense.......................... -- 20,066 145,365
Depreciation expense...................... -- (2,083) (2,691,163)
Net operating loss........................ -- 444,160 15,446,718
Valuation allowance....................... -- (709,662) (12,928,552)
-------- --------- ------------
Net deferred tax asset.................. $198,732 $ 121,586 $ 121,586
======== ========= ============
</TABLE>
As of December 31, 1999, 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 carry-back
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 (there are no material changes to the Company's effective tax rate for
1999):
<TABLE>
<CAPTION>
For the years
ended
December 31,
-------------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Federal statutory rate................................ 34.0% (34.0)% 34.0%
State income taxes, net of federal provision
(benefit)............................................ 5.4 (2.7) 4.6
Increase to valuation allowance....................... -- 33.7 (30.4)
Business meals, entertainment, penalties and other.... 6.4 1.5 (1.1)
Amortization of deferred compensation on stock options
disallowed for tax purposes.......................... -- -- (6.9)
---- ----- -----
45.8% (1.5)% 0.2%
==== ===== =====
</TABLE>
10. 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 had allocated $5,074,042 and $4,875,060 of the
net proceeds to the Preferred Stock and common stock, respectively, based on
the Company's estimate of fair value of the Preferred Stock and common stock.
Concurrently with the IPO, $5,000,000 of the Company's Series A Mandatorily
Redeemable Preferred Stock (Preferred Stock) was converted into 416,667 shares
of common stock at $12.00 per share, the public offering price, with the
remaining shares of Preferred Stock and all accrued dividends and accretion,
amounting to $1,238,096, cancelled without additional payment to the holders of
those shares.
54
<PAGE>
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.................................. -- 339,726
Accretion to redemption price...................... -- 257,719
Conversion of preferred stock to common stock...... (5,000,000) (5,000,000)
Cancellation of preferred stock.................... (5,000,000) (1,238,096)
----------- -----------
Balance, December 31, 1999......................... $ -- $ --
=========== ===========
</TABLE>
Stock Repurchase
On August 6, 1998, the Company repurchased 8,550,000 shares of common stock
for $1,900,000 from certain founders of the Company. This treasury stock
transaction was accounted for at cost.
11. Stock-Based Compensation
On July 23, 1998, the Company adopted the 1998 Incentive Stock Plan (the
"Plan"), under which incentive stock options, non-qualified stock options,
stock appreciation rights, restricted or unrestricted stock awards, phantom
stock, performance awards or any combination thereof may be granted to the
Company's employees and certain other persons in accordance with the Plan. The
Board of Directors, which administers the Plan, determines the number of
options granted, the vesting period and the exercise price. The Board of
Directors may terminate the Plan at any time. Options granted under the Plan
are fully exercisable into restricted shares of the Company's common stock upon
award and expire ten years after the date of grant. The restricted common stock
generally vests over a three or four year period. Subsequent to exercise,
unvested shares of restricted stock cannot be transferred while vested shares
are subject to a right of first refusal by the Company to repurchase the shares
at fair value. Upon voluntary termination, unvested shares of restricted stock
can be repurchased by the Company at the lower of fair value or the exercise
price. At December 31, 1998, 9,000,000 shares were reserved for issuance under
the Plan. Effective November 1, 1999, the Company increased the number of
shares of common stock reserved for issuance under the Plan to 13,250,000.
On April 1, 1999, the Company entered into a stock option agreement, which
granted a board of director member an option to purchase 250,000 shares of the
Company's common stock at an exercise price of $6.67 per share. On June 3,
1999, the board member exercised the stock option by paying $1,667,500 to the
Company. In addition, the agreement stipulated the board of director member was
issued an additional option to purchase 407,500 shares of common stock at an
exercise price of $3.00 per share and is unexercised as of December 31, 1999.
These options immediately vested upon the Company's IPO. As a result, the
Company recognized $3,504,375 of compensation expense during the year ended
December 31, 1999.
55
<PAGE>
As of December 31, 1998 and 1999, a total of 7,090,875 and 11,014,379,
respectively, of stock options which were immediately exercisable as of those
dates had been granted at exercise prices ranging from $.09 to $32.00 per
share. Stock option activity was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Range of Average
Stock Exercise Exercise
Options Prices Price
---------- ------------ --------
<S> <C> <C> <C>
Options outstanding, December 31, 1997....... -- $ -- $ --
Options granted, July 1998................... 5,400,000 $ 0.09 $ 0.09
Options granted, August 1998................. 225,000 $ 0.09 $ 0.09
Options granted, November 1998............... 1,465,875 $ 0.09 $ 0.09
---------- ------------ ------
Options outstanding, December 31, 1998....... 7,090,875 $ 0.09 $ 0.09
Options granted, January 1999................ 559,575 $ 0.09 $ 0.09
Options granted, March 1999.................. 1,350,000 $ 0.09 $ 0.09
Options granted, April 1999.................. 437,875 $ 0.09- 6.67 $ 3.84
Options granted, May 1999.................... 479,900 $ 3.00- 6.00 $ 5.78
Options granted, June 1999................... 733,850 $ 3.00-13.94 $ 4.55
Options granted, July 1999................... 139,650 $ 6.00-16.25 $10.60
Options granted, August 1999................. 395,050 $ 5.13-12.75 $ 6.43
Options granted, September 1999.............. 26,200 $13.00-13.75 $13.61
Options granted, October 1999................ 196,900 $12.63-12.81 $12.63
Options granted, November 1999............... 280,600 $12.25-16.19 $14.58
Options granted, December 1999............... 120,500 $20.63-32.00 $23.28
Options exercised............................ (531,996) $ 0.09- 6.67 $ 3.29
Options cancelled............................ (264,600) $ 0.09-20.63 $ 4.78
---------- ------------ ------
Options outstanding, December 31, 1999....... 11,014,379 $ 0.09-32.00 $ 1.73
========== ============ ======
</TABLE>
In certain instances, the Company has determined the fair value of the
underlying common stock on the date of grant was in excess of the exercise
price of the options. As a result, the Company recorded deferred compensation
of $3,681,750 and $23,092,080 for the years ended December 31, 1998 and 1999,
respectively. This amount was recorded as a reduction to additional paid-in
capital and is being amortized as a charge to operations over the vesting
periods which range from three to four years of the underlying restricted
common stock. The Company recognized stock compensation expense related to
those options of $218,997, and $8,165,293 for the years ended December 31, 1998
and 1999, respectively.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption of
a fair value-based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method for
options granted to employees and disclose pro forma net loss and loss per
share. Had 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>
For the years ended
December 31,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net loss as reported............................ $(2,075,938) $(40,287,907)
Pro forma net loss.............................. (2,100,700) (41,630,526)
Net loss per share as reported, basic and
diluted........................................ (0.08) (0.98)
Pro forma net loss per share, basic and
diluted........................................ (0.08) (1.01)
</TABLE>
The weighted-average fair value of options granted during the years ended
December 31, 1998 and 1999 was approximately $1.04 and $7.23, respectively,
based on the Black-Scholes option pricing model. Upon termination, unvested
shares of restricted stock are repurchased by the Company at the lower of the
exercise price or fair market value.
56
<PAGE>
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 years ended December 31, 1998 and 1999:
Dividend yield of 0%; expected volatility of 0% to 92%; risk-free interest
rates of 5.21% to 6.48%; and expected term of 5 years.
As of December 31, 1998 and 1999, the weighted average remaining contractual
life of the options is 9.8 and 8.8 years, respectively.
12. Employee Benefit Plan
On September 16, 1998, the Company adopted the Network Access Solution, Inc.
401(k) Profit Sharing Plan and Trust (the Plan). As allowed under Section
401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary
deductions for eligible employees. Participants must be at least 21 years of
age and may make voluntary contributions to the Plan of up to 15% of their
compensation not to exceed the federally determined maximum allowable
contribution. The Company is not obligated to make contributions or to match
participant contributions. Participants incrementally vest in Company
contributions on a straight-line basis over their first three years of
employment. The Company did not make contributions to the Plan during 1998.
During 1999 the Company contributed $403,726 to the Plan.
13. Segment Information
In accordance with SFAS No. 131, the Company discloses certain segment
information. The financial results of the Company's segments are presented on
an accrual basis. The Company evaluates the performance of its segments and
allocates resources to them based on gross profit. There are no intersegment
revenues. The table below presents information about the reported gross profit
(loss) of the Company's reportable segments for the years ended December 31,
1997, 1998 and 1999. Asset information is not reported for the product sales
and consulting services segments, as this data is not considered by the Company
in making its decisions regarding operating matters.
<TABLE>
<CAPTION>
Product Consulting Network Reconciling
Sales Services Services Items Total
------- ---------- -------- ----------- -------
(unaudited; dollars in thousands)
<S> <C> <C> <C> <C> <C>
As of and for the year ended
December 31, 1997:
Revenue................... $ 8,150 $ 791 $ 4 $ -- $ 8,945
======= ====== ======= ====== =======
Gross Profit (1).......... $ 970 $ 561 $ 1 $ -- $ 1,532
======= ====== ======= ====== =======
As of and for the year ended
December 31, 1998:
Revenue................... $ 9,900 $1,428 $ 311 $ -- $11,639
======= ====== ======= ====== =======
Gross profit (1).......... $ 1,260 $ 668 $ 270 $ -- $ 2,198
======= ====== ======= ====== =======
Property and equipment,
net........................ $ -- $ -- $ 4,652 $ 379 $ 5,031
======= ====== ======= ====== =======
As of and for the year ended
December 31, 1999:
Revenue................... $13,026 $2,593 $ 1,820 $ -- $17,439
======= ====== ======= ====== =======
Gross profit (loss) (1)... $ 1,692 $ 900 $(2,993) $ -- $ (401)
======= ====== ======= ====== =======
Property and equipment,
net........................ $ -- $ -- $48,903 $6,195 $55,098
======= ====== ======= ====== =======
</TABLE>
- --------
(1) Adjustments that are made to the total of the segments gross profit in
order to arrive at income (loss) before income taxes are as follows:
57
<PAGE>
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- ------------
(unaudited; dollars in thousands)
<S> <C> <C> <C>
Gross profit (loss)..................... $ 1,532 $ 2,198 $ (401)
Operating expenses:
Selling, general and administrative... 1,437 4,017 27,670
Amortization of deferred
compensation......................... -- 219 8,165
Depreciation and amortization......... 12 130 5,195
---------- ----------- ------------
Income (loss) from operations........... 83 (2,168) (41,431)
Interest income....................... -- 145 2,095
Interest expense...................... (5) (81) (1,023)
---------- ----------- ------------
Income (loss) before income taxes....... $ 78 $ (2,104) $ (40,359)
========== =========== ============
</TABLE>
14. Subsequent Events
On February 8, 2000, the Company announced a strategic financing agreement
with SBC Communications, Inc. (SBC) and Telefonos de Mexico, S.A. de C.V.
(Telmex), in which both companies agreed to purchase a total of $150 million
($75 million each), of the Company's convertible preferred stock for $100 per
share.
Due to the Company's need to obtain regulatory approvals, the Company was not
able to consummate the preferred stock sale upon execution of the strategic
financing agreement. In order to provide the Company with financing to begin
its strategic plan, SBC and Telmex loaned the Company a total of $30 million
($15 million each) until it received the necessary regulatory approvals to
complete the preferred stock sale. The loans bore interest at a rate of prime
plus 2% during the time they were outstanding. Upon obtaining the regulatory
approval, the Company exchanged the loans for preferred stock and received the
remaining proceeds upon the consummation of the preferred stock sale on March
7, 2000, net of the principal and accrued interest on these interim borrowings.
In conjunction with the financing agreement, the Company executed a summary
operating agreement with both SBC and Telmex, and intends to execute several
definitive agreements with SBC and Telmex covering distinct operating areas
during April 2000. In connection with the financing agreement, the Company also
announced that it would be expanding its network into 20 additional markets in
the southeastern and western regions of the United States. The proceeds from
the preferred stock issuance will, in part, fund this expansion.
The convertible preferred stock is non-voting pays a 7.0% dividend, which can
be satisfied with either additional stock or cash. Each $100.00 share of
preferred stock is convertible at any time at the election of the holder into
3.2258 shares of the Company's common stock, or a total of 4,838,700 common
shares. The preferred stock may be called by the Company for mandatory
conversion into its common stock at any time between two and five years after
the original issue date, provided the Company's stock is trading above $31.00
per share. On each anniversary of the issue date, beginning on the second
anniversary and ending on the seventh anniversary, the holders of the preferred
stock may request that the Company redeem the shares for a cash amount equal to
$100 per share plus unpaid dividends. The Company may postpone such right until
the following year for all but the seventh year if its common stock share price
is below $31.00 for a specified period preceding the anniversary date. The
Company has agreed to use 50% of the proceeds from the preferred stock to more
closely align its network and business operations with the future network and
business operations of both SBC and Telmex. If SBC and Telmex convert their
preferred stock positions into the Company's common stock, SBC will own
approximately 4.8% and Telmex will own approximately 4.5% of the Company's
equity on a fully diluted basis. SBC and Telmex have the right to maintain
their percentage equity ownership interests in the Company's common stock
through a right of primary offer mechanism in the financing agreement. This
right permits them to purchase, in any subsequent offering of the Company's
stock by the Company, on the same terms and conditions as the stock is offered
to third parties, an amount of stock that will allow them to maintain their
respective percentage ownership interests. Through a separate agreement
58
<PAGE>
with the Company's present principal stockholders, Spectrum Equity Investors
II, L.P. and Jonathan P. Aust, the Company's Chief Executive Officer, SBC and
Telmex also have a right of first offer to purchase, in certain circumstances,
any shares that these stockholders may wish to sell in the future.
On March 1, 2000, the Company adopted an Employee Stock Purchase Plan (ESPP).
A total of 500,000 shares of common stock are initially available for issuance
under the ESPP.
The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be implemented by a series of overlapping offering periods of 12 months'
duration, with new offering periods, other than the first offering period,
commencing on January 1 and July 1 of each year. Participants may not accrue
payroll deductions exceeding $10,000 during any offering period.
The purchase price per share at which shares will be sold in an offering
under the ESPP will be the lower of 85% of the fair market value of a share of
the Company's common stock on the first day of an offering period or 85% of the
fair market value of a share of the Company's common stock on the last day of
an offering period. The fair market value of the Company's common stock on a
given date will be equal to the closing price of the Company's common stock on
such date on The Nasdaq Stock Market, as reported in The Wall Street Journal.
59
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Network Access Solutions Corporation:
Our audits of the financial statements referred to in our report dated March
7, 2000, appearing in this Form 10-K also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
financial statements.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 7, 2000
60
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance
at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions Period
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Tax valuation allowance:
Year ended December 31, 1997... $ -- $ -- $ -- $ --
Year ended December 31, 1998... $ -- $ 709,662 $ -- $ 709,662
Year ended December 31, 1999... $ 709,662 $12,218,890 $ -- $12,928,552
Allowance for doubtful accounts
receivable:
Year ended December 31, 1997... $ -- $ -- $ -- $ --
Year ended December 31, 1998... $ -- $ 51,959 $ -- $ 51,959
Year ended December 31, 1999... $ 51,959 $ 324,440 $ -- $ 376,399
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or notes
thereto.
61
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Inapplicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table shows information about our directors and executive
officers as of March 15, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jonathan P. Aust........ 42 Chief Executive Officer and Chairman of the Board of Directors
Nicholas J. Williams.... 52 President and Chief Operating Officer
Christopher J. Melnick.. 34 Senior Vice President, Sales Development and Marketing and Director
Scott G. Yancey, Jr..... 47 Chief Financial Officer and Director
John J. Hackett......... 46 Senior Vice President, Sales and Marketing
Lester M. Lichter....... 53 Chief Information Officer
Worth D. MacMurray...... 46 Vice President, Legal and Strategic Projects
Brian D. Roberts........ 40 Vice President, Engineering and Operations
Brion B. Applegate...... 46 Director
Dennis R. Patrick....... 48 Director
</TABLE>
Jonathan P. Aust has been our Chief Executive Officer since founding Network
Access Solutions, with his wife Longma, in December 1994. In August 1998, Mr.
Aust also became our President and Chairman of the Board of Directors, and
served as our President until February 2000. 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.
Nicholas J. Williams has been our President and Chief Operating Officer since
joining us in February 2000. Prior to joining us, Mr. Williams served as Chief
Executive Officer and a member of the Board of Directors from July 1998, and as
President from April 1997, of Premisys Communications, Inc., a manufacturer of
integrated multiple access communications servers, until its acquisition by
Zhone Technologies, Inc. in November 1999. Mr. Williams also served as Chief
Operating Officer of Premisys between April 1997 and July 1998. From 1993 until
his move to Premisys, Mr. Williams was Vice President and General Manager,
International, of Tellabs, Inc., a telecommunications company, where he
contributed to the growth of multiple product lines, including the DXX and
wireless products.
Christopher J. Melnick was our Chief Operating Officer from July 1998 to
February 2000 when he became our Senior Vice President, Sales Development and
Marketing, and has been a Director since August 1998. Mr. Melnick was the Vice
President and General Manager for the Southeast Region of Level 3
Communications from March 1998 to July 1998. Mr. Melnick was a Vice President
of Sales for Worldcom, and formerly, MFS Telcom, from September 1995 to March
1998. From June 1994 to September 1995, Mr. Melnick was a member of sales
management at MFS Telcom.
Scott G. Yancey, Jr. has been our Chief Financial Officer since joining us in
July 1998 and a Director since August 1998. Mr. Yancey was the Chief Financial
Officer and General Manager of the data division of Cable & Wireless USA, a
telecommunications service provider, from July 1982 to May 1998.
John J. Hackett has been our Senior 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.
62
<PAGE>
Lester M. Lichter has been our Chief Information Officer since October 1999.
Prior to joining us, Mr. Lichter was Executive Vice President and Chief
Information Officer of Excel Communications from November 1997 to February
1999, where he was responsible for developing information services solutions to
support the company's business development activities. Mr. Lichter was Chief
Information Officer of Cable & Wireless USA from June 1996 to November 1997.
Before joining Cable & Wireless USA, Mr. Lichter was Vice President and Chief
Information Officer of AT&T's Business Communications Systems group from
December 1993 to May 1996.
Worth D. MacMurray has been our Vice President, Legal and Strategic Projects,
since joining us in September, 1999. Prior to joining us, Mr. MacMurray served
as Vice President, Legal & Administration from November 1998 to August 1999 at
Landmark Systems Corporation, a performance management software company. Prior
to joining Landmark, Mr. MacMurray served as Vice President and General Counsel
of Intersolv, Inc., a software tools company, from October 1997 to October
1998. From February 1988 to September 1997, Mr. MacMurray served in various
legal capacities for GTSI, an information technology reseller, including as
General Counsel.
Brian D. Roberts has been our Vice President for Engineering and Operations
since August 1999. Prior to joining us, Mr. Roberts was Managing Partner for
Network Solutions in the Mid-Atlantic Region for USWeb/CKS from February 1998
to August 1999. Mr. Roberts was Vice President for Engineering and Operations
for ACSI Advanced Data Systems Division (now e.spire Communications, Inc.) from
November 1997 to February 1999. Before joining ACSI, Mr. Roberts was Vice
President for Operations and Data Services at MFS Communications (now MCI
WorldCom) from August 1992 to April 1997.
Brion B. Applegate has been a Director of Network Access Solutions since
August 1998. Mr. Applegate is a co-founder and has been a Managing General
Partner of Spectrum, a private equity fund, since March 1993. Mr. Applegate is
a director of Tut Systems, Inc., a provider of broadband access services to
multi-tenant buildings.
Dennis R. Patrick has been a Director of Network Access Solutions since April
1999. Since February 2000, Mr. Patrick has been the President of AOL Wireless
(a division of AOL Online, Inc.), a deliverer of AOL content and services to
wireless devices. In addition, 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. There are no family relationships among our executive officers and
directors.
Our certificate of incorporation and bylaws provide for a classified board of
directors consisting of three classes of directors, each serving three-year
terms. As a result, a portion of our board of directors will be elected each
year. Prior to consummation of our initial public offering on June 3, 1999, two
of the nominees to the board were elected to a one-year term, two were elected
to two-year terms and one was elected to a three-year term. Thereafter,
directors will be elected for three-year terms. Messrs. Yancey and Melnick are
Class I directors with terms expiring at the 2000 annual meeting of
stockholders, Messrs. Applegate and Patrick are Class II directors, with terms
expiring at the 2001 annual meeting of stockholders, and Mr. Aust is Class III
director, with a term expiring at the 2002 annual meeting of stockholders.
63
<PAGE>
Board Committees
Our board of directors established an audit committee in April 1999. The
audit committee consists of Messrs. Applegate and Patrick. The
responsibilities of the audit committee include:
. recommending to our board of directors the independent public
accountants to conduct the annual audit of our books and records;
. reviewing the proposed scope of the audit;
. approving the audit fees to be paid;
. reviewing accounting and financial controls with the independent
public accountants and our financial and accounting staff; and
. reviewing and approving transactions between us and our directors,
officers and affiliates.
Our board of directors established a compensation committee in August 1998.
The compensation committee consists of Messrs. Aust, Applegate and 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 does not
participate in decisions regarding his own compensation.
Compensation Committee Interlocks and Insider Participation
During 1999, members of our compensation committee were Messrs. 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 Chief Executive Officer. Mr.
Applegate is the Managing General Partner of Spectrum, which is a holder of
approximately 42.2% of our common stock. See "Related Transactions and
Relationships" for a description of transactions between our company and Mr.
Aust, and between our company and Spectrum.
Directors' Compensation
Our directors have received no compensation for serving as directors. We
reimburse our directors for reasonable expenses they incur to attend board and
committee meetings. Our non-employee directors are eligible to receive grants
of options to acquire our common stock under our stock incentive plan. In
April 1999, we granted an option to acquire 250,000 shares of our common stock
at a price of $6.67 per share to Mr. Patrick. On June 3, 1999, Mr. Patrick
received an option to purchase an additional 407,500 shares of common stock at
an exercise price equal to $3.00 per share. Mr. Patrick exercised the option
to acquire 250,000 shares of our common stock on June 3, 1999. The options
granted to Mr. Patrick vested immediately upon the completion of our initial
public offering on June 3, 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and officers, and persons who own more than 10% of a registered class of our
equity securities, to file with the SEC reports concerning their beneficial
ownership of our equity securities. Pursuant to Item 405 of Regulation S-K, we
have an affirmative duty to provide disclosure of "insiders" who do not timely
file such reports. To our knowledge, based solely on our review of the copies
of such forms received by us from its directors, officers and greater than 10%
beneficial owners, Messrs. MacMurray, Melnick, Yancey and Williams each filed
on an untimely timely basis one report, each containing one transaction
relating to common stock beneficially owned by them.
64
<PAGE>
Item 11. Executive Compensation.
Executive Compensation
Summary Compensation Table. The following table summarizes the compensation
paid to our chief executive officer and the three other executive officers
whose total salary and bonus exceeded $100,000 during 1999, whom we identify as
"named executive officers":
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------------------------- ------------
Other Annual Securities
Salary Bonus Compensation Underlying All Other
Name and Principal Position Year (1) (2) (3) Options Compensation
--------------------------- ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust............... 1999 $362,500 $274,867 -- -- --
Chief Executive Officer and 1998 122,922 135,000 -- -- --
Chairman of the Board of Di- 1997 54,000 139,650 -- -- --
rectors
Christopher J. Melnick......... 1999 200,000 20,000 -- -- --
Senior Vice President, 1998 101,624(4) -- -- 3,150,000 --
Sales Department and Marketing 1997 -- -- -- -- --
Scott G. Yancey, Jr............ 1999 191,667 15,000 -- -- --
Chief Financial Officer 1998 75,000(4) -- -- 2,250,000 --
1997 -- -- -- -- --
John J. Hackett................ 1999 145,833(4) -- -- 1,350,000 --
Senior Vice President, 1998 -- -- -- -- --
Sales and Marketing 1997 -- -- -- -- --
</TABLE>
- --------
(1) Includes amounts, if any, deferred by the named executive officer pursuant
to our 401(k) plan.
(2) Bonuses are based on corporate and individual performance.
(3) Pursuant to SEC rules, perquisites not exceeding the lesser of $50,000 or
10% of a named executive officer's combined salary and bonus are not
required to be reported.
(4) Represents compensation for that portion of the year in which the officer
commenced employment with us.
Options Grants in 1999. The following table shows information about our
grants of options to purchase our common stock made to the named executive
officers during 1999:
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Rates of Stock
Price Appreciation for
Individual Grants Option Term(5)
------------------------------------------------ -----------------------
Number of
Securities Percent of
Underlying Total Options Exercise
Options Granted to or Base
Granted Employees Price Expiration
(1) in 1999(2) ($/share)(3) Date(4) 5% 10%
---------- ------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust........ -- -- -- -- -- --
Christopher J. Melnick.. -- -- -- -- -- --
Scott G. Yancey, Jr..... -- -- -- -- -- --
John J. Hackett......... 1,350,000 28.6% $12.00 3/1/09 $10,192,500 $25,812,000
</TABLE>
- --------
(1) All options were granted under our 1998 stock incentive plan. All options
were incentive stock options that vest over time. Generally, these options
vest in quarterly installments over 36 to 48 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.
65
<PAGE>
(2) Based on options to purchase 4,720,100 shares of our common stock granted
to employees in 1999.
(3) Based on our initial public offering price, in accordance with SEC guidance
on treatment of options granted prior to our initial public offering.
(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 2009. Depending on inflation rates, these amounts
may be worth significantly less in 2009, in real terms, than their value
today.
Aggregated Option Exercises in 1999 and Option Values at December 31,
1999. The following table sets forth information with respect to the named
executive officers concerning the exercise of options during the year ended,
and unexercised options held as of, December 31, 1999:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-
Underlying Unexercised the-Money Options at
Options at 12/31/99 12/31/99(2)
------------------------- -------------------------
Shares
Acquired Value
on Realized
Name Exercise (1) Exercisable Unexercisable Exercisable Unexercisable
---- --------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jonathan P. Aust........ -- -- -- -- -- --
Christopher M. Melnick.. 100,000 $1,438,010 1,212,500 1,837,500 $40,012,500 $60,637,500
Scott G. Yancey, Jr..... 30,000 327,333 907,500 1,312,500 29,947,500 43,312,500
John J. Hackett......... -- -- 253,125 1,096,875 8,353,125 36,196,875
</TABLE>
- --------
(1) Represents the excess of the market value of the shares acquired upon
exercise of such options over the exercise price of such options.
(2) Represents the excess of the market value of the shares subject to such
options over the exercise price of such options.
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 named executive officers.
Employment Arrangements. We have entered into employment agreements with each
of the named executive officers. Each of these agreements has an initial term
of four years, subject to earlier termination upon 30 days prior notice. The
term of each agreement is automatically extended for additional one-year terms
unless we or the executive elects to terminate the agreement within 30 days
before the end of the current term. Under these agreements, these executives
receive an initial annual base salary that will be increased by at least 5%
each year, based upon performance objectives set by our board of directors.
These executives also receive an annual bonus of up to 20% of the executive's
then current salary. The bonus is payable in cash, stock or a combination of
both at the election of our board of directors. The executives have received
options to acquire shares of our common stock that vest in quarterly
installments over either three or four years from the date of grant. The
following table shows information about the current compensation arrangements
we have with our named executive officers:
<TABLE>
<CAPTION>
Current Annual Maximum Options Granted
Base Salary Annual Bonus (Shares)
-------------- ------------ ---------------
<S> <C> <C> <C>
Jonathan P. Aust................... $450,000 20% --
Christopher J. Melnick............. 200,000 20 3,150,000
Scott G. Yancey, Jr. .............. 200,000 20 2,250,000
John J. Hackett.................... 175,000 20 1,350,000
</TABLE>
66
<PAGE>
The annual bonus and any salary increase for Mr. Aust are determined by our
compensation committee on an annual basis, and Mr. Aust does not participate
in decisions regarding his own compensation.
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 employees to sign agreements that prohibit the
employee from directly or indirectly competing with us while they are employed
by us and generally for a period of one year thereafter. We require all of our
employees to sign agreements that prohibit the disclosure of our confidential
or proprietary information.
1998 Stock Incentive Plan. Our stock incentive plan authorizes the grant of:
. stock options;
. stock appreciation rights;
. 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 13,250,000. As of March 15, 2000, we had 10,645,005 shares
of common stock subject to outstanding options at a weighted average exercise
price of $4.23 per share.
Stock Options. Our stock incentive plan permits the granting of options to
purchase shares of our common stock intended to qualify as incentive stock
options under the Internal Revenue Code and stock options that do not qualify
as incentive options. The option exercise price of each option will be
determined by the committee. The term of each option will be fixed by the
committee. The committee will determine at what time or times each option may
be exercised and the period of time, if any, after retirement, death,
disability or termination of employment during which options may be exercised.
Stock Appreciation Rights. The committee may grant a right to receive a
number of shares or, in the discretion of the committee, an amount in cash or
a combination of shares and cash, based on the increase in the fair market
value of the shares underlying the right during a stated period specified by
the committee.
67
<PAGE>
Stock Awards. The committee may award shares of our common stock to
participants at no cost or for a purchase price. These stock awards may be
subject to restrictions or may be free from any restrictions under our stock
incentive plan. The committee shall determine the applicable restrictions. The
purchase price of the shares of our common stock will be determined by the
committee.
Phantom Stock. The committee may grant stock equivalent rights, or phantom
stock, which entitle the recipient to receive credits that are ultimately
payable in the form of cash, shares of our common stock or a combination of
both. Phantom stock does not entitle the holder to any rights as a
stockholder.
Performance Awards. The committee may grant performance awards to
participants entitling the participants to receive cash, shares of our common
stock, or a combination of both, upon the achievement of performance goals and
other conditions determined by the committee. The performance goals may be
based on our operating income, or on one or more other business criteria
selected by the committee.
Employee Stock Purchase Plan. On March 1, 2000, we adopted an Employee Stock
Purchase Plan, or ESPP. A total of 500,000 shares of common stock are
initially reserved for issuance under the ESPP.
The ESPP, which is intended to qualify under Section 423 of the IRS Code,
will be implemented by a series of overlapping offering periods of 12 months'
duration each. New offering periods, other than the first offering period,
will commence on January 1 and July 1 of each year. Participants will not be
permitted to accumulate payroll deductions that exceed $10,000 during any
offering period.
The purchase price per share at which shares will be sold in an offering
under the ESPP will be the lower of 85% of the fair market value of a share of
our common stock on the first day of an offering period or 85% of the fair
market value of a share of our common stock on the last day of an offering
period. The fair market value of our common stock on a given date will be
equal to the closing price of our common stock on such date on the Nasdaq
National Market, as reported in The Wall Street Journal.
Implementation of the ESPP will require approval of a majority of our
shareholders, a vote of whom will be taken at our scheduled June 6, 2000
annual meeting.
68
<PAGE>
The following performance graph shall not be deemed incorporated by
reference by any general statement incorporating by reference this Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934, except to the extent that we specifically incorporate
this information by reference, and shall not otherwise be deemed filed under
such Acts.
PERFORMANCE GRAPH
The following graph compares the annual percentage change in the cumulative
total return on our common stock with the cumulative total return of the
Nasdaq Composite Index and a Peer Index of companies with the same four-digit
standard industrial classification (SIC) code as the Company (SIC Code 4813 --
Telephone Communications Except Radiotelephone) for the period commencing June
4, 1999 (the date of our initial public offering) and ending December 31,
1999. The stock price performance shown on the graph below assumes: (i) $100
invested on June 4, 1999 in our common stock and in the stocks of the
companies comprising the Nasdaq Composite Index and the Peer Group Index; and
(ii) immediate reinvestment of all dividends. This stock price performance is
not necessarily indicative of future price performance.
<TABLE>
<CAPTION>
6/4/99 6/30/99 7/31/99 8/30/99 9/30/99 10/29/99 11/30/99 12/31/99
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NASC................. 100.00 110.36 113.47 118.13 109.84 107.25 173.06 273.58
- --------------------------------------------------------------------------------------------
Peer Group Index....... 100.00 109.07 103.89 96.68 97.77 107.92 120.08 132.63
- --------------------------------------------------------------------------------------------
Nasdaq Index........... 100.00 108.54 106.61 110.27 110.43 118.97 133.06 162.68
</TABLE>
69
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of March 15, 2000 by:
. all persons known to us to beneficially own more that 5% of our
common stock;
. each director and named executive officer; and
. all directors and executive officers as a group.
An asterisk indicates ownership of less than 1%.
As of March 15, 2000, there were 46,760,750 shares of our common stock
outstanding.
<TABLE>
<CAPTION>
Shares
Beneficially
Name of Beneficial Owner(1) Owned(2) Percent
- --------------------------- ------------ -------
<S> <C> <C>
Brion B. Applegate / Spectrum Equity Investors II, 19,737,601 42.2%
L.P.(3).................................................
245 Lytton Avenue
Palo Alto, CA 94301
Jonathan P. Aust(4)...................................... 9,387,000 20.1
FBR Technology Venture Partners, LP...................... 3,495,000 7.5
1001 19th Street
Arlington, VA 22209
SBC Communications Inc.(5)............................... 2,956,984 6.0
175 E. Houston Street
San Antonio, TX 78205
Telefonos de Mexico, S.A. de C.V.(6)..................... 2,777,773 5.6
Parque Via 198
Oficina 701
Col Cuauhtemoc
Mexico City DF 06599
Mexico
Christopher J. Melnick(7)................................ 1,837,499 3.9
Scott G. Yancey, Jr.(8).................................. 1,312,500 2.7
Dennis R. Patrick(9)..................................... 657,500 1.4
John J. Hackett(10)...................................... 337,500 *
All executive officers and directors as a group 67.2
(10 persons)(11)........................................ 33,325,849
</TABLE>
- --------
(1) The address of Messrs. Aust, Hackett, Melnick, Patrick and Yancey is 100
Carpenter Drive, Sterling, Virginia 20164.
(2) The number of shares beneficially owned by each person includes
outstanding shares of our common stock and shares of our common stock
issuable upon conversion of our Series B preferred stock and exercise of
stock options exercisable within 60 days of March 15, 2000.
(3) Spectrum Equity Investors II, L.P. is under common control with SEA 1998
II, L.P., or SEA, and, therefore, beneficial ownership of the shares of
our common stock owned by SEA is attributed to Spectrum Equity Investors.
Mr. Applegate is a Managing General Partner of Spectrum Equity Investors
and, therefore, beneficial ownership of the shares of our common stock
owned by Spectrum Equity Investors is attributed to Mr. Applegate.
(4) 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.
(5) Includes shares issuable upon conversion of 750,000 shares of our Series B
preferred stock. As reported in the Schedule 13-D dated March 8, 2000,
filed by SBC Communications Inc.
70
<PAGE>
(6) Includes shares issuable upon conversion of 750,000 shares of our Series B
preferred stock. As reported in the Schedule 13-G dated March 17, filed by
Carlos Slim Helu, Telefonos de Mexico, S.A. de C.V., or Telmex Parent, is
the beneficial owner of 2,777,773 shares. Of such 2,777,773 shares, Telmex
Communications, LLC is the beneficial owner of 2,419,350 shares, which it
has the right to acquire upon conversion of 750,000 shares of our Series B
preferred stock owned by it. The shares beneficially owned by Telmex
Parent are owned indirectly through Telmex Communications, L.L.C. and
Inmobiliaria Aztlan, S.A. de C.V., each a wholly-owned subsidiary of
Telmex Parent. Carso Global Telecom, S.A. de C.V. , or CGT, is the
beneficial owner of the 2,777,773 shares. Each of Carlos Slim Helu, Carlos
Slim Domit, Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya
Slim Domit, Vanessa Paolo Slim Domit and Johanna Monique Slim Domit, which
we collectively refer to as the Slim Family, as majority owners of CGT,
are the beneficial owners of 2,777,773 shares, and has shared power to
dispose of such shares. CGT may be deemed to control Telmex Parent through
the regular voting shares of Telmex Parent that it owns directly, as well
as through its interest in a trust, which we refer to as the Control
Trust, that owns all of the outstanding Series AA shares of Telmex Parent,
or AA Shares. The principal beneficiaries of the Control Trust are CGT,
which owns a 45.0% economic and voting interest in the trust, SBC, which
owns a 24.5% economic and voting interest in the trust, and France
Telecom, which owns a 24.5% economic and voting interest in the trust.
Under the terms of the Control Trust, the trustee must vote all shares
held in the Control Trust as instructed by a simple majority of the
members of a technical committee appointed by the trust's beneficiaries
(except in the case of certain significant corporate matters). The Control
Trust entitles CGT to appoint a majority of the members of such technical
committee; therefore, CGT may be deemed to control the Control Trust.
Through its ownership of all the outstanding AA Shares, the Control Trust
owns a majority of Telmex Parent's outstanding regular voting equity
securities. Therefore, through the Control Trust, CGT may be deemed to
control Telmex Parent. All information presented in this footnote relating
to Telmex Parent, Telmex Communications, LLC, Inmobiliaria Aztlan, S.A. de
C.V., CGT and the Slim Family is based solely on the Schedule 13-G filed
by Carlos Slim Helu.
(7) Includes 712,502 shares issuable upon exercise of options to acquire our
common stock.
(8) Includes 1,282,500 shares issuable upon exercise of options to acquire our
common stock.
(9) Includes 407,500 shares issuable upon exercise of options to acquire our
common stock.
(10) Includes 337,500 shares issuable upon exercise of options to acquire our
common stock.
(11) Includes 2,796,251 shares issuable upon exercise of options to acquire our
common stock that are held by Messrs. Hackett, Lichter, MacMurray,
Melnick, Patrick, Roberts and Yancey.
71
<PAGE>
Item 13. Certain Relationships and Related Transactions.
In August 1998, we entered into a Series A Preferred Stock Purchase Agreement
with Spectrum, FBR Technology Venture Partners, LLC, or FBR, 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 and its
affiliates 8,470,000 shares of our Series A preferred stock and 18,676,350
shares of our common stock in exchange for an aggregate purchase price of
$8,474,150. As of March 15, 2000, Spectrum beneficially owned 42.2% 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 1,500,000 shares of our
Series A preferred stock and 3,307,500 shares of our common stock in exchange
for an aggregate purchase price of $1,500,735. As of March 15, 2000, FBR owned
7.5% of our common stock.
In March 1999, we entered into a note purchase agreement with Spectrum and
FBR. Pursuant to this agreement, Spectrum purchased a convertible note in the
principal amount of $4,250,000, and FBR purchased a convertible note in the
principal amount of $750,000. The principal of and interest on the notes were
converted into 416,667 shares of our common stock upon the closing of our
initial public offering. Pursuant to our amended note purchase agreement,
Spectrum purchased an additional convertible note in the principal amount of
$4,250,000 and FBR purchased an additional convertible note in the principal
amount of $750,000 on May 17, 1999. Those notes converted into an aggregate of
416,667 shares of our common stock upon the closing of the initial public
offering on June 3, 1999.
In March 1999, we amended our certificate of incorporation to modify the
terms of our then outstanding Series A preferred stock. Upon completion of our
initial public offering on June 3, 1999, 50% of our Series A redeemable
preferred stock was cancelled and ceased to exist without compensation or
recourse, and the remaining shares of Series A preferred stock were converted
into 416,667 shares of our common stock.
Following the sale of our Series A preferred stock in August 1998, we
repurchased some of the shares of our common stock held by James A. Aust,
Jonathan P. Aust, Longma M. Aust and Stephen C. Aust. We repurchased 1,350,000
shares of our common stock for an aggregate purchase price of $300,000 from
James A. Aust. We repurchased 1,953,950 shares of our common stock for an
aggregate purchase price of $434,211 from Jonathan P. Aust. We repurchased
3,986,051 shares of our common stock for an aggregate purchase price of
$885,789 from Longma M. Aust. We repurchased 1,260,000 shares of our common
stock for an aggregate purchase price of $280,000 from Stephen C. Aust.
Jonathan P. Aust and Longma M. Aust are husband and wife. James A. Aust,
Jonathan P. Aust and Stephen C. Aust are brothers.
In March 1999, we issued an option to purchase 1,350,000 shares of our common
stock at an exercise price of $0.09 per share to Mr. Hackett, our Vice
President, Sales and Marketing. In August 1999, we issued options to purchase
125,000 shares of common stock at an exercise price of $5.12 to both Mr.
MacMurray, our Vice President, Legal and Strategic Projects, and Mr. Roberts,
our Vice President, Engineering and Operations. In October 1999, we issued an
option to purchase 75,000 shares of our common stock at an exercise price of
$12.62 to Mr. Lichter, our Chief Information Officer. We have also granted
options to acquire shares of our common stock to Messrs. Patrick, James A. Aust
and Melnick that are described under "Item 10--Directors and Executive Officers
of the Registrant--Directors' Compensation" and "Management--Executive
Compensation." We have entered into employment agreements with each of the
named executive officers. For details of these agreements, see "Item 11--
Executive Compensation."
In November 1998, we entered into an agreement with a software and service
provider to support its DSL services. Spectrum, our single largest shareholder,
is also a shareholder of this software and service provider. Under the terms of
the agreement, software licensing and service fees were $1,023,700 which were
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
72
<PAGE>
30 days of project completion accrue interest at a rate of 10%. We commenced
implementing the software and support service in 1999. As of December 31, 1999,
all fees under this agreement had been paid.
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.
73
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements
See the Index included in Item 8 on Page 41 of this Form 10-K.
(2) Financial Statement Schedules
See the Index included in Item 8 on page 41 of this Form 10-K.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1/2/ Amended and Restated Certificate of Incorporation of the Company
3.2/2/ Amended and Restated By-Laws of the Company
3.3 Certificate of the Designations, Voting Powers, Preferences and
Relative, Participating, Optional or Other Special Rights of
Preferred Stock and Qualifications, Limitations or Restrictions
Thereof dated February 4, 2000
4.1/2/ Specimen stock certificate for shares of Common Stock of the
Company
4.2 Specimen stock certificate for shares of Series B Preferred Stock
of the Company
10.1/2/,/3/ Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2/2/,/3/ Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3/2/ Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
10.4/2/ Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5/2/ Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1/2/ First Lease Amendment dated June 26, 1998, by and between the
Company and Sterling/Gunston LLC
10.5.2/2/ Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6/2/ Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7/2/ Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8/2/ Employment Agreement dated as of August 16, 1998, by and between
the Company and Jonathan P. Aust
10.9/2/ Employment Agreement dated as of July 13, 1998, by and between the
Company and Christopher J. Melnick
10.10/2/ Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11/2/ Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12/2/ Employment Agreement dated as of March 1, 1999, by and between the
Company and John J. Hackett
10.13/2/ 1998 Stock Incentive Plan, as amended
10.14/2/ Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15/2/ Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.16/2/ Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17/2/ Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18/2/ Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and Jonathan P. Aust
10.19/2/ Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and James A. Aust
10.20/2/ 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
10.21/2/ 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
10.22/2/ 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
10.23/2/ 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.
10.24/2/ Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and Spectrum Equity Investors II, L.P.
10.25/2/ Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and FBR Technology Venture Partners
L.P.
10.26/2/ Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
and between the Company and Dennis R. Patrick
10.27/2/ Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.28/2/ Letter Agreement dated May 6, 1999, by and between the Company and
SBC Communications Inc.
10.29/2/ Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de C.V.
10.30/2/ Letter Agreement dated May 10, 1999, by and between the Company
and DSL Solutions, Inc. d/b/a DSL Networks
10.31/1/ Employment Agreement dated as of September 13, 1999 by and between
the Company and Worth D. MacMurray
10.32/1/ Nonqualified Stock Option Grant Agreement dated August 9, 1999 by
and between the Company and Worth D. MacMurray
10.33 Lease Agreement by and between Dulles Tech, Inc. and the Company
dated October 27, 1999
10.34 Stock Purchase Agreement dated February 4, 2000 by and between the
Company and SBC Communications Inc.
10.35 Stock Purchase Agreement dated February 4, 2000 by and between the
Company and Telefonos de Mexico, S.A. de C.V.
10.36 Summary of Operating Agreement dated February 4, 2000 by and
between the Company and each of SBC Telecom, Inc. and Telefonos de
Mexico, S.A. de C.V.
10.37 Employee Stock Purchase Plan
23.1 Consent of PricewaterhouseCoopers, LLP
27 Financial Data Schedule
</TABLE>
- --------
/1 /Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-93455).
/2 /Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-74679).
/3 /Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
75
<PAGE>
(b) Reports on Form 8-K
None.
(c) Exhibits
See the list of Exhibits in Item 14(a)(3) beginning on Page 74 of this Form
10-K.
(d) Financial Statement Schedules
See the Index included in Item 8 on page 41 of this Form 10-K.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Sterling, Commonwealth of Virginia.
Network Access Solutions Corporation
Dated: March 27, 2000 /s/ Jonathan P. Aust
By: _________________________________
Jonathan P. Aust,
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jonathan P. Aust Chairman and Chief March 27, 2000
______________________________________ Executive Officer
Jonathan P. Aust (Principal Executive
Officer) and a Director
/s/ Scott G. Yancey, Jr. Chief Financial Officer March 27, 2000
______________________________________ (Principal Financial and
Scott G. Yancey, Jr. Accounting Officer)
and a Director
/s/ Brion B. Applegate Director March 27, 2000
______________________________________
Brion B. Applegate
/s/ Christopher J. Melnick Director March 27, 2000
______________________________________
Christopher J. Melnick
/s/ Dennis R. Patrick Director March 27, 2000
______________________________________
Dennis R. Patrick
</TABLE>
77
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1/2/ Amended and Restated Certificate of Incorporation of the Company
3.2/2/ Amended and Restated By-Laws of the Company
3.3 Certificate of the Designations, Voting Powers, Preferences and
Relative, Participating, Optional or Other Special Rights of
Preferred Stock and Qualifications, Limitations or Restrictions
Thereof dated February 4, 2000
4.1/2/ Specimen stock certificate for shares of Common Stock of the
Company
4.2 Specimen stock certificate for shares of Series B Preferred Stock
of the Company
10.1/2/,/3/ Master Equipment Lease Agreement dated November 17, 1998, by and
between the Company and Paradyne Credit Corporation
10.2/2/,/3/ Purchase and Sale Agreement dated as of October 16, 1998, by and
between the Company and Ascend Communications, Inc., as amended
10.3/2/ Master Lease Agreement dated October 9, 1998, by and between the
Company and Ascend Credit Corporation
10.4/2/ Promissory Note dated October 16, 1998, by and between the Company
and Ascend Communications, Inc., as amended
10.5/2/ Commercial Lease dated February 24, 1997, by and between the
Company, Sterling/Gunston Limited Partnership and Bernstein
Management Corporation
10.5.1/2/ First Lease Amendment dated June 26, 1998, by and between the
Company and Sterling/Gunston LLC
10.5.2/2/ Third Lease Amendment dated February 1, 1999, by and between the
Company and Sterling/Gunston LLC
10.6/2/ Sublease dated August 31, 1998, by and between the Company and
U.S. Interactive, Inc.
10.7/2/ Letter of Intent dated March 2, 1999 by and between the Company
and Trans Dulles Center, Inc.
10.8/2/ Employment Agreement dated as of August 16, 1998, by and between
the Company and Jonathan P. Aust
10.9/2/ Employment Agreement dated as of July 13, 1998, by and between the
Company and Christopher J. Melnick
10.10/2/ Employment Agreement dated as of July 13, 1998, by and between the
Company and Scott G. Yancey, Jr.
10.11/2/ Employment Agreement dated as of August 18, 1998, by and between
the Company and James A. Aust
10.12/2/ Employment Agreement dated as of March 1, 1999, by and between the
Company and John J. Hackett
10.13/2/ 1998 Stock Incentive Plan, as amended
10.14/2/ Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Scott G. Yancey, Jr., as amended
10.15/2/ Incentive Stock Option Grant Agreement dated July 23, 1998, by and
between the Company and Christopher J. Melnick, as amended
10.16/2/ Incentive Stock Option Grant Agreement dated November 1, 1998, by
and between the Company and James A. Aust
10.17/2/ Incentive Stock Option Grant Agreement dated March 30, 1999, by
and between the Company and John J. Hackett
10.18/2/ Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and Jonathan P. Aust
10.19/2/ Deferred Compensation Agreement dated June 1, 1997, by and between
the Company and James A. Aust
10.20/2/ 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
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.21/2/ 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
10.22/2/ 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
10.23/2/ 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.
10.24/2/ Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and Spectrum Equity Investors II, L.P.
10.25/2/ Amended and Restated Convertible Note dated as of March 31, 1999,
by and between the Company and FBR Technology Venture Partners
L.P.
10.26/2/ Nonqualified Stock Option Grant Agreement dated April 1, 1999, by
and between the Company and Dennis R. Patrick
10.27/2/ Deed of Lease dated April 8, 1999, by and between the Company and
TransDulles Center, Inc.
10.28/2/ Letter Agreement dated May 6, 1999, by and between the Company and
SBC Communications, Inc.
10.29/2/ Letter Agreement dated May 7, 1999, by and between the Company and
Telefonos de Mexico, S.A. de C.V.
10.30/2/ Letter Agreement dated May 10, 1999, by and between the Company
and DSL Solutions, Inc. d/b/a DSL Networks
10.31/1/ Employment Agreement dated as of September 13, 1999 by and between
the Company and Worth D. MacMurray
10.32/1/ Nonqualified Stock Option Grant Agreement dated August 9, 1999 by
and between the Company and Worth D. MacMurray
10.33 Lease Agreement by and between Dulles Tech, Inc. and the Company
dated October 27, 1999
10.34 Stock Purchase Agreement dated February 4, 2000 by and between the
Company and SBC Communications Inc.
10.35 Stock Purchase Agreement dated February 4, 2000 by and between the
Company and Telefonos de Mexico, S.A. de C.V.
10.36 Summary of Operating Agreement dated February 4, 2000 by and
between the Company and each of SBC Telecom, Inc. and Telefonos de
Mexico, S.A. de C.V.
10.37 Employee Stock Purchase Plan
23.1 Consent of PricewaterhouseCoopers, LLP
27 Financial Data Schedule
</TABLE>
- --------
/1 /Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-93455).
/2 /Incorporated by reference to the Company's Registration Statement on Form
S-1 (No. 333-74679).
/3 /Confidential portions omitted and supplied separately to the Securities and
Exchange Commission.
79
<PAGE>
Exhibit 3.3
NETWORK ACCESS SOLUTIONS CORPORATION
CERTIFICATE OF THE DESIGNATIONS, VOTING POWERS, PREFERENCES AND
RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS OF PREFERRED STOCK
AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF
________________________________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
________________________________________________
We, the undersigned, being the President and Chief Executive Officer,
and the Secretary, respectively, of Network Access Solutions Corporation, a
Delaware corporation (the "Corporation"), DO HEREBY CERTIFY, pursuant to Section
151 of the General Corporation Law of the State of Delaware, that the following
resolution was duly adopted by the Board of Directors of the Corporation as of
February 4, 2000:
"RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation (the "Board of Directors")
by the provisions of the Amended and Restated Certificate of Incorporation of
the Corporation, the Board of Directors hereby creates and designates a series
of preferred stock of the Corporation to consist of one million five hundred
thousand (1,500,000) shares, each of $0.001 par value, and the Board of
Directors hereby fixes the relative rights and preferences of the shares of such
Series as follows:
1. Designation. The shares of such series of preferred stock shall
-----------
be designated "Series B Convertible Preferred Stock" (referred to herein as the
"Series B Preferred Stock") and shall be senior to all other capital stock of
the Corporation as to the distribution of assets on liquidation, dissolution and
winding up of the Corporation and with respect to dividends.
2. Authorized Number. The number of shares constituting the Series
-----------------
B Preferred Stock shall be one million five hundred thousand (1,500,000);
provided, however, that the number of shares constituting the Series B Preferred
Stock may be increased (but not above the total number of authorized shares of
preferred stock of the Corporation) or decreased (but not below the number of
shares of the Series B Preferred Stock then outstanding) by a certificate of
designations executed, acknowledged and filed with the Secretary of State of the
State of Delaware, in accordance with applicable law, setting forth a statement
that the specified increase or decrease therein has been authorized and directed
by a resolution or resolutions duly adopted by the Board of Directors. No
further approval of any stockholder or stockholders of the Corporation
(including, without limitation, the holders of any shares of the Series B
Preferred Stock outstanding at such time) shall be required in connection
therewith.
<PAGE>
3. Dividends. The holders of record of shares of the Series B
---------
Preferred Stock shall be entitled to receive dividends at a rate of 7.0% per
annum on the stated value of the Series B Preferred Stock ($100 per share),
payable in shares of Series B Preferred Stock or in cash out of funds legally
available therefor. The choice of the method of payment shall be at the option
of the Corporation. Dividends shall be payable annually on each anniversary of
the Original Issue Date or, if such date is not a Business Day, the next
succeeding Business Day. For purposes hereof, the term "Business Day" means a
day other than (i) a Saturday or Sunday or (ii) a day on which banking
institutions are authorized or required by law or executive order to remain
closed in the States of Texas or Virginia. Any unpaid dividends shall
accumulate. No dividends shall be paid on the common stock, par value $0.001 per
share, of the Corporation (the "Common Stock") or any other capital stock of the
Corporation until all accrued and unpaid dividends shall have been paid on the
Series B Preferred Stock and in the event the Board of Directors declares a
dividend to the holders of shares of Common Stock or other capital stock of the
Corporation, the Board of Directors shall at the same time declare a dividend
for the holders of the Series B Preferred Stock in an amount for each share of
Series B Preferred Stock equal to the dividend payable on the number of shares
of Common Stock into which shares of Series B Preferred Stock may be converted
or other capital stock of the Corporation.
4. Liquidation Preference. Upon any liquidation, dissolution or
----------------------
winding up of the Corporation, whether voluntary or involuntary (a
"Liquidation"), the holders of the shares of Series B Preferred Stock shall be
entitled, before any distribution or payment is made upon the Common Stock, to
be paid an amount equal to $100.00 per share plus all declared but unpaid
dividends to such date (collectively, the "Liquidation Preference"). After
setting apart for payment or paying in full the Liquidation Preference, the
remaining assets (whether stated capital or surplus), if any, and all
consideration received by the Corporation in excess of the Liquidation
Preference, shall be distributed to the holders of record of the issued and
outstanding shares of Common Stock. If upon any Liquidation of the Corporation,
whether voluntary or involuntary, the assets to be distributed among the holders
of Series B Preferred Stock shall be insufficient to permit payment in full of
the Liquidation Preference to the holders of Series B Preferred Stock, then the
entire assets of the Corporation shall be distributed ratably among such holders
in proportion to the full respective distributive amounts to which they are
entitled. Written notice of a Liquidation, stating a payment date, the estimated
amount of the Liquidation Preference, and the place where said amounts shall be
payable shall be given by mail not less than 20 days prior to the payment date
stated therein, to each holder of record of Series B Preferred Stock at his
address as shown by the records of the Corporation. Notwithstanding the
foregoing, however, the failure of the Corporation to give such notice, or any
defect therein, shall not affect the legality or validity of any dividend,
distribution or other action or event. Notwithstanding the provisions of Section
6(c) below, a transaction described in Section 6(c)(i) (excluding a transaction
within the exclusion set forth therein) or Section 6(c)(ii) shall, at the
election of one or more holders of the Series B Preferred Stock by written
notice to the Corporation within 10 days prior to the date that is before the
occurrence of such event, be deemed a Liquidation if the value of the cash,
property or securities per share received by the holders of the shares of Series
B Preferred Stock in such transaction would be less than the Liquidation
Preference. The foregoing election right of the holders of the Series B
Preferred Stock is exercisable by each of
2
<PAGE>
such holders and the exercise by any holder thereof shall not affect the rights
of any other holders of Series B Preferred Stock.
5. Conversion. The holders of the Series B Preferred Stock shall
----------
have the following conversion rights:
(a) Optional Conversion. Each share of Series B Preferred Stock
-------------------
shall be convertible at any time, at the option of the holder of record thereof,
into fully paid and nonassessable shares of Common Stock at the "Conversion
Rate" (as defined in Section 5(c) below) then in effect upon surrender to the
Corporation or its transfer agent of the certificate or certificates
representing the shares of Series B Preferred Stock to be converted, as provided
below, or if the holder notifies the Corporation or its transfer agent that such
certificate or certificates have been lost, stolen or destroyed, upon the
execution and delivery of an agreement and security satisfactory to the
Corporation to indemnify the Corporation from any losses incurred by it in
connection therewith. Such conversion shall occur automatically upon receipt of
all applicable regulatory and other consents and approvals, and the Corporation
shall reasonably cooperate with the holders of the Series B Preferred Stock to
obtain all necessary consents and approvals.
(b) Mandatory Conversion. Beginning on the date which is 2 years
--------------------
from the date of the initial issuance of the Series B Preferred Stock (the
"Original Issue Date") until the date which is 5 years after the Original Issue
Date, the Corporation may require, by written notice to one or more of the
holders of the Series B Preferred Stock given at least 30 days prior to the date
of conversion, that all, but not less than all, of such holder's Series B
Preferred Stock shall be automatically converted into fully paid and
nonassessable shares of Common Stock at the Conversion Rate then in effect. Such
conversion shall occur automatically upon receipt of all applicable regulatory
and other consents and approvals, and the holders of the Series B Preferred
Stock shall reasonably cooperate with the Corporation to obtain all necessary
consents and approvals. In such event, the outstanding shares of Series B
Preferred Stock shall be converted automatically without any further action by
the holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent; provided,
--------
however, that the Corporation shall have no right to require conversion of the
- -------
Series B Preferred Stock if the average of the Closing Prices of the Common
Stock for the 30 trading days preceding the proposed date of conversion shall be
less than the Conversion Price and provided, further, that the Corporation shall
-------- -------
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless certificates evidencing such shares of the
Series B Preferred Stock being converted are delivered to the Corporation or its
transfer agent, as provided below, or the holder notifies the Corporation or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes and delivers an agreement and security satisfactory to the Corporation
to indemnify the Corporation from any losses incurred by it in connection
therewith. For purposes of this provision the "Closing Price" means, for any
security as of any date, the closing sale price for such security on the Nasdaq
Stock Market as reported by the consolidated transaction reporting system, or,
if the Nasdaq Stock Market is not the principal trading market for such
security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by the consolidated transaction reporting system, or if the foregoing
do not apply, the last closing
3
<PAGE>
bid price of such security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg Financial Markets
("Bloomberg"), or, if no closing bid price is reported for such security by
Bloomberg, the last closing trade price of such security that is listed by
Bloomberg, or, if no last closing trade price is reported for such security by
Bloomberg, the average of the bid prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc.
(c) Basis For Conversion; Converted Shares. The basis for any
--------------------------------------
conversion under this Section 5 shall be the "Conversion Rate" in effect at the
time of conversion, which for the purposes hereof shall mean the number of
shares of Common Stock issuable with respect to each share of Series B Preferred
Stock to be converted under this Section 5. Initially, the Conversion Rate shall
be 3.2258:1 (i.e., 3.2258 shares of Common Stock for each share of Series B
Preferred Stock being converted). Such Conversion Rate shall be subject to
adjustment as provided in Section 6 below. As used herein, the term "Conversion
Price" initially shall be $31.00 per share of Common Stock, but shall be subject
to adjustment as provided herein. If any fractional interest in a share of
Common Stock would be deliverable upon conversion of Series B Preferred Stock,
the Corporation shall pay in lieu of such fractional share an amount equal to
the Conversion Price of such fractional share (computed to the nearest ten
thousandth of a share) in effect at the close of business on the date of
conversion. Any shares of Series B Preferred Stock which have been converted
shall be canceled and the certificates representing shares of Series B Preferred
Stock so converted shall represent the right to receive (x) such number of
shares of Common Stock into which such shares of Series B Preferred Stock are
convertible, plus (y) cash payable for any fractional share plus (z) all accrued
but unpaid dividends relating to such shares. Upon the conversion of shares of
Series B Preferred Stock as provided in this Section 5, the Corporation shall
promptly pay all then declared and accrued but unpaid dividends to the holder of
the Series B Preferred Stock being converted, if any. The Board of Directors
shall at all times reserve a sufficient number of authorized but unissued shares
of Common Stock to be issued in satisfaction of the conversion rights and
privileges aforesaid.
(d) Mechanics of Conversion. Before any holder of shares of
-----------------------
Series B Preferred Stock shall be entitled to convert the same into shares of
Common Stock, such holder shall surrender the certificate or certificates
therefor, duly endorsed, or deliver an appropriate indemnity agreement and
security, at the office of the Corporation or its transfer agent for the Series
B Preferred Stock and in the case of a conversion pursuant to Section 5(a)
above, shall give written notice to the Corporation of the election to convert
the same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such office to such
holder of Series B Preferred Stock, or to the nominee or nominees of such
holder, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid. A certificate or
certificates will be issued for the remaining shares of Series B Preferred Stock
in any case in which fewer than all of the shares of Series B Preferred Stock
represented by a certificate are converted.
6. Adjustment of Conversion Price and Conversion Rate. The number
--------------------------------------------------
and kind of securities issuable upon the conversion of the Series B Preferred
Stock, the Conversion
4
<PAGE>
Price and the Conversion Rate shall be subject to adjustment from time to time
in accordance with the following provisions:
(a) Definition of Common Stock. For purposes of this Section 6,
--------------------------
the term "Common Stock" shall be deemed to mean the Common Stock and the stock
of the Corporation of any class, or series within a class, whether now or
hereafter authorized, which has the right to participate in the distribution of
either earnings or assets of the Corporation without limit as to the amount.
(b) Reorganization; Share Exchange; Reclassification. In the
------------------------------------------------
event of a reorganization, share exchange, or reclassification, other than a
change in par value, or from par value to no par value, or from no par value to
par value or a transaction described in subsection (c) or (d) below, each share
of Series B Preferred Stock shall, after such reorganization, share exchange or
reclassification, be convertible into the kind and number of shares of stock or
other securities or other property of the Corporation which the holder of Series
B Preferred Stock would have been entitled to receive if the holder had held the
Common Stock issuable upon conversion of such share of Series B Preferred Stock
immediately prior to such reorganization, share exchange, or reclassification.
(c) Merger; Consolidation. If (i) the Corporation consolidates
---------------------
or merges into or with any other corporation or corporations or any other entity
or entities (excluding any merger or consolidation in which the Corporation is
the surviving corporation and, after giving effect thereto, the holders of the
Corporation's outstanding capital stock (on a fully-diluted, as-converted basis)
immediately prior to such merger or consolidation will own more than 50% of the
outstanding capital stock of the Corporation (on a fully-diluted, as-converted
basis) immediately following such merger or consolidation), or (ii) in a single
transaction or a series of related transactions, the Corporation sells or
transfers all or substantially all its assets, each share of Series B Preferred
Stock shall, after such merger, consolidation or transaction(s), be convertible
into the kind and number of shares of stock and/or other securities, cash or
other property which the holder of such share of Series B Preferred Stock would
have been entitled to receive if the holder had held the Common Stock issuable
upon conversion of such share of Series B Preferred Stock immediately prior to
such merger, consolidation or transaction(s).
(d) Subdivision or Combination of Shares. In case outstanding
------------------------------------
shares of Common Stock shall be subdivided, the Conversion Price shall be
proportionately reduced as of the effective date of such subdivision. In case
outstanding shares of Common Stock shall be combined, the Conversion Price shall
be proportionately increased as of the effective date of such combination.
(e) Stock Dividends. In case shares of Common Stock are issued
---------------
as a dividend or other distribution on the Common Stock, then the Conversion
Price shall be adjusted, as of the earliest of the date of such declaration,
payment or other distribution, to that price determined by multiplying the
Conversion Price in effect immediately prior to such declaration, payment or
other distribution by a fraction (i) the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to the payment of such
dividend or other
5
<PAGE>
distribution, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after the payment of such
dividend or other distribution. In the event that the Corporation shall declare
or pay any dividend on the Common Stock payable in any right to acquire Common
Stock for no consideration, then the Corporation shall be deemed to have made a
dividend payable in Common Stock on an amount of shares equal to the maximum
number of shares issuable upon exercise of such rights to acquire Common Stock.
(f) Adjustment of Conversion Rate. Upon each adjustment of the
-----------------------------
Conversion Price under the provisions of this Section 6, the Conversion Rate
shall be adjusted to an amount determined by dividing $100 by such adjusted
Conversion Price.
(g) Other Provisions Applicable to Adjustment Under this
----------------------------------------------------
Section. The following provisions will be applicable to the adjustments in the
- -------
Conversion Price and the Conversion Rate as provided in this Section 6:
(i) Treasury Shares. The number of shares of Common Stock
---------------
at any time outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the Corporation. For purposes
of this Section 6, the sale or other disposition of any Common Stock of the
Corporation theretofore held in its treasury shall, unless otherwise set forth
herein, be deemed to be an issuance thereof.
(ii) Other Action Affecting Common Stock. In case the
-----------------------------------
Corporation shall take any action affecting the outstanding number of shares of
Common Stock other than an action described in any of the foregoing subsections
6(b) to 6(e) hereof, inclusive, which would have an inequitable or dilutive
effect on the relative percentage ownership interests of the holders of Series B
Preferred Stock that could not have been cured or avoided by the holders of the
Series B Preferred Stock by their exercise of any available rights of first
offer, the Conversion Price shall be adjusted in such manner and at such time as
the Board of Directors of the Corporation on the advice of the Corporation's
independent public accountants may in good faith determine to be equitable in
the circumstances.
(iii) Minimum Adjustment. No adjustment of the Conversion
------------------
Price shall be made if the amount of any such adjustment would be an amount less
than 1% of the then applicable Conversion Price, but any such amount shall be
carried forward and an adjustment with respect thereof shall be made at the time
of and together with any subsequent adjustment which, together with such amount
and any other amount or amounts so carried forward, shall aggregate an increase
or decrease of 1% or more of the then applicable Conversion Price.
(h) Notices of Adjustments. Whenever the Conversion Rate and
----------------------
Conversion Price is adjusted as herein provided, an officer of the Corporation
shall compute the adjusted Conversion Rate and Conversion Price in accordance
with the foregoing provisions and shall prepare a written certificate setting
forth such adjusted Conversion Rate and Conversion Price and showing in detail
the facts upon which such adjustment is based, and such written instrument shall
promptly be delivered to the record holders of the Series B Preferred Stock.
6
<PAGE>
7. Notices of Record Dates and Effective Dates. In case (i) the
-------------------------------------------
Corporation shall declare a dividend (or any other distribution) on the Common
Stock payable otherwise than in shares of Common Stock; (ii) the Corporation
shall authorize the granting to the holders of Common Stock of rights to
subscribe for or purchase any shares of capital stock of any class or any other
rights; (iii) of any reorganization, share exchange or reclassification of the
capital stock of the Corporation, or of any consolidation or merger to which the
Corporation is party or of the sale, lease or exchange of all or substantially
all of the property of the Corporation; or, (iv) of a Liquidation, then the
Corporation shall cause to be mailed to the record holders of the Series B
Preferred Stock at least 20 days prior to the applicable record date or
effective date hereinafter specified, a notice stating the date on which a
record is to be taken for the purpose of such dividend, distribution or rights,
or, if a record is not to be taken, the date as of which the holders of record
of Common Stock to be entitled to such dividend, distribution or rights are to
be determined or the date on which such dividend, granting of rights,
reclassification, reorganization, share exchange, consolidation, merger, sale,
lease, exchange, or Liquidation is expected to become effective, and the date as
of which it is expected that holders of record of Common Stock shall be entitled
to exchange their shares of Common Stock for securities or other property
deliverable upon such dividend, granting of rights, reclassification,
reorganization share exchange, consolidation, liquidation, merger, sale, lease,
exchange, dissolution or Liquidation.
8. Voting Rights. Holders of Series B Preferred Stock shall be
-------------
entitled to notice of any stockholder's meeting. However, the holders of shares
of Series B Preferred Stock shall not be entitled to vote upon any matters upon
which holders of the Common Stock have the right to vote. Upon conversion of
Series B Preferred Stock to Common Stock, the holders of such Common Stock shall
be entitled to such voting rights with respect to such Common Stock as the other
holders of Common Stock.
9. Redemption. Except as provided below, at any time after 2 years
----------
from the Original Issue Date, any holder of Series B Preferred Stock shall have
the right to require the Corporation to redeem all or any shares of Series B
Preferred Stock then held by such holder (the "Redemption Right") at a price
equal to the original purchase price paid to the Corporation by such holder,
plus any accrued but unpaid dividends (the "Series B Redemption Price"). In the
event that the average of the Closing Prices of the Common Stock of NAS for the
30 trading days preceding the second, third, fourth, fifth or sixth
anniversaries of the Original Issue Date shall be less than the Conversion Price
(a "Low Stock Price Condition"), then the Corporation may, by written notice
(the "Extension Notice"), elect to postpone the holder's Redemption Right until
the next following anniversary of the Original Issue Date. The Extension Notice
shall be effective only if delivered on the first Business Day following the
pertinent anniversary date of the Original Issue Date or, if such anniversary
date is not a Business Day, then the date for delivery of the Extension Notice
shall be the next Business Day. The Company's right to postpone the holder's
Redemption Right for such one-year periods shall not be available for the one-
year period following any anniversary date in which the Company was entitled to
deliver an Extension Notice and failed to do so on a timely basis. The Company's
right to postpone the holder's Redemption Right for such one-year periods shall
expire on the sixth anniversary of the Original Issue Date. The holders shall in
any event have the right to require redemption from and after the seventh
anniversary of the Original Issue Date. Payment of the Series B
7
<PAGE>
Redemption Price to the holders of Series B Preferred Stock shall be made by the
Corporation from any source of funds legally available therefor within 90
business days (the "Series B Redemption Date"). Any holder of shares of the
Series B Preferred Stock wishing to exercise such redemption right shall give
written notice (the "Series B Redemption Notice") by mail, postage prepaid, to
the Corporation of such holders' intention to exercise such redemption right.
Such notice shall state the intention of such holder to exercise its redemption
rights and shall set forth the number of shares of Series B Preferred Stock in
respect of which redemption is demanded. Prior to payment of the Series B
Redemption Price, each holder of shares of Series B Preferred Stock who shall
have requested that such holder's shares of Series B Preferred Stock be so
redeemed shall surrender the certificate or certificates evidencing such shares
to the Corporation. In the case of any certificate or certificates which have
been lost, stolen or destroyed, the holder of such certificate or certificates
shall make, execute and deliver an agreement and security satisfactory to the
Corporation to indemnify the Corporation from any losses incurred by it in
connection therewith.
10. Amendment; Waiver. Except as expressly prohibited by Delaware
-----------------
law, this Certificate of Designation may be amended and any provision herein may
be waived with the approval of the holders of a majority of the Series B
Preferred Stock and the Board of Directors. Any amendment or waiver so effected
shall be binding upon each holder of Series B Preferred Stock.
[Signature Page Follows]
8
<PAGE>
IN WITNESS WHEREOF, this Certificate has been signed by the President
and Chief Executive Officer and attested to by the Secretary of Network Access
Solutions Corporation this ____ day of __________, 2000.
By:____________________________
By:_________________________
Secretary
9
<PAGE>
Exhibit 4.2
NUMBER SHARES
*50,000
Incorporated under the
laws of the State of Delaware
Network Access Solutions Corporation
The Corporation is authorized to issue 1,500,000 Shares of Series B Convertible
Preferred Stock par value $.001
SPECIMEN
This certifies that _____________________________________________________ is the
---------- Seven Hundred Fifty Thousand ------------
registered holder of ____________________________________________________ Shares
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
March 2000
affixed this ___________ day of ___________ A.D. ________.
___________________________________ _______________________________________
Worth D. MacMurray, Secretary Jonathan P. Aust, Chairman of the Board
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF
ANY STATE OR FOREIGN JURISDICTION ("OTHER LAWS") IN RELIANCE UPON THE
REPRESENTATION BY THE HOLDER THAT THEY HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND NOT WITH A VIEW TO RESALE OR FURTHER DISTRIBUTION. SUCH SHARES
MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR
HYPOTHECATED, NOR WILL ANY ASSIGNEE OR ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER
HEREOF BY THE ISSUER FOR ANY PURPOSE. UNLESS A REGISTRATIN STATEMENT UNDER THE
ACT AND ANY APPLICABLE OTHER LAW WITH RESPECT TO SUCH SHARES SHALL THEN BE IN
EFFECT OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION SHALL BE
ESTABLISHED TO THE SATISFACTION OF COUNSEL FOR THE ISSUER.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE
WITH THE TERMS OF THE STOCK PURCHASE AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS
THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL, OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEROF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
TEN COM --as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT --as tenants by the entireties --------------------
JT TEN --as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to minors
Act
-----------------
(State)
Addition abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
--------------------
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFICATION NUMBER
OF ASSIGNEE
_______________________________
| |
|_____________________________|
- --------------------------------- --------------------------------------------
- ------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocable constitute and
appoint
----------------------------------------------------------------------
- ------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated,
----------------------------
-------------------------------
In presence of
- ----------------------------------
<PAGE>
EXHIBIT 10.33
THREE DULLES TECH CENTER
LEASE AGREEMENT
BY AND BETWEEN
DULLES TECH, INC, AS LANDLORD
AND
NETWORK ACCESS SOLUTIONS CORPORATION, AS TENANT
October 27, 1999
<PAGE>
LEASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. BASIC LEASE PROVISIONS
ARTICLE II.
Section 2.1 Premises................................................. 1
Section 2.2 Term..................................................... 2
Section 2.3 Use...................................................... 2
ARTICLE III.
Section 3.1 Rental Payments.......................................... 2
Section 3.2 Additional Rent.......................................... 3
Section 3.3 Security................................................. 6
Section 3.4 Tenant's Review Right.................................... 7
ARTICLE IV.
Section 4.1 Services................................................. 7
Section 4.2 Keys and Locks........................................... 8
Section 4.3 Graphics and Building Directory.......................... 9
ARTICLE V.
Section 5.1 Occupancy of Premises.................................... 9
Section 5.2 Entry for Repairs and Inspection......................... 9
Section 5.3 Hazardous Materials...................................... 9
ARTICLE VI.
Section 6.1 Leasehold Improvements................................... 10
Section 6.2 Repairs by Landlord...................................... 11
Section 6.3 Repairs by Tenant........................................ 11
Section 6.4 Liens.................................................... 12
Section 6.5 Indemnification.......................................... 12
ARTICLE VII.
Section 7.1 Condemnation............................................. 12
Section 7.2 Force Majeure............................................ 13
Section 7.3 Fire or Other Casualty Damage............................ 13
Section 7.4 Insurance................................................ 14
Section 7.5 Waiver of Subrogation Rights............................. 14
ARTICLE VIII.
Section 8.1 Default by Tenant........................................ 15
Section 8.2 Landlord's Remedies...................................... 15
Section 8.3 Waiver of Duty to Relet or Mitigate...................... 16
Section 8.4 Reentry.................................................. 17
Section 8.5 Rights of Landlord in Bankruptcy......................... 17
Section 8.6 Waiver of Certain Rights................................. 17
Section 8.7 NonWaiver................................................ 17
Section 8.8 Holding Over............................................. 17
Section 8.9 Abandonment of Personal Property......................... 17
ARTICLE IX.
Section 9.1 Transfers................................................ 17
Section 9.2 Assignment by Landlord................................... 19
Section 9.3 Limitation of Landlord's Liability....................... 19
ARTICLE X.
Section 10.1 Subordination............................................ 19
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 10.2 Estoppel Certificate or Three-Party Agreement............ 19
Section 10.3 Notices.................................................. 20
ARTICLE XI.
Section 11.1 Right to Relocate Tenant................................ 20
Section 11.2 Rights and Remedies Cumulative.......................... 20
Section 11.3 Legal Interpretation.................................... 20
Section 11.4 Authority............................................... 21
Section 11.5 No Brokers.............................................. 21
Section 11.6 Consents by Landlord.................................... 21
Section 11.7 Joint and Several Liability............................. 21
Section 11.8 Independent Covenants................................... 21
Section 11.9 Attorneys' Fees and Other Expenses...................... 21
Section 11.10 Recording............................................... 21
Section 11.11 Disclaimer; Waiver of Jury Trial........................ 21
Section 11.12 Access to Roof.......................................... 22
Section 11.13 Parking................................................. 22
Section 11.14 No Accord or Satisfaction............................... 22
Section 11.15 Acceptance.............................................. 22
Section 11.16 Waiver of Counterclaim.................................. 22
Section 11.17 Time Is of the Essence.................................. 22
Section 11.18 Counterparts............................................ 22
</TABLE>
EXHIBITS
Exhibit A - Land
Exhibit B - Floor Plan(s) of Premises
Exhibit C - Special Stipulations
Exhibit D - Commencement Date
Agreement
Exhibit E - Work Letter Agreement
Exhibit F - Building Rules and Regulations
Exhibit G - Proposed Tenant Signage
Exhibit H - Cleaning Specifications
Exhibit I - Parking Area
<PAGE>
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease") is made and entered into as of the 27th day
-----
of October, 1999, by and between DULLES TECH, INC., a Delaware corporation
("Landlord"), whose address is c/o West World Management, Inc., 4 Manhattanville
---------
Road, Purchase, New York 10577, and NETWORK ACCESS SOLUTIONS CORPORATION, a
Delaware corporation ("Tenant"), whose address is 100 Carpenter Drive, Suite
------
206, Sterling, Virginia 20164, Attention: Manager, Facilities. Subject to all
of the terms, provisions, covenants and conditions of this Lease, and in
consideration of the mutual covenants, obligations and agreements contained in
this Lease, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Landlord and Tenant agree as
follows:
ARTICLE I.
BASIC LEASE PROVISIONS
Landlord, for and in consideration of the rents and all other charges and
payments hereunder and of the covenants, agreements, terms, provisions and
conditions to be kept and performed hereunder by Tenant, demises and leases to
Tenant, and Tenant hereby hires and takes from Landlord, the premises described
below, subject to all matters hereinafter set forth and upon and subject to the
covenants, agreements, terms, provisions and conditions of this Lease for the
term hereinafter stated. For purposes of this Lease, the following terms shall
have the meanings ascribed to them below:
Base Year shall mean calendar year 2000.
- ---------
Building shall mean the approximately 113,093 rentable square foot structure
- --------
situated upon the Land (hereinafter defined) commonly known as Three Dulles Tech
Center located at 13650 Dulles Technology Drive, Herndon, Virginia 20171, County
of Fairfax, State of Virginia as the same currently exists or as it may from
time to time hereafter be expanded or modified.
Commencement Date shall mean March 1, 2000, provided that the First Phase
- -----------------
Premises are Substantially Complete (as defined in Exhibit E to this Lease). In
the event the First Phase Premises are not Substantially Complete by March 1,
2000, the Commencement Date will be extended day for day until Landlord makes
the First Phase Premises Substantially Complete.
Land shall mean that certain tract of 12.14 acres of land situated in Fairfax
- ----
County, Virginia and more particularly described on Exhibit A attached hereto
and hereby made a part hereof.
Lease Year shall mean each consecutive twelve (12) month period during the Term
- ----------
commencing with the Commencement Date.
Prepaid Rent shall mean the amount of $227,822.63 for the first and a portion of
- ------------
the second month of the Term. Prepaid Rent shall be paid by Tenant to Landlord
no later than January 1, 2000.
Project shall mean the Building, together with the Land and the parking area
- -------
serving the Building, all other improvements situated on the Land or directly
benefitting the Building, and all additional facilities or improvements directly
benefitting the Building that may be constructed in subsequent years.
Security Deposit shall mean the amount of $1,600,000 as shall be posted and
- ----------------
reduced during the Term of this Lease as set forth in Section 3.3.
Term shall mean One Hundred Twenty (120) months from the Commencement Date, as
- ----
the same may be extended pursuant to Section C of Exhibit C attached hereto.
ARTICLE II.
<PAGE>
Section 2.1 Premises. The Premises demised by this Lease are deemed to be
--------
(i) 57,709 rentable square feet consisting of an approximately 10,397 rentable
square foot portion of the first floor, as shown on Exhibit B attached hereto,
---------
and the entirety of Floors four and five of the Building (the "First Phase
-----------
Premises"); (ii) 46,022 rentable square feet known or to be known as Suites 200
- --------
and 300, on Floors two and three, respectively, of the Building (with each Suite
occupying the entire floor) (the "Second Phase Premises"); and (iii) 9,362
---------------------
rentable square feet on the first floor of the Building, as shown on Exhibit B
attached hereto, which is to serve as a network and/or telecommunications
operations center or for similar use by Tenant (the "Third Phase Premises"),
--------------------
together with the nonexclusive use of the common areas of the Project made
available by Landlord from time to time to all tenants of the Project (the First
Phase Premises, the Second Phase Premises and the Third Phase Premises are
collectively referred to herein as the "Premises"). The Premises are outlined on
--------
Exhibit B attached hereto and hereby made a part hereof. All square footage
- ---------
utilized in this Lease has been or will be as to future space, made in
accordance with "Standard Method for Measuring Floor Area in Office Buildings",
published by the Secretariat, Buildings Owners and Managers Association
International (ANSI/BOMA Z65.1 - 1996), approved June 7, 1996 (the "Standard
--------
Measure"). Unless otherwise specifically designated, all references to square
- -------
footage or square feet in this Lease are to rentable square footage or square
feet. Landlord shall have its space planner or architect re-measure the Premises
upon completion of the Tenant Space Plan (as defined in Exhibit E) and/or
---------
Tenant's Work (as defined in Exhibit E), and at no time thereafter, to confirm
---------
that the measurement provided herein is accurate and conforms to the Standard
Measure. In the event that such re-measurement shows a different rentable square
footage for the Premises, all relevant terms of this Lease shall be adjusted to
conform to such re-measurement.
Section 2.2 Term. The Term of this Lease shall begin on the Commencement
----
Date and shall continue in full force and effect for the Term of this Lease
unless extended or sooner terminated in accordance with the provisions of this
Lease. After the occurrence of the Commencement Date, Tenant and Landlord shall
execute a certificate in the form attached as Exhibit D stipulating and agreeing
---------
to the Commencement Date. If the Commencement Date should be changed for any
reason, including a change pursuant to the terms of Exhibit E hereto, Landlord
---------
shall not be liable or responsible for any claims, damages or liabilities in
connection therewith or by reason thereof. If the First Phase Premises are not
Substantially Complete as of March 1, 2000 for any reason other than a Tenant
Delay, then the term Commencement Date shall mean such subsequent date upon
which the First Phase Premises are Substantially Complete, and such failure to
Substantially Complete the First Phase Premises on the earlier date shall not
constitute a default by Landlord hereunder or render Landlord liable for any
loss or damage that may be incurred as a result of such failure.
Section 2.3 Use. The Premises are to be used only for general office
---
purposes, including but not limited to, use of a portion of the first floor of
the Building, to the extent permitted by law or covenant, as a network and/or
telecommunications operations center or related use and for no other business or
purpose without the prior written consent of Landlord which consent shall not be
unreasonably withheld or delayed. No act shall be done in or about the Premises
that is unlawful or that will increase the existing rate of insurance on the
Building. In the event of a breach of this covenant, Tenant shall, after written
notice, (a) immediately cease the performance of any unlawful act and (b) with
respect to acts that will or has increased the existing rate of insurance,
Tenant shall either cease such act that is increasing or has increased the
existing rate of insurance (and pay for any such increases theretofor charged to
Landlord) or shall pay to Landlord any and all increases in insurance premiums
resulting from such breach. Tenant shall not commit or allow to be committed any
waste upon the Premises, or any public or private nuisance or other act or thing
which disturbs the quiet enjoyment of any other tenant in the Building. If any
of Tenant's office machines or equipment disturb any other tenant in the
Building, then Tenant shall provide adequate insulation, or take such other
action as may be necessary to eliminate the noise or disturbance at its sole
cost and expense. Tenant shall not, without Landlord's prior consent which
consent shall not be unreasonably withheld or delayed, install any equipment,
machine, device, tank or vessel which is subject to any federal, state or local
permitting requirement. Tenant, at its expense, shall comply with all laws,
statutes, ordinances and governmental rules, regulations or requirements
governing the installation, operation and removal of any such equipment,
machine, device, tank or vessel. Tenant, at its expense, shall comply with all
laws, statutes, ordinances, governmental rules, regulations or
requirements, and the provisions of any recorded documents now existing or
hereafter in effect
<PAGE>
relating to its use, operation or occupancy of the Premises and shall observe
such reasonable and non-discriminatory rules and regulations as may be adopted
and made available to Tenant by Landlord from time to time for the safety, care
and cleanliness of the Premises or the Building and for the preservation of good
order therein; provided, however, that such rules and regulations do not
-------- -------
conflict with this Lease, materially increase Tenant's obligations or liability
with respect to the Premises and to the extent such rules and regulations do
conflict with the terms of this Lease, the terms of this Lease shall govern. The
current rules and regulations for the Building are attached hereto as Exhibit F.
---------
Without limiting the foregoing, Tenant agrees to be wholly responsible at
Tenant's sole cost and expense for any accommodations or alterations which need
to be made to the Premises to comply with the provisions of the Americans With
Disabilities Act of 1990, as amended (the "ADA"). Landlord will be responsible
---
for compliance of the common areas of the Building as well as the Building shell
(as described in Exhibit E) with the provisions of ADA.
ARTICLE III.
Section 3.1 Rental Payments.
---------------
(a) Base Rent. Commencing (i) on the Commencement Date as to the First
---------
Phase Premises, (ii) on the date of Substantial Completion of the Second Phase
Premises (or such earlier date as the Second Phase Premises would have been
Substantially Complete but for Tenant Delays) as to the Second Phase Premises,
and (iii) on the earlier of July 1, 2000 or the date of Substantial Completion
of the Third Phase Premises as to the Third Phase Premises, and continuing
thereafter throughout the Term, Tenant shall pay the Base Rent, which is due and
payable each Lease Year during the Term hereof in twelve (12) equal installments
on the first (1st) day of each calendar month during the Term to Landlord at
Landlord's address specified in this Lease (or such other address as may be
designated by Landlord from time to time) monthly in advance at the following
rates:
<TABLE>
<CAPTION>
Lease Base Rent Per
Year Rentable Square Foot
---- --------------------
<S> <C>
1 $ 25.50
2 $ 25.94
3 $ 25.95
4 $ 25.94
5 $ 25.50
6 $ 25.50
7 $ 25.50
8 $ 25.50
9 $ 25.50
10 $ 25.50
</TABLE>
So long as Tenant is not then in default under this Lease, in the event Tenant
has paid Landlord any Prepaid Rent such Prepaid Rent shall be applied to the
first (1st) monthly and a portion of the second (2nd) installment of Base Rent
due hereunder.
(b) First Year Credit. Notwithstanding anything to the contrary in Section
-----------------
3.1(a), Tenant shall receive a credit against the Base Rent payable during the
first year of the Term of the Lease in an aggregate amount of Twelve Thousand
Five Hundred and No/100's Dollars ($12,500.00) per month.
(c) Annual CPI Adjustment. On each anniversary of the Commencement Date,
---------------------
the annual Base Rent for the entire Premises (but, for purposes of this
Subsection, excluding from the Base Rent in respect of the second, third and
fourth lease years, the sums per rentable square foot of $0.44, $0.45 and $0.44
respectively) shall be adjusted as follows: beginning the first day of the
second lease year following the Commencement Date, the Base Rent shall be
increased by an amount equal to three hundred percent (300%) of any increase in
the CPI. The amount of the adjustment shall be determined by multiplying the
previous year's adjusted Base Rent by a product of (a) three hundred percent
(300%) and (b) a fraction, the numerator of which shall be (i) the CPI for the
period immediately preceding the anniversary date of the lease year for which
the adjustment is to be made, minus (ii) the CPI for the period immediately
preceding the
<PAGE>
previous lease year, and the denominator of which shall be the CPI for the
period immediately preceding the previous lease year. Notwithstanding this
calculation, the adjustment to the Base Rent shall not exceed three percent (3%)
of the Base Rent for the immediately preceding Lease Year.
The CPI as used herein shall mean the United States Bureau of Labor
Statistics, Consumer Price Index for Urban Consumers, all items for Washington,
D.C.-MD-VA (CPI-U) (1982 - 1984 = 100). If the CPI shall be discontinued with no
successor or comparable successor index, Landlord shall promptly so notify
Tenant and the parties shall attempt to agree within thirty (30) days after
Tenant's receipt of such notice upon a substitute index which measures, on at
least an annual basis, fluctuations in the cost of goods to consumers of such
goods in the Washington, D.C. metropolitan area. If the parties are unable to
agree upon a substitute index, then the matter shall be determined by
arbitration in accordance with the rules of the American Arbitration Association
then prevailing.
(d) Partial Month. If the date for Tenant to start paying any of the
-------------
amounts of Basic Rent set forth above is other than the first (1st) day of a
calendar month or if this Lease expires or terminates on a day other than the
last day of a calendar month, then the installments of Base Rent for such month
or months shall be prorated based upon multiplying the applicable Base Rent by a
fraction, the numerator of which shall be the number of days of the Term
occurring during said commencement or termination month, as the case may be, and
the denominator of which shall be the number of days in such month.
(e) Payment; Late Charge; Past Due Rate. The Base Rent, the Additional
-----------------------------------
Rent (hereinafter defined), any Prepaid Rent and any and all other payments
which Tenant is obligated to make to Landlord under this Lease shall constitute
and are sometimes hereinafter collectively referred to as "Rent". Tenant shall
pay all Rent and other sums of money as shall become due from and payable by
Tenant to Landlord in lawful money of the United States of America at the times
and in the manner provided in this Lease, without demand, deduction, abatement,
setoff, counterclaim or prior notice. Tenant hereby acknowledges that late
payment to Landlord of Rent or other sums due hereunder will cause Landlord to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. If any Rent or other sum due from Tenant is
not received on or before its due date, then Tenant shall pay to Landlord
immediately upon Landlord's demand therefor, in addition to such overdue amount,
a late charge in an amount equal to Five Thousand and No/100's Dollars ($5,000),
plus any reasonable attorneys' fees and costs incurred by Landlord by reason of
Tenant's failure to pay Rent and other charges when due hereunder; provided,
--------
however, that Landlord shall waive such charge as to the first such instance in
- -------
any Lease year (but in no event more than three (3) times during the Term of the
Lease) as to which such late charge would otherwise be payable. Additionally,
all Rent under this Lease shall bear interest from the date due until paid at
the lesser of twelve percent (12%) or the maximum nonusurious rate of interest
then permitted by the applicable laws of the state in which the Building is
located or the United States of America, whichever shall permit the higher
nonusurious rate, such interest being in addition to and cumulative of any other
rights and remedies which Landlord may have with regard to the failure of Tenant
to make any such payments under this Lease.
Section 3.2 Additional Rent.
---------------
(a) Definitions:
-----------
(i) "Base Operating Expenses" means Operating Expenses (hereinafter
-----------------------
defined) for the Base Year.
(ii) "Operating Expenses" means all expenses, costs and disbursements
------------------
of every kind and nature, provided such expenses, costs and disbursements are
actually incurred, relating to or incurred or paid in connection with the
ownership and operation of the Project, computed on an accrual basis in
accordance with generally accepted accounting principles consistently applied,
including but not limited to the following:
(A) the proportionate share of wages and salaries of all persons
directly engaged in the operation, maintenance, security or access control of
the Project, including all
<PAGE>
taxes, insurance and benefits relating thereto, provided that no such amounts
are allowed for any employee above the level of property engineer;
(B) the cost of all supplies, tools, equipment and materials
used in the operation and maintenance of the Project, including rental fees for
the same, if such items are not purchased and amortized pursuant to this Section
-------
3.2 below;
- ---
(C) the cost of all utilities for the Project, including but not
limited to the cost of water and power, heating, lighting, air conditioning and
ventilating (excluding those costs billed to specific tenants) of the Building
and Project;
(D) the cost of all maintenance and service agreements for the
Project and the equipment therein, including but not limited to alarm service,
security service, access control, landscaping, window cleaning, pest control,
elevator maintenance and janitorial service;
(E) the cost of repairs and general maintenance, excluding (y)
repairs and general maintenance paid by proceeds of insurance, by Tenant or by
other third parties, and (z) alterations attributable solely to tenants of the
Building;
(F) amortization (at an interest rate of 8% per annum) of the
cost of capital investment items which are installed for the purpose of reducing
operating expenses, promoting safety, complying with governmental requirements
or maintaining the quality of the Building over the useful life of such item;
(G) the cost of all insurance relating to the Project,
including, but not limited to, the cost of property insurance, casualty, rental
loss and liability insurance applicable to the Project and Landlord's personal
property used in connection therewith and the cost of commercially reasonable
deductibles paid on claims made by Landlord;
(H) Landlord's and/or Landlord's managing agent's reasonable
accounting and audit costs and attorneys' fees applicable to the Project;
(I) all property management fees for the Project, provided that
such fees shall not exceed three percent (3%) of gross receipts for the Project;
and
(J) all taxes, assessments and governmental charges, whether or
not directly paid by Landlord, whether federal, state, county or municipal and
whether they are imposed by taxing districts or authorities currently taxing the
Project or by others subsequently created or otherwise, and any other taxes and
assessments, assessed against or attributable to the Project or its operation,
excluding, however, (i) federal and state taxes on income, death taxes,
- --------- -------
franchise taxes and any taxes imposed or measured on or by the income of
Landlord from the operation of the Project, (ii) transfer taxes or fees imposed
in connection with any change of ownership of the Project together with the
reasonable cost (including attorneys, consultants and appraisers) of any
negotiation, contest or appeal pursued by Landlord in an effort to reduce any
such tax, assessment or charge, and all of Landlord's administrative costs in
relation to the foregoing ("Real Estate Taxes"); provided, however, that if at
----------------- -------- -------
any time during the Term the present method of taxation or assessment shall be
so changed that the whole or any part of the taxes, assessments, levies,
impositions or charges now levied, assessed or imposed on real estate and the
improvements thereof shall be changed and as a substitute therefor, or in lieu
of or in addition thereto, taxes, assessments, levies, impositions or charges
shall be levied, assessed or imposed wholly or partially as a capital levy or
otherwise on the rents received from the Project or the rents reserved herein or
any part thereof, then such substitute or additional taxes, assessments, levies,
impositions or charges, to the extent so levied, assessed or imposed, shall be
deemed to be included within the Real Estate Taxes to the extent that such
substitute or additional tax would be payable if the Project were the only
property of the Landlord subject to such tax, (iii) any environment assessments,
charges or liens arising in connection with the remediation of Hazardous
Materials from the Project, the causation of which arose prior to the
Commencement Date or was caused by Landlord, its agents, employees or
contractors or any tenant of the Project (other than Tenant or its sublessees or
assignees), (iv) costs or fees payable to public authorities in connection with
any future construction, renovation and/or improvements to the Project other
than Tenant's Work, including fees for transit, housing, schools, open space,
<PAGE>
child care, arts programs, traffic mitigation measures, environmental impact
reports, traffic studies, and transportation system management plans or (v)
reserves for future taxes.
Notwithstanding the foregoing provisions of this Section 3.2(a)(ii),
------------------
Operating Expenses shall not include any of the following:
(A) legal fees, brokerage commissions, advertising costs or related
expenses in connection with the leasing of the Project and/or administration of
Landlord's ownership entity;
(B) except as allowable under Section 3.2(a)(ii)(F), capital repairs,
---------------------
alterations, additions, improvements or replacements connected with or arising
from the renovation of the Project or any repairs or replacements made to
rectify or correct any defect in the design, materials or workmanship of any
portion of the Project or Commons Areas;
(C) costs incurred in connection with damage or repairs which are covered
under any insurance policy carried by Landlord in connection with the Project or
Common Areas (except for commercially reasonable deductibles);
(D) expenses for repair or replacement paid by condemnation awards;
(E) costs associated with damage or repairs to the Project or the Common
Areas necessitated by the gross negligence or willful misconduct of Landlord or
Landlord's employees, agents, contractors or invitees;
(F) increases in insurance premiums over those in effect on the
Commencement Date to the extent any other tenant causes Landlord's insurance
premiums to increase or obligates Landlord to purchase additional insurance;
(G) reserves for Landlord's repair, replacement or improvement of the
Project or any portion thereof;
(H) charitable or political contributions or fees paid to trade
associates;
(I) Landlord's general overhead expenses not related to the Project or
Common Areas;
(J) all principal, interest, loan fees, and other carrying costs related
to any mortgage or deed of trust encumbering the Project and all rental and
other payables due under any ground or underlying lease;
(K) legal fees, accountant fees and other expenses incurred in disputes
with other tenants or occupants of the Project or associated with the
enforcement of any other leases or defense of Landlord's title to or interest in
the Project or any part thereof;
(L) costs (including permit, license and inspection fees) incurred in
renovating or otherwise improving, decorating, painting, expanding or altering
space for other tenants or other occupants of vacant space in the Project;
(M) any costs, fines, or penalties incurred due to violations by Landlord
or any tenant of the Project (other than Tenant) of any governmental rule or
authority, this Lease or any other lease in the Project, or due to Landlord's
gross negligence or willful misconduct;
(N) payments for rented equipment, the cost of which equipment would be a
capital expenditure if such equipment were purchased by Landlord;
(O) the cost of any special service provided to Tenant or other occupants
of the Project for which Landlord is entitled, pursuant to the terms of leases,
to be reimbursed;
(P) the costs of major repairs and/or replacements of the roof,
foundation, and structural supports of the Premises unless such costs are
amortized over the useful life of the item;
<PAGE>
(Q) any amounts paid to any person, firm or corporation related to or
otherwise affiliated with Landlord or any general partner, officer, director or
shareholder of Landlord or any of the foregoing, to the extent the same exceeds
arm's length competitive prices paid in Fairfax County, Virginia for similar
services or goods; and
(R) costs of acquisition of sculpture or other objects of art for the
Project.
Operating Expenses shall be reduced by all cash discounts, trade discounts
or quantity discounts received by Landlord or Landlord's managing agent in the
purchase of any goods, utilities or services in connection with the prudent
operation of the Building. In the calculation of any expenses hereunder, it is
understood that no expense shall be charged more than once. Landlord shall use
its reasonable efforts in good faith to effect an equitable proration of bills
for services rendered to the Building and to any other property owned by
Landlord or an affiliate of Landlord.
Landlord agrees that, upon Tenant's request from time to time, Landlord
shall confer with Tenant to consider mutually acceptable ways to minimize or
reduce Operating Expenses.
(iii) "Adjustment Period" means each calendar year occurring during
-----------------
the Term beginning with calendar year 2001, which shall be the first Adjustment
Period.
(iv) "Tenant's Pro Rata Share" means the percentage calculated by
-----------------------
dividing the rentable area of the Premises (numerator) by the rentable area of
the Building (denominator), and expressing the fraction as a percentage.
(b) Gross-Up Adjustment. If the Building is less than fully occupied or if
-------------------
standard Landlord services are not provided to the entire Building during the
Base Year or any Adjustment Period, then Operating Expenses for the Base Year or
such Adjustment Period shall be "grossed up" by Landlord to that amount of
Operating Expenses that, using reasonable projections, would normally be
expected to be incurred during the Base Year or Adjustment Period if the
Building was one hundred percent (100%) occupied and receiving building standard
Landlord services during the Base Year or Adjustment Period, as determined under
generally accepted accounting principles consistently applied.
(c) Payment by Tenant. If the Operating Expenses for any Adjustment Period
-----------------
exceed the Base Operating Expenses (any such excess being known collectively as
the "Expense Increase"), then Tenant agrees to pay Landlord as additional rent
----------------
(the "Additional Rent") Tenant's Pro Rata Share of the Expense Increase;
---------------
provided, however, that notwithstanding any other provision of this Lease to the
- -------- -------
contrary, no such payment with respect to excess Operating Expenses shall be due
from Tenant during the first twelve (12) months commencing with the Commencement
Date.
(d) Manner of Payment.
-----------------
(i) Landlord shall give Tenant notice of Landlord's estimate of
amounts payable under this Section 3.2 for each Adjustment Period based upon
-----------
generally accepted accounting principles consistently applied. By the first day
of each month during the Adjustment Period, Tenant shall pay Landlord one-
twelfth (1/12th) of the estimated amount. If for any reason the estimate is not
given before the Adjustment Period begins, Tenant shall continue to pay on the
basis of the previous year's estimate, if any, until the month after the new
estimate is given.
(ii) Within one hundred twenty (120) days after each Adjustment
Period ends, or as soon thereafter as reasonably practical, Landlord shall give
Tenant a statement (the "Statement"), in reasonable detail as to line items,
---------
showing the: (A) actual Operating Expenses for the Adjustment Period; (B) Base
Operating Expenses; (C) the Expense Increase for the Adjustment Period; (D) the
amount of Tenant's Pro Rata Share of the Expense Increase; (E) the amount, if
any, paid by Tenant during the Adjustment Period towards the Expense Increase;
and (F) the amount Tenant owes towards the Expense Increase or the amount
Landlord owes as a refund. Delay by Landlord in providing to Tenant any
Statement shall not relieve Tenant from the obligation to pay any
<PAGE>
Expense Increase upon the rendering of such Statements nor shall it relieve
Landlord from paying any refund if so due.
(iii) If the Statement shows that the actual amount Tenant owes for
the Adjustment Period is less than any estimated Expense Increase paid by Tenant
during the Adjustment Period, Landlord shall return the difference (the
"Overpayment"). If the Statement shows that the actual amount Tenant owes is
-----------
more than any estimated Expense Increase paid by Tenant during the Adjustment
Period, Tenant shall pay the difference (the "Underpayment"). The Overpayment
------------
or Underpayment shall be paid within thirty (30) days after the Statement is
delivered to Tenant.
(iv) During any Adjustment Period in which this Lease is not in
effect for a complete calendar year, unless it was ended due to Tenant's
default, Tenant's obligation for Additional Rent for those Adjustment Periods
shall be prorated by multiplying the Additional Rent for the Adjustment Period
by a fraction expressed as a percentage, the numerator of which is the number of
days of the Adjustment Period included in the Term and the denominator of which
is 365.
Section 3.3 Security. (a) Tenant has delivered to Landlord, as security
--------
for the performance of Tenant's obligations under this Lease, either (i) the sum
of One Million Six Hundred Thousand and No/100 Dollars ($1,600,000.00) by good
check (the "Security Deposit"), (ii) an unconditional, irrevocable letter of
----------------
credit in the amount of One Million Six Hundred Thousand and No/100 Dollars
($1,600,000.00) in a form satisfactory to Landlord, issued by a New York
Clearinghouse member bank, including First Union National Bank, or a bank
reasonably satisfactory to Landlord and available for presentation in the
Borough of Manhattan in New York, New York ("Letter of Credit") or (iii) a
----------------
Security Deposit and a Letter of Credit, the sum of which equals One Million Six
Hundred Thousand and No/100 Dollars ($1,600,000.00; such amount whether in the
form of a Security Deposit or Letter of Credit or both being herein referred to
as the "Initial Amount"). The Letter of Credit shall either (i) expire on the
--------------
date which is sixty (60) days after the expiration or earlier termination of
this Lease (the "LC Date") or (ii) be automatically self-renewing until the LC
-------
Date. If Landlord, at any time during the Term, is not reasonably satisfied
with the bank issuing the Letter of Credit, it may so notify Tenant, and Tenant,
within ten (10) business days after receipt of such notice, shall replace the
Letter of Credit then held by Landlord with a substitute letter of credit (the
"Substitute Letter of Credit") issued by a New York Clearinghouse member bank
---------------------------
(or other bank reasonably acceptable to Landlord) which satisfies the terms of
this Section 3.3(a). If the Letter of Credit or any replacement Letter of Credit
--------------
has an expiration date or is otherwise scheduled to terminate prior to the LC
Date, then at least thirty (30) days prior to such expiration or termination
date, Tenant shall deliver to Landlord a replacement Letter of Credit issued by
the issuing bank of the then current Letter of Credit, or a bank reasonably
satisfactory to Landlord, available for presentation in the Borough of Manhattan
in New York, New York, in substantially the same form as the original Letter of
Credit, and in the amount provided for herein. If Tenant shall not have provided
such replacement Letter of Credit by the date which is thirty (30) days prior to
the expiration or other scheduled termination of the then current Letter of
Credit, then Landlord shall have the right to draw down the full amount the then
current Letter of Credit, at which time the amount so drawn shall become the
Security Deposit.
(b) On the third (3rd) anniversary of the Commencement Date, the Initial
Amount shall be reduced to an amount equal to Nine Hundred Twenty Thousand and
No/100 Dollars ($920,000.00), provided that no default shall then be continuing
--------
and any amounts drawn by Landlord upon the Security Deposit or the Letter of
Credit have been replaced by Tenant. On the fourth (4th) anniversary of the
Commencement Date, the amount of the Security Deposit or Letter of Credit or
both, as applicable, shall then be reduced to an amount equal to Two Hundred
Forty Thousand and No/100 Dollars ($240,000.00), provided that no default shall
--------
then be continuing and any amounts drawn by Landlord upon the Security Deposit
or the Letter of Credit have been replaced by Tenant.
(c) On or before the LC Date: (i) if there shall be no uncured defaults
hereunder, Landlord shall return to Tenant the Security Deposit or Letter of
Credit or Substitute Letter of Credit then held by Landlord or (ii) if Landlord
shall have drawn upon such Security Deposit or Letter of Credit or Substitute
Letter of Credit to remedy defaults by Tenant in the payment or performance of
any of Tenant's obligations under this Lease, Landlord shall return to Tenant
that
<PAGE>
portion, if any, of such Security Deposit or of the proceeds of the Letter of
Credit or Substitute Letter of Credit remaining in Landlord's possession, which
has not been applied to remedy, and will not be required to remedy, any Tenant
default. If Landlord shall have so drawn upon the Security Deposit or the Letter
of Credit, Tenant shall, upon written demand made prior to the LC Date, deposit
with Landlord, or cause the Letter of Credit to be increased by, a sum equal to
the amount so drawn by Landlord.
Section 3.4 Tenant's Review Right. Following Tenant's receipt of the
---------------------
annual Statement for any Lease Year until ninety (90) days thereafter, Tenant
shall have the right to dispute items on such Statement. In such event, Landlord
and Tenant will consult in a good faith effort to resolve the dispute within
thirty (30) days after Landlord receives notice of such dispute. In the event
that such consultations within such thirty (30) day period do not resolve the
matter, Tenant shall be entitled, provided that Tenant shall have paid to
Landlord the amounts shown thereon as due from Tenant, to have an independent
certified public accounting firm hired by Tenant and reasonably approved by
Landlord review the books, receipts and records pertaining to such disputed
items for such Lease Year. Tenant shall have the right to make copies of such
books, receipts and records. The results of any such review shall be provided
simultaneously to Landlord and Tenant by the accounting firm and shall be
binding upon Landlord and Tenant and, in the event that any such review reveals
a net underpayment or overpayment with respect to Operating Expenses and/or the
Expense Increase, the applicable party shall pay to the other, within ten (10)
business days following demand therefor, the amount necessary to effect the
appropriate adjustments. In the event an overpayment exceeds 7%, Landlord shall
pay the costs of the accounting firm's review, not to exceed $2,500.00. No more
than one such review may be conducted with respect to any Lease Year. Tenant
shall keep all information gained in connection with any review or inspection of
Landlord's records, and all information contained in any annual Statement,
confidential and shall not disclose it to third parties except to carry out the
purposes of this Section and except as required by law; provided, however, that
-------- -------
Tenant may disclose such information to the extent reasonably needed in
connection with financing arrangements or assignments of Tenant's interests in
the Premises so long as Tenant takes reasonable steps to assure that the
applicable lender or proposed assignee keeps such information confidential.
ARTICLE IV.
Section 4.1 Services.
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(a) Services Provided. Landlord shall furnish to Tenant while Tenant is
-----------------
occupying the Premises:
(i) Hot and cold domestic water in common use restrooms and
toilets in locations provided for general use and as reasonably deemed by
Landlord to be in keeping with the Project standards.
(ii) Heating and air conditioning in season from 8:00 a.m. to 6:00
p.m. on Monday through Friday and 9:00 a.m. to 1:00 p.m. on Saturday ("Business
--------
Hours"), excluding the hereinafter defined Holidays, subject to curtailment as
- -----
required by governmental laws, rules or regulations, in such amounts as are
considered by Landlord to be standard, but such service at times during weekdays
other than the hours stated above, and on Saturdays, Sundays and Holidays, shall
be furnished only upon request of Tenant, and for such service Tenant shall pay
Landlord upon demand an amount equal to Landlord's actual costs at that time of
providing such service.
(iii) Electric lighting service for all public areas and special
service areas of the Building in the manner and to the extent deemed by Landlord
to be standard.
(iv) Janitor service on a five (5) day week basis in a manner
considered by Landlord to be standard for similar projects in the area and as
described in Exhibit H attached hereto; provided, however, if Tenant's floor
--------- -------- -------
coverings or other improvements require special care, Tenant shall pay the
additional cleaning cost attributable thereto.
(v) Access control for the Project comparable as to coverage,
control and responsiveness (but not necessarily as to means for accomplishing
same) to other similarly
<PAGE>
situated multi-tenant office buildings in the vicinity; provided, however,
-------- -------
Landlord shall have no responsibility to prevent, and shall not be liable to
Tenant for, any liability or loss to Tenant, its agents, employees and visitors
arising out of losses due to theft, burglary, or damage or injury to persons or
property caused by persons gaining access to the Premises, and Tenant hereby
releases Landlord from all liability for such losses, damage or injury.
(vi) Sufficient electrical capacity to operate (i) incandescent
lights, typewriters, calculating machines, photocopying machines and other
machines of similar voltage electrical consumption (120/220 volts), provided
that the total rated electrical design load for said lighting and machines of
low electrical voltage shall not exceed four and one-half (4.50) watts per
square foot of rentable area; and (ii) lighting and equipment of high voltage
electrical consumption (277/480 volts), provided that the total rated electrical
design load for said lighting and equipment of high electrical voltage shall not
exceed two (2.00) watts per square foot of rentable area (each such rated
electrical design load to be hereinafter referred to as the "Building standard
rated electrical design load"). Tenant shall be allocated Tenant's pro rata
share of the Building standard circuits provided on the floor(s) Tenant
occupies.
Should Tenant's fully connected electrical design load exceed the Building
standard rated electrical design load for either low or high voltage electrical
consumption, or if Tenant's electrical design requires low voltage or high
voltage circuits in excess of Tenant's share of the Building standard circuits,
Landlord will (at Tenant's expense) install one (1) additional high voltage
panel and/or one (1) additional low voltage panel with associated transformer,
space for which has been provided in the base building electrical closets based
on a maximum of two (2) such additional panels per floor for all tenants on the
floor (which additional panels and transformers shall be hereinafter referred to
as the "additional electrical equipment"). If the additional electrical
equipment is installed because Tenant's low or high voltage rated electrical
design load exceeds the applicable Building standard rated electrical design
load, then a meter shall also be added (at Tenant's expense) to measure the
electricity used through the additional electrical equipment.
The design and installation of any additional electrical equipment (or
related meter) required by Tenant shall be subject to the prior approval of
Landlord (which approval shall not be unreasonably withheld). All expenses
incurred by Landlord in connection with the review and approval of any
additional electrical equipment shall also be reimbursed to Landlord by Tenant.
Tenant shall also pay on demand the actual metered cost of electricity consumed
through the additional electrical equipment (if applicable), plus any actual
accounting expenses incurred by Landlord in connection with the metering
thereof.
If any of Tenant's electrical equipment requires conditioned air in excess
of Building standard air conditioning, the same shall be installed by Landlord
(on Tenant's behalf), and Tenant shall pay all design, installation, metering
and operating costs relating thereto.
If Tenant requires that certain areas within the Premises must operate in
excess of the Business Hours set forth above, the electrical service to such
areas shall be separately circuited and metered such that Tenant shall be billed
the actual costs associated with electricity consumed during hours other than
the Business Hours. Without limiting the foregoing, Tenant shall arrange to have
its network and/or telecommunications operating center separately circuited and
metered as aforesaid.
(vii) All fluorescent bulb and ballast replacement for Building
standard lighting in all areas and all incandescent bulb replacement in public
areas, toilet and restroom areas and stairwells.
(viii) Nonexclusive operatorless passenger elevator service to the
Premises twenty-four (24) hours per day; provided, that Landlord may reasonably
limit the number of elevators in operation on weekdays after the Business Hours.
(b) Cessation of Services. To the extent the services described in Section
--------------------- -------
4.1(a) of this Lease require electricity, gas and water supplied by public
- ------
utilities, Landlord's covenants thereunder shall only impose on Landlord the
obligation to use its reasonable efforts to cause the applicable public
utilities to furnish the same. Failure by Landlord to furnish the services
described in this Section 4.1 to any extent, or any cessation thereof, shall
-----------
not, unless such failure
<PAGE>
was caused by the gross negligence or willful misconduct of Landlord or of
Landlord's employees, agents and contractors, (i) render Landlord in default
hereunder or liable in any respect for damages to either person or property, or
(ii) be construed as an eviction of Tenant, or (iii) work an abatement of Rent,
or (iv) relieve Tenant from fulfillment of any covenant or agreement hereof. In
addition to the foregoing, should any of the equipment or machinery break down,
cease to function properly for any cause other than the gross negligence or
willful misconduct of Landlord or Landlord's employees, agents or contractors or
be intentionally turned off for testing or maintenance purposes, Tenant shall
have no claim for abatement or reduction of Rent or damages on account of an
interruption in service occasioned thereby or resulting therefrom; provided,
--------
however, Landlord agrees to use diligent efforts to repair said equipment or
- -------
machinery and to restore said services and Tenant's rent shall abate after five
(5) consecutive business days of such cessation of services for the duration of
the cessation so long as the Premises are not and cannot reasonably be used for
the conduct of Tenant's business operation and are not being so used by Tenant.
(c) Holidays. The following dates shall collectively be known as
--------
"Holidays" and individually known as a "Holiday": New Year's Day; Memorial Day;
-------- -------
Independence Day; Labor Day; Thanksgiving Day; Friday following Thanksgiving
Day; Christmas Day; any other holiday recognized and taken by tenants occupying
at least one-half (1/2) of the rentable area of office space of the Building and
any other holiday recognized and taken by any unions which service the Building
in any manner. If in the case of any Holiday, a different day shall be observed
than the respective day above described, then that day which constitutes the day
observed by national banks in the city or proximate area in which the Building
is located, on account of such Holiday, shall constitute the Holiday under this
Lease.
Section 4.2 Keys and Locks. Subject to the terms and provisions of this
--------------
Lease, Tenant shall have access to the Premises 24 hours a day, 7 days a week.
Landlord shall initially furnish Tenant with [five hundred thirty-one (531)]
card keys or keys, respectively, for the building entrance and for the standard
corridor doors serving the Premises. Additional keys will be furnished by
Landlord upon an order signed by Tenant and at Tenant's expense. All such keys
shall remain the property of Landlord. Without the prior written consent of
Landlord, no additional locks shall be allowed on any door of the Premises, and
Tenant shall not make or permit to be made any duplicate keys, except those
furnished by Landlord. Upon termination or expiration of this Lease or a
termination of possession of the Premises by Tenant, Tenant shall surrender to
Landlord all keys to any locks on doors entering or within the Premises.
Landlord shall also provide card-key controlled access (or other similar access
control device or mechanism as Landlord may from time to time elect to provide)
intended to limit the general public's access to the Building during other than
Business Hours. Landlord, however, shall have no liability to Tenant, its
employees, agents, invitees or licensees for any loss, damage or injury of any
kind or nature caused by or as a result of the presence of any unauthorized
person in the Premises, the Building or the Project, including without
limitation any loss, damage or injury due to theft, burglary or other criminal
conduct by any person, nor shall Landlord be required to insure against any such
loss, damage or injury
Section 4.3 Graphics and Building Directory. Landlord shall provide and
-------------------------------
install, at Tenant's expense, all letters or numerals at the entrance to the
Premises, and a strip containing a listing of Tenant's name on the Building
directory board to be placed in the main lobby of the Building. All such
letters and numerals shall be in Building standard graphics. Landlord shall not
be liable for any inconvenience or damage occurring as a result of any error or
omission in any directory or graphics. No signs, numerals, letters or other
graphics shall be used or installed by Tenant on the exterior of, or which may
be visible from outside, the Premises, unless approved in writing by Landlord.
Additionally, Landlord agrees to provide to Tenant, at Tenant's sole cost and
expense, prominent and exclusive signage (subject however to the provisions of
Section 5.2) at or about the top of the Building to the maximum size permitted
under the signage provisions of the Fairfax County Zoning Ordinance and any
other applicable laws or covenants. The design, size, placement, style,
lighting, colors and materials of such sign shall require Landlord's prior
approval, which approval will not be unreasonably withheld, conditioned or
delayed, and will be subject further to Tenant's obtaining approval from the
Dulles Tech Center association and applicable governmental authorities. Upon
the expiration or earlier termination of this Lease, Tenant shall remove all
such signage and/or graphics and repair any and all damage caused by or
resulting from the installation, maintenance, operation and/or removal of such
signage or graphics at Tenant's sole cost and expense. Tenant's proposed
signage is attached
<PAGE>
hereto as Exhibit G, and Landlord approves such signage, subject to Tenant's
obtaining the other approvals and permits referred to hereinabove.
ARTICLE V.
Section 5.1 Occupancy of Premises. Tenant shall throughout the Term of
---------------------
this Lease, at its own expense, maintain the Premises and all improvements
thereon and keep them free from waste, damage or nuisance, and shall deliver up
the Premises in a clean and sanitary condition at the expiration or termination
of this Lease or the termination of Tenant's right to occupy the Premises by
Tenant, in good repair and condition, reasonable wear and tear excepted. In the
event Tenant should neglect to maintain and/or return the Premises in such
manner at any time, Landlord shall have the right, but not the obligation, to
cause repairs or corrections to be made, and any reasonable costs therefor shall
be payable by Tenant to Landlord within ten (10) days of demand therefor by
Landlord. Upon the expiration or termination of this Lease or the termination
of Tenant's right to occupy the Premises by Tenant, Landlord shall have the
right to reenter and resume possession of the Premises. No act or thing done by
Landlord or any of Landlord's agents (hereinafter defined) during the Term of
the Lease shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender of the Premises shall be valid unless the same
be made in writing and executed by Landlord. Tenant shall notify Landlord at
least ten (10) days prior to vacating the Premises and shall arrange to meet
with Landlord for a joint inspection of the Premises. If Tenant fails to give
such notice or to arrange for such inspection, then Landlord's inspection of the
Premises shall be deemed correct for the purpose of determining Tenant's
responsibility for repair and restoration of the Premises.
Section 5.2 Entry for Repairs and Inspection. Tenant shall permit
--------------------------------
Landlord and its agents to enter the Premises (provided Landlord gives Tenant
reasonable prior notice and Tenant has the option to have a representative
accompanying Landlord during such entry) at all reasonable times to inspect the
same; to show the Premises to prospective tenants (within twelve (12) months of
the expiration of the term of this Lease), or interested parties such as
prospective lenders and purchasers; to exercise its rights under this Lease; to
clean, repair, alter or improve the Premises or the Building; to discharge
Tenant's obligations when Tenant has failed to do so within the time required
under this Lease or within a reasonable time after written notice from Landlord,
whichever is earlier; to post notices of nonresponsibility and similar notices
and "For Sale" signs at any time and to place "For Lease" signs upon or adjacent
to the Building or the Premises at any time within twelve (12) months of the
expiration of the term of this Lease. Tenant shall permit Landlord and its
agents to enter the Premises at any time in the event of an emergency. When
reasonably necessary, Landlord may temporarily close entrances, doors,
corridors, elevators or other facilities without liability to Tenant by reason
of such closure.
Section 5.3 Hazardous Materials.
-------------------
(a) As used in this Lease, the term "Hazardous Materials" shall mean and
-------------------
include any substance that is or contains petroleum, asbestos, polychlorinated
biphenyls, lead, or any other substance, material or waste which is now or is
hereafter classified or considered to be hazardous or toxic under any federal,
state or local law, rule, regulation or ordinance relating to pollution or the
protection or regulation of human health, natural resources or the environment
(collectively "Environmental Laws") or poses or threatens to pose a hazard to
------------------
the health or safety of persons on the Premises or any adjacent property.
Landlord represents and warrants that to the best of Landlord's actual
knowledge, there are no Hazardous Materials located in, on or under the Building
or the Land, and Landlord has received no notices concerning violation of any
laws relating to Hazardous Materials with respect to the Building or the Land.
If Hazardous Materials are discovered in the Building or on the Land after the
Commencement Date and were not caused or permitted by Tenant or Tenant's
employees, assignees agents or invitees, then Landlord will be responsible for
all costs and expenses associated with regulatory requirements to eliminate any
violations of law resulting from such presence and Landlord shall indemnify,
defend, and hold Tenant and Tenant's employees, assignees, agents and invitees
harmless from any and all claims, costs, liabilities or expenses associated with
such Hazardous Materials.
(b) Tenant agrees that during its use and occupancy of the Premises it
will not permit Hazardous Materials to be present on or about the Premises
except in a manner and quantity necessary for the ordinary performance of
Tenant's business and that it will comply with all Environmental Laws relating
to the use, storage or disposal of any such Hazardous Materials.
<PAGE>
(c) If Tenant's use of Hazardous Materials on or about the Premises
results in a release, discharge or disposal of Hazardous Materials on, in, at,
under, or emanating from, the Premises or the property in which the Premises are
located, Tenant agrees to investigate, clean up, remove or remediate such
Hazardous Materials in full compliance with (a) the requirements of (i) all
Environmental Laws and (ii) any governmental agency or authority responsible for
the enforcement of any Environmental Laws; and (b) any additional requirements
of Landlord that are reasonably necessary to protect the value of the Premises
or the property in which the Premises are located. Landlord shall also have the
right, but not the obligation, to take whatever action with respect to any such
Hazardous Materials that it deems reasonably necessary to protect the value of
the Premises or the property in which the Premises are located. All costs and
expenses paid or incurred by Landlord in the exercise of the right set forth in
this Section 5.3(c) shall be payable by Tenant upon demand.
--------------
(d) Upon reasonable notice to Tenant, Landlord may, at its sole cost and
expense unless a violation is discovered, inspect the Premises for the purpose
of determining whether there exists on the Premises any Hazardous Materials or
other condition or activity that is in violation of the requirements of this
Lease or of any Environmental Laws. The right granted to Landlord herein to
perform inspections shall not create a duty on Landlord's part to inspect the
Premises, or liability on the part of Landlord for Tenant's use, storage or
disposal of Hazardous Materials, it being understood that Tenant shall be solely
responsible for all liability in connection therewith.
(e) Tenant shall surrender the Premises to Landlord upon the expiration or
earlier termination of this Lease free of debris, waste or Hazardous Materials
placed on or about the Premises by Tenant or its agents, employees, contractors
or invitees, and in a condition which complies with all Environmental Laws.
(f) Tenant agrees to indemnify and hold harmless Landlord and Landlord's
employees, assignees, agents and invitees from and against any and all claims,
losses (including, without limitation, loss in value of the Premises or the
property in which the Premises are located), liabilities and expenses (including
reasonable attorney's fees) sustained by Landlord attributable to (i) any
Hazardous Materials placed on or about the Premises by Tenant or its agents,
employees, contractors or invitees or (ii) Tenant's breach of any provision of
this Section 5.3.
-----------
(g) The provisions of this Section 5.3 shall survive the expiration or
-----------
earlier termination of this Lease.
ARTICLE VI.
Section 6.1 Leasehold Improvements.
----------------------
(a) Acceptance of Premises. Tenant has made a complete inspection of the
----------------------
Premises and, except as set forth in this Section 6.1 and Exhibit E, shall
----------- ---------
accept the Premises and the Project in their "AS IS," "WHERE IS," and "WITH ALL
FAULTS" condition on the Commencement Date without recourse to Landlord, subject
to the terms of Exhibit E attached hereto and hereby made a part hereof. Except
---------
as expressly provided in this Lease, Landlord shall have no obligation to
furnish, equip or improve the Premises or the Project. The taking of possession
of the Premises by Tenant shall be, except as set forth in this Section 6.1 and
-----------
Exhibit E, conclusive evidence against Tenant that (i) Tenant accepts the
- ---------
Premises and the Project as being suitable for its intended purpose and in a
good and satisfactory condition, (ii) acknowledges that the Premises and the
Project comply fully with Landlord's covenants and obligations under this Lease
and (iii) waives any defects in the Premises and its appurtenances and in all
other parts of the Project. Notwithstanding the foregoing, Landlord agrees
that upon the Commencement Date, the Building, its common areas, and all central
mechanical, electrical and plumbing systems will be in good working order,
condition and repair, and the Building and the Land will be in compliance with
all applicable laws in effect at the Commencement Date (subject to Tenant's
performance of the Tenant Work). In the event of a material breach of the
covenant contained in the preceding sentence, Landlord shall promptly after
receipt of written notice from Tenant setting forth the nature and extent of
such material breach, rectify same at Landlord's cost and expense, as Tenant's
sole remedy therefor. After the Commencement Date,
<PAGE>
Landlord will be responsible for the costs of compliance with applicable laws
with respect to the common areas of the Building and the Land as well as all
structural elements of the Building, provided that such costs are not the result
of Tenant's use, occupancy, manner of use or occupancy, or the negligence of
Tenant.
(b) Improvements and Alterations. Tenant shall not make or allow to be
----------------------------
made (except as otherwise provided in this Lease) any improvements, alterations
or physical additions (including fixtures) in or to the Premises or the Project,
without first obtaining the written consent of Landlord, which approval shall
not be unreasonably withheld, conditioned or delayed (except in the case of
structural changes or changes to any Building system, in which case Landlord may
withhold such approval in its sole discretion), including Landlord's written
approval of Tenant's contractor(s) and of the plans, working drawings and
specifications relating thereto (none of which shall be unreasonably withheld,
conditioned or delayed, except in the case of structural changes or changes to
any Building system, in which case Landlord may withhold such approval in its
sole discretion). Approval by Landlord of any of Tenant's drawings and plans
and specifications prepared in connection with any alterations, improvements,
modifications or additions to the Premises or the Project shall not constitute a
representation or warranty of Landlord as to the adequacy or sufficiency of such
drawings, plans and specifications, or alterations, improvements, modifications
or additions to which they relate, for any use, purpose or conditions, but such
approval shall merely be the consent of Landlord as required hereunder. Except
as otherwise expressly provided in Exhibit E attached hereto, any and all
furnishing, equipping and improving of or other alteration and addition to the
Premises shall be: (i) made at Tenant's sole cost, risk and expense, and Tenant
shall pay for Landlord's reasonable costs incurred in connection with and as a
result of such alterations or additions; (ii) performed in a good and
workmanlike manner with labor and materials of such quality as Landlord may
reasonably require; (iii) constructed in accordance with all plans and
specifications approved in writing by Landlord prior to the commencement of any
such work; (iv) prosecuted diligently and continuously to completion so as to
minimize interference with the normal business operations of other tenants in
the Building, the performance of Landlord's obligations under this Lease or any
mortgage or ground lease covering or affecting all or any part of the Building
or the Land and any work being done by contractors engaged by Landlord with
respect to or in connection with the Building; and (v) performed by contractors
approved in writing by Landlord, which approval shall not be unreasonably
withheld, conditioned or delayed. Tenant shall have no (and hereby waives all)
rights to payment or compensation for any such item. Tenant shall notify
Landlord upon completion of such alterations, improvements, modifications or
additions and Landlord shall inspect same for workmanship and compliance with
the approved plans and specifications. Tenant and its contractors shall comply
with all commercially reasonable requirements Landlord may impose on Tenant or
its contractors with respect to such work (including but not limited to,
insurance and indemnity requirements), and shall deliver to Landlord a complete
copy of the "as-built" or final plans and specifications for all alterations or
physical additions so made in or to the Premises within thirty (30) days of
completing the work. Tenant shall not place safes, vaults, filing cabinets or
systems, libraries or other heavy furniture or equipment within the Premises
without Landlord's prior written consent, which approval shall not be
unreasonably withheld, conditioned or delayed.
Notwithstanding the foregoing provisions of this Section 6.1(b),
--------------
Tenant shall notify Landlord of, but shall not be obligated to obtain Landlord's
prior consent for any improvement, alteration or physical addition which costs
less than $20,000.00 and does not affect the Building's structure or the
Building's HVAC, electrical or plumbing systems.
(c) Title to Alterations. All alterations, physical additions,
--------------------
modifications or improvements in or to the Premises (including fixtures) shall,
when made, become the property of Landlord and shall be surrendered to Landlord
upon termination or expiration of this Lease or termination of Tenant's right to
occupy the Premises, whether by lapse of time or otherwise, without any payment,
reimbursement or compensation therefor; provided, however, that (i) Tenant shall
-------- -------
retain title to and shall remove from the Premises movable equipment or
furniture owned by Tenant, (ii) Tenant repairs any damage caused by a removal
pursuant to Section 6.1(c)(i), and (iii) Tenant returns the Premises to their
-----------------
condition existing immediately prior to removal (with respect to a removal of
an improvement pursuant to Section 6.1(c)(i) only). Notwithstanding any of the
-----------------
foregoing to the contrary, Landlord may require Tenant to remove all
alterations, additions or improvements to the Premises (including, but not
limited to, the network and/or telecommunications operations center) that are
other than a standard office buildout in the
<PAGE>
Reston/Herndon area in which the Building is located, including, without
limitation, any cabling or other computer, satellite or telecommunications
equipment or hardware, whether or not such alterations, additions, or
improvements are located in the Premises upon the expiration or earlier
termination of this Lease or the termination of Tenant's right to possession of
the Premises and restore the same to Building standard condition, reasonable
wear and tear excepted. If Tenant fails to remove any movable equipment or
furniture or any alterations, additions or improvements so required hereunder to
be removed, then Landlord may remove such items, at Tenant's sole cost and
expense. The rights conferred to Landlord under this Section 6.1(c) shall be in
--------------
addition to (and not in conflict with) any other rights conferred on Landlord by
this Lease, in equity or at law. Notwithstanding the foregoing provisions of
this Section 6.1(c), Tenant shall not be required to remove any addition,
--------------
modification or improvement to the Premises unless Landlord informs Tenant in
writing, either at the time Landlord gives its consent to such addition,
modification or improvement or within ten (10) business days of Tenant's written
request for an addition, modification or improvement which does not require
Landlord's consent, that it will have to remove such addition, modification or
improvement at the expiration or earlier termination of this Lease.
(d) Personal Property Taxes; Sales, Use and Excise Taxes. Tenant shall be
----------------------------------------------------
responsible for and shall pay ad valorem taxes and other taxes, assessments or
charges levied upon or applicable to Tenant's personal property, the value of
Tenant's leasehold improvements in the Premises in excess of Building standard
(and if the taxing authorities do not separately assess Tenant's leasehold
improvements, Landlord may make a reasonable allocation of the taxes assessed on
the Project to give effect to this Section 6.l(d)) and all license fees and
--------------
other fees or charges imposed on the business conducted by Tenant on the
Premises before such taxes, assessments, charges or fees become delinquent.
Tenant shall also pay to Landlord with all Rent due and owing under this Lease
an amount equal to any sales, rental, excise and use taxes levied, imposed or
assessed by the State or any political subdivision thereof or other taxing
authority upon any amounts classified as Rent.
Section 6.2 Repairs by Landlord. All repairs, alterations or additions
-------------------
that affect the Project's structural components shall be made by Landlord or
its contractors only, and, in the case of any damage to such components or
systems caused the negligence or willful misconduct of Tenant or Tenant's
agents, shall be paid for by Tenant in an amount equal to Landlord's costs plus
twelve percent (12%) as an overhead expense. Unless otherwise provided herein,
Landlord shall not be required to make any improvements to or repairs of any
kind or character to the leasehold improvements located in the Premises during
the Term, except such repairs as Landlord deems necessary for normal maintenance
operations of the Building.
Section 6.3 Repairs by Tenant. Subject to Section 6.2 of this Lease,
----------------- -----------
Tenant shall be responsible, at its own cost and expense, for all repair or
replacement of any damage to the leasehold improvements in the Premises (unless
such damage is caused by the negligence or willful misconduct of Landlord or
Landlord's employees, agents or contractors), together with any damage to the
Project or any part thereof caused by Tenant or any of Tenant's agents. Except
insofar as Landlord is expressly obligated under this Lease to maintain and
repair the Building, in addition to the maintenance and repair obligations of
Tenant otherwise expressly set forth in this Lease, Tenant is also obligated to
perform, at Tenant's own cost and expense and risk, all other maintenance and
repairs necessary or appropriate to cause the Premises to be maintained in good
condition and suitable for Tenant's intended commercial purpose reasonable wear
and tear excepted.
Section 6.4 Liens. Tenant shall keep the Premises and the Building free
-----
from any liens, including but not limited to liens filed against the Premises by
any governmental agency, authority or organization, arising out of any work
performed, materials ordered or obligations incurred by or on behalf of Tenant,
and Tenant hereby agrees to indemnify and hold Landlord, its agents, employees,
independent contractors, officers, directors, partners, and shareholders
harmless from any liability, cost or expense associated with any lien caused by
Tenant. Tenant shall cause any lien imposed as a result of Tenant's actions or
inaction to be released of record by payment or posting of the proper bond
acceptable to Landlord within ten (10) days after the earlier of imposition of
the lien or written request by Landlord. Tenant shall give Landlord written
notice of Tenant's intention to perform work on the Premises which might result
in any claim of lien, at least ten (10) days prior to the commencement of such
work to enable Landlord to post and record a notice of nonresponsibility or
other notice deemed proper before
<PAGE>
commencement of any such work. If Tenant fails to remove any lien within the
prescribed ten (10) day period, then Landlord may do so at Tenant's expense and
Tenant's reimbursement to Landlord for such amount, including reasonable
attorneys' fees and costs, shall be deemed Additional Rent. Tenant shall have no
power to do any act or make any contract which may create or be the foundation
for any lien, mortgage or other encumbrance upon the reversion or other estate
of Landlord, or of any interest of Landlord in the Premises.
Section 6.5 Indemnification. Tenant shall defend, indemnify and hold
---------------
harmless Landlord, its agents, employees, officers, directors, partners and
shareholders ("Landlord's Related Parties") from and against any and all
--------------------------
liabilities, judgments, demands, causes of action, claims, losses, damages,
costs and expenses, including reasonable attorneys' fees and costs, arising out
of the use, occupancy, conduct, operation, or management of the Premises by, or
the willful misconduct or negligence of, Tenant, its officers, contractors,
licensees, agents, servants, employees, guests, invitees, or visitors in or
about the Building or Premises or arising from any breach or default under this
Lease by Tenant, or arising from any accident, injury, or damage, howsoever and
by whomsoever caused, to any person or property, occurring in or about the
Building or Premises. This indemnification shall survive termination or
expiration of this Lease. This provision shall not be construed to make Tenant
responsible for loss, damage, liability or expense resulting from injuries to
third parties caused by the negligence or willful misconduct of Landlord, or
its officers, contractors, licensees, agents, employees, or invitees.
Landlord shall indemnify, defend and hold harmless Tenant as well as
Tenant's employees, agents and invitees ("Tenant's Related Parties") from and
------------------------
against all liability, claims, losses and expenses (i) resulting from the
negligent acts, omissions or willful misconduct of Landlord or Landlord's
Related Parties in connection with Landlord's or Landlord's Related Parties'
activities in, on or about the Project except to the extent that such liability
or claim is for damage to Tenant's personal property, fixtures or furniture in
the Premises and is covered by insurance that Tenant is required to obtain under
this Lease (or would have been covered had Tenant carried the insurance required
under this Lease) and (ii) Landlord's breach of this Lease. This provision
shall not be construed to make Landlord responsible for any losses, liabilities,
damages or expenses resulting from injuries or damage caused by the negligence
or willful misconduct of Tenant, or its officers, contractors, licensees,
agents, employees or invitees.
ARTICLE VII.
Section 7.1 Condemnation.
------------
(a) Total Taking. In the event of a taking or damage related to the
------------
exercise of the power of eminent domain, by any agency, authority, public
utility, person, corporation or entity empowered to condemn property (including
without limitation a voluntary conveyance by Landlord in lieu of such taking or
condemnation) (individually, a "Taking") of (i) the entire Premises, (ii) so
------
much of the Premises as to prevent or substantially impair its use by Tenant
during the Term of this Lease or (iii) portions of the Building or Project
required for reasonable access to, or reasonable use of, the Premises including,
without limitation, material portions of the parking areas (individually, a
"Total Taking"), the rights of Tenant under this Lease and the leasehold estate
------------
of Tenant in and to the Premises shall cease and terminate as of the date upon
which title to the property taken passes to and vests in the condemnor or the
effective date of any order for possession if issued prior to the date title
vests in the condemnor ("Date of Taking").
--------------
(b) Partial Taking. In the event of a Taking of only a part of the
--------------
Premises or of a part of the Project which does not constitute a Total Taking
during the Term of this Lease (individually, a "Partial Taking"), the rights of
--------------
Tenant under this Lease and the leasehold estate of Tenant in and to the portion
of the property taken shall cease and terminate as of the Date of Taking, and an
adjustment to the Rent shall be made based upon the reduced area of the
Premises.
(c) Termination by Landlord. In the event of a Taking of the Building
-----------------------
(other than the Premises) such that, in Landlord's reasonable opinion, the
Building cannot be restored in a manner that makes its continued operation
practically or economically feasible, Landlord may terminate this Lease by
giving notice to Tenant within ninety (90) days after the date notice of such
Taking is received by Landlord.
<PAGE>
(d) Rent Adjustment. If this Lease is terminated pursuant to this Section
--------------- -------
7.1, Landlord shall refund to Tenant any prepaid unaccrued Rent and any other
- ---
sums due and owing to Tenant (less any sums then due and owing Landlord by
Tenant), and Tenant shall pay to Landlord any remaining sums due and owing
Landlord under this Lease, each prorated as of the Date of Taking where
applicable.
(e) Repair. If this Lease is not terminated as provided for in this
------
Section 7.1, then Landlord at its expense shall promptly repair and restore the
- -----------
Building, Project and/or the Premises to approximately the same condition that
existed at the time Tenant entered into possession of the Premises, wear and
tear excepted (and Landlord shall have no obligation to repair or restore
Tenant's improvements to the Premises or Tenant's Property), except for the part
taken, so as to render the Building or Project as complete an architectural unit
as practical, but only to the extent of the condemnation award received by
Landlord for the damage.
(f) Awards and Damages. Except as expressly provided below, Landlord
------------------
reserves all rights to damages and awards paid because of any Partial or Total
Taking of the Premises or the Project. So long as it does not reduce the amount
of the award payable to Landlord, Tenant (i) shall be entitled to receive any
amount attributable to any excess of the market value of the Premises for the
remainder of the Term over the present value as of the Expiration Date of the
rent payable for the remainder of the Term and (ii) shall have the right to make
a separate claim in any condemnation proceeding for the taking of the
unamortized or undepreciated value of the improvements and alterations owned by
Tenant which Tenant may remove at the expiration or earlier termination of this
Lease, reasonable removal and relocation costs for any improvements Tenant has
the right to remove and elects to remove, relocation costs, the claim for which
Tenant may pursue by separate action independent of this Lease and any other
amount. Tenant shall have the right to negotiate directly with the condemnor
for the recovery of the portion of the award that Tenant is entitled to under
subsection (ii) above. Further, Tenant shall not make claims against Landlord
or the condemning authority for damages. If a temporary taking of part of the
Premises or a portion of the Project which prevents Tenant's use or occupancy of
all or a material portion of the Premises occurs through (a) the exercise of any
government power (by legal proceedings or otherwise) by condemnor or (b) a
voluntary sale or transfer by Landlord to any condemnor, either under threat of
exercise of eminent domain by a condemnor or while legal proceedings for
condemnation are pending, Rent shall abate during the time of such taking in
proportion to the portion of the Premises taken. The entire award relating to
the temporary taking shall be and remain the property of Landlord. Tenant
irrevocably assigns and transfers to Landlord all rights to and interest in such
award and fully releases and relinquishes any claim to, right to make a claim
on, and any other interest in the award.
Section 7.2 Force Majeure. Neither Landlord nor Tenant shall be required
-------------
to perform any term, provision, agreement, condition or covenant in this Lease
(other than the obligations of Tenant to pay Rent as provided herein) so long as
such performance is delayed or prevented by "Force Majeure", which shall mean
-------------
acts of God, strikes, injunctions, lockouts, material or labor restrictions by
any governmental authority, civil riots, floods, fire, theft, public enemy,
insurrection, war, court order, requisition or order of governmental body or
authority, and any other cause not reasonably within the control of Landlord or
Tenant and which by the exercise of due diligence Landlord or Tenant is unable,
wholly or in part, to prevent or overcome. Neither Landlord nor any mortgagee
shall be liable or responsible to Tenant for any loss or damage to any property
or person occasioned by any Force Majeure, or for any damage or inconvenience
which may arise through repair or alteration of any part of the Project as a
result of any Force Majeure.
Section 7.3 Fire or Other Casualty Damage.
-----------------------------
(a) Damage. If any portion of the Premises shall be destroyed or damaged
------
by fire or any other casualty, Tenant shall immediately give notice thereof to
Landlord. Within thirty (30) days of the date of Tenant's notice, Landlord
shall provide Tenant with a reasonable written estimate, calculated in good
faith, of the number of days that it will take to restore the Building and/or
Premises (the "Restoration Estimate"). If the Restoration Estimate is greater
--------------------
than 180 days, both Landlord and Tenant shall have the right to terminate this
Lease by giving 30 days written notice to the other. If the Restoration
Estimate is less than 180 days, Landlord shall promptly commence and diligently
pursue through completion the restoration of the Building
<PAGE>
and/or Premises and this Lease shall continue in full force and effect. If,
however, the cost of the restoration exceeds the insurance proceeds Landlord
reasonably expects to receive due to the casualty (provided, however, that the
-------- -------
insurance required to be carried by Landlord by this Lease was in effect on the
date of the casualty) or Landlord's lender demands that such insurance proceeds
be paid to it, Landlord may terminate the Lease, subject to Tenant's right to
propose keeping the Lease in effect by Tenant's paying for the restoration. If
Tenant elects to do so, Tenant shall notify Landlord within ten (10) business
days of receiving Landlord's notice of termination of the Lease, and the parties
shall engage in good faith negotiations to determine the terms of Tenant's
election to pay for the restoration; provided, however, that if the parties do
-------- -------
not reach agreement to keep this Lease in effect within ten (10) business days
after Tenant delivers such written notice to Landlord, then this Lease shall
terminate as of the date set forth in Landlord's notice of termination.
Following a casualty, Tenant's obligation to pay Rent shall be abated in
proportion to the interference caused to its use and occupation of the Premises
provided that Tenant no longer occupies or uses such affected Premises for the
active conduct of its business.
Notwithstanding the terms of the foregoing paragraph, if the casualty
occurs in the last year of the Term (unless Tenant shall have renewed this Lease
as provided herein) and materially affects Tenant's use or occupation of the
Premises (i.e., more than 25% of the Premises has been damaged, or the cost to
repair is reasonably estimated by Landlord to exceed $250,000), either Landlord
or Tenant may elect to terminate this Lease by giving the other party 30 days
prior written notice. Notwithstanding the provisions of the immediately
preceding paragraph to the contrary, if Landlord elects to terminate this Lease
as a result of such casualty occurring in the last year of the Term (unless
Tenant shall have renewed this Lease as provided herein), Tenant shall not have
the right to keep this Lease in effect by paying for the restoration.
(b) Repair. Landlord shall use reasonable efforts to give Tenant written
------
notice of its decisions, estimates or elections under this Section 7.3 within
-----------
thirty (30) days after any such damage or destruction. If Landlord is obligated
to repair and restore the Premises or other portion of the Project, this Lease
shall continue in full force and effect, and the repairs will be made as
promptly as is commercially reasonable (not to exceed 120 days from the date of
the Restoration Estimate, subject to the provisions of Section 7.2 of this
-----------
Lease. Should the repairs, despite Landlord's use of commercially reasonable
efforts, not be completed within that period, both Landlord and Tenant shall
each have the option of terminating this Lease by written letter of termination.
If this Lease is terminated as herein permitted, Landlord shall refund to Tenant
any prepaid Rent (unaccrued as of the date of damage or destruction) and any
other sums due and owing by Landlord to Tenant (less any sums then due and owing
Landlord by Tenant) and any remaining sums due and owing by Tenant to Landlord
shall be paid to Landlord. If Landlord has elected to repair and reconstruct
the Premises or other portion of the Project to the extent stated above, the
Term will be extended for a time equal to the period from the occurrence of such
damage to the completion of such repair and reconstruction. If Landlord elects
to rebuild the Premises or other portion of the Project, Landlord shall only be
obligated to restore or rebuild the Premises or other portion of the Project to
approximately the same condition as existed at the time Tenant entered into
possession of the Premises, wear and tear excepted and not be required to
rebuild, repair or replace any part of Tenant's Property or Tenant's leasehold
improvements. Notwithstanding anything contained in this Lease to the contrary,
if Landlord shall elect to repair and restore the Premises or other portion of
the Project pursuant to this Section 7.3, in no event shall Landlord be required
-----------
to expend under this Article VII any amount in excess of the proceeds actually
-----------
received from the insurance carried by Landlord pursuant to Section 7.4(a) of
--------------
this Lease. Landlord shall not be liable for any inconvenience or annoyance to
Tenant or injury to the business of Tenant resulting in any way from such damage
or destruction or the disregard of the repair thereof.
(c) Negligence of Tenant. Notwithstanding the provisions of Sections
-------------------- --------
7.3(a) and 7.3(b) of this Lease, if the Premises, the Project or any portion
- -----------------
thereof, are damaged by fire or other casualty resulting from the fault or
negligence of Tenant or any of Tenant's agents, the Rent under this Lease will
not be abated during the repair of that damage, and Tenant will be liable to
Landlord for the cost and expense of the repair and restoration of the Premises,
the Project or any part thereof, caused thereby to the extent that cost and
expense is not covered by insurance proceeds (including without limitation the
amount of any insurance deductible).
Section 7.4 Insurance.
---------
<PAGE>
(a) Landlord shall maintain, or cause to be maintained, standard fire and
extended coverage insurance on the Buildings and Building standard tenant
improvements (excluding leasehold improvements by Tenant in excess of Building
standard and Tenant's Property) in amounts considered by Landlord to be
reasonable and customary. The insurance required to be obtained by Landlord may
be obtained by Landlord through blanket or master policies insuring other
entities or properties owned or controlled by Landlord.
(b) Tenant shall, at its sole cost and expense, procure and maintain
during the Term of this Lease (and during any period prior to the Commencement
Date in which Tenant is performing work in any portion of the Building) all such
policies of insurance as Landlord may require, including without limitation
commercial general liability insurance (including personal injury liability,
premises/operation, property damage, independent contractors) in amounts of not
less than a combined single limit of $5,000,000; comprehensive automobile
liability insurance; business interruption insurance for a period of at least
twelve (12) months; contractual liability insurance; property insurance with
respect to Tenant's Property, and all leasehold improvements, alterations and
additions in excess of Building standard, to be written on an "all risk" basis
for full replacement cost; worker's compensation and employer's liability
insurance; and comprehensive catastrophe liability insurance; all maintained
with companies, on forms and in such amounts as Landlord may, from time to time,
reasonably require and endorsed to include Landlord as an additional insured (on
all but the workers compensation coverage), with the premiums fully paid on or
before the due dates. The insurer must be licensed to do business in the state
in which the Building is located. Tenant, and not Landlord, will be liable for
any costs or damages in excess of the statutory limit for which Tenant would, in
the absence of worker's compensation, be liable. In the event that Tenant fails
to take out or maintain any policy required by this Section 7.4 to be maintained
-----------
by Tenant, such failure shall be a defense to any claim asserted by Tenant
against Landlord by reason of any loss sustained by Tenant that would have been
covered by such policy, notwithstanding that such loss may have been proximately
caused solely or partially by the negligence or willful misconduct of Landlord
or any of Landlord's Related Parties. If Tenant does not procure insurance as
required, Landlord may, upon advance written notice to Tenant, cause this
insurance to be issued and Tenant shall pay to Landlord the premium for such
insurance within ten (10) days of Landlord's demand, plus interest at the past
due rate provided for in Section 3.1(c) of this Lease until repaid by Tenant.
--------------
All policies of insurance required to be maintained by Tenant shall specifically
provide that Landlord shall be given at least thirty (30) days' prior written
notice of any cancellation or nonrenewal of any such policy. A certificate
evidencing each such policy shall be deposited with Landlord by Tenant on or
before the Commencement Date, and a replacement certificate evidencing each
subsequent policy shall be deposited with Landlord at least thirty (30) days
prior to the expiration of the preceding such policy. All insurance policies
obtained by Tenant shall be written as primary policies (primary over any
insurance carried by Landlord), not contributing with and not in excess of
coverage which Landlord may carry, if any.
Section 7.5 Waiver of Subrogation Rights. Each party hereto waives all
----------------------------
rights of recovery, claims, actions or causes of actions arising in any manner
in its (the "Injured Party's") favor and against the other party for loss or
damage to the Injured Party's property located within or constituting a part or
all of the Project, to the extent the loss or damage: (a) is covered by the
Injured Party's insurance; or (b) would have been covered by the insurance the
Injured Party is required to carry under this Lease, whichever is greater,
regardless of the cause or origin, including the sole, contributory, partial,
joint, comparative or concurrent negligence of the other party. This waiver
also applies to each party's directors, officers, employees, shareholders,
partners, representatives and agents. All insurance carried by either Landlord
or Tenant covering the losses and damages described in this Section 7.5 shall
provide for such waiver of rights of subrogation by the Injured Party's
insurance carrier to the maximum extent that the same is permitted under the
laws and regulations governing the writing of insurance within the state in
which the Building is located. Both parties hereto are obligated to obtain such
a waiver and provide evidence to the other party of such waiver. The waiver set
forth in this Section 7.5 shall be in addition to, and not in substitution for,
any other waivers, indemnities or exclusions of liability set forth in this
Lease.
ARTICLE VIII.
<PAGE>
Section 8.1 Default by Tenant. The occurrence of any one or more of the
-----------------
following events shall constitute a default by Tenant under this Lease:
(a) Tenant shall fail to pay to Landlord any Rent or any other monetary
charge due from Tenant hereunder as and when due and payable;
(b) Tenant breaches or fails to comply with any term, provisions,
conditions or covenant of this Lease, other than as described in Section 8.1(a),
--------------
or with any of the Building rules and regulations now or hereafter established
to govern the operation of the Project;
(c) A Transfer (hereinafter defined) shall occur, without the prior
written approval of Landlord;
(d) The interest of Tenant under this Lease shall be levied on under
execution or other legal process;
(e) Any petition in bankruptcy or other insolvency proceedings shall be
filed by or against Tenant, or any petition shall be filed or other action taken
to declare Tenant a bankrupt or to delay, reduce or modify Tenant's debts or
obligations or to reorganize or modify Tenant's capital structure or
indebtedness or to appoint a trustee, receiver or liquidator of Tenant or of any
property of Tenant, or any proceeding or other action shall be commenced or
taken by any governmental authority for the dissolution or liquidation of Tenant
and, within thirty (30) days hereafter, Tenant fails to secure a discharge
thereof;
(f) Tenant shall become insolvent, or Tenant shall make an assignment for
the benefit of creditors, or Tenant shall make a transfer in fraud of creditors,
or a receiver or trustee shall be appointed for Tenant or any of its properties;
or
(g) Tenant shall abandon the Premises or any substantial portion thereof
for any reason other than destruction or condemnation of the Premises.
Section 8.2 Landlord's Remedies. Upon occurrence of any default by Tenant
-------------------
under this Lease and (i) if the event of default described in Section 8.l(a) is
--------------
not cured within five (5) days after receipt by Tenant of written notice from
Landlord of such default stating the nature of the default; or (ii) the events
described in Sections 8.1 (b), (d), (f) and (g) are not cured within thirty (30)
---------------- --- --- ---
days after receipt by Tenant of written notice stating the nature of the default
from Landlord of such default provided that if such default cannot be cured
within thirty (30) days after receipt by Tenant of such notice, Tenant shall not
be in default hereunder so long as Tenant promptly commences curative action
within such thirty (30) day period and thereafter diligently and continuously
pursues such cure to completion within ninety (90) days after delivery of such
notice (there being no notice and cure period for events of defaults described
in Sections 8.1 (c) and (e) except as otherwise set forth herein), the Landlord
---------------- ---
shall have the option to do and perform any one or more of the following in
addition to, and not in limitation of, any other remedy or right permitted it by
law or in equity by this Lease:
(a) Continue this Lease in full force and effect, and this Lease shall
continue in full force and effect as long as Landlord does not terminate this
Lease, and Landlord shall have the right to collect Rent, Additional Rent and
other charges when due.
(b) Terminate this Lease, and Landlord may forthwith repossess the
Premises and be entitled to recover as damages a sum of money equal to the total
of (i) the cost of recovering the Premises, (ii) the cost of removing and
storing Tenant's or any other occupant's property, (iii) the unpaid Rent and any
other sums accrued hereunder at the date of termination, (iv) a sum equal to the
amount, if any, by which the present value of the total Rent and other benefits
which would have accrued to Landlord under this Lease for the remainder of the
Term, if the terms of this Lease had been fully complied with by Tenant,
discounted at five percent (5%) per annum exceeds the total fair market value of
the Premises for the balance of the Term (it being the agreement of the parties
hereto that Landlord shall receive the benefit of its bargain), (v) the cost of
any attempted reletting or reletting and the collection of rent accruing from
such reletting, (vi) the cost of any reasonable brokerage fees or commission
payable by Landlord in connection with any reletting or attempted reletting,
(vii) any other costs reasonably incurred by Landlord in connection with any
such reletting or attempted reletting, (viii) any increase in insurance
<PAGE>
premiums caused by the vacancy of the Premises and (ix) any other sum of money
or damages owed by Tenant to Landlord at law, in equity or hereunder. In the
event Landlord shall elect to terminate this Lease, Landlord shall at once have
all the rights of reentry upon the Premises, without becoming liable for
damages, or guilty of trespass.
(c) Terminate Tenant's right of occupancy of the Premises and reenter and
repossess the Premises by entry, forcible entry or detainer suit or otherwise,
without demand or notice of any kind to Tenant and without terminating this
Lease, without acceptance of surrender of possession of the Premises, and
without becoming liable for damages or guilty of trespass, in which event
Landlord may, but shall be under no obligation to, relet the Premises or any
part thereof for the account of Tenant (nor shall Landlord be under any
obligation to relet the Premises before Landlord relets or leases any other
portion of the Project or any other property under the ownership or control of
Landlord) for a period equal to or lesser or greater than the remainder of the
Term of the Lease on whatever terms and conditions Landlord, at Landlord's sole
discretion, deems advisable. Tenant shall be liable for and shall pay to
Landlord all Rent payable by Tenant under this Lease (plus interest at the past
due rate provided in Section 3.1(c) of this Lease if in arrears) plus an amount
--------------
equal to (i) the cost of recovering possession of the Premises, (ii) the cost of
removing and storing any of Tenant's or any other occupant's property left on
the Premises or the Project after reentry, (iii) the cost of decorations,
repairs, changes, alterations and additions to the Premises and the Project,
(iv) the cost of any attempted reletting or reletting and the collection of the
rent accruing from such reletting, (v) the cost of any brokerage fees or
commissions payable by Landlord in connection with any reletting or attempted
reletting, (vi) any other costs incurred by Landlord in connection with any such
reletting or attempted reletting, (vii) the cost of any increase in insurance
premiums caused by the termination of possession of the Premises, (viii) the
amount of any unamortized improvements to the Premises paid for by Landlord,
(ix) the amount of any unamortized brokerage commissions or other costs paid by
Landlord in connection with the leasing of the Premises and (x) any other sum of
money or damages owed by Tenant to Landlord at law, in equity or hereunder, all
reduced by any sums received by Landlord through any reletting of the Premises;
provided, however, that in no event shall Tenant be entitled to any excess of
- -----------------
any sums obtained by reletting over and above Rent provided in this Lease to be
paid by Tenant to Landlord. For the purpose of such reletting Landlord is
authorized to decorate or to make any repairs, changes, alterations or additions
in or to the Premises that may be necessary. Landlord may file suit to recover
any sums falling due under the terms of this Section 8.2(c) from time to time,
--------------
and no delivery to or recovery by Landlord of any portion due Landlord hereunder
shall be any defense in any action to recover any amount not theretofore reduced
to judgment in favor of Landlord. No reletting shall be construed as an
election on the part of Landlord to terminate this Lease unless a written notice
of such intention is given to Tenant by Landlord. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect to
terminate this Lease for such previous default and/or exercise its rights under
Section 8.3(b) of this Lease.
- --------------
(d) Enter upon the Premises and do whatever Tenant is obligated to do
under the terms of this Lease; and Tenant agrees to reimburse Landlord on demand
for any expenses which Landlord may incur in effecting compliance with Tenant's
obligations under this Lease twelve percent (12%) of such cost to cover overhead
plus interest at the past due rate provided in this Lease, and Tenant further
agrees that Landlord shall not be liable for any damages resulting to Tenant
from such action. No action taken by Landlord under this Section 8.2(d) shall
--------------
relieve Tenant from any of its obligations under this Lease or from any
consequences or liabilities arising from the failure to perform such
obligations.
(e) Without waiving such default, apply all or any part of any unapplied
Prepaid Rent to cure the default or to any damages suffered as a result of the
default to the extent of the amount of damages suffered. Tenant shall reimburse
Landlord for the amount of such depletion of any Prepaid Rent on demand.
(f) Change all door locks and other security devices of Tenant at the
Premises and/or the Project, and Landlord shall not be required to provide the
new key to the Tenant except during Tenant's regular business hours, and only
upon the condition that Tenant has cured any and all defaults hereunder and in
the case where Tenant owes Rent to the Landlord, reimbursed Landlord for all
Rent and other sums due Landlord hereunder. Landlord, on terms and conditions
satisfactory to Landlord in its sole discretion, may upon request from Tenant's
employees, enter
<PAGE>
the Premises for the purpose of retrieving therefrom personal property of such
employees, provided, Landlord shall have no obligation to do so.
(g) Exercise any and all other remedies available to Landlord in this
Lease, at law or in equity.
Section 8.3 Waiver of Duty to Relet or Mitigate. Notwithstanding anything
-----------------------------------
contained herein to the contrary, to the full extent permitted under applicable
law, Tenant and Landlord agree that Landlord shall have no duty to relet the
Premises or otherwise mitigate damages under this Lease and Tenant hereby
releases Landlord from any and all duty to relet the Premises or otherwise
mitigate damages. Tenant agrees that Landlord shall not be liable, nor shall
Tenant's obligations hereunder be diminished, because of Landlord's failure to
relet the Premises or collect rent due with respect to such reletting.
Furthermore, Tenant hereby waives any and all rights to plead such failure of
Landlord to mitigate damages as affirmative defense in any proceeding based on
any Default by Tenant under this Lease. In the event, and only in the event,
that (despite such waiver and contrary to the intent of the parties hereunder)
applicable law requires Landlord to attempt to mitigate damages, Landlord and
Tenant agree that any such duty to mitigate shall be satisfied and Landlord
shall be deemed to have used objectively reasonable efforts to fill the Premises
by doing the following: (a) posting a "For Lease" sign on the Premises; (b)
advising Landlord's leasing agent of the availability of the Premises; and (c)
advising at least one outside commercial brokerage entity of the availability of
the Premises; provided, however, that Landlord shall not be obligated to relet
-----------------
the Premises before leasing any other unoccupied portions of the Project and any
other property under the ownership or control of Landlord. If Landlord receives
any payments from the reletting of the Premises and is required to mitigate
damages (despite the intent of the parties hereunder), any such payment shall
first be applied to any costs or expenses incurred by Landlord as a result of
Tenant's Default under this Lease.
Section 8.4 Reentry. If Tenant fails to allow Landlord to reenter and
-------
repossess the Premises, Landlord shall have full and free license to enter into
and upon the Premises with or without process of law for the purpose of
repossessing the Premises, expelling or removing Tenant and any others who may
be occupying or otherwise within the Premises, removing any and all property
therefrom and changing all door locks of the Premises. Landlord may take these
actions without being deemed in any manner guilty of trespass, eviction or
forcible entry or detainer, without accepting surrender of possession of the
Premises by Tenant, and without incurring any liability for any damage resulting
therefrom, including without limitation any liability arising under applicable
state law and without relinquishing Landlord's right to Rent or any other right
given to Landlord hereunder or by operation of law or in equity, Tenant hereby
waiving any right to claim damage for such reentry and expulsion, including
without limitation any rights granted to Tenant by applicable state law.
Section 8.5 Rights of Landlord in Bankruptcy. Nothing contained in this
--------------------------------
Lease shall limit or prejudice the right of Landlord to prove for and obtain in
proceedings for bankruptcy or insolvency, by reason of the expiration or
termination of this Lease or the termination of Tenant's right of occupancy, an
amount equal to the maximum allowed by any statute or rule of law in effect at
the time when, and governing the proceedings in which, the damages are to be
proved, whether or not the amount be greater, equal to, or less than the amount
of the loss or damages referred to in this Section 8.5. In the event that under
-----------
applicable law, the trustee in bankruptcy or Tenant has the right to affirm this
Lease and continue to perform the obligations of Tenant hereunder, such trustee
or Tenant shall, in such time period as may be permitted by the bankruptcy court
having jurisdiction, cure all defaults of Tenant hereunder outstanding as of the
date of the affirmance of this Lease and provide to Landlord such adequate
assurances as may be necessary to ensure Landlord of the continued performance
of Tenant's obligations under this Lease.
Section 8.6 Waiver of Certain Rights. Tenant hereby expressly waives any
------------------------
and all rights Tenant may have under applicable state law to its right to
recover possession of the Premises or terminate this Lease. Tenant hereby
waives any and all liens (whether statutory, contractual or constitutional) it
may have or acquire as a result of a breach by Landlord under this Lease.
Tenant also waives and releases any statutory lien and offset rights it may have
against Landlord, including without limitation the rights conferred upon
applicable state law.
<PAGE>
Section 8.7 NonWaiver. Failure on the part of Landlord to complain of
---------
any action or nonaction on the part of Tenant, no matter how long the same may
continue, shall not be deemed to be a waiver by Landlord of any of its rights
under this Lease. Further, it is covenanted and agreed that no waiver at any
time of any of the provisions hereof by Landlord shall be construed as a waiver
of any of the other provisions hereof and that a waiver at any time of any of
the provisions hereof shall not be construed as a waiver at any subsequent time
of the same provisions. The consent or approval by Landlord to or of any action
by Tenant requiring Landlord's consent or approval shall not be deemed to waive
or render unnecessary Landlord's consent or approval to or of any subsequent
similar act by Tenant.
Section 8.8 Holding Over. In the event Tenant remains in possession of
------------
the Premises after the expiration or termination of this Lease without the
execution of a new lease, then Tenant, at Landlord's option, shall be deemed to
be occupying the Premises as a tenant at will at a base rental equal to one
hundred fifty percent (150%) of the then applicable Base Rent, and shall
otherwise remain subject to all the conditions, provisions and obligations of
this Lease insofar as the same are applicable to a tenancy at will, including
without limitation the payment of all other Rent; provided, however, nothing
-----------------
contained herein shall require Landlord to give Tenant more than thirty (30)
days prior written consent to terminate Tenant's tenancy-at-will. No holding
over by Tenant after the expiration or termination of this Lease shall be
construed to extend or renew the Term or in any other manner be construed as
permission by Landlord to hold over. Tenant shall indemnify Landlord (y)
against all claims for damages by any other tenant to whom Landlord may have
leased all or any part of the Premises, effective upon the date that is forty-
five (45) days after the date of termination or expiration of this Lease and (z)
for all other losses, costs and expenses, including reasonable attorneys' fees,
incurred by reason of such holding over after such 45th day.
Section 8.9 Abandonment of Personal Property. Any personal property left
--------------------------------
in the Premises or any personal property of Tenant left about the Project at the
expiration or termination of this Lease, the termination of Tenant's right to
occupy the Premises or the abandonment, desertion or vacating of the Premises by
Tenant, shall be deemed abandoned by Tenant and may, at the option of Landlord,
be immediately removed from the Premises or such other space by Landlord and
stored by Landlord at the full risk, cost and expense of Tenant. Landlord shall
in no event be responsible for the value, preservation or safekeeping thereof.
In the event Tenant does not reclaim any such personal property and pay all
costs for any storage and moving thereof within thirty (30) days after the
expiration or termination of this Lease, the termination of Tenant's right to
occupy the Premises or the abandonment, desertion or vacating of the Premises by
Tenant, Landlord may dispose of such personal property in any way that it deems
proper. If Landlord shall sell any such personal property, it shall be entitled
to retain from the proceeds the amount of any Rent or other expenses due
Landlord, together with the cost of storage and moving and the expense of the
sale. Notwithstanding anything contained herein to the contrary, in addition to
the rights provided herein with respect to any such property, Landlord shall
have the option of exercising any of its other rights or remedies provided in
the Lease or exercising any rights or remedies available to Landlord at law or
in equity.
ARTICLE IX.
Section 9.1 Transfers. Tenant shall not, by operation of law or
---------
otherwise, (a) assign, transfer, mortgage, pledge, hypothecate or otherwise
encumber this Lease, the Premises or any part of or interest in this Lease or
the Premises, (b) grant any concession or license within the Premises, (c)
sublet all or any part of the Premises or any right or privilege appurtenant to
the Premises, or (d) permit any other party to occupy or use all or any part of
the Premises (collectively, a "Transfer"), without the prior written consent of
--------
Landlord, which consent shall not be unreasonably withheld, conditioned or
delayed. This prohibition against a Transfer includes, without limitation, (i)
any subletting or assignment which would otherwise occur by operation of law,
merger, consolidation, reorganization, transfer or other change of Tenant's
corporate or proprietary structure; (ii) an assignment or subletting to or by a
receiver or trustee in any federal or state bankruptcy, insolvency, or other
proceedings; (iii) the sale, assignment or transfer of all or substantially all
of the assets of Tenant, with or without specific assignment of Lease; (iv) the
change in control in a partnership; or (v) conversion of Tenant to a limited
liability entity. If Tenant converts to a limited liability entity without
obtaining the prior written consent of Landlord: (i) the conversion shall be
null and void for purposes of the Lease, including the determination of all
obligations and liabilities of Tenant and its partners to Landlord; (ii) all
<PAGE>
partners of Tenant immediately prior to its conversion to a limited liability
shall be fully liable, jointly and severally, for obligations of Tenant accruing
under this Lease pre-conversion and post-conversion, and all members and other
equity holders in Tenant post-conversion shall be fully liable for all
obligations and liabilities of Tenant accruing under the Lease after the date
such members and other equity holders are admitted to the limited liability
entity as if such person or entity had become a general partner in a
partnership; and (iii) Landlord shall have the option of declaring Tenant in
default under this Lease. If Tenant requests Landlord's consent to any
Transfer, then Tenant shall provide Landlord with a written description of all
terms and conditions of the proposed Transfer, copies of the proposed
documentation, and the following information about the proposed transferee: name
and address; reasonably satisfactory information about its business and business
history; its proposed use of the Premises; a copy of the proposed sublease or
assignment agreement; banking, financial and other credit information; and
general references sufficient to enable Landlord to determine the proposed
transferee's creditworthiness and character. In addition to its right to
approve or reject the proposed Transfer, Landlord shall have the option, upon
written notice to Tenant within thirty (30) days after the receipt of such
information concerning the proposed transferee, to (x) sublease the applicable
space on the terms and conditions of this Lease or (y) in the case of a proposed
assignment or proposed subletting for all or substantially all of the Term, to
terminate this Lease as to the space so affected as of the date of the proposed
assignment or such subletting, in which event the provisions of this Lease
governing such space shall terminate (except for any provisions that pursuant to
this Lease expressly survive such termination); provided, however, that
-------- -------
Landlord's rights set forth in this sentence shall not apply if (A) the proposed
subletting is for less than fifty percent (50%) of the Premises and (B) the
proposed term of such subletting is for less than a four (4) year term
(including any renewal terms). Landlord's consent to a Transfer shall not
release Tenant from performing its obligations under this Lease, but rather
Tenant's transferee shall assume all of Tenant's obligations under this Lease in
a writing satisfactory to Landlord, and Tenant and its transferee shall be
jointly and severally liable therefor. Landlord's consent to any Transfer shall
not waive Landlord's rights as to any subsequent Transfer. While the Premises
or any part thereof are subject to a Transfer, Landlord may collect directly
from such transferee all rents or other sums relating to the Premises becoming
due to Tenant or Landlord and apply such rents and other sums against the Rent
and any other sums payable hereunder. If the aggregate rental, bonus or other
consideration paid by a transferee for any such space exceeds the sum of (y)
Tenant's Rent to be paid to Landlord for such space during such period and (z)
Tenant's costs and expenses actually incurred in connection with such Transfer,
including reasonable brokerage fees, reasonable costs of finishing or renovating
the space affected and reasonable cash rental concessions, which costs and
expenses are to be amortized over the term of the Transfer, then fifty percent
(50%) of such excess shall be paid to Landlord within thirty (30) days after
such amount is earned by Tenant. Such overage amounts in the case of a sublease
shall be calculated and adjusted (if necessary) on a Lease Year (or partial
Lease Year) basis, and there shall be no cumulative adjustment for the Term.
Landlord shall have the right to audit Tenant's books and records relating to
the Transfer. Tenant authorizes its transferees to make payments of rent and
any other sums due and payable, directly to Landlord upon receipt of notice from
Landlord to do so. Any attempted Transfer by Tenant in violation of the terms
and covenants of this Article IX shall be void and shall constitute a default by
----------
Tenant under this Lease. In the event that Tenant requests that Landlord
consider a sublease or assignment hereunder, Tenant shall pay Landlord's
reasonable attorneys' fees and costs incurred by Landlord in connection with the
consideration of such request or such sublease or assignment.
Notwithstanding the prohibition against assignment and subleasing contained
in the immediately preceding paragraph, Tenant may, without the prior written
consent of Landlord, but only after giving Landlord at least thirty (30) days
prior written notice (which notice shall include the identity of the Affiliate
(hereinafter defined) and the relationship of the Affiliate to Tenant), sublet
the Premises or any part thereof to an affiliate or assign this Lease to an
Affiliate or permit occupancy of any portion of the Premises by an Affiliate
(each a "Permitted Transfer"). If Tenant is a partnership, the term "Affiliate"
shall mean (i) any corporation which, directly or indirectly, controls or is
controlled by or is under common control with the general partner of Tenant,
(ii) any
<PAGE>
corporation not less than fifty percent (50%) of whose outstanding stock shall,
at the time be owned directly or indirectly by Tenant's general partner or (iii)
any partnership or joint venture in which Tenant or the general partner of
Tenant is a general partner or joint venturer (with joint and several liability
for all of the partnership's or venture's obligations). If Tenant is a
corporation or individual, the term "Affiliate" shall mean (i) any corporation
which, directly or indirectly, controls or is controlled by or is under common
control with Tenant or (ii) any corporation not less than fifty percent (50%) of
whose outstanding stock shall, at the time, be owned directly or indirectly by
Tenant or Tenant's parent corporation. An "Affiliate" shall also include any
entity resulting from the merger, consolidation or other reorganization with
Tenant, whether or not Tenant is the surviving entity or any person or legal
entity which acquires all or substantially all of the assets or stock of Tenant.
Before such transfer shall be effective, (y) in the event of an assignment of
this Lease, said Affiliate shall assume, in full, the obligations of Tenant
under this Lease and (z) the use of the Premises by the Affiliate shall be as
set forth in Section 2.3. For purposes of this paragraph, a public or private
-----------
offering of Tenant stock is a Permitted Transfer and the term "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management, affairs and policies of anyone, whether through the
ownership of voting securities, by contract or otherwise. The bonus rental
provisions of this Section 9.1 shall not apply to a transfer by Tenant to a
-----------
Permitted Transfer. A Permitted Transfer shall not constitute a Transfer for
purposes of this Lease.
Section 9.2 Assignment by Landlord. Landlord shall have the right at any
----------------------
time to sell, transfer or assign, in whole or in part, by operation of law or
otherwise, its rights, benefits, privileges, duties, obligations or interests in
this Lease or in the Premises, the Building, the Land, the Project and all other
property referred to herein, without the prior consent of Tenant, and such sale,
transfer or assignment shall be binding on Tenant provided that (i) Tenant is
notified of the transfer and (ii) except as provided in any SNDA, any such
transferee shall assume, in writing, all non-accrued obligations of Landlord
under this Lease. After such sale, transfer or assignment, Tenant shall attorn
to such purchaser, transferee or assignee, and Landlord shall be released from
all liability and obligations under this Lease accruing after the effective date
of such sale, transfer or assignment.
Section 9.3 Limitation of Landlord's Liability. Any provisions of this
----------------------------------
Lease to the contrary notwithstanding, Tenant hereby agrees that no personal,
partnership or corporate liability of any kind or character (including, without
limitation, the payment of any judgment) whatsoever now attaches or at any time
hereafter under any condition shall attach to Landlord or any of Landlord's
Related Parties or any mortgagee for payment of any amounts payable under this
Lease or for the performance of any obligation under this Lease. The exclusive
remedies of Tenant for the failure of Landlord to perform any of its obligations
under this Lease shall be to proceed against the interest of Landlord in and to
the Project and/or the proceeds of insurance or condemnation. The provision
contained in the foregoing sentence is not intended to, and shall not, limit any
right that Tenant might otherwise have to obtain injunctive relief against
Landlord or Landlord's successors in interest or any suit or action in
connection with enforcement or collection of amounts which may become owing or
payable under or on account of insurance maintained by Landlord. In no event
shall Landlord be liable to Tenant, or any interest of Landlord in the Project
be subject to execution by Tenant, for any indirect, special, consequential or
punitive damages.
ARTICLE X.
Section 10.1 Subordination. This Lease shall be subject and subordinated
-------------
at all times to (a) all ground or underlying leases which may hereinafter be
executed affecting the Project, and (b) the lien or liens of all mortgages and
deeds of trust in any amount or amounts whatsoever hereafter placed on the
Project or Landlord's interest or estate therein or on or against such ground or
underlying leases and to all renewals, modifications, consolidations,
replacements and extensions thereof and to each advance made or hereafter to be
made thereunder; provided, however, that Tenant obtains from the holder of such
mortgage or deed of trust a Tenant's non-disturbance agreement in such party's
standard form (the "SNDA"). Tenant shall execute and deliver upon demand any
----
instruments, releases or other commercially reasonable documents requested by
any lessor or mortgagee for the purpose of subjecting and subordinating this
Lease to such ground leases, mortgages or deeds of trust, subject to Tenant's
receipt of the SNDA. Tenant shall, subject to its receipt of the SNDA, attorn
to any party succeeding to Landlord's interest in the Premises, whether by
purchase, foreclosure, deed in lieu of foreclosure, power of sale, termination
of lease or otherwise, only upon such party's request and at such party's sole
discretion but not otherwise. Notwithstanding such attornment, Tenant agrees
that any such successor in interest shall not be (a) liable for any act or
omission of, or subject to any rights of setoff, claims or defenses otherwise
assertable by Tenant against, any prior owner of the Project (including without
limitation, Landlord), (b) bound by any rents paid more than one (1) month in
advance to any prior owner, and (d) if such successor is a mortgagee or a
ground lessor whose
<PAGE>
address has been previously given to Tenant, bound by any modification,
amendment, extension or cancellation of the Lease not consented to in writing by
such mortgagee or ground lessor. Subject to Tenant's receipt of the SNDA, Tenant
shall execute all such commercially reasonable agreements confirming such
attornment as such party may reasonably request. Tenant shall not seek to
enforce any remedy it may have for any default on the part of Landlord without
first giving written notice by certified mail, return receipt requested,
specifying the default in reasonable detail, to any mortgagee or lessor under a
lien instrument or lease covering the Premises whose address has been given to
Tenant, and affording such mortgagee or lessor a reasonable opportunity to
perform Landlord's obligations hereunder. Notwithstanding the generality of the
foregoing, any mortgagee or ground lessor may at any time subordinate any such
deeds of trust, mortgages, other security instruments or ground leases to this
Lease on such terms and conditions as such mortgagee or ground lessor may deem
appropriate. Tenant shall execute any such subordination or attornment documents
as described herein within ten (10) days after demand therefor, subject to
Tenant's receipt of the SNDA. Landlord represents and warrants that, as of the
date of this Lease, there is no mortgagee or holder of a deed of trust on the
Project.
Section 10.2 Estoppel Certificate or Three-Party Agreement. Tenant agrees
---------------------------------------------
within ten (10) days following written request therefor by Landlord (a) to
execute, acknowledge and deliver to Landlord and any other persons specified by
Landlord, a certificate or three-party agreement among Landlord, Tenant and/or
any third party dealing with Landlord, certifying (i) that this Lease is
unmodified and in full force and effect, or, if modified, stating the nature of
such modification (ii) the date to which the Rent and other charges are paid in
advance, if any, (iii) that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or so specifying such defaults, if
any, as are claimed and/or (iv) any other matters as such third party may
reasonably require in connection with the business dealings of Landlord and/or
such third party and (b) to deliver to Landlord current financial statements of
Tenant, including a balance sheet and a profit and loss statement for at least
two (2) years, all prepared in accordance with generally accepted accounting
principles consistently applied. Tenant's failure to deliver such certificate
or three-party agreement within such ten (10) day period shall be conclusive
upon Tenant (x) that this Lease is in full force and effect without modification
except as may be represented by Landlord, (y) that to Tenant's knowledge there
are no uncured defaults in Landlord's performance, and (z) that no Rent has been
paid in advance except as set forth in this Lease.
Section 10.3 Notices. Any Notice, demand, request, consent, approval,
-------
disapproval or certificate ("Notice") required or desired to be given under this
------
Lease shall be in writing and given by certified mail, return receipt requested,
by personal delivery or by Federal Express or a similar nationwide over-night
delivery service providing a receipt for delivery. Notices may not be given by
facsimile. Notwithstanding anything to the contrary herein, whenever any
provision of the Lease provided the Tenant with a grace period in which to
perform an obligation of Tenant hereunder, such time period shall not commence
until Tenant has actually received (or has refused receipt of) a copy of such
written notice by one of the methods described in this Section 10.3. Any
------------
written notice whose receipt is refused by either Landlord or Tenant shall be
deemed given on the date that such written notice is refused. All notices,
demands, requests, consents, approvals, disapprovals, or certificates shall be
addressed as follows:
To Landlord:
-----------
DULLES TECH, INC.
C/o West World Management, Inc.
4 Manhattanville Road, 2/nd/ Floor
Purchase, NY 10577
To Tenant (if prior to Commencement Date):
-----------------------------------------
Network Access Solutions Corporation
100 Carpenter Drive
Suite 206
Sterling, VA 20164
Attn: Manager, Facilities
<PAGE>
To Tenant (if after Commencement Date):
--------------------------------------
Network Access Solutions Corporation
at the Premises
Attn: Manager, Facilities
With a copy to:
---------------
Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
7929 Westpark Drive, Suite 400
McLean, Virginia 22102
Attention: John G. Lavoie, Esquire
Either party may change its address by giving notice of same in accordance with
the methods described in this paragraph reasonably in advance.
ARTICLE XI.
Section 11.1 Right to Relocate Tenant. [Intentionally Omitted.]
------------------------
Section 11.2 Rights and Remedies Cumulative. The rights and remedies of
------------------------------
Landlord under this Lease shall be nonexclusive and each right or remedy shall
be in addition to and cumulative of all other rights and remedies available to
Landlord under this Lease or at law or in equity. Pursuit of any right or
remedy shall not preclude pursuit of any other rights or remedies provided in
this Lease or at law or in equity, nor shall pursuit of any right or remedy
constitute a forfeiture or waiver of any Rent due to Landlord or of any damages
accruing to Landlord by reason of the violation of any of the terms of this
Lease.
Section 11.3 Legal Interpretation. This Lease and the rights and
--------------------
obligations of the parties hereto shall be interpreted, construed and enforced
in accordance with the laws of the state in which the Building is located and
the United States. The determination that one or more provisions of this Lease
is invalid, void, illegal or unenforceable shall not affect or invalidate any
other provision of this Lease, and this Lease shall be construed as if such
invalid, illegal or unenforceable provision had never been contained in this
Lease, and, so far as is reasonable and possible, effect shall be given to the
intent manifested by the portion held invalid or inoperative. All obligations
of either party hereunder not fully performed as of the expiration or
termination of the Term of this Lease shall survive the expiration or
termination of the Term of this Lease and shall be fully enforceable in
accordance with those provisions pertaining thereto. Article and section titles
and captions appearing in this Lease are for convenient reference only and shall
not be used to interpret or limit the meaning of any provision of this Lease.
No custom or practice which may evolve between the parties in the administration
of the terms of this Lease shall waive or diminish the right of Landlord to
insist upon the performance by Tenant in strict accordance with the terms of
this Lease. This Lease is for the sole benefit of Landlord and Tenant, and,
without the express written consent thereto, no third party shall be deemed a
third party beneficiary hereof. Tenant agrees that this Lease supersedes and
cancels any and all previous statements, negotiations, arrangements, brochures,
agreements and understandings, if any, between Landlord and Tenant with respect
to the subject matter of this Lease or the Premises and that this Lease,
including written extrinsic documents referred to herein, is the entire
agreement of the parties, and that there are no representations, understandings,
stipulations, agreements, warranties or promises (express or implied, oral or
written) between Landlord and Tenant with respect to the subject matter of this
Lease or the Premises. It is likewise agreed that this Lease may not be
altered, amended, changed or extended except by an instrument in writing signed
by both Landlord and Tenant. The terms and provisions of this Lease shall not
be construed against or in favor of a party hereto merely because such party is
the "Landlord" or the "Tenant" hereunder or because such party or its counsel is
the draftsman of this Lease. All references to days in this Lease and any
Exhibits or Addenda hereto mean calendar days, not working or business days,
unless otherwise stated.
Section 11.4 Authority. Each party warrants and represents to the other
---------
that (a) it is a duly organized and validly existing legal entity, in good
standing and qualified to do business in the state in which the Building is
located, with no proceedings pending or contemplated for its dissolution or
reorganization, voluntary or involuntary, (b) it has full right, power and
authority
<PAGE>
to execute, deliver and perform this Lease, (c) the person executing this Lease
on its behalf is authorized to do so, and (d) upon execution of this Lease by
such party, this Lease shall constitute a valid and legally binding obligation
of such party.
Section 11.5 No Brokers. Landlord and Tenant warrant and represent to the
----------
other that it has not dealt with any real estate broker and/or salesman (other
than Trammell Crow Real Estate Services, Inc. who represented Landlord and The
Irving Group, who represented Tenant) in connection with the negotiation or
execution of this Lease and no such broker or salesman has been involved in
connection with this Lease, and each party agrees to defend, indemnify and hold
harmless the other party from and against any and all costs, expenses,
attorneys' fees or liability for any compensation, commission and charges
claimed by any real estate broker and/or salesman (other than the aforesaid
brokers) due to acts of such party or such party's representatives. Landlord
shall pay the brokers identified above pursuant to separate agreements.
Section 11.6 Consents by Landlord. In all circumstances under this Lease
--------------------
where the prior consent or permission of Landlord is required before Tenant is
authorized to take any particular type of action, such consent must be in
writing and the matter of whether to grant such consent or permission shall,
except as otherwise expressly provided herein, be within the sole and exclusive
judgment and discretion of Landlord, and it shall not constitute any nature of
breach by Landlord under this Lease or any defense to the performance of any
covenant, duty or obligation of Tenant under this Lease that Landlord delayed or
withheld the granting of such consent or permission, whether or not the delay or
withholding of such consent or permission was prudent or reasonable or based
upon good cause.
With respect to any provision of this Lease which provides that Landlord
shall not unreasonably withhold or unreasonably delay any consent or any
approval, Tenant, in no event, shall be entitled to make nor shall Tenant make
any claim for, and Tenant hereby waives any claim for money damages; nor shall
Tenant claim any money damages by way of setoff, counterclaim or defense, based
upon any claim or assertion by Tenant that Landlord has unreasonably withheld or
unreasonably delayed any consent or approval; but, unless Landlord shall have
acted in bad faith, Tenant's sole remedy shall be an action or proceeding to
enforce any such provision, or for specific performance, injunction or
declaratory judgment.
Section 11.7 Joint and Several Liability. If there is more than one
---------------------------
Tenant, then the obligations hereunder imposed upon Tenant shall be joint and
several.
Section 11.8 Independent Covenants. The obligation of Tenant to pay Rent
---------------------
and other monetary obligations provided to be paid by Tenant under this Lease
and the obligation of Tenant to perform Tenant's other covenants and duties
under this Lease constitute independent, unconditional obligations of Tenant to
be performed at all times provided for under this Lease, save and except only
when an abatement thereof or reduction therein is expressly provided for in this
Lease and not otherwise, and Tenant acknowledges and agrees that in no event
shall such obligations, covenants and duties of Tenant under this Lease be
dependent upon the condition of the Premises or the Project, or the performance
by Landlord of its obligations hereunder.
Section 11.9 Attorneys' Fees and Other Expenses. In the event either
----------------------------------
party hereto defaults in the faithful performance or observance of any of the
terms, covenants, provisions, agreements or conditions contained in this Lease,
the party in default shall be liable for and shall pay to the nondefaulting
party all reasonable expenses incurred by such party in enforcing any of its
remedies for any such default, and if the nondefaulting party places the
enforcement of all or any part of this Lease in the hands of an attorney, the
party in default agrees to pay the nondefaulting party's reasonable attorneys'
fees in connection therewith.
Section 11.10 Recording. Neither Landlord nor Tenant shall record this
---------
Lease, but a short- form memorandum hereof may be recorded at the request of
Landlord.
Section 11.11 Disclaimer; Waiver of Jury Trial. LANDLORD AND TENANT
--------------------------------
EXPRESSLY ACKNOWLEDGE AND AGREE, AS A MATERIAL PART OF THE CONSIDERATION FOR
LANDLORD'S ENTERING INTO THIS LEASE WITH TENANT, THAT, EXCEPT AS OTHERWISE SET
FORTH IN THIS LEASE, (a) LANDLORD HAS MADE NO WARRANTIES TO TENANT AS TO THE
USE OR CONDITION OF THE PREMISES OR THE PROJECT, EITHER EXPRESS OR IMPLIED, AND
(b) LANDLORD
<PAGE>
AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES OR THE
PROJECT ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL PURPOSE OR ANY OTHER
WARRANTY (EXPRESS OR IMPLIED) REGARDING THE PREMISES OR THE PROJECT. EXCEPT AS
EXPRESSLY SET FORTH IN THIS LEASE, LANDLORD AND TENANT EXPRESSLY AGREE THAT
THERE ARE NO, AND SHALL NOT BE ANY, IMPLIED WARRANTIES OF MERCHANTABILITY,
HABITABILITY, FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER KIND ARISING OUT OF
THIS LEASE, ALL SUCH OTHER EXPRESS OR IMPLIED WARRANTIES IN CONNECTION HEREWITH
BEING EXPRESSLY DISCLAIMED AND WAIVED.
LANDLORD AND TENANT WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY ACTION
OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS LEASE. THIS
WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY TENANT AND TENANT
ACKNOWLEDGES THAT NEITHER LANDLORD NOR ANY PERSON ACTING ON BEHALF OF LANDLORD
HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR
IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. TENANT FURTHER ACKNOWLEDGES THAT IT
HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE
SIGNING OF THIS LEASE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL
COUNSEL, SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO
DISCUSS THIS WAIVER WITH COUNSEL. TENANT FURTHER ACKNOWLEDGES THAT IT HAS READ
AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION AND AS
EVIDENCE OF SAME HAS EXECUTED THIS LEASE.
Section 11.12 Access to Roof. At no additional charge by Landlord during
--------------
the Term and any renewal thereof, Tenant shall have the sole and exclusive
access to the Building's (i) roof to install, repair and maintain upon the
Building's roof telecommunication devices, such as satellite dishes and antennae
or other similar devices, for the purpose of receiving and sending radio,
television, computer, telephone or other communications signals for its own use
and (ii) risers and conduits in order to connect such telecommunication devices
to the Premises as well as to outside cable, fiber and/or telephone lines,
including easements or rights of way, as reasonably required. Tenant shall
advise Landlord at least ten (10) days in advance of the planned installation of
such devices which such installation shall be subject to Landlord's prior
approval, which approval shall not be unreasonably withheld, conditioned or
delayed. Tenant will be responsible for complying and/or obtaining all required
association or governmental approvals or permits with respect to the
installation of the telecommunication devices set forth herein (including
screening of such telecommunication devices if so required). To the extent that
any telecommunication devices installed by Tenant interferes with other
telecommunication devices installed by Landlord or any of Landlord's tenants at
13600 Dulles Technology Drive, Landlord may require that Tenant relocate, at
Landlord's sole cost and expense, such telecommunication device to another area
of the Building's roof such that it does not interfere with such other
telecommunication device. Tenant shall remove the telecommunication devices and
any connecting equipment from the Building upon the expiration or earlier
termination of this Lease. Tenant shall be solely responsible and shall pay for
any damage to the Building arising out of or resulting from the installation,
operation, maintenance and/or removal of the antennae.
Section 11.13 Parking. Tenant's occupancy of the Premises shall include,
-------
at no additional cost, the use of five hundred thirty-one (531) parking spaces
(at a ratio of 4.7/1000 rentable square feet) which shall be used in common with
other tenants, invitees and visitors of the Building, as shown on Exhibit I
---------
attached hereto. Tenant shall have access to up to fifteen (15) visitor's
spaces reserved for Tenant's use in locations proximate to the Building mutually
acceptable to Landlord and Tenant. Tenant agrees not to overburden the parking
facilities, to cooperate with Landlord and other tenants in use of the parking
facilities and that neither it nor shall any of its employees, agents or
invitees park any vehicles overnight in the parking facilities. Landlord
reserves the right in its absolute discretion to determine whether the parking
facilities are becoming overburdened and to allocate and reassign parking spaces
among Tenant and other tenants, and to reconfigure the parking area and modify
the existing ingress to and egress from the parking area as Landlord shall deem
reasonably appropriate provided that Tenant continues to have use of and access
to the [five hundred thirty-one (531)] parking spaces set forth above.
<PAGE>
Section 11.14 No Accord or Satisfaction. No payment by Tenant or receipt
-------------------------
by Landlord of a lesser amount than the Rent and other sums due hereunder shall
be deemed to be other than on account of the earliest Rent or other sums due,
nor shall any endorsement or statement on any check or accompanying any check or
payment be deemed an accord and satisfaction; and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of such
Rent or other sum and to pursue any other remedy provided in this Lease.
Section 11.15 Acceptance. The submission of this Lease by Landlord does
----------
not constitute an offer by Landlord or other option for, or restriction of, the
Premises, and this Lease shall only become effective and binding upon Landlord,
upon full execution hereof by Landlord and delivery of a signed copy to Tenant.
Section 11.16 Waiver of Counterclaim. Tenant hereby waives the right to
----------------------
interpose any counterclaim of whatever description in any summary proceeding.
Section 11.17 Time Is of the Essence. Time is of the essence of this
----------------------
Lease. Unless specifically provided otherwise, all references to terms of days
or months shall be construed as references to calendar days or calendar months,
respectively.
Section 11.18 Counterparts. This Lease may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but such counterparts shall together constitute one and the same instrument.
<PAGE>
IN TESTIMONY WHEREOF, the parties hereto have executed this Lease as of the
day and year first above written.
LANDLORD:
- --------
DULLES TECH, INC.,
a Delaware corporation
By: ______________________________________
Charles Schouten, President
Tax Identification No.:__________________________________
[Remainder of Page Intentionally Left Blank.]
<PAGE>
TENANT:
------
NETWORK ACCESS SOLUTIONS CORPORATION, a
Delaware corporation
By: ____________________________
Name: ____________________________
Title: ____________________________
Tax Identification No.:____________________
[Remainder of Page Intentionally Left Blank.]
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF LAND
-------------------------
<PAGE>
EXHIBIT B
FLOOR PLAN OF PREMISES
----------------------
<PAGE>
EXHIBIT C
SPECIAL STIPULATIONS
--------------------
These Special Stipulations are hereby incorporated into this Lease and in
the event that they conflict with any provisions of this Lease, these Special
Stipulations shall control.
A. Renewal Options. 1. If, on the expiration of the Term of this Lease
---------------
and the date Tenant notifies Landlord of its intention to renew the Lease Term
(as provided in subsection (2) below), (i) Tenant is not in default under this
Lease beyond any applicable notice and cure period provided for in this Lease,
and (ii) this Lease is in full force and effect, then Tenant shall have and may
exercise an option to renew this Lease for an additional term of five (5) years
(the "Renewal Term") upon the same terms and conditions contained in this Lease
------------
with the exceptions that the rental for the Renewal Term shall be the then-
prevailing market rate of rent in the Herndon, Virginia area, inclusive of
consideration of then-current market concessions (including, without limitation,
refurbishment allowances and rent abatement) (the "Renewal Rental Rate").
-------------------
2. If Tenant desires to renew this Lease pursuant to subsection (1)
above, Tenant must notify Landlord in writing of its intention to renew (the
"Renewal Notice") not less than twelve (12) months prior to the expiration of
--------------
the Term of this Lease (the "Expiration Date"). Landlord shall, within ten (10)
---------------
business days following the later of Landlord's receipt of such Renewal Notice
or the date which is twelve (12) months prior to the Expiration Date, notify
Tenant in writing of Landlord's determination of the Renewal Rental Rate and
Tenant shall, within the next ten (10) business days following receipt of
Landlord's determination of the Renewal Rental Rate, notify Landlord in writing
of Tenant's acceptance or rejection of Landlord's determination of the Renewal
Rental Rate. If Tenant timely notifies Landlord of Tenant's acceptance of
Landlord's determination of the Renewal Rental Rate, this Lease shall be
extended as provided herein and Landlord and Tenant shall enter into an
amendment to this Lease to reflect the extension of the Lease Term and changes
in Base Rent in accordance with this Exhibit. If (i) Tenant timely notifies
Landlord in writing of Tenant's rejection of Landlord's determination of the
Renewal Rental Rate or (ii) Tenant does not notify Landlord in writing of
Tenant's acceptance or rejection of Landlord's determination of the Renewal
Rental Rate within such ten (10) business day period, Landlord and Tenant will
promptly attempt to agree on the Renewal Rental Rate. If Landlord and Tenant
cannot agree within ten (10) business days of Tenant's rejection in subclause
(i) hereinabove or the expiration of the ten (10) business days period referred
to in subclause (ii) hereinabove, then Tenant may either (A) withdraw its
Renewal Notice by written notice to Landlord, in which event, all of Tenant's
rights under this Paragraph A shall immediately and irrevocably terminate, or
(B) proceed promptly to determine the Renewal Rental rate by appraisal, in which
case, Landlord and Tenant shall each select a qualified independent real estate
broker or appraiser (i.e., a real estate broker or appraiser with no prior or
existing contractual relationship with either party) with at least five (5)
years experience in leasing office buildings in the Herndon, Virginia area to
determine the Renewal Rental Rate. If the values determined by the
brokers/appraisers are less than ten percent (10%) apart, the average of the
values determined by them shall be deemed the Renewal Rental Rate for the
Premises. If the brokers/appraisers do not agree, and if their determinations
are more than ten percent (10%) apart, then on or before seventy-five (75) days
prior to the commencement of the Renewal Term, the two brokers/appraisers shall
select a third independent broker/appraiser who will determine the Renewal
Rental Rate for the Premises. If the value determined by the third
broker/appraiser is between the values determined by the two prior
broker/appraisers, the determination of the third broker/appraiser will control.
If the third broker/appraiser's determination is not between the values
determined by the two prior broker/appraisers, then the value of the first two
broker/appraisers closest to the value of the third broker/appraiser will be the
Renewal rental Rate for the Premises. Each party shall pay the fees and
expenses of its broker/appraiser, and the fees and expenses of the third
broker/appraiser shall be shared equally between Landlord and Tenant.
B. Landlord Lien Waiver. Landlord hereby waives any lien rights which it
--------------------
may otherwise have concerning Tenant's property, which shall include furniture,
fixtures, equipment, any and all equipment and/or supplies utilized by Tenant in
its business operations, and Tenant
<PAGE>
shall have the right to remove the same at any time without Landlord's consent.
Furthermore, Landlord acknowledges Tenant's right to finance and to secure under
the Uniform Commercial Code, inventory, furnishings, furniture, equipment,
machinery, leasehold improvements and other personal property located in or at
the Premises, and Landlord agrees to execute commercially reasonable waiver
forms releasing liens in favor of any purchase money seller, lessor or lender
who has financed or may finance in the future such items. Without limiting the
effectiveness of the foregoing, provided that no default shall have occurred and
be continuing, Landlord shall, upon the request of Tenant, and at the Tenant's
sole cost and expense, execute and delivery any commercially reasonable
instruments necessary or appropriate to confirm any such grant, release,
dedication, transfer, annexation or amendment to any person or entity permitted
under this paragraph including landlord waivers with respect to any of the
foregoing.
<PAGE>
EXHIBIT D
COMMENCEMENT DATE AGREEMENT
---------------------------
This Commencement Date Agreement (this "Agreement") is made and entered
---------
into this ____day of ___________, 19___, by and between DULLES TECH, INC.
("Landlord") and NETWORK ACCESS SOLUTIONS ("Tenant").
- ---------- ------
WHEREAS, Landlord and Tenant entered into that certain Lease (the "Lease")
-----
dated October ___, 1999, with respect to certain premises located at 13650
Dulles Technology Drive, Herndon, Virginia 20171, as such demised premises are
more particularly described in the Lease.
WHEREAS, this Agreement is executed by Landlord and Tenant to confirm the
Commencement Date and the Expiration Date, as those terms are defined in the
Lease;
NOW, THEREFORE, for and in consideration of the demised premises and the
mutual covenants expressed in the Lease, it is hereby agreed by Landlord and
Tenant as follows:
1. The Premises were substantially complete and the Base Rent and
Additional Rent (as such terms are defined in the Lease) commenced on
_____________, 19__ (the "Commencement Date") and will expire on ___________,
-----------------
20 ___ (the "Expiration Date").
---------------
2. This Agreement shall not be deemed or construed to alter or amend
the Lease in any manner.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be
executed as of the day and year first above written.
LANDLORD
--------
DULLES TECH, INC., a Delaware corporation
By: ________________________________
Charles Schouten, President
TENANT:
------
NETWORK ACCESS SOLUTIONS CORPORATION,
a Delaware corporation
By: ______________________________
Name: ______________________________
Title: ______________________________
<PAGE>
EXHIBIT E
WORK LETTER AGREEMENT ("WORK AGREEMENT")
----------------------------------------
The following provisions shall govern (A) the preparation and approval
process for the drawings and specifications for the build-out of the Premises
and (B) terms and conditions relating to contractors and subcontractors in
connection with the build-out of the Premises.
A. Description of Landlord's Work. Subject to the terms and conditions
------------------------------
of this Work Agreement, Landlord agrees to construct, at its sole cost and
expense, a building shell which shall contain the following items ("Landlord's
----------
Work"):
- ----
As described in Landlord's October 15, 1999 proposal attached hereto
in Exhibit E-2 with the following additions:
-----------
1) All concrete flooring should be level, complete and ready to
accept carpet, VCT or other floor applications.
2) The base Building should have an energy management system of a
quality found in similar class buildings in Reston/Herndon, Virginia submarket.
B. General Matters regarding Plans and Specification. Tenant shall cause
-------------------------------------------------
its architect (The M Group, except as otherwise set forth in this Work
Agreement) and/or engineer (B&A Consulting Engineers, except as otherwise set
forth in this Work Agreement) to prepare "Tenant's Space Plans", the "Working
Drawings" and the "Final Plans" (as such terms are defined below) for the Tenant
Improvement Work. The fees of Tenant's architect and engineer shall be paid by
Landlord from the "Tenant Improvement Allowance", as defined below.
C. Tenant Improvement Work. (1) Tenant shall submit to Landlord for
-----------------------
Landlord's approval a space plan for the build-out of the Premises ("Tenant's
--------
Space Plans"), by the respective date(s) for each phase shown on the
- -----------
construction schedule set forth in Exhibit E-1 hereto, prepared by Tenant's
-----------
architect showing the interior layout of the Premises and its integration with
Building systems, core areas and the building shell improvements in sufficient
detail to permit Landlord a reasonable opportunity to review and provide
preliminary approval or comments regarding Tenant's proposed interior design.
Landlord shall review and approve or disapprove of Tenant's Space Plans as to
the First Phase Premises and Second Phase Premises by the date set forth on the
attached construction schedule set forth in Exhibit E-1 hereto, which approval
-----------
shall not be unreasonably withheld, conditioned or delayed, except or to the
extent such plans affect the structure of the Building or the Building's
systems, in which case, Landlord may withhold such approval in its sole
discretion. Landlord shall endeavor to adhere to a similar construction
schedule, review periods and level of cooperation with Tenant as to the
planning, approving and completion of the Third Phase Premises thereafter. If
Landlord disapproves, either in whole or in part, of Tenant's Space Plans,
Landlord shall provide to Tenant with reasonable specificity Landlord's reasons
for its disapproval, which shall be commercially reasonable to the extent
required in the preceding sentence. Tenant shall promptly correct or otherwise
address all disapproved items identified by Landlord. The work shown in
Tenant's Space Plans shall be deemed "Tenant Improvement Work." (2) Landlord
-----------------------
and Tenant hereby covenant and agree that Rent pursuant to the Lease shall
commence for each phase of construction upon substantial completion of all
Tenant Improvement Work ("Substantial Completion") as defined pursuant to
----------------------
Section (L) below so that Tenant could obtain its Certificate of Occupancy and
occupy each phase of the Premises then intended for occupancy. For every day
after March 1, 2000 that such First Phase Premises are not Substantially
Complete, absent any delay on the part of the Tenant or any occurrence of Force
Majeure, Landlord shall pay to Tenant as a fixed and agreed upon sum and not as
a penalty, an amount equal to one (1) day's rent for the First Phase Premises
for each day after March 1, 2000 that the Tenant is unable to occupy the First
Phase Premises because the same is not Substantially Complete. Notwithstanding
the foregoing, there shall be no Force Majeure condition excusing Landlord from
its obligation to pay the damages specified herein if Landlord is delayed due to
its inability to procure sufficient labor, either for its general contractor,
its subcontractors, its Construction Manager, or any other entity, required to
complete the First Phase or the Second Phase. Landlord
<PAGE>
shall pay to Tenant such amounts in immediately available U.S. funds monthly at
the end of each month unless and until the First Phase Premises are
Substantially Complete.
D. Working Drawings and Final Plans. Tenant shall cause its architects
--------------------------------
and/or engineers to prepare, and Tenant shall submit to Landlord, complete
preliminary architectural plans, construction drawings and mechanical,
electrical and plumbing drawings for the Premises (the "Working Drawings"),
----------------
including those base Building improvements (such as HVAC and sprinkler
distribution and the like) which are interior to the Premises or otherwise need
to be coordinated with Landlord's Work in order to be performed properly. Said
Working Drawings shall be submitted to Landlord in form sufficient for the
permitting and construction of the Premises, and the bidding of the Tenant
Improvement Work (that is, in such form so that, if approved by Landlord without
revision, the same would be sufficient for the permitting and construction of
the Premises, and the bidding of the Tenant Improvement Work). Within five (5)
business days, Landlord or its designated contractor shall provide Tenant with a
list of its objections, modifications, deletions or qualifications to the same.
Tenant shall cause Tenant's architect and engineer to prepare final drawings,
plans, and specifications (the "Final Plans"), based on the Working Drawings but
-----------
conforming to Landlord's objections, modifications, deletions or qualifications
which shall be commercially reasonable to the extent required hereunder, by the
date set forth on the attached construction schedule set forth in Exhibit E-1
-----------
hereto. No plans and specifications shall constitute the Final Plans hereunder
unless and until the same have been acknowledged, approved and agreed in writing
as to the exact description, detail and date of the Final Plans by both Landlord
and Tenant. Such acknowledgment shall be attached hereto as Exhibit E-3.
-----------
Landlord agrees to respond to Tenant within five (5) business days of Tenant's
written request for Landlord's approval. If Landlord fails to respond with the
five (5) business days period, Tenant may deliver a second request for approval;
if Landlord does not respond within five (5) business days of delivery of such
second notice, then Landlord's approval shall be deemed granted.
E. Construction. Following the preparation and approval of Tenant's
------------
Space Plans and the Working Drawings, Landlord agrees to build out the Premises
according to the Final Plans. All construction for the Premises shall be
awarded following a competitive bid format, with Trammell Crow Company serving
as construction manager ("Construction Manager"). The Construction Manager
--------------------
shall: (1) prepare a bid package approved by Landlord and Tenant; (2) solicit
bids from a minimum of three (3) qualified general contractors approved by
Landlord and Tenant; (3) prepare a bid analysis for review by Landlord and
Tenant; and (4) award the bid to the lowest qualified general contractor which
such contractor shall be subject to Tenant's reasonable approval. On behalf of
Landlord and Tenant, the Construction Manager shall supervise the construction
for the Premises.
F. Tenant Improvement Allowance. Landlord agrees to provide to Tenant an
----------------------------
allowance with respect to the Premises of Twenty Five Dollars ($25.00) per
rentable square foot (the "Tenant Improvement Allowance") (i.e., a total of
----------------------------
113,093 sf x $25.00 prsf = Two Million Eight Hundred Twenty Seven Three Hundred
Twenty Five Dollars ($2,827,325.00). Any unused portion of the Tenant
Improvement Allowance shall be applied against any move related costs including
any cabling requirements, antenna or signage costs, and any further remaining
allowances may be used to offset rent throughout the Term or any renewal term.
Provided Tenant uses The M Group as its architect to perform Tenant's Space
Plans, Working Drawings or Final Plans, except as to the network and/or
telecommunications operations center, Landlord's three percent (3%) construction
management fee shall be charged only against hard construction costs.
G. Delay in Preparation of Tenant's Space Plans. If a "Tenant Delay"(as
-------------------------------------------- ------------
defined below) occurs, and Substantial Completion of the Premises is delayed as
a result thereof, then Tenant shall pay to Landlord on the date Rent would have
commenced hereunder in the absence of such delay, a sum of money equivalent to
the Rent for the Premises for the period during which Tenant would have been
obligated to pay Rent to Landlord had not the Commencement Date been so delayed;
provided, however, that Landlord shall have notified Tenant in writing that a
- -------- -------
Tenant Delay has occurred, which such notice shall describe the nature of the
Tenant Delay, within five (5) business days following Landlord's learning about
the Tenant Delay. Each Tenant Delay shall be offset against each day Landlord
fails to Substantially Complete Landlord's Work due to a Landlord Delay (as
defined below).
<PAGE>
H. Changes to Tenant Plans. Tenant shall have the right to request
-----------------------
changes in the Final Plans and any such change shall be initiated by Tenant's
architect and approved by Landlord, which approval shall not be unreasonably
withheld, conditioned or delayed (except for changes which affect the structure
of the Building or the Building's systems, in which case Landlord may withhold
its consent in its sole discretion) and reasonably approved by the general
contractor. Further, if changes are made by Tenant to the Final Plans after
Landlord's approval, and should these changes to Tenant's Final Plans cause
Landlord to fail to achieve Substantial Completion of the Premises by the dates
specified herein or delay the Commencement Date, then Landlord shall have the
right to refuse to permit the making of such changes unless and until Tenant
shall have committed in writing, in a manner reasonably satisfactory to
Landlord, to pay to Landlord on the date Rent would have commenced hereunder in
the absence of such delay, a sum of money equivalent to the Rent for the
applicable phase of the Premises for the period during which Tenant would have
been obligated to pay Rent to Landlord had not this Lease Commencement Date been
so delayed.
I. Tenant's Work. Notwithstanding anything to the contrary in this
-------------
Exhibit E, Tenant shall be responsible for all work, construction and
- ---------
installation in the Premises which is not designated as Landlord's Work and
Tenant Improvement Work (including but not limited to all fixtures, furniture,
equipment and other office installations). Such work shall be referred to as
"Tenant's Work," and shall be at Tenant's sole cost and expense subject to the
-------------
application of the Tenant Improvement Allowance. Tenant's Work shall be
considered an alteration for purposes of this Lease, and shall be subject to the
provisions of Section 6.1 thereof. Notwithstanding the foregoing, any plans
-----------
Tenant has attached hereto as Exhibit E-4 as of the date this Lease is executed
-----------
depicting such Tenant Work are hereby deemed approved by Landlord. Prior to
commencing any other Tenant's Work, Tenant shall submit drawings and
specifications for Tenant's Work to Landlord, showing all aspects of such work,
to Landlord for Landlord's review and approval, which approval as to non-
structural matters and matters not affecting the Building's systems shall not be
unreasonably withheld, conditioned or delayed. In order to perform the Tenant's
Work, upon Tenant's notice (reasonably sufficient to permit Landlord to
supervise Tenant's Work), Landlord shall grant Tenant, its contractors and
agents access to the extent permitted by law to the Building, loading dock, and
a dedicated elevator for freight use during the hours of 6:00 a.m. to 6:00 p.m.
and 8:00 a.m. to 1:00 p.m. on Saturday (except as to Tenant's move-in which
shall be over one or more weekends and the hours adjusted accordingly to
accommodate Tenant's scheduled move) and such additional time as may be
reasonably agreed between Landlord and Tenant subject to compliance with the
Building Rules and Regulations set forth in Exhibit F to the Lease, from the
---------
time the Lease is executed and further during the move-in phases related to the
Tenant Work or the Premises. Furthermore, Landlord, shall grant access to and
normal and customary use of reasonable temporary utilities including, but not
limited, to electricity, HVAC, plumbing and water, during such stated hours and
such additional time as may be agreed between Landlord and Tenant. Tenant
agrees that it will pay Landlord directly for the actual portion of utilities
used by Tenant in the Project to construct the Tenant Work within thirty (30)
days after written request accompanied by presentation and verification of
documented costs and charges for such utility usage. Tenant agrees that such
entry into the Premises shall be deemed to be under all of the terms, covenants,
conditions and provisions of the Lease, except that the covenant to pay periodic
Rent shall not apply until the Lease Commencement Date. Tenant acknowledges
that the Landlord Work and Tenant Improvement Work take precedence over the
completion of the Tenant's Work, but Landlord shall reasonably cooperate with
Tenant as to the scheduling and completion of the Tenant's Work.
J. Permits, Certificate of Occupancy. Except as provided below, Landlord
---------------------------------
shall obtain all necessary permits in connection with Landlord's Work and Tenant
Improvement Work. On or before the date Landlord tenders delivery of the
Premises to Tenant, Landlord agrees to obtain all final inspection approvals
which are required for Landlord to deliver the Premises to Tenant with
Landlord's Work completed, and to obtain all Certificates of Occupancy, pursuant
to Section (L) hereof, that can be obtained by Landlord prior to Tenant
-----------
installing its fixtures, furniture and equipment. Tenant shall be responsible
for applying for and obtaining all permits required for Tenant to perform
Tenant's Work, and for obtaining the final fire inspection approval after
installation of Tenant's Work, if any.
K. Notice. Tenant and Landlord shall, by notice to the other in writing,
------
designate a single individual who Tenant or Landlord agrees shall be available
to meet and consult with the other at the Premises as Tenant's or Landlord's
representative respecting the matters which are
<PAGE>
the subject of this Exhibit and who, as between Landlord and Tenant, shall have
the power to legally bind Tenant and Landlord, in making requests for changes,
giving approval of plans or work, giving directions to Tenant and Landlord or
the like, under this Exhibit (each of these representatives shall be a
"Construction Representative"); provided, however, that Landlord's Construction
---------------------------
Representative shall not have authority to approve changes without Landlord's
prior approval.
L. Substantial Completion. For purposes of this Lease, "Substantially
---------------------- -------------
Complete" or "Substantial Completion" as to the Premises or the applicable phase
- -------- ----------------------
thereof means full completion, except for minor or insubstantial details of
construction, decoration or installation such that a Certificate of Occupancy
has been issued for Landlord's Work and Tenant Improvement Work to the extent
that the same can be issued prior to the completion of Tenant's Work, if any.
In the event that Landlord is unable to obtain a Certificate of Occupancy due to
unfinished Tenant's Work which is not delayed due to Landlord, Landlord shall be
deemed to have achieved Substantial Completion when Landlord obtains final and
complete trade inspections for all major trades. Landlord shall use
commercially reasonable efforts to give Tenant at least ten (10) business days
prior written notice of the date that the Premises, or the applicable phase
thereof, will be Substantially Complete.
M. Permits; Compliance with Laws. The Tenant's Space Plans shall be in a
-----------------------------
form in which building permits can be readily obtained and shall comply with all
applicable local, state and federal laws, ordinances, codes and regulations.
The architect shall certify to Landlord and Tenant that Tenant's Space Plans
comply with the Americans with Disabilities Act of 1990 ("ADA") and all other
---
applicable local, state and federal laws, ordinances, codes and regulations.
N. Default. The failure by Landlord or Tenant to comply with the
-------
provisions of this Exhibit E shall constitute a default by that respective
---------
entity under the Lease and the non-defaulting party shall have the benefit of
all remedies provided for in the Lease.
O. No Liability. Notwithstanding the review and approval by Landlord of
------------
Tenant's Space Plans and specifications, Landlord shall have no responsibility
or liability in regard to the safety, sufficiency, adequacy or legality thereof
and Tenant shall be solely responsible for the compliance of such plans and
specifications with all applicable laws and regulations, the architectural
completeness and sufficiency thereof and other matters relating thereto, except
to the extent a valid construction permit is issued therefore.
P. Code Compliance. Landlord shall construct the base Building Landlord
---------------
Work so that it is in compliance with all applicable codes and laws, including
the ADA.
Q. Back-Up Generator. Landlord shall provide a location mutually
-----------------
acceptable to Landlord and Tenant for the location of a generator to be
installed by Tenant (the costs of which may be deducted from the Tenant
Improvement Allowance) to provide back up power and for any supplemental HVAC
equipment that will be required. The generator shall be reasonably screened and
buffered as required; the costs of which may be deducted from the Tenant
Improvement Allowance.
R. Network and/or Telecommunications Operations Center. Tenant shall
---------------------------------------------------
have an approximately nine thousand three hundred sixty two (9,362) square feet
network and/or telecommunications operations center in the Building that will
operate twenty four (24) hours per day, seven (7) days per week, that will be
contained within the Third Phase Premises. Landlord and Tenant shall work
together to achieve the most cost effective method to accommodate this need.
Tenant may utilize at no additional cost the base Building condenser water riser
system for its supplement HVAC equipment. Notwithstanding anything else in this
Lease, Tenant shall have the right, subject to Landlord's reasonable approval,
to choose its architect, engineer, consultants, general contractor and
subcontractors to perform this work.
S. Landlord Delays or Tenant Delays. 1. As used herein, "Landlord Delay"
-------------------------------- --------------
shall mean a delay which is primarily attributable to one or more of the
following:
(a) Landlord's (for purposes of this Exhibit E, "Landlord" shall be
---------
deemed to include the Landlord, Landlord's Construction
Representative, Landlord's consultants, the general contractor
and the agents of all of these), (i) failure to comply with any
of the deadlines specified in this Work Agreement, (ii)
<PAGE>
unjustifiably withholding, delaying or refusal to (A) fund, or
permit to be funded by Tenant, any draw request of the Tenant
Improvement Allowance, or (b) make any advance or grant any
approval requested by Tenant relating to the Tenant Space Plans,
Working Drawings or Final Plans, Landlord Work, Tenant
Improvement Work or Tenant Improvement Allowance as indicated by
Tenant prevailing in the dispute resolution process described in
Section (W) hereof, or (iii) Landlord's breach of its obligations
-----------
under the terms of this Work Agreement or the Lease;
(b) Landlord's request for changes or additions to the Final Plans
for the Tenant Improvement Work subsequent to the date of
Landlord's approval of the Final Plans and not related to Tenant
Final Plan changes;
(c) The gross negligence or willful misconduct of Landlord, in
connection with the Landlord Work, Tenant Improvement Work or
this Work Agreement;
(d) Landlord's unreasonable interference with the Tenant's schedule
for Tenant Work or the general contractor's schedule for the
Landlord Work or Tenant Improvement Work; or
(e) The time and delay incurred by the enforcement of the dispute
resolution process outlined in Section (W) to this Work
Agreement, to the extent that Tenant is the prevailing party
therein.
2. As used herein, "Tenant Delay" shall mean a delay which is primarily
------------
attributable to one or more of the following:
a. Tenant's (for purposes of this Exhibit E, "Tenant" shall be
---------
deemed to include the Tenant, Tenant's Construction Representative,
Tenant's consultants and the agents of all of these), (i) failure to
comply with any of the deadlines specified in this Work Agreement,
(ii) unjustifiably withholding, delaying or refusing to make any
approval sought by Landlord or (iii) breach of its obligations under
the terms of this Work Agreement or the Lease;
b. Tenant's request for changes or additions to the Final Plans
after Landlord's approval of same that cause Landlord to fail to
achieve Substantial Completion of the Premises by the dates specified
herein;
c. The gross negligence or willful misconduct of Tenant, in
connection with the submittal of Tenant's Space Plans and Working
Drawings, Tenant's Work or this Work Agreement;
d. Tenant's unreasonable interference with the Landlord's or
general contractor's schedule for Landlord Work or Tenant Improvement
Work;
e. The time and delay incurred by the enforcement of the
dispute resolution process outlined in Section (W) to this Work
Agreement, to the extent that Landlord is the prevailing party.
T. Access. [Intentionally Deleted.]
------
U. Adjustment of Tenant Improvement Allowance. At such time as the exact
------------------------------------------
square footage of the Premises is determined in accordance with Section 2.1 of
the Lease, then in that event the Tenant Improvement Allowance shall be adjusted
to reflect the correct amounts based upon the re-computed and agreed upon
rentable square footage of the Premises.
V. Time for Performance. Wherever in this Work Agreement a date for
--------------------
performance falls on a Saturday, Sunday or legal holiday, the time for
performance shall be extended until the following business day.
W. Disputes. In the event that either party shall have any claim or
--------
dispute under this Exhibit E, both parties agree that such claim or dispute
---------
shall be decided by arbitration in
<PAGE>
accordance with the Construction Industry Rules of the American Arbitration
Association. Both parties irrevocably submit to such arbitration. Both parties
further agree that any decision so rendered through that arbitration shall be
final and binding on both parties hereto and may be entered in any court of
competent jurisdiction.
List of Exhibits
----------------
Exhibit E-1 Schedule
- -----------
Exhibit E-2 Completed Shell Definitions
- -----------
Exhibit E-3 Written Confirmation of Tenant's Final Plans
- -----------
Exhibit E-4 Tenant's Work
- -----------
<PAGE>
EXHIBIT E-1
-----------
<TABLE>
<CAPTION>
First Phase Second Phase
--------------------------------
Tenant Executes Lease Document Oct 27,1999 Oct 27, 1999
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Tenant to submit approved Space Plan to Landlord for Nov 5, 1999 Dec 6, 1999
review.
Tenant to submit completed load letter to Landlord. Nov 5, 1999 Dec 6, 1999
Landlord to complete review and approve or disapprove Nov 9, 1999 Dec 9, 1999
Tenant Space Plan
Tenant to submit approved Construction Drawings and Nov 19, 1999 Dec 20, 1999
Specifications to Landlord for review.
Landlord to complete review and approve or disapprove Nov 23, 1999 Dec 23, 1999
Tenant Construction Drawings and Specifications.
Landlord to submit for Building Permit. Nov 23, 1999 Dec 23, 1999
Landlord to send construction bid packages to general Nov 23, 1999 Dec 23, 1999
contractors.
General contractors' bids due Dec 14, 1999 Jan 13, 2000
Construction Bid acceptance date (LL awards to low, Dec 17, 1999 Jan 17, 2000
qualified general contractor)
Construction Start Date Dec 20, 1999 Jan 19, 2000
Building Permit approved by Fairfax County Jan 3, 2000 Feb 2, 2000
General contractor to submit for sprinkler & fire alarm _____________ _____________
Permits.
Fairfax County approves sprinkler & fire alarm permits _____________ _____________
Target Date for Substantial Completion March 1, 2000 April 1, 2000
</TABLE>
<PAGE>
EXHIBIT E-2
COMPLETED SHELL DEFINITIONS
---------------------------
<PAGE>
EXHIBIT E-3
WRITTEN CONFIRMATION OF TENANT'S FINAL PLANS
--------------------------------------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT E-4
TENANT'S WORK
-------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT F
BUILDING RULES AND REGULATIONS
------------------------------
1. Sidewalks, doorways, vestibules, halls, stairways, and other similar areas
shall not be used for the disposal of trash, be obstructed by Tenant or be used
by Tenant for any purpose other than ingress and egress to and from the Premises
and for going from one part of the Building to another part of the Building.
2. Plumbing fixtures and appliances shall be used only for the purposes for
which designed, and no sweepings, rubbish, rags, or other unsuitable material
shall be thrown or placed therein. Damage resulting to any such fixtures or
appliances from misuse by Tenant shall be paid by such Tenant and Landlord shall
not in any case be responsible therefor.
3. Signs, advertisements, or notices visible in or from public corridors or
from outside the Building shall be subject to Landlord's prior written approval.
Without Landlord's prior consent, which consent shall not be unreasonably
withheld, no curtains or other window treatments shall be placed between the
glass and the Building standard window treatments.
4. With respect to work being performed by Tenant in the Premises, Tenant
shall refer all contractors, contractors' representatives, and installation
technicians rendering any service to Tenant to Landlord for Landlord's
supervision and approval before the performance of any contractual services.
This provision shall apply to all work performed in the Building, including, but
not limited to, installations of telephones, telegraph equipment, electrical
devices and attachments, and any and all installations of every nature affecting
floors, walls, woodwork, trim, windows, ceilings, equipment, and other physical
portions of the Building.
5. Movement in or out of the Building of furniture, office equipment, safes
and other heavy equipment, or the dispatch or receipt by Tenant of any bulky
material or merchandise, or materials which require use of elevators or
stairways or movement through the Building entrances or lobby, shall be
restricted to such hours as Landlord reasonably designates. All such movement
shall be under the supervision of Landlord and in the manner reasonably agreed
between Tenant and Landlord by prearrangement before performance. Such
prearrangement, to be initiated by Tenant, will include reasonable determination
by Landlord as to the time, method, and routing of such movement and as to
limitations for safety or other concerns. Tenant assumes all risks of damage to
articles moved and injury to persons engaged or not engaged in such movement.
Tenant shall be liable to personnel of Landlord damaged or injured as a result
of acts in connection with carrying out this service for Tenant, and Landlord
shall not be liable for the acts of any person engaged in, or any damage or loss
to any property or persons resulting from any act in connection with, such
service performed for Tenant.
6. Building management shall have the right and authority to prescribe the
maximum weight and position of safes and other heavy equipment which may
overstress any portion of a floor. All damages done to the Building by taking in
or putting out any property of Tenant, or done by Tenant's property while in the
Building, shall be repaired at the expense of Tenant, unless caused by
Landlord's gross negligence or willful misconduct.
7. Corridor doors, when not in use, shall be kept closed.
8. Tenant space visible from a public area must be kept neat and clean.
9. Should Tenant require telegraphic, telephonic, annunciator, or other
communication services, Landlord will direct the electricians as to where and
how wires are to be introduced and placed, and none shall be introduced or
placed except as Landlord shall reasonably direct. Electric current shall not be
used for power or heating without Landlord's prior written permission, which
consent shall not be unreasonably withheld.
10. No animals shall be brought into or kept in, on, or about the Building.
11. Passenger elevators are to be used only for the movement of persons, unless
an exception is approved by the Building management office.
<PAGE>
12. Tenant shall not tamper with or attempt to adjust temperature control
thermostats in the Premises. Landlord shall adjust thermostats as required to
maintain the Building standard temperature. Landlord requests that all window
blinds remain down and tilted at a 45 degree angle toward the street to help
maintain comfortable room temperatures and conserve energy.
13. Tenant will comply with all reasonable security procedures provided to
Tenant in writing during business hours and after hours and on weekends.
14. Tenants are requested to lock all office doors leading to corridors and to
turn out all lights at the close of their working day.
15. All requests for overtime air conditioning or heating must be submitted in
writing to the Building management office by 4:00 p.m. on the preceding Business
Day.
16. No flammable or explosive fluids or materials shall be kept or used within
the Building except in areas approved by Landlord, and Tenant shall comply with
all applicable building and fire codes relating thereto.
17. Tenant may not place any items on the balconies of the Building without
obtaining Landlord's prior written consent.
18. No smoking shall be permitted in the Premises. Smoking shall only be
permitted in the areas expressly designated by Landlord from time to time.
19. Subject to the terms of the Lease, Landlord reserves the right to rescind
any of these rules and regulations and to make such other and further reasonable
and non-discriminatory rules and regulations as in its good faith judgment shall
from time to time be needed for the safety, protection, care and cleanliness of
the Property, the operation thereof, the preservation of good order therein, and
the protection and comfort of the tenants and their agents, employees, and
invitees, provided such rules and regulations do not materially increase
Tenant's obligations or liabilities under the Lease and which rules and
regulations, when made and written notice thereof is given to Tenant, shall be
binding upon Tenant in like manner as if originally herein prescribed.
<PAGE>
EXHIBIT G
PROPOSED TENANT SIGNAGE
-----------------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT H
CLEANING SPECIFICATIONS
-----------------------
<PAGE>
EXHIBIT I
PARKING AREA
------------
[TO BE ATTACHED SUBSEQUENT TO LEASE SIGNING UPON
MUTUAL AGREEMENT OF LANDLORD AND TENANT]
<PAGE>
EXHIBIT 10.34
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
NETWORK ACCESS SOLUTIONS CORPORATION
AND
SBC COMMUNICATIONS INC.
February 4, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1: Defined Terms........................................................................ 1
Section 2: Terms of Purchase and Sale........................................................... 7
2.1 Conveyance of Stock................................................................ 7
2.2 Purchase Price for the Preferred Shares............................................ 7
2.3 Number of Preferred Shares to be Issued at the Closing............................. 7
Section 3: Closing.............................................................................. 7
3.1 The Closing........................................................................ 7
3.2 Deliveries by SBC.................................................................. 8
3.3 Deliveries by NAS.................................................................. 8
Section 4: Conditions to NAS's Obligations...................................................... 9
4.1 Consents.......................................................................... 9
4.2 Litigation........................................................................ 9
4.3 SBC Representations; Compliance with Covenants.................................... 9
4.4 Deliveries........................................................................ 9
4.5 SBC Change in Control Event....................................................... 10
4.6 Telmex Agreement.................................................................. 10
Section 5: Conditions to SBC's Obligations...................................................... 10
5.1 Consents.......................................................................... 10
5.2 Litigation........................................................................ 10
5.3 NAS's Representations; Compliance with Covenants.................................. 10
5.4 NAS Change in Control Event....................................................... 11
5.5 Adverse Developments.............................................................. 11
5.6 Deliveries........................................................................ 11
Section 6: Representations and Warranties of SBC................................................ 11
6.1 Organization and Standing......................................................... 11
6.2 Authorization by SBC.............................................................. 11
6.3 Litigation........................................................................ 12
6.4 Finders' and Brokers' Fees........................................................ 12
6.5 Investment Intent; Qualification.................................................. 12
6.6 Representations Not Misleading.................................................... 12
Section 7: Representations and Warranties of NAS................................................ 13
7.1 Organization and Standing of NAS.................................................. 13
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
7.2 Authorization by NAS; Consents.................................................... 13
7.3 Corporate Documents............................................................... 14
7.4 Licenses; Qualification........................................................... 14
7.5 Litigation........................................................................ 14
7.6 Exclusive Dealing................................................................. 15
7.7 Compliance with Applicable Laws................................................... 15
7.8 Title to Preferred Shares; Absence of Liens....................................... 15
7.9 Financial Statements.............................................................. 15
7.10 Conduct of Business in Ordinary Course............................................ 16
7.11 No Material Adverse Effect........................................................ 16
7.12 Absence of Defaults............................................................... 16
7.13 No Conflict....................................................................... 16
7.14 Capital Stock of NAS.............................................................. 17
7.15 Finders' and Brokers' Fees........................................................ 17
7.16 Taxes............................................................................. 17
7.17 Subsidiaries...................................................................... 17
7.18 Representations Not Misleading.................................................... 17
Section 8: Covenants of SBC..................................................................... 18
8.1 Cooperation....................................................................... 18
8.2 Confidentiality; Press Releases................................................... 18
8.3 Definitive Operating Agreement.................................................... 18
8.4 Consent Relating to Registration Rights........................................... 18
8.5 Further Assurances................................................................ 19
Section 9: Covenants of NAS..................................................................... 19
9.1 Cooperation....................................................................... 19
9.2 Access to NAS Information......................................................... 19
9.3 Ordinary Course Operation......................................................... 19
9.4 Board Representation.............................................................. 19
9.5 Confidentiality; Press Releases................................................... 20
9.6 Notification of Change in Control Event........................................... 20
9.7 Registration Rights............................................................... 20
9.8 Listing........................................................................... 23
9.9 Issuance of Other Securities...................................................... 23
9.10 Further Assurances................................................................ 23
9.11 Use of Proceeds................................................................... 23
9.12 Definitive Operating Agreement.................................................... 24
9.13 Right of Primary Offer............................................................ 24
9.14 Government License Application Amendment.......................................... 25
Section 10: Termination......................................................................... 25
10.1 Terminating Events................................................................ 25
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
10.2 Effect on Obligations............................................................. 26
Section 11: Indemnification..................................................................... 26
11.1 Indemnification by NAS............................................................ 26
11.2 Indemnification by SBC............................................................ 27
11.3 Losses............................................................................ 27
11.4 Survival.......................................................................... 27
11.5 Procedures Relating to Third Party Claims......................................... 28
Section 12: Arbitration......................................................................... 29
12.1 Resolution of Disputes............................................................ 29
12.2 Arbitrators....................................................................... 30
12.3 Costs and Fees.................................................................... 30
12.4 Burden of Proof................................................................... 30
12.5 Award............................................................................. 30
12.6 Agreement Controls................................................................ 30
Section 13: Miscellaneous....................................................................... 31
13.1 Entire Agreement; Amendment....................................................... 31
13.2 Successors and Assigns............................................................ 31
13.3 Rights and Remedies............................................................... 31
13.4 Counterparts...................................................................... 31
13.5 Modification and Waiver........................................................... 31
13.6 Expenses.......................................................................... 32
13.7 Notices........................................................................... 32
13.8 Severability...................................................................... 33
13.9 Governing Law..................................................................... 33
13.10 Rules of Construction............................................................. 33
13.11 Ownership Limitation.............................................................. 34
</TABLE>
iii
<PAGE>
Schedules:
7.2 Consents Exceptions
7.4 NAS Licenses
7.5 Litigation
7.6 Exclusive Dealing Exceptions
7.8 Outstanding Options or Rights
7.9 Financial Statements
7.10 Ordinary Course Exceptions
7.13 Conflicts
7.14 NAS Capital Stock
7.15 Finders' and Brokers' Fees
7.17 Subsidiaries
Exhibits:
A Certificate of Designations
B Form of Shook, Hardy & Bacon Legal Opinion
C Summary of Operating Agreement
iv
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement"), dated as of February 4,
2000, is by and between SBC Communications Inc., a Delaware corporation ("SBC"),
and Network Access Solutions Corporation, a Delaware corporation ("NAS").
RECITALS
- --------
WHEREAS, SBC wishes to acquire, and NAS wishes to sell to SBC, shares of
preferred stock of NAS;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
SBC and NAS agree as follows:
Section 1: Defined Terms
- -------------------------
The following terms shall have the following meanings in this Agreement:
"AAA" means the American Arbitration Association.
"Affiliate" means, with respect to a Person, any other Person directly or
indirectly controlling, controlled by or under common control with such Person.
"Agreement" shall have the meaning set forth in the preamble hereto.
"Assets" means the contracts, NAS Licenses, personal property, intellectual
property and real property, and all other assets, rights and properties,
tangible and intangible, of NAS and used or held for use in the NAS Business,
including (without limitation) cash, cash equivalents and accounts receivable.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act or transaction that forms or could form the basis for any
specified consequences.
"Beneficial Owner" means, with respect to any security, a Person that
Beneficially Owns such security.
"Beneficially Own" means having the right to vote or dispose of, or
"beneficially own" as determined pursuant to Rule 13d-3 under the Exchange Act
as in effect on the date of this Agreement, including pursuant to any agreement,
arrangement or understanding.
<PAGE>
"Business Day" means a day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions are authorized or required by law or executive
order to remain closed in the domicile of SBC or NAS.
"Closing" means the consummation of the transactions contemplated by this
Agreement in accordance with the provisions of Section 2 and Section 3.
"Closing Date" shall mean the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder, or any subsequent legislative enactment thereof, as in
effect from time to time.
"Common Stock" shall mean, collectively, the Common Stock of NAS.
"Communications Act" means the Communications Act of 1934, 47 U.S.C.
Section 151 et seq., as amended and in effect from time to time.
"Company Control Person" shall have the meaning set forth in Section 11.2.
"Consents" means all of the consents, permits or approvals of Governmental
Authorities and other Persons necessary or required to consummate the
transactions contemplated hereby.
"Control Person" shall have the meaning set forth in Section 11.1.
"Convertible Securities" means any securities convertible into,
exchangeable for or bearing a right to acquire Common Stock.
"Definitive Operating Agreement" means a mutually agreeable definitive
operating agreement(s) between NAS and SBC Telecom, Inc. as contemplated by, and
containing terms and conditions substantially as set forth in, the Summary of
Operating Agreement attached as Exhibit C hereto.
"Dispute" shall have the meaning set forth in Section 12.1(a).
"Dispute Notice" shall have the meaning set forth in Section 12.1(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
and in effect from time to time.
"Enforceability Exceptions" shall have the meaning set forth in Section
6.2(a).
"FCC" means the Federal Communications Commission or any successor thereto.
"FCC Rules" means Title 47 of the Code of Federal Regulations, as amended
at any time and from time to time, and FCC decisions issued pursuant to the
adoption of such regulations.
2
<PAGE>
"Final Order" means an order as to which the time for filing a request for
administrative or judicial relief, or for instituting administrative review sua
sponte, shall have expired without any such filing having been made or notice of
review having been issued; or, in the event of such filing or review sua sponte,
as to which such filing or review shall have been disposed of favorably to the
order and the time for seeking further relief with respect thereto shall have
expired without any request for such further relief having been filed.
"Fully Diluted" shall mean, with respect to the number of Shares
outstanding on a fully diluted basis, the number of Shares which would be
outstanding at the time of determination assuming the conversion, exchange or
exercise of all Convertible Securities (irrespective of any legal or contractual
restriction on such exercise, exchange or conversion), and any reference herein
to the number of Shares outstanding shall mean the number of Shares outstanding
assuming no conversion, exchange or exercise of Convertible Securities.
"GAAP" means generally accepted accounting principles consistent with the
past practices of NAS.
"Governmental Authority" means (i) the United States, any state,
commonwealth, territory, or possession thereof and any political subdivision or
quasi-governmental authority of any of the same, including but not limited to
courts, tribunals, departments, commissions, boards, bureaus, agencies,
counties, municipalities, provinces, parishes, and other instrumentalities, and
(ii) any foreign (as to the United States) sovereign entity, including but not
limited to nations, states, republics, kingdoms and principalities, any
province, commonwealth, territory or possession thereof, and any political
subdivision, quasi-governmental authority, or instrumentality of any of the
same.
"Holder" means SBC and each transferee of SBC's rights hereunder that is a
Wholly-Owned SBC Subsidiary and any other transferee of SBC's rights hereunder
to which NAS consents, which consent shall not be unreasonably withheld.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended and in effect from time to time.
"Indemnified Party" shall have the meaning set forth in Section 11.5.
"IRS" shall mean the Internal Revenue Service and any governmental body or
agency succeeding to the functions thereof.
"Judgment" means any judgment, writ, order, injunction, award or decree of
any court, judge, justice or magistrate, including any bankruptcy court, or
arbiter, and any order of or by any other Governmental Authority.
"Knowledge" with respect to NAS means the actual knowledge of NAS and, with
respect to SBC, means the actual knowledge of SBC.
3
<PAGE>
"Legal Requirements" means applicable common law and any applicable
statute, ordinance, code or other law, rule, regulation, order, technical or
other standard, requirement or procedure enacted, adopted, promulgated or
applied by any Governmental Authority, including any Judgment.
"Lien" means any security agreement, financing statement filed with any
Governmental Authority, conditional sale or other title retention agreement, any
lease, consignment or bailment given for the purpose of security, any lien,
mortgage, indenture, pledge, option, encumbrance, restriction on transfer,
adverse interest, constructive trust or other trust, claim, attachment,
exception to or defect in title or other ownership interest (including but not
limited to reservations, rights of entry, possibilities of reverter,
encroachments, easements, rights-of-way, restrictive covenants, leases and
licenses) of any kind, which otherwise constitutes an interest in or claim
against property, whether arising pursuant to any Legal Requirement, contract or
otherwise.
"Litigation" means any claim, action, suit, proceeding, arbitration,
investigation, hearing or other activity or procedure that could result in a
Judgment, and any notice of any of the foregoing.
"Losses" means any losses, liabilities, damages, Liens, penalties, costs,
fines and expenses, whether in connection with any Litigation or otherwise,
including but not limited to interest which may be imposed in connection
therewith, expenses of investigation, reasonable fees and disbursements of
counsel and other experts, and the cost to any Person making a claim or seeking
indemnification under this Agreement with respect to funds expended by such
Person by reason of the occurrence of any event with respect to which
indemnification is sought.
"Material Adverse Effect" shall mean, with respect to either party, a
material adverse change in the financial condition or financial results of
operations of such party or the occurrence of any event or combination of events
that is reasonably likely to result in a material adverse change in the
financial condition or financial results of operations of such party and its
Subsidiaries taken as a whole. When the phrase "material adverse" is used in
this Agreement and is not used as a capitalized term and in the phrase "Material
Adverse Effect," such "material adverse" reference shall not be defined or
construed as provided in the immediately preceding sentence or in the context of
such party taken as a whole but instead shall mean a material adverse effect,
change or consequences only as to the matter with respect to which the phrase
"material adverse" is utilized.
"NAS" shall have the meaning set forth in the preamble hereto.
"NAS Business" means NAS's business as conducted in the United States in
accordance with NAS's existing operations and business plans.
"NAS Change in Control Event" shall be deemed to have occurred if (i) there
shall be consummated (x) any consolidation or merger of NAS in which NAS is not
the continuing or surviving corporation or pursuant to which shares of the
Common Stock would be converted into cash, securities or other property, other
than a merger of NAS in which the holders of the Common
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Stock immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger, or (y)
any sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the Assets of NAS, or
(ii) the stockholders of NAS approved any plan or proposal for the liquidation
or dissolution of NAS, or (iii) any Person other than Jonathan P. Aust and
Spectrum Equity Investors II, L.P shall become the Beneficial Owner of 20% or
more of the outstanding Common Stock or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire NAS Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by NAS's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
"Nasdaq" means Nasdaq National Market.
"NAS Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of NAS as of September 30, 1999
and as of December 31, 1998 and the related consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) and (ii) the consolidated balance sheets of NAS (including related notes
and schedules, if any) and related statements of income, shareholders' equity
and cash flows (including related notes and schedules, if any) with respect to
periods ended subsequent to September 30, 1999.
"NAS Licenses" means all Section 214 authorizations or microwave and other
spectrum licenses issued by the FCC, and all certificates of public convenience
and necessity or comparable authorizations issued by any state public utilities
commission or comparable regulatory authority, and held by NAS.
"New Securities" shall have the meaning set forth in Section 9.13(d)(i).
"Note" shall mean that certain Promissory Note dated of even date herewith,
in the original principal amount of $15,000,000.00, payable by NAS to SBC.
"Notice" shall have the meaning set forth in Section 9.13(a).
"Outstanding" with respect to the number of Shares outstanding on a fully
diluted basis, shall have the meaning set forth in the definition of the term,
"Fully Diluted."
"Percentage" shall have the meaning set forth in Section 9.13(d)(ii).
"Permitted Registration Date" means the date that is the later of (i) two
years from the Closing Date, or (ii) the date of termination of the Definitive
Operating Agreement.
"Person" means any natural person, Governmental Authority, corporation,
general or limited partnership, limited liability company, limited liability
partnership, joint venture, trust, estate, association, organization or
unincorporated entity of any kind.
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"Preferred Shares" means the Convertible Series B Preferred Stock of NAS,
as the terms of such Preferred Shares are set forth in the Certificate of
Designations attached as Exhibit A hereto.
"Prior Holders" shall have the meaning set forth in Section 9.7.
"Purchase Price" means $75,000,000.00.
"Registration Request" shall have the meaning set forth in Section 9.7(b).
"Registration Statement" shall have the meaning set forth in Section
9.7(b).
"SBC" shall have the meaning set forth in the preamble hereto.
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
"SBC Change in Control Event" shall be deemed to have occurred if (i) there
shall be consummated (x) any consolidation or merger of SBC in which SBC is not
the continuing or surviving corporation or pursuant to which shares of the
Common Stock would be converted into cash, securities or other property, other
than a merger of SBC in which the holders of the Common Stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the Assets of SBC, or (ii) the
stockholders of SBC approved any plan or proposal for the liquidation or
dissolution of SBC, or (iii) any Person shall become the Beneficial Owner of 20%
or more of the outstanding Common Stock or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire SBC Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by SBC's
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
"Securities Act" shall mean the Securities Act of 1933, as amended and in
effect from time to time.
"Selling Shareholder" shall have the meaning set forth in Section 9.7(b).
"Subsidiary" of any corporation shall mean any other corporation, limited
liability company, general or limited partnership, limited liability
partnership, joint venture, trust or other entity of which the outstanding
capital stock possessing a majority of voting power in the election of directors
(otherwise than as the result of a default) is owned or controlled by such
corporation directly or indirectly through Subsidiaries.
"Taxes" means all levies and assessments of any kind or nature imposed on
NAS by any Governmental Authority, including but not limited to all income,
sales, use, ad valorem, value added, franchise, severance, net or gross
proceeds, withholding, payroll, employment, excise or
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property taxes, together with any interest thereon and any penalties, additions
to tax or additional amounts applicable thereto.
"Telmex" shall mean Telefonos de Mexico, S.A. de C.V.
"Third Party Claim" shall have the meaning set forth in Section 11.5.
"Wholly-Owned SBC Subsidiary" means any corporation, limited liability
company, general or limited partnership, limited liability partnership, joint
venture, trust or other entity of which the outstanding capital stock is wholly
owned directly or indirectly by SBC and which is formed for business purposes
that are unrelated to the ability of such entity to receive any rights or
interests hereunder or associated herewith.
Section 2: Terms of Purchase and Sale
- --------------------------------------
2.1 Conveyance of Stock
Subject to the terms and conditions of this Agreement, NAS shall issue to
SBC, free and clear of all Liens, the number of shares of its newly issued
Convertible Preferred Stock set forth in Section 2.3 (the "Preferred Shares").
2.2 Purchase Price for the Preferred Shares
The aggregate purchase price for the Preferred Shares ("Purchase Price")
shall be $75,000,000.00.
2.3 Number of Preferred Shares to be Issued at the Closing
The number of shares of Preferred Shares to be acquired by SBC at the
Closing shall be 750,000.
Section 3: Closing
- -------------------
3.1 The Closing
Upon the terms and subject to the conditions contained herein (each party
agreeing to notify the other when all closing conditions have occurred), the
Closing shall take place at the offices of Arnold & Porter in Washington, D.C.,
at 2:00 p.m. local time on the date (the "Closing Date") which is five (5)
Business Days after each of the conditions set forth in Section 4 and 5 hereof
have been satisfied or waived, or any other mutually agreed upon time.
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3.2 Deliveries by SBC
On the Closing Date, SBC shall deliver or cause to be delivered to NAS the
following, in form and substance reasonably satisfactory to NAS and its counsel:
(a) The Purchase Price, (i) by wire transfer in the form of immediately
available funds to an account designated by NAS and (ii) to the extent
of the amount of unpaid principal and accrued interest on the Note, by
tender of the Note;
(b) The Note, marked "Paid and Cancelled";
(c) A certificate, dated as of the Closing Date, executed by a Senior Vice
President of SBC, certifying that the conditions set forth in Section
4 have been fulfilled;
(d) A certificate, dated as of the Closing Date, executed by SBC's
Secretary certifying that the execution of this Agreement and the
consummation of the transaction contemplated hereby have been
authorized and approved by all necessary corporate action of SBC,
which remains in full force and effect and has not been modified or
amended; and
(e) Such other documents and instruments as shall be reasonably necessary
to effect the intent of this Agreement and consummate the transactions
contemplated by this Agreement.
3.3 Deliveries by NAS
On the Closing Date, NAS shall deliver to SBC the following, in form and
substance reasonably satisfactory to SBC and its counsel:
(a) A certificate or certificates for all of the Preferred Shares;
(b) A certificate, dated as of the Closing Date, executed by the President
of NAS, certifying that all the conditions set forth in Section 5 have been
fulfilled;
(c) A certificate, dated as of the Closing Date, executed by the Secretary
of NAS, certifying that the resolutions, as attached to such certificate, were
duly adopted by the Board of Directors of NAS authorizing and approving the
execution of this Agreement and the consummation of the transactions
contemplated hereby, and that such resolutions remain in full force and effect
and have not been modified or amended;
(d) SBC shall have been furnished with a favorable opinion, dated the
Closing Date; of outside counsel to NAS (which counsel shall be reasonably
satisfactory to SBC), confirming the matters set forth in Sections 7.1, 7.2 (as
to all transaction documents), 7.5, 7.8, 7.13, 7.14, and exemption of the
issuance and sale of the Series B Preferred Stock from the registration
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requirements of the federal and state securities laws, which opinion shall be in
form and substance reasonably satisfactory to SBC.
(e) Opinions of Shook, Hardy & Bacon, NAS's state regulatory counsel,
dated as of the Closing Date, substantially in the form of Exhibit B hereto; and
(f) Such other documents and instruments as shall be reasonably necessary
to effect the intent of this Agreement and consummate the transactions
contemplated by this Agreement.
Section 4: Conditions to NAS's Obligations
- -------------------------------------------
The obligations of NAS to sell the Preferred Shares and effect the Closing
shall be subject to the satisfaction by SBC, or waiver thereof by NAS, on or
prior to the Closing Date of all of the following conditions:
4.1 Consents
All Consents shall have been obtained.
4.2 Litigation
No Litigation shall be pending, and no Legal Requirement shall have been
enacted, entered, promulgated or issued, or shall have become or be deemed
applicable, to any of the transactions contemplated by this Agreement by any
Governmental Authority, that would (i) prohibit SBC's ownership of the Stock or
prohibit NAS's operation of the NAS Business in any material respect as it is
being operated as of the date of this Agreement, (ii) prevent or make illegal
the consummation of the transactions contemplated by this Agreement.
4.3 SBC Representations; Compliance with Covenants
SBC's representations and warranties contained in Section 6 shall be
accurate in all material respects when made and at and as of the Closing with
the same effect as though such representations and warranties had been made at
and as of the Closing, and SBC shall have in all material respects performed and
complied with all covenants and agreements and conditions required by this
Agreement to be performed or complied with by it prior to or on the Closing,
provided that this condition shall be satisfied if the inaccuracy of any
representation or warranty, or the nonperformance or noncompliance with any
covenant, agreement or condition, individually or in the aggregate, does not
have a Material Adverse Effect.
4.4 Deliveries
SBC shall have made or stand willing and able to make all of the deliveries
to NAS set forth in Section 3.2.
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4.5 SBC Change in Control Event
No SBC Change in Control Event shall have occurred.
4.6 Telmex Agreement
Telmex shall have executed a stock purchase agreement with respect to the
purchase of 750,000 Preferred Shares in the form of this Agreement except for
appropriate changes to reflect Telmex as a party thereto.
Section 5: Conditions to SBC's Obligations
- -------------------------------------------
The obligations of SBC to purchase the Preferred Shares and effect the
Closing shall be subject to the satisfaction, or waiver by SBC, on or prior to
the Closing Date of all of the following conditions:
5.1 Consents
All Consents shall have been obtained.
5.2 Litigation
No Litigation shall be pending, and no Legal Requirement shall have been
enacted, entered, promulgated or issued, or shall have become or be deemed
applicable, to any of the transactions contemplated by this Agreement by any
Governmental Authority, that would (i) prohibit SBC's ownership of the Preferred
Shares or prohibit NAS's operation of the NAS Business in any material respect
as it is being operated as of the date of this Agreement, or (ii) prevent or
make illegal the consummation of the transactions contemplated by this
Agreement.
5.3 NAS's Representations; Compliance with Covenants
NAS's representations and warranties contained in Section 7 shall be
accurate in all respects when made and at and as of the Closing with the same
effect as though such representations and warranties had been made at and as of
the Closing except: (i) insofar as any such representation or warranty is made
specifically as of the date of this Agreement or as of any other specified
earlier date (in which event the same shall continue at and as of the Closing
Date to be true and correct as of such earlier date) and (ii) with respect to
changes contemplated by this Agreement, and NAS shall have in all material
respects performed and complied with all covenants and agreements and conditions
required by this Agreement to be performed or complied with by it prior to or on
the Closing Date, provided that this condition shall be satisfied if the
inaccuracy of any representation or warranty, or the nonperformance or
noncompliance with any covenant, agreement or condition, individually or in the
aggregate, does not have a Material Adverse Effect.
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5.4 NAS Change in Control Event
No NAS Change in Control Event shall have occurred.
5.5 Adverse Developments
Since September 30, 1999, there shall not have occurred any change, or any
development involving a prospective change, in or affecting the business,
operations, properties, Assets or prospects of NAS which materially impairs the
value of the Preferred Shares.
5.6 Deliveries
NAS shall have made or stand willing and able to make all of the deliveries
to SBC set forth in Section 3.3.
Section 6: Representations and Warranties of SBC
- -------------------------------------------------
SBC hereby represents and warrants to NAS as follows:
6.1 Organization and Standing
SBC is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to execute and deliver this Agreement and to perform its
obligations hereunder.
6.2 Authorization by SBC
(a) This Agreement has been duly and validly executed and delivered by SBC
and constitutes the legal, valid and binding obligation of SBC enforceable
against SBC in accordance with its terms, except as such enforceability may be
limited by (i) bankruptcy, insolvency, or other similar laws affecting the
enforcement of creditors' rights generally or (ii) general principles of equity
(collectively, the "Enforceability Exceptions").
(b) Neither the execution, delivery and performance of this Agreement by
SBC nor the consummation by SBC of the transactions contemplated herein will,
with or without the giving of notice or the lapse of time, or both, (i) violate
any Legal Requirements to which SBC is subject, (ii) conflict with or result in
a breach of the terms, conditions or provisions of, or constitute a default
under, the charter or by-laws of SBC or any material agreement or commitment to
which SBC is a party or by which SBC or any of SBC's assets, may be bound or
affected, or (iii) require SBC to obtain any authorization, consent, approval or
waiver from, or to make any filing with, any Governmental Authority or non-
governmental third party. NAS has informed SBC that the approvals referred to on
Schedule 7.2 are required for consummation of the transactions contemplated by
this Agreement.
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6.3 Litigation
There is no Litigation pending against SBC or, to the best of SBC's
Knowledge, any Basis for Litigation or threatened Litigation against SBC which
seeks to enjoin or obtain damages in respect of the consummation of the
transactions contemplated hereby. SBC is not a party to or involved in any
Litigation which has a material adverse effect on SBC's ability to consummate,
or would prevent the consummation of, the transactions contemplated by this
Agreement.
6.4 Finders' and Brokers' Fees
Neither SBC, nor anyone on behalf of SBC, has any obligations to any
broker, finder or agent, or agreed to pay any brokerage fee, finder's fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
6.5 Investment Intent; Qualification
(a) SBC is acquiring the Preferred Shares solely for its own account, for
investment purposes only, and not with a view to any distribution thereof, in
whole or in part, within the meaning of the Securities Act or any applicable
state securities laws. The Preferred Shares will not be resold by SBC unless
registered pursuant to the Securities Act and any applicable state securities
laws or unless an exemption therefrom is available. SBC hereby acknowledges that
NAS will rely upon the truth of the representations made in this Section 6.5 in
determining that an exemption from the registration requirements of the
securities laws is available in connection with the sale of the Preferred Shares
pursuant to this Agreement.
(b) SBC has the ability to evaluate the merits and risks associated with
its investment in the Preferred Shares on the basis of SBC's knowledge and
experience in financial and business matters. SBC is an "accredited investor" as
defined in Rule 501 of the General Rules and Regulations under the Securities
Act. SBC has not relied upon any representation or warranty made by NAS, or by
any person on behalf of NAS, other than the representations and warranties
contained in this Agreement.
6.6 Representations Not Misleading
The representations made by SBC in this Agreement do not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
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Section 7: Representations and Warranties of NAS
- -------------------------------------------------
NAS hereby represents and warrants to SBC as follows:
7.1 Organization and Standing of NAS
NAS is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with all requisite power and authority
(corporate and other) to own its properties and conduct its business as now
being conducted, and is duly qualified to do business as a foreign corporation
in good standing in each jurisdiction where the ownership of its properties or
the conduct of its business makes such qualification necessary, except in those
jurisdictions where failure so to qualify will not permanently impair title to a
material amount of its properties or its rights to enforce in all material
respects contracts against others or expose it to substantial liabilities in
such jurisdictions. Each Subsidiary of NAS is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation with all requisite power and authority (corporate and other) to
own its properties and conduct its business as now being conducted, and is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership of its properties or the conduct of its
business makes such qualification necessary, except in those jurisdictions where
failure so to qualify will not permanently impair title to a material amount of
its properties or its rights to enforce in all material respects contracts
against others or expose it to substantial liabilities in such jurisdictions.
7.2 Authorization by NAS; Consents
(a) NAS has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement. NAS has taken all
corporate action necessary to authorize this Agreement and the issue, sale and
delivery of the Preferred Shares. This Agreement has been duly authorized,
executed and delivered by NAS and is a legal, valid and binding obligation of
NAS enforceable in accordance with its terms, except as such enforceability may
be limited by the Enforceability Exceptions.
(b) All material Consents required to be obtained by NAS are set forth on
Schedule 7.2. Except for the Consents set forth in Schedule 7.2, neither the
execution, delivery and performance of this Agreement by NAS nor the
consummation by NAS of the transactions contemplated herein will, with or
without the giving of notice or the lapse of time, or both, (i) violate any
Legal Requirements to which NAS is subject, (ii) conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
the charter or by-laws of NAS, or any NAS License, any material contract to
which NAS is a party or by which NAS may be bound or affected, or (iii) require
NAS to obtain any authorization, consent, approval or waiver from, or to make
any filing with, any Governmental Authority or non-governmental third party.
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7.3 Corporate Documents
True and correct copies of the Amended and Restated Certificate of
Incorporation and the Amended and Restated By-Laws of NAS, certified by an
appropriate officer of NAS, have been delivered to SBC and such Amended and
Restated Certificate of Incorporation, as amended, and Amended and Restated By-
Laws have not been amended since the respective dates of certification thereof,
nor has the Board of Directors or the shareholders of NAS taken any action for
the purpose of effecting the amendment or modification of such Amended and
Restated Certificate of Incorporation or Amended and Restated By-Laws.
7.4 Licenses; Qualification
(a) NAS or its Subsidiaries hold all the NAS Licenses listed in Schedule
7.4 hereto in its corporate name. The NAS Licenses listed in Schedule 7.4 are
all of the material and necessary Licenses which are required in connection with
the current operation of the NAS Business. Except as set forth on Schedule 7.4,
all NAS Licenses are currently in full force and effect and there are no pending
or, to the Knowledge of NAS, threatened revocation proceedings which would have
a Material Adverse Effect on the operation of the NAS Business, nor, to the
Knowledge of NAS, is there any Basis for any such proceeding. NAS has made
available to SBC for SBC's review, accurate and complete copies of all NAS
Licenses.
(b) All fees due and payable to Governmental Authorities pursuant to the
NAS Licenses have been paid and, except as set forth on Schedule 7.4, no event
has occurred which, with or without the giving of notice or the lapse of time or
both, would constitute grounds for revocation of the NAS Licenses. Except as set
forth on Schedule 7.4, NAS is in compliance in all material respects with the
terms of the NAS Licenses, and there is no condition, event or occurrence
existing, nor is there any proceeding being conducted of which NAS has received
notice, nor, to NAS's Knowledge, is there any proceeding threatened, by any
Governmental Authority, which would cause the termination, suspension,
cancellation or nonrenewal of any of the NAS Licenses, or the imposition of any
material penalty or fine by any Governmental Authority, nor, to the Knowledge of
NAS, is there any Basis for any such proceeding.
(c) Except as set forth on Schedule 7.4, to NAS's Knowledge, all
applications, reports, fees, filings and other submissions required by any
Governmental Authority have been made or paid in a timely fashion, the
noncompliance with which reasonably could have a Material Adverse Effect.
7.5 Litigation
There is no Litigation pending against NAS or any of its Subsidiaries, or,
to the Knowledge of NAS, a Basis for Litigation or threatened Litigation against
NAS or any of its Subsidiaries which seeks to enjoin or obtain damages in
respect of the consummation of the transactions contemplated hereby. Except for
those matters disclosed on Schedule 7.5, as of the date hereof there is no
Litigation or, to the Knowledge of NAS, Basis for Litigation, against NAS or any
of its Subsidiaries (including proceedings concerning labor disputes or
grievances, civil
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rights discrimination cases and affirmative action proceedings) nor is there any
governmental investigation pending or, to NAS's Knowledge, Basis for
governmental investigation or threatened governmental investigation relating to
NAS or any of its Subsidiaries or to which NAS or any such Subsidiary is a
party, nor is there any Judgment relating to NAS or any of its Subsidiaries or
to which NAS or any of its Subsidiaries is a party which is unsatisfied or
requires continuing compliance. Neither NAS nor any of its Subsidiaries is a
party to or involved in any Litigation which has a Material Adverse Effect upon
NAS's ability to consummate, or would prevent the consummation of, the
transactions contemplated by this Agreement.
7.6 Exclusive Dealing
Except as set forth on Schedule 7.6, neither NAS nor any of its Affiliates
is a party to any currently effective agreement, written or oral, involving the
sale of any NAS Securities, a material portion of NAS's Assets, or any of the
NAS Business to any Person other than SBC and Telmex.
7.7 Compliance with Applicable Laws
NAS and each of its Subsidiaries has complied and presently is in
compliance with all applicable Legal Requirements.
7.8 Title to Preferred Shares; Absence of Liens
(a) The Preferred Shares have been duly authorized for issuance and are
validly issued, fully paid and nonassessable. None of the Preferred Shares has
been issued in violation of, or is subject to, any preemptive or subscription or
similar rights. Except as disclosed on Schedule 7.8 there are no outstanding
options or rights of any kind to acquire or subscribe for any Preferred Shares
nor are there any obligations to issue, sell or otherwise cause to become
outstanding any such options, rights, capital stock or securities. Except as
disclosed on Schedule 7.8, NAS is not a party to, and does not have any
Knowledge of, any voting trusts, proxies, voting agreements or other agreements
with respect to the voting of the capital stock of NAS.
(b) SBC will acquire at the Closing good title to the Preferred Shares,
free and clear of all Liens.
(c) NAS owns all of the issued and outstanding capital stock of each of
its Subsidiaries.
7.9 Financial Statements
Attached as Schedule 7.9 are the unaudited NAS Financial Statements for
September 30, 1999 in the form included in NAS's Form 10-Q for the nine months
ended September 30, 1999. The NAS Financial Statements have been prepared by NAS
in accordance with GAAP and present fairly the financial position of NAS and its
Subsidiaries as of the dates of such
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statements. There are no material
contingent liabilities that are not disclosed on the NAS Financial Statements.
7.10 Conduct of Business in Ordinary Course
Since September 30, 1999, and except as set forth on Schedule 7.10, NAS
has conducted the NAS Business only in the ordinary course and consistent with
past practices and has not: (i) made any material increase in compensation
payable or to become payable to any senior executives of NAS, or any material
change in personnel policies, insurance benefits or other compensation
arrangements affecting NAS's employees; (ii) made any sale, assignment, lease or
other transfer of any of the Assets, other than obsolete Assets no longer usable
in the operation of the NAS Business or other Assets sold or disposed of in the
normal course of business with suitable replacements being obtained therefor;
(iii) experienced any physical damages, destruction or loss exceeding $50,000.00
in the aggregate affecting the NAS Business that is not covered by insurance or
has not been remedied within 30 days; (iv) incurred any indebtedness or Liens
except in the ordinary course and consistent with past practices; (v) paid any
dividends; or (vi) waived any material rights of NAS under any contract or NAS
License.
7.11 No Material Adverse Effect
Since September 30, 1999, there has been no Material Adverse Effect.
7.12 Absence of Defaults
Neither NAS nor any of its Subsidiaries is in material default under or in
material violation of any provision of its Amended and Restated Certificate of
Incorporation or Amended and Restated By-Laws or contained in any other
agreement or instrument to which it is a party or by which it is bound or to
which any of its properties is subject, and neither NAS nor any of its
Subsidiaries is in material violation of any statute, order, rule or regulation
of any court or governmental agency or body having jurisdiction over it or any
of its properties.
7.13 No Conflict
Except as set forth on Schedule 7.13, neither the execution and delivery
by NAS of this Agreement, nor the consummation of the transactions contemplated
hereby, nor compliance by NAS with its obligations hereunder:
(i) will conflict with, or result in a breach or violation of, or
constitute a default under, any provision of the Amended and Restated
Certificate of Incorporation or Amended and Restated By-Laws of NAS or any
law, rule, regulation, order, injunction or decree of any court,
administrative authority or arbitrator applicable to NAS or any property
or Assets of NAS, or will conflict with, or result in a breach or
violation of or constitute a default in the performance, observance or
fulfillment of any obligation under, or constitute, or, with the giving of
notice or lapse of time or both, would constitute, an event of default by
NAS, or result in the acceleration of any obligation, or require any
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consent or approval, under, any agreement or instrument to which NAS is a
party or by which it or any of its properties or Assets are bound;
(ii) will result in the creation or imposition of any Lien upon any
of the Assets of NAS; or
(iii) will require any action, consent or approval of, or filing
with, any Governmental Authority.
7.14 Capital Stock of NAS
The authorized capital stock of NAS as of the date hereof is as set forth
on Schedule 7.14 and no other shares are issued or outstanding, except as a
result of the expiration of employee options on February 4, 2000. Each issued
and outstanding share of Common Stock is duly and validly authorized and issued
and is fully paid and nonassessable. The Preferred Shares, when issued and
delivered to SBC pursuant to this Agreement will be duly and validly authorized
and issued and fully paid and nonassessable. There is no existing option,
warrant, call or commitment of any kind relating to the capital stock of NAS or
securities convertible into capital stock of NAS except as set forth on Schedule
7.14. The Preferred Shares are not and will not at the time of issuance be
subject to any preemptive right of any shareholder.
7.15 Finders' and Brokers' Fees
Neither NAS, nor anyone on behalf of NAS, has any obligations to any
broker, finder or agent, or agreed to pay any brokerage fee, finder's fee or
commission in connection with this Agreement and the transactions contemplated
hereby except as set forth on Schedule 7.15.
7.16 Taxes
NAS and each of its Subsidiaries has filed or caused to be filed all
federal, state and local tax returns which are required to be filed by it, and
has paid or caused to be paid all taxes shown to be due and payable on such
returns or on any assessments received by it, including payroll taxes.
7.17 Subsidiaries
Other than as set forth on Schedule 7.17 hereto, NAS has no Subsidiaries.
7.18 Representations Not Misleading
The representations made by NAS in this Agreement do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
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Section 8: Covenants of SBC
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SBC hereby covenants and agrees with NAS as follows:
8.1 Cooperation
SBC will use commercially reasonable efforts and cooperate with NAS to
secure promptly all necessary Consents.
SBC will not sell or otherwise dispose of any Preferred Shares except in
compliance with the provisions of the Securities Act, the SEC's regulations
thereunder and other applicable federal and state securities and Blue Sky laws.
8.2 Confidentiality; Press Releases
No press release or public disclosure, either written or oral, of the
existence or terms of this Agreement shall be made by SBC without the consent of
NAS, and SBC shall furnish to NAS advance copies of any release which it
proposes to make public concerning this Agreement or the transactions
contemplated hereby and the date upon which SBC proposes to make such press
release. This provision shall not, however, be construed to prohibit SBC from
making any disclosures to any Governmental Authority or other Person which it is
required to make under any Legal Requirement, or to obtain any Consents.
8.3 Definitive Operating Agreement
Promptly following the execution of this Agreement, SBC shall, and shall
cause SBC Telecom, Inc. to, negotiate in good faith the Definitive Operating
Agreement. The Definitive Operating Agreement shall contain the substance of the
terms and conditions set forth in the Summary of Operating Agreement attached as
Exhibit C and such other terms and conditions as the parties may mutually agree
upon.
8.4 Consent Relating to Registration Rights
Upon receipt by NAS of the consents of the Prior Holders referred to in
Section 9.7, SBC (and any Holder) also will consent (i) to permit each Prior
Holder to participate in any registration statement in which the Holders may
participate and (ii) to the extent not all shares to be offered by the Holders
and Prior Holders may be sold under any such registration statement, to reduce
the number of shares the Holders, as a group, may sell under such registration
statement on a pro rata basis with the Prior Holders as a group, with such pro
rata reduction based on the number of shares of Common Stock, or the shares of
Common Stock represented by Convertible Securities, that each group owns or
Beneficially Owns at the time of the relevant Registration Request.
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8.5 Further Assurances
At any time or from time to time after the Closing Date, SBC shall execute
and deliver any further instruments or documents, and take all such further
action as NAS may reasonably request, in order to effect this Agreement and
issue and deliver the Preferred Shares to SBC free and clear of all Liens.
Section 9: Covenants of NAS
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NAS hereby covenants and agrees with SBC as follows:
9.1 Cooperation
NAS will use commercially reasonable efforts and cooperate with SBC to
secure promptly all necessary Consents.
9.2 Access to NAS Information
During the period prior to Closing, NAS will grant to SBC and its
representatives reasonable access to all the premises, books, records,
inventory, and physical plant relating to NAS. NAS shall cause its
representatives and independent auditors to furnish to SBC such financial and
other data and information with respect to NAS as SBC and/or its independent
accountants and counsel shall reasonably request, to the extent already in
existence and permitted by law.
9.3 Ordinary Course Operation
Between the date of the Agreement and the Closing, NAS (i) shall, in all
material respects, operate the NAS Business, serve its customers, and preserve
and maintain the Assets of NAS and relationships with customers, vendors and
employees in a reasonable and prudent manner and (ii) shall, in all material
respects, conduct the NAS Business in the ordinary course. Through the Closing
Date, NAS will use its best efforts to maintain the current status of the NAS
Licenses.
9.4 Board Representation
NAS shall ensure that SBC, as long as SBC owns all of the Preferred Shares
issued upon Closing or all of the Common Stock issued upon conversion of such
Preferred Shares (or owns a greater number of Preferred Shares or shares of
Common Stock than originally issued upon Closing or conversion), shall have the
right to elect its designated nominee as a member of the Board of Directors of
NAS. Until conversion of Preferred Shares to Common Stock, such member shall be
a nonvoting member; thereafter, the member shall be a full voting member of the
Board of Directors.
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9.5 Confidentiality; Press Releases
No press release or public disclosure, either written or oral, of the
existence or terms of this Agreement shall be made by NAS without the consent of
SBC, and NAS shall furnish to SBC advance copies of any release which it
proposes to make public concerning this Agreement or the transactions
contemplated hereby and the date upon which NAS proposes to make such press
release. This provision shall not, however, be construed to prohibit NAS from
making any disclosures to any Governmental Authority or other Person which it is
required to make under any Legal Requirement, or to obtain any Consents.
9.6 Notification of Change in Control Event
NAS shall promptly notify SBC upon the occurrence of any NAS Change in
Control Event.
9.7 Registration Rights
(a) The registration rights in this Section 9.7 as they apply to the
Holders, Telmex and the stockholders of NAS who have, as of the date of this
Agreement, registration rights as to their stock in NAS (the "Prior Holders")
are subject to that certain letter agreement of even date among SBC, Telmex and
the Prior Holders.
(b) After the Permitted Registration Date, any Holder holding, in the
aggregate, at least 500,000 shares of Common Stock issued upon the conversion of
the Preferred Shares, shall have the right, on one occasion only, by written
request (a "Registration Request") of one or more Holders (the "Selling
Shareholders") to NAS, to require NAS to prepare a registration statement (the
"Registration Statement") on the appropriate form under the Securities Act with
respect to the Common Stock then owned by such Selling Shareholders for use in
connection with an underwritten public distribution of all or part of the
Subject Stock.
(c) If at any time after the Permitted Registration Date, NAS shall
propose to prepare on its own behalf or on behalf of any holders of any of its
Common Stock a registration statement in connection with an underwritten public
offering of any such shares of Common Stock, NAS shall give each Holder written
notice at least twenty or, in case of a registration statement proposed to be
filed pursuant to Rule 415 of the Securities Act, ten Business Days before the
anticipated filing date of such registration statement. Should any Holder
desire to have any shares of Common Stock included in such registration
statement, such Holder shall so notify NAS in writing (which notice, and the
notice of all other Holders with respect to such registration statement, shall
be deemed to be a Registration Request) no later than ten or, in the case of a
registration statement proposed to be filed pursuant to Rule 415 of the
Securities Act, five Business Days after NAS's notice is given, setting forth
the number of shares of Common Stock which such Holder requests to be included
in the registration statement and providing any other information requested by
NAS in its original notice relating to inclusion in the registration statement.
Any such registration statement that includes shares of Common Stock owned by
any Holder is hereinafter included in the term "Registration Statement" and each
Holder who owns
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shares of Common Stock included in a Registration Statement shall be a Selling
Shareholder with respect to such Registration Statement.
(d) NAS may refuse to include in any such Registration Statement the
Common Stock owned by a Holder if in NAS's reasonable judgment, based on advice
of its investment bankers, inclusion of such shares of Common Stock would have
an adverse effect on the ability of NAS to complete such underwritten public
offering. If in accordance with a Registration Request pursuant to Section
9.7(b), NAS reduces the number of shares to be included in any such Registration
Statement in accordance with the foregoing, NAS will include in such
registration, to the extent of the number which NAS is so advised can be sold in
such offering, first, shares of Common Stock requested to be included in such
registration by the Selling Shareholders (subject to the rights, if any, of
Prior Holders) and, second, securities NAS proposes to sell and other securities
of NAS included in such registration by the holders thereof. If, as a result of
this Section 9.7(d) or as a result of the participation of Prior Holders in the
Registration Statement, the Selling Shareholders are not able to register all of
their shares of Common Stock requested to be registered pursuant to Section
9.7(b), such Registration Request will not be deemed to be the single allowable
Registration Request for purposes of Section 9.7(b) and the Holders' rights to
one additional Registration Request will be restored, and if as a result of such
reduction the Selling Shareholder is left with fewer than 500,000 shares of
Common Stock, then the 500,000 share limit in Section 7(b) shall not apply.
(e) With respect to any Registration Statement under this Section 9.7, NAS
will:
(i) prepare and file with the SEC the Registration Statement within
120 days after a Selling Shareholders' notice requesting registration or
inclusion in a proposed registration, and use its reasonable efforts to
cause the securities covered by such Registration Statement to become
registered and such Registration Statement to be declared effective as
expeditiously as possible under the Securities Act or other applicable
federal law and regulations (and cause to be prepared and file any
amendments or supplements thereto as may be necessary to comply with
applicable federal law and regulations); provided, however, that NAS may be
allowed to defer filing of the Registration Statement: (A) if the Vice
President - Legal of NAS reasonably determines in good faith that it is in
the best interests of NAS not to disclose the existence of or facts
surrounding any proposed or pending material developments; (B) if the
underwriters have notified NAS that market conditions are such as to
recommend deferral; (C) pending the completion of year-end financial
statements or quarterly earnings releases; or (D) if an offering by NAS of
any securities is pending; provided, however, that any deferral pursuant to
clauses (A), (B), (C) or (D) of this paragraph shall not in the aggregate
be for more than 90 days.
(ii) use its reasonable efforts to cause to be registered or
qualified the securities covered by such Registration Statement under such
securities or Blue Sky laws in such jurisdictions within the United States
as any Selling Shareholder may reasonably request; provided, however, that
NAS reserves the right, in its sole discretion, not to cause to be
registered or qualified such securities in any jurisdiction where NAS would
be
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required in connection therewith to execute a general consent to service or
to qualify as a foreign corporation or to subject itself to taxation;
(iii) maintain the effectiveness of any Registration Statement
hereunder for 90 days or such longer period as may be required by the
Securities Act to enable any Selling Shareholder and the underwriters, if
any, to complete such offering;
(iv) promptly notify each Selling Shareholder of the happening of any
event as a result of which any preliminary prospectus or prospectuses
included in any Registration Statement hereunder includes an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements not misleading in
light of the circumstances then existing;
(v) have the right to reasonably approve the choice of lead
underwriter for underwritten offerings initiated by the Holders under
Section 9.7(b);
(vi) furnish, at the request of any Selling Shareholder, an opinion,
dated the date the Registration Statement became effective, of counsel
representing NAS (which may be in-house counsel) for the purposes of such
registration, addressed to the underwriters, if any, and to such Selling
Shareholder as to such legal matters as such Selling Shareholder shall
reasonably request; and
(vii) furnish, at the request of any Selling Shareholder, a letter,
dated the date the Registration Statement became effective, of independent
certified public accountants of NAS, addressed to the underwriters, if any,
and to such Selling Shareholder as to such accounting matters as such
Selling Shareholder shall reasonably request.
(f) The obligations of NAS to cause a Registration Statement to be
prepared pursuant to the provisions of this Section 9.7 and each Selling
Shareholder's right to have shares of Common Stock included in any Registration
Statement pursuant to the provisions of this Section 9.7 shall be subject to the
following conditions:
(i) Each Selling Shareholder shall furnish to NAS in writing such
information and documents as, in the opinion of NAS's counsel, may be
reasonably required to properly cause to be prepared such Registration
Statement in accordance with applicable provisions of the Securities Act
and the SEC's regulations thereunder or federal or state securities or Blue
Sky laws and regulations then in effect; and
(ii) If a Selling Shareholder desires to sell and distribute such
shares of Common Stock over a period of time, or from time to time,
pursuant to a Registration Statement prepared pursuant to the provisions of
this Section 9.7, then such Selling Shareholder shall execute and deliver
to NAS such written undertakings as NAS and its counsel may reasonably
require in order to assure full compliance with the relevant provisions of
the Securities Act and the SEC's regulations thereunder or other federal or
state securities or Blue Sky laws and regulations as then in effect.
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(g) The Selling Shareholder will pay or cause to be paid all fees and
expenses (including all Blue Sky, New York Stock Exchange and National
Association of Securities Dealers, Inc. filing and registration fees, accounting
fees and disbursements, printing costs, attorneys' fees and disbursements)
arising out of the preparation, filing, amending and supplementing of a
Registration Statement pursuant to Section 9.7(b) hereof in which only the
Selling Shareholder participates and the amount of such fees and expenses that
are reasonably allocable to the Selling Shareholder for a Registration Statement
used under Section 9.7(c) or a Registration Statement based on the number of
shares offered by the Selling Shareholders relative to the number of other
shares offered by NAS or on behalf of any of its other holders.
(h) In no event shall NAS be required to maintain the effectiveness of
any Registration Statement for more than 90 days.
9.8 Listing
Upon SBC's request, NAS will use its best efforts, and diligently take all
steps necessary, to list for trading on the Nasdaq or, if at the time of
issuance any Common Stock is listed on any securities exchange, to list on each
such exchange, the Common Stock to be issued to SBC upon conversion of the
Preferred Shares (promptly after such Common Stock is issued).
9.9 Issuance of Other Securities
NAS shall not issue or agree to issue any securities of NAS to any Person
with voting rights that are more favorable in any material respect than the
voting rights of the Preferred Shares.
9.10 Further Assurances
At any time or from time to time after the Closing Date, NAS shall execute
and deliver any further instruments or documents, and take all such further
action as SBC may reasonably request, in order to effect this Agreement and to
issue to SBC the Preferred Shares free and clear of all Liens except for Liens
as SBC may cause to attach to the Preferred Shares.
9.11 Use of Proceeds
NAS shall use at least 50% of the Purchase Price for the purpose of more
closely aligning its network and business operations with the future network and
business operations of SBC Telecom, Inc., as outlined in the Summary of
Operating Agreement attached as Exhibit C hereto. The remainder of the Purchase
Price shall be available for general corporate purposes as determined by NAS.
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9.12 Definitive Operating Agreement
Promptly following the execution of this Agreement, NAS shall negotiate in
good faith the Definitive Operating Agreement. The Definitive Operating
Agreement shall contain the substance of the terms and conditions set forth in
the Summary of Operating Agreement attached as Exhibit C and such other terms
and conditions as the parties may mutually agree upon.
9.13 Right of Primary Offer
Subject to the terms and conditions specified in this Section 9.13, NAS
hereby grants to each Holder, a right of primary offer with respect to future
sales by NAS of its New Securities (as defined in Section 9.13(d)(i)) after the
date hereof.
(a) In the event NAS proposes to issue New Securities, it shall give each
Holder written notice (the "Notice") of its intention stating: (i) a description
of the New Securities it proposes to issue, (ii) the number of shares of New
Securities it proposes to offer, (iii) the price per share at which, and other
terms on which, it proposes to offer such New Securities, and (iv) the number of
shares that the Holder has the right to purchase under this Section 9.13, based
on the Holder's Percentage (as defined in Section 9.13(d)(ii)).
(b) Within 10 Business Days after the Notice is given, the Holder may
elect to purchase, at the price specified in the Notice, up to the number of
shares of the New Securities proposed to be issued equal to the Holder's
Percentage. An election to purchase shall be made in writing and must be given
to NAS within such 10 Business Day period. The closing of the sale of New
Securities by NAS to the participating Holder upon exercise of its rights under
this Section 9.13 shall take place simultaneously with the closing of the sale
of New Securities to third parties.
(c) NAS shall have 90 days after the last date on which the Holder's
right of first offer lapsed to enter into an agreement (pursuant to which the
sale of New Securities covered thereby shall be closed, if at all, within 45
days from the execution thereof) to sell the New Securities which the Holder did
not elect to purchase under this Section 9.13, at or above the price and upon
terms not materially more favorable to the purchasers of such securities than
the terms specified in the initial Notice given in connection with such sale. In
the event NAS has not entered into an agreement to sell the New Securities
within such 90 day period (or sold and issued New Securities in accordance with
the foregoing within 45 days from the date of such agreement), NAS shall not
thereafter issue or sell any New Securities without first offering such New
Securities to the Holder in the manner provided in this Section 9.13.
(d) Definitions:
(i) "New Securities" shall mean any shares of, or securities
convertible into or exercisable for any shares of, any class of NAS's
capital stock; provided that "New Securities" does not include: (A)
securities issued pursuant to the acquisition of another business entity
by NAS by merger, purchase of substantially all of the assets of such
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entity, or other reorganization whereby NAS owns not less than a majority
of the voting power of such entity; (B) shares of NAS's Common Stock,
options or warrants to purchase shares of NAS's Common Stock, and the
shares of Common Stock issuable upon exercise of such options or warrants,
issued pursuant to any arrangement approved by the Board of Directors to
employees, officers and directors of, or consultants, advisors or other
Persons performing services for, NAS; (C) shares of NAS's Common Stock
issued in connection with any stock split, stock dividend or
recapitalization of NAS; or (D) shares of NAS's Common Stock issued upon
exercise of warrants, options or convertible securities if the issuance of
such warrants, options or convertible securities was a result of the
exercise of the right of first offer granted under this Section 9.13 or
was subject to the right of first offer granted under this Section 9.13.
(ii) The applicable "Percentage" for each Holder shall be the number
of shares of New Securities calculated by dividing (A) the total number of
shares of Common Stock owned by the Holder (assuming conversion of all
outstanding convertible securities and exercise of all outstanding options
and warrants) by (B) the total number of shares of Common Stock
outstanding at the time the Notice is given (assuming conversion of all
outstanding convertible securities and exercise of all outstanding options
and warrants).
9.14 Government License Application Amendment
NAS shall amend its pending applications for government licenses to cover
the transactions contemplated by this Agreement and shall use its reasonable
best efforts to have those applications, as amended, approved.
Section 10: Termination
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10.1 Terminating Events
This Agreement may be terminated:
(a) By the mutual written consent of NAS and SBC; or
(b) By NAS, by ten (10) Business Days written notice to SBC (if NAS is
not then materially in default or breach of this Agreement), if SBC shall
default in any material respect in the performance of any of its obligations
under this Agreement, and such default or breach has not been cured by SBC
within seven (7) Business Days following receipt of written notice from NAS of
NAS's intention to terminate this Agreement; or
(c) By SBC, by ten (10) Business Days written notice to NAS (if SBC is
not then materially in default or breach of this Agreement), if NAS shall
default in any material respect in the performance of any of its obligations
under this Agreement, and such default or breach has
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not been cured by NAS within seven (7) Business Days following receipt of
written notice from SBC of SBC's intention to terminate this Agreement; or
(d) By either SBC or NAS if the Closing has not occurred on or before
July 31, 2000 (provided that the right to terminate this Agreement under this
Section 10.1(d) shall not be available to any party whose breach of any
obligation under this Agreement has been the cause of or resulted in the failure
of the Closing to occur on or before such date).
10.2 Effect on Obligations
In the event of any termination of this Agreement pursuant to Section
10.1(a) or 10.1(d), neither SBC nor NAS shall have any further liability
hereunder, except with respect to the confidentiality provisions hereof. In the
event of a termination under Section 10.1(b) or 10.1(c), both parties shall
retain all their rights at law or in equity.
Section 11: Indemnification
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11.1 Indemnification by NAS
(a) NAS hereby agrees to indemnify SBC and its Affiliates and their
respective officers and directors against and hold them harmless from any Losses
suffered or incurred by any such Indemnified Party for or on account of or
arising from or in connection with any breach of any representation, warranty or
covenant of NAS contained in this Agreement, provided, however, that NAS shall
not have any liability under this Section 11.1 unless the aggregate of all
Losses relating thereto exceed on a cumulative basis $750,000.00, and then only
to the extent of such excess, and (ii) in excess of the Purchase Price. SBC
acknowledges and agrees that its sole and exclusive remedy with respect to any
and all claims for monetary damages relating to the subject matter of this
Agreement shall be pursuant to the indemnification provisions set forth in this
Section 11.
(b) NAS agrees to indemnify and hold harmless each Selling Shareholder
and each Person, if any, who controls (within the meaning of Section 15 of the
Securities Act and Section 20 of the 34 Act) such Selling Shareholder (a
"Control Person") against any Losses to which such Selling Shareholder or any
such Control Person may become subject, insofar as such Losses arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any preliminary or final Registration Statement prepared
pursuant to Section 9.7 of this Agreement or prospectus with respect thereto, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that NAS will not be liable in any case to the extent that
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished by or on
behalf of such Selling Shareholder or any such Control Person specifically for
use in the preparation thereof.
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11.2 Indemnification by SBC
(a) SBC hereby agrees to indemnify NAS and its Affiliates and their
respective officers and directors against and hold them harmless from any Losses
suffered or incurred by any such Indemnified Party for or on account of or
arising from or in connection with any breach of any representation, warranty or
covenant of SBC contained in this Agreement, provided, however, that SBC shall
not have any liability under this Section 11.2 unless the aggregate of all
Losses relating thereto exceed on a cumulative basis $750,000.00, and then only
to the extent of such excess. NAS acknowledges and agrees that its sole and
exclusive remedy with respect to any and all claims for monetary damages
relating to the subject matter of this Agreement shall be pursuant to the
indemnification provisions set forth in this Section 11.
(b) SBC and any other Selling Shareholder to whom SBC's rights under this
Agreement have been transferred will, severally and not jointly, indemnify and
hold harmless NAS and each of its directors, officers and each Person, if any,
who controls (within the meaning of Section 15 of the Securities Act and Section
20 of the 34 Act) NAS (a "Company Control Person") to the same extent as set
forth in the foregoing indemnity from NAS to each Selling Shareholder set forth
in Section 11.1(b), but only with reference to written information included in
any preliminary or final Registration Statement prepared pursuant to Section
9.7 of this Agreement or prospectus with respect thereto, or amendment or
supplement thereto, furnished by or on behalf of such Selling Shareholder
specifically for use in the preparation of such documents.
11.3 Losses
The amount of any Losses for which indemnification is provided under this
Section 11 shall be net of any amounts recovered or recoverable by the
Indemnified Party under insurance policies with respect to such Losses and shall
be increased to take account of any Tax cost to the Indemnified Party and
reduced to take account of any Tax benefit to the Indemnified Party arising from
the incurrence or payment of any Losses.
11.4 Survival
The representations and warranties made by NAS contained in Section 7
hereof, and the obligation of NAS to indemnify SBC pursuant to Section 11.1
hereof, shall survive the execution and delivery of this Agreement, any
examination or due diligence inquiry by a party and the Closing until the date
which is one year after the Closing Date, except that the representations and
warranties made by NAS in Section 7.8 (Title to Preferred Shares; Absence of
Liens) shall survive for the applicable statute of limitations. The
representations and warranties made by SBC contained in Section 6 hereof, and
the obligation of SBC to indemnify SBC pursuant to Section 11.2 hereof, survive
the execution and delivery of this Agreement, any examination or due diligence
inquiry by a party and the Closing until the date which is one year after the
Closing Date. All covenants and agreements of NAS or SBC contained in this
Agreement (which terms do not include representations and warranties) shall
survive the Closing for a period of one year
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unless otherwise expressly provided herein. The obligations to indemnify and
hold harmless a party hereto, pursuant to Section 11.1 and Section 11.2 hereof,
shall survive only until the expiration of the applicable survival period for
the representation and warranty or covenant under which the claim for
indemnification is being made; provided, however, that such obligations to
indemnify and hold harmless shall not terminate with respect to any item as to
which the Person to be indemnified shall have, before the expiration of the
applicable period, previously made a claim by delivering a notice (stating in
reasonable detail the basis of such claim) to the party to be providing the
indemnification.
11.5 Procedures Relating to Third Party Claims
In order for a party (the "Indemnified Party") to be entitled to any
indemnification provided for under this Agreement in respect of, arising out of
or involving a claim or demand made by any Person against the Indemnified Party
(a "Third Party Claim"), such Indemnified Party must notify the indemnifying
party in writing of the Third Party Claim within 10 Business Days after receipt
by such Indemnified Party of written notice of the Third Party Claim; provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the indemnifying party
shall have been actually prejudiced as a result of such failure (except that the
indemnifying party shall not be liable for any expenses incurred during the
period in which the Indemnified Party failed to give such notice). Thereafter,
the Indemnified Party shall deliver to the indemnifying party, within five
Business Days after the Indemnified Party's receipt thereof copies of all
notices and documents (including court papers) received by the Indemnified Party
relating to the Third Party Claim.
If a Third Party Claim is made against an Indemnified Party, the
indemnifying party will be entitled to participate in the defense thereof and
upon notice to the Indemnified Party to assume the defense thereof provided that
(i) the indemnifying party's counsel is reasonably satisfactory to the
Indemnified Party and (ii) the indemnifying party shall thereafter consult with
the Indemnified Party upon the Indemnified Party's request for such consultation
from time to time with respect to such suit, action or proceeding. If the
indemnifying party assumes such defense, the Indemnified Party shall have the
right (but not the duty) to participate in the defense thereof and to employ
counsel, at its own expense, separate from the counsel employed by the
indemnifying party. The indemnifying party shall be liable for the fees and
expenses of counsel employed by the Indemnified Party for any period during
which the indemnifying party has not assumed the defense thereof. Should the
indemnifying party so elect to assume the defense of a Third Party Claim, the
indemnifying party will not be liable to the Indemnified Party for any legal
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof. Whether or not the indemnifying party chooses to defend or
prosecute any Third Party Claim, all of the parties hereto shall cooperate in
the defense or prosecution thereof. Such cooperation shall include the retention
and (upon the indemnifying party's request) the provision to the indemnifying
party of records and information which are reasonably relevant to such Third
Party Claim, and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. Whether or not the indemnifying party shall have assumed the defense
of a Third Party Claim, the Indemnified Party
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shall not admit any liability with respect to, or settle, compromise or
discharge, such Third Party Claim without the indemnifying party's prior written
consent.
Any payment pursuant to this Section 11.5 shall be made not later than 15
days after receipt by the indemnifying party of written notice from the
Indemnified Party stating that any Third Party Claim has been paid by any
Indemnified Party and the amount thereof and the indemnity payment requested.
Section 12: Arbitration
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12.1 Resolution of Disputes
(a) The parties shall attempt in good faith to resolve any controversy,
dispute or claim arising out of or relating to this Agreement or the breach,
termination, enforceability or validity thereof (collectively, a "Dispute")
promptly by negotiation between officers or employees who have authority to
settle the Dispute. Either party may give the other a written notice (a "Dispute
Notice") setting forth with reasonable specificity the nature of the Dispute and
the identity of such party's representatives who will attend and participate in
the meeting at which the parties will attempt to settle the Dispute. Following
the receipt of a Dispute Notice, the representatives of both parties shall meet
as soon as is practicable at a mutually acceptable time and place to negotiate
in good faith a settlement of the Dispute, and shall meet thereafter as they
reasonably deem necessary. All negotiations pursuant to this Section 12.1(a)
shall be confidential and shall be treated as compromise and settlement
negotiations. Nothing said or disclosed, nor any document produced, in the
course of such negotiations which is not otherwise independently discoverable
shall be offered or received as evidence or used for impeachment or for any
other purpose in any current of future arbitration or litigation.
(b) If the Dispute has not been resolved within 30 days after the receipt
of a Dispute Notice through negotiation as provided in Section 12.1(a), then the
Dispute shall be finally settled by arbitration in accordance with the
commercial arbitration rules of the American Arbitration Association ("AAA")
then in effect. However, in all events, the arbitration provisions in this
Section 12 shall govern over any conflicting rules that may now or hereafter be
contained in the AAA rules. The arbitration shall be held in Washington, D.C.,
unless the parties mutually agree to have the arbitration held elsewhere, and
Judgment upon the award made therein may be entered by any court having
jurisdiction in the United States; provided, however, that nothing contained in
this Section 12 shall be construed to limit or preclude a party from bringing
any action in any court of competent jurisdiction for injunctive or other
provisional relief to compel another party to comply with its obligations under
this Agreement during the pendency of the arbitration proceedings. Any Judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction over the subject matter hereof. The arbitrator shall have the
authority to grant any equitable and legal remedies that would be available in
any judicial proceeding instituted to resolve any claim hereunder.
29
<PAGE>
12.2 Arbitrators
Any such arbitration will be conducted before three (3) arbitrators, one
of which shall be chosen by NAS, one of which shall be chosen by SBC, and the
third chosen by the other two arbitrators. Each person chosen to serve as an
arbitrator shall be a neutral and impartial attorney who has had training and
experience as an arbitrator. The decision of a majority of the arbitrators will
be the decision of the arbitrators. The arbitrators shall permit such discovery
of information related to the controversy or claim in arbitration as they shall
determine is appropriate in the circumstances, taking into account the needs of
the parties and the desirability of making discovery expeditious and cost-
effective.
12.3 Costs and Fees
All fees and expenses of the arbitrators, expenses for hearing facilities
and other expenses of the arbitration shall be borne equally by the parties
unless the arbitrators in the award assess such fees and expenses other than
equally against the parties. Each party shall bear the fees and expenses of its
own attorneys and witnesses except to the extent otherwise provided in this
Agreement or by law; provided, that if the arbitrators determine that the claim
or defense of any party was frivolous or lacked a reasonable basis in fact or
law, the arbitrators may assess against such party all or part of the fees and
expenses of attorneys and witnesses for the other party.
12.4 Burden of Proof
For any Dispute submitted to arbitration, the burden of proof will be as
it would be if the claim were litigated in a judicial proceeding.
12.5 Award
Upon the conclusion of any arbitration proceedings hereunder, the
arbitrators will render findings of fact and conclusions of law and a written
opinion setting forth the basis and reasons for any decision reached and will
deliver such documents to each party to this Agreement along with a signed copy
of the award.
12.6 Agreement Controls
The arbitrators chosen in accordance with these provisions will not have
the power to alter, amend or otherwise affect the terms of these arbitration
provisions or the provisions of this Agreement.
30
<PAGE>
Section 13: Miscellaneous
- --------------------------
13.1 Entire Agreement; Amendment
This Agreement (including the attached Schedules and Exhibits) constitutes
the sole understanding of the parties with respect to the subject matter hereof,
and supersedes all prior oral or written agreements, commitments or
understandings with respect to such matters. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto.
13.2 Successors and Assigns
This Agreement may not be assigned by either NAS or SBC without the
consent of the other party (which consent shall not be unreasonably withheld)
except that SBC may assign this Agreement to any Wholly-Owned SBC Subsidiary
that agrees to be bound by all of the terms hereof, and provided that no such
permitted assignment shall relieve the parties hereto of any liability for a
breach of this Agreement by such party or its assignee. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs or successors in interest.
13.3 Rights and Remedies
Unless otherwise provided herein, the rights and remedies of the parties
hereunder shall not be mutually exclusive, and the exercise of one or more
provisions of this Agreement shall not preclude the exercise of any other
provisions. Each of the parties confirms that damages at law may be an
inadequate remedy for a breach or threatened breach of any provision hereof. The
respective rights and obligations hereunder shall be enforceable by specific
performance, injunction or other suitable remedy, it being the intention of this
Section 13.3 to make clear the agreement of the parties that the respective
rights and obligations of the parties hereunder shall be enforceable in equity
as well as at law or otherwise.
13.4 Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall for all purposes be deemed to be an original and all of which shall
constitute the same instrument.
13.5 Modification and Waiver
At any time on or prior to the Closing Date, the parties by mutual
agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, or (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall only be valid if set forth in an instrument in
writing signed on behalf of such party.
31
<PAGE>
13.6 Expenses
Except as specifically provided herein, SBC and NAS shall each pay all
costs and expenses incurred by it or on its behalf in connection with this
Agreement and the transactions contemplated hereby, including, without limiting
the generality of the foregoing, fees and expenses of its own consultants,
accountants and counsel.
13.7 Notices
Any notice, request, instruction or other document to be given hereunder
by any party hereto to any other party shall be in writing and shall be deemed
given upon receipt if delivered personally or by telex or facsimile, the next
day if by express mail or three days after being sent by registered or certified
mail, return receipt requested, postage prepaid to the following addresses (or
at such other address for a party as shall be specified by like notice provided
that such notice shall be effective only after receipt thereof):
If to SBC: James Kahan
Senior Vice President -
Corporate Development
SBC Communications Inc.
175 East Houston Street
San Antonio, TX 78205
Fax: 210-351-5034
Voice: 210-351-5030
With a copy (which shall Michael A. Meyer
not constitute notice) to: General Attorney
SBC Communications Inc.
175 East Houston Street
San Antonio, TX 78205
Fax: 210-351-3488
Voice 210-351-2165
If to NAS: Jonathan P. Aust
President and Chief
Executive Officer
Network Access Solutions
100 Carpenter Drive
Sterling, VA 20165
Fax: 703-742-7706
Voice: 703-995-1682
32
<PAGE>
With a copy (which shall Worth D. MacMurray
not constitute notice) to: Vice President, Legal and
Strategic Planning
Network Access Solutions
100 Carpenter Drive
Sterling, VA 20165
Fax: 703-995-2180
Voice: 703-995-2695
13.8 Severability
In case any one or more of the provisions contained in this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in any
respect by a court or other authority of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein and, in lieu of each
such illegal, invalid or unenforceable provision, there shall be added
automatically as a part of this Agreement a provision as similar in terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable, it being the intent of the parties to maintain the
benefit of the bargain for all parties.
13.9 Governing Law
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware applicable to agreements made and to be performed
wholly within such jurisdiction.
13.10 Rules of Construction
Words used in this Agreement, regardless of the gender and number
specifically used, shall be deemed and construed to include any other gender and
any other number as the context requires. As used in this Agreement, the word
"including" is not limiting, and the word "or" is not exclusive. Except as
specifically otherwise provided in this Agreement in a particular instance, a
reference to a Section, Schedule or Exhibit is a reference to a Section of this
Agreement or a Schedule or Exhibit hereto, and the terms "this Agreement,"
"hereof," "herein," and other like terms refer to this Agreement as a whole,
including the Schedules to this Agreement, and not solely to any particular part
of this Agreement. The descriptive headings in this Agreement are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement. The parties to this Agreement
do not intend that NAS Employees or any other Person shall obtain any rights as
third party beneficiaries of this Agreement.
33
<PAGE>
13.11 Ownership Limitation
Notwithstanding anything else to the contrary in this Agreement, nothing
set forth in this Agreement shall be construed or interpreted to provide SBC
with the right to Beneficially Own any shares of Common Stock or other class of
capital stock of NAS to the extent that it would violate any Legal Requirements
of the FCC or any other Governmental Authority.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement, or have
caused this Agreement to be signed in their respective names by an officer,
hereunto duly authorized, on the date first above written.
NETWORK ACCESS SOLUTIONS CORPORATION
By:____________________________________
Name:_______________________________
Title:______________________________
SBC COMMUNICATIONS INC.
By:____________________________________
Name:_______________________________
Title:______________________________
34
<PAGE>
Exhibit 10.35
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
NETWORK ACCESS SOLUTIONS CORPORATION
AND
TELEFONOS DE MEXICO, S.A. DE C.V.
February 4, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SECTION 1: DEFINED TERMS.......................................................1
SECTION 2: TERMS OF PURCHASE AND SALE..........................................7
2.1 Conveyance of Stock...................................................7
2.2 Purchase Price for the Preferred Shares...............................7
2.3 Number of Preferred Shares to be Issued at the Closing................7
SECTION 3: CLOSING.............................................................7
3.1 The Closing...........................................................7
3.2 Deliveries by Telmex..................................................7
3.3 Deliveries by NAS.....................................................8
SECTION 4: CONDITIONS TO NAS'S OBLIGATIONS.....................................8
4.1 Consents..............................................................8
4.2 Litigation............................................................8
4.3 Telmex Representations; Compliance with Covenants.....................9
4.4 Deliveries............................................................9
4.5 Telmex Change in Control Event........................................9
4.6 SBC Agreement.........................................................9
SECTION 5: CONDITIONS TO TELMEX'S OBLIGATIONS..................................9
5.1 Consents..............................................................9
5.2 Litigation............................................................9
5.3 Nas's Representations; Compliance with Covenants.....................10
5.4 Nas Change in Control Event..........................................10
5.5 Adverse Developments.................................................10
5.6 Deliveries...........................................................10
SECTION 6: REPRESENTATIONS AND WARRANTIES OF TELMEX...........................10
6.1 Organization and Standing............................................10
6.2 Authorization by Telmex..............................................10
6.3 Litigation...........................................................11
6.4 Finders' and Brokers' Fees...........................................11
6.5 Investment Intent; Qualification.....................................11
6.6 Representations Not Misleading.......................................12
SECTION 7: REPRESENTATIONS AND WARRANTIES OF NAS..............................12
7.1 Organization and Standing of Nas.....................................12
7.2 Authorization by Nas; Consents.......................................12
7.3 Corporate Documents..................................................13
7.4 Licenses; Qualification..............................................13
7.5 Litigation...........................................................13
7.6 Exclusive Dealing....................................................14
7.7 Compliance With Applicable Laws......................................14
7.8 Title to Preferred Shares; Absence of Liens..........................14
7.9 Financial Statements.................................................14
7.10 Conduct of Business in Ordinary Course...............................14
7.11 No Material Adverse Effect...........................................15
7.12 Absence of Defaults..................................................15
7.13 No Conflict..........................................................15
7.14 Capital Stock of Nas.................................................16
</TABLE>
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<TABLE>
<S> <C>
7.15 Finders' And Brokers' Fees...........................................16
7.16 Taxes................................................................16
7.17 Subsidiaries.........................................................16
7.18 Representations Not Misleading.......................................16
SECTION 8: COVENANTS OF TELMEX................................................16
8.1 Cooperation..........................................................16
8.2 Confidentiality; Press Releases......................................17
8.3 Definitive Operating Agreement.......................................17
8.4 Consent Relating to Registration Rights..............................17
8.5 Further Assurances...................................................17
SECTION 9: COVENANTS OF NAS...................................................17
9.1 Cooperation..........................................................17
9.2 Access to NAS Information............................................18
9.3 Ordinary Course Operation............................................18
9.4 Board Representation.................................................18
9.5 Confidentiality; Press Releases......................................18
9.6 Notification of Change in Control Event..............................18
9.7 Registration Rights..................................................18
9.8 Listing..............................................................21
9.9 Issuance of Other Securities.........................................21
9.10 Further Assurances...................................................22
9.11 Use of Proceeds......................................................22
9.12 Definitive Operating Agreement.......................................22
9.13 Right of Primary Offer...............................................22
9.14 Government License Application Amendment.............................23
SECTION 10: TERMINATION.......................................................23
10.1 Terminating Events...................................................23
10.2 Effect on Obligations................................................24
SECTION 11: INDEMNIFICATION...................................................24
11.1 Indemnification by NAS...............................................24
11.2 Indemnification by Telmex............................................25
11.3 Losses...............................................................25
11.4 Survival.............................................................25
11.5 Procedures Relating to Third Party Claims............................26
SECTION 12: ARBITRATION.......................................................27
12.1 Resolution of Disputes...............................................27
12.2 Arbitrators..........................................................27
12.3 Costs and Fees.......................................................28
12.4 Burden of Proof......................................................28
12.5 Award................................................................28
12.6 Agreement Controls...................................................28
SECTION 13: MISCELLANEOUS.....................................................28
13.1 Entire Agreement; Amendment..........................................28
13.2 Successors and Assigns...............................................29
13.3 Rights and Remedies..................................................29
13.4 Counterparts.........................................................29
13.5 Modification and Waiver..............................................29
13.6 Expenses.............................................................29
13.7 Notices..............................................................29
13.8 Severability.........................................................30
</TABLE>
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<TABLE>
<S> <C>
13.9 Governing Law........................................................31
13.10 Rules of Construction................................................31
13.11 Ownership Limitation.................................................31
</TABLE>
Schedules:
7.2 Consents Exceptions
7.4 NAS Licenses
7.5 Litigation
7.6 Exclusive Dealing Exceptions
7.8 Outstanding Options or Rights
7.9 Financial Statements
7.10 Ordinary Course Exceptions
7.13 Conflicts
7.14 NAS Capital Stock
7.15 Finders' and Brokers' Fees
7.17 Subsidiaries
Exhibits:
A Certificate of Designations
B Form of Shook, Hardy & Bacon Legal Opinion
C Summary of Operating Agreement
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<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement"), dated as of February 4,
2000, is by and between Telefonos de Mexico S.A. de C.V. ("Telmex"), and Network
Access Solutions Corporation, a Delaware corporation ("NAS").
RECITALS
--------
WHEREAS, Telmex wishes to acquire, and NAS wishes to sell to Telmex, shares
of preferred stock of NAS;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
Telmex and NAS agree as follows:
Section 1: Defined Terms
The following terms shall have the following meanings in this Agreement:
"AAA" means the American Arbitration Association.
"Affiliate" means, with respect to a Person, any other Person directly or
indirectly controlling, controlled by or under common control with such Person.
"Agreement" shall have the meaning set forth in the preamble hereto.
"Assets" means the contracts, NAS Licenses, personal property, intellectual
property and real property, and all other assets, rights and properties,
tangible and intangible, of NAS and used or held for use in the NAS Business,
including (without limitation) cash, cash equivalents and accounts receivable.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act or transaction that forms or could form the basis for any
specified consequences.
"Beneficial Owner" means, with respect to any security, a Person that
Beneficially Owns such security.
"Beneficially Own" means having the right to vote or dispose of, or
"beneficially own" as determined pursuant to Rule 13d-3 under the Exchange Act
as in effect on the date of this Agreement, including pursuant to any agreement,
arrangement or understanding.
"Business Day" means a day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions are authorized or required by law or executive
order to remain closed in the domicile of Telmex or NAS.
"Closing" means the consummation of the transactions contemplated by this
Agreement in accordance with the provisions of Section 2 and Section 3.
<PAGE>
"Closing Date" shall mean the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder, or any subsequent legislative enactment thereof, as in
effect from time to time.
"Common Stock" shall mean, collectively, the Common Stock of NAS.
"Communications Act" means the Communications Act of 1934, 47 U.S.C.
Section 151 et seq., as amended and in effect from time to time.
"Company Control Person" shall have the meaning set forth in Section 11.2.
"Consents" means all of the consents, permits or approvals of Governmental
Authorities and other Persons necessary or required to consummate the
transactions contemplated hereby.
"Control Person" shall have the meaning set forth in Section 11.1.
"Convertible Securities" means any securities convertible into,
exchangeable for or bearing a right to acquire Common Stock.
"Definitive Operating Agreement" means a mutually agreeable definitive
operating agreement(s) between NAS and Telmex as contemplated by, and containing
terms and conditions substantially as set forth in, the Summary of Operating
Agreement attached as Exhibit C hereto.
"Dispute" shall have the meaning set forth in Section 12.1(a).
"Dispute Notice" shall have the meaning set forth in Section 12.1(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
and in effect from time to time.
"Enforceability Exceptions" shall have the meaning set forth in Section
6.2(a).
"FCC" means the Federal Communications Commission or any successor thereto.
"FCC Rules" means Title 47 of the Code of Federal Regulations, as amended
at any time and from time to time, and FCC decisions issued pursuant to the
adoption of such regulations.
"Final Order" means an order as to which the time for filing a request for
administrative or judicial relief, or for instituting administrative review sua
sponte, shall have expired without any such filing having been made or notice of
review having been issued; or, in the event of such filing or review sua sponte,
as to which such filing or review shall have been disposed of favorably to the
order and the time for seeking further relief with respect thereto shall have
expired without any request for such further relief having been filed.
"Fully Diluted" shall mean, with respect to the number of Shares
outstanding on a fully diluted basis, the number of Shares which would be
outstanding at the time of determination as-
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<PAGE>
suming the conversion, exchange or exercise of all Convertible Securities
(irrespective of any legal or contractual restriction on such exercise, exchange
or conversion), and any reference herein to the number of Shares outstanding
shall mean the number of Shares outstanding assuming no conversion, exchange or
exercise of Convertible Securities.
"GAAP" means generally accepted accounting principles consistent with the
past practices of NAS.
"Governmental Authority" means (i) the United States, any state,
commonwealth, territory, or possession thereof and any political subdivision or
quasi-governmental authority of any of the same, including but not limited to
courts, tribunals, departments, commissions, boards, bureaus, agencies,
counties, municipalities, provinces, parishes, and other instrumentalities, and
(ii) any foreign (as to the United States) sovereign entity, including but not
limited to nations, states, republics, kingdoms and principalities, any
province, commonwealth, territory or possession thereof, and any political
subdivision, quasi-governmental authority, or instrumentality of any of the
same.
"Holder" means Telmex and each transferee of Telmex's rights hereunder that
is a Wholly-Owned Telmex Subsidiary and any other transferee of Telmex's rights
hereunder to which NAS consents, which consent shall not be unreasonably
withheld.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended and in effect from time to time.
"Indemnified Party" shall have the meaning set forth in Section 11.5.
"IRS" shall mean the Internal Revenue Service and any governmental body or
agency succeeding to the functions thereof.
"Judgment" means any judgment, writ, order, injunction, award or decree of
any court, judge, justice or magistrate, including any bankruptcy court, or
arbiter, and any order of or by any other Governmental Authority.
"Knowledge" with respect to NAS means the actual knowledge of NAS and, with
respect to Telmex, means the actual knowledge of Telmex.
"Legal Requirements" means applicable common law and any applicable
statute, ordinance, code or other law, rule, regulation, order, technical or
other standard, requirement or procedure enacted, adopted, promulgated or
applied by any Governmental Authority, including any Judgment.
"Lien" means any security agreement, financing statement filed with any
Governmental Authority, conditional sale or other title retention agreement, any
lease, consignment or bailment given for the purpose of security, any lien,
mortgage, indenture, pledge, option, encumbrance, restriction on transfer,
adverse interest, constructive trust or other trust, claim, attachment,
exception to or defect in title or other ownership interest (including but not
limited to reservations, rights of entry, possibilities of reverter,
encroachments, easements, rights-of-way, restrictive
-3-
<PAGE>
covenants, leases and licenses) of any kind, which otherwise constitutes an
interest in or claim against property, whether arising pursuant to any Legal
Requirement, contract or otherwise.
"Litigation" means any claim, action, suit, proceeding, arbitration,
investigation, hearing or other activity or procedure that could result in a
Judgment, and any notice of any of the foregoing.
"Losses" means any losses, liabilities, damages, Liens, penalties, costs,
fines and expenses, whether in connection with any Litigation or otherwise,
including but not limited to interest which may be imposed in connection
therewith, expenses of investigation, reasonable fees and disbursements of
counsel and other experts, and the cost to any Person making a claim or seeking
indemnification under this Agreement with respect to funds expended by such
Person by reason of the occurrence of any event with respect to which
indemnification is sought.
"Material Adverse Effect" shall mean, with respect to either party, a
material adverse change in the financial condition or financial results of
operations of such party or the occurrence of any event or combination of events
that is reasonably likely to result in a material adverse change in the
financial condition or financial results of operations of such party and its
Subsidiaries taken as a whole. When the phrase "material adverse" is used in
this Agreement and is not used as a capitalized term and in the phrase "Material
Adverse Effect," such "material adverse" reference shall not be defined or
construed as provided in the immediately preceding sentence or in the context of
such party taken as a whole but instead shall mean a material adverse effect,
change or consequences only as to the matter with respect to which the phrase
"material adverse" is utilized.
"NAS" shall have the meaning set forth in the preamble hereto.
"NAS Business" means NAS's business as conducted in the United States in
accordance with NAS's existing operations and business plans.
"NAS Change in Control Event" shall be deemed to have occurred if (i) there
shall be consummated (x) any consolidation or merger of NAS in which NAS is not
the continuing or surviving corporation or pursuant to which shares of the
Common Stock would be converted into cash, securities or other property, other
than a merger of NAS in which the holders of the Common Stock immediately prior
to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the Assets of NAS, or (ii) the
stockholders of NAS approved any plan or proposal for the liquidation or
dissolution of NAS, or (iii) any Person other than Jonathan P. Aust and Spectrum
Equity Investors II, L.P shall become the Beneficial Owner of 20% or more of the
outstanding Common Stock or (iv) during any period of two consecutive years,
individuals who at the beginning of such period constitute the entire NAS Board
of Directors shall cease for any reason to constitute a majority thereof unless
the election, or the nomination for election by NAS's stockholders, of each new
director was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of the period.
"Nasdaq" means Nasdaq National Market.
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<PAGE>
"NAS Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of NAS as of September 30, 1999
and as of December 31, 1998 and the related consolidated statements of income,
shareholders' equity and cash flows (including related notes and schedules, if
any) and (ii) the consolidated balance sheets of NAS (including related notes
and schedules, if any) and related statements of income, shareholders' equity
and cash flows (including related notes and schedules, if any) with respect to
periods ended subsequent to September 30, 1999.
"NAS Licenses" means all Section 214 authorizations or microwave and other
spectrum licenses issued by the FCC, and all certificates of public convenience
and necessity or comparable authorizations issued by any state public utilities
commission or comparable regulatory authority, and held by NAS.
"New Securities" shall have the meaning set forth in Section 9.13(d)(i).
"Note" shall mean that certain Promissory Note dated of even date herewith,
in the original principal amount of $15,000,000.00, payable by NAS to Telmex.
"Notice" shall have the meaning set forth in Section 9.13(a).
"Outstanding" with respect to the number of Shares outstanding on a fully
diluted basis, shall have the meaning set forth in the definition of the term,
"Fully Diluted."
"Percentage" shall have the meaning set forth in Section 9.13(d)(ii).
"Permitted Registration Date" means the date that is the later of (i) two
years from the Closing Date, or (ii) the date of termination of the Definitive
Operating Agreement.
"Person" means any natural person, Governmental Authority, corporation,
general or limited partnership, limited liability company, limited liability
partnership, joint venture, trust, estate, association, organization or
unincorporated entity of any kind.
"Preferred Shares" means the Convertible Series B Preferred Stock of NAS,
as the terms of such Preferred Shares are set forth in the Certificate of
Designations attached as Exhibit A hereto.
"Prior Holders" shall have the meaning set forth in Section 9.7.
"Purchase Price" means $75,000,000.00.
"Registration Request" shall have the meaning set forth in Section 9.7(b).
"Registration Statement" shall have the meaning set forth in Section
9.7(b).
"SBC" shall mean SBC Communications Inc.
"SEC" shall mean the Securities and Exchange Commission and any
governmental body or agency succeeding to the functions thereof.
-5-
<PAGE>
"Securities Act" shall mean the Securities Act of 1933, as amended and in
effect from time to time.
"Selling Shareholder" shall have the meaning set forth in Section 9.7(b).
"Subsidiary" of any corporation shall mean any other corporation, limited
liability company, general or limited partnership, limited liability
partnership, joint venture, trust or other entity of which the outstanding
capital stock possessing a majority of voting power in the election of directors
(otherwise than as the result of a default) is owned or controlled by such
corporation directly or indirectly through Subsidiaries.
"Taxes" means all levies and assessments of any kind or nature imposed on
NAS by any Governmental Authority, including but not limited to all income,
sales, use, ad valorem, value added, franchise, severance, net or gross
proceeds, withholding, payroll, employment, excise or property taxes, together
with any interest thereon and any penalties, additions to tax or additional
amounts applicable thereto.
"Telmex" shall have the meaning set forth in the preamble hereto.
"Telmex Change in Control Event" shall be deemed to have occurred if (i)
there shall be consummated (x) any consolidation or merger of Telmex in which
Telmex is not the continuing or surviving corporation or pursuant to which
shares of the Common Stock would be converted into cash, securities or other
property, other than a merger of Telmex in which the holders of the Common Stock
immediately prior to the merger have the same proportionate ownership of common
stock of the surviving corporation immediately after the merger, or (y) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the Assets of Telmex, or
(ii) the stockholders of Telmex approved any plan or proposal for the
liquidation or dissolution of Telmex, or (iii) any Person shall become the
Beneficial Owner of 20% or more of the outstanding Common Stock or (iv) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the entire Telmex Board of Directors shall cease for any
reason to constitute a majority thereof unless the election, or the nomination
for election by Telmex's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
"Third Party Claim" shall have the meaning set forth in Section 11.5.
"Wholly-Owned Telmex Subsidiary" means any corporation, limited liability
company, general or limited partnership, limited liability partnership, joint
venture, trust or other entity of which the outstanding capital stock is wholly
owned directly or indirectly by Telmex and which is formed for business purposes
that are unrelated to the ability of such entity to receive any rights or
interests hereunder or associated herewith.
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Section 2: Terms of Purchase and Sale
2.1 Conveyance of Stock
Subject to the terms and conditions of this Agreement, NAS shall issue to
Telmex, free and clear of all Liens, the number of shares of its newly issued
Convertible Preferred Stock set forth in Section 2.3 (the "Preferred Shares").
2.2 Purchase Price for the Preferred Shares
The aggregate purchase price for the Preferred Shares ("Purchase Price")
shall be $75,000,000.00.
2.3 Number of Preferred Shares to be Issued at the Closing
The number of shares of Preferred Shares to be acquired by Telmex at the
Closing shall be 750,000.
Section 3: Closing
3.1 The Closing
Upon the terms and subject to the conditions contained herein (each party
agreeing to notify the other when all closing conditions have occurred), the
Closing shall take place at the offices of Arnold & Porter in Washington, D.C.,
at 2:00 p.m. local time on the date (the "Closing Date") which is five (5)
Business Days after each of the conditions set forth in Section 4 and 5 hereof
have been satisfied or waived, or any other mutually agreed upon time.
3.2 Deliveries by Telmex
On the Closing Date, Telmex shall deliver or cause to be delivered to NAS
the following, in form and substance reasonably satisfactory to NAS and its
counsel:
(a) The Purchase Price, (i) by wire transfer in the form of immediately
available funds to an account designated by NAS and (ii) to the extent of the
amount of unpaid principal and accrued interest on the Note, by tender of the
Note;
(b) The Note, marked "Paid and Cancelled";
(c) A certificate, dated as of the Closing Date, executed by a Senior
Officer of Telmex, certifying that the conditions set forth in Section 4 have
been fulfilled;
(d) A certificate, dated as of the Closing Date, executed by Telmex's
Secretary certifying that the execution of this Agreement and the consummation
of the transaction contemplated hereby have been authorized and approved by all
necessary corporate action of Telmex, which remains in full force and effect and
has not been modified or amended; and
(e) Such other documents and instruments as shall be reasonably necessary
to effect the intent of this Agreement and consummate the transactions
contemplated by this Agreement.
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3.3 Deliveries by NAS
On the Closing Date, NAS shall deliver to Telmex the following, in form and
substance reasonably satisfactory to Telmex and its counsel:
(a) A certificate or certificates for all of the Preferred Shares;
(b) A certificate, dated as of the Closing Date, executed by the President
of NAS, certifying that all the conditions set forth in Section 5 have been
fulfilled;
(c) A certificate, dated as of the Closing Date, executed by the Secretary
of NAS, certifying that the resolutions, as attached to such certificate, were
duly adopted by the Board of Directors of NAS authorizing and approving the
execution of this Agreement and the consummation of the transactions
contemplated hereby, and that such resolutions remain in full force and effect
and have not been modified or amended;
(d) Telmex shall have been furnished with a favorable opinion, dated the
Closing Date; of outside counsel to NAS (which counsel shall be reasonably
satisfactory to Telmex), confirming the matters set forth in Sections 7.1, 7.2
(as to all transaction documents), 7.5, 7.8, 7.13, 7.14, and exemption of the
issuance and sale of the Series B Preferred Stock from the registration
requirements of the federal and state securities laws, which opinion shall be in
form and substance reasonably satisfactory to Telmex.
(e) Opinions of Shook, Hardy & Bacon, NAS's state regulatory counsel,
dated as of the Closing Date, substantially in the form of Exhibit B hereto; and
(f) Such other documents and instruments as shall be reasonably necessary
to effect the intent of this Agreement and consummate the transactions
contemplated by this Agreement.
Section 4: Conditions to NAS's Obligations
The obligations of NAS to sell the Preferred Shares and effect the Closing
shall be subject to the satisfaction by Telmex, or waiver thereof by NAS, on or
prior to the Closing Date of all of the following conditions:
4.1 Consents
All Consents shall have been obtained.
4.2 Litigation
No Litigation shall be pending, and no Legal Requirement shall have been
enacted, entered, promulgated or issued, or shall have become or be deemed
applicable, to any of the transactions contemplated by this Agreement by any
Governmental Authority, that would (i) prohibit Telmex's ownership of the Stock
or prohibit NAS's operation of the NAS Business in any material respect as it is
being operated as of the date of this Agreement, (ii) prevent or make illegal
the consummation of the transactions contemplated by this Agreement.
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4.3 Telmex Representations; Compliance with Covenants
Telmex's representations and warranties contained in Section 6 shall be
accurate in all material respects when made and at and as of the Closing with
the same effect as though such representations and warranties had been made at
and as of the Closing, and Telmex shall have in all material respects performed
and complied with all covenants and agreements and conditions required by this
Agreement to be performed or complied with by it prior to or on the Closing,
provided that this condition shall be satisfied if the inaccuracy of any
representation or warranty, or the nonperformance or noncompliance with any
covenant, agreement or condition, individually or in the aggregate, does not
have a Material Adverse Effect.
4.4 Deliveries
Telmex shall have made or stand willing and able to make all of the
deliveries to NAS set forth in Section 3.2.
4.5 Telmex Change in Control Event
No Telmex Change in Control Event shall have occurred.
4.6 SBC Agreement
SBC shall have executed a stock purchase agreement with respect to the
purchase of 750,000 Preferred Shares in the form of this Agreement except for
appropriate changes to reflect SBC as a party thereto.
Section 5: Conditions to Telmex's Obligations
The obligations of Telmex to purchase the Preferred Shares and effect the
Closing shall be subject to the satisfaction, or waiver by Telmex, on or prior
to the Closing Date of all of the following conditions:
5.1 Consents
All Consents shall have been obtained.
5.2 Litigation
No Litigation shall be pending, and no Legal Requirement shall have been
enacted, entered, promulgated or issued, or shall have become or be deemed
applicable, to any of the transactions contemplated by this Agreement by any
Governmental Authority, that would (i) prohibit Telmex's ownership of the
Preferred Shares or prohibit NAS's operation of the NAS Business in any material
respect as it is being operated as of the date of this Agreement, or (ii)
prevent or make illegal the consummation of the transactions contemplated by
this Agreement.
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5.3 NAS's Representations; Compliance with Covenants
NAS's representations and warranties contained in Section 7 shall be
accurate in all respects when made and at and as of the Closing with the same
effect as though such representations and warranties had been made at and as of
the Closing except: (i) insofar as any such representation or warranty is made
specifically as of the date of this Agreement or as of any other specified
earlier date (in which event the same shall continue at and as of the Closing
Date to be true and correct as of such earlier date) and (ii) with respect to
changes contemplated by this Agreement, and NAS shall have in all material
respects performed and complied with all covenants and agreements and conditions
required by this Agreement to be performed or complied with by it prior to or on
the Closing Date, provided that this condition shall be satisfied if the
inaccuracy of any representation or warranty, or the nonperformance or
noncompliance with any covenant, agreement or condition, individually or in the
aggregate, does not have a Material Adverse Effect.
5.4 NAS Change in Control Event
No NAS Change in Control Event shall have occurred.
5.5 Adverse Developments
Since September 30, 1999, there shall not have occurred any change, or any
development involving a prospective change, in or affecting the business,
operations, properties, Assets or prospects of NAS which materially impairs the
value of the Preferred Shares.
5.6 Deliveries
NAS shall have made or stand willing and able to make all of the deliveries
to Telmex set forth in Section 3.3.
Section 6: Representations and Warranties of Telmex
Telmex hereby represents and warrants to NAS as follows:
6.1 Organization and Standing
Telmex is a corporation duly organized, validly existing and in good
standing under the laws of the United Mexican States and has all requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder.
6.2 Authorization by Telmex
(a) This Agreement has been duly and validly executed and delivered by
Telmex and constitutes the legal, valid and binding obligation of Telmex
enforceable against Telmex in accordance with its terms, except as such
enforceability may be limited by (i) bankruptcy, insolvency, or other similar
laws affecting the enforcement of creditors' rights generally or (ii) general
principles of equity (collectively, the "Enforceability Exceptions").
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(b) Neither the execution, delivery and performance of this Agreement by
Telmex nor the consummation by Telmex of the transactions contemplated herein
will, with or without the giving of notice or the lapse of time, or both, (i)
violate any Legal Requirements to which Telmex is subject, (ii) conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, the charter or by-laws of Telmex or any material agreement or
commitment to which Telmex is a party or by which Telmex or any of Telmex's
assets, may be bound or affected, or (iii) require Telmex to obtain any
authorization, consent, approval or waiver from, or to make any filing with, any
Governmental Authority or non-governmental third party. NAS has informed Telmex
that the approvals referred to on Schedule 7.2 are required for consummation of
the transactions contemplated by this Agreement.
6.3 Litigation
There is no Litigation pending against Telmex or, to the best of Telmex's
Knowledge, any Basis for Litigation or threatened Litigation against Telmex
which seeks to enjoin or obtain damages in respect of the consummation of the
transactions contemplated hereby. Telmex is not a party to or involved in any
Litigation which has a material adverse effect on Telmex's ability to
consummate, or would prevent the consummation of, the transactions contemplated
by this Agreement.
6.4 Finders' and Brokers' Fees
Neither Telmex, nor anyone on behalf of Telmex, has any obligations to any
broker, finder or agent, or agreed to pay any brokerage fee, finder's fee or
commission in connection with this Agreement or the transactions contemplated
hereby.
6.5 Investment Intent; Qualification
(a) Telmex is acquiring the Preferred Shares solely for its own account,
for investment purposes only, and not with a view to any distribution thereof,
in whole or in part, within the meaning of the Securities Act or any applicable
state securities laws. The Preferred Shares will not be resold by Telmex unless
registered pursuant to the Securities Act and any applicable state securities
laws or unless an exemption therefrom is available. Telmex hereby acknowledges
that NAS will rely upon the truth of the representations made in this Section
6.5 in determining that an exemption from the registration requirements of the
securities laws is available in connection with the sale of the Preferred Shares
pursuant to this Agreement.
(b) Telmex has the ability to evaluate the merits and risks associated
with its investment in the Preferred Shares on the basis of Telmex's knowledge
and experience in financial and business matters. Telmex is an "accredited
investor" as defined in Rule 501 of the General Rules and Regulations under the
Securities Act. Telmex has not relied upon any representation or warranty made
by NAS, or by any person on behalf of NAS, other than the representations and
warranties contained in this Agreement.
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6.6 Representations Not Misleading
The representations made by Telmex in this Agreement do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 7: Representations and Warranties of NAS
NAS hereby represents and warrants to Telmex as follows:
7.1 Organization and Standing of NAS
NAS is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with all requisite power and authority
(corporate and other) to own its properties and conduct its business as now
being conducted, and is duly qualified to do business as a foreign corporation
in good standing in each jurisdiction where the ownership of its properties or
the conduct of its business makes such qualification necessary, except in those
jurisdictions where failure so to qualify will not permanently impair title to a
material amount of its properties or its rights to enforce in all material
respects contracts against others or expose it to substantial liabilities in
such jurisdictions. Each Subsidiary of NAS is a corporation duly organized,
validly existing and in good standing under the laws of its state of
incorporation with all requisite power and authority (corporate and other) to
own its properties and conduct its business as now being conducted, and is duly
qualified to do business as a foreign corporation in good standing in each
jurisdiction where the ownership of its properties or the conduct of its
business makes such qualification necessary, except in those jurisdictions where
failure so to qualify will not permanently impair title to a material amount of
its properties or its rights to enforce in all material respects contracts
against others or expose it to substantial liabilities in such jurisdictions.
7.2 Authorization by NAS; Consents
(a) NAS has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement. NAS has taken all
corporate action necessary to authorize this Agreement and the issue, sale and
delivery of the Preferred Shares. This Agreement has been duly authorized,
executed and delivered by NAS and is a legal, valid and binding obligation of
NAS enforceable in accordance with its terms, except as such enforceability may
be limited by the Enforceability Exceptions.
(b) All material Consents required to be obtained by NAS are set forth on
Schedule 7.2. Except for the Consents set forth in Schedule 7.2, neither the
execution, delivery and performance of this Agreement by NAS nor the
consummation by NAS of the transactions contemplated herein will, with or
without the giving of notice or the lapse of time, or both, (i) violate any
Legal Requirements to which NAS is subject, (ii) conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default under,
the charter or by-laws of NAS, or any NAS License, any material contract to
which NAS is a party or by which NAS may be bound or affected, or (iii) require
NAS to obtain any authorization, consent, approval or waiver from, or to make
any filing with, any Governmental Authority or non-governmental third party.
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7.3 Corporate Documents
True and correct copies of the Amended and Restated Certificate of
Incorporation and the Amended and Restated By-Laws of NAS, certified by an
appropriate officer of NAS, have been delivered to Telmex and such Amended and
Restated Certificate of Incorporation, as amended, and Amended and Restated By-
Laws have not been amended since the respective dates of certification thereof,
nor has the Board of Directors or the shareholders of NAS taken any action for
the purpose of effecting the amendment or modification of such Amended and
Restated Certificate of Incorporation or Amended and Restated By-Laws.
7.4 Licenses; Qualification
(a) NAS or its Subsidiaries hold all the NAS Licenses listed in Schedule
7.4 hereto in its corporate name. The NAS Licenses listed in Schedule 7.4 are
all of the material and necessary Licenses which are required in connection with
the current operation of the NAS Business. Except as set forth on Schedule 7.4,
all NAS Licenses are currently in full force and effect and there are no pending
or, to the Knowledge of NAS, threatened revocation proceedings which would have
a Material Adverse Effect on the operation of the NAS Business, nor, to the
Knowledge of NAS, is there any Basis for any such proceeding. NAS has made
available to Telmex for Telmex's review, accurate and complete copies of all NAS
Licenses.
(b) All fees due and payable to Governmental Authorities pursuant to the
NAS Licenses have been paid and, except as set forth on Schedule 7.4, no event
has occurred which, with or without the giving of notice or the lapse of time or
both, would constitute grounds for revocation of the NAS Licenses. Except as set
forth on Schedule 7.4, NAS is in compliance in all material respects with the
terms of the NAS Licenses, and there is no condition, event or occurrence
existing, nor is there any proceeding being conducted of which NAS has received
notice, nor, to NAS's Knowledge, is there any proceeding threatened, by any
Governmental Authority, which would cause the termination, suspension,
cancellation or nonrenewal of any of the NAS Licenses, or the imposition of any
material penalty or fine by any Governmental Authority, nor, to the Knowledge of
NAS, is there any Basis for any such proceeding.
(c) Except as set forth on Schedule 7.4, to NAS's Knowledge, all
applications, reports, fees, filings and other submissions required by any
Governmental Authority have been made or paid in a timely fashion, the
noncompliance with which reasonably could have a Material Adverse Effect.
7.5 Litigation
There is no Litigation pending against NAS or any of its Subsidiaries, or,
to the Knowledge of NAS, a Basis for Litigation or threatened Litigation against
NAS or any of its Subsidiaries which seeks to enjoin or obtain damages in
respect of the consummation of the transactions contemplated hereby. Except for
those matters disclosed on Schedule 7.5, as of the date hereof there is no
Litigation or, to the Knowledge of NAS, Basis for Litigation, against NAS or any
of its Subsidiaries (including proceedings concerning labor disputes or
grievances, civil rights discrimination cases and affirmative action
proceedings) nor is there any governmental investigation pending or, to NAS's
Knowledge, Basis for governmental investigation or threatened gov-
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ernmental investigation relating to NAS or any of its Subsidiaries or to which
NAS or any such Subsidiary is a party, nor is there any Judgment relating to NAS
or any of its Subsidiaries or to which NAS or any of its Subsidiaries is a party
which is unsatisfied or requires continuing compliance. Neither NAS nor any of
its Subsidiaries is a party to or involved in any Litigation which has a
Material Adverse Effect upon NAS's ability to consummate, or would prevent the
consummation of, the transactions contemplated by this Agreement.
7.6 Exclusive Dealing
Except as set forth on Schedule 7.6, neither NAS nor any of its Affiliates
is a party to any currently effective agreement, written or oral, involving the
sale of any NAS Securities, a material portion of NAS's Assets, or any of the
NAS Business to any Person other than Telmex.
7.7 Compliance with Applicable Laws
NAS and each of its Subsidiaries has complied and presently is in
compliance with all applicable Legal Requirements.
7.8 Title to Preferred Shares; Absence of Liens
(a) The Preferred Shares have been duly authorized for issuance and are
validly issued, fully paid and nonassessable. None of the Preferred Shares has
been issued in violation of, or is subject to, any preemptive or subscription or
similar rights. Except as disclosed on Schedule 7.8 there are no outstanding
options or rights of any kind to acquire or subscribe for any Preferred Shares
nor are there any obligations to issue, sell or otherwise cause to become
outstanding any such options, rights, capital stock or securities. Except as
disclosed on Schedule 7.8, NAS is not a party to, and does not have any
Knowledge of, any voting trusts, proxies, voting agreements or other agreements
with respect to the voting of the capital stock of NAS.
(b) Telmex will acquire at the Closing good title to the Preferred
Shares, free and clear of all Liens.
(c) NAS owns all of the issued and outstanding capital stock of each of
its Subsidiaries.
7.9 Financial Statements
Attached as Schedule 7.9 are the unaudited NAS Financial Statements for
September 30, 1999 in the form included in NAS's Form 10-Q for the nine months
ended September 30, 1999. The NAS Financial Statements have been prepared by NAS
in accordance with GAAP and present fairly the financial position of NAS and its
Subsidiaries as of the dates of such statements. There are no material
contingent liabilities that are not disclosed on the NAS Financial Statements.
7.10 Conduct of Business in Ordinary Course
Since September 30, 1999, and except as set forth on Schedule 7.10, NAS
has conducted the NAS Business only in the ordinary course and consistent with
past practices and has not: (i)
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made any material increase in compensation payable or to become payable to any
senior executives of NAS, or any material change in personnel policies,
insurance benefits or other compensation arrangements affecting NAS's employees;
(ii) made any sale, assignment, lease or other transfer of any of the Assets,
other than obsolete Assets no longer usable in the operation of the NAS Business
or other Assets sold or disposed of in the normal course of business with
suitable replacements being obtained therefor; (iii) experienced any physical
damages, destruction or loss exceeding $50,000.00 in the aggregate affecting the
NAS Business that is not covered by insurance or has not been remedied within 30
days; (iv) incurred any indebtedness or Liens except in the ordinary course and
consistent with past practices; (v) paid any dividends; or (vi) waived any
material rights of NAS under any contract or NAS License.
7.11 No Material Adverse Effect
Since September 30, 1999, there has been no Material Adverse Effect.
7.12 Absence of Defaults
Neither NAS nor any of its Subsidiaries is in material default under or in
material violation of any provision of its Amended and Restated Certificate of
Incorporation or Amended and Restated By-Laws or contained in any other
agreement or instrument to which it is a party or by which it is bound or to
which any of its properties is subject, and neither NAS nor any of its
Subsidiaries is in material violation of any statute, order, rule or regulation
of any court or governmental agency or body having jurisdiction over it or any
of its properties.
7.13 No Conflict
Except as set forth on Schedule 7.13, neither the execution and delivery
by NAS of this Agreement, nor the consummation of the transactions contemplated
hereby, nor compliance by NAS with its obligations hereunder:
(i) will conflict with, or result in a breach or violation of, or
constitute a default under, any provision of the Amended and Restated
Certificate of Incorporation or Amended and Restated By-Laws of NAS or any
law, rule, regulation, order, injunction or decree of any court,
administrative authority or arbitrator applicable to NAS or any property
or Assets of NAS, or will conflict with, or result in a breach or
violation of or constitute a default in the performance, observance or
fulfillment of any obligation under, or constitute, or, with the giving of
notice or lapse of time or both, would constitute, an event of default by
NAS, or result in the acceleration of any obligation, or require any
consent or approval, under, any agreement or instrument to which NAS is a
party or by which it or any of its properties or Assets are bound;
(ii) will result in the creation or imposition of any Lien upon any
of the Assets of NAS; or
(iii) will require any action, consent or approval of, or filing
with, any Governmental Authority.
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7.14 Capital Stock of NAS
The authorized capital stock of NAS as of the date hereof is as set forth
on Schedule 7.14 and no other shares are issued or outstanding, except as a
result of the expiration of employee options on February 4, 2000. Each issued
and outstanding share of Common Stock is duly and validly authorized and issued
and is fully paid and nonassessable. The Preferred Shares, when issued and
delivered to Telmex pursuant to this Agreement will be duly and validly
authorized and issued and fully paid and nonassessable. There is no existing
option, warrant, call or commitment of any kind relating to the capital stock of
NAS or securities convertible into capital stock of NAS except as set forth on
Schedule 7.14. The Preferred Shares are not and will not at the time of issuance
be subject to any preemptive right of any shareholder.
7.15 Finders' and Brokers' Fees
Neither NAS, nor anyone on behalf of NAS, has any obligations to any
broker, finder or agent, or agreed to pay any brokerage fee, finder's fee or
commission in connection with this Agreement and the transactions contemplated
hereby except as set forth on Schedule 7.15.
7.16 Taxes
NAS and each of its Subsidiaries has filed or caused to be filed all
federal, state and local tax returns which are required to be filed by it, and
has paid or caused to be paid all taxes shown to be due and payable on such
returns or on any assessments received by it, including payroll taxes.
7.17 Subsidiaries
Other than as set forth on Schedule 7.17 hereto, NAS has no Subsidiaries.
7.18 Representations Not Misleading
The representations made by NAS in this Agreement do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 8: Covenants of Telmex
Telmex hereby covenants and agrees with NAS as follows:
8.1 Cooperation
Telmex will use commercially reasonable efforts and cooperate with NAS to
secure promptly all necessary Consents.
Telmex will not sell or otherwise dispose of any Preferred Shares except
in compliance with the provisions of the Securities Act, the SEC's regulations
thereunder and other applicable federal and state securities and Blue Sky laws.
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8.2 Confidentiality; Press Releases
No press release or public disclosure, either written or oral, of the
existence or terms of this Agreement shall be made by Telmex without the consent
of NAS, and Telmex shall furnish to NAS advance copies of any release which it
proposes to make public concerning this Agreement or the transactions
contemplated hereby and the date upon which Telmex proposes to make such press
release. This provision shall not, however, be construed to prohibit Telmex from
making any disclosures to any Governmental Authority or other Person which it is
required to make under any Legal Requirement, or to obtain any Consents.
8.3 Definitive Operating Agreement
Promptly following the execution of this Agreement, Telmex shall negotiate
in good faith the Definitive Operating Agreement. The Definitive Operating
Agreement shall contain the substance of the terms and conditions set forth in
the Summary of Operating Agreement attached as Exhibit C and such other terms
and conditions as the parties may mutually agree upon.
8.4 Consent Relating to Registration Rights
Upon receipt by NAS of the consents of the Prior Holders referred to in
Section 9.7, Telmex (and any Holder) also will consent (i) to permit each Prior
Holder to participate in any registration statement in which the Holders may
participate and (ii) to the extent not all shares to be offered by the Holders
and Prior Holders may be sold under any such registration statement, to reduce
the number of shares the Holders, as a group, may sell under such registration
statement on a pro rata basis with the Prior Holders as a group, with such pro
rata reduction based on the number of shares of Common Stock, or the shares of
Common Stock represented by Convertible Securities, that each group owns or
Beneficially Owns at the time of the relevant Registration Request.
8.5 Further Assurances
At any time or from time to time after the Closing Date, Telmex shall
execute and deliver any further instruments or documents, and take all such
further action as NAS may reasonably request, in order to effect this Agreement
and issue and deliver the Preferred Shares to Telmex free and clear of all
Liens.
Section 9: Covenants of NAS
NAS hereby covenants and agrees with Telmex as follows:
9.1 Cooperation
NAS will use commercially reasonable efforts and cooperate with Telmex to
secure promptly all necessary Consents.
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9.2 Access to NAS Information
During the period prior to Closing, NAS will grant to Telmex and its
representatives reasonable access to all the premises, books, records,
inventory, and physical plant relating to NAS. NAS shall cause its
representatives and independent auditors to furnish to Telmex such financial and
other data and information with respect to NAS as Telmex and/or its independent
accountants and counsel shall reasonably request, to the extent already in
existence and permitted by law.
9.3 Ordinary Course Operation
Between the date of the Agreement and the Closing, NAS (i) shall, in all
material respects, operate the NAS Business, serve its customers, and preserve
and maintain the Assets of NAS and relationships with customers, vendors and
employees in a reasonable and prudent manner and (ii) shall, in all material
respects, conduct the NAS Business in the ordinary course. Through the Closing
Date, NAS will use its best efforts to maintain the current status of the NAS
Licenses.
9.4 Board Representation
NAS shall ensure that Telmex, as long as Telmex owns all of the Preferred
Shares issued upon Closing or all of the Common Stock issued upon conversion of
such Preferred Shares (or owns a greater number of Preferred Shares or shares of
Common Stock than originally issued upon Closing or conversion), shall have the
right to elect its designated nominee as a member of the Board of Directors of
NAS. Until conversion of Preferred Shares to Common Stock, such member shall be
a nonvoting member; thereafter, the member shall be a full voting member of the
Board of Directors.
9.5 Confidentiality; Press Releases
No press release or public disclosure, either written or oral, of the
existence or terms of this Agreement shall be made by NAS without the consent of
Telmex, and NAS shall furnish to Telmex advance copies of any release which it
proposes to make public concerning this Agreement or the transactions
contemplated hereby and the date upon which NAS proposes to make such press
release. This provision shall not, however, be construed to prohibit NAS from
making any disclosures to any Governmental Authority or other Person which it is
required to make under any Legal Requirement, or to obtain any Consents.
9.6 Notification of Change in Control Event
NAS shall promptly notify Telmex upon the occurrence of any NAS Change in
Control Event.
9.7 Registration Rights
(a) The registration rights in this Section 9.7 as they apply to the
Holders, Telmex, and the stockholders of NAS who have, as of the date of this
Agreement, registration rights as to
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their stock in NAS (the "Prior Holders) are subject to that certain letter
agreement of even date among SBC, Telmex and the Prior Holders.
(b) After the Permitted Registration Date, any Holder holding, in the
aggregate, at least 500,000 shares of Common Stock issued upon the conversion of
the Preferred Shares, shall have the right, on one occasion only, by written
request (a "Registration Request") of one or more Holders (the "Selling
Shareholders") to NAS, to require NAS to prepare a registration statement (the
"Registration Statement") on the appropriate form under the Securities Act with
respect to the Common Stock then owned by such Selling Shareholders for use in
connection with an underwritten public distribution of all or part of the
Subject Stock.
(c) If at any time after the Permitted Registration Date, NAS shall
propose to prepare on its own behalf or on behalf of any holders of any of its
Common Stock a registration statement in connection with an underwritten public
offering of any such shares of Common Stock, NAS shall give each Holder written
notice at least twenty or, in case of a registration statement proposed to be
filed pursuant to Rule 415 of the Securities Act, ten Business Days before the
anticipated filing date of such registration statement. Should any Holder desire
to have any shares of Common Stock included in such registration statement, such
Holder shall so notify NAS in writing (which notice, and the notice of all other
Holders with respect to such registration statement, shall be deemed to be a
Registration Request) no later than ten or, in the case of a registration
statement proposed to be filed pursuant to Rule 415 of the Securities Act, five
Business Days after NAS's notice is given, setting forth the number of shares of
Common Stock which such Holder requests to be included in the registration
statement and providing any other information requested by NAS in its original
notice relating to inclusion in the registration statement. Any such
registration statement that includes shares of Common Stock owned by any Holder
is hereinafter included in the term "Registration Statement" and each Holder who
owns shares of Common Stock included in a Registration Statement shall be a
Selling Shareholder with respect to such Registration Statement.
(d) NAS may refuse to include in any such Registration Statement the
Common Stock owned by a Holder if in NAS's reasonable judgment, based on advice
of its investment bankers, inclusion of such shares of Common Stock would have
an adverse effect on the ability of NAS to complete such underwritten public
offering. If in accordance with a Registration Request pursuant to Section
9.7(b), NAS reduces the number of shares to be included in any such Registration
Statement in accordance with the foregoing, NAS will include in such
registration, to the extent of the number which NAS is so advised can be sold in
such offering, first, shares of Common Stock requested to be included in such
registration by the Selling Shareholders (subject to the rights, if any, of
Prior Holders) and, second, securities NAS proposes to sell and other securities
of NAS included in such registration by the holders thereof. If, as a result of
this Section 9.7(d) or as a result of the participation of Prior Holders in the
Registration Statement, the Selling Shareholders are not able to register all of
their shares of Common Stock requested to be registered pursuant to Section
9.7(b), such Registration Request will not be deemed to be the single allowable
Registration Request for purposes of Section 9.7(b) and the Holders' rights to
one additional Registration Request will be restored, and if as a result of such
reduction the Selling Shareholder is left with fewer than 500,000 shares of
Common Stock, then the 500,000 share limit in Section 7(b) shall not apply.
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(e) With respect to any Registration Statement under this Section 9.7, NAS
will:
(i) prepare and file with the SEC the Registration Statement within
120 days after a Selling Shareholders' notice requesting registration or
inclusion in a proposed registration, and use its reasonable efforts to
cause the securities covered by such Registration Statement to become
registered and such Registration Statement to be declared effective as
expeditiously as possible under the Securities Act or other applicable
federal law and regulations (and cause to be prepared and file any
amendments or supplements thereto as may be necessary to comply with
applicable federal law and regulations); provided, however, that NAS may be
allowed to defer filing of the Registration Statement: (A) if the Vice
President - Legal of NAS reasonably determines in good faith that it is in
the best interests of NAS not to disclose the existence of or facts
surrounding any proposed or pending material developments; (B) if the
underwriters have notified NAS that market conditions are such as to
recommend deferral; (C) pending the completion of year-end financial
statements or quarterly earnings releases; or (D) if an offering by NAS of
any securities is pending; provided, however, that any deferral pursuant to
clauses (A), (B), (C) or (D) of this paragraph shall not in the aggregate
be for more than 90 days.
(ii) use its reasonable efforts to cause to be registered or
qualified the securities covered by such Registration Statement under such
securities or Blue Sky laws in such jurisdictions within the United States
as any Selling Shareholder may reasonably request; provided, however, that
NAS reserves the right, in its sole discretion, not to cause to be
registered or qualified such securities in any jurisdiction where NAS would
be required in connection therewith to execute a general consent to service
or to qualify as a foreign corporation or to subject itself to taxation;
(iii) maintain the effectiveness of any Registration Statement
hereunder for 90 days or such longer period as may be required by the
Securities Act to enable any Selling Shareholder and the underwriters, if
any, to complete such offering;
(iv) promptly notify each Selling Shareholder of the happening of any
event as a result of which any preliminary prospectus or prospectuses
included in any Registration Statement hereunder includes an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements not misleading in
light of the circumstances then existing;
(v) have the right to reasonably approve the choice of lead
underwriter for underwritten offerings initiated by the Holders under
Section 9.7(b);
(vi) furnish, at the request of any Selling Shareholder, an opinion,
dated the date the Registration Statement became effective, of counsel
representing NAS (which may be in-house counsel) for the purposes of such
registration, addressed to the underwriters, if any, and to such Selling
Shareholder as to such legal matters as such Selling Shareholder shall
reasonably request; and
(vii) furnish, at the request of any Selling Shareholder, a letter,
dated the date the Registration Statement became effective, of independent
certified public accountants
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of NAS, addressed to the underwriters, if any, and to such Selling
Shareholder as to such accounting matters as such Selling Shareholder shall
reasonably request.
(f) The obligations of NAS to cause a Registration Statement to be
prepared pursuant to the provisions of this Section 9.7 and each Selling
Shareholder's right to have shares of Common Stock included in any Registration
Statement pursuant to the provisions of this Section 9.7 shall be subject to the
following conditions:
(i) Each Selling Shareholder shall furnish to NAS in writing such
information and documents as, in the opinion of NAS's counsel, may be
reasonably required to properly cause to be prepared such Registration
Statement in accordance with applicable provisions of the Securities Act
and the SEC's regulations thereunder or federal or state securities or Blue
Sky laws and regulations then in effect; and
(ii) If a Selling Shareholder desires to sell and distribute such
shares of Common Stock over a period of time, or from time to time,
pursuant to a Registration Statement prepared pursuant to the provisions of
this Section 9.7, then such Selling Shareholder shall execute and deliver
to NAS such written undertakings as NAS and its counsel may reasonably
require in order to assure full compliance with the relevant provisions of
the Securities Act and the SEC's regulations thereunder or other federal or
state securities or Blue Sky laws and regulations as then in effect.
(g) The Selling Shareholder will pay or cause to be paid all fees and
expenses (including all Blue Sky, New York Stock Exchange and National
Association of Securities Dealers, Inc. filing and registration fees, accounting
fees and disbursements, printing costs, attorneys' fees and disbursements)
arising out of the preparation, filing, amending and supplementing of a
Registration Statement pursuant to Section 9.7(b) hereof in which only the
Selling Shareholder participates, and the amount of such fees and expenses that
are reasonably allocable to the Selling Shareholder for a Registration Statement
used under Section 9.7(c) or a Registration Statement based on the number of
shares offered by the Selling Shareholders relative to the number of other
shares offered by NAS or on behalf of any of its other holders.
(h) In no event shall NAS be required to maintain the effectiveness of any
Registration Statement for more than 90 days.
9.8 Listing
Upon Telmex's request, NAS will use its best efforts, and diligently take
all steps necessary, to list for trading on the Nasdaq or, if at the time of
issuance any Common Stock is listed on any securities exchange, to list on each
such exchange, the Common Stock to be issued to Telmex upon conversion of the
Preferred Shares (promptly after such Common Stock is issued).
9.9 Issuance of Other Securities
NAS shall not issue or agree to issue any securities of NAS to any Person
with voting rights that are more favorable in any material respect than the
voting rights of the Preferred Shares.
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9.10 Further Assurances
At any time or from time to time after the Closing Date, NAS shall execute
and deliver any further instruments or documents, and take all such further
action as Telmex may reasonably request, in order to effect this Agreement and
to issue to Telmex the Preferred Shares free and clear of all Liens except for
Liens as Telmex may cause to attach to the Preferred Shares.
9.11 Use of Proceeds
NAS shall use at least 50% of the Purchase Price for the purpose of more
closely aligning its network and business operations with the future network and
business operations of Telmex Telecom, Inc., as outlined in the Summary of
Operating Agreement attached as Exhibit C hereto. The remainder of the Purchase
Price shall be available for general corporate purposes as determined by NAS.
9.12 Definitive Operating Agreement
Promptly following the execution of this Agreement, NAS shall negotiate in
good faith the Definitive Operating Agreement. The Definitive Operating
Agreement shall contain the substance of the terms and conditions set forth in
the Summary of Operating Agreement attached as Exhibit C and such other terms
and conditions as the parties may mutually agree upon.
9.13 Right of Primary Offer
Subject to the terms and conditions specified in this Section 9.13, NAS
hereby grants to each Holder, a right of primary offer with respect to future
sales by NAS of its New Securities (as defined in Section 9.13(d)(i)) after the
date hereof.
(a) In the event NAS proposes to issue New Securities, it shall give each
Holder written notice (the "Notice") of its intention stating: (i) a description
of the New Securities it proposes to issue, (ii) the number of shares of New
Securities it proposes to offer, (iii) the price per share at which, and other
terms on which, it proposes to offer such New Securities, and (iv) the number of
shares that the Holder has the right to purchase under this Section 9.13, based
on the Holder's Percentage (as defined in Section 9.13(d)(ii)).
(b) Within 10 Business Days after the Notice is given, the Holder may
elect to purchase, at the price specified in the Notice, up to the number of
shares of the New Securities proposed to be issued equal to the Holder's
Percentage. An election to purchase shall be made in writing and must be given
to NAS within such 10 Business Day period. The closing of the sale of New
Securities by NAS to the participating Holder upon exercise of its rights under
this Section 9.13 shall take place simultaneously with the closing of the sale
of New Securities to third parties.
(c) NAS shall have 90 days after the last date on which the Holder's
right of first offer lapsed to enter into an agreement (pursuant to which the
sale of New Securities covered thereby shall be closed, if at all, within 45
days from the execution thereof) to sell the New Securities which the Holder did
not elect to purchase under this Section 9.13, at or above the price and upon
terms not materially more favorable to the purchasers of such securities than
the terms
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specified in the initial Notice given in connection with such sale. In the event
NAS has not entered into an agreement to sell the New Securities within such 90
day period (or sold and issued New Securities in accordance with the foregoing
within 45 days from the date of such agreement), NAS shall not thereafter issue
or sell any New Securities without first offering such New Securities to the
Holder in the manner provided in this Section 9.13.
(d) Definitions:
(i) "New Securities" shall mean any shares of, or securities
convertible into or exercisable for any shares of, any class of NAS's
capital stock; provided that "New Securities" does not include: (A)
securities issued pursuant to the acquisition of another business entity
by NAS by merger, purchase of substantially all of the assets of such
entity, or other reorganization whereby NAS owns not less than a majority
of the voting power of such entity; (B) shares of NAS's Common Stock,
options or warrants to purchase shares of NAS's Common Stock, and the
shares of Common Stock issuable upon exercise of such options or warrants,
issued pursuant to any arrangement approved by the Board of Directors to
employees, officers and directors of, or consultants, advisors or other
Persons performing services for, NAS; (C) shares of NAS's Common Stock
issued in connection with any stock split, stock dividend or
recapitalization of NAS; or (D) shares of NAS's Common Stock issued upon
exercise of warrants, options or convertible securities if the issuance of
such warrants, options or convertible securities was a result of the
exercise of the right of first offer granted under this Section 9.13 or
was subject to the right of first offer granted under this Section 9.13.
(ii) The applicable "Percentage" for each Holder shall be the number
of shares of New Securities calculated by dividing (A) the total number of
shares of Common Stock owned by the Holder (assuming conversion of all
outstanding convertible securities and exercise of all outstanding options
and warrants) by (B) the total number of shares of Common Stock
outstanding at the time the Notice is given (assuming conversion of all
outstanding convertible securities and exercise of all outstanding options
and warrants).
9.14 Government License Application Amendment
NAS shall amend its pending applications for government licenses to cover
the transactions contemplated by this Agreement and shall use its reasonable
best efforts to have those applications, as amended, approved.
Section 10: Termination
10.1 Terminating Events
This Agreement may be terminated:
(a) By the mutual written consent of NAS and Telmex; or
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(b) By NAS, by ten (10) Business Days written notice to Telmex (if NAS is
not then materially in default or breach of this Agreement), if Telmex shall
default in any material respect in the performance of any of its obligations
under this Agreement, and such default or breach has not been cured by Telmex
within seven (7) Business Days following receipt of written notice from NAS of
NAS's intention to terminate this Agreement; or
(c) By Telmex, by ten (10) Business Days written notice to NAS (if Telmex
is not then materially in default or breach of this Agreement), if NAS shall
default in any material respect in the performance of any of its obligations
under this Agreement, and such default or breach has not been cured by NAS
within seven (7) Business Days following receipt of written notice from Telmex
of Telmex's intention to terminate this Agreement; or
(d) By either Telmex or NAS if the Closing has not occurred on or before
July 31, 2000 (provided that the right to terminate this Agreement under this
Section 10.1(d) shall not be available to any party whose breach of any
obligation under this Agreement has been the cause of or resulted in the failure
of the Closing to occur on or before such date).
10.2 Effect on Obligations
In the event of any termination of this Agreement pursuant to Section
10.1(a) or 10.1(d), neither Telmex nor NAS shall have any further liability
hereunder, except with respect to the confidentiality provisions hereof. In the
event of a termination under Section 10.1(b) or 10.1(c), both parties shall
retain all their rights at law or in equity.
Section 11: Indemnification
11.1 Indemnification by NAS
(a) NAS hereby agrees to indemnify Telmex and its Affiliates and their
respective officers and directors against and hold them harmless from any Losses
suffered or incurred by any such Indemnified Party for or on account of or
arising from or in connection with any breach of any representation, warranty or
covenant of NAS contained in this Agreement, provided, however, that NAS shall
not have any liability under this Section 11.1 unless the aggregate of all
Losses relating thereto exceed on a cumulative basis $750,000.00, and then only
to the extent of such excess, and (ii) in excess of the Purchase Price. Telmex
acknowledges and agrees that its sole and exclusive remedy with respect to any
and all claims for monetary damages relating to the subject matter of this
Agreement shall be pursuant to the indemnification provisions set forth in this
Section 11.
(b) NAS agrees to indemnify and hold harmless each Selling Shareholder
and each Person, if any, who controls (within the meaning of Section 15 of the
Securities Act and Section 20 of the 34 Act) such Selling Shareholder (a
"Control Person") against any Losses to which such Selling Shareholder or any
such Control Person may become subject, insofar as such Losses arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any preliminary or final Registration Statement prepared
pursuant to Section 9.7 of this Agreement or prospectus with respect thereto, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
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provided, however, that NAS will not be liable in any case to the extent that
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission from any of such documents in
reliance upon and in conformity with written information furnished by or on
behalf of such Selling Shareholder or any such Control Person specifically for
use in the preparation thereof.
11.2 Indemnification by Telmex
(a) Telmex hereby agrees to indemnify NAS and its Affiliates and their
respective officers and directors against and hold them harmless from any Losses
suffered or incurred by any such Indemnified Party for or on account of or
arising from or in connection with any breach of any representation, warranty or
covenant of Telmex contained in this Agreement, provided, however, that Telmex
shall not have any liability under this Section 11.2 unless the aggregate of all
Losses relating thereto exceed on a cumulative basis $750,000.00, and then only
to the extent of such excess. NAS acknowledges and agrees that its sole and
exclusive remedy with respect to any and all claims for monetary damages
relating to the subject matter of this Agreement shall be pursuant to the
indemnification provisions set forth in this Section 11.
(b) Telmex and any other Selling Shareholder to whom Telmex's rights
under this Agreement have been transferred will, severally and not jointly,
indemnify and hold harmless NAS and each of its directors, officers and each
Person, if any, who controls (within the meaning of Section 15 of the Securities
Act and Section 20 of the 34 Act) NAS (a "Company Control Person") to the same
extent as set forth in the foregoing indemnity from NAS to each Selling
Shareholder set forth in Section 11.1(b), but only with reference to written
information included in any preliminary or final Registration Statement prepared
pursuant to Section 9.7 of this Agreement or prospectus with respect thereto, or
amendment or supplement thereto, furnished by or on behalf of such Selling
Shareholder specifically for use in the preparation of such documents.
11.3 Losses
The amount of any Losses for which indemnification is provided under this
Section 11 shall be net of any amounts recovered or recoverable by the
Indemnified Party under insurance policies with respect to such Losses and shall
be increased to take account of any Tax cost to the Indemnified Party and
reduced to take account of any Tax benefit to the Indemnified Party arising from
the incurrence or payment of any Losses.
11.4 Survival
The representations and warranties made by NAS contained in Section 7
hereof, and the obligation of NAS to indemnify Telmex pursuant to Section 11.1
hereof, shall survive the execution and delivery of this Agreement, any
examination or due diligence inquiry by a party and the Closing until the date
which is one year after the Closing Date, except that the representations and
warranties made by NAS in Section 7.8 (Title to Preferred Shares; Absence of
Liens) shall survive for the applicable statute of limitations. The
representations and warranties made by Telmex contained in Section 6 hereof, and
the obligation of Telmex to indemnify Telmex pursuant to Section 11.2 hereof,
survive the execution and delivery of this Agreement, any examination or due
diligence inquiry by a party and the Closing until the date which is one year
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after the Closing Date. All covenants and agreements of NAS or Telmex contained
in this Agreement (which terms do not include representations and warranties)
shall survive the Closing for a period of one year unless otherwise expressly
provided herein. The obligations to indemnify and hold harmless a party hereto,
pursuant to Section 11.1 and Section 11.2 hereof, shall survive only until the
expiration of the applicable survival period for the representation and warranty
or covenant under which the claim for indemnification is being made; provided,
however, that such obligations to indemnify and hold harmless shall not
terminate with respect to any item as to which the Person to be indemnified
shall have, before the expiration of the applicable period, previously made a
claim by delivering a notice (stating in reasonable detail the basis of such
claim) to the party to be providing the indemnification.
11.5 Procedures Relating to Third Party Claims
In order for a party (the "Indemnified Party") to be entitled to any
indemnification provided for under this Agreement in respect of, arising out of
or involving a claim or demand made by any Person against the Indemnified Party
(a "Third Party Claim"), such Indemnified Party must notify the indemnifying
party in writing of the Third Party Claim within 10 Business Days after receipt
by such Indemnified Party of written notice of the Third Party Claim; provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the indemnifying party
shall have been actually prejudiced as a result of such failure (except that the
indemnifying party shall not be liable for any expenses incurred during the
period in which the Indemnified Party failed to give such notice). Thereafter,
the Indemnified Party shall deliver to the indemnifying party, within five
Business Days after the Indemnified Party's receipt thereof copies of all
notices and documents (including court papers) received by the Indemnified Party
relating to the Third Party Claim.
If a Third Party Claim is made against an Indemnified Party, the
indemnifying party will be entitled to participate in the defense thereof and
upon notice to the Indemnified Party to assume the defense thereof provided that
(i) the indemnifying party's counsel is reasonably satisfactory to the
Indemnified Party and (ii) the indemnifying party shall thereafter consult with
the Indemnified Party upon the Indemnified Party's request for such consultation
from time to time with respect to such suit, action or proceeding. If the
indemnifying party assumes such defense, the Indemnified Party shall have the
right (but not the duty) to participate in the defense thereof and to employ
counsel, at its own expense, separate from the counsel employed by the
indemnifying party. The indemnifying party shall be liable for the fees and
expenses of counsel employed by the Indemnified Party for any period during
which the indemnifying party has not assumed the defense thereof. Should the
indemnifying party so elect to assume the defense of a Third Party Claim, the
indemnifying party will not be liable to the Indemnified Party for any legal
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof. Whether or not the indemnifying party chooses to defend or
prosecute any Third Party Claim, all of the parties hereto shall cooperate in
the defense or prosecution thereof. Such cooperation shall include the retention
and (upon the indemnifying party's request) the provision to the indemnifying
party of records and information which are reasonably relevant to such Third
Party Claim, and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. Whether or not the indemnifying party shall have assumed the defense
of a Third Party Claim, the Indemnified Party
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shall not admit any liability with respect to, or settle, compromise or
discharge, such Third Party Claim without the indemnifying party's prior written
consent.
Any payment pursuant to this Section 11.5 shall be made not later than 15
days after receipt by the indemnifying party of written notice from the
Indemnified Party stating that any Third Party Claim has been paid by any
Indemnified Party and the amount thereof and the indemnity payment requested.
Section 12: Arbitration
12.1 Resolution of Disputes
(a) The parties shall attempt in good faith to resolve any controversy,
dispute or claim arising out of or relating to this Agreement or the breach,
termination, enforceability or validity thereof (collectively, a "Dispute")
promptly by negotiation between officers or employees who have authority to
settle the Dispute. Either party may give the other a written notice (a "Dispute
Notice") setting forth with reasonable specificity the nature of the Dispute and
the identity of such party's representatives who will attend and participate in
the meeting at which the parties will attempt to settle the Dispute. Following
the receipt of a Dispute Notice, the representatives of both parties shall meet
as soon as is practicable at a mutually acceptable time and place to negotiate
in good faith a settlement of the Dispute, and shall meet thereafter as they
reasonably deem necessary. All negotiations pursuant to this Section 12.1(a)
shall be confidential and shall be treated as compromise and settlement
negotiations. Nothing said or disclosed, nor any document produced, in the
course of such negotiations which is not otherwise independently discoverable
shall be offered or received as evidence or used for impeachment or for any
other purpose in any current of future arbitration or litigation.
(b) If the Dispute has not been resolved within 30 days after the receipt
of a Dispute Notice through negotiation as provided in Section 12.1(a), then the
Dispute shall be finally settled by arbitration in accordance with the
commercial arbitration rules of the American Arbitration Association ("AAA")
then in effect. However, in all events, the arbitration provisions in this
Section 12 shall govern over any conflicting rules that may now or hereafter be
contained in the AAA rules. The arbitration shall be held in Washington, D.C.,
unless the parties mutually agree to have the arbitration held elsewhere, and
Judgment upon the award made therein may be entered by any court having
jurisdiction in the United States; provided, however, that nothing contained in
this Section 12 shall be construed to limit or preclude a party from bringing
any action in any court of competent jurisdiction for injunctive or other
provisional relief to compel another party to comply with its obligations under
this Agreement during the pendency of the arbitration proceedings. Any Judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction over the subject matter hereof. The arbitrator shall have the
authority to grant any equitable and legal remedies that would be available in
any judicial proceeding instituted to resolve any claim hereunder.
12.2 Arbitrators
Any such arbitration will be conducted before three (3) arbitrators, one
of which shall be chosen by NAS, one of which shall be chosen by Telmex, and the
third chosen by the other two
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arbitrators. Each person chosen to serve as an arbitrator shall be a neutral and
impartial attorney who has had training and experience as an arbitrator. The
decision of a majority of the arbitrators will be the decision of the
arbitrators. The arbitrators shall permit such discovery of information related
to the controversy or claim in arbitration as they shall determine is
appropriate in the circumstances, taking into account the needs of the parties
and the desirability of making discovery expeditious and cost-effective.
12.3 Costs and Fees
All fees and expenses of the arbitrators, expenses for hearing facilities
and other expenses of the arbitration shall be borne equally by the parties
unless the arbitrators in the award assess such fees and expenses other than
equally against the parties. Each party shall bear the fees and expenses of its
own attorneys and witnesses except to the extent otherwise provided in this
Agreement or by law; provided, that if the arbitrators determine that the claim
or defense of any party was frivolous or lacked a reasonable basis in fact or
law, the arbitrators may assess against such party all or part of the fees and
expenses of attorneys and witnesses for the other party.
12.4 Burden of Proof
For any Dispute submitted to arbitration, the burden of proof will be as
it would be if the claim were litigated in a judicial proceeding.
12.5 Award
Upon the conclusion of any arbitration proceedings hereunder, the
arbitrators will render findings of fact and conclusions of law and a written
opinion setting forth the basis and reasons for any decision reached and will
deliver such documents to each party to this Agreement along with a signed copy
of the award.
12.6 Agreement Controls
The arbitrators chosen in accordance with these provisions will not have
the power to alter, amend or otherwise affect the terms of these arbitration
provisions or the provisions of this Agreement.
Section 13: Miscellaneous
13.1 Entire Agreement; Amendment
This Agreement (including the attached Schedules and Exhibits) constitutes
the sole understanding of the parties with respect to the subject matter hereof,
and supersedes all prior oral or written agreements, commitments or
understandings with respect to such matters. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto.
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13.2 Successors and Assigns
This Agreement may not be assigned by either NAS or Telmex without the
consent of the other party (which consent shall not be unreasonably withheld)
except that Telmex may assign this Agreement to any Wholly-Owned Telmex
Subsidiary that agrees to be bound by all of the terms hereof, and provided that
no such permitted assignment shall relieve the parties hereto of any liability
for a breach of this Agreement by such party or its assignee. This Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs or successors in interest.
13.3 Rights and Remedies
Unless otherwise provided herein, the rights and remedies of the parties
hereunder shall not be mutually exclusive, and the exercise of one or more
provisions of this Agreement shall not preclude the exercise of any other
provisions. Each of the parties confirms that damages at law may be an
inadequate remedy for a breach or threatened breach of any provision hereof. The
respective rights and obligations hereunder shall be enforceable by specific
performance, injunction or other suitable remedy, it being the intention of this
Section 13.3 to make clear the agreement of the parties that the respective
rights and obligations of the parties hereunder shall be enforceable in equity
as well as at law or otherwise.
13.4 Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall for all purposes be deemed to be an original and all of which shall
constitute the same instrument.
13.5 Modification and Waiver
At any time on or prior to the Closing Date, the parties by mutual
agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, or (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall only be valid if set forth in an instrument in
writing signed on behalf of such party.
13.6 Expenses
Except as specifically provided herein, Telmex and NAS shall each pay all
costs and expenses incurred by it or on its behalf in connection with this
Agreement and the transactions contemplated hereby, including, without limiting
the generality of the foregoing, fees and expenses of its own consultants,
accountants and counsel.
13.7 Notices
Any notice, request, instruction or other document to be given hereunder
by any party hereto to any other party shall be in writing and shall be deemed
given upon receipt if delivered personally or by telex or facsimile, the next
day if by express mail or three days after being sent
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by registered or certified mail, return receipt requested, postage prepaid to
the following addresses (or at such other address for a party as shall be
specified by like notice provided that such notice shall be effective only after
receipt thereof):
If to Telmex: Telefonos de Mexico S.A. de C.V.
Parque Via 190, Piso 10
Col Cuauhtemoc
Mexico City DF, 06599
Mexico
Fax: (52)5255-1576
Voice: (52)5222-5780
With a copy (which shall
not constitute notice) to: Rafael Robles Miaja
Franck, Galicia, Duclaud y Robles, S.C.
Paseo de Los Palmos No. 405-3
Col Lomos de Chapultepec
Mexico City DF, 11000
Mexico
Fax: (52)5540-9202
Voice: (52)5540-9225
If to NAS: Jonathan P. Aust
President and Chief Executive Officer
Network Access Solutions
100 Carpenter Drive
Sterling, VA 20165
Fax: 703-742-7706
Voice: 703-995-1682
With a copy (which shall Worth D. MacMurray
not constitute notice) to: Vice President, Legal and Strategic Planning
Network Access Solutions
100 Carpenter Drive
Sterling, VA 20165
Fax: 703-995-2180
Voice: 703-995-2695
13.8 Severability
In case any one or more of the provisions contained in this Agreement
shall for any reason be held to be invalid, illegal or unenforceable in any
respect by a court or other authority of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof and this Agreement shall be construed as if such invalid, illegal or
unenforce-
-30-
<PAGE>
able provision had never been contained herein and, in lieu of each such
illegal, invalid or unenforceable provision, there shall be added automatically
as a part of this Agreement a provision as similar in terms to such illegal,
invalid or unenforceable provision as may be possible and be legal, valid and
enforceable, it being the intent of the parties to maintain the benefit of the
bargain for all parties.
13.9 Governing Law
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware applicable to agreements made and to be performed
wholly within such jurisdiction.
13.10 Rules of Construction
Words used in this Agreement, regardless of the gender and number
specifically used, shall be deemed and construed to include any other gender and
any other number as the context requires. As used in this Agreement, the word
"including" is not limiting, and the word "or" is not exclusive. Except as
specifically otherwise provided in this Agreement in a particular instance, a
reference to a Section, Schedule or Exhibit is a reference to a Section of this
Agreement or a Schedule or Exhibit hereto, and the terms "this Agreement,"
"hereof," "herein," and other like terms refer to this Agreement as a whole,
including the Schedules to this Agreement, and not solely to any particular part
of this Agreement. The descriptive headings in this Agreement are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement. The parties to this Agreement
do not intend that NAS Employees or any other Person shall obtain any rights as
third party beneficiaries of this Agreement.
13.11 Ownership Limitation
Notwithstanding anything else to the contrary in this Agreement, nothing
set forth in this Agreement shall be construed or interpreted to provide Telmex
with the right to Beneficially Own any shares of Common Stock or other class of
capital stock of NAS to the extent that it would violate any Legal Requirements
of the FCC or any other Governmental Authority.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement, or have
caused this Agreement to be signed in their respective names by an officer,
hereunto duly authorized, on the date first above written.
NETWORK ACCESS SOLUTIONS CORPORATION
By:____________________________________
Name:
Title:
-31-
<PAGE>
TELEFONOS DE MEXICO, S.A. DE C.V.
By:____________________________________
Name:
Title:
-32-
<PAGE>
Exhibit 10.36
SUMMARY OF OPERATING AGREEMENT
This Summary of Operating Agreement ("Summary") is entered into this 4th day of
February, 2000, by and between SBC Telecom, Inc. ("SBCT "), a wholly owned
subsidiary of SBC Communications Inc. ("SBC"), Telefonos de Mexico S.A. de C.V.
("Telmex") and Network Access Solutions Corporation ("NAS") (collectively the
"Parties") and sets forth the agreement concerning operational, resale and
marketing interaction between SBCT and NAS and Telmex and NAS in connection with
Telmex and SBC's proposed initial loan and purchase of convertible preferred
shares issued by NAS (the "Equity Investment"). The terms and conditions set
forth herein are binding upon the Parties for a period of one (1) year or until
part or all of this Summary is superceded by one or more of the definitive
agreements contemplated by this Summary. The Parties shall use their best
efforts to negotiate definitive agreements within sixty (60) days.
1. RECITALS
WHEREAS, NAS is a provider of local telecommunications/DSL services with
operations in Delaware, Maryland, Massachusetts, New York, Pennsylvania,
Virginia and the District of Columbia;
WHEREAS, NAS has announced plans to expand aggressively in those states and
in other states;
WHEREAS, Telmex, through a wholly owned subsidiary, is making an investment
in NAS and will have access to NAS services and participation in operating
and network decisions outlined herein;
WHEREAS, SBCT has announced plans to offer local telecommunications
services in geographical areas in at least 30 major metropolitan areas;
WHEREAS, SBCT intends to provide xDSL service ("xDSL" includes, but is not
limited to, DSL, ADSL, IDSL and SDSL services) to its customers on a
nationwide basis, through its own facilities and through arrangements with
other providers of such services;
WHEREAS, NAS desires to make modifications to its network and business
operations in order to more closely align its network and business
operations with
the future network and business operations of SBCT and Telmex; and
<PAGE>
WHEREAS, a major form of consideration that SBCT and Telmex is receiving
for making the Equity Investment is the execution of this Summary and a
definitive agreement covering marketing, systems integration, collocation,
cooperative network development, joint product development and such other
matters as the Parties may agree (the "Operating Agreements") and a
definitive resale agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Parties agree as follows:
2. SALES AND MARKETING
a. NAS and SBCT, and NAS and Telmex, shall each enter into negotiations
for the purpose of reaching an agreement for SBCT's and / or Telmex's
resale of NAS's telecommunications services including, but not limited
to, xDSL services (the "Resale Agreement"). NAS's wholesale prices to
SBCT and Telmex shall be the lowest of: 1) the lowest wholesale price
extended by NAS to any other customer; 2) the wholesale price at which
such services are available from other telecommunications carriers in
the primary metropolitan statistical area ("PMSA"), provided, however,
that under this subparagraph (2) NAS's wholesale prices shall include
a reasonable profit margin; or 3) NAS's direct cost attributable to
the service, plus a reasonable rate of return, subject to mutually
agreed upon costing methodologies.
b. For services provided by NAS and resold by SBCT and / or Telmex, SBCT
and NAS, and Telmex and NAS, will jointly establish benchmark service
level agreements, service intervals and service guarantees due from
NAS. The Parties will agree on incentives to assure attainment of
agreed upon service levels.
c. SBCT, Telmex and each of their affiliates (including, without
limitation, Prodigy) shall have the ability to purchase wholesale
services from NAS; provided, however, that such ability to purchase
wholesale services shall not apply to Section 3 (Collocation), herein.
d. SBCT, Telmex and each of their affiliates (including, without
limitation, Prodigy) shall have the right to resell NAS
telecommunications services, each under their own brand, and to
establish their own marketing programs, sales collateral and other
promotional material.
e. NAS and SBCT, and NAS and Telmex, shall enter into discussions for the
negotiation of an agreement with NAS to allow NAS to sell certain SBCT
and / or Telmex services.
2
<PAGE>
3. COLLOCATION
a. SBCT, at its option, may lease space from NAS inside any collocation
space NAS currently has or has ordered from another party where there
is excess capacity or inside any other space used by NAS to provision
service. SBCT may deploy equipment of its choosing in the collocation
space, except that, to the extent that NAS has DSL equipment in place
or current plans to deploy DSL equipment in that collocation space
that will deliver xDSL-based services in the timeframe required by
SBCT and in accordance with SBCT's existing requirements, SBCT shall
not provide xDSL services using its own equipment located in NAS's
collocation space, except that SBCT may provide DSL service if no
valid resale agreement is in place with NAS. If SBCT changes its
existing requirements, the deployment of SBCT's DSL equipment in NAS's
collocation space shall be subject to the Network Committee review
process for network architecture under the network development
provisions of this Agreement. If NAS deploys DSL equipment in the
future in the shared collocation space that is capable of serving
SBCT's DSL requirements, SBCT shall provision no additional DSL
customers using SBCT's equipment in NAS's collocation space. The
Parties further agree that they will expeditiously work out
collocation issues with respect to Boston, Miami, Seattle and other
cities where SBCT is having difficulty meeting its deployment targets.
If SBCT and NAS have not entered into a resale agreement by June 1,
2000, then (a) SBCT may not request additional collocation space after
December 31, 2000, and (b) SBCT may not request additional collocation
space after June 1, 2000 in any given PMSA if SBCT is already
collocated or has ordered collocation at 10 or more central offices in
that PMSA where NAS has collocation space; provided that the
restrictions set forth in clauses (a) and (b) shall be of no further
effect if SBCT and NAS enter into a resale agreement after June 1,
2000.
b. The space shall be provided by NAS at the lowest of: 1) the lowest
price extended by NAS to any other carrier; 2) the price at which such
space is available from other carriers in the PMSA, provided, however,
that under this subparagraph (2) NAS's prices shall include a
reasonable profit margin; or 3) NAS's direct cost attributable to
providing the space plus a reasonable rate of return, subject to
mutually agreed upon costing methodologies. To provide SBCT with time
to assess its collocation space needs, until June 1, 2000, NAS will
not lease to any third party any collocation space that NAS now
occupies or has ordered without SBCT's prior consent, nor will NAS
lease to any third party prior to December 1, 2000 any collocation
space for which SBCT has advised NAS by June 1, 2000 that SBCT intends
to lease.
3
<PAGE>
c. At SBCT's option, NAS shall jointly plan with SBCT where and when to
acquire new collocation spaces and the physical requirements of NAS's
new collocation spaces in order to allow SBCT to share collocation
space with NAS, except that in operating territories where an SBC
affiliate is an ILEC, NAS shall make the final determination on any
new collocation space. Each Party will be responsible for its pro rata
share of the direct costs and mutually acceptable indirect costs of
the jointly planned collocation space based on each Party's allocated
space.
d. NAS represents that it has or will acquire the contractual ability to
share collocation space with SBCT under the terms of its
interconnection agreements or collocation tariffs with the owners of
the space and that nothing contained in this section shall cause NAS
to be in breach of any contractual or tariff obligation.
e. Telmex and NAS will negotiate in good faith the terms and conditions
of the collocation and other agreements, consistent with the terms and
conditions provided to SBCT. NAS will apply the necessary flexibility
and devote the necessary resources to develop a long term, mutually
beneficial relationship with Telmex in these matters.
4. NETWORK COMMITTEE
a. SBCT, Telmex and NAS shall establish a Network Committee comprised of
an equal number of representatives from each Party. The Network
Committee will operate under rules agreed to by the Parties. Except
within operating territories where an SBC affiliate is the ILEC, the
Committee shall be responsible for network architecture, network
buildout, collocation planning and such other functions as the Parties
may agree upon. In operating territories where an affiliate of SBC is
an ILEC, NAS shall be solely responsible for its own network
architecture, network buildout and collocation planning function.
b. Committee Management
1) The Network Committee will meet monthly (or as otherwise agreed by
the Parties) at a time and place agreed upon by the members.
Meetings may also be called by any Party on 14 days written
notice to the other Parties, except in cases of emergency, where
as much notice will be given as practicable.
2) Unless agreed by the other Parties, no matter can be finally
resolved unless it was disclosed in an agenda with sufficient
particularity to reasonably disclose the nature of the matter.
3) A quorum shall consist of at least one member from each Party.
4
<PAGE>
4) Members may participate in a meeting by teleconference and may
designate an alternate member to participate in a meeting on
their behalf.
5) NAS, Telmex and SBCT shall jointly establish, with the assistance
of counsel, rules and procedures governing the conduct of
Committee meetings.
6) Each Party will designate a Project Manager to serve as the
principal contact for matters related to the subject matter of
this Summary.
7) SBCT, Telmex and NAS shall each have as many votes as they have
representatives on the Network Committee, regardless of whether
each representative participates in a meeting.
8) The Parties shall attempt in good faith to promptly resolve any
dispute arising out of this Summary or out of the definitive
agreements contemplated herein ("Dispute") by negotiation between
the designated Project Manager for each Party. Any Party may
provide written notice of a Dispute, which will set forth the
nature of the dispute and the identity of representatives in
addition to the Project Manager who will attend settlement
meetings. After the receipt of a written notice of a Dispute, the
representatives of the Parties shall meet as soon as practicable
at mutually acceptable times and places. If a Dispute has not
been resolved within 30 days of the receipt of written notice,
the Dispute shall be referred to the CEO of NAS, the President of
SBCT, and the Senior Officer of Telmex for resolution.
5. NETWORK ARCHITECTURE
a. The Network Committee will jointly test, evaluate and approve proposed
network platforms, network equipment and network architecture to be
used in NAS's network.
b. NAS will deploy the network platforms and establish network
architecture, and will use the equipment vendors, approved by SBCT and
Telmex, provided however, that SBCT or Telmex shall not require NAS to
use network platforms or establish network architecture which would
have a material adverse effect on NAS's ability to provide service to
its customers nor shall anything preclude NAS from using any network
platforms or network architecture it wishes-- provided that such
network platforms and network architecture do not adversely affect the
services SBCT and / or Telmex obtains or has requested from NAS.
5
<PAGE>
6. NETWORK BUILDOUT
a. The Network Committee will jointly evaluate and approve proposals to
build out new NAS network facilities, which may include, but is not
limited to, transport, central offices, collocation and equipment
("Network Facilities"). NAS will build out new Network Facilities as
directed by the unanimous vote of the Network Committee.
b. In the event that NAS wants to build out new Network Facilities and
cannot obtain the agreement of the SBCT and Telmex members(s), nothing
in this section shall prevent NAS from building out such Network
Facilities.
c. In the event that SBCT or Telmex wants NAS to build out new Network
Facilities and cannot obtain the agreement of the NAS members(s), NAS
shall build out the Network Facilities as a Mandatory Project as set
forth in subparagraph (e) below.
d. Notwithstanding any other provision of this Section 6 (Network
Buildout) NAS shall establish new Network Facilities to support the
provision of xDSL services in the PMSAs listed in Attachment A. SBCT
shall have the right to amend the list upon reasonable notice. The
xDSL service shall meet SBCT's specifications and shall be deployed in
accordance with SBCT's reasonable timeline.
e. Mandatory Project
1) Should a Network Facilities build out proposal fail to receive
the necessary approval of the Network Committee due to the
failure of NAS to support it, either SBCT or Telmex may require
NAS to initiate the proposal as a Mandatory Project. NAS shall
commence efforts on the Mandatory Project within one (1) month of
receiving notice from SBCT or Telmex to proceed with the
Mandatory Project.
2) Notwithstanding the immediately preceding subparagraph 1), SBCT
or Telmex may, instead of pursuing the proposal as a Mandatory
Project, undertake the project on its own or with a third party.
In such case, NAS will cooperate with SBCT or Telmex and will use
its best efforts to integrate a Mandatory Project into the
existing infrastructure of NAS's network.
3) If NAS is required to complete a Mandatory Project, SBCT and / or
Telmex shall pay NAS: (i) all reasonable, identifiable fully
loaded direct expenses associated with the Mandatory Project,
6
<PAGE>
plus (ii) the reasonable cost of capital investments directly
required by the Mandatory Project, less (iii) any cost savings,
tax benefits or other benefits attributable to the Mandatory
Project. Cost savings shall be estimated, and then adjusted when
actual data becomes available. Mandatory Projects shall be
subject to mutually agreed upon costing methodologies.
4) At Telmex's or SBCT's option, SBCT or Telmex will either: (i) own
all aspects of the Mandatory Project, including facilities,
intellectual property and rights to use; or (ii) lease from NAS
the exclusive rights to use all aspects of the Mandatory Project
for the life of the equipment for $1 per year plus operating
costs.
5) SBCT and Telmex shall have reasonable audit rights.
7. SYSTEMS INTEGRATION
a. The Parties use certain systems to process, analyze, store and
retrieve data. These systems include, but are not limited to, revenue
systems (which include, among others, systems for pre-ordering,
ordering, service activation, service assurance and billing) and
administrative systems (which include, among others, payroll,
personnel and accounting systems) (collectively, the "Data Systems").
b. NAS and SBCT, and NAS and Telmex, shall, as soon as reasonably
practicable following the execution of Resale Agreements, develop
electronic methods of exchanging information related to pre-ordering,
ordering, service activation, service assurance and billing for NAS
services under their separate resale relationships. NAS and SBCT, and
NAS and Telmex, will establish manual processes for use until
electronic processes are in place.
c. NAS, Telmex and SBCT shall each bear its own cost of developing and/or
otherwise providing the manual and electronic methods of information
exchange. Costs for all shared facilities or capabilities shall be
borne equally by the Parties on a pro-rata basis.
8. PRODUCT DEVELOPMENT
a. SBCT and NAS, and Telmex and NAS, shall actively participate in joint
product development processes, including but not limited to,
identification and evaluation of new products and product
functionalities, and decisions on whether to develop or acquire the
desired product functionality.
7
<PAGE>
b. SBCT and NAS, and Telmex and NAS, will agree as to both the
functionality of jointly deployed products and the timing of the
marketing and delivery of such products.
c. To the extent joint product development results in characteristics not
otherwise available in the market, the Parties (either SBCT and NAS or
Telmex and NAS) will agree on the terms and conditions upon which
these products are to be made available to customers and other
telecommunications carriers.
d. SBCT and NAS, and Telmex and NAS, will share intellectual property
rights in jointly developed products.
9. TERM
The term of the definitive Operating Agreements and Resale Agreements shall
be five (5) years from the date such agreements are executed.
10. CONFIDENTIALITY
Except to the extent required to be disclosed by law or pursuant to an
order of a court or agency with jurisdiction, each Party shall hold in
confidence the provisions of this Summary and any proprietary or
confidential information received pursuant to the negotiations surrounding
this Summary and shall use such proprietary or confidential information
only to fulfill its obligations or enforce its rights under this Summary or
to consummate a definitive agreement between the Parties covering the
subject matter of this Summary. Each Party shall use the same efforts to
safeguard any proprietary or confidential information received pursuant to
this Summary as it uses to protect its own proprietary or confidential
information. Each Party shall have the right to enforce this
confidentiality obligation by injunctive relief, including specific
performance. This confidentiality obligation shall remain in effect for a
period of twelve (12) months after the expiration of this Summary.
11. COMPLIANCE WITH LAWS
Nothing in this Summary shall obligate a Party to take any action that
violates any applicable governmental law, regulation, order, or policy of
the FCC or any other governmental entity, including, but not limited to,
any provisions of the Federal Communications Act of 1934, as amended
("Act") and the antitrust laws of the United States and the respective
States. In no event shall a Party be obligated to perform any acts or to
abstain from performing any act if, in the Party's reasonable judgment,
after consulting with the other Parties, performance or non-performance
will violate the Act or any applicable law regulation, order, policy of the
FCC, any antitrust laws, or any other law or regulation.
8
<PAGE>
12. OTHER TERMS AND CONDITIONS
The definitive Operating Agreement between the Parties shall, at a minimum,
contain terms and conditions covering intellectual property rights,
prohibition on solicitation of employees, transition upon termination,
representations and warranties, indemnification, limitation of liability
and coordination on publicity.
13. CHANGE IN CONTROL
In the event of an NAS Change in Control Event, as defined in the Stock
Purchase Agreement by and between SBC and NAS, and Telmex and NAS, SBCT and
Telmex shall have the right to terminate the Operating Agreements and the
Resale Agreements for 180 days after the NAS Change in Control Event by
providing notice to NAS, and such termination shall occur 60 days after
giving such notice.
14. MISCELLANEOUS
Nothing in this Summary permits NAS to influence or control any aspect of
network deployment or operation of Telmex, SBC, or an SBC affiliate, within
SBC's ILEC operating territory.
9
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have signed this Summary, or have caused
this Summary to be signed in their respective names by an officer, hereto duly
authorized, on the date first written above.
SBC Telecom, Inc.
By: ______________________________
Name: __________________________
Title: ___________________________
Telefonos de Mexico S.A. de C.V.
By: ____________________________
Name: __________________________
Title: ___________________________
Network Access Solutions Corporation
By: _____________________________
Name: __________________________
Title: ___________________________
10
<PAGE>
ATTACHMENT A
<TABLE>
<CAPTION>
PMSA's For NAS Deployment of Network Facilities
<S> <C>
Boston Nashville
Miami Raleigh
Seattle Norfolk
Ft. Lauderdale Louisville
New York City New Orleans
Washington, DC Tucson
Baltimore
Atlanta
Philadelphia
Phoenix
Minneapolis
Denver
Nassau, NY
Bergen-Passaic, NJ
Newark, NJ
Middlesex, NJ
Orlando
Tampa
Salt Lake City
West Palm Beach
Portland
Charlotte
Buffalo
Memphis
</TABLE>
11
<PAGE>
EXHIBIT 10.37
AS PROPOSED ON
JANUARY 28, 2000
NETWORK ACCESS SOLUTIONS CORPORATION
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitutes the provisions of the 2000 Employee Stock
Purchase Plan of Network Access Solutions Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Subsidiaries with an opportunity to purchase Common Stock of the
Company through payroll deductions. It is the intention of the Company that the
Plan qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code of 1986, as amended. The provisions of the Plan shall,
accordingly, be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
(b) "Company" means Network Access Solutions Corporation, a Delaware
corporation.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the Common Stock, $0.001 par value, of the
Company.
(e) "Compensation," unless otherwise determined by the Board, means
total cash compensation from employment reportable on Form W-2 including,
without limitation, regular straight-time gross earnings, overtime pay, shift
premium, incentive compensation, bonuses, commissions and automobile allowances.
(f) "Employee" means any person, including an officer, who is
customarily employed for more than 20 hours per week and five months or more per
calendar year by the Company or its subsidiaries. For purposes of the Plan, the
employment relationship shall be treated as continuing intact while the person
is on military leave, sick leave or other leave of absence approved by the
Company; provided that where the period of leave exceeds 90 days and the
person's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship will be deemed to have terminated on the
91st day of such leave.
(g) "Exercise Date" means the last business day of an Offering Period
of the Plan.
(h) "Offering Date" means the first business day of an Offering Period
of the Plan.
(i) "Offering Period" means the period of time beginning with the
Offering Date and ending with the Exercise Date.
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<PAGE>
(j) "Plan" means this Network Access Solutions Corporation 2000
Employee Stock Purchase Plan.
(k) "Subsidiary," for purposes of this Plan, means those subsidiaries
of the Company which have been designated by the Board from time to time in its
sole discretion as eligible to participate in the Plan (in general, a subsidiary
(as described in Section 424 of the Code) is any corporation in which the
Company owns, directly or indirectly, 50% or more of the voting shares).
3. Eligibility.
-----------
(a) General Rule. Any person who is an Employee, as defined in
------------
Section 2, as of either Offering Date during a Plan year shall be eligible to
participate in the Plan (subject to the limitations imposed by Section 5 herein
and Section 423(b) of the Code).
(b) Exceptions. Any provisions of the Plan to the contrary
----------
notwithstanding, no Employee shall be granted an option under the Plan if:
(i) immediately after the grant such Employee (or any other
person whose stock ownership would be attributed to such Employee pursuant to
Section 424(d) of the Code) would own shares and/or hold outstanding options to
purchase shares possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or of any Subsidiary; or
(ii) such option would permit the Employee's rights to purchase
stock under all employee stock purchase plans (within the meaning of Section 423
of the Code and any successor provision) of the Company and its Subsidiaries to
accrue (i.e., become exercisable) at a rate which exceeds $25,000 of fair market
value of such stock (determined at the time such option is granted) for each
calendar year in which such option is outstanding at any time.
4. Offerings. The Plan shall be implemented by two offerings (each an
---------
Offering Period) during each calendar 12-month period during the term of the
Plan. Each offering shall be of 12 months' duration. Offering I shall commence
on January 1 and end on December 31 of each year of the Plan; Offering II shall
commence on July 1 and end on June 30 of the following year of the Plan.
Participation in one offering under the Plan shall neither limit nor require
participation in any other offering; provided, however, that an eligible
Employee may only participate in one Offering Period at a time.
5. Participation. An eligible Employee may become a participant in an
-------------
offering under the Plan by completing and signing a subscription agreement
authorizing payroll deductions on a form provided by the Company (the
"Subscription Agreement") and by filing it with the Company's payroll office not
less than 15 days prior to the first Offering Date with respect to which it is
to be effective, unless a later time for filing the Subscription Agreement has
been set by the Company with respect to a given offering. An Employee's
authorization and participation in the Plan shall become effective on the first
Offering Date following the timely filing of his or her Subscription Agreement
and shall remain effective until revoked by the participant by the filing of a
Notice Of Cancellation Of Option And Withdrawal from the Plan as described in
Section 10(a) or until changed by the filing of a Payroll Deduction
Authorization Change or Withdrawal form providing for a change in the
participant's payroll deduction rate. An Employee who becomes eligible to
participate in the Plan after the commencement of an Offering Period may not
become a participant in the Plan until the commencement of the next Offering
Period, two of which shall occur each calendar year.
-2-
<PAGE>
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her Subscription Agreement,
he or she shall elect to have payroll deductions made on each payday (and on
each such other day upon which any form of Compensation is paid to the
participant (e.g., a separate bonus payment)) during the next Offering Period at
a percentage rate equal to a whole number and not exceeding $10,000, or such
other maximum rate as may be determined from time to time by the Board subject
to the provisions of Section 19, of the Compensation which he or she receives
during the Offering Period.
(b) Payroll deductions for a participant shall commence on the first
payday following the date when a participant's payroll deduction authorization
becomes effective and shall automatically continue from Offering Period to
Offering Period until terminated by the participant in accordance with the terms
hereof.
(c) All payroll deductions authorized by a participant shall be
credited to the participant's individual account under the Plan. A participant
may not make any additional payments into such account.
(d) A participant may terminate his or her participation in the Plan
as provided in Section 10 at any time prior to the Exercise Date, but may not
change the rate of his or her payroll deductions with respect to an Offering
Period during such Offering Period.
(e) By enrolling in the Plan, each participant will be deemed to have
authorized the establishment of a brokerage account in his or her name at a
securities brokerage firm or other financial institution, if approved by the
Committee in its discretion.
(f) Each participant agrees, by entering the Plan, to promptly give
the Company notice of any disposition of shares purchased under the Plan where
such disposition occurs within two years after the Exercise Date pursuant to
which such shares were purchased.
7. Grant of Option.
---------------
(a) Subject to the limitations set forth in Sections 3(b) and 12, on
each Offering Date with respect to which a participant's payroll deduction
authorization is effective, each participant in the Plan shall automatically be
granted an option to purchase (at the option price as provided in Section 7(b))
up to the number of whole shares of the Common Stock arrived at by dividing (x)
such participant's payroll deductions accumulated prior to the Exercise Date and
retained in the participant's account as of the Exercise Date by (y) the option
price per share set forth in Section 7(b).
(b) The option price per share of the shares to be sold during each
offering shall be the lower of: (i) 85% of the fair market value of a share of
the Common Stock on the Offering Date; or (ii) 85% of the fair market value of a
share of the Common Stock on the Exercise Date. The fair market value of a
share of the Common Stock shall be determined as provided in Section 7(c).
(c) The fair market value of a share of the Common Stock shall equal
the closing price per share of the Common Stock on The Nasdaq Stock Market, as
reported in The Wall Street Journal. In the event that there has been no
-----------------------
trading in the Common Stock on any Offering Date or Exercise Date, then the fair
-3-
<PAGE>
market value of a share of the Common Stock shall equal the closing price in
effect for the immediately previous day upon which the Common Stock has been
traded.
8. Exercise of Option. Unless a participant cancels his or her option and
------------------
withdraws from the Plan as provided in Section 10, his or her option for the
purchase of shares shall be exercised automatically as of the Exercise Date of
the Offering Period, and the accumulated payroll deductions credited to a
participant's account on the Exercise Date will be applied to purchase whole
shares of the Common Stock at the applicable option price. Any amount credited
to a participant's account and not applied to the purchase of Common Stock by
reason of the limitation on the number of shares subject to option shall be
refunded promptly to such participant after the Exercise Date, provided that any
amount remaining in a participant's account and representing a fractional share
shall be carried over and applied to the purchase of shares in the subsequent
Offering Period if the participant participates in the subsequent offering.
During his or her lifetime, a participant's option to purchase shares hereunder
is exercisable only by such participant.
9. Delivery. As promptly as practicable after the end of each Offering
--------
Period, the Company shall arrange the delivery to each participant, as
appropriate, either of a certificate or via direct deposit into a book entry
account or brokerage account representing the shares purchased upon exercise of
his or her option.
10. Withdrawal; Termination of Employment.
-------------------------------------
(a) A participant may terminate his or her participation in the Plan
and withdraw all, but not less than all, of the payroll deductions credited to
his or her account under the Plan at any time prior to an Exercise Date by
giving written notice of withdrawal to the Company on a Payroll Deduction
Authorization Change or Withdrawal form provided for such purpose. All of the
participant's payroll deductions credited to his or her account shall be paid to
him or her promptly after receipt of his or her notice of withdrawal, and his or
her option for the current period shall be automatically cancelled, and no
further payroll deductions for the purchase of shares shall be made except
pursuant to a new Subscription Agreement filed in accordance with Section 5.
(b) Upon termination of a participant's employment for any reason,
including retirement or death, as soon as practicable after such termination,
the payroll deductions credited to his or her account for any incomplete
Offering Period shall be returned to him or her or, in the case of his or her
death, to the person or persons entitled thereto under Section 14, and his or
her option in such incomplete Offering Period shall be automatically cancelled.
(c) Except as otherwise provided herein, in the event an Employee
fails to remain in the continuous employ of the Company or its Subsidiaries for
more than 20 hours per week during the Offering Period in which the Employee is
a participant, he or she will be deemed to have elected to withdraw from the
Plan and the payroll deductions credited to his or her account for any
incomplete Offering Period will be returned to him or her and his or her option
in such incomplete Offering Period will be cancelled.
(d) A participant's withdrawal from an offering shall not have any
effect upon his or her eligibility to participate in a subsequent offering or in
any similar plan which may hereafter be adopted by the Company in which such
participant otherwise qualifies for eligibility.
11. Interest. No interest shall accrue for benefit of a participant on
--------
the payroll deductions of a participant in the Plan.
-4-
<PAGE>
12. Stock.
-----
(a) The maximum number of shares of the Common Stock which shall be
made available for sale under the Plan shall be Five Hundred Thousand (500,000)
shares, subject to adjustment upon changes in capitalization of the Company as
provided in Section 18. The shares to be sold to participants in the Plan will
be authorized but unissued shares, or treasury shares if available and at the
discretion of the Committee. If the total number of shares which would
otherwise be subject to options granted pursuant to Section 7(a) at the Offering
Date exceeds the number of shares then available under the Plan (after deduction
of all shares for which options have been exercised or are then outstanding),
the Company shall make a pro rata allocation of the shares remaining available
for option grant in as uniform and equitable a manner as is practicable. In
such event, the Company shall give written notice of such reduction of the
number of shares subject to the option to each participant affected thereby and
shall reduce the rate of payroll deductions, if necessary.
(b) A participant will have no interest or voting right in shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall, as
specified in the participant's Subscription Agreement, be registered in the name
of the participant, or in the name of the participant and his or her spouse, or
in the "street name" of a Company approved broker for benefit of a participant's
account.
13. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board, as necessary to comply
with Rule 16b-3 under the Securities Exchange Act of 1934. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan; provided, however, that to
the extent necessary to comply with Rule 16b-3 no discretion concerning
decisions regarding the Plan shall be afforded to a person who is not a
"disinterested person" as that term is defined and interpreted under Rule 16b-3.
Every finding, decision and determination made by the Board or its committee
shall, to the full extent permitted by law, be final and binding upon all
parties.
14. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the Exercise
Date of an Offering Period but prior to delivery to him or her of such shares
and cash. In addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's account under the
Plan in the event of such participant's death prior to the Exercise Date of an
Offering Period.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a valid designation of a beneficiary who is living at the time
of such participant's death, the Company shall deliver such shares and/or cash
to the executor or administrator of the estate of the participant; or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the participant; or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
-5-
<PAGE>
15. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution, pursuant to a qualified domestic relations order as defined by the
Code, or as provided in Section 14) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 10.
16. Use of Funds. All payroll deductions received or held by the Company
------------
on behalf of a participant under the Plan may be used by the Company for any
corporate purpose, and the Company shall not be obligated to segregate such
payroll deductions.
17. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Individual statements of account will be given to participating
Employees as promptly as practicable following the Exercise Date of an Offering
Period, which statements shall set forth the amounts of payroll deductions, the
per share option price, the number of shares purchased and the remaining cash
balance, if any, in a participant's account.
18. Adjustments Upon Changes in Capitalization.
------------------------------------------
(a) Subject to any required action by the stockholders of the Company,
the number of shares of Common Stock covered by each option under the Plan which
has not yet been exercised and the number of shares of Common Stock which have
been authorized for issuance under the Plan but have not yet been placed under
option or which has been returned to the Plan upon the cancellation of an
option, as well as the option price per share of Common Stock covered by each
option under the Plan which has not yet been exercised, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, stock dividend, spin-off, reorganization,
recapitalization, merger, consolidation, exchange of shares or the like. Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to option.
(b) In the event of the proposed dissolution or liquidation of the
Company, or in the event of a proposed sale of all or substantially all of the
assets of the Company, or the merger or consolidation of the Company with or
into another corporation, the Board shall (i) make provision for the assumption
of all outstanding options by the successor corporation or (ii) declare that any
option shall terminate as of a date fixed by the Board which is at least 30 days
after the notice thereof and unless a participant terminates his or her
participation in the Plan prior to such date, his or her option for the purchase
of shares will be exercised automatically on such date and the accumulated
payroll deductions credited to a participant's account on such date will be
applied to purchase whole shares of the Common Stock (up to the maximum number
subject to option as determined in accordance with Section 7(a)) at the
applicable option price.
(c) No fractional shares of Common Stock shall be issuable on account
of any adjustment described herein, and the aggregate number of shares into
which shares then covered by an option, when changed as the result of such
adjustment, shall be reduced to the largest number of whole shares resulting
from such adjustment, unless the Board, in its sole discretion, shall determine
to issue scrip certificates in respect
-6-
<PAGE>
to any fractional shares, which scrip certificates, in such event, shall be in a
form and have such terms and conditions as the Board in its discretion shall
prescribe.
19. Amendment or Termination. The Board may at any time terminate or
------------------------
amend the Plan in such respects as the Board may deem advisable. No such
termination will affect options previously granted, nor may an amendment make
any change in any option theretofore granted which adversely affects the rights
of any participant without the prior written consent of such participant, nor
may an amendment be made without prior approval of the stockholders of the
Company if such amendment would:
(a) Increase the number of shares that may be issued under the Plan;
(b) Materially modify the requirements as to eligibility for
participation in the Plan; or
(c) Materially increase the benefits which accrue to participants
under the Plan.
20. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by vote of a majority of the
outstanding shares of the Company entitled to vote on the adoption of the Plan.
The Plan shall continue in effect for a term of ten years unless sooner
terminated under Sections 19 or 22.
21. Notices. All notices or other communications by a participant to the
-------
Company in connection with the Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
22. Stockholder Approval. Notwithstanding anything to the contrary
--------------------
herein, the continuance of the Plan and the effectiveness of any option granted
hereunder shall be subject to approval by the affirmative vote of the holders of
a majority of the outstanding shares of stock of the Company present or
represented and entitled to vote thereon at a meeting within 12 months before or
after the date the Plan is adopted by the Board. No options granted before such
stockholder approval has been obtained shall be exercisable unless such
stockholder approval is obtained. If the Plan is not approved by the
stockholders of the Company within the above-referenced 12-month period, the
Plan and any options granted thereunder shall terminate and all payroll
deductions credited to a participant's account shall be promptly returned to him
or her.
23. No Enlargement of Employee Rights. The Plan is purely voluntary on
---------------------------------
the part of the Company, and the continuance of the Plan shall not be deemed to
constitute a contract between the Company and any Employee, or to be
consideration for or a condition of the employment of any Employee. Nothing
contained in this Plan shall be deemed to give any Employee the right to be
retained in the employ of the Company, its parent, subsidiary or a successor
corporation, or to interfere with the right of the Company or any such
corporations to discharge or retire any Employee thereof at any time. No
Employee shall have any right to or interest in options authorized hereunder
prior to the grant of an option to such Employee, and upon such grant he or she
shall have only such rights and interests as are expressly provided herein,
subject, however, to all applicable provisions of the Company's Certificate of
Incorporation, as the same may be amended from time to time.
24. Information to Participants. The Company shall make available without
---------------------------
charge to each participant in the Plan copies of such annual and periodic
reports as are provided by the Company to its stockholders generally.
-7-
<PAGE>
25. Governing Law. To the extent that Federal laws do not otherwise
-------------
control, the Plan and all determinations made or actions taken pursuant hereto
shall be governed by the laws of the state of Delaware, without regard to the
conflicts of laws rules thereof, and construed accordingly.
26. Tax Withholding. If, at any time, the Company or any Subsidiary is
---------------
required, under applicable laws and regulations, to withhold, or to make any
deduction of, any taxes or take any other action in connection with any exercise
of an option made hereunder or transfer of shares of Common Stock, the Company
or such Subsidiary shall have the right to deduct from all amounts paid in cash
any taxes required by law to be withheld therefrom, and in the case of shares of
Common Stock, the participant or his or her estate or beneficiary shall be
required to pay the Company or such Subsidiary the amount of taxes required to
be withheld, or, in lieu thereof, the Company or such Subsidiary shall have the
right to retain, or sell without notice, a sufficient number of shares of Common
Stock to cover the amount required to be withheld, or to make other arrangements
with respect to withholding as it shall deem appropriate.
27. Securities Law Compliance. No shares of Common Stock may be issued
-------------------------
upon the exercise of any option under the Plan until all requirements of
applicable Federal, state, foreign or other securities laws, with respect to the
purchase, sale and issuance of shares of Common Stock shall have been satisfied.
If any action must be taken because of such requirements, then the purchase,
sale and issuance of shares shall be postponed until such action can reasonably
be taken. Upon demand by the Company, an Employee shall deliver to the Company
a representation in writing that the purchase of shares pursuant to the exercise
of an option hereunder is being made for investment only and not for resale or
with a view to distribution, or such other information, representations or
undertakings as the Company may reasonably require in order to comply with any
registration requirements of, or exemptions from, applicable securities laws.
The Company may require any securities so issued to bear a legend, may give its
transfer agent instructions, and may take such other steps as in its judgment
are reasonably required to prevent any such violation of applicable securities
laws.
-8-
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-85399) of Network Access Solutions Corporation of
our report dated March 7, 2000 relating to the financial statements, which
appears in the Annual Report to Shareholders, which is incorporated in this
Annual Report on Form 10-K. We also consent to the incorporation by reference
of our report dated March 7, 2000 relating to the financial statement schedules,
which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 17, 2000
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,240
<SECURITIES> 24,576
<RECEIVABLES> 3,634
<ALLOWANCES> (377)
<INVENTORY> 441
<CURRENT-ASSETS> 47,441
<PP&E> 60,436
<DEPRECIATION> (5,338)
<TOTAL-ASSETS> 104,620
<CURRENT-LIABILITIES> 18,907
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0
0
<COMMON> 54
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<TOTAL-LIABILITY-AND-EQUITY> 104,620
<SALES> 17,439
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<TOTAL-COSTS> 17,840
<OTHER-EXPENSES> 41,030
<LOSS-PROVISION> (41,431)
<INTEREST-EXPENSE> 1,023
<INCOME-PRETAX> (40,359)
<INCOME-TAX> (71)
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